As the lines between what were once considered distinct medical technology sectors continue to blur, medical device executives are challenged to continually reassessand, when necessary, reinventtheir companies' strategies for growth. Thus, many of medtech's leading companies today scarcely resemble their businesses as they existed only several years ago. GE Healthcare (Chalfont St. Giles, UK) is no exception.
In January, seeking to establish a competitive position in the $32 billion global market for in vitro diagnostics (IVDs), the company announced an agreement to buy two of the three diagnostic business units belonging to Abbott Laboratories (Abbott Park, IL). In the $8.13 billion, all-cash transaction, GE will pick up Abbott's highly regarded IVD unit as well as the company's point-of-care diagnostics business. Combined, the businesses generated about $2.7 billion in sales during 2006.
Joseph M. Hogan, president and CEO of GE Healthcare, says the acquisition is another step in an ambitious strategic plan that his company set in motion in 2001. At the time of the plan's conception, GE Healthcare operated almost exclusively in the imaging sector, generating about $7 billion in annual revenues. Now, scarcely five years later, the company has grown into a broad-based diagnostics and information technologies (IT) company, generating more than $16 billion in annual revenues.
In this interview with MX editor-in-chief Steve Halasey, Hogan elaborates on the motivations behind the Abbott acquisition and some of GE Healthcare's other recent moves to broaden its presence in the medical technology market. He also discusses the future of diagnostics, the continued integration of medical technologies, and ongoing transition to a new paradigm of healthcare.
MX: In January, GE announced an agreement to buy Abbott's IVD unit as well as the company's point-of-care diagnostics business. How do these acquisitions further GE Healthcare's vision for the future?
Joseph M. Hogan: GE Healthcare's vision is centered on early health, which refers to the goal of identifying disease or the potential for disease as early as possible. When disease is identified early, physicians and patients have increased treatment options. And further, we know that for many conditions, including cancer and cardiovascular disease, treating earlier is better medicine and often less expensive.
In vitro diagnostics are an essential part of the concept of early health. Regular blood tests, urine tests, and other similar diagnostics can identify diseases much earlier. What I love about Abbottand what I've loved about Abbott for yearsis the company's strong position in immunoassays and its robust point-of-care business. GE Healthcare picked up both those assets.
When considering the early health paradigm, the industry must look not only at where the technology is today, but also what that technology promises in the future in terms of being able to identify more diseases, and to do so earlier. In this sense, Abbott's in vitro diagnostics unit and point-of-care diagnostics business fit well with how GE Healthcare wants to shape the market.
The acquisitions are true to the way in which GE Healthcare has developed its portfolio over the years. We are a broad-based diagnostics, information technology, and life sciences company. Information technology is a big part of in vitro diagnostics and will play an even bigger role in the future. And the life sciences platform contributes to the whole picture as well. So the Abbott units are a synergistic addition in terms of GE Healthcare's vision for the future and mesh well with GE Healthcare's existing assets.
In announcing the acquisitions, GE Healthcare indicated that it had been evaluating the deal for about five years. Was the company specifically evaluating the Abbott acquisition, or was it generally evaluating an acquisition in the IVD area?
We were looking for an acquisition in the IVD area. Sometime around 2001, we formulated a solid strategy for shaping GE Healthcarewhich was primarily an imaging companyinto a broader diagnostic, information technology, and life sciences company.
One issue we had to consider was whether to achieve this vision organically or inorganically. And considering how well-developed the IVD marketplace is, it would have been naïve for us to think we could develop our own division in this sector organically. The IVD sector has progressed too much for a new player to come in and compete effectively with the established sector leaders. So we knew GE Healthcare had to make an inorganic play to enter the IVD realm.
GE Healthcare has a strong business development department that evaluates potential acquisitions. Once a month, I meet with what's referred to as the growth boarda panel of GE Healthcare representatives charged with evaluating growth opportunitiesand examine possible acquisitions and organic plays that might enhance the business.
Over a period of five years, the growth board has examined just about every conceivable way of entering the IVD marketplace. We considered all the players currently on the market, the existing technologies, and the future potential of those technologies. Finally, we determined the type of presence we wanted to have in the marketplace.
Obviously Abbott was at the top of the list of players that we identified due to its strength over the years, particularly in immunoassays and the acquisitions and growth the company achieved in its point-of-care business.
How will the Abbott divisions be incorporated into GE Healthcare in terms of logistics, management, and rebranding?
Until the deal closes, there aren't too many details we can announce. During the period of time until the acquisition is finalized, GE Healthcare has to respect Abbott's businesses as independent entities. We don't have any legal authority over those assets until the deal is approved.
However, there are a few details that I can disclose. For example, John Chiminski, who used to run GE Healthcare's global magnetic resonance business, will be the leader of the new diagnostics business following the close of the deal. In addition, Dan Tereau will be the integration leader for the newly acquired assets. Dan is part of GE Healthcare's business development department, and he knows the IVD sector well.
On the Abbott side, Joe Nemmers, executive vice president of Abbott's diagnostic and animal health divisions, is a terrific leader who will be helping out during the transition. So right now, we're putting teams in place that will enable a smooth transition from a number of standpoints.
As far as branding, we won't be able to call it the Abbott business, but Abbott has a good brand name. So GE Healthcare will be working with Abbott to determine how to make that adjustment and in what time frame. Based on my experiences in past acquisitions, the healthcare market seems to identify with product brands, not necessarily corporate brands or institutional brands. I'm sure the market identifies as much with Prism, Abbott's amino acid blood system brand, as much as it does with Abbott itself. So we'll certainly keep product brands in place. We just have to figure out how to deal with the institutional brand over time.
Are considerations such as those a little easier to manage when you're dealing with a professional consumer rather than a home-use consumer?
It's much easier to handle the switch when it comes to a professional customer base. When you are dealing with end-users in a business-to-consumer type of interaction, it's a completely different discussion.
Abbott's molecular diagnostics and diabetes care businesses were not included in the acquisition. Did GE Healthcare initially hope to acquire these businesses? If not, why not?
Obviously Abbott has a strong molecular diagnostics business. Miles D. White, Abbott's chairman and CEO, and the rest of his team, including Joe Nemmers, feel strongly that the company's molecular diagnostics business aligns well with the future path of the company's therapeutic business. Going into the deal, GE Healthcare knew that unit wasn't going to be for sale. However, I did have a casual interest in the unit because GE Healthcare's existing life sciences business includes a molecular diagnostics segment.
We entered the molecular diagnostics marketplace through the existing platform that we acquired through our 2004 purchase of Amersham's life sciences business, and we think we can further build on this in the future.
How do the Amersham acquisition and the Abbott acquisitions fit together in GE Healthcare's overall vision for the future of diagnostics, particularly in the molecular imaging field?
The development of our strategy goes back to that point about five years ago when the executives at GE Healthcare sat down to develop a roadmap for the future. At that point in time, we envisioned purchasing a contrast agent company, which would become GE Healthcare's in vivo molecular diagnostics component. We planned to follow that with the purchase of an IVD company.
The in vivo company acquisition was given priority because it was a little closer in line with GE Healthcare's existing imaging business at that time. Our company and in vivo companies called on the same customers, namely radiologists. Modalities such as positron emission tomography (PET) and magnetic resonance imaging (MRI), which we had identified as being key to the future of molecular imaging, presented synergistic fits. By acquiring Amersham three years ago, GE Healthcare built a biological capability into its business that didn't previously exist. Prior to the purchase of Amersham, GE Healthcare consisted of primarily electrical engineers and software engineers. That was the core competency of the business.
From a strategic standpoint, we thought it would be easier to bridge from in vivo to IVD than vice versa. So we used the Amersham acquisition as a stepping stone. It was easier to take two shorter steps rather than attempting to jump all the way across with one acquisition. Having been able to develop that biochemistry platform over the past few years, we're now much more able to move into the in vitro diagnostics sector.
Amersham had interests in both life sciences research and molecular diagnostics, and both relied on the company's inherent technical capabilities in biochemistry. That core technology area is also present in Abbott. Consequently, the Amersham business unit formed a good platform on which to land the Abbott acquisition. It would have been much tougher to do just an in vitro diagnostics deal without having the Amersham in vivo deal in between.
The future of molecular imaging technology rests largely on the pace of discoveries in the biotechnology and molecular reagent fields. Are you satisfied with the pace of discoveries and growth in those fields? What do you envision as a realistic timeline for developing a workable molecular imaging business?
I think we are relatively close to that point. In running a company in this industry, you always want things to happen faster than they can. But there's no lack of technology development within GE Healthcare and other outside companies in areas such as molecular and functional imaging. All the pieces are there. The real constraint is the time it takes to prove clinical efficacy according to FDA guidelines.
A key point to managing this process is to make sure the company is choosing the right compounds to move to later-stage evaluation. After all, the initial innovation part in developing compounds is not the difficult partthe difficult part is picking the winning compounds and moving them forward through the regulatory process. I'm satisfied with the technical innovation we're seeing in this field, but I'm not necessarily satisfied with the speed at which such innovations are being commercialized.
A good example in the molecular imaging field is GE Healthcare's DaTSCAN. DaTSCAN, a radiopharmaceutical used in the diagnosis of Parkinson's disease, was recently commercialized in Europe.
For years, from an in vivo imaging standpoint, Parkinson's disease has often been misdiagnosed. In fact, about 25% of patients who are diagnosed with Parkinson's disease don't actually have it. They have a disease called dementia with Lewy bodies or another neurological condition that is often misdiagnosed as Parkinson's disease. It can be detrimental for a patient to be put on the incorrect therapy. DaTSCAN identifies Parkinson's disease with nearly 99% accuracy, enabling physicians to implement the proper therapies.
DatSCAN will be moving into the U.S. market within the next couple of years. We also have several products based on angiogenesis compounds that can identify cancer, and have started work on one for targeting breast cancer at the molecular level. All of these are in the stage at which we must demonstrate clinical efficacy, and that process can take a while. But the efficacy we're already seeing in the trials is exciting.
This work is moving us a step closer to the goal we've been envisioning. As we move forward with the whole concept of molecular imaging and gain a better sense of in vivo imaging, we're going to increasingly be able to identify in real time inside the body what disease a patient has and how effective a particular therapy is in treating that disease. Those are two goals of molecular imaging, and current developments in the field are exciting and promising in this regard.
You mentioned the need to demonstrate clinical efficacy. Traditionally, the IVD sector seems to have operated in a slightly different way. Researchers often discover a biomarker that they believe reflects a certain disease or medical condition. Even before they determine the clinical importance of that biomarker, they want to go to market with it so that physicians and laboratorians can begin working with it. And while FDA might permit the biomarker to enter the market, the company is not allowed to make any medical claims. Therefore, there's no reimbursement attached to the biomarker. How is your view different from this strategy?
There are examples of the situation you are describing outside of the IVD sector. For example, in the imaging market, practitioners have done magnetic resonance angiography (MRA) for years, but there's no indication for it right now. It's all done off label, and manufacturers can't market the equipment for that use. GE Healthcare has spent millions of dollars over the last few years in proving the clinical efficacy of MRA. It's not complete yet, but we're working with FDA to get that clinical indication.
This is a similar situation to the one you're describing in the IVD sector. Companies discover a biomarker that they think may be indicative of some disease state, and they want to get it on the market immediately. However, I think the days of that approach being a viable strategy are numbered. Due to the cost constraints that exist in the healthcare system today, it's incumbent upon companies to prove the clinical efficacy of their products before they're approved and launched.
Companies today need to consider both pieces: FDA approval and reimbursement. The reimbursement piece is tied to the economics of a product, and the market is going to increasingly scrutinize manufacturers on this side of the equation. As participants in the device and diagnostics industry, manufacturers must prove not just safety, but efficacy as well.
There's tremendous pressure on IVD companies to keep the cost per test low. That's often been cited by companies as the reason they haven't been able to invest in the kind of clinical testing that they might have wanted to do. But it sounds like you're saying that companies are going to need to find that money due to the importance of proving clinical efficacy.
Yes. Depending on the year, GE Healthcare invests about 710% of its annual revenues in research and development (R&D). That's about how much Abbott has invested in its in vitro diagnostics business over the years too. The additional R&D needs that I'm describing are not a dramatic increase in that investment in any way. It's about how a company applies its R&D funds. The funds spent on the identification of biomarkers and the investment made in the clinical efficacy piece need to be more carefully balanced in the future.
GE Healthcare's announcement of its intent to acquire Abbott's diagnostics division came shortly after Siemens' acquisitions of Diagnostic Products Corp. and Bayer Diagnostics. Once the dust settles from all these acquisitions, what will the competitive field of the diagnostics sector look like?
I have a great deal of respect for Siemens. The company is a great competitor. And now that both GE Healthcare and Siemens are becoming broader-based diagnostics companies, we can collectively have an even greater impact on the healthcare industry in terms of bringing the applications we've been discussing to market.
This is the age of diagnostics. In the past, when people talked about medicine, they talked about pharmaceuticals. When people went to the doctor, they were focused on getting a prescription. That's the way most people today were raised. The focus of medicine wasn't on the specificity of diagnostics.
The advent of the technologies and diagnostic capabilities that has occurred over the past 10 years is phenomenal. Diagnostics have really started to come of age. For example, computed tomography (CT) and MR applications have received Nobel prizes in recent years.
Unfortunately, government regulatory bodies and payers have yet to fully recognize the positive effects of enhanced diagnostics, not only on healthcare costs, but also on the efficacy of therapeutics, by ensuring that expensive therapeutics are being used properly.
People talk about the rivalry between Siemens and GE Healthcare as broader-based diagnostics companies. But in reality, we both respect one another. Our companies have competed well over the years. And together, our companies can expand the understanding and appreciation of what diagnostics can do in the future. In the future, diagnostics will be elevated to a position much closer to that of therapeutics than they have been in the past.
Manufacturers in the IVD sector have worked extremely hard to get improved reimbursement for laboratory testing. Traditionally, though, the IVD sector has been the Rodney Dangerfield of the medical device industry: the sector gets no respect. Is the muscle that Siemens and GE Healthcare bring to this picture going to be able to change it at all?
Obviously GE Healthcare and Siemens have scale, but I don't think we're going to move the sector forward just by flexing muscle. But our companies do have a more concentrated ability to convey the message of how important the diagnostics piece is to the overall healthcare picture. Participation of larger players in the IVD realm will help in terms of the sector finally being able to express what diagnostics can do.
There needs to be an overall strategy for communicating what a technology means to healthcare. The U.S. healthcare system is attacking IVD costs, but IVDs actually account for less than 2% of the total cost of healthcare in the United States. And imaging technologies account for less than 5%.
But when a person has to undergo heart surgery, a physician might want to know the patient's blood enzyme levels. And the surgeon would probably like to know where the stenosis is located before he starts cutting. Knowledge like that is taken for granted today, but it's so important to the overall effectiveness of healthcare.
I have never heard anyone knowledgeable indicate that they had a plan for the future of healthcare that involved less use of diagnostics.
I completely agree.
When I was growing up, my mother told me that my aunt went in for exploratory surgery, and I understood that surgeons had to open up my aunt and look around to see what was wrong with her. Today, that just sounds like witchcraft. Thanks to technological advances, a practitioner can do a CT scan in eight seconds and know exactly what's going on inside a person. Or a practitioner can do an IVD test and have a good indication of that person's physical state.
When companies discuss an integrated future for healthcare that will be focused on earlier diagnosis, one need that must be considered is that of a robust information technologies (IT) infrastructure. How does GE Healthcare's current position in this market contribute to such a broader vision?
This year, GE Healthcare's IT business will pull in revenues of nearly $2 billion, depending on how you define the sector. So we're one of the world's largestif not the largestplayers in healthcare IT.
When considering IT and healthcare, I think about it in two dimensions. One dimension is clinical software applications. Clinical software applications are those that would be embedded in radiology and cardiology departments, as well as in laboratories. GE Healthcare has strong clinical information systems capabilities. The other dimension is systems software, such as revenue management applications and electronic medical records. These systems pull a wide variety of information together into one place.
GE Healthcare has offerings in both dimensions. We have a strong laboratory software application that will complement the in vitro acquisition from Abbott. But the company also has the broader capability to tie those clinical laboratory data into electronic health records, enabling those data to be available across healthcare systems, both from an ambulatory standpoint and a central hospital standpoint.
Although IT is already an important piece of the healthcare picture today, it's going to play an even bigger role going forward. And IT manufacturers need to offer solutions in both dimensions. They need to offer a good enterprise software piecemeaning a good electronic patient recordas well as a strong departmental capability.
In the IVD sector, there is a lot of number crunching required to determine the significance of various biomarkers. Does GE have applications on that side of the business?
Yes, we do. Our life sciences business focuses on that area, and we offer an entire diagnostics platform product. That platform focuses on evaluating cellular functions and protein capabilities that indicate the status of a patient's health in certain situations, from a therapeutic standpoint. It can assess not only the patient's health, but also the status of a therapeutic that is being applied, and the effects of that therapeutic on the patient.
GE Healthcare's life sciences business is divided into two pieces. We have a discovery piece focused on the laboratory side, and we also have a manufacturing piece, which is our protein separations business. So, as a pharmaceutical or large molecule comes into production, we also have a means of ensuring that the proteins or antibodies that are being developed as therapeutic agents are captured efficiently out of that manufacturing process.
Last year, GE Healthcare acquired information technology provider IDX Systems Corp. for about $1.2 billion. What new capabilities and offerings did IDX bring to GE Healthcare? And how is the integration going?
IDX Systems added an enterprise software capacitymeaning an electronic medical record (EMR)to GE Healthcare's portfolio. That was the most important addition that came with IDXour company didn't have that offering prior to the acquisition. IDX also added to GE Healthcare's portfolio a revenue cycle management offering with a good installed base.
In addition, IDX brought a radiology information system (RIS) into GE Healthcare's portfolio. Prior to the acquisition, GE Healthcare had worked for years to develop a decent RIS. We already had the largest picture archiving and communications systems (PACS) business in the world. That segment constitutes the clinical IT side of a radiology department. But we didn't yet have the scheduling and payer piece of the IT picture, which is the RIS. So the acquisition of IDX helped GE Healthcare round out its offerings for the radiology department.
The integration of IDX has gone smoothly. In some of the most recent ratings, such as those put out by KLAS Enterprises LLC, GE Healthcare's performance has gone up. During an integration, I watch those metrics carefully. A significant drop can indicate that you're losing customers. It's important that customers continue to see the same level of service during an integration, and the quality ratings that I've seen recently tell me that our customers feel good about the IDX acquisition and that we're making the transition work.
When MX started tracking the healthcare IT sector a few years back, the medical device industry as a whole didn't seem to be doing much in that space. That's beginning to change, and the movement has been led by the imaging and IVD sectors. It sounds as though GE Healthcare is looking to take a lead in EHR development, which is a critical step in achieving the nationaland possibly even internationalinteroperable electronic health record vision that President Bush is supporting.
Yes. The IVD acquisition fits well into our overall strategy by bringing another departmental capability that can plug into an EHR. GE Healthcare is striving to develop an EMR that can be used from an ambulatory and acute-care standpoint. We want that information to be exchangeable.
In the end, it's not the data that are importantit's the information. From a technology standpoint, the companies currently operating in the EMR spacemeaning not just GE Healthcare, but also other players such as Cerner and Eclipsysare capable of digitizing healthcare systems and records. The trick in the future is going to be taking that data and turning it into useful information. That is the business support component. Healthcare systems are acquiring all this information. Now what do they do with it? For example, if a physician has a patient come in for an IVD test and determines that the patient's enzyme levels are high, the physician may then order a volumetric CT scan. Based on that, the physician may determine the patient has a stenosis. But then the physician is faced with the question of how best to treat the patient.
In an effort to help answer that question, GE Healthcare is working to develop its EMR in partnership with Intermountain Healthcare (Salt Lake City), an independent delivery network with clinics and hospitals in Utah and Idaho. Based on its experience, Intermountain has produced some of the best decision-support algorithms in the world. The company can take all the data it's gathered over the years and roll it up into performance algorithms that can be applied across the institution. The company has proven itself to be one of the best institutions in the world in terms of being able to develop algorithms like that.
GE Healthcare is excited about more than just having an EMR that can capture data. We're excited about the clinical algorithms that can be derived from experience. Such algorithms can be laid over the top of electronic patient records to enable physicians to more quickly make clinical decisions related to patient treatment. The systems that we're developing with Intermountain Healthcare will offer capabilities like that within the next 18 months to two years.
FDA seems to have shown a little hesitation in this area. Algorithms such as the ones you are describing would essentially put FDA into the position of approving products with associated algorithms to dictate medical practice. Traditionally, the agency has scrupulously avoided treading into this area. In developing its systems, has GE Healthcare encountered any resistance from FDA?
No, we haven't. This is where it becomes important to make a distinction between applications software and systems software. On the system software level, I haven't seen any resistance from FDA. The agency wants manufacturers to validate their software. Any type of quality system should be validated, and I completely support that.
We are confident we will continue to succeed in a rigorous regulatory environment. For example, GE Healthcare has a big mammography business. And within fields such as mammography, in which there is a high volume of screening, computed diagnostic algorithms (CDAs) are useful. Such algorithms can help identify whether certain lesions in a woman's breast might be precancerous or completely benign. When it comes to capabilities like that, FDA is rightly very rigorous. Manufacturers must show clinical data that prove a system is not generating too many false positives or false negatives. In these instances, FDA is just applying the criteria it would apply to any other medical device. That's a point that is sometimes confused in the marketplace.
FDA regulates application software much like any other device. But when discussing a universal healthcare record, it's less of an FDA issue. In that case, the concerns that come into play are those related to the Stark physician-referral and antikickback laws, as well as regulations under various other government agencies.
Yes, FDA has been rigorous about the development and use of application software. And the key issue always seems to have been whether the manufacturer could demonstrate that its algorithms are clinically efficacious.
Some of the CDA software that's out there today truly isn't suited for use yet. Even in the case of Pap smears, for instance, what really made it possible to automate Pap smears was the ability of the pathologist to identify cell irregularity using a digitized kind of a process.
FDA plays a key role in regulating the emergence of such application software onto the market. And I think it should.
Who is currently developing clinical application software? Device manufacturers or healthcare providers?
Both. GE Healthcare writes its own computer-dated diagnostic algorithms at the company's global research center. We focus only on areas in which we feel we can add value beyond what a payer, entrepreneur, or university might be able to do. A lot of the original CDAs that were developed for radiology came out of the University of Chicago. Most of those are intellectual properties that have been licensed from the University of Chicago, which has done a great job in developing its algorithms. And I support third-party development like that. GE Healthcare is happy to license other parties' algorithms and incorporate them into its products.
However, there are technology areas in which we think GE Healthcare is in a position to develop algorithms on its own. For example, GE Healthcare is pioneering 3-D breast mammography. We've been working on it for a number of years, so we've had to develop those algorithms to prove the clinical efficacy. In that area, it makes sense for GE Healthcare to take the lead in developing those algorithms. But if we don't think we can add value to a field and that the outside market is better positioned to do so, we'll partner with a third party and support its efforts.
The role that the medical device industry will play in the development of a national EHR is still largely undefined. However, last year a consortium of IT companies, medical equipment manufacturers, and healthcare providers brought IT and medical devices a step closer to convergence with the formation of the Continua Health Alliance. GE Healthcare is a member of this new consortium. Tell me a little bit about the group and its mission. How do you see medical device manufacturers participating in and benefiting from the alliance?
One goal of GE Healthcare is to promote the importance of IT in healthcare. Bringing device companies together through an organization like Continua gives the industry a louder, more uniform voice with which to support legislation and other needed initiatives. One example of a legislative issue of interest to such organizations is the need to modify sections of the Stark law and other regulations that prohibit hospitals from outsourcing some of their IT to outpatient and ambulatory centers. Industry organizations are also playing a role in setting standards of interoperability.
There are other kinds of software of interest to device companies. For example, Medtronic, St. Jude Medical, and Guidantnow part of Boston Scientificuse certain software to communicate with devices such as implantable cardioverter-defibrillators. Those are examples of application software. I don't see industry organizations playing a central role in developing those applications. They are more focused on systems software capabilities and electronic medical records. They'll be looking to influence some of the legislation that's needed to make those applications more useful across the country.
There is some crossover. We're starting to hear about cardiac rhythm management (CRM) devices and orthopedic implants that automatically communicate with physicians and transmit their data directly into an EHR.
Yes, I think those applications are going to be useful. When it comes to something like a CRM device, it's useful to think about using the data from that device in two ways. For example, if a patient's defibrillator fires, an alert message should be sent to the patient's physician, meaning someone needs to check in on that patient. At the same time, that information should go directly into that patient's medical record as a data point that indicates the defibrillator fired at that time. That information serves as a historical record. Both pathways for informationsurrounding an event and surrounding the patientare important.
GE Healthcare's product and service offerings extend beyond the imaging and healthcare IT sectors. Tell me a little bit more about the other healthcare sectors in which GE Healthcare participates and how these rank in prominence in relation to the company's overall portfolio.
When considering the IT and imaging sectors, there are certain products that spring to mind. But there are also some less-obvious products included in those categories.
GE Healthcare's legacy business is basically its diagnostic imaging offerings: x-ray systems, CT systems, MRI systems, and PET systems. Those are all very strong legacy businesses for us. We also have a business focused on clinical systems, which is part of the diagnostics field. That business, which consists primarily of ultrasound and monitoring devices and anesthesia devices, produces revenues of more than $3 billion. Of that, GE Healthcare's ultrasound business brings in more than $1.5 billion, meaning we have the world's largest ultrasound business.
When discussing the radiology department and diagnostics, ultrasound is often a forgotten component. Yet it's one of the largest modalities in the world right now. The miniaturization of ultrasound products is putting devices in more and more hands. GE Healthcare now has portable units that weigh less than 10 lb, and they can do what a 300-lb device could do only five years ago. Ultrasound systems today offer unbelievably powerful, portable diagnostic information. The systems are being used in a wider variety of settings, including emergency rooms and anesthesia centers. They are also being used more by primary care physicians to diagnose disease earlier.
The use of ultrasound at the point of care is growing dramatically. GE Healthcare has several clinical trials under way that are exploring additional uses for ultrasound equipment. For example, we're exploring ultrasound's ability to identify abdominal aortic aneurysms and plaque in carotid arteries, which may be an indication that a patient has some form of arterial sclerosis. Such applications could put tremendous diagnostic power into the hands of physicians.
GE Healthcare's existing clinical systems businessand in particular, its strong ultrasound segmentmerges well with the point-of-care offerings that GE Healthcare will be acquiring through Abbott. One exciting part of the acquisition is Abbott's laboratory on a chip, which is a handheld medical device that's used at the bedside to obtain readings from blood and other clinical specimens. More and more, the kinds of tests that required a full-scale laboratory can be done on these handheld devices. So we're increasingly bringing powerful diagnostics out of the hospitals, laboratories, and radiology departments and delivering them right at the point of care. And the information obtained right in front of a patient is available in real time.
That brings us back to the original question regarding GE Healthcare's overall portfolio. In addition to the point-of-care synergies between GE Healthcare's ultrasound business and Abbott's offering, our company also has a strong monitoring business. And that business is going through the same miniaturization and portablizationwhich is a relatively newly coined termthat is occurring in ultrasound. Patient-monitoring devices are becoming more remote, meaning that information can be tracked, recorded, and fed back to a central system as patients and their devices move throughout the hospital or other care settings. GE Healthcare has the largest monitoring business in the world. Our anesthesia businesswhich is part of the clinical systems side of our businessincludes a strong monitoring component in addition to anesthesia delivery equipment.
In addition, GE Healthcare has a large interventional business, which includes products for cardiology, cardiac surgery, and interventional radiology. That side of the business accounts for about $2 billion in annual revenues for GE Healthcare. That's about on par with our IT business, which also brings in about $2 billion.
GE Healthcare's life sciences business is the discovery part of the company's business. It's the division of the company that applies all the company's tools and capabilities to look for new therapeutics. That division is also responsible for seeing those therapeutics into manufacture through bioreactor processing and separations steps.
So by rolling up everything I've mentioned, you can get a pretty good sense of the GE Healthcare portfolio. And although it's a wide-ranging portfolio, the thread that unites all the offerings is the concept of early health. Life sciences is a diagnostic business. So when we look at GE Healthcare's technology, it's largely focused on diagnostics. Much of that is applied in a research setting rather than strictly in a clinical setting. But many of the same technologies underlie applications in both areas.
One of the drawbacks of early point-of-care diagnostics was that they were useful at the bedside but didn't produce any kind of record. Now we're seeing instrumented systems being brought to the bedside. Will all of these eventually merge into some form of instrumented system that will automatically record data and transmit them to a patient's EHR?
Absolutely. That's where the market has to go. That's the wonderful thing about wireless communication today. Even detached instruments can talk to one another. For example, data from an ultrasound machine can be fed into a PACS in real time, via a broadband network. Bluetooth-based technology can enable connections with portable devices. It's all about convenience. Manufacturers can make these devices available, but they must also provide the means to document the data they gather. Manufacturers must put the science and technologies in a place that enables practitioners to transport that information where it can be recorded and used to make decisions.
The Bigger Picture
Tell me a little bit about how GE Healthcare fits into the overall corporate structure of General Electric Co., which also includes subsidiaries in the entertainment and jet engines industries. Are there parts of the company that aren't paying attention to what the healthcare business is doing?
Everybody at GE loves the healthcare business. When I assumed this role, I took over for Jeff Immelt, who is currently chairman and CEO of GE. It's great to have Jeff running the entirety of GE because he loves and knows healthcare. He's been a huge help to me in developing the strategy and direction for GE Healthcare going forward. It would have been different if someone who hadn't worked in healthcare had stepped into the role of CEO. I would probably have to spend more time educating the person on the industry and the importance of GE Healthcare's strategy and technology. I don't have to do that with Jeff. Thanks to his experience in the business and his personal interest in healthcare, he runs right beside me.
I've worked for three other divisions of GE, and the great thing about the company is that we all understand enough of each other's businesses to make ourselves dangerous. That's helpful in two dimensions. First, it enables us to identify talent throughout GE that can be harnessed by a certain division to support its platforms and drive its growth.
The second advantage comes in the form of GE's corporate research development center. That's where the company brings together core technologies that can be applied across different businesses, be it aircraft engines, or power systems, or plastics. And that includes healthcare too. For example, consider nanotechnology. GE has a huge initiative focused on nanotechnology that is under way at the global research center. And there are certain nanoparticles that enable jet engines and power system turbines to run at temperatures that would be higher than melting points of metal. It sounds crazy, but nanotechnology can be used to do that. And in the same vein, GE Healthcare is looking closely at nanoparticles as an agent in healthcare. It's great to have access to GE's core technologies. We can develop them on a large scale and then pull pieces off where it makes sense for each business.
Is there a formal process for exploring synergies across business units?
Yes. The formal process is called our growth playbook. Once a year, we do a three- to five-year plan that's based on marketed technology. The global research center plays a big part in developing that plan. In addition, I go through a review process with the global research center four times a year, and my peers in the other units do the same thing. The reviews help us evaluate how technology can be transferred across different dimensions of the company.
Do the engineers come up with some of the ideas?
Oh, yes, they really do. And GE has set up processes to get disparate engineers to sit down and talk to each other. A lot of ideas are generated through those interactions alone.
GE must have a significant amount of intellectual property (IP) activity under way at all times. At what level is that conducted at GE?
The overall GE Healthcare unit has its own IP department, which is run by a terrific guy named Carl Horton. Then there are IP people embedded in each one of the businesses within GE Healthcare. Then there are also IP capabilities at the corporate level at GE's headquarters in Fairfield, CT.
GE has a history of strong IP and knows the value of it. Therefore, it's embedded throughout all the businesses. Years ago, there was a lot of sharing and licensing among GE, Philips, and Siemens. It was a 510(k) industry at that point, so IP wasn't necessarily as important as it is today. Companies in our sector mainly operated on equivalency ratings and made use of a lot of license-sharing agreements. But now, as we've gotten into more sectors, IP has become even more important. Therefore, over the past five years, GE has developed the in-house IP capabilities needed in a variety of competitive sectors.
What percentage of GE Healthcare's growth has been driven by acquisitions and how much was generated through internal efforts? Over the past 57 years, about 60% of our growth has been organic, and the other 40% has been through acquisitions.
You mentioned about 710% of GE Healthcare's annual revenues go toward R&D. How are these funds prioritized?
We prioritize these funds through two different processes. First, we use our corporate growth playbook process that helps us strategically map our technologies on a three- to five-year timeline. We also have a process called S II, which is our budgeting process that occurs around October or November each year. That process locks in our investments for the upcoming period. We went through that process in November 2006 to lock in our investment plans for 2007.
Are you content with the amount of money available to support the R&D needed to move GE Healthcare's technology forward?
All of us would like to have another $100 million. But if we all had that $100 million, we'd want $100 million more. Ultimately, from a leadership standpoint in business, an executive's job is reverse allocation. Most existing healthcare companies, particularly those in the device industry, spend about 710% in R&D. The real trick is making sure that that expenditure is placed in the right area and on the right technologies.
There are a couple of dimensions involved in that allocation process. Companies have to consider where they can place their money from an R&D standpoint to get the biggest return. But companies also need to evaluate their technology according to three phases: breakthroughs, platforms, and derivatives.
When investing in breakthroughs, a company is taking a long shot that might take five to seven years to bear fruit. A lot of the breakthrough technology that GE Healthcare identifies goes to our global research center. That's where the leading-edge technologies are developed. On the other hand, platform technologies are translations of existing technology, such as adding portability to ultrasound devices. Finally, derivatives are upgrades that provide existing technology with additional capabilities. Companies have to make sure their resources are allocated across all three groups.
GE was the plaintiff in a recent case in which Siemens Medical Solutions pled guilty to obstructing justice and admitted it had engaged in fraudulent activities to gain a contract with Stroger Hospital, in Chicago. Stories such as this point to bigger ethics questions. What kind of ethics policies does GE have in place for its employees?
GE has a very rigorous and standardized process for enforcing compliance across the business. Every year we have a compliance process review with Jeff Immelt and our senior legal authorities.
Also, years ago GE developed and adopted an ombudsprocess. Each one of our departments, functions, or businesses, down to the smallest unit, includes an ombudsperson, who is appointed. This process offers a safety valve so that if anyone thinks that something bad is going on within GEwhether it has to do with FDA compliance or something that would be illegal in some waya person can report it and remain completely anonymous. Through this process, upper management and even GE's board of directors can be notified of possible problems, and that will trigger an audit. This process is rigorously enforced throughout GE and GE Healthcare
Today's businesses are challenged to ensure that they have imbedded compliance processes throughout their enterprise. Such processes have to be made integral parts of the company's culture, and it takes a long time to accomplish that. There are so many things in this industryor in any industrythat can get a company off track, particularly as it becomes more and more global. If the company doesn't have rigorous processes and audits that people trust, it can easily run into trouble over time.
I don't want to suggest that GE is flawless. But we work to maintain a culture that includes safety valves, so that potential problems can be identified early and dealt with effectively.
Do you sense that there are major parts of the industry that don't have quite such a formal process and where there might be problems?
There are obviously problems out there. Companies with compliance issues are continually coming forward or being identified.
As the leader of a business, a company executive must always be diligent in developing a culture of compliance. That's the executive's responsibility from a compliance standpoint.
And company leaders should also listen, through an ombudsprocess, for anything that might be a problem. And then they should rigorously audit it to certify to themselves and their teams that there is no problem. Or if there is a problem, then company leaders should ensure that the perpetrators are identified and dealt with, and the problems resolved.
There is more risk of compliance issues as companies move internationally. Across the globein places such as India, China, and developing parts of Africaindustry is growing even as the societies themselves are developing and changing in huge ways. Is there more risk out there? Absolutely. That's why it's so important that companies pay attention to the issues of compliance and ethics and put the processes in place to address those issues.
In which areasparticularly among those in which GE Healthcare competesdo you think the medical device industry's next major breakthroughs are likely to develop? How long will it take to make them happen? And, most importantly, what do you think GE Healthcare's role will be?
Overall, some of the most exciting developments are going to begin with diagnostics. GE Healthcare certainly expects to see advances in molecular imaging, biomarker discovery, and in vitro diagnostics. Developing these technologies is essential.
That becomes even more obvious when you look at what the cost of therapeutics will be in the future. There are some exciting drugs on the horizon, but it will be important to determine whether those therapeutics are being applied to the right patients at the right time. Confirming effectiveness is going to be really important, and diagnostic technology is what will enable that.
Obviously information technologies and life sciences will play a large part in uniting that data and being able to deliver information to patients and providers in real time. It's hard for me to name a single technology that will shape the future of healthcare. It's the integration of the broad-based areas of diagnostics and information technology that offers the most exciting possibilities to change healthcare in a positive way.
People first started discussing the possibilities of molecular biology two decades ago.
And we're still talking about those possibilities as being something for the future.
So is the field just moving at the pace of a glacier?
It's faster than that. We've been on a glacier, but we've hit a tipping point. Another term for it is a phase change, and that's the point at which things start to explode. People who talk about the revolution often miss the evolution. But everyday we're seeing new molecular diagnostic biomarkers emerge. We're seeing new therapeutics. In the past five years, the advances that have been made in our understanding of cancer alone are mind-boggling.
We're at that phase change point in healthcare at which we're beginning to see an explosion in understanding as to what is underlying disease processes. And this phase change point--the underlying information, the dynamics of that information--is going to be driven by diagnostics. Diagnostics are going to dictate where the therapeutics go. In the future, the most exciting discussions in healthcare are going to be focused on advanced diagnostics.