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Strategic Responsibility

Advanced Medical Optics chairman and CEO James V. Mazzo on creating a vision for the future.

COVER STORY

Sidebars:

The quest to help people live healthier lives is a noble pursuit, one that is at the very core of the medical device industry. But in a competitive marketplace where success is measured by revenue growth and share­holder returns, a noble cause is rarely enough. In order to be able to continually develop and deliver life-enhancing technologies to patients around the world, companies must be able to translate their missions into strategic and sustainable business plans.

With 111 years of financial growth and technological innovation under its belt, Becton, Dickinson and Company (BD; Franklin Lakes, NJ) has clearly figured out how to translate its corporate purpose, 'helping all people live healthy lives,' into market success.

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BD Chairman, president, and CEO Edward J. Ludwig on global leadership and growth.

With offices in nearly 50 countries worldwide, BD is an international powerhouse with annual revenues of more than $6.3 billion. In addition to maintaining a significant presence in established device and diagnostics markets, the company also operates in many developing countries where few other medtech companies have ventured. Working under what BD chairman, president, and CEO Edward J. Ludwig refers to as a transnational approach, the company structures its global offices in a manner designed to ensure the company has an in-depth understanding of varied national needs. With such needs in mind, BD develops and adjusts its products to meet the unique requirements of the many markets it serves.

In March 2008, Ludwig ended a two-year term as chairman of industry association AdvaMed (Washington, DC). During his term, Ludwig served as a tireless advocate for expanded patient access to lifesaving and life-improving medical technology—an industrywide mission that is closely aligned with BD's own fundamental approach to healthcare.

In this excerpted interview with MX editor-in-chief Steve Halasey, Ludwig discusses BD's long and prestigious history, its ongoing strategies for domestic and international growth, and the company's leadership role in shaping the future of healthcare delivery.

MX: You have recently ended a two-year term as chairman of the industry association AdvaMed. During your tenure, what were the most noteworthy challenges for the association and for industry at large that came to your attention?

Edward J. Ludwig: What we do at AdvaMed is always focused on access to the value of medical technology. This focus is manifested in a number of ways—including even the way that AdvaMed has been organized over the years—in order to ensure that people all over the world have access to the best possible medical care and safe, effective, and innovative medical technology.

We need an effective FDA, so AdvaMed worked very hard to develop and then support enactment of the medical device user-fee program, and in 2007 we worked with the agency and Congress to strengthen that program.

We also need a predictable and transparent process to reimburse providers who use our medical technologies and an appropriate level of payment for technology innovations, so AdvaMed engages with the Centers for Medicare and Medicaid Services (CMS). And we need free trade, as well as regulatory transparency and consistency, across borders, so AdvaMed has a group devoted to international affairs.

How has your involvement with AdvaMed influenced your leadership at BD, and vice versa? How do the differences and similarities between those roles influence your thinking in both places?

The purposes of the two organizations are very much aligned. BD and AdvaMed are both trying to help people live healthy lives.

In the AdvaMed context, I worked as a leader among leaders, managing very much by influence, by consensus. That's important, because wherever possible, we try to speak with one voice as an industry.

Because of who I am and what the company is, leading at BD is not vastly dissimilar. We're trying to use everyone's skills and capabilities to find the best solution and go forward on that basis.

You have described BD's approach to the market as consisting of a number of distinct steps: identifying emerging healthcare problems; developing and applying technology; applying manufacturing skills to get high quality at low cost; and then applying the company's sales, service, and support expertise. Can you explain how this approach evolved and developed?

BD's approach to strategy is very much analytically and financially driven. Over time, BD employees have relentlessly pursued the company's stated purpose of "Helping all people live healthy lives." And as a result and natural outgrowth of this purpose, they have continually been on the lookout for underappreciated emerging healthcare problems within their chosen spaces of drug delivery, diagnostics, and biosciences.


BD Growth, at Home and Abroad

BD has experienced both significant organic growth and significant acquisition activity. How would you weight the importance of those two strategies, and what do you think have been the company's most noteworthy acquisitions?

Approximately one-third of our innovation is developed in large part by BD personnel, and solutions developed with partners constitute another third of our business. The final third of BD's innovation is achieved through acquisitions. We employ all three methods: self-invention, licenses and partnerships, and acquisitions.

Recently, our most significant acquisitions have been GeneOhm and TriPath. In the past 10 years in BD's history, those acquisitions are two of the largest and most successful that we've done. But at the time of the acquisitions, both of them were fairly modest in terms of total revenue.

When BD purchased GeneOhm, GeneOhm had annual revenues of between $5 million and $10 million. And yet, we paid more than $200 million for the company because we saw enormous potential for expanding the market for screening for healthcare-associated infections.

TriPath had about $100 million in annual revenues when we acquired it, and we paid more than $300 million for the company. We saw a great potential to expand its Pap screening business in the United States, Europe, and Japan through TriPath's liquid-based preparation, which provides a monolayer ability to study cells in a much purer environment.

Does BD also have a venture arm that invests in early-stage technologies or companies that might later on be acquisition candidates? If so, does the company take an equity position or make other arrangements with those companies?

We do operate in that area. It's not a formal fund, but rather we might decide to make an allocation of anywhere between half a million and $1 million in an interesting venture.

BD also has incubator companies that share space in some of our facilities. After all, start-up companies often need care and feeding as much as they need money.

We have not yet gotten any of those early-stage investments to the point where they've been brought into our core businesses. So to date, our investments haven't paid off in that specific sense. However, our involvement with the early-stage ventures has exposed us to some interesting ideas. I'm optimistic that in the next 3–5 years, we will see some of our venture investments move to the next stage in terms of product development. But right now, we're still in the investment mode.

In the foreseeable future, which of BD's product lines are likely to see greatest growth? What regions offer BD the greatest opportunities for growth?

One of the strengths of BD is that we have great diversity among our various product groups. We believe that every one of our three major segments—and more or less our 12 major business units—can grow at or above the company average, which has been about 6-8% on the top line on an exchange-neutral basis.

In BD Medical, BD is working to develop more-advanced systems for drug delivery. Such systems will focus on both patient safety and healthcare worker safety, as well as getting drugs to work better. One good example is the relationship BD has with Sanofi Pasteur, which hopes to market a new system for flu vaccination. The system, which has been submitted for approval in Europe, is integrated with a tiny BD microneedle.

In BD Diagnostics, we expect to broaden rapid molecular diagnostics. BD is looking to expand its menu for BD GeneOhm assays as we increase the capabilities we have in cancer screening and cancer diagnostics.

BD Biosciences is also exploring some interesting applications. On the clinical side, our biosciences products are used for CD4 testing. We are trying to devise easier-to-use and lower-cost CD4 test systems so they can be sold effectively in the developing world, where the largest prevalence of HIV exists.

Those are the big areas of interest for BD in terms of products. On balance, we expect to grow more rapidly outside the United States than inside the United States. Right now, about 55% of our business comes from outside the United States, and I think that number will continue to increase over time. BD is looking for growth opportunities in places like India, China, Russia, and Africa.

Medtech companies don't usually include Russia or Africa on their list of regional growth opportunities. Neither region is typically thought to have much capital to spend on medical technologies. How is it that BD is able to identify big growth opportunities in those areas?

Actually, Russia has a lot of money. Unfortunately for the rest of the world, oil is more than $130 a barrel, and Russia is benefiting. Russia has always been the home of good science, but the country does have a set of problems when it comes to healthcare.

BD has set up a legal entity in Russia that employs about 50 people. But it's a slow go. The business currently represents about $50 million in annual revenue. It is still pretty small, but it's growing at between 20 and 30% a year. There's an emerging awareness in Russia of the need for basic "healthcare 101" products such as those offered by BD. That includes products for safe injections and safe blood collection.

With the exception of South Africa, most of Africa is not self-sufficient. Most African countries do not have the financial wherewithal to provide citizens with even basic healthcare. In those cases, we work with third parties--often nongovernmental organizations (NGOs) such as the United Nations Children's Fund (UNICEF), the World Health Organization, Project HOPE, the Clinton Foundation, and the Red Cross—to provide our products to those regions, sometimes free of charge. We are very careful to distinguish between philanthropy and commerce.

Whenever possible, we believe there should be a commercial element to our work in developing nations. We design products specific to a region, and we price them so people in that region can afford them. If the operation is a commercial endeavor, it's more sustainable because our company is able to put some of the profits back into development in order to sustain and expand the medical technology products that are made available to that region. If our efforts were purely philanthropic, we'd run into limits on how much we could reasonably give away.

In Africa, BD's model is to work with these NGOs. We are also working with another major contributor to healthcare in Africa: the President's Emergency Plan for AIDS Relief (PEPFAR). That initiative measures in the billions of dollars.

We have established an arrangement with PEPFAR whereby BD is going to be providing people, technology, skills, and training to help build good laboratory practices in certain countries in Africa.


International in Scope

In order to grow its business in the international marketplace, what does BD do differently in terms of structure or operations, branding or marketing?

BD has been a global company since its founding, so the company has a rich tradition in the international marketplace. About 20 years ago, we began subscribing to an approach that some practitioners call transnational.

By transnational, we mean that we conduct certain operations—such as product development or manufacturing planning—according to a global strategy. But we simultaneously subscribe to a very strong national organization. Our approach is de­signed to ensure we have an exquisite understanding of national needs and nuances and that we adjust and tweak our products accordingly.

Over the years, we've discovered that there's rarely a product that is specific to a single country. A product may start in a given country, but almost every product BD has ever sold has turned out to have applications in not one, but many countries. Many products that are designed with a specific country's needs in mind quickly migrate to other parts of the world.

Among the many challenges that people are dealing with at local levels, which have enough importance that they often come to you on a global scale?

Many of BD's people outside the United States are members of trade associations in their respective countries. BD's involvement in trade associations around the world enables an added level of coordination. AdvaMed representatives may call Eucomed representatives to try to coordinate their efforts on a given issue—for example, the recast of the Medical Devices Directive. The biggest issues that come up are regulatory ones—getting products approved and reimbursed can be extraordinary challenges.

We have been working diligently for global harmonization, which is the focus of the Global Harmonization Task Force (GHTF). The GHTF is a group of industry and government regulatory leaders that meets periodically as part of a larger multiyear effort to harmonize regulatory standards. The idea is to establish a common data set and format that can be used anywhere in the world.

How does the current disarray in world economies affect BD, either in its revenues or its planning on a day-to-day, month-to-month, quarter-to-quarter basis?

Two major external factors affect BD. One is the price of raw materials. We use a lot of resins, and typically resins are priced as an indirect function of the price of oil. So BD has been adapting—successfully to date, I might add—to keep pace with the rising price of resin.

The second factor is somewhat beyond our control: currency. Interestingly, these two factors tend to move in opposite directions. For example, as the dollar weakens, we see a positive translation effect. When the dollar weakens, a euro translates to more dollars. So when we translate euro-denominated sales back into U.S. dollars, there's a positive translation effect.

The good news is that the positive effect of the currency translation has been greater than the negative effect of the higher resin prices because our foreign revenue figure is so much higher than our expenditure on resins.


Looking Forward

In the fields in which BD competes, you've identified dozens of themes and particular product types that are actively being explored and developed. Which of these do you think offers the greatest chance for the next really major breakthroughs?

Five or 10 years from now, I believe BD will be involved in several new areas based on a couple of product platforms now being developed. Two areas to watch will be advanced drug delivery and advanced diagnostics. Advanced drug delivery includes our advanced bioprocessing platform. In the advanced diagnostics area, the acquired properties of GeneOhm and TriPath may each become significant opportunities as they grow to their potential over the next five years. In five years, we hope to be talking about what these business areas are contributing to our revenue at that time.

In the broader market for medical technology companies, there seems to be an increasing distinction between companies whose growth tends to be subject to boom and bust cycles, and companies that tend toward slow and steady growth. We've seen a lot of boom and bust in the cardiovascular space, and to a lesser degree in orthopedics. But there are also a lot of companies that offer a 'steady as she goes' approach to growth. Companies such as C. R. Bard, Hospira, and BD offer good solid growth.

I think BD has reached an inflection point. The company is already well on its way, changing from its previous focus as a medical supplies company to a company focused on the development and commercialization of innovative, higher-value devices. The company's growth rates and margins are starting to show that change, and it is also beginning to be reflected in our stock price.

Copyright ©2008 MX
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