Philips strives for market lead with broad-based clinical offerings

January 31, 2001

Philips Medical Systems' ambition to lead the healthcare industry in clinical offerings is getting a big push from its purchase of two important imaging firms. The company finalized its acquisition of ADAC Laboratories in mid-December and is conducting

Philips Medical Systems' ambition to lead the healthcare industry in clinical offerings is getting a big push from its purchase of two important imaging firms. The company finalized its acquisition of ADAC Laboratories in mid-December and is conducting due diligence for its acquisition of Agilent Technologies, two moves that will cap a $4 billion three-year effort.

These purchases, along with that of ATL Ultrasound and a medical document service provider in 1998, and an equity investment in an Israeli home healthcare company the same year, are in line with corporate expectations to transform Philips into a company generating $5 billion in annual sales.

"With these (new acquisitions) we will have enormous breadth and depth," said Hans Barella, president and CEO of Philips Medical Systems. "Beyond any doubt we will be the strongest supplier in cardiology. We will have external defibrillators, home care, and PET imaging (products), so there will be a lot of strong growth."

To reach this point, the company must address the assimilation of large corporate entities into an organization that is only now coming to grips with its previous acquisitions.

"The goal is to get more synergy going forward and develop touch points across our product line," said Tim Mickelson, who has been put in charge of integrating these new acquisitions, in addition to serving as president of ATL Ultrasound.

A guiding principle in the integration will be to develop market "footprints" composed of branded products that address specific opportunities. A diagnostic cardiology offering might comprise products representing such modalities as MR, CT, ultrasound, x-ray, and nuclear medicine.

"Philips has paid a lot of money for company and brand names," Mickelson said. "That is key for us because we want productrecognition."

The challenge will be to maintain product recognition while getting across the idea that they are all made by Philips. The solution, Barella said, will be to create a new "umbrella" for these names.

Acquisition is one crucial part of Philips' strategy. Diversifying into new markets is another. Financial markets are growing at only about 5% per year, Barella said. Ironically, demand for medical services is going up but spending is not keeping pace. The way to bring them into alignment is to increase efficiency and the quality of healthcare, he said. To do so, the breadth of services a company can offer must increase.

"Companies with a limited product range cannot succeed," Barella said. "To meet demands from customers, companies need broad and deep portfolios of technologies. We have been lucky enough to get first-class companies together, ones that are tops in what they are doing. And by combining them, we will be able to meet these demands from consumers."

Agilent was attractive partly for its commanding market share in echocardiography, but also because the company meets the Philips need for diversification. Agilent is number one in market share for defibrillators, for example, a position achieved by addressing multiple market niches.

"We are the leader for providing airlines (with defibrillators) worldwide; we have a large share of the emergency medical services segment; we have devices in ski areas and golf course, hotels and airports," said Steve Rusckowski, senior vice president and general manager for the Agilent Healthcare Solutions Group.

Corporate strategy is based in large part on the idea of selling into nontraditional markets. Home healthcare, for example, will be examined as a niche for the sale of defibrillators. Such nontraditional settings will also be explored for the sale of patient monitoring equipment.

Looking for alternative markets has led Philips to consider opportunities among application service providers (ASPs). Of particular interest is the need for data storage solutions. The company is also looking at using the Internet to train equipment users.

"A lot of educational activities are possible for customers," said Jack Price, president of Philips Medical Systems North America. "We can make online CME credits available for technologists and (offer) advanced training for doctors."

Philips is also exploring use of the Internet to more rapidly educate employees. Another possibility is to use the Web to conduct transactions, going online as a means to reduce sales costs and increase customer value.

Nontraditional opportunities will be sought for all product lines, including imaging modalities. This effort will probably build slowly, however.

"What we have in mind is to first maintain our sales where they are focused today," Barella said. "Nuclear medicine will be focused on nuclear medicine, but it will be embedded in a larger service structure so that our customers see more than one face. The sales effort should be supported by marketing efforts aimed at disease categories."

The organizational structure of the company may be adjusted to optimize marketing to different groups. Individual groups focused on cardiology, radiology and its subgroup neuroradiology, oncology, and women's health are being considered.

In exploring new marketing paths, the company plans to maintain a modality-centric perspective to better guide R&D.

In MRI, radiology and cardiology, as well as interventional procedures, are driving development. In ultrasound, surgical applications are taking a higher profile. Cross-fertilization, exemplified by molecular medicine, will bring some of these modalities together as functional capabilities in MR, ultrasound (particularly the use of contrast agents for such applications as myocardial perfusion), and nuclear medicineÑespecially PETÑ develop further.

"We are trying to establish a consistent set of tools across modalities so (healthcare providers) can more easily make use of the data," Mickelson said.

Underlying each of these moves is Philips' quest to become number one, not necessarily in terms of market numbers but in terms of clinical value.

"A lot of times when companies say they are number one (after mergers or acquisitions) it's because they have put bits and pieces together to get a volume of sales," he said. "We want to be number one in clinical offerings."