Client Forum – Sysmex Corporation

Sysmex Corporation, founded in 1968 as Toa Medical Electronics, Co., Ltd. is a major player in the global diagnostics markets. The Company manufactures and markets haematology instruments, urinalysis instruments and other medical laboratory testing instruments, as well as reagents and Laboratory Information Systems. HBS Consulting which is currently working alongside Sysmex spoke to Jeff Allen, Managing Director of Sysmex UK, about future developments in the UK diagnostics market.

HBS Consulting – Can I start with asking you what you feel are the developments which you find exciting within the in vitro diagnostics market and how do you see the market shaping over the next five years?

Mr Allen: Well I think it is not just a matter of being excited, but more I feel that our business should be in the position of being able to respond to the changing needs of the customer. There is no question that there seems to be a big move within diagnostic services to shift some of those diagnostic services and decentralise. Currently, most of our diagnostics … certainly pathology, still tend to be centralised within fairly large, what I would call, core laboratories.

HBS Consulting: So is there some movement to providing certain diagnostic tests at the primary care level?

Mr Allen: Yes and I think that an increasingly key aspect is that the Primary Care Trusts (PCTs) are becoming more powerful. They are getting far more of the funding and they are really there to provide services out in the community. I can’t disagree with that. As a business we have to now educate ourselves and become far more knowledgeable about what the Primary Care Trusts are really looking at providing, and of course act accordingly. Certainly it needs interviews from our side, you know, with people like GPs, and so on assessing what services would they like to provide out there in the community, and hopefully having the ability to provide the technology, the instrumentation to be able to satisfy those needs. That is something that Sysmex as a standalone company won’t be able to do.

HBS Consulting: Saying that, does this mean that you will be looking at partnerships which provide the necessary synergies to satisfy the demands of the primary care sector?

Mr Allen: We have to look at partnerships with other companies, other suppliers to be able to provide a, if you like, a portfolio of instrumentation products to meet emerging demands.

HBS Consulting: Would you therefore be looking to provide offerings which enable whole patient screening?

Mr Allen: Well, certainly in terms of probably an initial screening since you are never going to get to the point of being able to provide a full diagnostic service, but being able to provide some basic sort of screenings. So if a patient goes along to their GP and signs are that a haemoglobin screen is necessary then I envisage such a scenario where this type of test could be done there and then.

We have got a lot more equipment coming along now which will also allow for what we call “near patient” testing and even patient “self testing.”

HBS Consulting: Is this again in the area of haematology?

Mr Allen: Well, yes. There are several areas, blood glucose is one of them, probably one of the main products that patients “self test”. Furthermore, now we get to the point of having little devices that can allow people to do their own INR (International Normalization Ratio), so that if they are on anti-coagulation medication, whether it is from a prosthetic valve, or whether it is to treat DVT or something like that, a lot of people can do their own testing, and then just probably go onto the web and download that information and get the correct medication dosing that way. This is preferable to making regular visits to anticoagulation clinics in hospitals and, you know, doctor’s surgeries.

The frequency of this type of testing, the INR, it varies as to how stable the patient can be. You know, some people will start off having to have a test at least every week, and then it may go to two weeks. Some people never get into a very good, or into the correct, therapeutic range and stay there. So some people are always up and down. I mean, a lot of people are still working and regular testing takes up such a lot of time. Also this takes up unnecessary resource really.

HBS Consulting: So that’s one area that you are already moving into?

Mr Allen: It is one of the key changes that I see. We believe that it is getting into the Primary Care Trusts, but we are ascertaining exactly what their requirements are. At this moment in time, I don’t think even they know what their requirements are. We need to bear in mind that different GPs have completely different outlooks. Someone will say “oh no, no, we are going to leave that with the central hospital” while others are requesting this option. Partly, this is because they are also getting incentives to take on some of that responsibility. The market is evolving

I think the other major move, going back to the issue of the core laboratories, is that there is the mergers of NHS Trusts, and mergers of Trusts normally means rationalisation of certain services. Some of those will be pathology services because pathology services are very expensive. So wherever they can, they will certainly think about rationalisation of pathology services, which then brings us back into big centralised laboratories, possibly even privatised laboratory services. I know of one major Trust down in London at the moment which is literally in the process of going out to tender with a view of going out to a managed service of pathology. Whether that is being done to scare their existing personnel into agreeing to rationalisation or whether it is being done generally to improve the quality of service and save money, we don’t know. This issue of centralisation/decentralisation is in a continual state of flux….. we tend to go through phases in pathology. Ten years ago the move was to consider centralisation of services, five years later it is decentralisation, and it goes on.

HBS Consulting: Based on what you have said, what do you think are the primary strengths of Sysmex which are going to stand the company in good stead within the scenarios you have depicted….moves toward testing in PCTs, near patient testing an so on?

Mr Allen: The principal thing that we have is that we should be in a position to respond to those market demands…..providing the right sort of technology to meet different user requirements. It is very difficult to offer, but considering that the operator of sophisticated equipment is critically important, that equipment is designed with the user in mind. It is no good going with an instrument that is designed for laboratory use and putting it into a PCT doctor’s surgery practice or somewhere like that, because you don’t have the technical competence. So, we have to be very sensitive to this fact.

I think we have always been a company that has responded quite well to the different needs of our customers. The other thing would be that we have to make sure that we have a totally comprehensive portfolio of products. Due to this we continue to look for good partners that we can collaborate with and we remain flexible in our approach to this, not always initiating or leading the approach.

One example of a partnership which has allowed us to expand into new territory is that with Novartis. This collaboration has taken us into dealings with Mental Health Trusts. The Novartis partnership that we have set up, was really brought about by Novartis wanting to provide exactly what we have been talking about… which is testing at the point of care. They have a drug called Clozapine targeted at treatment of schizophrenics. This particular schizophrenic drug has to be monitored as outlined in Department of Health guidelines since a severe side effect is agranulocytosis. This condition occurs when the number of white blood cells called neutrophils suddenly drops. The immune system relies on neutrophils to help ward off infection, so agranulocytosis can be life threatening. For this reason, people receiving clozapine need regular blood tests to monitor their neutrophil levels. At the moment, the patient comes in, and you can imagine if it is a schizophrenic, they are often difficult to get in anyway. So, he/she comes in and has a blood test, and then the same patient has to come back a week later. To try and get this patient back in a week later is very difficult. So, now what we hope to be able to try and do is get the patient in, take the blood off the patient, immediately analyse it, within five minutes if they are able to. There is a centralised monitoring service from Novartis, which the system is linked up to, which operates like a traffic light system. Red, no, the patient’s result is in the danger zone, stop prescribing. Amber, borderline, refer it to the central laboratory service. Green light, you can carry on prescribing. So the, one visit by the patient, the blood sample is taken, and they walk away with the prescription again. It is ideal.

Now that is a big contract, over the next ten years, you know, that’s a £10 million contract between ourselves and Novartis. This is a good example of how we can collaborate with companies in being able to provide them with the tool that otherwise they would have had to access this service through a more centralised facility. It is not necessarily going to make or save them money, but it is going to ensure that they can probably prescribe more drugs.

HBS Consulting: Sysmex has recently made a move into the Life Sciences area. I would just be interested to a little more about the background to this.

Mr Allen: It is as we all know an interesting market. The transition can be difficult but I think it is very important. Remaining a pure play diagnostics company can be very limiting in terms of sustaining growth. So, therefore we have to expand our outlook and become more of a general healthcare company.

Life Science is a very all-encompassing sort of word. The area that we are looking at more specifically, as you know, is the oncology area. Breast cancer as a first line, and then moving onto other cancer detection. With life sciences we touch upon opportunities in say, molecular biology and so on. The future really in terms of diagnostics will be moving towards molecular biology-related tools and in the end we are just embracing these developments. We can’t afford to stand still and really expect our future growth to be based upon very old, traditional means of diagnosis.

HBS Consulting: Is there a similar degree of caution which we see from other companies in the diagnostics sector, in terms of moving towards molecular biology- based diagnostic tools?

Mr Allen: I think there will always be caution, because it is change. It is a change from existing practice and enforcing change is very difficult. Getting there, for many companies, is going to be a marathon, and not a sprint. It is something that needs to evolve. Some of the technology already starts to encompass areas of molecular biology without us really, really realising it. However, I think certainly over the next ten years there is so much knowledge and progression in understanding of gene therapy and areas like this that I think it will be a bit like computers to some degree. It will just suddenly gather momentum. When I look at haematologists and people like that now, if we go to Congresses, so much of the programmes and the lectures that they go to are all geared around molecular biology.

We also need to be aware that newer companies entering the market will in some ways be much more technically competent when it comes to the use of molecular biology tools in diagnostics. The advance of technology is one of those things that can all of a sudden just pass you by and I think that’s what we, as large more “traditional” diagnostic companies have to be very alert to is some of these new players will come in and immediately get into a very strong position. We may only be able to overcome that by entering into things like mergers and acquisitions. We may be forced to look at acquiring some of these companies as that is a very, very rapid way of gaining competence and so on. Otherwise it is a very lengthy process.

We find ourselves in the top ten diagnostics companies. Not because we have done mergers and acquisitions, but because other people have. So, companies keep disappearing because they have merged with someone else.

As I said it is a way of actually gaining expertise rapidly, and it can often be a cheaper way than risking money in increasing R & D. Sysmex itself is a relatively cash rich organisation, and we are always looking for acquisition. This is because we have got to grow, the growth that is expected from the shareholders and investors is something you can’t sustain by natural growth, you can only continue that growth by acquisition. That’s exactly what we will do in these circumstances.

HBS Consulting: What would you say Sysmex strengths are in the way you interact with your customer base. Also, how important are things such as customer relationship management, CRM. In a broader context how is CRM developing within the diagnostic industry?

Mr Allen: We are a service industry now. At a local customer facing level like ours we have to be there to provide nothing more than services to the customer. Now those services are of many different types, be they application support, product support, technical support, logistic support and so on. For the past two years now we have been trying to gain acceptance throughout the company for a very customer focused type ethos, from top management down.

If support doesn’t come from top management you can never expect it to filter its way through to other management and employee levels. The one thing that we are just doing is coming up with a new customer charter talking about our customer services and so on. That, in itself will allow us to get into new areas. If we have got a very good reputation in what I call our core business it is very easy for us to use that as a reference for making inroads into new business fields, such as Life Science. Life Science will incorporate some facets of pathology to some degree, even though we may have not been in them before, but the fact is that people do occasionally talk to each other. If you can get a good reference about a company you are more likely to do business with them. So managing customer relationships, nurturing relationships can short cut the sales process.

As we have got ourselves into such a strong market position in our core business, we have to look at maintaining that business. It is a case of not just winning new business but also we tend to be very good at thinking about how we are going out there and getting new business. Relationships are important as we sometimes forget that we run the risk of being a leaky bucket if we are not careful.

HBS Consulting: How has Sysmex positioned itself given the current activity in the healthcare IT sector in the UK. For example how have you ensured that your systems integrate within hospital information management systems?

Mr Allen: Well, if you are speaking in terms of lab information systems we work and obviously co-operate with the main LIS providers. We, at Sysmex, are also in the business of lab information systems. However, in the UK market, we have taken the decision to really pull away from that, because of current developments and the timing of our entry into this sector in the UK. We came into the market just at the time that the government’s initiative for the LSP, Local Service Providers was really getting to its peak. We were never fortunate enough to have a long enough presence in the market to become selected as one of the LSPs.

The choice of LIS partners for the HIS providers designated as providers of systems at the regional level is now restricted to perhaps four lab information system partners. I think this is wrong. The reason I think it is wrong is that it will not be an incentive for the chosen companies to continue investment in system development, because they will say well there is only four of us, that means we are going to get 25% of the business no matter what. This restriction of choice and forecast lack of product development is detrimental for advancing the technology of lab information systems. You need active competition, that’s the driver for people to invest in R & D, to ensure that they keep or always aim to be the number one.

I know that many of the testing laboratories feel as though they should have some control and input into their lab information choice, and now they are being given no choice whatsoever. They are told this is it, you know, you have got a choice of one. Going back to your question on compatibility all of our products have to be easily interfaced into a lab information system. That gets easier these days because there is a lot more standardisation in the outputs from analysers with HL7 for example. While standards, and the adoption of them, should make it cheaper to interface as well, it doesn’t, because interfacing is very much a bit of a cash cow to LIS companies, so they can charge a lot of money to interface equipment. We’ve done the same thing.

HBS Consulting: Where do you think the biggest challenges are going to be for companies such as Sysmex, over the next few years?

Mr Allen: The greatest challenge is to continue the growth that we have achieved for ourselves. I think over the last ten years, not just within Sysmex UK but as a corporation we have grown at an average of about 16, 17% per annum. Some of that growth has been brought about on a corporate level because of success in entering new territories such as the Eastern Bloc. There is a lot more investment going in now, so the healthcare system infrastructure has improved and there are a lot more opportunities.

We also have to manage effectively our entry into new areas like Life Science and handling mergers and acquisition. We will see restriction in growth in our traditional core business of in vitro diagnostics, because our market share is already at a reasonable rate. The testing market is not achieving the sort of growth that we would like to see …. the testing markets tend to grow at probably less than 10% per annum. I certainly know that the Board of Directors are looking for more than 10% growth per annum.

You are just not going to see that, unless you move into new areas. Reimbursement systems around the globe are under pressure…..massive pressure on bringing down the level of reimbursement. So even if the testing volumes were to go up the pressure would be there. Our biggest challenge as a corporation is being successful in North America. The North American business has gone through a period of uncertainty with us having a distributor in North America, then we went to direct sales, then back to a distributor, and now we have gone direct again. With this change there is now a substantial investment there. We have got a relatively low market share, probably between 10 and 15% market share in North America and we know the potential there. Every percentage point growth that you can get there is serious in terms of turnover. So managing the business in that market is a big challenge. I think there are two commercial testing organisations over there which do something like between 70 and 80% of the laboratory testing that takes place.

HBS Consulting: In terms of the UK can I ask you what is Sysmex market share here?

Mr Allen: In the two business sectors that we concentrate upon, haematology and haemostasis, or coagulation, they are both around the 40% mark. Nobody has got more than 50%. In haematology, I think we are at about 41 to 42%, very similar to Beckman Coulter. Beckman Coulter, in terms of haematology diagnostics, are still perceived as the number one player. So we have got about equal market share with them. There are probably three other competitors which are Abbot, Bayer, ABX. All within the 5 -10% range of market share.

Within coagulation or haemostasis, there is a situation in the UK market whereby there was one dominant player called IL, Instrumentation Laboratory, who were really innovators in automating coagulation testing, and they used to have a massive market share. Absolutely huge. Again we’ve managed to do the same thing here, you know, we’ve got ourselves up to between 40 and 45% in terms of that market. For IL, it is one of the problems that you find when you become number one, there is only one way to go, and that’s down.

I think Beckman Coulter and IL suffered from becoming very complacent. I don’t know whether it is complacency or arrogance, you know, but either one of those two gave rise to the same outcome and we were able to take advantage of that.

Both companies have really plummeted in terms of their position in the market. In May 1991 we entered the market with nothing but we have taken the company from under £2 million worth of turnover to where we expect this year to do £18 million. It is serious growth. It is so tremendous, that’s the problem, people still expect that same kind of growth.

HBS Consulting: If you were made Secretary of Health for a week, next week or whenever, what would be the key thing that you would do, with regard to laboratory diagnostics?

Mr Allen: I would try and raise the awareness of laboratory diagnostics. I am very passionate in feeling that people just do not know about laboratory diagnostics, and how important it is. People think that these doctors are absolute wizards, and I am not trying to knock them whatsoever. However, without some of the information that they receive from the labs they wouldn’t have a clue as to how to treat a patient. I would certainly raise awareness of laboratory diagnostics and also I’d probably want to put in place a much more efficient programme for health screening, because my view is, and I think most people tell you, the sooner you can catch a condition, the cheaper it is to cure it and the more successful it is going to be to provide a cure. The problem is that we don’t do enough health screening, and when people do become ill they are expensive. They take up beds. That’s what is expensive. WE really need someone to have the balls to really put that money up front. Then I think it would pay dividends but it just needs somebody who has got the strength to do that. Health screening programmes seem to be restricted to very emotive areas, mammography and things like that. Breast cancer is a very emotive subject. You have got to spend more money on healthcare.