Talk about baptism by fire.
When Steve Rusckowski took the posts of senior vice president and general manager of Agilent Technologies Inc.’s (Palo Alto, Calif.) Healthcare Solutions Group (HSG of Andover, Mass.) in October 1999 — one month after Cynthia Danaher stepped down from those duties — Agilent was in the throes of its spin-off from parent company Hewlett-Packard Co. (Palo Alto). Agilent went public in November 1999 after just six months of legal and logistical preparations.
Fortunately for Rusckowski and HSG, he was a member of the management team that helped direct the transition.
He certainly is familiar with HSG, having served as general manager of HSG’s Cardiology Products division and as general manager of the Healthcare Information Management division during his 16-year tenure at the company. Rusckowski also held other management positions, including general manager of HSG’s Medical Customer Services business unit, field operations business manager, marketing operations controller and general manager of the Clinical Information Systems operation.
Rusckowski now is facing his toughest task. A lackluster hospital market has resulted in weak sales in HSG’s largest product area. The sales slowdown in capital equipment purchases contributed greatly to HSG’s $30 million operating loss in the second fiscal quarter, ending April 30, and $40 million operating loss in the third fiscal quarter, ending July 31.
With approximately 5,000 employees worldwide and the work force reduction of some 650 employees coming over the next two months, some major changes are underway. Medical Imaging spoke with Rusckowski about the state of HSG.
Looking back, what have been your priorities since taking the position last October?
It was quite a turbulent time to take over. A lot of the transition is positive for us, because we are a much more significant piece of a very substantial company. We account for approximately 12 percent of Agilent’s revenues.
My first priority coming into this job was to solidify our strategy and direction for the Healthcare Solutions Group. We spent a lot of time as a management team in the spring and summer of 1999 looking at how to compete on the basis of our strong product lines and how to get into some new product areas.
The second piece of the plan was the focus on operational excellence. One part of that is to go after our costs, our efficiencies and the delivery of products and solutions with a vengeance. There are a number of efficiency programs in place and hard decisions we are making in terms of the supply chain, manufacturing capacity and delivering products to the marketplace faster.
The next piece of the strategy is to differentiate ourselves from some of the larger players in the marketplace. If we can excel at operational excellence and excel at delivering products — and solutions and services around those products — we will differentiate ourselves and continue to do well in our marketplace.
Interwoven with all of this is that we now are under the microscope with our financial performance. Before [the spin-off], we accounted for approximately 3 percent of Hewlett-Packard’s
revenues. We did not disclose our product segments publicly. Now, we disclose HSG’s performance, orders and revenues. To some extent, that changes the pressure in terms of quarterly performance than we ever have had before.
How do you assess HSG’s financial performance so far in FY2000?
We came off a very strong FY99 (ending Oct. 31) with very strong growth rates in all of our product lines. We had a profitable year and profitable fourth quarter and first quarter [of FY2000].
What we see in FY2000 clearly is a softening in our business, primarily in the hospital segments. We attribute that to two areas. A number of accounts — both in Europe and the U.S. — pulled some of their purchases into 1999 based upon increased budgets for Y2K spending. The second area is the Balanced Budget Amendment. As it started to flow through hospitals, it put a pause in purchasing. The business is there, but the market has softened, primarily in the large purchase areas, such as patient monitoring.
How long do you think the Y2K hangover will last?
First of all, the timing of the hospitals’ fiscal years is different than ours. They are timed to renew their budgets in the summer months, so we hope some of the money comes back on the table to increase purchases of our products. When there is change in healthcare funding policy, worldwide there is a pause in the market, particularly in the area of durable capital purchases. The capital purchase market slides out for one to three quarters. We saw this in 1994 with managed care; we saw it in the mid-1980s with DRGs (diagnostic related groups) and prospective payment systems.
Our hope is that with what we hear coming out of Washington, it will give hospitals some relief on how academic medical centers are reimbursed and some relief from the Balanced Budget Amendment.
The second-quarter and third-quarter downturns weren’t total surprises then?
We expected the business would grow in modest, single-digit rates this year. Quite frankly, what we have seen in the second and third quarters was a softening beyond what we expected. At the same time, however, we track our deals and we are not losing market share.
If you look at the third quarter, our volume in the hospital market in patient monitoring was slightly lower than the second quarter and that was the primary reason for the increase in operating loss from the second quarter.
On the positive side in the third quarter, our external defibrillator line had impressive growth and so did our point-of-care diagnostic business. Our service and supplies business also continues to perform well.
In addition, when we separated from Hewlett-Packard, we had to duplicate everything — infrastructure costs, corporate finance, corporate IT, corporate human resource systems. So, there is a new group of expenses that we now are bearing a cost percentage of that we did not have in 1999.
What will happen over time is that the company across-the-board will work on reducing infrastructure costs and that financial burden. Some of that will help us in subsequent quarters.
What are some of the cost reduction measures HSG has taken?
Like most businesses, we went after discretionary spending levels, such as cutting back on travel, meetings and discretionary out-of-pocket expenses. Second, we looked at temporary plant closures in Massachusetts and in Germany. We closed in Massachusetts during the week of July 4 for three days and we had some voluntary closures in Germany for one week, pulling back on some capacity in the third fiscal quarter. Third, we tried to put an emphasis on introducing new products that would make a substantial difference in our top lines in the third fiscal quarter.
We hope that the business will strengthen, but we don’t see the business strengthening as quickly as we expect, so there will be continuations of more stringent expense reductions going forward.
The company also will reduce its work force by 650 employees. In which areas are the reductions concentrated?
It is worldwide and it is across all our multifunctional areas. What we did was try to rescale operations to our projected revenues. We saw cuts in all our functions and announced the move of our China facility to Singapore. We will phase out of production of our cardiograph line in Qingdao over the next three quarters and move that production to Singapore. We have a small engineering organization there and that will move to Shanghai.
What is the status of plans to transfer final assembly operations from Andover to Singapore?
We currently are evaluating all the product lines we have in Andover. We have plans over the course of the remainder of this calendar
year and next year to slowly transfer some of our manufacturing capacity from Andover to Singapore, with the majority of some of the transfers planned for 2002. In Andover, we manufacture our
traditional external defibrillation line, patient monitoring products and ultrasound products. We will continue to have what we call our manufacturing engineering functions, our global procurement
function and manufacturing planning functions in Andover.
Singapore is a significant Asian presence for Agilent for manufacturing and administration in general. Agilent has some 4,000 employees there now.
Across Agilent there is a geographic simplification program going on. We will move to fewer locations and have more of a centralized approach to field administration in the future to help lower our infrastructure costs.
How soon do you see the hospital market turning around? And what do you think will ignite the rebound in this segment?
It is difficult to predict, but we don’t expect market conditions in healthcare to improve substantially soon.
We went back and tracked the U.S. market over the last 10 years and we traditionally have had very strong fourth quarters. There were a couple of years where the market did not respond as quickly as the other eight [years]. I think some of the relief from Washington will help. You can backup demand only so long. Some of that pressure will build in the system to release some purchase orders to us and then we potentially will see at least a modest rebound in our fourth quarter, which is August, September and October.
The expectation going forward is a very modest growth rate for next year and we will live within that window of revenue.
In the third quarter, HSG introduced several significant new products and enhancements in ultrasound imaging; Web-enabled, wireless patient monitoring; and resuscitation, both in and outside the hospital. Customer interest in these new products is encouraging.
Turning back to the products, what is the breakdown by revenues for HSG?
We don’t disclose specific revenue numbers, but patient monitoring is our largest business.
We are the worldwide leader in patient monitoring and cardiac ultrasound and the leader in echocardiography. We believe we are a leader in external defibrillation and gaining share in the market.
The majority of our business — 60 percent — is in the U.S. and much of the remainder is in Europe and Asia. Europe is going through some of the same challenges as the U.S., in terms of healthcare funding. Asia and the Pacific Rim seem to be experiencing a bit of a rebound.
Is the plan to maintain the current product mix and the percentage of revenues the products contribute to HSG?
The overarching vision we have for HSG is to be the most pervasive cardiology and monitoring company in the world. We are well-positioned in the cardiology market.
In ultrasound, the majority of our strength is in cardiac ultrasound. If you think about patient monitoring, a large piece of that is in the coronary care unit. We have a telemetry line and cardiologists continue to influence purchases in patient monitoring.
Our focus is to continue to use the cardiology marketplace as a differentiating factor as we go forward.
The next piece is the monitoring business. If you extend your definition of monitoring to the defibrillator in the ambulance — which may be doing more monitoring than defibrillation these days — and think about what we are doing outside of the hospital, these are nontraditional acute care settings for monitors. The monitoring and cardiology connection is unique and another differentiator for us.
Another of our strategies is to extend the reach of care. The first element of that is determining that we are best-in-class in our core businesses. We will continue to strengthen our patient monitoring business and ultrasound business and will be the leader in external defibrillation. Finally, we have made moves to strengthen the diagnostic cardiology business with the acquisition of Zymed [Corp. (Oxnard, Calif.)]. We will launch future growth opportunities from those platforms.
The next area of growth will be to springboard from our strong businesses onto the low-end of the marketplace across our product lines. The best proof of that is our acquisition of Heartstream, which clearly will be the growth area of external defibrillation.
The external defibrillation market is a $400 million marketplace. People believe the AED marketplace by itself will reach $1 billion.
In addition, we — and our competitors — will invest and have plans to make inroads in the lower end of the ultrasound marketplace. There is an opportunity to sell low-end ultrasound as screening devices for the cardiologist, general practitioner or in clinics.
Agilent intends to maintain its leadership position in ultrasound by providing customers with the technology and applications they need to enhance their practices and meet the demands for products that help improve productivity and the quality of patient care.
We also see this low-end opportunity in patient monitoring. If you look at sub-acute care and non-hospital market for patient monitoring, it is a substantial marketplace that we haven’t participated in over the years. In May, we signed a worldwide supply agreement with Analogic [Corp. of Bedford, Mass.] to manufacture and develop for HSG a new line of portable, stand-alone patient monitors for rapidly growing markets, such as lower-acuity and alternate-site care. We see that as a $500 million market that we haven’t addressed yet.
The final area of growth is in the explosive areas of point-of-care diagnostics, e-Care and genomic medicine.
You mentioned low-end ultrasound devices. What are HSG’s plans for the hand-held ultrasound market?
We share the enthusiasm for that marketplace. We believe it is a major growth area for us. We are making investments and increasing our functionality at lower price points in ultrasound and we will participate in the lower end of the ultrasound marketplace, for sure.
That fits into our strategy. As the AED is to defibrillation, lower-end ultrasound devices will be to the ultrasound market.
That means HSG has a hand-held ultrasound product coming out soon?
I can’t tell you that, but if you look at the ultrasound market in general, what is happening there is consistent with what has happened in other technologies. The large-scale integration of technology will mean smaller footprints. That is the next frontier, if you will, for a lot of healthcare technology.
This will be a significant part of the market in the future and Agilent intends on being a player.
