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Not your same old Perkin-Elmer or years, Perkin-Elmer (PE) was the analytical instrument company to beat. The manufacturer, founded in 1937 as a precision optics company, entered the analytical instrument business in the 1940s and has grown to be a dominant force in the business by offering a wide range of instrumentation and software products many considered top of the line. PE's success propelled the company to the coveted position of the number one analytical instrument business worldwide based on total However, the 1990s have not always been kind to PE. Sales revenue from PE's analytical instrument division—which manufactures the company's traditional line of analytical instruments and accounts for more than half of PE's revenue—has stagnated, profits have fallen, and the stock has performed poorly. On top of that, PE lost its number one position in 1996 to "upstart" Thermo Instrument Systems. In an effort to turn around its fortunes, PE appointed Tony White as CEO, president, and board chair in 1995. White came from $9-billion-a-year health care giant Baxter International, where he spent 26 years climbing the corporate ladder to become
on the production floor, and large A new team of man- boxes empty floor spaces marked areas where had once machined metal or built agers reinvents PE's workers components. How has PE's AI division changed itself? traditional analytical Analytical Chemistry reports on the firsf steps the AI division is taking to restore its instrument business. health and where those changes are taking the long-time instrument manufacturer. executive vice-president. White, in turn, lured his old friend from Baxter, Manuel "Manny" Baez, to head up PE'' ailing analytical instrument (AT) division. Sincc taking over as a senior vice-president, Baez has built a new management team; improved the division's profitability; and changed the way the division researches, develops, sells, and manufactures its instruments. More changes are still to come, Baez tells Analytical Chemistry. .Everything ii snder review." Indeed, when Analytical Chemistry visited the AI division at PE's corporate headquarters in Norwalk, CT, last December, changes were very evident, as the company was still in the process of shifting responsibility for elements of instrument manufacturing to outside companies—a practice known as "outsourcing". Equipment sat in
Two divisions Ironically, it was two highly successful moves by the old PE management that, in many ways, set in motion events that would precipitate the company's reinvention. In 1991 Hoffman La Roche purchased the rights for the polymerase chain reaction (PCR) from Cetus, where Karry Mullis had developed the technique, and then licensed the rights to sell the PCR reagents in nondiagnostic markets to PE. (PE had already developed with Cetus the thermal cycler unit necessary to run the reaction.) In early 1993 PE completed the acquisitions of Applied Biosystems with its line of instrumentation to sequence and synthesize DNA and Denudes With that combination PE auicklv became a major olayer in the verv hot life sciences market
Analytical Chemistry News & Features, March 1, 1998 193 A
Focus PE's management decided to integrate the newly acquired life sciences company with the AI division through a single sales force and production management group. Sales from the applied biosystems line grew, but the AI division languished. Business analysts argued that the life sciences business could grow even faster and blamed problems in the AI division for holding back the life sciences engine and PE overall. Unhappiness erupted into the open in 1995, just as White was taking over the company, when a group of stockholdlead by financier George Soros debe broken up to unleash the life sciences business White resisted the breakup, but he did agree that the two segments should be separate divisions with their own marketing and sales forces. Since that time, PE has made significant investments in what is now the applied biosystems division (ABD) by acquiring several companies, including PerSeptive Biosystems in January of this year. ABD has grown significantly—23% in net revenue during fiscal 1997 and last year generated more revenue than the AI divisions (Figure 1). White and the management at ABD are committed to growing the life sciences business at 20% or better annually However, fixing the AI division has proven more difficult. White says the AI division he inherited was riddled with problems and close to losing money. "There were too many costs and too many assets. The division was too complicated and lacked good business structures. The management team was at a loss as to what to do next," he tells Analytical Chemistry. "They were following the industry, not leading it. [At that time] I wouldn't have given them a nickel for an investment." Business analysts agreed and called AI's product line "tired" Worse yet the AI division was competing in a worldwide analytical instrument market that was growing only 8% annually compared with the 15%-20% growth per year forecasted for DNA analysis eauipmenfr It is also a rnmnptitive markpt in
which brand loyalty means I A G C ar\t\
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White believed that Baez was just the person to tackle the difficult job of revitalizing the AI division. Baez, too, had moved up Baxter's corporate ladder from sales194 A
man to executive vice-president and was then directing a sales market that was worth $3.5 billion annually and employed around 25,000 people worldwide. "Manny is a great motivator of people," says White. "He builds confidence in people, and he builds teams. He has an incredible ability to pick good people who work well together." Baez had another skill that White wanted. "He can simplify problems." After years of high-pressure management and constant travel, however, Baez wasn't looking for a new job in 1996. "After 22 years [with Baxter], it was ttme for me to retire and spend time with my wife," Baez recalls thinking. White appealed to his friend to help him out, and he sweetened the offer with a promise that he would have the chance to make "a boadoad of money". (Baez's salary, according to PE documents, includes stock options plus bonuses based on division performance.) Baez accepted the challenge. A new culture When Baez took over the AI division in 1996, sales totaled around $650 million, and profits were 4.6% of sales. White's objectives for the division were to increase profitability to 9% for fiscal year 1997 (FY 97, PE's fiscal year ends on June 30 of the calendar year), 11% for FY 98, and 13% for FY 99, and to increase the amount of cash the business generated to $70-$80 million per year. To accomplish these goals, Baez initiated a number of changes that, in retro-
Figure 1 . Net revenue and operating income for ABD and the AI division. ABD's net revenue (•) and operating income (•) have grown steadily; net revenue (A) for AI has been flat and operating income (•) has been weak (FY 95 and FY 96 operating income for AI include one-time "restructuring costs" of $19.2 and $27.1 million, respectively).
Analytical Chemistry News & Features, March 1, 1998
spect, introduced modern business practices into the AI division. In 1995, AI employees were involved in all aspects of instrument manufacture, from machining metal to electronic assembly to painting the metal case. It was an old model of manufacturing that most major companies had abandoned. Baez transferred most of the instrument construction to outside firms, leaving AI to handle final assembly and testing. (The Norwalk, CT, employees whose jobs were eliminated were able to move to the new companies and keep their seniority and salaries; however, some jobs were lost in Europe.) These outside companies could produce components at lower costs because they handled larger volumes They also provided AI with access to advanced manufactiinntr practices without having to invest in new equipment say AI managers Baez also changed AI's internal culture and restructured the company along markets such as chemical, pharmaceutical, and environmental. "We are now organized by customer," he says. One clear example is AI's new six-person EuroBoard, which oversees the European operation. Each of the members has the double responsibility of representing one of these markets and a particular region. For example, the head of the chemicals market for Europe also has responsibility for the United Kingdom; the pharmaceuticals head responsibility for France; environmental Germany and softhandles the Belux countries The board also provides AI with a more panEuropean approach to marketing (What goes on in Europe is particularly important because according to Baez that region is AI's largest and right now toughest market Sales revenue from European operations declined 2 3% in FY 97 compared with FY 9fi 1 At the same time, AI is shifting its resources to where it sees the most promising markets. In recent months, AI has closed offices in Europe but has opened new offices in South American countries, such as Argentina, Columbia, and Chile (where sales are growing by double digits), and Asian countries, such as the Philippines, Indonesia, and China. The significance of these examples is that PE is selling directly in these countries and not working through local agents.
"There are higher costs at the beginning," says Sandra Carrie, staff vice-president for strategic initiatives, "but this allows greater penetration into the marketplace in the long run." Currently, around two-thirds of AI's business is outside the United States. New efforts are also underway to rationalize what instruments AI will develop and sell. "Scientists [in AI] were creating instruments, then going to the sales force and saying, 'Now sell it'," says Baez. As a result, the AI division offers a remarkable variety of instrumental techniques. In some areas, such as FT-IR, inductively coupled plasma MS, and atomic absorption, AI instruments have strong market positions. Other products, such as their liquid chromatograph, are estimated by industry observers to account for only 5% of the total market sales for that category. To focus on instrument development, Baez expanded the marketing group to survey customer needs. "Marketing really tries to listen to the customers and predict what they will need," says Michael Elliott, AI's vice-president for worldwide marketing. "We want to build the organization to get returns five, six, seven years out," says Elliott. This process, strategic marketing, matches new markets with new technology, which in turn helps direct the techniques that will be developed and with what applications. "[This strategy] places a huge responsibility on marketing, which is traditionally much comfortable with looking at existing markets with slight evolutions of existing technologies" says David Tracy vice-president for research One market that AI managers speak of with enthusiasm is food analysis, especially as new bioengineered products enter the marketplace. In fact, AI's marketing group for food also handles pharmaceutical products. Providing instrumentation for food analysis also supports AI's push into certain foreign markets, such as Costa Rica and Chile, where food exports to the United States and elsewhere are increasing. The growth of marketing is also changing AI's approach to R&D. "We are more focused on the actual market opportunities," says Tracy, which means fewer projects, more targeted projects, and shorter times to go from R&D to market. "There is less of a 'we can do it all here'
attitude. The role of the industrial scientist is not to develop new out-of-the-box technologies but to harvest what is out there in the world at large and adapt it to the needs of our industry," says Tracy. As a result, AI is forming partnerships with outside companies and institutions to bring new technologies into the marketplace. To seek out these new technologies, PE has provided the AI division with an interesting new resource. In 1996, Mark Rogers was made PE's chief technical officer, reporting to White. Rogers, an M.D., came to the ecmpany from Duke University's Medical Center, where he was a vice-chancellor. Rogers says that his role is to find new technologies and collaborative opportunities for PE's R&D groups. "We try to think about the fundamental things that must be addressed." In that role he works with contacts and technology transfer officers in academia, national laboratories and private nonprofit research centers to search out new opportunities For example, working with Rogers, the AI division and Sarnoff Corp. (Princeton, NJ) announced in October 1997 an agreement to jointly develop IR laser systems for the analysis of "medical gases" that could be used in monitoring patients. The agreement leverages AI's expertise in instrument design,
chemometrics, and environmental gas monitoring with Sarnoff s know-how in lasers and IR imaging. First products are expected to reach clinical trials later this year, according to the AI division. AI is even rethinking what constitutes a new analytical instrument. "Customers are moving away from looking at just the cost of an instrument and are looking toward the whole cost of an analysis—validation costs, method development costs, training costs, costs of the expert using it, service, and so on," argues Stephen Allen, AI's vicepresident of product engineering and development. Moreover, major customers, and even some research centers are increasingly wary of instruments that must be run by a specialist, says Allen. "Being an exDcrt in one particular analytical technique doesn't seem to be much of a career path anymore" he wryly observes To service these trends, AI is developing new instruments that are easier to use and more application-specific, providing not just a measurement but something approaching an answer. New instruments are being constructed with software that incorporates routines, such as chemometrics and artificial intelligence, to provide more data interpretation. "Instruments are sup-
Analytical Chemistry News & Features, March 1, 1998 195 A
Focus port issue is the number one driver of repeat business. We need to go above and beyond the customer's expectations on service and support," Elliott adds. A quality of life company
Figure 2. Wall Street's vote of confidence in the new PE. Bars show weekly stock highs and lows, solid line is 50-week exponential average. Bottom chart is shares traded. Arrow indicates Tony White's arrival at PE.
posed to be decision support, so why not put the decision support into the instrument and not expect an expert to go through hoops to get it," says Allen. According to Allen, R&D ii now charged with developing only instruments that offer an order-of-magnitude improvement. "It is orders-of-magnitude change in cost of analysis that is what often matters," he says. To gain these order-of-magnitude changes and still have short times-to-market, AI must get more leverage out of iis R&D projects, says Tracy. "For example, we have numerous software platforms that grew out of various product lines. We need to integrate things, so we aren't reinventing the same technology over and over again." That broad vision wasn't always possible within AI because the division was subdivided into small product-line units or subdivisions that operated autonomously with separate budgets "We have one R&D budget for rll of the divisions Steve [Allen] and I can those around from project to project instantaneously " The sales team also has a greater influence, says Joe Malandrakis, AI corporate vice-president in charge of sales and service in the United States and Canada. "We 196 A
can make decisions quickly without needing approval from higher levels [of management] . We have the authority to make commitments to major customers in terms of support and minor adjustments to something, such as software, to support their applications." To make these types of commitments, sales, marketing, and R&D must cooperate. That cooperation can help land a sale, but it also means that the creneral managers are now more accountable for their decisions, says Malandrakis. Sales is also focusing more on "key" accounts. Malandrakis cites one example in which AI is the "suppller of choice" to a major company for ICP optical emission spectroscopy instruments that analyze wear metals in oil. 'We have gone ffom product selling to more of an applications selling to get these multiple-unit sales." It is not only the big accounts, however, that are getting more attention. "We are trying to provide more service and support, and better response times," says Elliott. He says that of the 600,000 calls requesting information or help from the division each year, around 96% of them are now answered by a live operator, rather than a recorded message. "The [instrument] sup-
Analytical Chemistry News & Features, March 1, 1998
Overall, the early returns on all these changes have been positive for AI and PE. "PE is our number-one [stock] pick," says Wall Street analyst Paul Jaber (Gargiulo Group). "They are a very aggressive company. They are looking at the next barrier." Jaber's comments are echoed by other stock analysts who follow the industry and by the upswing in PE's stock value (Figure 2). Like most analysts, Jaber sees ABD as PE's ticket to success. "They are putting the pieces in place to dominate the molecular medicine field." Nevertheless, signs indicate that AI is beginning to contribute to PE's renewed health. AI reached its target of 9% operating revenue in FY 97 and seems to be on target to hit 11% and around $65 milllon in operating income in FY 98, according to PE managers. Malandrakis says that the division improved its profitability in the competitive North American market in FY 97 by more than 50%, compared with FY 96, with sales revenue growth of 3%-4%. "The [AI division] is well on its way to the goal [of increased profits and cash flow]" says White Although this news is good, net revenue has shown little growth (Figure 1). Much of the increase in profits stems from operating cost savings arising from the restructuring of the division, $25 million in FY 97 and more than $40 million expected for FY 98. 'We've given a sick business a lot of help in getting its profitability back up," says White. "AI has been a benefit on our [stock's] earnings per share growth, although it's been holding down our sales growth. If the business can't grow [in sales revenue] it will hold back the momentum of the company Everyone understands that" In many ways, the most difficult challenge for the AI division is what comes next. For the sales revenue to grow, the division must decide what businesses it wants to keep, which ones to invest in, which ones to sell off, and where it wants tofindnew opportunities. "We are working on rationalizing or reducing the number of
WEB EDITIONS FROM served markets in an effort to focus new technology on higher growth," says White. Signs of new businesses being formulated are already apparent. Malandrakis tells Analytical Chemistry that AI is launching a laboratory repair, maintenance, and application support service in North America that will support its own as well as competitors' instruments. On the technology front, Baez cites sensors as another new area of analytical instrumentation. Rogers predicts that in the future, AI will produce more "inexpensive instruments, which will be manufactured in high volumes." These instruments will probably be more application-specific devices or sensors Furthermore, after dividing PE into two divisions, White now wants some crossfertilization. "We are looking at the synergy between the AI division and biotech business. We are looking across the corporation at what opportunities come from joint efforts," he says. What is still lacking, however, is a clear vision of where the AI division is heading. To clarify that vision, the Boston-based Parthenon consulting group has recently completed a five-month study of every aspect of the AI business. The study included a historic review of AI's products, an examination of how the products have developed and performed, and interviews with more than 10 000 customers and noncustomers. Actions based on the study are expected soon Nevertheless, question any of AI's new managers on where they see the division heading and you are likely to hear them cite the life sciences market. These same managers, however, quickly qualify that prediction with a broader definition—a "quality of life company" that includes other arenas, such as environmental, forensics, food, and clinical, alongside the pharmaceutical and biotechnology markets. How this concept will transform into specific product lines is yet to be determined. All these changes have created a new sense of optimism about AIss future. "Manny has shaken things up and created a new direction for the business," says White. 'Today, with the [AI] division generating $60, $70 million in cash, if they want to spend some of that on their future—and it makes sense—I'm all for it." Alan Newman
ABRF '98 From Genomes to Function: Technical Challenges of the Post-Genome Era The Third Annual International Symposium sponsored by the Association of Biomolecular Resource Facilities will be held at the Town & Country Hotel, 500 Hotel Circle North, San Diego, CA from Saturday, March 21 through Tuesday, March 24, 1998. Organizers AI Smith, Stanford University Medical Center and Mike Rohde, Amgen, Inc. have assembled an exciting program of plenary, scientific, tutorial and poster sessions. Additional information can be found on the Web at http:// www. faseb.org/meetings/ abrf/abrf98/abrfmp.htm. To receive information by mail contact: ABRF Meeting Office 9650 Rockville Pike Bethesda, MD 20814 Phone:(301)530-7010 Fax: (301) 530-7014 Email:
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