Prognosis for Beckman Instruments Looks Healthy : Louis T. Rosso : Q & A

Louis T. Rosso became president of Beckman Instruments in 1982 shortly after the Fullerton company was acquired in a $1-billion merger with the Philadelphia pharmaceutical giant that became SmithKline Beckman Corp.

At the same time, the domestic market for medical diagnostic and analytical instruments suddenly went sour because of revisions in Medicare reimbursement regulations that put new constraints on hospital operating costs.

Rosso, watching Beckman’s once-booming sales flatten, redirected the company’s research and development to meet the new requirements of the hospitals, clinical laboratories and biomedical companies that are its customers.

His decisions to significantly expand the company’s international sales and develop more cost-effective instruments are credited for recent improvement in Beckman’s business. The company posted $511.7 million in sales for the first nine months of 1987, up 14% over sales of $450.8 million for the same period in 1986.

When Rosso joined Beckman Instruments in 1959, the company founded by Dr. Arnold O. Beckman in 1935 was known primarily in the electronics field. Rosso, who held a bachelor’s degree in biology and chemistry from San Francisco State College and a master’s degree in business administration from the University of Santa Clara, started at Beckman as a product marketing specialist in the biomedical instrumentation division.

Rosso later held management positions in both the diagnostic and analytical sides of Beckman’s medical and biological instrumentation business, which grew greatly in the 1970s. He became senior vice president of Beckman in 1980 and succeeded William F. Ballhaus as company president after the merger.

After the merger, SmithKline Beckman sold Beckman’s electrical and industrial instrument businesses. Responding to lower sales in its diagnostics division, Beckman laid off about 500 employees between 1982 and the end of 1985. The company now employs 7,200 workers worldwide, including 2,300 at its Fullerton headquarters and its Diagnostic Systems Group in Brea.

Rosso, 54, recently discussed the changes in the medical industry with Times staff writer Leslie Berkman.

Q: Has the business of Beckman Instruments suffered from the cost-cutting trend in medicine that began in 1983 with the change in Medicare policy that restricted reimbursements to hospitals? I understand that new orders slowed down for laboratory instruments that you make.

A: Certainly the period from 1983 through 1985 was very difficult. We were a company used to growing at 20% a year (in sales) and instead we were growing in the single digits. There were some cutbacks in those early times. . . . We had to lay off some people and consolidate some businesses. We are a lot leaner and meaner now than we were. When you are growing rapidly and your markets are growing fast, you can afford to pay less attention to the efficiency of an organization.

Q: Was Beckman’s sales performance disappointing to SmithKline Beckman Corp., your corporate parent, which paid top dollar for Beckman?

A: The parent certainly didn’t get what was expected. But remember they (SmithKline) saw the acquisition hit by an industry problem that wasn’t peculiar to the company. Henry Wendt (chairman of SmithKline Beckman) said, ‘Quite frankly, you know it (Beckman) is a wonderful company, and it fits very well (into SmithKline) and it’s going to do fine, but the timing (of the acquisition) was not the best.’ SmithKline Beckman is a pharmaceutical company with a great long-term view.

Q: What markets does Beckman compete in?

A: Beckman is a leader in two interrelated markets: life sciences and health care. We serve these markets with two business groups, which each make up about half of the sales volume. The Bioanalytical Systems Group serves the life sciences laboratory market. That includes the bioresearch segment, made up of academic institutions and research institutes, and the bioindustrial segment--primarily the pharmaceutical industry--as well as the biotechnology industry, agriculture, food and beverage companies.

The Diagnostic Systems Group serves hospital laboratories, group practices, reference laboratories and ambulatory sites--chiefly for blood chemistry.

Q: How has Beckman Instruments responded to a more cost-conscious marketplace?

A: We had to reconceptualize our strategy for diagnostics and redirect our R&D; efforts. This caused a hiatus of new diagnostic products for about three years. In the interim, we did a good job of selling what was available and kept the diagnostic instrument business going, if not growing. During that time we were buoyed by the bioanalytical business, which continued to grow.

We are getting new products, and we have a new strategy that is adjusted to the way reimbursements are funded. Overall, Beckman is turning the corner. We are growing, we’re contributing to the corporation and we expect over the next few years to get up to the performance that was predicted when the merger took place.

Q: Did hospitals stop spending money for new equipment?

A: The hospitals never were totally without money. They always bought moderately, and they always bought after-market materials (the chemicals and other products needed to operate and maintain the diagnostic instruments already purchased). Over half of our business is in the after-market. But what suffered was the purchase of new equipment for a while. It just wasn’t at the rate we had planned.

Q: In the last year did you introduce many new products?

A: Well, I’d say the rate at which new products are coming to market, from both our life sciences and our diagnostic business, is stepping up. Last year we must have had at least 10 significant new products. In 1988 there won’t be as many introductions, but we are going to get the benefit of everything that we introduced in 1987. It takes a while to get the word out and to get the demonstrators out there and get people to buy them.

Q: Are your new products less expensive, in keeping with your customers’ increased interest in cost control?

A: Well, they are better. They are good values. I don’t know if they are less expensive. Value is being judged by what the product will do, compared to its price. Productivity is an issue. We are automating equipment so it doesn’t require a lot of labor, instilling data handling into the product so that you get the final answer, instead of having to calculate the final answer. We are providing products that do tasks that were otherwise done manually and that were very onerous, like DNA sequencing or synthesizing.

We are designing hospital laboratory blood-testing instruments with random access, which means that they can do any combination of tests without reprogramming. So a doctor can order specific diagnostic tests at a lower cost per test. Last year we also began to focus very heavily on reducing our costs of production. We are using a lot of new manufacturing approaches that have been applied in some industries, but never this one.

Q: How much money have you saved so far from production streamlining?

A: It is too early to tell because these programs are in the start-up phase. But we have already seen time savings in individual cases.

Q: Are you benefiting from the explosion in biotechnology?

A: Oh, yes. That is the driving force in our business, both in the United States and worldwide. The piece that is growing fastest is pharmaceutical research. The pharmaceutical industry is putting way more money into research than it did 10 years ago. We are right in the middle of the new biology and its potential for cures, new drugs, new understandings of cancer and AIDS.

Q: What kind of instruments are needed for that kind of research?

A: Well, in all laboratory research you prepare the sample by separating it from everything else. Then the purified sample is taken to an instrument to do some kind of analysis on it, and that is done on several instruments we make--nuclear detectors, spectrophotometers, amino acid analyzers, high performance liquid chromatographs. Then, when you have finished the analysis, you want to handle the data, and sometimes that function is built into the instrument and sometimes it is done on a separate computer system for which we produce the software.

Q: Does biotechnology demand a different type of instrumentation than you made 10 years ago?

A: Yes. For instance, new equipment is needed for the work that is being done in DNA separation and sequencing. We make laboratory robots, pieces of automated equipment that handle a lot of repetitive tasks for this process. There was nothing like that, and in fact no need for anything like that, 10 years ago. Also, our diagnostic instrumentation uses a lot of computerization now as part of the automation process, and there is a lot more data to handle in a clinical laboratory.

Q: Are your instruments used in the preparation of drugs as well as for research and for diagnostic purposes?

A: In the pharmaceutical business they’re looking for consistency of product. If a pill is supposed to contain certain ingredients, they want to know if it really does contain them every time and there are no impurities. You take a batch off the production line and bring it into a laboratory and take a look at what is in it for quality control. We make the instrumentation and data-handling equipment used in that process.

Q: What is Beckman Instruments’ greatest competitive advantage?

A: We have a number of strengths. Number one, we have a very large installed base (of equipment), probably the largest of anybody in the world. We capitalize an awful lot on the fact that we’ve got that big customer base. We go back, not only for new customers, but we keep selling to the same customers because we do a good job for them. When their products are becoming obsolete or when they want to expand with accessories or with major add-ons, we design the products so they will work with what the customer already has.

Having a large installed base also means we have to be strong in providing after-sale service and supplying the installed instruments with expendables. We need a strong customer-support infrastructure that is worldwide in scope.

Q: How important is your international business?

A: About 35% of our business was international 8 or 10 years ago. Now it is going over 50%, and it is growing much faster than our domestic business.

Q: Has your expansion overseas been difficult in that you have to deal with various governments?

A: You have to deal with every government, and you have to put down an after-market infrastructure. This business is built on supporting the customers you have, and you have to have a good logistics system, because we are moving a lot of after-market supplies around the world. You also have to build up a reputation. You go into a place like Japan, which we are just penetrating right now, and you have a lot of local competitors that are better known.

Q: Is your international business helped by the weakened dollar?

A: We were growing internationally when the dollar was stronger, but the weakening dollar has helped.

Q: Are you doing all of your manufacturing in the United States?

A: No. We manufacture in Ireland and in Scotland and a little bit in some other countries where we need a presence.

Q: Is it true that the medical instrument business is consolidating?

A: Yes, there have been consolidations. On the diagnostic side there have been a number of companies (that were) bought as we were, or merged, and as a result there are probably fewer and bigger companies.

Q: Is that good or bad for the industry?

A: I think it recognizes the reality that it costs much more today to develop a new product, and large companies have more financial resources. The products being developed are much more complex. It can cost $3 million to $50 million to develop a new measuring instrument or a new generation of an instrument.

Q: By contrast, how much did an instrument development cost a decade ago?

A: I don’t really know the number, but I am going to estimate a third to half that. Today’s development process favors the large company or the very entrepreneurial company. . . . Another point in favor of bigness is that if you have to invest a lot to develop these products, then you need a global market to get your return. You can’t get it out of one country, even the United States.

Now, you notice that I didn’t mention the need for large-scale production, large factories and so forth, because you don’t make these instruments in large quantity.

Q: What do you mean by saying the very entrepreneurial companies also can thrive in the new environment?

A: Well, a little start-up company might come on to a really exciting new idea, and they might not be able to get it all the way to market or make a big business out of it, but they’ll get the product to the point where they can use the help of a bigger company.

Q: Are you out looking to acquire the products of small companies?

A: Sure. We are looking to buy some little company’s product or an international product and put it through our marketing and distribution channel with our name on it.

Q: People keep talking about the potential for Orange County becoming a sort of Silicon Valley with the emphasis on biomed companies. Is that feasible?

A: There are a lot of start-up companies in Orange County. And you’ve got a fine research establishment in the University of California at Irvine that’s expanding rapidly. And so Orange County, among several other places, could be a focal point for the biomed industry, some of the other places being San Diego, San Francisco and Boston.

Q: Is it more difficult now to decide how to design new products to meet the needs of your customers?

A: Yes. Because the demands are stringent now, the customer is much more value-conscious; the markets in the United States in particular are growing more slowly and you’ve got more competition. So, yes, you have to be very careful.

Q: What do you base your decision on?

A: By paying particular attention to the customer’s requirement for productivity. I keep using that word. But that is what he or she wants. And they’re probably less interested in frills than they once were. They are probably less interested in having the latest and the best and more interested in having utility. And they want durability. It is not terribly different than the way we’ve gone with automobiles. People look for value. They don’t look for fringe and accessories and all that stuff.

Q: In hindsight, when you look at the push for cost containment and what the medical industry has gone through, has this come to be a plus for the public or a negative?

A: Oh, I think it is a plus for the public. I don’t think the whole medical health-care delivery system is as efficient as it has to be. But it is improved from what it was.

Q: Will the stock market crash and concerns about the economy affect your business?

A: Economic conditions might reduce the ability of our customers, especially start-up biotechnology companies, to raise money on the public market. But we don’t depend heavily on start-ups.

Q: So the medical industry is really better buffered against economic changes than a lot of other industries?

A: Except for the start-ups, yes. It’s not a consumer-driven industry. Life sciences research is a matter of public policy mostly, and health care is not a discretionary item. I mean individuals can defer elective hospital stays up to a point, but they can’t do that indefinitely. . . . We love life sciences and health care. We think that’s the place to be in a long haul. It’s hard to imagine a world that doesn’t have funding going into medical research and money to support its health care delivery.