Rolf Classon, President of Bayer Corporation's Diagnostics Division

Diagnostic Insight, 1998 Interview conducted by Robert Bauer

Rolf Classon, president of Bayer Diagnostics, came to the United States from Sweden in 1984, expecting to stay for a couple of years. "I've been here ever since, and I'm going to stay," he said. "I have one regret in life, and that is that I didn't come here earlier." With a degree in chemical engineering and the Swedish equivalent of an M.B.A., Classon began his career in 1969 in the Human Resources department of Pharmacia. After five years he left to work as a management consultant, later becoming general manager for a division within the Swedish Match Group and then returning to Pharmacia as president of the Hospital Products Division.

More company presidencies were in store for Classon in the United States: In 1984 he became president of Pharmacia Development Company, an in-house mergers/acquisitions and venture capital group, and from 1989-1991 he served as president of Pharmacia Biosystems, including the diagnostics, biotechnology, and medical devices groups. He joined Bayer Diagnostics in late 1991, in charge of its worldwide sales and marketing subsidiaries, and rose to president at the end of 1995. Regarding the current environment in diagnostics, Classon said, "Rapid change is occurring, and that is threatening, but it also creates the opportunity to change paradigms and approaches. For too long, the diagnostics industry was very product line and technology focused. Operationally, it's very important to manage product lines, but strategically, I believe it is more important to focus on the different market segments," he explained.

As the leader of Bayer Diagnostics, Classon stresses customer focus. "One of the important things I believe in is how much energy, skill, responsiveness, and enthusiasm we deliver in our day-to-day interactions with customers," he said. "We refer to it internally as 'the moment of truth' — every time, every day when one of our employees interacts with a customer. We have about 20,000 moments of truth every day around the world, and they are very defining moments for the company. Either you add something or you take something away, or it's a lost opportunity." He added, "Traditionally, we have been very focused on the quality of our products and systems. Now I want to extend this to the quality of our interactions. My dream is that one day, as part of our quality system, we will be able to manage and measure the quality of 'the moment of truth' just as I can measure precisely the quality of our products," he said.

CLASSONis married with three grown children, aged 19 to 27. A self-proclaimed "lousy golfer," he enjoys hunting, boating, and annual trips to his summer house in Sweden. He maintains business contacts in Sweden and, because of the time difference, takes advantage of his hour-plus daily commute to Bayer's offices in Tarrytown, NY, to attend to business in Europe.

In the following interview, Classon discusses changes diagnostics and Bayer's role in this evolving industry.

Four IVD Companies Compete in all Three of the Major IVD Segments - clinical lab testing, point-of-care, and diabetes blood glucose testing

ROBERT BAUER: Today there are seven companies atop the IVD industry today. What will propel two or three to emerge from this group?

CLASSON: In my opinion, we will see two different types of companies emerge: One group will be significant players in all three of the major IVD segments--lab testing, point-of-care, and diabetes self testing. Today, four companies are set to compete in all three of the major IVD segments: Roche-Boehringer, Abbott, J & J, and Bayer.

Then you’ll have a group of companies that specialize in one or two segments, such as Beckman Coulter and Dade Behring, who participate predominantly on the lab side but to some extent in point-of-care.

In the near future I think you’ll see Roche-Boehringer becoming a clear number one because of the strength of their product portfolio.

ROBERT BAUER: In addition to participation in multiple segments, on what basis will the four companies you’ve named compete?

CLASSON: We are moving away from an era when competition is based on who had the newest or most sensitive box. Today, all companies are good at developing, manufacturing, and supplying the analytical systems. So the industry leaders are shifting their focus toward the next paradigm of competition -- to help customers run their laboratories in an efficient way.

ROBERT BAUER: Most IVD companies have focused their acquisitions on broadening their product portfolios rather than expanding position in their core business, and as a result, we still have pretty much the same number of competitors in each of the major product/ technology segments. In retrospect, was this the right thing to do?

CLASSON: Critical mass is important in terms of the R&D investment that you are able to make. If you look a typical income statement, you can afford to sustain over a long period of time 10-12% of sales into R & D and product development. If you want to play in the three major IVD segments, you have to have a certain size to be able to spend the kind of money that’s needed--a minimum of $120 million to $150 million a year in R&D.

Just as important is critical mass. I believe it is important how a company ranks within the its segments. For example, we’re number six in the industry, and that might lead you to believe that we’re not really where we want to be at this time. But if you look at the segments, we’re number three in self-testing, number four in point-of-care, and number eight--although we do have significantly higher ambitions than that--in lab testing.

ROBERT BAUER: Do you foresee more consolidation among the industry leaders?

CLASSON: Within the next year or two, we’ll see a few other combinations that will change the format of the top five or six players. Then I think we’ll reach a point where the industry structure will be fairly stable.

Bayer Broadened its IVD Business in the 90s

ROBERT BAUER: Bayer broadened its IVD business significantly in the 90s. You had a point-of-care businesses in the late ‘70s that was quite profitable, then in 1989 you acquired a struggling chemistry business in Technicon. What was the thinking behind this?

CLASSON: I wasn’t at Bayer at the time, so I don’t want to speculate too much, but I think there was concern that diabetes and urine chemistry were niche businesses that might not be defensible. While they were very profitable and growing nicely, they were viewed as a leverage assets to get into diagnostics in a much broader way.

There was some disappointment with how the Technicon acquisition shaped up. For almost three years following the acquisition, we suffered from new products that were not up to standard. Only now do we have the flow of new products needed for a company our size to grow.

ROBERT BAUER: As recently as two years ago, there were strong rumors that you were going to jettison the Technicon business. What has happened since then?

CLASSON: Those rumors were not correct. But it is true that in the early ‘90s we weren’t sure which way to take the business.

Today, Bayer Diagnostics is viewed as a life sciences business and the commitment to diagnostics as one piece of Bayer the life sciences business -- where the company has quite a strong focus with three or four other businesses--- is very strong from a corporate point of view.

The Blood Glucose Testing Market is Key to Bayer

ROBERT BAUER: What were the key decisions that you made in the last few years to turn this organization around culturally and to get more products in the pipeline?

CLASSON: The first and perhaps most important was in early 1992 when we entered into the strategic alliance with Kyoto Daiichi in blood glucose monitoring. This had a significant impact one or two years later when our pipeline was still weaker than it should have been to generate growth. This alliance today represents the single biggest product line that we have--almost one-quarter of the revenue base of our diagnostics business.

Secondly, there was a lot of duplication between Miles and Technicon--we shut down several manufacturing sites to eliminate the duplication.

And third, we set up an organization strongly focused on product lines, with business units for hematology, clinical chemistry, immunoassays, urine chemistry, etc. Based on a strategic focus for the different product lines, we were able to cut back significantly on the number of projects. But even with reduced head count and expenses, we maintained R&D progress. Two or three years later we saw good things in the pipeline.

ROBERT BAUER: In the case of blood glucose, you have products from a partnership, and most recently products that Bayer has developed. Is this a signal of change to come?

CLASSON: For a long time, Miles/Ames held the lead in blood glucose monitoring but lost it basically because of technology. When LifeScan came with technique-independent systems, Miles/Ames wasn’t there.

In diabetes, Miles was really a one-product company (Glucometer GX, 2, and 3) and managed through the life cycle of each generation of product, one product at a time.

Now we have two platforms: one that Kyoto Daiichi has developed--the Elite platform, that will continue to generate a number of product variations--and the Glucometer Dex platform, developed by our research group in Elkhart, IN. This is the first time that we are able to market two products in parallel, positioned differently. As a result, we are starting to gain share in this market.

ROBERT BAUER: How will the role of partnerships change as your organization grows?

CLASSON: We want to be a significant player in all three segments. From a vertical point of view, we are very flexible as far as entering into partnerships. We are careful about branding, trademarks, and integrating support functions to the customers, but we don’t feel that we have to develop or manufacture all products on our own. Our facilities are more and more becoming assembly plants where we do systems integration, quality assurance, and assembly work.

We recently announced that we’ve entered into a relationship with Joel. Joel has developed a high-end chemistry analyzer that we will integrate into our line with coloring, design, and interface with our other Advia products. You’ll see us enter into other relationships where we fold technologies or products, which we don’t necessarily develop or manufacture, into our product line. Another example is our new relationship with ABx, which has not yet been announced, which will expand our breadth of hematology systems.

But there are certain core areas where we want to stay completely integrated and do everything from start to finish.

ROBERT BAUER: In what businesses do you want to become fully integrated?

Bayer's Core Competencies are in Chemistry Systems, Immunoassay Systems, and Hematology Systems

CLASSON: The Advia represents one aspect of high-level systems integration of different platforms. With the same technology, it does chemistry, and homogeneous and heterogeneous immunoassays, making it a core competence area that is very close to our mark.

We believe hematology is an important segment in the market, partly because it’s a significant chapter in laboratory testing today but also because it is an interesting entry into cellular analysis. It’s one way to avoid moving completely toward commoditization. You can still build a proprietary position based on new discoveries or technology that will make your offering more competitive.

ROBERT BAUER: In an interesting turn of events, Toshiba went from being your partner in clinical chemistry to beings Abbott’s partner. How do you view your this transition?

CLASSON: Toshiba was a good vendor and partner, but I wouldn’t say that it was a strategic alliance. The alliance was forged at the end of the Technicon era, and it helped us through that period. Toshiba, though, wasn’t right for us going forward, so we moved apart in a friendly way.

For our Advia modular integrated chemistry/immunoassay system, we have a different design philosophy than the Architect. So, for us it didn’t make sense to maintain the relationship.

ROBERT BAUER: Tell me more about the concept of Advia and its role in Bayer’s future.

CLASSON: Advia’s tagline is -- One decision, a lifetime of choices.

With Advia, our purpose is to define a customer segment in which we have closer relationships, like those that we so clearly benefit from with our vendors. Rather than provide a little for all of our customers--potentially 27,000-30,000 hospital labs worldwide--we’d rather provide a lot for a few customers. For that group, we are developing an integrated product line of hematology, chemistry, and immunoassay analyzers, an integrated chemistry/ immunoassay analyzer, and automated urine chemistry analyzers that all perform to a certain standard. This standard is what we call Advia. We’re trying to build a brand not for a product but for a family of products.

ROBERT BAUER: Is Advia a way for Bayer to offer a complete automation solution that is competitive with BMC, Abbott, and others while, at the same time, providing the company with a vehicle to sell individual systems that operate on generic automation lines?

CLASSON: Advia is flexible. The Advia Lab Cell would work well with a Boehringer, Beckman, or Abbott instrument--or all of them. Or if the lab is at a different stage, it may want to start with the Advia Modular System.

ROBERT BAUER: Automation can be something of a double-edged sword: If labs go with one manufacturer, they may feel over committed to that manufacturer, but it enables them to fix a problem with one call. When multiple systems work together, there’s the concern that someone will blame the track system, or the other instrument, or the data management system. How do you work through that?

CLASSON: We are facing exactly the same situation with our vendors. When we go from a large to a smaller number of vendors, the benefit is efficiency and quality assurance, but you become more dependent on each other. You don’t develop other vendor relationships that you might need in the future. It’s just like that for the laboratories: How much future flexibility are you willing to trade for more efficiencies by working with fewer suppliers? I believe that in 5 or 10 years, many of the labs will have 60-70% of their needs served by one supplier. At the end of the day, customers will determine what best drives costs down and productivity up.

Other Point of Care Testing Markets

ROBERT BAUER: Clearly point-of-care is Bayer’s strongest IVD business. Do you see expanding into other point-of-care markets such as pregnancy?

CLASSON: I don’t believe that in the foreseeable future we’ll see a self-testing parameter of the magnitude of glucose testing. Glucose testing is a unique creature--self-testing alone does not describe the segment. It is physician-supervised or monitored treatment of a chronic disease. Those words are important: physician-supervised is important for compliance, and you’re monitoring treatment, not diagnosing it.

ROBERT BAUER: Do you believe that coagulation will be an important self-testing analyte?

CLASSON: It could be, but I still don’t see it as being as big as glucose testing, in terms of population and patients. It could fit some of the parameters that I mentioned--physician-supervised monitoring of treatment or administration of therapy for a long-term condition.

Technology Partnerships in Cancer Prognostics and Molecular Diagnostics

ROBERT BAUER: Many of your technology partnerships involve markers and tests in the cancer area. Is this a significant thrust for Bayer?

CLASSON: Yes. This is an area where we deliberately invest a lot of money. From a technology point of view, you need certain areas that are unique to give you a proprietary position. Tumor markers is clearly such an area for us; it could develop into a core competency. We benefit from belonging to a significant life sciences company where there is an exchange of research and technologies between us and the pharmaceutical group.

ROBERT BAUER: Specifically, will prognostic cancer be an important area?

CLASSON: Yes, both in terms of prognostics in general and in terms of assessing effectiveness, lack of effectiveness, or even potential danger with certain therapies.

ROBERT BAUER: Is infectious disease also a potential strategy for the future?

CLASSON: That is one of the weaknesses we recognize today, and we are doing everything we can to develop this area. In fact, while it hasn’t been made public, we just acquired a licence from Roche to market product using PCR technology.

ROBERT BAUER: Bayer’s alliance with HCIA, where the company supports healthcare systems in the development of “best practice” models is very far reaching for a diagnostics company. Has this program been successful?

CLASSON: HCIA will become very critical in what we offer and how we support our customers. We don’t feel that we need this core competence in house; we can serve our customers better by accessing it from someone who can take it to higher levels than we can on our own.

We’ve had some very important successes with HCIA in the United States. This could very well turn out to be not a global market, but a very regionalized one, where customer needs in the United States, Japan, and Europe are different. You might need a different allegiance in each region, rather than drive it as an internal core competency.

ROBERT BAUER: Do you see direct benefits of this service as it relates to diagnostics or is it more a global benefit for Bayer Health Care Systems?

CLASSON: I think it is a clear benefit for the customer and for us. It gives our relationship another dimension, helping us to drive better understanding and knowledge, which in turn drives more efficiencies. Ideally, the relationship between us and customers should be almost seamless, but there is still a supplier/customer relationship rather than a partnership.

Today, our vendors are becoming more and more integrated into our manufacturing because of the way we design products and contract them out. If we could further develop such a relationship with our customers, we can help them benefit to the same extent that we and our vendors benefit.

ROBERT BAUER: What is your overview of the industry in general?

CLASSON: There is much to be said about the lab testing and point-of-care--particularly point-of-care testing in hospitals. I’m excited about the diagnostic industry and because of the changes occurring in where and how testing is done. The lab segment is the biggest right now, but it’s growing the slowest--2-3%. Point of care is growing at almost twice that rate and you have a profit rate 50-60% higher than in the central lab. The diabetes or glucose testing segment is growing even faster--almost twice as fast as point of care with an even higher profit margin.

I hope that we will be able to grow this business double digits with the mix of businesses we have. Almost half of our mix is in diabetes, which is helpful in sustaining a higher-than-average profit.

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