Midnight in the garden of Hewlett-Packard Medical
By ARTHUR GASCH
Healthcare InfoTech Contributing Editor
Business deals gone awry always are disappointing for the party that loses. Sometimes very disappointing. Often there is at least the blessing that the whole world isn't aware of who you are.
When Spacelabs (Redmond, WA) purchased JRS Technologies a couple of years ago during the Healthcare Information and Management Systems Society (HIMSS; Chicago) meeting, few knew that Protocol Systems (Beaverton, OR) had its press release announcing the same acquisition all ready for distribution, but lost the deal just the night before due to someone on its board of directors meddling with the terms to get a "little better deal," and ending up with no deal at all. Ah, greed! Had that acquisition succeeded, Protocol would have been a different company than it is today. Paul Harvey, for one, has made a career out of telling ". . . the rest of the story."
Two weeks ago, in the midst of the big story at HIMSS about the breakup of Hewlett-Packard (HP; Palo Alto, CA), it was easy to miss the related story from GE Medical (Milwaukee, WI), and to see the connection. HP's medical business has been cranking along, but Cynthia Danaher, general manager of the Hewlett Packard Medical Group (Andover, Massachusetts) hadn't been able to get the attention of and commitment from company CEO Lewis Platt, which she needed to grow HP's medical business. After all, HP Medical, market leader in medical monitoring, ultrasound, fetal monitoring - that it is, contributes only $1.4 billion to the HP corporate $47+ billion revenue trough, which looks perhaps to HP corporate like a trickle - less than 3% of corporate revenues. What with all the divestiture planning, and daily business decisions regarding what is now clearly HP's main interest - its printer and computer businesses - it's easy to push the Medical Group to the back burner, and ignore it. Indeed, perhaps the divestiture was so close at hand that HP had just lost focus on the divisions which were going to be spun off, under a new company and IPO structure, and didn't want to write checks of make commitments until that has occurred. Therefore, it missed a major opportunity for a second time and that truly is a shame.
For while HP was announcing its divestiture of its Medical, Chemical, and Instrument businesses, GE Medical/Marquette (now a $5B business unit of corporate GE, which employs 19,000) announced March 11, 1999 that it had again pulled the rug out from under HP in the operating room segment, by the deal it had cut with Drager, the number two supplier in the US of anesthesia workstations, and HP's latest OR partner. The press release about the deal with Drager didn't actually say that - indeed, it didn't even mention HP - but it was clear to anyone who watches this market even casually.
Recall that less than a year ago, upstart rival Datex-Engstrom had done exactly the same thing by purchasing Ohmeda, HP's previous OR business and alliance partner, from BOC. That had move left HP without an OR partner, and disrupted a long-term relationship with Ohmeda. When BOC, Ohmeda's former owners had announced Ohmeda was for sale, the "logical conclusion" was that HP, Ohmeda's long time business partner would have purchased them. But the "logical conclusion" was the wrong conclusion. For whatever reasons - perhaps focus, perhaps commitment, whatever HP did, it was ineffective and the deal went to little Datex-Engstrom, more than doubling it in size and creating a new, major threat for HP in the perioperative and surgical ICU market segments. In one deal Datex had emerged not only as more of a threat to HP, but had stripped HP of its presence in perioperative settings worldwide. To make matters even worse HP customers had to go to Datex-Ohmeda for service on their HP/Ohmeda products.
After this embarrassing situation, HP immediately warmed up to Ohmeda's major competitor, and No. 2 player in the US market - North American Drager (NAD). Ohmeda has about a 48% market share of U.S. anesthesia workstation. Drager, HP's new target had a respectable 44% market share, so a successful deal with Drager would have only cost HP 4% market share, and would have provided a state-of-the-art perioperative CPR, something which Ohmeda didn't have. Drager Medical Group (Pennsylvania) accounts for 4,500 of parent Draegerwerk's (Luebeck, Germany) 8,700 employees worldwide, and for $1B of its parents, $1.8B in corporate revenues. So the pursuit of Drager by HP began. There was the exchange of equipment in both company's booths at last October's American Society of Anesthesiologists meeting, and allusions to a new "blessed alliance" to replace the Ohmeda one. HP dumped its perioperative information system, in favor of promoting Drager's new Saturn perioperative information product, developed jointly at Duke, a major HP account. It looked to the world that HP had made a nice recovery to a very dumb move. But as the world found out last week, looks can be deceiving.
Apparently HP doesn't keep their partners warm long anymore, or perhaps the HP Corporate commitment to HP Medical, had already waned in the foreplay of divestiture, so perhaps Medical just couldn't come up with enough cash or whatever else it took to keep the relationship warm. While HP's negotiations dragged on with Drager for months and nothing concrete came forth, rival GE quietly slipped in the back door, showed up next to Drager at the front door, and pulled the welcome mat right out from under HP yet again. GE signed up Drager in a formal, best of class alliance which HP would have loved to consummate, but couldn't. When HP bungled the first opportunity with Ohmeda, it would have been hard to imagine how they could have surpassed even that debacle yet a year later in their deal with Drager, but they did.
The global alliance forged by rival GE represents a serious problem for HP. Of the four major global medical companies seeking a share of the US perioperative system market - HP, GE/Marquette/Drager, Datex/Ohmeda, and Spacelabs, HP ends up being the only person in the race without an anesthesia workstation - a pretty fundamental shortcoming in the OR market. HP could approach Mallinckrodt/Nellcor/Puritan Bennett, and offer to buy its ventilator business. That might be a possibility. Mallinckrodt has enough indigestion from all its acquisitions that such an offer might look like an opportunity to Mallinckrodt. Apart from that however, where do you find a good ventilator partner which is established in the US market? Siemens has an excellent ventilator, and is established as an ICU supplier, but its KION is only now gaining a small market share in OR. Datex also has locked up Engstrom, Spacelabs and Hill-Rom have beat HP in aligning with non-US partners, and it begins to look like HP is the only lady at the dance without a partner.
To make matters worse, and more to the point of Healthcare InfoTech readers, this alliance between Drager and GE/Marquette also leaves HP without a perioperative information system OR partner, and with serious questions about its commitment to medical information systems at all. HP's Carevue 9000 product remains, but hospitals today are looking for integration, not niche market players. In the hospital information system business, hospitals are looking for a supplier who can offer point-of-care, CPR systems for ICU and Perioperative and Perinatal and Emergency Department and General Wards. HP now offers only ICU and Perinatal - having been stripped of its perioperative (Saturn) CPR by the GE/Drager alliance. But that was only the latest handwriting on the wall.
When Harry Comerchero, long-time CPR marketeer from Emtek, came to HP and then quickly departed HP's Carevue Group for rival startup, iMDSoft, it began to look like commitment to information systems within HP Medical might be slipping, more than the announcement that the "Information Systems" business unit was being rolled back into the "Patient Monitoring" business group - might have indicated.
This latest alliance begins to make HP look like a niche player in hospital CPR systems - and with rare exceptions, niche players don't do too well in the long term in hospital information systems. HP of course has a large installed base it can sell into, indeed we believe that the majority of this year's Carevue sales were into existing base who is invested in and committed to HP, for better or for worse. Moreover, we estimate it obtained 700 new Carevue workstation "seats" last year, ranking it among the major players. But in the longer term what can HP do?
HP can of course dust off their own, internally-developed perioperative CPR, but having announced to the world that it wasn't as good as the Saturn system, and shelving it, just last October would make that move look like an expedient response of offering a less than competitive solution. How would that look to hospital prospects, or competitors? As you look at the situation there aren't a lot of good internal solutions. Perhaps HP will look outward and do another deal - but who would be worthy partners, and would they be interested?
HP might turn to Picis, Inc., (Arlington, VA) and upcoming supplier of perioperative information systems. Indeed, Picis closed more OR CPR orders last year than any other competitor we can identify. And Picis has been taking the big and prestigious accounts, like MD Anderson, Baylor, which HP loves to have in its customer base. Picis also has an ICU CPR product which is taking its share of business from Carevue 9000. Picis is a Microsoft partner, and has been on the NT platform longer than HP has, and has made it work successfully. Picis therefore would be a logical choice as an HP acquisition or business alliance partner for perioperative. But "logical choices" haven't been what HP has made in the past.
So where does all of this leave poor HP's Medical Group? Ms. Danaher made the point at the HIMSS Press Briefing in March that the divestiture would be good for HP Medical, and she is exactly right. The new, yet to be named HP spin off company will go public, via IPO and that will infuse it with some cash. Cash that might be used for acquisitions or alliances, if Danaher can convince the other Division Managers of the new $7.9B company she now represents 18% of, that the investments in Medical make sense. Certainly HP Medical Group managers should have a bigger voice in what the new company does, and how it focuses its resources, than they did under the older HP structure. HP's Medical Group realizes this, and so do its larger customers - who will watch HP closely now to see if how it handles this new opportunity, created by divestiture. Will a spark of the innovation and entrepreneurial genius that clearly characterized the original HP, ignite the dry stubble spread all over HP Medical by its "professional management" and "committee decision" structure, or will it be business as usual at the new HP?
Either way the company is likely to grow, and the divestiture by HP of its medical business if good for both the surviving HP and the new company of which Medical will be a much larger part. But if there are still people within HP who remember what it was, say 20-25 years ago when Bill and Dave were alive and active, and if the New HP is willing to restructure themselves, readopt a "management by objective" philosophy, and take some risks - what emerges, in spite of its perioperative fiascos, would be a much tougher competitor that it had ever been under the current HP structure. Such a transformation will not occur over night however. It will take a couple of years. HP needs time to come up with some coherent perioperative strategy. It needs time to phase out SDN and finish the transition to an Ethernet LAN topology, joining every other major competitor. It needs time to replace its aging bedsides with a new product line that has fewer, all portable monitors. It needs time to decide and make it clear to the market - whether it is "in or out" of the inpatient computer-based patient record systems business. And it needs the money that the IPO will generate to accelerate this transformation.
Sometimes success breads lethargy, and sometimes failure is a wake up call. Clearly HP has been successful in medical, and clearly it has botched two partnerships in the perioperative segment of its medical business. But, HP is now awake, and it has resources, and more importantly a new sense of being free of a large, cumbersome, political corporate structure which doused any inclinations of taking risks and being a bold leader in the market. HP Medical is free at last. What will it do with its new freedom? As General Manager of Medical, Cynthia Danaher remarked - Just you watch us now!
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