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________________________________________________________________________________________________________________ Professor Tarun Khanna and Research Associate Elizabeth A. Raabe prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

T A R U N K H A N N A

E L I Z A B E T H A . R A A B E

General Electric Healthcare, 2006

In January 2006, Joe Hogan, head of General Electric (GE) Healthcare Technologies, packed his belongings at his Wisconsin office. Hogan was moving to England to officially step into Sir William Castell’s shoes as CEO of GE Healthcare, the world’s leading manufacturer of diagnostic imaging equipment, after the latter’s retirement in mid-2006. Castell, the former head of British bioscience and medical diagnostics firm Amersham plc, became CEO of GE Healthcare in April 2004 when its celebrated corporate parent GE, under the direction of CEO Jeff Immelt, acquired Amersham for $10 billion. The acquisition was part of Immelt’s GE-wide move to reemphasize research and development (R&D) to complement former CEO Jack Welch’s emphasis on efficiency (Exhibits 1 and 2).

Hogan had run GE Healthcare’s predecessor organization, GE Medical Systems (GEMS), which he had taken over from Immelt in November 2000 when Immelt was named to replace the legendary Welch in the top position at GE. A 20-year GE veteran, Hogan witnessed three distinct stages of the subsidiary’s development as it evolved from the Global Product Company (GPC), to the modified GPC, and then to GE Healthcare. The firm had built a formidable global presence by adopting the GPC concept, launched under Immelt in 1997. GPC’s philosophy was to concentrate manufacturing wherever in the world it could be carried out to GE’s exacting standards most cost-effectively. Later Hogan modified GPC by adopting an “In Country for Country” policy that focused squarely on particular markets, such as China. By 2005, the company had a 34% market share of the worldwide diagnostic imaging equipment business.1

During this time, populations in advanced nations were aging, and those in Asia, eastern Europe, and Latin America increasingly demanded better healthcare (Exhibit 3). Technological changes—represented by advances in genomics and healthcare information technology (IT)—were making personalized diagnostics and personalized medicine possible. In response, GE acquired Amersham and several healthcare IT firms. GEMS thus entered the next stage of its evolution, reinventing itself as GE Healthcare. GE executives designed the acquisitions to catalyze the firm’s move from an engineering and physics-based diagnostic company to a life sciences-based healthcare solutions company that could better meet worldwide healthcare needs. As Hogan placed the last item in a box, he wondered: What challenges did GEMS’ previous quantum leaps portend for this new step-function change?

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706-478 General Electric Healthcare, 2006

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The Global Product Company (GPC)

Immelt inherited a $4 billion company in 1997. GEMS1 had come a long way from its origins as an X-ray business in Chicago in the 1940s, its invention of computed tomography (CT) in the 1970s, and its tentative forays into Japan and Europe in the 1990s.

He stepped up acquisitions to grow the business dramatically. For example, a company acquired in 2000 formed the basis for GEMS-IT, a new subsidiary focused on healthcare IT. GEMS often acquired companies with little international presence and used its resources to offer the companies’ products and services worldwide. Immelt also tried to make GEMS more than an equipment company in his customers’ eyes by developing local marketing and sales organizations that, among other activities, hosted symposia to keep customers abreast of change.

But by far his greatest legacy was the Global Products Company (GPC) initiative. GPC was geared toward cutting costs by shifting manufacturing activities, and eventually design and engineering activities, out of high-cost countries and moving them into low-cost countries. This built on prior CEO John Trani’s efforts to globalize GEMS in the 1980s. Trani had emphasized cross-national teams of managers rather than only employing American nationals working outside the U.S.

By the time Immelt handed over GEMS to Hogan in 2000, it dominated the worldwide diagnostic imaging market together with its three principal competitors, divisions of Siemens, Philips, and Toshiba. These firms were just four of 10 prominent full-line diagnostics players in the early 1980s.2 By 2005, the four leaders accounted for over 80% of worldwide sales. GEMS’ three major competitors were strong in different modalities and geographic areas. For example, Germany-based Siemens was well positioned in the future growth markets of eastern Europe. Philips led in nuclear medicine and was particularly strong in vascular and cardiologic X-ray (Exhibit 4).

Key activities under GEMS’ GPC model are described below.

Manufacturing Since the launch of GPC in 1997, manufacturing was shifted from high-cost to low-cost countries. Each product was to be built in one or two “Centers of Excellence (COEs)” and could then be shipped anywhere in the world (Exhibit 5). Between 60% and 96% of products made in a COE ended up being sold elsewhere. GEMS, with its extensive sales and marketing organizations around the world, was ideally positioned among GE divisions to pioneer GPC. Manufacturing had gradually moved from Paris to Budapest and from Tokyo to Shanghai and Bangalore.

The firm was more a supply-chain manager for complex subassemblies than a manufacturer (Exhibit 6). Its assembled “inputs” were not simple parts such as bolts, resistors, or metal frames; they were complex, high-value-added assemblies such as computer boards and precision-machined assemblies. GEMS only made the proprietary heart of each of the company’s products. In 2002, inputs purchased from vendors accounted for roughly $2 billion of GEMS’ $2.3 billion in total variable costs for manufacturing, and most (85%) of these inputs were manufactured in high-cost countries. Manufacturing costs were approximately 80% material and 20% labor. John Chiminski of the services division observed that an efficient parts organization was a key part of the supply chain:

We use 90 warehouses across five continents to ship 2 million parts annually. There are half a million different types of parts, of which 80,000 will ship in any given year, with half of these repeating the following year. In general, demand is spiky. We measure our performance by the “span,” or the time it takes to fulfill a certain percentage of the demand for our services. Seventy-five percent of our demand is met in four hours, and 95% is met within 75 hours.

1 We refer to the company as GEMS prior to GE’s 2004 acquisition of Amersham and as GE Healthcare afterwards.



General Electric Healthcare, 2006 706-478

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GEMS had set a goal of having 50% of its direct material purchases from low-cost countries and 60% of its manufacturing activities located there, up from roughly 15% and 40% in 2001. Its ultimate goal under GPC was to save 10%–30% on materials and 50% on labor. Brian Worrel, head of finance at GEMS, commented, “While GPC moves into a country entail some fixed costs, the payback has been within two years typically, partly because much of the plant and equipment can be sourced locally.” The biggest challenge in such a transition was the development of suppliers in low-cost countries, which took considerable time and commitment. First-year cost savings of moving to a low-cost country were about 30%, with expectations of further ongoing cost reductions of 10% annually.

GPC costs included inventory, logistics, documentation, and import-duty costs relating to moving materials and products around the world. It was costly to rely on a less experienced workforce in the new location. Those left behind often lost their jobs, creating a human toll on the workforce. Moving away from developed countries also meant losing the concessions these countries often provided to encourage export-generating investment. On the other hand, GPC enabled the company to attract talent from new regions, gaining the firm insider status in these countries. GEMS used a “pitcher-catcher” concept to help move production from one location to another. For each move, a pitching team at the site of the existing plant worked with a catching team at the new site. Managers were measured on the effectiveness of the move, which was not considered complete until the performance of the catching team met or exceeded that of the pitching team.

R&D and product design GEMS typically spent 7%–9% of sales on R&D. New products within existing platforms might take a year or two to develop and cost $5 million–$10 million. New platforms might take three years to develop, while significant breakthroughs might take 10 years. Often longer-term projects focused on more basic research were done at the GE corporate R&D level. Corporate R&D had helped develop remote monitoring and diagnostic technologies that GEMS used in its equipment-service activities. The technology had since diffused throughout GE.

The GPC philosophy had begun to seep through to the R&D function, causing product design responsibility to gravitate toward regions (e.g., eastern Europe) with talented but underutilized human capital. The ability to absorb new talent pools would be fundamental going forward. Shifting knowledge bases of relevance certainly created the potential for being blindsided.

Sales Local expertise and relationships were needed to deal with customers and healthcare infrastructures in each country because of differences in the financing of healthcare (public versus private), physician compensation, and hospital ownership. The U.S., for example, was the only wealthy, industrialized country to fund the majority of its healthcare from private sources. Employers paid the majority of private insurance premiums with a significant minority portion paid by the covered employees. There were recent increases in outpatient and in-home care as pressures mounted to cut costs. In contrast, in Japan, payroll deductions financed insurance pools that covered retirees and other population segments. Doctors owned the mostly for-profit hospitals. France’s government-sponsored universal healthcare insurance system was funded largely through employer payroll contributions and covered approximately 75% of the nation’s total healthcare costs.3 And in developing countries like India, most people did not even receive care.

GEMS usually relied on a wholly owned direct sales organization. Given the high price of GEMS products, often in excess of $1 million, the sales process typically took 6–12 months and involved managers at multiple levels within the healthcare organization. The sales team met with financial managers to discuss costs, reimbursements, and financing; with heads of radiology departments to discuss and demonstrate image quality and throughput (number of procedures per time period); and with technicians to discuss equipment operation. Increasingly, sales team members also met with physicians to discuss ways in which the images could be used. The level of reimbursement, typically set by a government health agency, and the equipment throughput were big factors in determining




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the price the purchaser could afford. The imaging equipment had a life cycle of approximately seven years in most western countries and a bit longer in poorer nations. It could last much longer but became technically obsolete. Overall, GEMS earned roughly 60% of its revenues through equipment sales, with the remainder from services such as equipment repair, healthcare IT systems, and productivity improvement consulting. Services accounted for $800 million of the company’s total revenues in 1995, $3 billion in 2000, and nearly $6 billion in 2005.4 Service contracts earned much higher margins than did equipment sales. With the larger installed base of equipment, service-contract sales were proportionally higher in the mature markets.

There was competition in providing after-sales services. In the U.S., each of the four principal rivals serviced equipment from any original equipment manufacturer (OEM) and were labeled “multivendors.” Other OEMs serviced their own equipment only. There were also independent service organizations (ISOs) that were typically multivendors and often received contracts from insurance companies that specialized in insuring the diagnostic equipment of their hospital customers. By 2002 OEMs’ share in the U.S. had increased to 77%, while that of ISOs and in-house staff had fallen to 10% and 13%, respectively, with insurers falling by the wayside.5 The services sector was organized quite differently outside the U.S. Since many nations’ authorities insisted that OEMs service their own products, there was little scope for multivendors to exist.

Marketing Primary marketing challenges included customizing products to suit country needs and marketing used products and newer-generation products and services (healthcare IT).

GEMS believed that customers and patients were basically the same around the world but at the same time realized that some customization of products was required for each country. The desire to follow GPC to drive down costs had to be reconciled with this realization. For example, richer countries tended to buy more sophisticated equipment. Differences in cultural feelings existed as well; some countries used less nuclear medicine due to health concerns. Complicating things further were nationalist beliefs that caused purchasers from some countries to avoid buying equipment made in certain other countries. Though GEMS designed products to be easily adaptable to the different markets, engineers in one country did not always understand the needs of others. Mike Jones, GEMS’ global business and market development manager, stated: “People in the U.S. can’t design a low-end product for China. They will add needless bells and whistles, and they just won’t get it right. Similarly, China can’t design a product for the Mayo Clinic.” The firm catered to the needs of developing nations, which lacked the “soft” infrastructure needed for diagnostic healthcare delivery. It held seminars for users of advanced equipment in general and also marketed significantly to regulators in these nations.

GEMS used a “Gold Seal” program to manage the used-equipment market, which had two parts. The “as-is-where-is” business entailed GEMS acquiring used equipment from one location and relocating it. The refurbishing business acquired used equipment satisfying stringent criteria—using state-of-the-art digitized databases—brought it back to OEM specs, and resold it. Traditionally GEMS refurbished only its own products, although it was in the midst of acquiring a large refurbisher of non-GEMS products. One Gold Seal executive commented:

This is a $1.3 billion global market, growing at 8%–10% per year. The original equipment manufacturers [GE, Siemens, Philips, etc.] hold roughly 50% of the market. We are moving in the direction of doing more refurbishing rather than as-is-where-is work. Our business has been growing dramatically, particularly in demanding and competitive regions like Asia [50% annual growth] and Latin America [over 100% annual growth]. We run refurbishment facilities in the U.S., Europe, China, and Japan. Ten percent of used sales that we complete crosses national borders, though my guess is that cross-border potential business as a fraction of the total used business is more in the range of 30%. What scares me most about this business is the




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800-odd broker/dealers who have no passion for Six Sigma-type quality and very low overheads.

In 2006, one could even purchase used medical equipment on eBay!

Different challenges presented themselves in marketing the wide spectrum of healthcare IT products to clinicians. At one extreme were the “if we build it they will come” type of products, with a clear value proposition for the adopters. This included products that replaced manual monitoring with automated surveillance of dozens of patients in an obstetrics environment. Products at the other extreme required physicians to change behavior. Physician order entry provided the classic example. Systemwide costs would be greatly reduced if computer entry occurred, but most doctors continued to prefer to write their orders, often illegibly. One executive commented, “Vital signs, meds, and disease markers are the same worldwide, but hospitals are organized differently around the world.”

Human resources Under Welch, GE had emphasized developing highly competent technical and managerial talent. Also, executives in one GE business regularly selected managers from other parts of GE. GEMS moved managers around from one country to another and also developed local managers within each country. Indeed, between 1995 and 2002, GEMS headcount had increased tenfold in China, fivefold in India, and three times over in Mexico and eastern Europe.

Reallocating human resources away from mature segments toward newer ones was a perennial human resources challenge. GEMS addressed this partly by creating new units, such as GEMS-IT, to separate the businesses. As one IT executive put it, “Working with cutting-edge technology at a leading company to help save people’s lives is a compelling value proposition for talent and has allowed us to maintain lower-than-usual attrition rates.”

Pulling the activities together GEMS’ introduction of Signa, its open magnetic resonance imaging (MRI) system, illustrated how all the functions came together to develop a new product line. Traditional MRI systems required patients to slide on a table into a cylindrical scanning tunnel, which many patients found uncomfortable. In the mid-1990s, a competitor developed a system with magnets above and below, but not surrounding, the exam table; however, the system’s magnetic strength was low, and the resulting image quality poor. GEMS then invested some $50 million over two and a half years to develop what it believed was a far better system, putting it a couple of years ahead of the competition. This was facilitated by GEMS’ prior $1 billion investment in the MRI business. It launched the Signa simultaneously all over the world, spending between $10 million and $15 million on product rollout campaigns, and helped hospitals target specific markets with advertisements aimed at medical consumers.

GEMS sold 300 units in 18 months at approximately $1.5 million each. Actual selling prices varied widely in different countries depending on reimbursement rates for the various procedures that the Signa could perform. For markets such as China and other sites with restricted funding opportunities, the firm had designed a less powerful Signa machine that sold for half as much. Service contracts were profitable, as GEMS could receive $100,000 per year for what usually amounted to minor adjustments to the machines. GEMS expected to acquire used units at about $300,000–$400,000 each, to spend $100,000 in refurbishing, and to resell these for $800,000 with a year’s warranty included. GEMS would also sell five-year contracts to customers at $125,000 per year.

Modifying GPC

When Hogan took over GEMS in 2000, Immelt charged him to grow the company 20% annually. The firm’s strategic issues varied extensively around the world. For example, Japan, a traditional




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stronghold, remained mired in a decade-long economic stasis. In contrast, GEMS had shaped usage patterns in Hungary as it emerged as a major market for medical diagnostics. But perhaps the greatest challenge had to do with China. Hogan realized that an “In China for China” policy would entail a move of resources away from other parts of Asia toward China. However, he deemed an “In Country for Country” modification of GPC—that is, the embedding of country-specific demands within the global-supply-chain logic of GPC—the right evolution.

"In China for China"

GEMS’ activity in China spanned the last three decades, during which the country’s healthcare system underwent great change. Before the early 1980s, the Chinese government both paid for and delivered the majority of healthcare services in China. By 2005, many programs had been discontinued, and individuals largely paid for their own healthcare as out-of-pocket expenses. Half the urban population and 10% of the rural population had some level of health insurance. The government still ran a large fraction of the total number of hospitals, where patients paid out-of-pocket; a miniscule 1% of these were large and well funded.6 The government set the prices that providers could charge patients at 25%–50% of the actual costs of the service. To make up the shortfall, providers prescribed drugs and diagnostic tests since these were not subject to price controls. Consequently, investor groups formed diagnostic testing centers that purchased or leased high-tech diagnostic equipment. Hospitals’ reputations came to be based on the ownership of such equipment, demand for which was high in proportion to the overall amount spent on healthcare even though the installed base was still low.

GEMS sold its first CT unit in China in 1979 in response to an order placed directly with its Milwaukee headquarters. Subsequent developments included a Hong Kong office, followed by a “rep office” in China in 1986 and a 1991 manufacturing joint venture to get around import quotas. In 1995, following the elimination of quotas, the China team competed aggressively with other GE teams in Korea, India, and Japan for the rights to become the “Center of Excellence” for low-end CT manufacturing within GE. It won the bid.

Separate joint ventures were established for CT, X-ray, and ultrasound involving partnerships with multiple regulatory authorities (e.g., Ministry of Health) and their subsidiary manufacturing units. Chih Chen, a native of Taiwan, a U.S.-educated Ph.D., and a veteran of GE postings in Silicon Valley, Singapore, Taiwan, and Beijing, had run GEMS’ China effort since 1995. He described the challenges of these ventures: “In one joint venture, the partner firm would receive orders for equipment and then service the orders from its separately and wholly owned factory, thus cutting us out. We couldn’t stop this practice. So we had to renegotiate.” By 2002, GE had acquired 100% ownership of two of the ventures and 90% of the third.

Three categories of products existed at GEMS China—locally made products for local use, locally made products for sale by GEMS around the world, and products imported from other GEMS plants worldwide. GEMS had a 40% market share, greater than the sum of the shares of Siemens and Philips. The remaining market was populated with hundreds of assemblers and trading companies, many of which had tried to set up manufacturing facilities but with limited success. In 2005, 65% of GEMS China’s production was for export.

Chen attributed GEMS leadership in China to knowing how to “work in the jungle.” He explained that China’s size and composition made it an important market for GEMS:

China is already the third-largest market for medical diagnostics worldwide, behind the U.S. and Japan, and growing the fastest of these three. It also has the largest demand for low-




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end medical diagnostic products. For example, we sell a CT Economy scanner for $300,000 in China, whereas the U.S. model costs $1 million. These low-end products can be used all over the world ultimately, even in some parts of rich countries. The low end probably accounts for 20% of worldwide industry revenues, with the high end and middle tier accounting for 45% and 35%, respectively. To succeed in the high end and middle tier, you have to be in the U.S. and Japan, respectively; to succeed in the low end, you will have to own the Chinese market.

Chen’s team advocated an “In China for China” policy, which would involve bending the tenets of the GPC policies that had propelled GEMS through its recent successes. It would entail moving plants already in low-cost countries to China, partly duplicating existing infrastructure, under the logic that domestic production would have greater demand. As an example, Exhibit 7 shows the per unit and total economics of the part of a patient-monitoring product made in Mexico for the Chinese market. The product was sold in developing countries around the world and to individual clinics in advanced economies and was a simpler version of a networked monitoring device sold worldwide. Demand in China was such that a drop in price of 10% could probably raise sales by 50%. Moving the production to China would require incremental fixed costs of no more than $1 million, since physical space was already available. Incrementally smaller variable costs could be expected—on the order of 2%—by avoiding duties and tariffs and by local sourcing, limited in the immediate term.

Selling locally also meant developing deeper local management capability. Chen explained, “In 1995 when I took over, we were losing money and management was in chaos. I shook up the organization.” His predecessor had focused the firm’s efforts on urban, east-coast China, particularly Beijing. Chen developed markets outside the major urban centers and used these successes to build credibility with the old guard in the sales force. Chen recalled that his tactics of approaching urban China from a position of strength in the nonurban areas had a historical parallel—Mao Zedong, leader of the Chinese Communist Party (1943–1976), who relied on the peasantry for a communist revolution, had operated this way. Chen took this parallel further with great success. He compared GE “corporate speak” to Chinese revolutionary rhetoric to motivate the older members of his staff and relied on conventional business school language to motivate the younger ones. In a sense, the likened GE management style, emphasizing learning from practice, was no different from that of Chinese political reformers like Deng Xiaoping, who had launched China on its current growth path by his reforms since 1978 (Exhibit 8). Due to Chen’s efforts, his Wisconsin bosses appreciated China as more than a low-cost locale—they recognized different segments of customers and talent.

"In Country for Country"

The “In China for China” policy was serving as the model for a localized version of the GPC concept that focused on segmenting and developing internal markets and building local management capability. According to Omar Ishrak, president and CEO, Clinical Systems Division, country-specific endeavors complemented, but did not replace, GPC efforts. He illustrated how this worked in ultrasound production. Engineering and manufacturing COEs were located in the U.S., Japan, Norway, Austria, Israel, India, Korea, and China. Products were manufactured in some of these countries because strong local markets existed there along with engineers in touch with these markets. For example, Indian engineers made a low-end ultrasound for India with assistance from engineers around the world who were also cost-sensitive. Formerly the Japan team developed global products also sold in Japan. These Japanese-produced products were popular in Europe, but the company learned that this strategy compromised the Japanese market. Ishrak described subsequent changes:

Japanese customers require a dedicated product. Our Japan team is now split in two: there’s a global team and a Japan-specific team. The former serves the global market at a particular price point. The latter is in tune with Japanese competition; it can move more quickly because




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it doesn’t have to follow a global release schedule, yet it can draw on global connections. This type of setup is the emerging trend that we’re seeing now—there has been a shift from the manufacture of global products to the manufacture of global products plus local products.

GEMS’ global “submarkets” benefited from shared engineering expertise. Ishrak elaborated:

There is a cultural aspect to this which is quite valuable. If all these teams work together, there is a sense of healthy competition and also learning from each other. Take the Israelis and the Japanese, for instance. The Israelis are very entrepreneurial and can get products to market very quickly. On the other hand, the Japanese are highly reliable, but they won’t change direction easily. In a group over time, they learn from each other. They don’t lose their core cultures, but there is a “middling effect”—a sharing of cultures and breadths. It’s this “middling effect” which makes all products better.

The firm used this “middling effect” to create one of its newest, most successful products, the LightSpeed VCT, a volumetric CT scanner that could image most organs in one second and the heart and arteries in five heartbeats. Engineers in Waukesha, Wisconsin; Hino, Japan; and Haifa, Israel designed the product, and programmers in Japan, China, France, and the U.S. wrote its software.7

The Amersham Era

GE executives recognized the value of complementing GEMS’ engineering and physics heritage with biochemistry acumen. A 2001 partnership between GEMS and U.K. bioscience firm Amersham to develop positron emission tomography (PET—see Appendix) scanners that could detect cancer earlier catalyzed discussions between Immelt and Amersham CEO Castell about an acquisition. Under the direction of Castell, who had become CEO in 1989, Amersham had developed important contrast agents—injected substances that made organs visible during scanning. During the 1990s, he executed several key mergers and acquisitions; in 1997 Amersham merged with Norwegian imaging firm Nycomed and the Swedish healthcare company Pharmacia & Upjohn. By 2003, the company had two divisions (Exhibit 9). Amersham Health manufactured diagnostic imaging agents, while Amersham Biosciences developed “enabling technologies for gene and protein research, drug screening and testing, and protein separation systems for the manufacture of biopharmaceuticals.”8

Castell advocated a shift from a “late-disease” healthcare model that “optimize[d] . . . late-stage treatment” to an “early-health” one that focused on diagnosing and treating diseases as early as possible, even presymptomatically.9 His vision of personalized medicine, that is, medicine tailored to individuals or small groups of people based on their genetic profiles, which Amersham had pursued since the early 1990s, meshed with GEMS’ goal to be on the forefront of healthcare developments. Furthermore, the increased melding of diagnosis and therapy and the medical community’s interest in moving away from in vitro (“outside of the body,” i.e., laboratory) testing toward in vivo (“in the body”) testing created an environment ripe for the acquisition.10

“After much wooing”11 and GE’s “agreement to pay a 45% premium on Amersham shares,”12 Castell agreed to the proposed acquisition. In April 2004, GE purchased the company for $10 billion. Together GEMS and Amersham became known as GE Healthcare. Immelt named Castell CEO of GE Healthcare and made him a GE vice chairman. Headquartered in the U.K., the company was the first GE subsidiary with a non-U.S. base. Hogan headed the former GEMS, renamed GE Healthcare Technologies, from Wisconsin, while Peter Loescher, previously Amersham’s chief operating officer, led the former Amersham, rechristened GE Healthcare Bio-Sciences and also headquartered in the




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U.K. (Exhibit 10). GE indicated the acquisition would generate annual revenue synergies of $350 million to $400 million and cost savings of the same amount by 2008.13

Amersham was a key component of Immelt’s plan to “rebuil[d] a culture of innovation” at GE and ensure the corporation’s status as a technological pioneer in the twenty-first century.14 Immelt, like most new GE CEOs, was “abandoning the most treasured ideas of his predecessor”—cost-cutting, efficiency, and earnings targets—to focus on growing the corporation organically through innovation.15 He was requiring subsidiaries to develop “Imagination Breakthrough” projects that had to “take GE into a new line of business, geographic area, or customer base” and provide incremental revenues of $100 million or more; Immelt had pledged $5 billion to fund the first set of projects, which were expected to generate $25 billion in sales by 2007.16 In a move representing his new strategy, he revitalized GE’s House of Magic, a research laboratory in Schenectady, New York, established in 1900. The lab flourished through the 1940s (e.g., the X-ray tube was invented there) but withered thereafter because later CEOs were more interested in “scientific management” than “basic science.”17 Under Immelt, GE reinvested heavily in the lab and established similar centers in China, Germany, and India.

Biology, Bytes, and Broadband

Castell maintained that the shift in focus from “late disease” to “early health” depended on continuing advances in three areas: “First, we have Biology, particularly genomics and its daughter sciences. Second, we have the Bytes, the power for driving informatics processing. Third, we have Broadband, to provide connectivity through cheap, infinite-capacity mass communications that will link our clinics to hospitals, patients to records and the rural to urban environments.”18

Biology

Earlier disease prognosis and personalized medicine depended on advances in genomics and proteomics—broad terms used to describe the study of hereditary traits and cell structure and function (see Appendix). A recent breakthrough at Harvard Medical School (HMS) illustrated the benefits of genomics. The average life span in lung cancer patients from diagnosis to death was 12–18 months, making early intervention critical. Patients typically had three treatment options, including Iressa, a drug launched in 2001 that, like most other chemotherapy agents, had an efficacy rate of 20% to 30% and serious side effects. In 2004, HMS researchers determined that if an individual was one of the 10% of the population with a particular gene mutation, his or her response to Iressa rose from 25% to 95%. Loescher asked attendees at an internal meeting, “Wouldn’t you like to know if the drug worked for you before undergoing chemotherapy?” Afterwards, a colleague told him, “I have lung cancer and have tried two treatment options; I have now been prescribed Iressa.” GE Healthcare helped the colleague determine that he had the gene mutation, but by then it was too late. Loescher summarized, “We want to move towards helping the asymptomatic population. Right now, we’re picking up disease too late, and people are receiving average treatment.”

Advances in imaging capabilities were also required to identify disease earlier. Traditional techniques, such as X-ray and MRI, did not have high enough image resolutions to identify disease presymptomatically in many cases (see Appendix). Newer ones, such as PET scanning, held promise, and researchers were developing sophisticated contrast agents to be used with the machines. The newer technologies were expected to be able to “light up” the contrast agents, which, when injected into patients, attached themselves to particular diseased cell receptors, thus facilitating more precise diagnoses than currently feasible. It might also be possible to verify whether or not specific drugs




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were reaching the targeted areas, as had begun to be the case in treatments of brain lesions that characterized Alzheimer’s disease. Castell explained that the final year of drug-therapy treatment for an individual with colorectal cancer could cost $100,000–$300,000; a diagnostic imaging test that could identify the cancer early on and obviate such treatments cost $1,000.19

In the future, the pharmaceutical industry would provide more drugs to smaller subsets of the population. Genetically tailored therapies posed opportunities and challenges for the pharmaceutical industry, which currently generated large income streams from a limited number of blockbuster drugs and hence would need a new business model. Clinical trials for targeted therapies would require fewer patients and proceed faster, enabling new drugs to go to market sooner. Fewer instances of adverse drug effects were expected under this new scenario.

Specialized knowledge bases were emerging worldwide to support these developments. For example, the U.K. and Sweden were hubs for nuclear medicine and protein separation, respectively. Laura King, head of GE Healthcare’s Interventional Cardiology and Surgery unit, stated, “The U.S. does not have a patent on great talent. The cure for cancer could come from China. Also, there’s more clinical innovation in Europe than in the U.S. because there’s not as much litigation and regulation.”

Bytes and Broadband

Many predicted the greater use of IT would revolutionize the healthcare industry and make it more patient-centric. The need to appropriately manage massive amounts of data had created a worldwide healthcare IT market that was approximately $16.2 billion in size and growing at 10% per year.20 Healthcare IT encompassed administrative and clinical IT elements.

Digital imaging Digital imaging—at the simplest level, viewing images on computer screens instead of X-ray films—was responsible for a flood of new data. Observing the actual functioning of an organ, often in three dimensions, required the generation of thousands of images. Digital imaging could also be combined with detection software, so that clinicians could manipulate images, combine them with images from other detection equipment, and integrate them with other patient health data to achieve a far more meaningful picture of the disease state. Promising applications were already in various stages of development. For example, it was hoped that digital X-rays of particular organs could automatically be computer searched for signs of other abnormalities.

Electronic medical records Electronic medical records (EMRs) allowed patient data to be easily stored and accessed remotely and easily. To illustrate their value, an industry executive described a hypothetical situation often faced by diabetics:

Diabetes requires constant monitoring. Often a patient who is not in a location near his or her regular physician or endocrinologist is in trouble because patient records are hard to locate. The physician has to make decisions based on inadequate data. When the patient goes on vacation, changes in dietary habits or exercise levels cause fluctuations in blood sugar levels. The patient decides to wait to see a doctor since it is unlikely that adequate treatment will be provided by someone unfamiliar with the case. Such a patient could go into potentially fatal insulin shock. EMRs partly address such problems by centralizing records and enabling remote access, though they create concerns about patient privacy and data ownership.

Computerized patient information, portable electronic devices, and bar-code technology were already converging. BusinessWeek reported, “At Brigham & Women’s, nurses carry mini laptops as they visit patients to dispense pills. They take along handheld bar-code scanners. . . . With the laptop,




11

they can look up what drugs the patient is to receive, then run the scanner over bar codes printed on the medication packages and the patient’s wristband to make sure they match up.”21

The U.K. planned to spend $6.5 billion to aggressively digitize the country’s healthcare system in four years, and the U.S. was pushing for EMR adoption by 2014. Loescher explained that partly because of the lack of EMR penetration, “Nearly 100,000 people die in the U.S. annually from preventable medical errors, such as adverse drug prescriptions, costing healthcare facilities $100 billion.” Optimists thought that developing countries such as China and India, which had underdeveloped healthcare IT infrastructures for data collection and record keeping, could leapfrog advanced nations by adopting EMR systems.

Loescher discussed other advantages of EMRs: “All of a person’s biological information is available at all times, whenever doctors need it. Also, an individual’s data can be linked with that of others in a repository, allowing doctors to drive onto the experience of the entire country in diagnosing or treating diseases.” Throughout the world, repositories of DNA and tissue samples were being linked to databases of people’s medical information, creating biobanks.22 The U.K. Biobank was collecting samples from 500,000 people aged 40–69 and tracking their health over the next 30 years to better understand onset factors for cancer, diabetes, heart disease, and strokes.23 Concerns about the confidentiality of biobank donors, the ethical use of information, and the need for standardization among biobanks abounded; however, one observer noted, “Biobanking is becoming an essential part of the transformation to a personalised model of medicine.”24 All recognized that diagnostic equipment and hospital IT systems would have to be made compatible over time.

Clinician support systems Clinician support systems included medical databases that healthcare personnel could reference as well as software programs to guide physicians in making diagnoses and treatment decisions. While some doctors worried that the latter would infringe on their autonomy, others maintained that the healthcare industry’s greater reliance on IT was long overdue. One doctor exclaimed, “There is no other profession that tries to operate in the fashion we do,” and he likened the practice of medicine sans computers to “trying to send people up on the space shuttle with pencil and paper.”25 Efforts were being made to integrate various IT functions into comprehensive practice management systems that could perform scheduling and billing, store EMRs, offer diagnostic-decision support software, and so on. This would help patients with chronic illnesses like diabetes, for example, to be sent e-mail reminders for regular treatment. Castell enthusiastically awaited the arrival of the “protocol-based medicine” that IT systems promised.26

The major competitors were growing their healthcare IT businesses. In 2000, Siemens purchased Shared Medical Systems for $2 billion to help its healthcare IT efforts. Between 1997 and 2001, GE Healthcare’s IT sales grew from $50 million to $1.3 billion; in 2005, they reached approximately $2.7 billion. In 2005, GE Healthcare and Intermountain Healthcare (IHC), a nonprofit network of 120 clinics and hospitals in Utah and Idaho, announced a 10-year, $100 million agreement to develop a co-functioning EMR and clinician-support system. Also, GE Healthcare acquired software manufacturer IDX Systems for $1.2 billion in 2006. The purchase was to the company’s IT business as Amersham was to its biology-based imaging goals. Vishal Wanchoo, head of GE Healthcare Information Technologies, acknowledged doctor resistance to new technology adoption but thought the greater efficiencies made adoption ultimately inevitable.

GE Healthcare > GEMS + Amersham

GE Healthcare’s equipment was helped by Amersham’s contrast agents. Hogan explained:




12

The terms we use to describe accuracy in imaging are sensitivity and specificity. Sensitivity means we can see smaller things. And specificity means we know what they are. This is exactly why we wanted to acquire Amersham. Because as we can see smaller things, we need to increase our specificity, and more and more chemistry is used to define the specificity of disease. For example, we can see a 3 mm tumor in your lung with a CT scan. And with PET technology we can tell if that tumor is cancerous without doing a biopsy. That means we have both sensitivity and specificity.27

Through the years GEMS had focused on developing equipment that could produce increasingly sharper diagnostic images. Hogan noted, “The next iteration of technology was not always disease tied. We’d put it quickly in the market, but that’s not where you want to run. I’d rather see something that doctors need to see to treat a disease than see the same thing better. For example, I don’t want to have a faster CT, I want to see coronary arteries in real time.”

Hence, GE Healthcare had become a much more clinical- and disease-focused business. Mark Vachon, CFO, pointed out that doctors did not care about the tools, they wanted functionality that helped them to cure particular disease states. Castell noted that the company was focusing initially on breast carcinoma and coronary heart disease, trying to figure out where in the life cycle of a disease diagnostics would be most useful.

Particular posts reflected the blended company’s new focus, too. Dr. Bill Clarke, former head of R&D at Amersham, was GE Healthcare’s chief technology and medical officer. Jean-Michel Cosséry, a former Amersham executive with degrees in business, nuclear chemistry, and pharmacology, led GE Healthcare’s strategic marketing organization, which consisted of doctors and Ph.Ds in economics. Division heads used both Clarke and Cosséry to sell new products. The former set up the clinical trials to prove the value of a particular volumetric CT scanner in a cardiac catheterization lab, for example, while the latter dealt with the economic aspects of adoption—including reimbursement—for the healthcare organization. The trials could much more easily be carried out in locations like India, with the company’s global scope, than the older Amersham could have managed.

Additionally, the Amersham acquisition catalyzed collaborations between GE Healthcare and pharmaceutical companies. Because its protein-separation systems were used in the development of over 90% of drugs on the market, Amersham had long-standing relationships with several pharmaceutical firms.28 In mid-2005, GE Healthcare and Roche announced a partnership to clinically test a diagnostic agent and drugs to combat Alzheimer’s disease, which affected 18 million people worldwide, could develop for 20 years before symptoms appeared, and had no cure. A GE Healthcare PET diagnostic imaging agent measured the amount of beta-amyloid—a brain plaque associated with memory loss in Alzheimer’s patients—in individuals taking Roche’s drugs.29 The company was also working with Eli Lilly and Pfizer on Alzheimer’s-related projects. GE Healthcare did not intend to be a therapeutics company but wanted to assist in the development of drugs that treated diseases earlier or that were tailored to individuals.

The projects were manifestations of the company’s new long-term focus on healthcare as opposed to a focus on yearly equipment developments. They also posed challenges for the firm, including complicated regulatory approval cycles. It had learned to satisfy requirements (e.g., FDA ones) for diagnostic imaging equipment; with Amersham, GE Healthcare gained experience navigating pharmaceutical regulatory waters for its disease-based trials.

Clarke noted that the company had to create new business models: “We have to meld the pharmaceutical business model, which is long term, high risk, and high margin [if successful], with our existing model as an IT/physics/engineering company. The two business models are divergent




13

and not convergent. It’s difficult to plan a five-year, $50 million trial when the tech life cycle is 15 months. We have to figure out how to do this.”

Traditional revenue streams for imaging-equipment companies consisted of a sizable up-front payment at the time of initial equipment sale and an ongoing and very profitable servicing revenue stream. Overall operating margins, with three- to five-year development cycles, could be as high as 20%. In contrast, in some chemical-intensive businesses, equipment was sold “at cost,” and most profits were made from ongoing sale of chemical reagents. In pharmaceutical companies, operating margins were closer to 30%, product development times were about 10 years, and the “hit rate” of successful products was very low compared with one of 90% for imaging-equipment makers. One GE Healthcare senior manager cautioned that, while regulatory factors were country specific, ultimately “the great thing is that we are all, country and race notwithstanding, genetically much more similar than we are not. It is a global opportunity.”

It took 5–10 years to develop new biochemical agents that could work with diagnostic equipment. The merger helped both Amersham and the former GEMS have a sense for their respective technology life cycles. Cosséry stated, “Now we can develop generations one, two, and three of a particular agent for a diagnostic machine. And the planning cycles are changing at the former GEMS as they consider not only technological life cycles but disease life cycles as well.”

Clarke concluded:

GEMS did not have to think of five- to seven-year road maps. For those who come from pharma and biotech, we like to think 5 to 10 years out. So we know we have to transition the business. We have real financial goals, and we are creating products for three to five years from now for a market that doesn’t exist. We believe passionately in our future vision, but we can’t walk away from our existing business models. We can’t let our guard down on protein-separation systems, CT and MR systems, etc. These are marketplaces that we live in today.

Executives believed that although it was far from realizing the full benefits of the merger, GE Healthcare was taking shape nicely (Exhibit 11). In 2005, it realized $250 million in revenue and cost synergies and approximately $15.1 billion in total revenues.30 Equipment-related sales accounted for over 40% of company revenues; services (including IT), about 40%; and biosciences, 20%. Forty-five percent of the firm’s sales occurred outside of the Americas, up from 37% in 2000. Approximately 25% of total sales were generated in Europe, 8% in Japan, and 6% in China. In early 2006 Castell expressed satisfaction about the integration thus far:

In a report I wrote for Jeff Immelt, I used the term “business combination” to describe the GE-Amersham merger. GE bought a strong people business, and an enormous premium was paid for the underlying goodwill. In two and a half years, we have not lost a single senior manager from the Amersham corporation, so the intellectual content is intact. We’ve had 150 cross appointments from GEMS to Amersham and vice versa. Total staff turnover has been 5%; we’ve maintained management.

Conclusion

Immelt had challenged Castell to grow the company to $25 billion in sales by 2010. Because Hogan was stepping into the role of CEO later in 2006, he inherited this challenge. The Amersham and IDX acquisitions had propelled the company toward new technological frontiers all around the world. As he shut the door to his Wisconsin office, Hogan reflected on the challenges before him.




14

Exhibit 1 GE Corporate Financial Data

For Years Ended December 31

($ millions), 2002 2003 2004

Revenues Sales of goods $ 55,096 $ 49,963 $ 55,005 Sales of services 21,138 22,391 29,700 Other income 1,013 602 1,064 Earnings of GE Capital Services (GECS) — — — GECS revenues from service 54,979 61,685 67,097

Total revenues 132,226 134,641 152,866 Costs and expenses

Cost of goods sold 38,833 37,189 42,645 Cost of services sold 14,023 14,017 19,114 Interest and other financial charges 10,151 10,892 12,036 Insurance losses and policyholder and annuity benefits 17,608 16,369 15,627 Provision for losses on financing receivables 3,084 3,752 3,888 Other costs and expenses 29,229 31,821 38,148 Minority interest in net earnings of consolidated affiliates 326 310 928

Total costs and expenses 113,254 114,350 132,386 Earnings before income taxes 18,972 20,291 20,480 Provision for income taxes (3,790) (4,468) (3,661) Net earnings $ 14,167 $ 15,236 $ 16,819 Total assets $575,236 $647,828 $750,507

General Electric Co. Balance Sheet ($ millions, except for stock price) 2002 2003 2004

Total assets $575,236 $647,828 $750,507 Total debt 329,334 370,364 Total equity 64,079 79,631 110,821 Fiscal year-end stock price 24.35 30.98 36.50

Source: General Electric, 2004 Form 10-K/A (Fairfield, CT: General Electric, 2005), pp. 23, 58, www.ge.com, accessed January 2006.




15

Exhibit 2 Summary of GE Healthcare and Other GE Operating Segments

For Years Ended December 31 ($ millions),

2000 2001 2002 2003 2004

GE Healthcare Revenue 7,275 8,409 8,955 10,198 13,456 Operating Profit 1,321 1,498 1,546 1,701 2,286

Revenues Advanced Materials $8,020 $7,069 $6,963 $7,078 $8,290 Commercial Finance 17,549 17,723 19,592 20,813 23,489 Consumer Finance 9,320 9,508 10,266 12,845 15,734 Consumer Industrial 13,406 13,063 12,887 12,843 13,767 Energy 15,703 21,030 23,633 19,082 17,348 Equipment & Other Services 15,074 7,692 5,561 4,881 8,986 Infrastructure 486 392 1,901 3,078 3,447 Insurance 24,766 23,890 23,296 26,194 23,070 NBC Universal 6,797 5,769 7,149 6,871 12,886 Transportation 13,285 13,885 13,685 13,515 15,562 Corporate items and eliminations (1,296) (2,057) (1,662) (2,757) (3,169)

Consolidated Revenues $130,385 $126,373 $132,226 $134,641 $152,866 Segment Profit

Advanced Materials $ 1,864 $ 1,433 $ 1,000 $ 616 $ 710 Commercial Finance 2,528 2,879 3,310 3,910 4,465 Consumer Finance 1,295 1,602 1,799 2,161 2,520 Consumer Industrial 1,270 894 567 577 716 Energy 2,598 4,897 6,294 4,109 2,845 Equipment & Other Services (212) (272) (339) (185) 833 Infrastructure 45 26 297 462 563 Insurance 2,201 1,879 (95) 2,102 569 NBC Universal 1,609 1,408 1,658 1,998 2,558 Transportation 2,511 2,577 2,510 2,661 3,213

Total segment profit 17,030 18,821 18,547 20,112 21,278 GECS goodwill amortization — — — (552) (620) Corporate items and eliminations 935 819 1,041 (491) (1,507) GE interest and other financial charges (811) (817) (569) (941) (979) GE provision for income taxes (3,799) (4,193) (3,837) (2,857) (1,973)

Earnings before accounting changes 12,735 14,078 15,182 15,823 16,819 Cumulative effect of accounting changes — (287) (1,015) (587) — Consolidated Net Earnings $ 12,735 $ 13,791 $ 14,167 $ 15,236 $16,819

Source: General Electric, 2004 Form 10-K/A (Fairfield, CT: General Electric, 2005), p. 64, www.ge.com, accessed January 2006.




16

Exhibit 3 Country Healthcare Statistics

Country

% GDP Spent on

Healthcare (2002)a

Healthcare Expenditures

per Capita (2002, $)a

Number of Hospitalsb

Hospital Beds per

1,000 Capitab

% of Population

over Age 60, 2003a

Medical Device Exp. per Capita

($)b U.S. 14.6 5,274 6,100 3.5 16.3 174 Japan 7.9 2,476 8,400 10.1 25.0 109 Germany 10.9 2,631 2,300 7.3 24.4 86 France 9.7 2,348 3,300 8.8 20.5 68 U.K. 7.7 2,031 1,600 4.9 20.8 50 Canada 9.6 2,222 1,200 5.7 17.4 75 Mexico 6.1 379 3,700 1.2 7.4 6 China 5.8 63 68,000 2.3 10.5 1 India 6.1 30 15,000 1.0 7.8 1

Sources: a World Health Organization, www.who.int/countries/en, accessed January 2006.

b Company documents.

Exhibit 4 Competitor Information

Siemens Medical Solutions Philips Medical Systems Toshiba Medical

Systems Corp.

Country of domicile Germany Netherlands Japan

2004 revenues ($ millions)

$8,737 $7,261 $2,774

EBIT 1,153 934

Parent company revenues 93,500 37,714 54,543

Sales by sector Imaging equipment (52%), imaging services (18%), IT (15%), other [e.g., hearing aids] (15%)

Imaging equipment (50%); customer services (26%); patient monitoring, IT, and other (24%)

Sales by geography North America (46%), Europe (33%), Asia/Pacific (14%), rest of world (7%)

North America (51%), Europe (31%), Asia/Pacific (15%), Latin America (3%)

Areas of strength PET, MR, healthcare IT Ultrasound, nuclear medicine, patient monitoring

Ultrasound, CT

Recent acquisitions CTI Molecular Imaging for $1 billion

Stentor (an image-archiving business) for $280 million

Sources: Tim Adams et al., Siemens, Citigroup, September 9, 2005; Niranjan Aiyagari, Siemens, SG Research, October 5, 2005; Yoshiharu Izumi, Toshiba, JP Morgan, November 7, 2005; John Van Steenberghe et al., Philips Electronics, Deutsche Bank, September 6, 2005, all via Thomson/Investext, accessed January 2006.




17

Exhibit 5 Global Product Company

Global Product Company

The COE Strategy...

! Value System Engineering- Locate System COE Near/Within Market

" High Tech Components- Co-locate & GrowEngineering &Manufacturing COEs

# Low Tech Components- Leverage Cost, Skills Base& Logistics

Mexico COE! XR Components! Tube Loading! MR Components! Magnet Machining! PET Components

Israel COE " Nuc/PET Engr & Mfg" MR UHF Engr & Mfg" Value Cardiac U/S

Hungary COE# DXR Analog" Applications Development" Electronics COE! Positioner COE! Mammo Components

India COE # Value U/S# Value C-Arm" Tube/Gen Engr & Mfg" CT Detector Packs" Value U/S Probes" MR Components! MR Tables

China COE # DXR Rad# Value CT# Value MR# Laptop U/S" Permanent Magnets" XR Components! CT Tables & PDU�s

Korea COE # Value Color U/S

GE Confidential

4

Source: Company documents.

Exhibit 6 Global Supply Chain

SuspensionSuspension

MexicoMexicoMonterreyMonterrey

SystemSystem

ChinaChinaBeijingBeijing

Global Supply Chain Example: Proteus

117 Parts117 Parts

AsiaKorea,Taiwan4 Parts

W. EU

4 Parts

22 Parts

USA,Canada18 Parts

360 Parts360 Parts

47 Parts

GeneratorGenerator

IndiaIndiaBangaloreBangalore

122 Parts122 Parts

N. AfricaMorocco23 Parts

E. EUPoland

1 Part

Intercontinental Supply Chain For 719 Parts

11PartPart

Photo

Proteus

MO-03





18

Exhibit 7 Economics of Patient-Monitoring Device Made in Mexico for the Chinese Market

$ Millions $/Unit Sales $ 2.6 $3,300 Total Variable Cost 2.1 2,570 Variable Margin 0.6 730 Incremental Fixed Cost 0.0 Profit 0.6

Number of units 800


Exhibit 8 Training PowerPoint Slide from China CEO Chih Chen


� 苦的工作才是在的艰艰。我的明是靠践得发艰

来的，不是什天才绝绝。 �� My inventions are from practice, not because of genius.�

� 践是真理唯一的准艰实实实 ��Practice is the sole criterion for testing truth.�

---GE Founder, Edison

---General Designer of China�s Opening-up and ReformsGreat Deng Xiaoping

Common Grounds Between GE Management and China�s Reforms




19

Exhibit 9 Amersham Financial Data ($ millions)

1999 2000 2001 2002 2003 Sales $2,224 $2,088 $2,308 $2,431 $2,701

Operating Profit 404 365 420 466 489

Net Income 142 162 304 269 190

Sales by Business Sector

Amersham Health

Medical Diagnostics 1,331 1,510

Therapy 93 80

Amersham Biosciences

Protein Separations 415 482

Discovery Systems 592 628

2,431 2,701

Regional Sales

Europe 1,584 1,798

North America 1,310 1,403

Japan 282 301

Asia Pacific 126 147

Rest of world 8 10

Less inter-segment sales (879) (958)

2,431 2,701

Source: Amersham, 2003 Annual Report (Little Chalfont, U.K.: Amersham, 2004), www.amersham.com, accessed January 2006.

Note: Annual British pound-U.S. dollar exchange rates obtained from www.federalreserve.gov, accessed January 2006.



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21

Exhibit 11 Leading Competitive Position

No. 1 No. 2 No. 3

Diagnostic Imaging GE Healthcare Siemens Philips

Services GE Healthcare Philips Siemens

Cardiology Philips GE Healthcare Siemens

Clinical IT GE Healthcare Cerner EPIC

Ultrasound GE Healthcare Philips Siemens

Medical Diagnostics GE Healthcare Bracco Tyco/Mallinkrodt

Protein Separations GE Healthcare Millipore Bio-rad

Discovery Systems ABI GE Healthcare P-E/Invitrogen





22

Appendix

Major Modalities of Diagnostic Imaging Competitors

X-Ray X-rays were the original imaging technology and represented over half of all diagnostic images taken. The equipment consisted of a radiation generator and a detector. Various body tissues absorbed or transmitted X-rays sent by the generator to various degrees. A two-dimensional contrasting image showing internal body structures thus formed on the detector. X-ray systems were useful for viewing structural abnormalities, such as broken bones or tumors, but were less adept at viewing soft tissues. Images were still pictures and often contained structures above and below the area of interest. The introduction of digital X-rays in the 1990s enabled images to be stored and shared electronically rather than on film and constituted a major advance.

Computed Tomography (CT) CT imaging systems, which included computer-axial tomography (CAT) systems, were an advanced form of X-ray imaging. In a CT system, an X-ray generator was located in one side of a donut-shaped (toroidal) cabinet and an X-ray detector was located in the opposite side. The patient lay on a table that slid through the donut hole. As the patient moved through the hole, the X-ray generator and X-ray detector rotated inside the cabinet and around the patient to take multiple images from many different angles. The image data was computer processed into two-dimensional views of the body. As with X-ray systems, CT images were based on differences in tissue density. CT was used in facial reconstruction, tumor detection, and the treatment of various traumas and blood-vessel blockages.

Magnetic Resonance (MR) Imaging MR imaging involved a patient lying on a table inside a cylindrical tunnel. The tunnel walls contained high-powered magnets, radio-wave generators, and radio-wave detectors. The magnetic field and radio waves generated by the MR system caused the hydrogen atoms in the patient’s water molecules to line up in a single direction. When the MR radio waves were turned off, the hydrogen atoms returned to their original positions, and in the process they emitted their own radio waves. These waves were detected by the MR system and used to create detailed two-dimensional and three-dimensional images. The 1990s development of open MR systems increased patient comfort by placing magnets above and below the patient table rather than surrounding the table. Higher-strength MR systems formed higher-quality images more quickly than lower-strength systems. MR systems were used to view soft tissues, particularly heart and circulatory systems, and muscular/skeletal abnormalities. Increasingly, MR systems were used in functional imaging whereby organs could be viewed in action.

Nuclear Medicine (NM) Imaging Radioactive isotopes were injected, ingested, or inhaled into the patient. Various tissues absorbed varying amounts of the isotopes that emitted gamma radiations. Gamma cameras detected the emissions, which were then computer processed and displayed on a monitor. NM imagers were used in functional imaging of organs, body systems, and disease conditions and not in snapshot structural imaging. The images provided exceptional detail to the cellular level and could be used to detect diseases much earlier than other modalities. The radio isotopes could be purchased or in some cases manufactured on-site. Positron emission tomography (PET) systems, a recent advancement in the NM field, produced images with significantly higher resolutions. However, PET systems were more expensive (approaching $2 million compared with less than $1 million for NM) and additionally required short-lived isotopes that had to be produced on-site using $2 million cyclotrons.




23

Ultrasound Ultrasound systems used a transducer to transmit ultrasound waves into the body. Internal organs and structures reflected the sound back to the transducer, were computer processed, and then displayed on a video monitor. While ultrasound systems were continually being improved and could produce detailed structural images, system costs remained low compared with those of other modalities. Typical applications included viewing heart function, blood flow, various organs, and pregnancy conditions.

Nonimaging Diagnostic Segments

Patient monitoring Patient monitoring was a broad field of products used to monitor various patient conditions within a variety of hospital settings. Patient-monitoring devices included neonatal monitoring, fetal monitoring, anesthesiology, and other products.

Cardiology Cardiology diagnostic equipment also covered a broad range and was often divided into invasive and noninvasive segments. Invasive cardiology products included equipment for catheter procedures that tested various aspects of a heart’s electrical systems. Noninvasive cardiology covered electrocardiograph (ECG) equipment and ambulatory devices that recorded heart electrical function through wires attached to the body and also stress-test equipment and heart defibrillators.

Genomics

Genomics and proteomics were broad terms used to describe the study of hereditary traits and potential abnormalities of cells and cell function. Genes, which were found in the cell’s DNA, determined cell function by controlling various proteins. Gene therapy involved replacing faulty DNA in diseased cells with healthy DNA. The basic steps included identifying the defective portion of the DNA, growing the corrected genes, and inserting the new genes into the appropriate cells using “vectors,” which were typically viruses made harmless. Each step in the process had high failure rates—the vector might not survive long enough, or the new gene might not arrive at the correct cells, might not get inside the cell nucleus to access the DNA, and might not function if it did get inside. Because of this failure rate, and because the technology of genetic diagnosing had advanced further than genetic therapies, physicians were debating whether it was ethical to tell patients they would contract diseases for which there was no treatment.




24

Endnotes 1 Scott Davis et al., General Electric, Morgan Stanley, May 4, 2005, p. 40, via Thomson/Investext, accessed

January 2006.

2 Joseph Eichinger, “Diagnostic Imaging Industry-Update,” The Investext Group, Boston, MA, November 16, 1983, p. 5.

3 Walter W. Wieners, editor, Global Healthcare Markets: A Comprehensive Guide to Regions, Trends, and Opportunities Shaping the International Healthcare Arena (San Francisco: Jossey-Bass, 2001), p. 166.

4 GE Healthcare, “Healthcare Re-imagined: Delivering the Future of Healthcare Today,” RSNA Investor Meeting, December 1, 2005, slide 20, www.ge.com/en/company/investor/index.htm, accessed January 2006.

5 Some information in this paragraph comes from “Total Medical Imaging Equipment Services Market,” a report by Frost and Sullivan, 2002.

6 Wieners, Global Healthcare, p. 321.

7 Guy Boulton, “Nexus of Medical Technology; Complexity, Innovation Profit GE Healthcare,” The Milwaukee Journal Sentinel, October 30, 2005, via Factiva, accessed December 2005.

8 “Amersham—About Us: Overview,” www.amersham.com/about/index.html, accessed December 2005.

9 Bill Castell, “The Next Generation of Health Care,” The Wall Street Journal, July 12, 2005, p. B2.

10 Peter Marsh, “Why the Medical Technology Business Is Looking So Lively,” The Financial Times, March 25, 2004, via Factiva, accessed December 2005.

11 Diane Brady, “The Immelt Revolution,” BusinessWeek, March 28, 2005, via Factiva, accessed December 2005.

12 Diane Brady and Kerry Capell, “GE Breaks the Mold to Spur Innovation,” BusinessWeek, April 26, 2004, via Proquest, ABI/Inform, www.proquest.com, accessed December 2005.

13 Steve Niles, “GE Brings Amersham to Life Sciences,” Med Ad News 22 (December 2003): 28, via Proquest, ABI/Inform, www.proquest.com, accessed December 2005.

14 Brady and Capell, “GE Breaks the Mold to Spur Innovation.”

15 Jerry Useem, “Another Boss Another Revolution,” Fortune, April 5, 2004, via Factiva, accessed January 2006.

16 Brady, “The Immelt Revolution.”

17 Useem, “Another Boss.”

18 Castell, “The Next Generation of Health Care.”

19 Kathleen Gallagher, “A New Focus for a New GE,” The Milwaukee Journal Sentinel, April 4, 2005, via Factiva, accessed December 2005.

20 Niranjan Aiyagari, Siemens, SG Research, October 5, 2005, via Thomson/Investext, accessed January 2006.

21 Carol Marie Cropper, “Between You, The Doctor, and the PC,” BusinessWeek, January 31, 2005, via Proquest, ABI/Inform, www.proquest.com, accessed January 2006.

22 “Medicine’s New Central Bankers,” The Economist, December 10, 2005, via Factiva, accessed December 2005.

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