Interview with Ben Lipps, Fresenius Medical Care
“You have to be prepared to take all of the risks and assume responsibility for failures.”
Back in the mid 1990s, the American Ben Lipps teamed up with Gerd Krick, then the CEO of the German medical technology company Fresenius, to risk an acquisition that would lay the groundwork for Fresenius to become the world’s leading provider of dialysis products and services. In this interview with THE FOCUS, Lipps – now Chairman of the Management Board of Fresenius Medical Care (FMC) – describes the obstacles he had to overcome to implement the notion of an integrated corporate group devoted to healthcare.
The Focus: Our topic is resilience, so what does resilience mean to you and what part has it played in your career?
Ben Lipps: As I see it, resilience means not only being able to make it through crises, but also persisting in the face of all kinds of obstacles. Looking back, it’s clear that resilience was important from the start of my career. When I graduated from college back in the mid ’60s, bioengineering was just starting. At the time, research and development work was concentrating on three organs, namely an artificial heart, artificial lungs, and artificial kidneys. Together with a few colleagues, we worked on artificial kidneys. We tested new materials for dialysis. These were urgently needed because, at the time, there were only a few thousand patients who could survive treatment, owing to the huge amount of blood that had to be taken out of the body during dialysis. We hoped we could help many more people by using hollow fibers that had been developed during the 1940s. The fibers worked just like the natural nephrons that are the basic units of kidneys and reduced the blood priming volume outside the body during dialysis.
The Focus: Where did you turn for funding? Was it easy to convince scientists and business people of your idea, or did you have trouble finding backers?
Lipps: Government research funding was available but limited. DOW Chemicals had an interest in developing products based on the hollow-fiber concept but could not justify the required development expenses because of the limited number of patients being treated by hemodialysis at that time. As always, we needed to fight for resources and were not going to give up – and with funding of 10 million dollars from the government and Dow’s support, we hired a team and expanded our development. We used the hollow-fiber technology and worked on different projects like developing batteries for electric vehicles, devices to desalt sea water – and of course the artificial kidney.
The Focus: But thanks to your resilience you were able to continue working on your own idea…
Lipps: That’s right. It took another three years before we were able to start commercialization of our first artificial hollow-fiber membrane dialyzer for dialysis – that was in 1969. Meanwhile we also had to solve other problems, such as how to prevent patients’ blood from clotting. Every time one of our experiments failed we were re-inspired by the contact with patients who needed a device to continue living.
The Focus: So you had a mission…
Lipps: Yes, and I think you need a mission. If you’re resilient but don’t know why or for what, you usually end up failing.
The Focus: Given all the setbacks you had to overcome, how did you stay motivated in the face of repeated failure?
Lipps: Actually it was very easy for us to stay motivated. All we had to do was visit a clinic and see how rough the existing treatment was on patients, who were hooked up to huge machines which still caused a major loss of blood at that time. Plus, the medical establishment knew perfectly well – unlike the health industry – that there was a big need if we could solve the design problems.
The Focus: Was it those same experiences that led you not only to supply equipment, but start treating patients as well?
Lipps: Not directly. The benefits for patients quickly became obvious and soon doctors all over the U.S. and Japan became very interested in our device. Now there was a clear path to extending life for dialysis patients suffering from a loss of kidney functions. Lacking at that point was the economic support to help patients to pay for dialysis. However, Medicare started covering patients in the U.S. in 1972. Alone in the United States, nearly 400,000 patients with so-called terminal kidney failure depend on dialysis today.
The Focus: How did you deal with that and the changes in the competitive environment?
Lipps: If you suddenly offer something that’s revolutionarily different, everybody wants it. We didn’t need a business plan, because the market was practically grabbing the dialyzers out of our hands. By the ’80s, however, when we cooperated with Fresenius, it was becoming more important to keep an eye on costs. The issues then were all about making technical improvements – typical engineering problems. In the ’90s, the market got crowded and we decided to go into the service side too, because products were only accounting for 15 percent of the revenue while services were 85 percent. Around the same time, our biggest U.S. customer, National Medical Care, became available because NMC’s parent company choose to divest the Dialysis Division due to issues they had with the U.S. government. This created an opportunity to expand beyond our product business and also move into dialysis services. This led to our merger with NMC in 1996 and the subsequent creation of Fresenius Medical Care.
The Focus: But that didn’t resolve the problems at NMC…
Lipps: No, in fact NMC was under massive attack and for a while was even in danger of being shut down by court order. The authorities looked at the practices of all of our companies and labs involved in dialysis. Together, our entry into the service business and the ongoing investigations created a double learning curve for us that kept us on our toes for at least four years. The result today includes a strong compliance program at FMC. The experience also sharpened our awareness of the need for high quality in both products and services. We developed a quality warning system to ensure that any kind of quality problems – which do happen – are spotted, identified and solved as early as possible, to minimize the exposure to our customers and patients.
The Focus: You were known as the person behind the takeover of NMC, which after all was considerably larger than Fresenius at the time. How did you personally deal with this challenge?
Lipps: It really was a unique situation. As I said, it took four years for the issue to be settled, and for me personally that was the roughest period of my entire career because I hadn’t had any experience with this type of situation. But we got through it and successfully executed the merger. One of the reasons it worked was that we relied on the existing local management. That’s also the advice I have for all international acquisitions: Work with local management and get their support, since they know the ins and outs of the local business.
The Focus: Being in such a sensitive business as the healthcare industry must put enormous demands on your corporate values.
Lipps: That is absolutely right. But I think it’s true of every personnel-intensive business, because when a lot of people are involved, mistakes happen. Our corporate philosophy is to treat both our customers and our own people in a very ethical and open manner. We do our own internal audits, and we have our own compliance program – in fact, we were the first German company to have a board member specifically for compliance issues. And if we find a mistake, we take it seriously and work hard to find a solution.
The Focus: Was it hard to get these lessons into the minds of your people?
Lipps: No, because dialysis technicians and nurses see patients three times a week and get to know patients and their families very well and tend to identify with them. Having this in mind, you can imagine that it is potentially easier for our employees to identify with our mission. Our employees are also able to share ideas for making any kind of improvements on a hotline which is available to them 24 hours a day. Our people are very committed to the patients they serve and to each other.
The Focus: Does that also apply to your executives?
Lipps: Interestingly, almost all of our executives come from the dialysis business. Yes, we want to make a profit for our stakeholders, but not at the expense of the quality of our products and services. All of us in management have enough experience to quickly realize whether something is a good idea or not. I’m convinced that this continuity and dedication over many years are the reasons why we’re number one in our industry worldwide.
The Focus: So what are the other reasons for your strong competitive position?
Lipps: The vertical integration of our products and services, together with our large market share, means we can study innovative new products and therapies in our own clinics. If our staff, associated physicians, and the patients we treat endorse these innovations, we know with confidence that these innovations can be successful. We have a 95% success rate on new products, which none of our competitors can match, because they are not vertically integrated. Sure, they all do market and field studies, but that’s not the same as having your own people critically looking at new products and telling you what they think about them. Health care systems around the world are seeking improved efficiencies in the delivery of health care. Being vertically integrated in the treatment of end-stage renal disease helps FMC to innovate in a number of ways. That includes thinking about holistic disease management 15 years ago. I also see a kind of resilience in this sort of long-term thinking.
The Focus: That will also give you more financial latitude.
Lipps: In some ways, yes, but we don’t think that way. We have never taken advantage of competitors’ problems to raise our prices. We have naturally increased our capacity and sold more machines and ultimately ended up with 90% of the market. Our restraint in terms of pricing has won us credibility, especially with healthcare policymakers. That’s why the next step is for us to bridge the gap between the physicians and payers and help coordinate the bigger picture.
The Focus: How can you afford to take such a long-term view of things as a publicly traded company?
Lipps: One of the reasons I joined Fresenius was the fact that because of its unique structure it provided long-term stability but short-term goals and objectives. Maybe we could have opportunistically expanded our profits short-term, but that would have hurt our standing with governments, our payers, and our customers. In countries that can’t afford our technology yet, we front them the equipment, because we understand the importance of emerging markets. Also, because kidney diseases become more common as a population ages, we already know that in ten years from now we will need to treat about twice as many patients as today. That leaves plenty of room for growth and innovation.
The Focus: Success breeds complacency. How do you keep your organization and your people focused on innovation?
Lipps: I believe that everything depends on upper management and their communication to the rest of the company. If the top executives are complacent, it spreads. Conversely, if management sets the right tone through their actions, motivation and complacency can be kept in check.
The Focus: That’s all it takes?
Lipps: Pretty much. If our top 200 people weren’t motivated, that would be devastating. Like I said, our big advantage is that we cannot help but be motivated when we go into one of our dialysis clinics and meet the patients.
“Our big advantage is that we can’t help but be motivated when we go and meet the patients.”
The Focus: What do you stress when selecting and developing your top 200 people? Is resilience a key quality criterion?
Lipps: When we hire people, we make sure they are top performers who have demonstrated their competence many times over. They will likely be resilient by nature. We also need certain skill sets, but for the most part we develop those in our executives in-house.
The Focus: Isn’t it important to look outside the box sometimes and bring in fresh ideas?
Lipps: Our problem is not a lack of ideas. What really counts is having a plan and making it happen. Our business depends on many factors; one of the most important is healthcare policy. If we want to implement something new like a comprehensive healthcare system for dialysis patients, we may need to supplement our internal staff with certain hires with specific skill sets. This requires resiliency to push forward policies that best serve payers and patients.
The Focus: How do you preserve corporate spirit and culture as your company grows?
Lipps: We have a highly decentralized organization, because every regional market has unique needs. Of course, we all share the same basis, because we treat the same disease and many countries are now moving toward similar payment structures. Almost all of our top 200 managers have also been with us for more than ten years. Although our company is very complex because of its vertical integration and every divisional head is, so to speak, the CEO of his region, we are all united by the same mission, namely to do what’s best for patients and our stakeholders.
In the future, two-thirds of our revenue will come from service, but we must not neglect the quality of our products. I am convinced that the commitment and persistence with which we have focused on quality and combined first-class products with excellent service will continue to drive our success.
The Focus: What signals do you personally send to your organization? What messages do you think your people are getting from the top?
Lipps: The entire top management of FMC is enthusiastic about what they and the company are doing. This attitude is clear and contagious.
The Focus: You said once that you were successful in combining the best of the Germans and Americans. What did you mean by that?
Lipps: Germany’s focus is on the long-range and Americans are somewhat more short-term oriented. By balancing both tendencies, we reach a very competitive balance. In addition, the stability and long-term influence of the healthcare view of the Else Kröner Foundation is greatly appreciated.
The Focus: Much has been written about the links between risk and resilience. What is your basic attitude to risk?
Lipps: The way I see it, you have to be prepared to take risks and assume responsibility for failures while being determined to bounce back for a worthy cause. Resilience is really a good description of the attribute – succeeding for a worthwhile mission.
The Focus: What character traits will the next generation of Fresenius managers need?
Lipps: The next generation at FMC will consist of experienced managers with the same traits and resilience we have today. I am pleased that we have the internal talent for the next generations of managers. My successor as chairman, Rice Powell, grew through the company and is already deputy chairman. I am confident he will successfully face future similar risks that call for resilience. Rice will be up to the task based on his many successful years at Fresenius Medical Care.
The Focus: Have you ever intentionally initiated turning points at FMC when you had the feeling that everything was running too smoothly?
Lipps: Maybe not that intentionally. There are always opportunities to improve our company and our nature is to seize them. We all have sales experience and as you know, right after closing a deal, good salespeople start looking for the next challenge. They also get used to being rejected. On average, every sale takes ten contacts, so you know you’re going to be rejected nine times. That fosters the personal resilience to keep bouncing back and the determination to do it better next time.
The Focus: Aren’t you worried about the planned cutbacks in national healthcare systems?
Lipps: Not at all – they will actually help us. Cost crises in the healthcare system are an opportunity for us to provide more high-quality services in a more efficient manner. That is the advantage of an integrated model. The fact that we have not budged from our chosen model despite early criticism is finally paying off.
The Focus: You mentioned emerging markets – tapping China’s gigantic market, for example, would surely offer huge growth opportunities, or are there too many obstacles?
Lipps: It is projected that in about ten years from now, China will have the world’s largest number of dialysis patients. We have a number of successful programs in China and are the leading supplier of hemodialysis products. The experience that we are gaining today with the comprehensive care approach to End Stage Renal Disease (ESRD) will be invaluable to the Chinese Government ten years from now. Also countries like India and Russia are potentially attractive markets. Stable reimbursement systems are a prerequisite for us to begin making sizeable investments in any country.
The Focus: May we conclude with a personal question? You are now 70 years old but still full of energy and ideas; what’s your secret?
Lipps: I grew up on a farm in the Midwest and had to start taking care of things when I was only six. Then when I was in high school I suddenly found myself running the whole farm. I’ve always enjoyed working, taking responsibility and being successful. I guess you could call that my secret.
RESUMÉ Ben Lipps
Ben Lipps was born in 1940 and grew up in a small U.S. Midwest rural town. He graduated in Chemical Engineering in 1962 and subsequently completed his doctorate at the renowned Massachusetts Institute of Technology (MIT) in Cambridge, Massachusetts. He then went on to lead the research team at Dow Chemical and developed the first artificial hollow- fiber membrane for use in dialysis equipment at the end of the 1960s. When a follow-up project was cancelled, Lipps decided to go into business for himself together with his team. In 1985, his next career move took him to the U.S. subsidiary of the German healthcare group Fresenius, where he was CEO of Fresenius USA until 1996. Together with Gerd Krick – then Fresenius CEO and today Chairman of its Supervisory Board and hailed by Lipps as an outstanding strategist – he set up the acquisition of National Medical Care (NMC) in 1996. Lipps anticipated the complex local negotiations for the deal. He took the helm of the newly founded Fresenius Medical Care in North America and has been Chairman and CEO of FMC since 1999. Lipps lives in the USA, from where he manages the company – very successfully. He recently extended his contract, which was due to expire in 2011, through to the end of 2012. His designated successor Rice Powell is currently working alongside him as deputy CEO.
FRESENIUS MEDICAL CARE Herring eats shark
Fresenius Medical Care (FMC) is the world’s leading supplier of dialysis products and services. Its parent company Fresenius SE holds some 36 percent of the company’s ordinary shares and more than 50 percent of the voting rights. In turn, 58 percent of the parent company’s shares are held by the Else Kröner Foundation and are therefore, in the broadest sense, still owned by the founding family. Else Kröner, the adoptive daughter of pharmacist and company founder Eduard Fresenius, moved into the distribution of dialysis equipment in the 1960s. From 1979 onwards the company developed its own dialysis equipment and advanced to become the global market leader. Under the management of the first non-family CEO, Gerd Krick, after a spectacular takeover battle Fresenius – by then a listed company – merged with National Medical Care (NMC), the world’s largest operator of dialysis clinics, combining this business with its own dialysis technology division. In revenue terms NMC was far larger than its new parent company, prompting headlines such as “Herring eats shark!” in the financial press. In 1996 FMC was established as an autonomous company. 2009 brought a six-percent increase in sales to US$11.3 billion. FMC currently treats over 195,000 patients at its worldwide network of 2,553 dialysis clinics.
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