AmeriPath Will Acquire Inform DX for $44.6 Mil

Transaction combines path industry’s two largest management companies

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CEO SUMMARY: It’s another example of consolidation in the anatomic pathology marketplace. AmeriPath, Inc.’s acquisition of Inform DX, Inc. positions the company to do as much as $350 million in revenues next year. By acquiring Inform DX, AmeriPath also gains entry into six more states. The financial performance of both companies is another sign that the era of the small anatomic pathology group practice is nearing its end.

WHEN ANATOMIC PATHOLOGY giant AmeriPath, Inc. announced the acquisition of Inform DX, Inc. last Wednesday, it was more than just a case of the biggest getting even bigger.

The real story behind this acquisition is that two anatomic pathology companies, each with a similar business strategy, realized that cooperation would be much more productive than competition. That is why this acquisition should be viewed as a merger of two like-minded companies.

AmeriPath, now approaching $300 million in annual revenues, will pay about $45 million for Inform DX. It will also incur an additional $12 million in debt once the transaction closes. InformDX has about $50 million in net revenues. Inform DX owns five of the 12 pathology labs it manages. The other seven are managed under contract. Both companies expect to complete the transaction no later than year-end.

“There have been ongoing discussions between the two companies for several months,” stated James C. New, Chairman and CEO of AmeriPath. “We think the business resources at both companies complement each other in several important ways. “InformDX has a strong management team,” continued New. “Over the past three years, they have demonstrated the ability to improve the operations of the pathology practices they manage while at the same time building specimen volume, revenues and profits.

“Another important factor is that Inform DX manages practices in six states where AmeriPath currently has no presence,” he added. “These are established pathology practices with a good reputation in the markets they serve. It increases our geographical coverage across the United States.”

Turn to Page 9 to read our interview with Ameripath Chairman and CEO James C. New and InformDX Chief Executive Officer Brian C. Carr

Once the merger is completed, Ameripath will have pathology operations in 20 states. It will have 405 pathologists and hold contracts to provide pathology services to 208 hospitals. The combined company will be the largest single direct provider of anatomic pathology services in the United States.

InformDX is itself the product of several acquisitions. As Pathology Consultants of America, it acquired American Pathology Resources, Inc. in 1998 and PathSOURCE, Inc. earlier this year. (See TDRs, April 13, 1998 and June 19, 2000.) It took the name Inform DX at the time of the PathSOURCE acquisition.

Few Companies Remain

Once InformDX merges into AmeriPath, only a handful of pathology-based management companies will be left. Pathology Partners, Inc. of Dallas, Texas and USLabs, Inc. of Irvine, California received substantial funding from venture capitalists. But the business plan of each of these companies is focused on operating pathology laboratories, not in managing pathology group practices.

Probably the largest pathology organization to remain will be Pathology Service Associates, LLC of Florence, South Carolina. This is a non-profit member association of state pathology practice networks. It has about 80 practices and approximately 400 participating pathologists.

For pathologists, one interesting aspect of the AmeriPath/Inform DX merger involves pathologist compensation. InformDX was using a business model based upon “shared equity.” It would sign a management agreement with the individual pathology group practice, and receive a management fee. As revenues and net profits increased, Inform DX would share a portion of those higher profits. AmeriPath, in contrast, acquires the assets of the pathology practice and those pathologists then become employees of the company.

Pathologist Compensation

“We have discussed the compensation arrangements with pathologists at each practice that we manage,” stated Brian C. Carr, Chief Executive Officer of InformDX. “These arrangements will not change after the merger. Also, our pathologists understand the business reasons for the merger and are very supportive of it.”

Inform DX owns five pathology laboratories. It holds management contracts with seven pathology group practices. This dichotomy in business structure is not expected to be a problem.

“InformDX did a good job in providing extra value to its practices during the past several years,” noted New. “We want to build upon the trust which Inform DX has established. Should they desire, we intend to give those practices with management contracts an opportunity to fully convert to the AmeriPath business model. There will be integrity in this process because there is no overlap with existing Ameripath operations in markets where InformDX manages a practice.”

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The merger of AmeriPath and Inform DX is a significant event, but not for the reasons most lab administrators and pathologists would assume. Certainly it is important that two of the larger pathology management companies are joining forces.

But the most significant insight from this event is this fact: after four years of competing in the marketplace for anatomic pathology business, both companies were evolving toward the identical business model.

THE DARK REPORT can identify several key elements to this business model:

ONE: it emphasizes pathology delivered locally, at the point of care.

TWO: local pathology services are supported by a national organization with these characteristics: a) professional executive management with significant physician involvement; b) rigorous billing and collections; c) sophisticated managed care contracting; and, d) effective and extensive sales and marketing of local pathology services.

THREE: capability to provide all levels of anatomic pathology services to referring clinicians, from routine procedures to esoteric testing, including molecular pathology and genetics.

FOUR: an effective network of pathology subspecialists, so cases can be referred to inhouse experts.

FIVE: Development of an integrated pathology informatics capability, to meet the needs of clinicians, payers, and generate additional revenue from pharmaceutical companies as well as research and development firms.

Similar Market Dynamics

It is important to understand that both AmeriPath and InformDX encountered similar dynamics in the healthcare marketplace as they tried to increase specimen volumes. In formulating strategic business plans, they were actually building corporate organizations which were uncannily similar.

THE DARK REPORT offers another insight gleaned from the business experience of AmeriPath and Inform DX during the past four years. Although these companies were originally created to be physician practice management (PPM) companies organized around pathology, they have morphed into a different business model. This business model is unique, just as pathology is unique among all physician specialties.

Pathologists practice medicine without seeing patients. They respond to cases referred by clinicians. This situation creates two functional business opportunities unavailable to other physician specialties. First, it is possible to send sales people out to physicians’ offices and solicit their AP case referrals. Try that with, say orthopedic surgery or oncology.

Second, the occasional, but regular need to refer specific cases to pathologist subspecialists makes an internal “hierarchy” of pathology skills a business asset. It allows the company to be a “one stop pathology shop.”

“Branding” Path Services

This business model makes it easier for pathology subspecialists to gather specimens across huge amounts of geography. It also allows the company to “brand” its pathologist-experts. Branding is already in the pathology marketplace. IMPATH, Inc. promotes its relationship with Juan Rosai, M.D. while AmeriPath promotes its relationship with A. Bernard Ackerman, M.D.

Add up these characteristics and it becomes obvious that InformDX and AmeriPath, despite their original function as a pathology PPM, are no longer structured to operate in that fashion. These companies, pre-merger, have been evolving into a unique business model, one specifically designed to meet the unique needs of the marketplace for anatomic pathology services.

These business developments leave some tea leaves that are easy to read. For example, whereas today the referral process for anatomic specimens is loose and involves many independent relationships, in the near future AP case referrals will be directed primarily to integrated pathology companies and organizations.

Second, the professional sales and marketing campaigns directed at physicians’ offices and payers will place small, independent pathology groups at a competitive disadvantage. Moreover, it can be expected that the growth of regional pathology “super-groups” operated by companies like AmeriPath will eventually affect the way hospitals contract for pathology services.

Sole Source Path Contracts

After all, the emergence of integrated delivery networks (IDN), responsible for multiple hospitals, is already encouraging IDN administrators to negotiate sole source pathology con- tracts with one company. IDN administrators prefer dealing with one entity which can cover all hospitals and outpatient cases in a cost-effective manner. This places the traditional small independent pathology group practice at a competitive disadvantage, even in the hospital environment.

Of course, none of this is going to happen overnight. But the pace of change is inexorable. For example, at the time of AmeriPath’s IPO in October 1997, who would have predicted that AmeriPath would achieve annual revenues of one-third billion dollars in only 49 months!

Path Business Economics

The significance in the merger of AmeriPath and Inform DX is not that a big pathology company is getting bigger. Rather, it is the validation that changes in the healthcare marketplace are changing the economics of the anatomic pathology business.

For savvy pathologists, under- standing these marketplace changes is the key to positioning the pathology group practice to maintain its relevance for local clinicians and its ability to maintain financial solvency.


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