AmeriPath & InformDX Merging To Form Largest Anatomic Pathology Firm in U.S.

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CEO SUMMARY: AmeriPath and InformDX shared several common elements in their respective business strategies. Both companies believe that pathology services are best delivered at the local level and benefit from the support of a national organization. Both companies believe that physicians must play a major role in designing and delivering anatomic pathology (AP) services. But the most intriguing aspect of this merger is how two different AP companies, in response to demand for AP services, were evolving into an almost identical business model. In this exclusive interview with THE DARK REPORT, the two chief executive officers share their insights about the anatomic pathology marketplace. The market clout of the post-merger AmeriPath will make it an important company to watch. As the future unfolds, AmeriPath will need to address the challenges of competition from the national laboratory companies, the arrival of advanced molecular pathology and genetic testing, and the importance of information management.

NOTE: This joint interview with AmeriPath Chairman and CEO James C. New and InformDX Chief Executive Officer Brian C. Carr was conducted by Robert L. Michel, Editor-In-Chief.

EDITOR: During the past four years, both AmeriPath, Inc. and InformDX, Inc. posted respectable growth in specimens, net revenues and operating profits. Given these individual successes, why did your companies decide to join forces?

NEW: That’s an easy question. Both our companies were founded upon similar business strategies. In recent years, as we individually analyzed the marketplace for anatomic pathology (AP) services, we found each of our companies was evolving toward a common business model.

CARR: I agree. Despite the differences in our companies, our operational philosophy and strategic business goals are in sync. We both realized that we could move faster in the marketplace if we combined our resources.

EDITOR: Jim, what were the specific attributes of InformDX which attracted AmeriPath?

NEW: I can list at least six major reasons why we believe InformDX is a good fit for AmeriPath. First, we think that InformDX’s 12 pathology practices are strong, respected groups. They make a good foundation for further growth in the markets they serve.

EDITOR: Yes.

NEW: Second, InformDX has an outstanding group of dermatopathologists. As you know, AmeriPath considers its dermpath activities to be an important part of our business strategy. Third is what we consider to be a strong management team at InformDX. Just look at its
accomplishments in the last few years. That track record speaks for itself.
Fourth, its 12 practices add to our geographic breadth. For example, InformDX operates in six states where AmeriPath currently has no presence.

EDITOR: That certainly has value.

NEW: Fifth, InformDX has demonstrated expertise in anatomic pathology group practice integration and turnarounds. These are uncommon skills to find in the pathology profession. Sixth, for AmeriPath, adding InformDX to our company brings us much closer to the size we need to be to meet the expectations of our shareholders.

EDITOR: Could you explain that?

NEW: At some point in our business development, the greater part of our growth must come from our internal operations, not from
acquisitions of pathology group practices. InformDX helps to better position us for sustained internal growth.

EDITOR: Those are certainly items which make InformDX attractive as a merger partner. Brian, what value did InformDX see from merging with AmeriPath?

CARR: Robert, you’ve followed our activities closely over the years. You know that we’ve posted strong rates of growth. However, to move to the next level of business, we had demands for more capital which were not easily met as a private company.

EDITOR: Please elaborate.

CARR: Certainly. It probably breaks down into three areas. First, expanding our sales and marketing organization requires considerable money up front. Second, we recognized the need to expand our capabilities in esoteric testing and molecular pathology. Third, you’re aware of our significant efforts to develop state-of-the-art pathology informatics services. Not only are we creating a unified data system and clinical
repository, but we are building information-based tools to aid our sales force in generating new client accounts and managed care contracts.

EDITOR: To do each of these right requires a lot of resources…

CARR: …more than that. Each of these three business areas also requires us to add the right kind of management skills. That is why the fit with AmeriPath was obvious. For example, AmeriPath recently opened its Center for Advanced Diagnostics. Why should InformDX invest a similar amount of money to duplicate this laboratory resource?

NEW: I should add that AmeriPath is impressed with what InformDX has achieved in pathology informatics. This is another area where the two companies don’t need to duplicate the same resources.

EDITOR: You two gentlemen present a compelling argument for this merger, don’t you!

CARR: Yes. Simply put, InformDX, as a private company, was going to be challenged to come up with the necessary capital and additional management to achieve these goals. We looked at AmeriPath and decided they are in the same business we are—pathology delivered locally, backed by a national support infrastructure, as opposed to a centralized pathology company offering national AP services.

NEW: I would like to add some details to Brian’s comments. From the day that AmeriPath was formed, we’ve been guided by some basic business strategies. First, we wanted to focus exclusively on anatomic pathology. Clinical testing was not in our plans. Second, we believe that pathology is a local business. Nothing beats the personal relationship a local pathologist has with clinicians in his community.

EDITOR: That’s true.

NEW: Third, we believe it’s essential that physicians play a major role in every aspect of the business. Our goal is to match the right combination of business skills with pathology services so that pathologists can practice medicine at a high level and with a stable financial foundation.

EDITOR: In other words, good pathology and good business administration work together.

“…we believe that pathology is a local business. Nothing beats the personal relationship a local pathologist has with clinicians in his community.”

NEW: Yes. These were our business philosophies from the start. They remain our business philosophies today. So when we began building AmeriPath, we first emphasized dermatopathology. The demographics for skin cancer during the next decade make this an important growth segment for pathology services. Next we started to expand hospital inpatient and outpatient pathology. Once we had established these business bases, we began building outward, both within the regional markets we serve as well as into new regional markets.

EDITOR: Both of you gentlemen have been working across multiple pathology practices and multiple markets for several years. What part of the pathology business is undergoing the fastest change?

NEW: I would say information technologies. If there was any one thing we underestimated when we began, it’s the importance of having a common information system from the start. The other thing that snuck up on us was esoteric testing. We didn’t fully appreciate how valuable esoteric testing would be to the total package of anatomic pathology services we offer until about one year ago.

EDITOR: That’s why you built the Center for Advanced Diagnostics (CAD)?

NEW: Precisely. CAD also reinforces our efforts in pathology informatics. We believe the growth predictions about genetic-based diagnostics are accurate. As increased knowledge about the human genome and genetics begins to generate new medical procedures, AmeriPath wants to be ready to provide that information.

EDITOR: Here you’re describing the directions you think anatomic pathology will take. Will there be a shift in pathology’s role?

NEW: I think so. Historically, the emphasis has been on diagnosis and treatment. Already that’s shifting in favor of prognostics and prevention. Physicians will want to look at the genetic make-up of individuals to detect potential health problems before they become visible.

EDITOR: What you are implying, Jim, is that anatomic pathology will shift its major emphasis away from diagnosis and move toward more prognostic types of procedures.

NEW: Basically yes. But this will not occur overnight. It will be a gradual change in emphasis. We can already see an emerging demand for genetic information. That is why AmeriPath has made a major decision to expand its involvement in esoterics, tissue banking, and pathology informatics.

EDITOR: That explains your relationship with Genomics Collaborative, Inc., the tissue banking company.

NEW: We partnered with it because we quickly realized that we couldn’t do it ourselves. It is building the tissue banking service platform. We will provide the tissue. We have 200 hospitals where it is possible for us to mine data. Currently we are working with these hospitals to resolve legal issues, develop protocols, and establish patient approval procedures. We estimate it will take 12 to 18 months to prepare this program.

EDITOR: Wow. That seems like a fast ramp-up.

NEW: I don’t anticipate we will see much revenue from this for another two or three years, certainly not more than $10 million annually. But after three years, the potential is immense. For example, just around Harvard University, in Cambridge, Massachusetts, there are more than 100 companies developing genetic-based healthcare products and services. The time is fast approaching when the fruits of this genetics research will reach widespread clinical use.

CARR: I would like to add to this observation. At InformDX, we identified these same changes within the pathology marketplace—in informatics capability, molecular pathology, and tissue banking. We knew we had to develop capabilities in all three. Competing companies have identified these same changes in the pathology marketplace. You can already see similar initiatives under way at companies like IMPATH, DIANON Systems, Quest Diagnostics, and LabCorp.

EDITOR: I would like to shift topics here. Please discuss any changes you see in how managed care is contracting for anatomic pathology services.

NEW: Frankly, payers didn’t give a damn about anatomic pathology until about one year ago. I’m blunt for a reason. Traditionally, they lumped AP with the same contract for clinical lab testing. No one ever educated HMOs about the differences between anatomic pathology and clinical lab testing.

EDITOR: You certainly have a strong opinion on this subject.

NEW: I was an executive at two HMO companies during my career. I know, first-hand, how and why things are done inside a health plan. If you look at the problems a payer has with lab, such as malpractice claims and the like, these are usually centered around pathology procedures, not lab tests—Pap smears and biopsies, for instance. With education, we are seeing payers carve AP out and put it in a separate contract.

EDITOR: What does AmeriPath offer as selling points to an HMO?

NEW: We are approaching the point where we can offer statewide coverage. We provide more points of service and a higher level of patient satisfaction. Most importantly, anatomic pathology is a “physician diagnosis business.” There are only so many talented pathologists in each marketplace. We can provide HMOs with a full panel of skilled pathologists, along with a comprehensive line-up of respected pathology sub-specialists. Doctors definitely recognize this benefit. Put everything together, and we have the ability to deliver high quality pathology services in a cost-effective manner.

CARR: Our experience at InformDX mirrors that of Ameripath. We market to what we call the “push-pull” phenomenon. We try and differentiate ourselves, not at the payer level, but at the clinician level. We believe that, once a referring physician, like a urologist, appreciates the quality of anatomic pathology services we provide and the local access he has to pathologists he knows personally, we have competitive advantage.

EDITOR: So the clinician “pushes” the HMO, and the HMO “pulls” you onto the approved panel of providers…

CARR: …correct. We’ve seen this business dynamic work particularly well among dermatologists. Also, having a consolidated pathology group practice in a metropolitan area makes it much easier to become a provider for the major health plans in that market.

NEW: What Brian describes is true. InformDX has done a good job with their sales and marketing program. We like the fact that 55% of its revenues come from outpatient specimens, with the remaining 45% coming from inpatient specimens. That demonstrates how sales and marketing can effectively bring in additional AP specimens from outside the hospital.

EDITOR: I believe most pathology group practices would welcome the additional income which comes with an outpatient/inpatient specimen mix of 55%–45%. That demonstrates how an effective sales and marketing program can help pathologists build their income. While we are on the subject of marketing, will the national laboratory companies be emphasizing anatomic pathology?

CARR: Quest Diagnostics includes anatomic pathology as one of its four or five strategic business objectives. Laboratory Corporation of America has been less specific about its national mar- keting plans for anatomic pathology.

NEW: One of the interesting questions about Quest Diagnostics is this: will it build a national AP services division internally, or will it acquire AP capability? Remember my earlier comment that pathology is a “physician diagnosis business.” There exists a limited number of great physicians in this country. Moreover, anatomic pathology must compete with other product and service lines within Quest Diagnostics.

EDITOR: What factors might encourage the two blood brothers to compete more intensely in the AP marketplace?

NEW: Certainly there will be motivation if payers reimburse more generously for anatomic pathology services. I believe most pathologists would agree with me that the value-added component that AP contributes to the healthcare system can justify increased reimbursement.

“It’s the local relationships which generate competitive advantage for both our companies and their pathologists. So far, it’s been a winning formula. But it’s worked because physicians have major input into the philosophy and operations of our companies.”

EDITOR: These are fascinating insights. We are almost out of time and I would like to clarify some key points. The types of changes you see taking place in the market for anatomic pathology services portend a very different environment for anatomic pathology than what we saw in the 1980s and 1990s. Obviously you believe the future lies in combining the skills of the anatomic pathologists with the talents of skilled business managers. Is that correct?

CARR: Essentially, yes. You have written in THE DARK REPORT about the evolution of healthcare, away from the trillion-dollar cottage industry that it was in the 1980s and into an organizational model built on the principles of modern corporate management. We see evidence of this occurring in the healthcare marketplace daily.

EDITOR: For the pathology profession, direct evidence of this trend is found in the revenue growth of companies offering AP services across the nation. These would include companies such as DIANON Systems, IMPATH, and UroCor, as well as InformDX and AmeriPath.

NEW: At AmeriPath, we are proud of our track record at hitting the goals established by our business plan. We are equally convinced that we can maintain this performance throughout the years to come. We believe the competitive edge is that we deliver our pathology services at the local level, and use a national organization to support our pathologists in ways that allow them to concentrate on the practice of medicine.

CARR: It’s the local relationships which generate competitive advantage for both our companies and their pathologists. So far, it’s been a winning formula. But it’s worked because physicians have major input into the philosophy and operations of our companies. We expect that to continue once the merger is completed.

EDITOR: Gentleman, thank you for your insights. It will certainly be interesting to watch how the medical science and art of pathology evolves with new technology. Certainly the “new” AmeriPath will have a major role in this process.

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