Gauging the Prospects For Anatomic Pathology

During 2010, investors paid aggressive prices for those laboratory companies focused on pathology

CEO SUMMARY: More buyers are crowding into the lab testing industry and looking to acquire anatomic pathology testing companies. These buyers are willing to pay strong prices to acquire AP labs and companies which they determine to be a strategic fit. All of this acquisition activity is happening even as the Baby Boomer generation of pathologists is poised to begin retiring in significant numbers. In coming months, that factor may trigger more intense AP merger/acquisition activity.

IN RECENT WEEKS, both General Electric (GE) and Sonic Healthcare, Ltd., announced that each would acquire one of the nation’s larger national anatomic pathology (AP) companies.

For GE, the acquisition target was Clarient, Inc., of Irvine, California. GE will pay $587 million to purchase Clarient and the deal is expected to close either before the end of 2010 or early in 2011.

For Sonic Healthcare, the acquisition target was CBL Path, Inc., of Ocala, Florida. It will pay $123 million to buy CPL Path. This sale should be completed by the end of December, 2010.

These two announcements were preceded just nine weeks earlier by the news that Roche Holdings would purchase BioImagene, Inc., the digital pathology company based in Sunnyvale, California. Roche will operate BioImagene from within its Ventana Medical Systems business division.

If there is a common theme to these three acquisitions, it is the strong—even aggressive—price buyers paid for at least two of the three acquisitions. In the case of Clarient, GE is paying $578 million for a public AP company that, at the end of 2009, reported $100 million of revenue and a loss of $10 million.

The price paid for CBL Path was more in line with the sales prices of anatomic pathology laboratories during the past 24 months. Sonic will pay $123 million for CBL Path, which is about 1.5 times the company’s annual revenue of around $80 million during the past year. (See pages 3-4.)

Roche to Buy BioImagene

The $100 million price paid for BioImagene surprised many observers. That’s because BioImagine is a new company and has just several hundred customers for its digital scanners and digital pathology systems.

This purchase price represents the strategic value BioImagene is expected to bring to Roche. But for pathologists and pathology practice administrators, the fact that Roche is willing to pay such a high price for the potential that BioImagene offers in digital pathology is certainly a sign. It reflects the confidence by one of the world’s largest corporations involved in the lab testing market that anatomic pathology testing will be a high-growth sector of laboratory medicine in coming years.

One could make that same interpretation about GE’s acquisition of Clarient. GE will pay almost one half billion dollars to acquire a pathology testing com- pany that has struggled to earn a profit and has revenues of around $100 million per year.

GE and Digital Pathology

But wait! Maybe there is more to the GE story. Don’t overlook the fact that Omnyx, LLC—GE’s digital pathology joint venture with UPMC—just announced that its digital pathology system will enter clinical use at four prominent academic center laboratories. They are: UPMC, Montefiore Medical Center, Stanford University Medical Center, and University Health Network.

One speculation is that GE has identified a strategic advantage it can seize in the anatomic pathology marketplace if it can marry Clarient’s strengths in advanced molecular diagnostics and genetic testing with the capabilities of the Omnyx digital pathology system. Then, once the Omnyx digital pathology system obtains market clearance from the FDA, GE can offer an integrated diagnostic solution that incorporates technologies and capabilities drawn from both Clarient and Omnyx.

 Integrating In Vivo & In Vitro

Some sharp-thinking clients and readers of THE DARK REPORT may also recognize that it is feasible that GE—a dominant global player in radiology and imaging—might also be ready to integrate radiology diagnostics with pathology diagnostics in some innovative and unexpected manner.

THE DARK REPORT thinks such a scenario is unlikely at this time. But it cannot be summarily dismissed, since technology advances in both molecular imaging and molecular diagnostics are moving quite swiftly.

As a gauge of the state of the laboratory merger/acquisition marketplace, the Clarient and CBL Path sales are evidence that investor interest in anatomic pathology remains quite high, particularly for the most desirable AP lab companies. Also, because many laboratory sales are transacted at the end of the year, it is likely that other significant laboratory acquisitions may be announced during the final six weeks of 2010.

Another factor which could play a major role in increasing merger and acquisition activity in the anatomic pathology sector is the looming retirement of the Baby Boomer generation of pathologists.

Baby Boomer Pathologists

A quick analysis shows why this will be true. Currently there are approximately 3,300 pathology groups in the United States and two-thirds of these groups have four or fewer pathologists.

Since about 30% of all pathologists are members of the Baby Boomer generation (and between 46 and 65 years old), it means that many of these pathology groups are beginning to plan for the retirement of at least one of their partner pathologists. This suggests that they will be motivated to look for sources of cash to buy out their retiring partners.

Collectively, the actions these independent pathology groups must take to accommodate the retirement plans of their Baby Boomer pathologists could trigger a large number of mergers and acquisitions during the next 12 to 36 months. In turn, this could be a factor in reshaping the anatomic pathology profession.

In that sense, the high prices paid for these recent acquisitions of anatomic pathology companies might be an early sign that the pathology profession is be poised to undergo major consolidation.


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