IMPATH Has a Buyer: Genzyme Pays $215 Mil

Latest entrant into oncology diagnostics may intensify marketplace competition

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CEO SUMMARY: Two unexpected things happened in IMPATH’s Chapter 11 bankruptcy action. First, it attracted a buyer willing to pay the premium price of $215 million for its assets. Second, the buyer was not another laboratory company. Rather, it is a new entrant into the oncology diagnostics marketplace. This raises interesting questions as to Genzyme’s strategies—and how it may change the AP marketplace.

WHEN IT COMES to anatomic pathology (AP) services, oncology continues to attract big money bets from major corporations.

The latest entrant is Genzyme Corporation. On March 1 it announced it had signed an agreement and had become the lead bidder to purchase the assets of IMPATH, Inc.’s physician services business division. In a deal worked out under the auspices of IMPATH’s bankruptcy court judge, Genzyme will pay approximately $215 million. IMPATH filed a Chapter 11 Bankruptcy action on September 23, 2003. (See TDR, September 29, 2003.)

Genzyme’s investment of $215 million to acquire the anatomic pathology-based business of IMPATH follows by just 13 months the acquisition of another anatomic pathology company. In February 2003, DIANON Systems, Inc. was purchased by Laboratory Corporation of America. LabCorp paid around $598 million for DIANON. Also in 2003, AmeriPath, Inc. was purchased. In a transaction which took that anatomic pathology company private, Welsh, Carson, Anderson & Stowe paid approximately $840 million.

Collectively, these three deals represent an investment of almost $1.65 billion in companies which provide anatomic pathology services! Further, all three acquisitions occurred within the short span of 13 months.

The message to the pathology profession couldn’t be clearer: oncology testing is expected to be a fast-growing and lucrative market—and big corporations want to compete for that business. Moreover, these big companies will invest major amounts of money on sales and marketing to capture specimens currently going to local pathology groups. This means more intense competition for anatomic pathology specimens.

Laboratory Acquisitions

Genzyme already has experience at buying market share in laboratory testing. In the mid-1990s, it became the dominant commercial lab company in cytogenetic testing by acquiring, one after another, almost all the nation’s specialty laboratories offering pre-natal and post-natal cytogenetic tests. (See TDR, February 26, 1996.) It holds that market position today, eight years later.

In offering to pay $215 million for IMPATH, a company currently crippled by a variety of problems, Genzyme demonstrates its belief that oncology will provide the steady growth and profits needed to recoup this sizeable investment.

Genzyme’s actions reinforce those of LabCorp. Following its acquisition of DIANON Systems last January, LabCorp Chair and CEO Thomas Mac Mahon, granted an exclusive interview with THE DARK REPORT. Mac Mahon made two powerful statements about the relationship of oncology to the success of anatomic pathology.

First, in explaining LabCorp’s interest in DIANON Systems, he said “I believe any laboratory seeking to be a leader in laboratory medicine must be a leader in cancer diagnostics. And if a lab is to be a leader in cancer diagnostics, it must have a tissue business and work closely with pathologists to evaluate those tissue specimens.”

Next, Mac Mahon pointed out that “to diagnose cancer requires tissue. To me, the greatest opportunity for a pathologist, moving forward, is to get control of molecular diagnostics. Pathologists should be expanding both their skill base and their business base, not only to read tissue, but to read tissue as it relates to molecular biology.

“Molecular pathology is expected to be the cutting edge of medicine as we move forward,” he continued. “On-going scientific advances in genomics and proteomics guarantee this will be true…[LabCorp] wants to be a leading company in tissue-based diagnostics and recognizes the need to develop our capabilities in anatomic pathology. ”

Mac Mahon’s statements are both clear and powerful. Going forward, oncology is expected to play a leading role in laboratory testing. Control of tissue is a necessary business strategy for any laboratory that wants to compete in the oncology testing marketplace.

More Competition Ahead

Competition for oncology specimens will increase. More specifically, there are competitive threats for specimens originating in both physician’s offices and community hospitals. The fact that professional money managers are willing to support $1.65 billion of investment into three anatomic pathology companies in only 13 months sends an unmistakable message. Cancer testing has a bright future, one which is expected to generate more profits than routine chemistry and hematology testing.

What is interesting is that, for the most part, anatomic pathologists are not among the investor-leaders and top executives in these enterprises. That means it is less likely that new companies offering diagnostic tests for cancer will respect traditional relationships between labs and clinicians. If this proves true, then the next few years may bring some of the fiercest competition for lab testing business yet seen in the lab industry.

Is Genzyme’s Strategy to Pair Up Diagnostics with Therapeutics

GENZYME’S ACQUISITION OF IMPATH is only part of a recent buying spree that may have significant impact in the market for laboratory testing services.

Just four days before Genzyme’s announcement about its status as the leading bidder to buy IMPATH, it released the news that it would pay approximately $1 billion to purchase Ilex Oncology Inc., a drug development company with one cancer drug on the market and several others in the pipeline.

That acquisition was preceded three days earlier by another announcement, on February 23, that Genzyme had purchased “substantially all the assets” of Alphigen, Inc., a cytogenetic laboratory based in Pasadena, California. Although the purchase price was not disclosed publicly, informed sources say that Genzyme paid in the range of $40 million for Alphigen, which had annual revenues totaling between $20 and $25 million.

Genzyme already has a sizeable national business in cytogenetics. The Alphigen acquisition is believed to be an opportunity for Genzyme to buy additional market share and keep its dominance in this diagnostic testing sector.

Genzyme’s Strategy

Of more immediate interest to both laboratory directors and pathologists is Genzyme’s motive in paying $1.2 billion dollars in four days for a company with cancer drugs and an anatomic pathology company which specializes in cancer diagnostics. Genzyme executives have yet to make extensive comments about their strategy for developing the cancer drug business of Ilex Oncology and the cancer diagnostic services of IMPATH. But there are tantalizing hints.

One clue is Genzyme’s acquisition, last summer, of SangStat Medical Corporation. It paid $600 million to acquire the company. Among its drug products which are either on the market or in development, are several promising drugs in the areas of autoimmune, hematology/oncology, and immunosuppression. These drugs complement a main drug offered by Ilex, which is CAMPATH® . In the United States, CAMPATH is approved for use in the treatment of B-cell chronic lymphocytic leukemia (B-CLL).

One obvious conclusion is that Genzyme is building a portfolio that includes several drugs useful in treating leukemia and lymphoma. That makes IMPATH useful to Genzyme. IMPATH’s case mix consists primarily of leukemia/lymphoma and breast cancer.

Selling Lab Tests & Drugs

Genzyme may have just placed a bet totaling almost $2 billion (for SangStat, Ilex Oncology, and IMPATH) that it can combine IMPATH’s cancer diagnostic capabilities with the oncology drugs in its portfolio. IMPATH’s relationship with community hospital-based pathologists and oncologists allows Genzyme to identify patients who could potentially benefit from one of its drugs—at the time that their cancer is diagnosed! It would then send out pharmaceutical reps to offer its therapeutic drugs to physicians treating those cancer patients.

Much has been written about the potential of pairing diagnostic laboratory tests with therapeutic drugs and offering both services to physicians under one company. Genzyme Corporation seems to be ready to pursue this strategy on a large scale.

Will Genzyme change the competitive market for oncology diagnostics with these acquisitions? If past history is an indication, the answer is probably yes. That’s because Genzyme has already built the nation’s largest business in cytogenetics and continues to successfully defend its market dominance. It has already demonstrated its ability to capture market share in cytogenetics. That makes it a credible threat in the market for cancer diagnostics.

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