National Anatomic Pathology Companies Continue to Grow

Local pathology practices have a template upon which to base their own growth strategies

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IT’S BOOM TIME IN ONE SEGMENT of the clinical laboratory world. The national anatomic pathology companies are posting record rates of
growth and profits.

The sustained and strong financial performance at DIANON Systems, Inc. and IMPATH, Inc. has not gone unnoticed by Wall Street. Share prices for the two companies have zoomed steadily upward since January.

At DIANON Systems, second quarter revenues and net income sky-rocketed by 28% and 66%, respectively. Revenues went from $19.1 million in Q2-99 to $24.4 million in Q2-00. Net income went from $0.9 million to $1.6 million during the same period.

DIANON’s stock now trades around $42 per share. Last fall, it was as low as $9 per share. The company predicts it will sustain a 25% growth in revenues through 2001.

New Pathology Products

DIANON’s new product is a hepatitis testing service for gastroenterologists. Called HepProgramT, it offers a comprehensive menu of immunologic, chemistry and esoteric molecular genetic assays packaged to meet the specific needs of gastroenterologists.

The company is offering this new testing package to the 1,000 gastroenterologists who currently are its clients. But DIANON is also pointing its sales force to the remaining 7,500 GI specialists who currently send no specimens to the company.

At IMPATH, revenue and earnings growth were equally strong. Second quarter revenues and net income increased 60% and 34%, respectively. The change in second quarter revenues was from $20.8 million to $33.4 million. Net income similarly climbed from $2.3 million to $3.1 million.

Stock Split At IMPATH

Investors have boosted IMPATH’s share price up from $14 in January to $43 recently. IMPATH did a stock split on August 29. Following the split, its share price remained in the low $40s.

But the more interesting story at IMPATH is that sales of its pathology- related services are picking up. IMPATH used clinical data generated from its AP caseload to create drug discovery and development tools. Revenues from these services are steadily climbing.

IMPATH’s efforts to package anatomic pathology data into added value products and services provides pathologists with a business template worth studying. The company is attempting to convert individual case data into useful clinical knowledge that has widespread application within the medical, research, and pharmaceutical communities. These product extensions allow it to generate additional profits from its core clinical services.

Although different in the way it services its widespread regional markets, AmeriPath, Inc. also reported strong gains in net revenue. Revenue increased 33%, to $55.4 million between Q2-99 and Q2-00.

Individual Path Practices

But AmeriPath, as a pathology physician practice management company, is the cumulative total of its individual pathology practices. Writedowns related to an AmeriPath pathology group in Cleveland caused net income to decline from $5.7 million in Q2-99 to $3.0 million in Q2-00.

For the anatomic pathology profession, the sustained multi-year success of DIANON Systems and IMPATH carries several important messages. First, these companies demonstrate that anatomic pathology (AP) services, particularly cases referred from outreach physician offices, represent a profitable and easily-grown business opportunity.

Second, investment in a professional sales and marketing program can generate steady revenue growth for pathology group practices. This is profitable new anatomic pathology business.

Solicit From Out-Of-Town

Third, the competitive marketplace for anatomic pathology services is evolving and becoming more complex. This has two consequences. It means that clinicians are learning to expect more sophisticated services from their AP provider. It also means that anatomic pathology groups that refuse to evolve with this changing market may find themselves outflanked by nimbler AP competitors from out of town.

THE DARK REPORT considers the business and financial performance of DIANON Systems and IMPATH to be worth the study of local pathology groups. Healthcare remains a “local business.” Thus, national AP companies work at a disadvantage when, as out-of-towners, they enter local markets and solicit biopsies from physicians practicing in the area.

Local pathology practices have an inherent competitive advantage against the national AP companies. Most local groups are hospital-based. Over the years, their pathologists have forged strong personal relationships with the clinicians practicing at these local hospitals.

This gives pathologists an important head start against sales reps representing national AP companies. First, local pathologists have pre-existing, even long-standing personal relationships with the physicians in their community. Second, their relationship is a doctor-to-doctor relationship, not a sales rep-to doctor relationship.

Local Physicians

THE DARK REPORT observes that specimens which fuel the rapid growth of DIANON Systems and IMPATH come from local physicians in communities throughout the United States. Generally, these are specimens which formerly went to the anatomic pathology group practice based in the nearby hospital.

For this reason, hospital-based anatomic pathology group practices should see the national AP companies as both a threat and an opportunity. The threat is the loss of local specimens, and the revenues associated with them, as sales reps of the national AP firms convince local doctors to do business with their company.

The opportunity is for hospital-based pathology groups to invest in professional sales and marketing programs. Such programs will deliver a steady growth in revenues, profits, and most importantly—partnership income distributions—to pathologists with the foresight to protect and expand their local market.


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