New Competitors Line Up In Oncology Marketplace

Genzyme is the latest company to invest big bucks in oncology diagnostics

CEO SUMMARY: Local pathology groups are advised to more closely track developments in the national market for oncology testing. Not only is big money targeting cancer testing, but a number of nimble, entrepreneurial start-up companies have begun to compete for specimens. Genzyme’s acquisition of IMPATH validates this trend and promises to bring more change to the anatomic pathology marketplace.

IT SEEMS A GOOD NEWS/BAD NEWS story is developing which will have significant impact on the anatomic pathology profession in the United States.

The good news is known to all. Expectations are that aging baby boomers, combined with new health- care technologies, will make oncology a high-growth segment within our health- care system. Because of the role played by anatomic pathology in the diagnosis of most cancer cases, this bodes well for the future of the profession.

The bad news is that the existing business model for most anatomic pathology services—the independent pathology group practice based in a community hospital—may find itself unable to vigorously compete with new competitors already lining up in today’s oncology marketplace.

Genzyme Corporation’s impending acquisition of IMPATH, Inc. is powerful evidence that oncology is attracting serious investors. In recent years, as much as $2 billion has been invested by investors to support new business models to provide diagnostic services in the oncology marketplace.

As noted on pages 2-4, three different companies have invested $1.65 billion to position themselves in the diagnostics marketplace during the past 13 months, . They are Genzyme ($215 million to buy IMPATH), AmeriPath ($840 million buy-out by an equity investment company), and Laboratory Corporation of America ($590 million to acquire DIANON Systems, Inc.).

More New Competitors

However, the tally of new competitors in oncology diagnostics shouldn’t stop there. U.S. Labs, Inc. of Newport Beach, California was launched a few years ago specifically to provide sophisticated cancer diagnostics to community hospital-based pathologists. Venture capitalists have invested tens of millions of dollars in this fast-growing company.

Another anatomic pathology start-up of recent years is AD Path Labs, based in Southern California. Its business model emphasizes regionalized histology in support of client pathology groups. AD PathLabs has received substantial amounts of capital from venture capital firms.

Another new national anatomic pathology firm is CBLPath, Inc., headquartered in Ocala, Florida. This firm launched last summer and its entrepreneurs include former executives from DIANON.

Potential Change Agents

When looking at the new competitors—and new types of business models—in cancer diagnostics, two other emerging players should be recognized. One is IMPAC Health Systems, which purchased Tamtron and IMPATH’s Cancer Registry business from IMPATH last December. Although IMPAC’s primary business is healthcare information systems, it is crafting a “total” oncology solution that may eventually lead it into the actual diagnostics.

Another developing trend involves physician groups in such specialties as urology or gastroenterology which hire an anatomic pathologist. The goal is to internalize anatomic pathology testing.

The other potential player is G.E. Medical Systems Information Technologies (GEMSIT). Last summer it acquired Triple G Systems of Toronto, Canada. Triple G offers a laboratory information system product. GEMSIT is a major player in radiology informatics and radiology instruments.

While recognizing both IMPAC and GEMSIT are informatics companies, it is possible that these two companies could develop a different cancer-testing business model. Because this model incorporates their informatics technology and provides a perceived competitive advantage, both companies would have an incentive to help entrepreneurial pathologists launch such a business—one which would compete against existing, local pathology group practices.

Another developing trend involves a new business relationship between physician groups and anatomic pathologist. In recent years, some forward-looking urology and gastroenterology medical group practices have shown an interest in hiring an anatomic pathologist to work within the group. The goal is to internalize anatomic pathology testing and allow the specialty group to bill for it directly.

The number of specialty groups taking this approach seems to be increasing. It is supported by another new phenomenon: newly-emerging anatomic pathology companies organized to pro- vide contract management services for the specialty groups’ histology and pathology needs. THE DARK REPORT is aware of two such companies, operating in two different states.

Target: Oncology Testing

These examples provide intriguing evidence that a variety of companies are targeting the oncology marketplace. In some cases, their strategy is exclusively focused on offering services to diagnose and monitor cancer patients. In other cases, performing anatomic pathology services is done to complement the company’s core business services.

For example, there is plenty of evidence to support a conclusion that Genzyme purchased both IMPATH (diagnostics) and Ilex Pharmaceuticals (therapeutic drugs) because it wants to offer lab tests to identify cancer, then be in a position to offer the referring physician those prescription drugs appropriate for the newly-diagnosed patients. (See this article.)

Further, because it is primarily a pharmaceutical company, Genzyme wants to access tissue specimens from cancer patients that it can use for research and development. IMPATH provides a way for Genzyme to identify sources of tissue, obtain informed consent from patients, then harvest the tissues.

Acquiring IMPATH also allows Genzyme to buy immediate access to IMPATH’s 2,500 hospital clients and physicians who have referred cases. This access comes without the time and expense otherwise required of Genzyme to hire sales reps and build its cancer diagnostic testing business from scratch.

Change To The Status Quo

As identified in this briefing, the cancer testing marketplace is about to be changed by at least three new threats to the status quo. First is the arrival of Wall Street-backed national pathology labs, which made a collective investment of $1.6 billion in just 13 months to position themselves in oncology diagnostics.

Second are the smaller start-up anatomic pathology companies. Each has a business strategy and a slightly different business model. But they all share the same goal: capture specimens and market share currently going to locally-based pathology group practices.

The third threat is from non-traditional competitors. Whether it is healthcare IT companies like IMPAC or GEIMS or urology, gastroenterology, and dermatology specialty practices, these types of companies have a financial incentive to create new anatomic pathology arrangements which help them share in the profits of direct testing for cancer.

Across the nation, local pathology group practices face a new challenge in two dimensions. In the first dimension, there will be a steady increase in the number of competitors sending sales reps into the community to convince local physicians to send their anatomic pathology specimens to their firm.

As identified in this briefing, the cancer testing marketplace is about to be changed by at least three new threats to the status quo.

In the second dimension, these companies are developing new business models for providing anatomic pathology services. No one should be surprised if at least one of these business models turns out to meet the needs and expectations of referring clinicians better than today’s standard business model—that of the pathology group based in a neighborhood hospital. When this happens, local pathologists need to be ready to incorporate the best qualities of this business model into their own group.

Response Of Local Paths

Such changes may require local groups to consolidate, to raise and invest more capital, to develop a professional sales and marketing team, and to establish other business resources currently not found in most pathology group practices. Failure to do so in a timely way will put local pathologists at a competitive disadvantage in the outreach market.

However, as with every good news/bad news story, there is opportunity along with the risk. Some local pathology groups already recognize the need to respond to changes in the oncology testing marketplace. They are developing strategies and building the resources necessary to defend their turf and expand their share of the market.

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