Another Lab Acquisition: LabCorp To Buy DIANON

In purchasing DIANON, LabCorp signals its interest in building anatomic path revenue

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CEO SUMMARY: Laboratory Corporation of America Holdings will pay almost $598 million to buy DIANON Systems, Inc. of Stratford, Connecticut. With this move, anatomic pathology becomes a high profile growth target for LabCorp. During the past eight years, DIANON Systems has built a national business providing highly specialized anatomic pathology and esoteric testing services to office-based physicians.

IT’S ANOTHER SIGN of the swift changes now transforming the profession of anatomic pathology.

Laboratory Corporation of America Holdings announced an agreement to acquire DIANON Systems, Inc. on November 11, 2002. In an all-cash offer (which includes using approximately $50 million in DIANON cash), LabCorp will pay approximately $598 mil- lion, or $47.50 per share. This is an 18% premium over DIANON’s closing stock price of $40.19 on November 8.

The transaction must be approved by DIANON’s shareholders and pass review by regulators. Both companies believe the approvals will be obtained and the acquisition can be completed by the end of March 2002.

This sizeable investment reflects LabCorp’s commitment to expanding its activities in the market for specialized anatomic pathology and esoteric testing services. LabCorp’s Chairman and CEO, Thomas P. Mac Mahon, described the value he believes will come from combining the resources of LabCorp and DIANON.

“DIANON Systems is a company I’ve admired for many years,” stated Mac Mahon. “It fits extremely well with our strategic direction at LabCorp because of its established role in cancer diagnostics.

“Specifically, we believe that, in the next two to five years, new technologies in testing for cancer will profoundly change the way patients are diagnosed and treated for cancer,” he explained. “DIANON fulfills our dream of having a company within the LabCorp family that is totally devoted to cancer. It complements our diligent efforts to execute relationships involving oncology-based testing with strategic partners such as Correlogic Systems, Celera Diagnostics, EXACT Sciences, and Myriad Genetics.”

DIANON To Retain Identity

At this time, LabCorp intends to operate DIANON Systems under its existing name and as a separate marketing vehicle. “The opportunity is to combine LabCorp’s skills with those of DIANON’s in the outpatient market for oncology services,” noted Mac Mahon.

“In particular, we plan on taking DIANON’s best practices with its CarePath™ information product and its top-performing sales system and matching them with LabCorp’s distribution channels,” he added. “LabCorp’s access through managed care contracts can generate additional specimens for DIANON. At the same time, DIANON’s coverage in certain regions around the country opens new opportunities for other lines of testing offered by LabCorp.”

Business Model

The business model LabCorp intends to use in developing DIANON will be based on its Center for Molecular Biology and Pathology (CMBP) in Research Triangle Park, North Carolina. “During the past 13 years, we’ve used the CMBP business model to evaluate and introduce new diagnostics technologies in infectious diseases,” stated Bradford T. Smith, Executive Vice President at LabCorp. “Throughout the last decade, this business model has helped us become an early leader in such areas as HIV and Hepatitis C testing.”

LabCorp hopes to duplicate CMBP’s clinical success in infectious disease. It believes oncology is becoming one of the biggest growth opportunities in diagnostic testing. LabCorp plans to build a specialty oncology business around DIANON.

“Two things will drive the cancer market,” predicted Smith. First, researchers are using the human genome map to develop ways to assess a patient’s risk to disease and the predisposition they may have to specific diseases. Much of this new research is aimed at cancer and will lead to a growing number of better tests for detecting and assessing different types of cancer.

Cancer Diagnostics

“Second, population demographics predict a growing number of cancer cases throughout this decade,” continued Smith. “Together, these two trends are expected to fuel a substantial demand for cancer diagnostics. LabCorp wants to put in place the resources necessary to meet this demand and support the evolving needs of physicians and their patients.”

LabCorp is betting almost $600 million that DIANON can be the platform around which it will build its cancer testing business. As it integrates DIANON, LabCorp will face several challenges.

First, DIANON’s business is organized to compete for tissue specimens that originate in physicians’ offices. It has developed a sales and marketing strategy that is different from that used by most commercial labs to compete for blood testing specimens.

Among other things, DIANON uses the “uncola” and “we’re number two—we try harder” marketing strategies developed by Seven-Up and Avis to compete against Coca Colaand Hertz, respectively. DIANON has positioned itself as a specialized lab provider that is not one of the two blood brothers. Post-merger, it will be a LabCorp business unit. Can DIANON keep its identify and retain the majority of its existing clients?

Second, LabCorp states that it wants to incorporate the best of DIANON’s CarePath information system. However, integration of information systems across multiple lab sites has been the source of much trouble and grief for most lab companies. Can LabCorp integrate the best features of CarePath across its other business divisions in a timely and cost-effective manner?

Other challenges, including antitrust, may pop up. But at this moment in time, executives at LabCorp and DIANON are optimistic that this is a doable merger with lots of potential.

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