AP’s “High & Mighty” Firms Hit Tough Times

Three public anatomic pathology firms undergo individual transformations

CEO SUMMARY: In the years between 1995 and 2002, public companies AmeriPath, DIANON Systems, and IMPATH built revenues and profits at a blistering pace. During this time period, these three firms captured enough market share to do almost $1 billion of anatomic pathology business in 2002. But that run of business success has ended. Each of the three companies has been dealing with unique circumstances.

IN CASE ANY PATHOLOGIST HAS FAILED to notice, the past 12 months have not been kind to the three public companies organized to provide anatomic pathology services across the nation.

During the years 1995 to 2002, AmeriPath, Inc., DIANON Systems, Inc., and IMPATH, Inc. posted amazing year-over-year rates of growth in specimen volume, revenues, and profits. In watching this occur, it was my belief that the success of these companies in the pathology marketplace was evidence that the traditional market for anatomic pathology was changing.

Adverse Impact Of Change

These market changes would increasingly have an adverse effect on local pathology group practices—if they didn’t implement a strategic response. That is why THE DARK REPORT was first to describe these new market characteristics and provide useful business intelligence to pathology groups, allowing them to develop
effective business strategies to counter these trends.

But every run of luck and every string of victories must eventually end. After five to seven years of rapid and unbroken growth, each of these three national pathology companies has “hit the wall” in some fashion.

For AmeriPath, its business model did not generate enough cash and its share price was not performing well enough to meet the company’s strategic needs. In order to infuse more capital in the company, AmeriPath structured a sale to Welsh, Carson, Anderson, & Stowe, a private equity company based in New York City. This transaction was completed earlier this year and AmeriPath became a private company. (See TDR, March 3, 2003.)

For DIANON Systems, Inc., it was the decision of the shareholders to sell the business to maximize its value. Last fall, Laboratory Corporation of America, Inc. became the willing buyer and paid almost $600 million to acquire DIANON and its revenue base of $190 million per year. (See TDR, November 18, 2002.)

With IMPATH, Inc., problems that placed it in bankruptcy this week have more to do with management decisions and corporate philosophies than adverse changes in the laboratory marketplace. (See pages 2-3 in this issue.) In fact, competing companies which copied its business model (offering lab services for difficult-to-diagnose cancers to community hospital-based pathologists and oncologists) continue to grow and prosper.

Radical Changes

So, in the space of 12 months, each of the three national anatomic pathology companies has undergone some type of radical restructuring. AmeriPath continues as a private company. DIANON Systems is being rapidly absorbed and consolidated within LabCorp. IMPATH’s specific fate is still unknown, but there it is highly unlikely that it will survive in its current form.

My assessment is that the events transforming AmeriPath, DIANON, and IMPATH are unrelated to the marketplace for anatomic pathology services. The evolution in healthcare and physician needs which supported the specimen growth of these three companies during the past five to seven years remains on course today.

Office-based physicians are increasingly willing to use anatomic pathology services offered by national lab companies. This is a change in physician referral patterns which must be recognized by anatomic pathology groups.

Local pathology groups now have national competitors attempting to capture anatomic pathology (AP) specimens originating in physicians’ offices. This is a battle and the competition is fierce. Local pathology group practices must recognize this fact and develop effective business strategies. Failure to do so will contribute to a possible decline in their core business.

It would be a mistake for pathology groups to interpret the changes at AmeriPath, DIANON Systems, and IMPATH as proof that the sales and marketing models used by these companies are no longer relevant. The restructuring activities at these three companies in the past 12 months are directly linked to the decisions and capabilities of their management teams, not because of any sudden shift in the marketplace itself.

To the contrary, studies of the anatomic pathology marketplace by experienced business minds validate the opportunity to build a profitable business by marketing AP services directly to physicians’ offices. That is precisely why LabCorp paid more than one-half billion dollars to buy DIANON Systems. It is why Quest Diagnostics Incorporatedis hiring pathologists and expanding its AP sales and marketing team.

New, Different Approach

I predict that we will see several well-financed new companies enter the national marketplace for AP services during the next 24 months. If these companies are well-managed, they should have the same kind of success that AmeriPath, DIANON Systems, and IMPATH enjoyed between 1995 and 2002.

For local anatomic pathology groups, the challenge will be to wake up all the pathologist-partners and develop business strategies which protect market share and generate the cash flow group practices need to acquire new diagnostic technology and offer it to local physicians.


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