Diagnostic Companies About To Undergo Change

Extensive shake-up to diagnostics marketplace expected as consolidation trends continue

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CEO SUMMARY: Diagnostic companies are undergoing the same consolidation wave as commercial laboratories and hospitals. Beckman’s acquisition of Coulter provides an early example of how diagnostics companies will use acquisitions to create a comprehensive product line. Other surprising mergers between diagnostic companies are expected.

CONSOLIDATION ACTIVITY WITHIN the diagnostic industry is about to intensify. As it does, the entire structure of the diagnostics industry will evolve into radically different forms, affecting how laboratories acquire and use diagnostic instruments.

THE DARK REPORT believes that the acquisition of Boehringer Mannheim by Roche Holdings, Ltd. in May will trigger a cascade of significant diagnostic acquisitions during the next 18 months.

Several market trends make consolidation in the diagnostics industry inevitable. First, continuing consolidation within healthcare is creating a new class of healthcare provider: multi-billion dollar corporations with national reach. These range from for-profit hospital companies like Columbia/HCA and Tenet Healthcare to MedPartners, PhyCor, and HealthSouth.

Matching the growth of multi-billion dollar corporations are insurance plans such as Aetna/US Healthcare, Cigna and Kaiser. They are developing local healthcare products from a national platform. All of these national firms, with their multi-billion dollar purchasing clout, want diagnostics suppliers who can service local markets from coast to coast and have the product volume to offer the lowest possible prices.

“Niche players won’t survive in the diagnostics industry as the marketplace evolves towards managed care.”
—Andrew Schmidt

Second, to survive the consolidation process, the remaining diagnostic companies must have a comprehensive product line to offer their customers. Niche players will fall by the wayside.

Diagnostics customers will increasingly want a single source vendor solution. This is becoming evident to diagnostics vendors. As buying consortiums like Premier and VHA intensify their efforts to squeeze costs from vendors, diagnostics companies with a broad line of products are more favorably positioned to win the business.

Third, the cost of developing new technology continues to spiral upward. This means that any diagnostics company which wants to remain at the front of the technology curve must invest great sums of money in research and development. Only size provides sufficient cash flow to finance such efforts.

“Expect these trends to actively shape and transform the diagnostics industry as we know it today,” stated Andrew Schmidt, Principal of Kellan Corporation, a consulting company in Alpharetta, Georgia. “Size and breadth of product offering will rapidly become critical success factors for any surviving diagnostics company.

“Consolidation activity among diagnostic companies will accelerate the impact of these trends,” he said. “I believe that Beckman’s acquisition of Coulter is a response to the Roche acquisition of Boehringer Mannheim only four months ago. Once Roche changed the historical balance between the major diagnostics companies, competitors had to act. We have not seen the last of it. For example, what will Abbott do in response to these acquisitions? Certainly they have the checkbook and the motivation to maintain their sizeable market share.

“Another interesting company to watch will be Johnson & Johnson Clinical Diagnostics,” noted Schmidt. “Traditionally this company had a close relationship with Coulter. I am curious as to why Johnson and Johnson did not acquire Coulter, especially since J&J has a history of using acquisitions to build their product line.”

Anticipating Mergers

According to Schmidt, one key aspect to anticipating possible mergers among diagnostics companies is to understand the strengths and weaknesses of each company’s product line. “If I were only a chemistry-based diagnostics company, I would be concerned by the Beckman-Coulter merger. I would look to combine in some fashion with a company offering hematology instruments.”

Schmidt believes that single-line diagnostic companies will be at a disadvantage to vendors offering a full menu of products. “Look at how acquisitions have changed hematology in recent years. Cell-Dyn, Technicon and now Coulter were all purchased. That leaves Sysmex. It would be reasonable to assume that Sysmex is even now looking for an appropriate partner.”

Schmidt believes that larger diagnostics companies will also react to Beckman’s acquisition of Coulter. “I see the Beckman-Coulter marriage as affecting Roche and Boehringer Mannheim. They offer only chemistry. In my experience, there is a distinct advantage to approaching a prospective customer and offering a bundled solution. I would bet that Roche and Boehringer are looking at ways to accomplish that.”

“If you agree that the market is asking for a fuller range of diagnostic solutions from one vendor, then you can speculate about some interesting combinations,” he went on. “From my perspective, a joint venture between Abbott and J&J Clinical Diagnostics would provide some interesting competitive benefits. It matches Abbott’s strengths in hematology with J&J’s solid line of chemistry products.

“I don’t think that one would sell to the other, but I do think that economic forces will cause them to explore ways that they can profitably work together,” predicted Schmidt. “Because market forces are transforming healthcare at a rapid pace, you should not be surprised to see some unusual pairings announced during the next year.”

THE DARK REPORT believes that the coming wave of consolidation in diagnostics will actually benefit clinical laboratories. But clinical laboratory executives must be prepared for the short-term turmoil and dislocation such acquisitions frequently force upon their customers.

Becton Dickinson Seeks Acquisitions

CLATEO CASTELLINI, CEO of Becton Dickinson, perfectly illustrates the coming acquisition wave among diagnostics companies. In an interview with the Wall Street Journal last week, Castellini outlined the company’s plans to double in size over five years. One source of growth: acquisitions of medical-device and diagnostic companies.

The reporter writes “Most of the companies in the…diagnostic-equipment business are highly innovative, but are small and have a difficult time getting access to the healthcare industry’s big buyers, such as Columbia/HCAHealthcare Corp. and large hospital buying groups.”

Both Castellini and the reporter recognize that only the larger diagnostics companies will have ready access to healthcare’s multi-billion companies. This will fuel consolidation within the diagnostics industry. Beckman’s acquisition of Coulter can be understood by the need to achieve size and market clout if any diagnostics supplier is to access large healthcare systems. Becton Dickinson recognizes this market dynamic and is positioning itself to achieve the necessary size and resources to capture market share.

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