DIANON Acquires UroCor And Boosts Urology Share

DIANON Systems becomes the “big dog” in the market for urology-based AP services

CEO SUMMARY: Following years of intense competition for the diagnostic testing business of office-based urologists, DIANON Systems and UroCor will now join forces. The recently-announced merger creates a powerhouse anatomic pathology company in the urology-based diagnostics services market. This merger also demonstrates that the market for anatomic pathology services remains robust.

FOR MORE THAN THREE YEARS, DIANON Systems, Inc. has sought a marriage with UroCor, Inc. That courtship finally ended with the announcement on June 29 that the two companies would merge.

DIANON Systems will pay approximately $180 million to acquire UroCor. DIANON and UroCor had revenues of $95.7 million and $52.6 million, respectively, in 2000.

The deal is subject to regulatory clearance and shareholder approval. Post-merger, DIANON Systems will be the nation’s largest provider of diagnostic services to office-based urologists.

“Everyone’s quite excited about this deal,” stated Kevin Johnson, DIANON’s President and CEO. “For several years, we’ve posted a strong financial performance. UroCor has turned its financial corner and is also doing well. That’s a great foundation to build upon.”

Within the anatomic pathology profession, the DIANON-UroCor merger demonstrates that the national market for pathology services continues to be robust. Johnson believes that the sum of the two companies will be more than the parts.

“Both companies are known and respected for outstanding quality and customer service,” observed Johnson. “Because of our similar business structures, there is significant opportunity for cost synergies and cross-selling to increase overall sales volume.”

“DIANON is focused on five clinical specialties—urology, gastroenterology, oncology, dermatology, and ob-gyn,” he said. “The diagnostic testing services performed by UroCor’s main lab in Oklahoma City will be broadened to include these five specialties.

“I would also like to point out that UroCor has an excellent team of pathologists and laboratory technologists,” explained Johnson. “With today’s tight labor market, that’s an invaluable asset that will play an essential role in supporting the continued growth of our combined company.”

Broadening Lab Services

DIANON already has experience at taking a single-specialty anatomic pathology laboratory and broadening its service menus. In recent years, DIANON has quietly built a network of five laboratories that complement its main lab facility in Stratford, Connecticut.

“We’ve had the opportunity to do strategic lab acquisitions. In every case, we’ve expanded the diagnostic services offered from those labs,” noted Johnson. “These labs are linked by a uniform information system. Over time, each of these labs has seen a hefty increase in business volume.”

Although both UroCor and DIANON have competed against each other for years, each company had a very different business strategy. UroCor was organized exclusively to serve the needs of office-based urologists. It wanted to offer both diagnostic services and therapeutic products to urologists. It was also willing to provide administrative services, such as billing and collections, as a way of becoming a value-added partner to its urologist clients. (See TDR, June 23, 1997.)

Five Clinical Specialties

In contrast to UroCor’s single-specialty business focus, DIANON Systems aimed at providing anatomic pathology and clinical lab testing services to the five key medical specialties mentioned earlier.

The competitive point of intersection was urology. Sales reps from both companies worked hard to convince urologists to use one lab over the other. Both companies devoted considerable resources to this sales battle.

During the first half of the 1990s, UroCor’s strategy played out well. At a time when financial turmoil and widespread bankruptcies plagued commercial laboratories across the country, UroCor was growing and profitable. During this time, it was listed four consecutive years as one of Inc. Magazine’s “Five Hundred Fastest Growing Private Companies.”

However, by 1998, two business decisions were coming back to haunt UroCor. Its foray into contract billing and collections for urology practices went poorly. The company pulled the plug on that business activity and posted a large loss.

Receivables Write-Down

Even as that was occurring, UroCor was dealing with the negative consequences of another business decision. As man- aged care contracts became an important part of the marketplace in the mid- 90s, UroCor had decided to bring in specimens from cities where they were not a contract provider.

However, getting paid by these managed care plans proved to be an impossible task. During 1998 and 1999, the company was forced to write-off large amounts of its receivables. It was not until 2000 and 2001 that UroCor began to again post profits.

During this same time, DIANON’s business strategy worked well. Since the mid-90s, the company has generated steady year-to-year gains in both revenues and net profits.

Its business strategy of serving five clinical specialties gave it a larger business base. Also, DIANON decided that it would not pursue specimens until it was a managed care contract provider. Accordingly, it spent more than two years working with a number of large health plans. Notably, it earned carve-out status with Aetna-U.S. Healthcare and Oxford Health Plans. Specimens generated by these contracts have made a substantial contribution to DIANON System’s revenue growth.

Impact On Pathology

For the anatomic pathology profession, the merger of DIANON Systems and UroCor has interesting consequences. It shows that the marketplace continues to support national anatomic pathology (AP) companies. Specimen volume growth by both companies has been consistent in recent years. These specimens are coming at the expense of local pathology group practices, which are failing to react to the changing competitive service levels introduced in their area by national AP companies.

THE DARK REPORT believes that the success of national anatomic pathology companies reflects a shift in thinking by growing numbers of office-based physicians. These doctors perceive that they get a greater range of clinical and operational services from national AP firms.

For local pathologists to compete with the national AP firms on a level playing field, it will require the creation of more regional pathology super-groups. This provides the operational support and resource base necessary to offer expert pathology subspecialty services to clinicians.

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