"Lab Industry Briefs"

Health Line Clinical Labs, ChromaVision, Cytyc, TriPath, Quest Diagnostics

HEALTH LINE CLINICAL LABS SIGNS $10 MILLION FRAUD SETTLEMENT WITH FEDS

DESPITE THE EVIDENCE that packing unnecessary tests into test panels is not acceptable to Medicare and Medicaid authorities, some laboratories continue the practice.

Health Line Clinical Laboratories, Inc. (HLCL) of Burbank, California is the latest lab company to pay a significant fine to settle allegations of Medicare/Medicaid fraud and abuse. On April 21, 2004, the United States Attorney for the Northern District of California announced a $10 million settlement with HCL and its owners, Aramis Paronyan, M.D. and Netalee Lalabekyan. Lalebekyan is married to Paronyan.

Starting in January 1, 1996 through September 20, 2003, HLCL was accused of adding five tests to “comprehensive panels and profiles that were ordered by physicians from HLCL.” The tests added were apolipoprotein A & B, 5’ nucleotidase, zinc protoporphyrin, and extractable nuclear antigen tests. Medicare and Medicaid investigators stated these tests were “medically unnecessary.”

This settlement was triggered by a whistleblower lawsuit. The qui tam lawsuit was filed by Kim Jenkins and Timothy Mills. Both are former sales representatives from HLCL. Jenkins and Mills filed their lawsuit on January 30, 1998 in Federal District Court. Federal prosecutors formally joined the qui tam lawsuit on October 22, 2001 and filed their own complaint on December 17, 2001.

Jenkins and Mills will receive 20% of the $10 million settlement, or $2 million. As defendents, HLCL, Paronyan, and Lalebekyan will pay $160,000 for expenses and legal fees of the whistleblowers.

Health Line Clinical Laboratories has also signed a corporate integrity agreement with the Medicare and Medicaid programs. As a result of these concessions, federal prosecutors will not seek revocation of HLCL’s license to provide lab testing services to the Medicare and Medicaid programs.

HLCL has been a fast-growing laboratory in California. It was formed in the mid-1990s, during the time when managed care pricing pressure was greatest on laboratories. HLCL’s annual revenues are estimated to be around $35 million.

CHROMAVISION LAUNCHES MAJOR RESTRUCTURING, RAISES $21 MILLION

MAJOR CHANGES ARE UNDER WAY at ChromaVision Medical Systems, Inc., the manufacturer of a cellular imaging system used by anatomic pathologists.

The company, based in San Juan Capistrano, California, raised $21 million by selling additional stock to a “limited number of accredited investors” last month. ChromaVision stock is publicly traded on NASDAQ under the symbol CVSN.

ChromaVision’s primary product is the ChromaVision ACIS® (for auto- mated cellular imaging system). In recent years, it has sold this system to anatomic pathology groups. ACIS uses “unique patented technology that detects, counts, and classifies cells of clinical interest based on color, size and shape to assist pathologists in making critical medical decisions.” The system has met with limited clinical acceptance since its introduction.

In response to the tepid market demand for the ACIS instrument system, ChromaVision is undergoing a major shift in its strategic business direction. The company will no longer sell ACIS instruments to pathology groups and laboratories. It is planning to establish its own laboratory and perform those clinical procedures for which the company feels ACIS provides a clear diagnostic benefit.

As ChromaVision implements this new strategy, it will be creating a new business model in anatomic pathology. The company has watched the growth of IMPATH, Inc. and US Labs, Inc. during the past decade. Its own business model will incorporate what it considers to be the strongest elements of the IMPATH and US Labs business models.

CYTYC–TRIPATH WAR SHIFTS TO A NEW FRONT: QUEST DIAGNOSTICS

PROBABLY THE MOST RANCOROUS competition among lab industry vendors is the ongoing liquid prep Pap “war” between Cytyc Corporation and TriPath Imaging, Inc.

Both companies offer laboratories a test kit that uses a liquid preparation technology to produce a thin-layer Pap smear slide. Cytyc holds the largest share of the U.S. market in liquid prep Pap testing, for two reasons. One, Cytyc was first to market, offering its ThinPrep® test kit to laboratories several years before TriPath’s SurePath™ received FDA clearance.

Second, Cytyc signed an exclusive agreement with Quest Diagnostics Incorporated prior to 2000. As part of this agreement, Quest Diagnsotics received favorable pricing from Cytyc, was issued warrants for Cytyc stock, and agreed to use only Cytyc’s products during the life of the contract.

Recently, two things happened which will stimulate a change in the competitive status quo between Cytyc and TriPath Imaging. First, the original contract between Cytyc and Quest Diagnostics expired. It was renewed on different terms.

Second, on May 6, Quest Diagnostics and TriPath Imaging announced a non-exclusive contract. Quest Diagnostics will begin using TriPath’s SurePrep kit and its PrepStain™ slide processor. Quest Diagnostics will also evaluate TriPath’s FocalPoint Pap analyzer (formerly called the AutoPap™ system). FocalPoint is approved by the FDA to perform automated primary screening of Pap smear slides.

There are two other important aspects of the agreement. One is that both companies will work in tandem to educate physicians about the SurePath technology. This probably includes joint sales calls by reps from the two companies. This contract provision means that, along with Cytyc’s ThinPrep Pap test, Quest Diagnostics is now willing to educate physicians about other Pap testing options besides ThinPrep.

Second, the agreement includes a provision for TriPath Imaging to issue common stock warrants to Quest Diagnostics. Quest Diagnostics can also earn additional incentive warrants as it achieves specific milestones. Together, these contract provisions provide a important financial incentive for Quest Diagnostics to increase the volume of TriPath SurePrep testing it performs.

Because Quest Diagnostics does as many as 15 million Pap tests annually, it is in a position to squeeze lower prices and other concessions from both Cytyc and TriPath Imaging.

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