Wedding Between AutoCyte and NeoPath Will Spawn A Single Prep/Screen System

CEO SUMMARY: Various technologies that automate cytology and Pap smear screening entered the clinical marketplace during the last four years. Because managed healthcare views new technology with a more skeptical eye than fee-for-service healthcare, THE DARK REPORT has provided extensive analysis for our clients on how and why the market has embraced or rejected this technology. It is our belief that automated cytology technology represents a good case study as to how other diagnostics technology, such as total laboratory automation, must deliver if it is to succeed in the clinical marketplace. With the impending merger of AutoCyte and NeoPath, the market acceptance cycle for automated cytology technology will enter a new phase. More importantly, new generations of these automated cytology systems will begin to find clinical application in areas beyond Pap smear screening, such as anatomic pathology. It is this fact which makes the AutoCyte/NeoPath merger a significant event. This exclusive newsmaker interview with the top executive officer for each company allows them to tell their story directly to our clients and readers.

NOTE: Separate interviews were conducted by Robert L. Michel, Editor, with James B. Powell, M.D. and Alan C. Nelson, Ph.D. These individual interviews were combined for clarity to show the uniformity of business strategies and outlook shared by both men. Dr. Powell and Dr. Nelson reviewed and approved the resulting “three-way-interview” which you are about to read.

EDITOR: Gentleman, could you please explain why this merger between AutoCyte, Inc. and NeoPath, Inc. is taking place?

DR. POWELL: In simplest terms, officers and directors at both companies realized that joining forces would allow us to almost immediately bring to market a single, automated solution for Pap smear preparation and screening. We believe this is what customers want.

EDITOR: You describe a short-term goal which allows you to market your “integrated” system to clinical laboratories immediately. What long-term business strategies bring your two companies together? Those are the real keys to understanding this merger.

DR. POWELL: At AutoCyte, we’ve always believed that an effective cytology system must address, in a comprehensive way, all the sources of error in the current technology. This includes sampling, preparation, and screening. Image analysis is a key element in standardizing quality and eliminating screening errors. The merger brings together AutoCyte’s improvements to sampling and preparation with NeoPath’s comprehensive foundation of imaging technology.

DR. NELSON: Pathologists and cytologists can look beyond the immediate question of whether the AutoPap® Pap smear screener can do a better job than traditional methods. Actual clinical experience is providing that answer. But before cytology and anatomic pathology laboratories can move to a higher level of adding value to physicians and patients while controlling costs, they must have the capability to integrate and handle information.

DR. POWELL: Which is why AutoCyte has always believed digital imaging of cytology slides to be the end game. AutoCyte and NeoPath are joining forces to develop a fully integrated technology package that does five things for clinical laboratories.

EDITOR: Share these, please.

DR. POWELL: First, we believe that liquid preparation, performed on automated equipment, will both enhance Pap smear screening and offer cost benefits. Second, the ability to totally automate the primary screening of Pap smears continually improves with each enhancement to existing technology. Further, automated image analysis improves and builds upon the best of human screening alone.

DR. NELSON: The next three areas are what most laboratorians overlook with today’s technology capabilities. These are essential to understanding why our two companies believe the merger is a smart strategy.

DR. POWELL: Third, once screening is complete, the specimen must be archived. Currently this is done with glass slides. However, imaging technology can now allow a laboratory to archive an electronic record of the specimen. Fourth, clinical laboratories will need to serve physicians with telecommunication and telemedicine capabilities. Glass slides can’t do this. Electronic archives can. Fifth, there is a growing demand to match cytology and anatomic pathology images to a patient’s total health record as archived by hospitals and physicians.

EDITOR: Wow! You are describing an instrument suite which goes beyond simply automating Pap smear preparation and primary screening.

DR. NELSON: That’s correct. As manufacturers of products designed to help laboratories add value in the managed healthcare environment, our companies were independently working toward very similar solutions to that five-step integrated capability just described by Dr. Powell.

EDITOR: In other words, from different technology platforms, both companies were actually trying to design something that would end up doing the same thing for clinical laboratories.

DR. NELSON: More or less true.

DR. POWELL: I agree, in terms of what kind of products our individual companies were planning to create during the coming years.

EDITOR: Dr. Powell, before we leave this concept of what I’ll call the “integrated cytology system,” could you clarify for DARK REPORT clients your vision of the laboratory of the future as it pertains to cytology and anatomic pathology?

DR. POWELL: Robert, in our past discussions I’ve indicated to you that we believe there will be ongoing consolidation of both clinical laboratories and anatomic pathology practices.

EDITOR: Yes, but given the widespread consolidation among commercial labs that has already occurred, why do you believe there will be further laboratory consolidation?

DR. POWELL: Good question. First, in the commercial arena, past consolidation created today’s existing system of regionalized, high-volume laboratories. The three national laboratories, LabCorp, Quest, and SmithKline, are examples of this, along with a number of regional independent labs. Obviously these labs, still performing cytology with traditional, manual procedures, represent existing demand for an auto- mated cytology solution, as well as demand for other pathology solutions.

EDITOR: Yes. That’s definitely a group of laboratories with unmet needs for automating cytology and Pap smear screening.

DR. NELSON: Precisely. NeoPath designed the AutoPap System with this particular market in mind.

EDITOR: Which is why the first buyers of the AutoPap Primary Screening Systems were laboratories like SmithKline Beecham Clinical Laboratories (see TDR, November 9, 1998) and Unilab Corporation.

DR. NELSON: Yes. Each of the three national laboratories already performs roughly 5-6 million Pap smears annually. With the shortage of qualified cytotechs in some cities, such labs find AutoPap to be a viable solution, particularly if their volume of Pap smears is increasing in those same cities and they need to improve the productivity of Pap smear screening.

EDITOR: Okay. So one specific market is the commercial lab industry, which has already consolidated, for the most part. Dr. Powell, why is your business plan based on an assumption of continued consolidation?

DR. POWELL: We believe that consolidation of hospital laboratories and anatomic pathology practices will continue in response to a variety of clinical and economic forces. This will increase the number of laboratories doing high volumes of testing. These types of laboratories will need to automate what are now manual procedures.

EDITOR: Do both of you believe there will be 1) continuing; and 2) extensive, consolidation of hospital laboratories and pathology practices?

DR. NELSON: Yes. Keep in mind that overall reimbursement for laboratory testing and anatomic pathology procedures is not keeping pace with the rate of inflation. This is one fact which encourages consolidation. Also, laboratories use consolidation to access economies of scale, thus lowering costs.

DR. POWELL: Let me add that cost pressures and the need for increased diagnostic capability do give even modest-sized laboratories the incentive to investigate and acquire automation that promises extra efficiency.

EDITOR: What about clinical integration? As that occurs, it forces discrete providers to link into an information continuum…

DR. NELSON: …Robert, that is perceptive, because it ties in with Dr. Powell’s earlier comments about the downstream uses of electronic archiving and diagnostic information management of Pap smear, cytology, and pathology images.

EDITOR: Thus, when Dr. Powell mentioned that he’s always felt imaging was the critical component, and end game, in the cytology/AP automation process, he’s referring to the need for laboratories to be ready to store lab results, archive it in such a way that it can be retrieved, and pass it along the clinical pathways in such forms that other users can generate useful clinical knowledge and utilization information from it. Do I understand this correctly?

DR. NELSON: Yes. That concept asks laboratorians to think in another dimension. Both NeoPath and AutoCyte are developing the capability to use this technology beyond the basic function of automating the preparation and primary screening of Pap smears. Our goal is that the systems be an integrated solution for preparation, more accurate diagnosis, analysis, archiving, and information exchange among providers.

DR. POWELL: Allow me to point out a significant benefit of an integrated system which can electronically archive Pap smears. Currently, all large laboratories have a problem in archiving glass slides. For example, remember the 6 million Pap smears that Laboratory Corp. of America does annually? LabCorp needs to archive those 6 million glass slides!

EDITOR: That’s expensive.

DR. POWELL: Besides the expense, there is the problem of slide retrieval when the situation calls for a specific slide to be found or referred to another laboratory or diagnostic site.

DR. NELSON: Finding and referring archived glass slides is time-consuming, costly, and the retrieved slides frequently are not returned to their original place. They are also subject to degradation over time.

“Without imaging, all you have is a slide. By imaging the Pap smear slide, you gain the improved ability to archive the slide, retrieve the specimen anytime, analyze the clinical data, and pass the specimen and results to other healthcare providers as required. ”
James B. Powell, M.D.
President & CEO, Autocyte, Inc.

DR. POWELL: That is why digital imaging of the specimen makes a lot of sense. It saves money on storage, it allows a faster retrieval when necessary, and it allows a copy of the electronic file to be distributed anywhere it might be useful. This is all available as a by-product of the image analysis process.

DR. NELSON: And it is why both NeoPath and AutoCyte are designing our various cytology screening systems to eventually meet laboratories’ needs for storage, retrieval, and possible later electronic transmission of the specimen to other physicians.

DR. POWELL: There are still legal requirements that labs retain the glass slide. But archiving electronic data is now accepted in radiology. The same is begining to happen in pathology. We believe that cytology and pathology must move to image-based archiving to integrate with other sectors of healthcare.

EDITOR: Thus, one key to understanding this merger between AutoCyte and NeoPath is their common commitment to an integrated imaging information system. This was the common goal for each company’s product design, even if their technology platforms and design philosophies were different.

DR. NELSON: That’s a fair assessment. During the last six months a number of things caused our two companies to work closely together. That led us to realize there was more benefit in combining forces than to continue independently funding parallel research and development projects.

EDITOR: This spring AutoCyte purchased the patents and other intellectual property of Neuromedical Systems, Inc., makers of the PapNet® System. Shortly thereafter I noticed announcements by AutoCyte and Neopath that they would share the intellectual property and that a clinical trial would commence to demonstrate AutoPap’s effectiveness in screening liquid prep specimens from AutoCyte’s PREP® System. Were these the corporate exchanges that led to the merger decision?

DR. POWELL: Yes and no. Long term, we definitely agree on how cytology and pathology will evolve. Short term, both companies are prepared to move their products from a research/evaluation and early adoption phase to widespread clinical use. The other driver in this merger was the fact that AutoCyte now has FDA approval for our PREP System, an automated liquid prep system to be used in Pap smear preparation. NeoPath has FDA approval to use its AutoPap System as a primary screener. The merger allows us to quickly submit an FDA supplement for the combined use of these products to laboratories as a single automated solution.

EDITOR: Dr. Nelson, AutoPap is already in the marketplace. NeoPath intentionally did not develop a preparation system. So why does NeoPath want to package its AutoPap System with AutoCyte’s PREP System?

DR. NELSON: That’s simple. As we went to customers to offer them an automated screening system, they told us they want to buy a single solution to Pap smears. That means preparation as well as screening. Pairing AutoCyte’s PREP System, with NeoPath’sAutopap System, allows us to provide that single solution.

EDITOR: But can PREP-prepared Pap smears be screened on AutoPap?

DR. NELSON: We have a clinical trial under way to demonstrate its ability to screen a PREP Pap smear. Once the trial is complete, we will file a supplement to our PMA with the FDA. Assuming that the FDA accepts the results of the clinical trial, then AutoPap and PREP can be sold as an integrated system. We already published some earlier study results which are encouraging.

DR. POWELL: This should take a few months to accomplish. In the meantime, each company has an FDA-approved system available to laboratories for immediate use. We are in the process of helping laboratories which currently own and use our PREP instruments for non-gynecological use to convert them to gynecological application. This is occurring as we speak.

EDITOR: Could either of you say something about any unexpected benefits to a laboratory when it can eventually operate a PREP and AutoPap system together?

DR. NELSON: Using Pap smears prepared in the traditional manner, an AutoPap instrument can process at least 40,000 slides per year. Early indications are the AutoPap should be able to significantly increase that number using liquid prep Pap smears.

EDITOR: That certainly changes the economics for the laboratory. Why such a huge increase in productivity?

DR. POWELL: Using liquid preparation techniques on Pap smears generates a slide which is free of extraneous material. The target cells are presented with more uniformity. There is more consistency in the number of cells present than with manual prep methods, and they are placed within a smaller, predefined area on the slide.

DR. NELSON: What the liquid prep Pap smear presents to AutoPap is a slide which is not only more consistent but has significantly less data for the imaging system to capture and process.

EDITOR: So AutoPap takes less time to capture data from each liquid prep slide, and the software algorithms can crunch that data more rapidly.

DR. NELSON: True. And remember, there is a tremendous amount of data on a traditional Pap smear, up to four giga-bytes per slide! For comparison, a liquid-based preparation slide would contain less than one quarter the amount of data. Another comparison involves a breast mammogram, which typically generates only about seven megabytes of data.

EDITOR: That means AutoPap can read a liquid-based preparation slide faster because it has fewer cells to capture and less raw data for the software to process. I must ask a logical question. Given this type of benefit, why hasn’t Cytyc Corporation, makers of the ThinPrep® liquid prep system, done a clinical trial to show its compatibility with AutoPap?

DR. NELSON: That’s a fair question. I will only say that our two companies have been in discussions during recent years about such a trial, and those discussions were not conclusive.

EDITOR: It seems to me that Cytyc has now missed an opportunity to position its preparation product as compatible with the AutoPap Primary Screen System. AutoCyte’s PREP System is now the preferred partner, given the merger between AutoCyte and NeoPath.

DR. NELSON: No comment on that.

EDITOR: ThinPrep has a retail list price of $9.75, plus the cost of the equipment and added labor. In recent years, I’ve repeatedly heard that AutoCyte was expected to provide a liquid-based preparation system at a considerably lower cost per test than that of Cytyc.

DR. POWELL: That’s our expectation.

EDITOR: Well, I know what the “per click” retail price of AutoPap has been. Several analysts tell me that they believe the combination PREP and Autopap instrument package will offer laboratories a cost-per-slide for prep and screen that is considerably less than Cytyc’s suggested retail of $9.75 for liquid-based preparation alone.

DR. NELSON: We are not ready to publish our expected pricing nor discuss our pricing strategy. Among other things, the clinical trial involving PREP and AutoPap still remains to be completed. The merger must also take place before the companies can properly evaluate how to price the combined system when a laboratory buys it as a package.

EDITOR: Let me discuss the merger then. I know that both companies continue to experience cash burn. Slowing the draw-down on existing capital must have been one consideration in this merger.

DR. NELSON: Without question, combining the two companies and eliminating redundancies benefits us both. Total cost reductions related to the merger of approximately $6 million per year have been planned by both companies already. That is significant. Plus, our pooled cash currently represents a war chest of more than $20 million.

EDITOR: Could you comment on the merger specifics?

DR. POWELL: This is a merger of equals. I want to stress that. Each company’s stockholders will end up with about 50% of the shares in the combined firm. It is our intention to rename the company when the merger is complete.

EDITOR: What about management?

DR. POWELL: Dr. Nelson will be Chairman. I will be President. Each company will represent a division of the unified firm and will continue to operate and manufacture in existing facilities. The functional areas of the companies will be combined.

EDITOR: Could you speak to the sharing of intellectual property and the benefits you expect from that?

DR. POWELL: As you know, upon merging, we will have all the patents, patents pending, and intellectual property from AutoCyte, Neopath, and Neuromedical. This is an important resource and makes it easier for us to develop other applications of our imaging technology, software algorithms, and growing clinical data repository.

EDITOR: What about staff resources?

DR. POWELL: Some of the best Neuromedical scientists have joined us. We now have the intellectual brain trust from AutoCyte, NeoPath, and Neuromedical working together. We project a three-to four-year effort to develop and bring to market an integrated suite of instruments for Pap smear preparation, screening, archiving, and information processing.

EDITOR: Does this effort extend beyond Pap smears and cytology?

DR. POWELL: That is our intent. In earlier interviews, I’ve told you and readers of THE DARK REPORT that cytotechnologists and pathologists need tools which automate and support their clinical skills. (See TDR, September 28, 1998.)

DR. NELSON: Hematology underwent a similar technology development curve. Hemotechnologists no longer look through a microscope and count cells by hand. Now they are medical technologists who administer the effective operation of a variety of sophisticated instruments that offer diagnostic information unimagined during the days when blood was smeared on a slide so someone could manually count the cells.

EDITOR: So both you gentlemen expect to see your combined technology platform find application in other areas of cytology and anatomic pathology?

DR. NELSON: Yes, but those are plans for the future. Our immediate goal is to install products now approved by the FDA into the hands of cytology laboratories, where they can put them to useful work in gynecological applications.

DR. POWELL: I would only add that we at AutoCyte are excited to have FDA approval for our PREP System. As Alan says, the immediate objective of our combined companies will be to introduce PREP and AutoPap Systems into successful operation in as many laboratories as possible.

EDITOR: Dr.’s Powell and Nelson, thank you for sharing your thoughts and plans for automated cytology systems. Your candid comments are
appreciated by clients of THE DARK REPORT.

Reimbursement Picture For Automated Cytology Expected to Evolve as Payers See More Claims

HOW TO GET PAID for new laboratory assays is the million-dollar question in the lab industry these days. In the past. as new cytology technology entered clinical use, the payment system was often not ready to respond.

Expect that to change in 1999 and 2000, for several reasons. First, laboratories already using the new technology, along with existing cytology vendors, provided a different level of input into the creation of new CPT codes for automated cytology procedures. These CPT codes became effective January 1, 1999.

While the AMA and HCFA were studying the new codes, input from the laboratory industry helped to structure the new codes so that payers recognized the clinical significance of these procedures. Effectively, this means that laboratories submitting claims under the new cytology CPT codes are finding it relatively easier to establish and clarify each payer’s reimbursement policies.

Second, vendors established reimbursement SWAT teams to help labs educate payers about the new CPT codes and help them establish acceptable levels of reimbursement.

Third, the campaign to increase Medicare’reimbursement for traditional Pap smears has made the entire subject of women’s health and automated Pap smear technology a more visible issue, requiring action by regulators.

Add to this mix a steady increase in the number of laboratories using automated cytology systems and trying to bill for them, and it means that payers are finally responding. In fact, there is anecdotal evidence from the field which indicates that payers do not give automated cytology CPT codes much notice until they see a regular stream of claims for automated cytology procedures. At that point, payers, under pressure from labs and vendors, take steps to establish their reimbursement schedules for the new CPT codes.

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