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Pap Smear Technologies Battle For Market Share - The Dark Intelligence Group

Pap Smear Technologies Battle For Market Share

Investors pressure competing companies to increase sales volume and earnings

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CEO SUMMARY: Cytyc, NeoPath and Neuromedical each tapped the public capital markets during the past 18 months. Now investors expect to see earnings growth and dividends as soon as possible. Clinical laboratories should expect intensified sales and marketing efforts from these three companies as they strive to increase sales.

Probably the most ubiquitous sales representatives visiting clinical laboratories today are those from the three major “Pap smear” technology companies.

Their pervasive presence is due to the pressure on Cytyc Corp., NeoPath, Inc. and Neuromedical Systems, Inc. to generate increased revenue and earnings that meet expectations of investors and the Wall Street brokerage firms which helped them raise capital from the public during the last 18 months.

These three companies have the same two hurdles to overcome. First, they must demonstrate the clinical efficacy of their technology to improve the current standard of care for diagnosing Pap smears. Second, because each company’s technology increases the cost of diagnosing Pap smears, they have to figure out how to get their technology reimbursed by Medicare and private payers.

As the forces of managed care, clinical integration and declining reimbursement radically transform the healthcare industry, the struggles of these three cytology-based companies provide valuable understanding about how new laboratory technology will become accepted by clinical laboratories around the country.

It is critical to understand how the healthcare marketplace accepts new laboratory technology, particularly for those laboratory executives responsible for buying instruments, laboratory automation systems and LIS software. With falling reimbursement and declining profit margins, any laboratory investing in the wrong technology or the wrong company could find themselves literally out of business.

Different Strategies

For example, all three cytology companies have dramatically different business strategies. Cytyc’s Pap smear technology serves a different function than that of NeoPath and Neuromedical. Cytyc’s ThinPrep® monolayer process is designed to improve the current method of collection and specimen preparation.

Once the ThinPrep process is used to prepare the Pap smear, a cytotechnologist can read the slide in the usual manner. The monolayer slide can also be read by the automated cytology systems offered by NeoPath and Neuromedical.

Cytyc’s most recent market development is an agreement, announced May 29, with Mead Johnson & Company to co-promote ThinPrep. Cytyc already has 55 sales people in the field. Mead Johnson has a sizeable sales force calling on OB/GYNs. Apparently Cytyc feels that Mead Johnson’s sales reps can help educate the 15,000 OB/GYNs about the benefits of ThinPrep.

After gaining FDA approval for the ThinPrep Pap smear preparation process late last year, Cytyc commenced direct sales activity in January 1997. Company documents state only that “65 companies became customers of Cytyc during the first quarter of 1997.” Such carefully chosen wording indicates that not all of these laboratories have actually purchased ThinPrep processing instruments or are paying “per slide” fees.

Marketing Battle

Of greater interest is the marketing battle between NeoPath’s AutoPap® 300 QC Automatic Pap Screener and Neuromedical’s PapNet® system. The two companies are ardent competitors, although their positioning in the market- place is totally different.

Further, both companies have active marketing programs under way overseas. Sales in foreign countries are important goals for both companies. The fact that each company emphasizes both domestic and foreign sales is important. In the healthcare world of the future, even clinical laboratories will be doing significant business overseas. THE DARK REPORT is uncovering a growing number of examples where clinical laboratories such as Specialty and SmithKline are developing overseas ventures.

East Asia is a major starting point for Neuromedical. “While we were a private company, Hong Kong-based investors provided us with venture capital in two rounds of financing,” stated Jack Henneman, Vice President of Corporate Development. “Investors from this group operate a cytology laboratory in Hong Kong. We recently purchased that cytology laboratory, called New Systems International, Ltd. The existing management team will remain at New Systems and it will operate independently of our scanning center in Hong Kong.”

The fact that each company emphasizes both domestic and foreign sales is important. In the healthcare world of the future, even clinical laboratories will be doing significant business overseas.

“For us, the China marketplace is more of an opportunity than an established business,” he continued. “But our operational base in Hong Kong is positioned to pick up increasing test volumes. Specimens flow into our Hong Kong scanning center from that city as well as Australia, mainland China and Taiwan.”

Domestically, Neuromedical reports that 47 new laboratories were added to the PapNet distribution system during the first five months of 1997.

Neuromedical’s PapNet

Neuromedical’s PapNet test was approved by the FDA as an adjunct test. It is priced at $35 to the patient and the laboratory performing the test pays Neuromedical $17 for the procedure. The slide is prepared in a normal fashion. It is sent to Neuromedical’s scanning center in Suffern, New York.

Using video imaging technology and neural net-based software, the PapNet system identifies the 128 cells most likely to be abnormal. The data file and slide are returned to the original laboratory where a trained cytologist reviews the slide to make a diagnosis.

In contrast to Neuromedical’s “direct to consumer” market strategy, NeoPath’s AutoPap is targeted at laboratories with high volumes of Pap smears. The AutoPap system was approved by the FDA for quality control and adjunct testing.

NeoPath successfully placed AutoPap units in all three of the national laboratories. After FDA approval and HCFA approval, Quest Diagnostics, SmithKline Beecham Clinical Laboratories of America and Laboratory Corporation signed contracts. Unilab, Inc. of California is another major commercial laboratory with multiple AutoPap instruments. Recently NeoPath announced an exclusive national contract with SmithKline to install AutoPap systems in ten more of its laboratories. AutoPap systems already operate in SmithKline’s St. Louis and Atlanta labs.

Whereas Neuromedical’s earliest overseas successes were in Hong Kong and the Far East, NeoPath has made Japan its highest priority. NeoPath lined up Nikon as a partner and gained approval from the Japanese Ministry of Health and Welfare to use the AutoPap system as a primary screener. NeoPath also has a foothold in Korea, where Samsung Hospital uses the AutoPap system.

Intensified Sales/Marketing

THE DARK REPORT predicts that sales and marketing efforts by the three companies will intensify during the next year. Clinical laboratories will notice the heightened sales activity.

If that wasn’t enough, three more companies will soon join the Pap smear battlefield. Marketing for Accumed International’s TracCell® system and Compucyte, Inc.’s PathFinder® system will soon intensify. AutoCyte, Inc. is preparing a monolayer system linked to a cytology screening system and is optimistic about early FDA approval.

Pap Smear Practices Differ Overseas

FOREIGN MARKETS REPRESENT lucrative opportunities for the three cytology companies. In many countries, the percentage of women receiving regular Pap smear screening is significantly lower than in the United States and Canada. For this reason, it is expected that Pap smear test volumes will increase in such countries.

Another benefit is that the regulatory environment is different than in the United States. All medical device manufacturers try to get their device approved and into clinical usage in as many countries as possible. This permits them to demonstrate the effectiveness of the technology in a wide variety of clinical settings.

“We find that each country requires a unique strategy,” stated Jack Henneman, Vice President of Corporate Development at Neuromedical Systems. “For different reasons, we see the most attractive markets for us as the United Kingdom, Germany and Italy. Each country has a large middle class that is ready for improvement in healthcare services. They represent good potential and have clinical practices similar to what we have in North America.

“We have operations in Europe, like we have in Asia,” he continued. “We operate a scanning center in the Netherlands. Pap smears from our client laboratories throughout the region are scanned at the scanning center. It is the base from which we intend to expand our European sales.”

NeoPath is also pursuing overseas markets. “Currently over 12 million Pap smears are done annually in Japan,” stated Alan Nelson, Ph.D., President of NeoPath. “Japan has a number of high-volume clinical laboratories similar to the United States, so our AutoPap systems are already designed to effectively meet their needs. In preparing to enter Europe, we are going through the regulatory process. Among the milestones, we obtained the CE Mark for the AutoPap system.”

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