DIANON Shoots At Urocor, Makes Unwelcome Offer

“Overaggressive and ungentlemanly” says UroCor as relations with DIANON turn sour

CEO SUMMARY: It pays to know your friends. Last month DIANON Systems announced an unsolicited offer to acquire UroCor. The offer, following months of ongoing discussions between the two companies, was clearly unwelcome at UroCor. Both companies are pushing hard to evolve disease management products from diagnostics testing and compete nationally for urologist referrals 

ON AUGUST 19, NEWS BROKE THAT DIANON Systems, Inc. of stratford, Connecticut was making an unsolicited bid to acquire UroCor, Inc. of Oklahoma City, Oklahoma.

DIANON offered to acquire all outstanding shares in UroCor for $7.50 per share. UroCor’s shares closed at $4.87 on August 19, so the DIANON offer represented a 54% premium and was worth $80 million. Although both companies acknowledge that they have conducted ongoing discussions about a variety of business arrangements in recent months, DIANON’s offer was clearly unwelcome at Urocor.

Declined The Offer

“DIANON’s offer was received on August 17, the day of our regularly scheduled directors meeting,” stated William Hagstrom, Chairman and CEO at Urocor. “UroCor’s board carefully considered every aspect of this unsolicited offer and declined to accept it. At this meeting the board passed a Shareholder Rights Plan. This agenda item was already scheduled for action and had been under development since last February.”

DIANON made public its offer on August 20 and Urocor (ibonvened its board and considered DIANON’s offer a second time, with the same result. Since the flurry of events in August, no further action has been taken by either company. UroCor has made it clear that the company is not for sale. DIANON has made no additional public announcements regarding the acquisition offer.

Clients and readers of The Dark Report know that each company represents a different business model for the clinical laboratory of the future. DIANON Systems is respected for its consistent ability to introduce new diagnostic assays and new technology into the clinical marketplace. (See TDR, March 2, 1998.)

In recent years the company has beefed up its anatomic pathology capabilities, with great success. DIANON is also developing disease management products built upon diagnostic testing technology. For 1997, DIANON’s revenues topped $61 million.

UroCor is familiar to clients of The Dark Report. Organized completely around the concept of disease management, UroCor is using diagnostic testing services as the platform to develop and offer increasingly sophisticated disease management products. UroCor’s target customers are urologists. (See TDR, June 23, 1997.)

Competition For Urologists

Urology is the link between DIANON Systems and UroCor. During the past five years, both companies competed aggressively for urologists’ business. Each company will boast of its success in this market niche. However, UroCor’s rapid penetration of the urology market in 1993 and 1994 was one factor in DIANON’s decision about that time to expand and emphasize anatomic pathology services.

Laboratory executives should understand that the ongoing battle between these two companies has less to do with evolving trends in the clinical laboratory marketplace and more to do with the internal challenges confronting DIANON Systems and UroCor.

All Pathologists Should Heed Marketing Lessons

MUCH OF THE REVENUE GROWTH AT DIANON Systems and UroCor comes from anatomic pathology. As national providers of AP services, both companies market themselves aggressively at the community level.

Most pathologists who practice in community hospitals would like local urologists to refer AP -specimens to them. That allows local specimens to be handled by pathologists in that community. Yet when sales reps from DIANON and UroCor began soliciting business from urologists in the community, most pathologists react like “deer in the headlights.” They freeze, do nothing and lose the business.

It is time for pathologists to heed the lessons of the marketplace. In the new world of managed care, pathologists will only achieve financial stability and revenue growth by proactively marketing their services. Community-based pathologists must compete, in their own way, with DIANON, UroCor, AmeriPath and other companies.

This means that pathologists must invest some of their practice revenues in marketing and sales. Pathologists must bring in business management expertise capable of running their practice profitably, making it grow, and increasing its profits.

The examples of DIANON and UroCor demonstrate that professional sales and marketing can cause clinicians to refer AP specimens to national providers. It is now time for local pathologists to study this success and use marketing as the tool to build their practice profits.

Limited Resources

Combined, the revenues of both companies are less than $100 million per year. That limits the financial resources of each company. It is difficult for them to invest in new product development and have sufficient capital to bring those products to the marketplace.

Limited resources to fund sales and marketing constrains both companies’ growth potential. For example, UroCor expanded its sales force from 42 to 65 sales reps during the last 12 months. It takes considerable time and expense for these new reps to build sales volume.

Another relevant factor is their status as public companies. Stockholders and financial analysts expect public companies to show sustained growth of 5% to 15% per year as a minimum. This is a challenge for DIANON and UroCor, since reimbursement is declining and there is pressure to reduce utilization. These are the reasons why DIANON’s rejected tender offer will probably not end their long-running love/hate relationship.

(For further information, contact DIANON Systems at 203-381-4000 and UroCor at 405-290-4000.)

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