Surprise Merger Changes Cytology Marketplace

AutoCyte and NeoPath are joining forces to offer a unified automated cytology solution

CEO SUMMARY: Expect the merger of AutoCyte, Inc. and NeoPath, Inc. to inaugurate a new market cycle for automated cytology systems. FDA approval of AutoCyte’s liquid preparation system, called PREP™, sets the stage for intensified marketing battles between the AutoCyte/NeoPath consortium and Cytyc Corporation. Clinical laboratories should benefit from this competition.

When the recently-announced merger between AutoCyte, Inc. and NeoPath, Inc. occurs sometime this fall, it will recast the market for automated cytology systems in fundamentally different ways.

The merger brings together two companies with complementary products, shared philosophy, and a realistic attitude toward how laboratories view the cost-benefit equation for automated cytology systems.

This merger can also be expected to put additional pressure on Cytyc Corporation, manufacturer of the ThinPrep® Pap smear preparation system. Although Cytyc has a head start in marketing its product, it is expected that the AutoCyte/NeoPath alliance will offer a modular cytology system with significant cost advantages over Cytyc’s product.

“Single” Cytology System

“If there is one lesson that we have learned at NeoPath during the last two years, it is that laboratories are most interested in a ‘single’ system for handling the preparation and primary screening of Pap smears,” stated Alan Nelson, Ph.D., Executive Chairman of NeoPath. “That’s a lesson that was not lost on AutoCyte. It caused us to begin mutual explorations on how our two companies could work together.”

System In The Marketplace

Neopath already has the only fully automated primary screening system (called AutoPap®) in the marketplace. It was introduced last year after it gained FDA approval. AutoCyte has developed an automated liquid preparation system (called PREP™) and is marketing a pathologist’s workstation with telepathology capability.

PREP was approved by the FDA for use in Pap smear preparation this month. AutoCyte and NeoPath are doing clinical trials to demonstrate the efficacy of PREP and AutoPap as an integrated instrument package.

“We expect to demonstrate that laboratories using our combined system for Pap smear preparation and screening can boost the quality of care and laboratory productivity at an acceptable cost,” noted Dr. Nelson.

“The reason is that an automated liquid preparation system, married to an automated primary screening system, allows the individual technologies to combine in synergistic ways. There is evidence that the whole becomes more than the sum of the parts.

“For example, a Pap smear prepared using liquid preparation technology produces a slide which offers the automated screener less extraneous material and a more uniform layer of cervical cells,” he continued. “This means the automated screener can achieve faster throughput and potentially better accuracy when compared to the traditional Pap smear.”

How much faster? Potentially 100%, according to Dr. Nelson. “Currently, the AutoPap primary screening system can process at least 40,000 traditional Pap smear slides per year,” he observed. “Early evidence indicates that a liquid prep Pap smear allows AutoPap to process up to 80,000 slides per year. Clinical trials are under way to determine whether, and by how much, the combined PREP/AutoPap system can improve clinical diagnosis of the slides. Those studies will be published when completed and submitted to the FDA as a supplement.”

Trump Card of Cost Per Slide

Another trump card which may give the merged AutoCyte/NeoPath consortium a market advantage is its cost per slide. Cytyc advertises a retail list price for ThinPrep of $9.75 per slide. Although Dr. Nelson declined to discuss a cost per slide for the PREP/AutoPap system, knowledgeable sources believe that a retail price for both a combined prep and screen on the AutoCyte/NeoPath system will be considerably less than Cytyc’s suggested retail price of $9.75 per slide.

If that proves true, then it means AutoCyte/NeoPath can bring an integrated, automated cytology solution to market which can both prep and screen a Pap smear at an affordable price per slide.

Analyzing the merger between AutoCyte and Neopath, THE DARK REPORT sees five business factors at play.

First, the combined company has a lock on all the patents and intellectual property involved in automated cytology screening. (It acquired Neuromedical Systems, Inc.’s patents from the bankruptcy court earlier this year.)

“Our shared intellectual property now includes 80 granted patents,” said Dr. Nelson. “There are another 30-35 patents pending. These patents have value beyond their applications in cytology. This is a long term asset which should continue to appreciate.”

Second, the combined company will offer “one-stop shopping” to laboratories. Its PREP/AutoPap system is an integrated solution for automating both Pap smear preparation and primary screening. There is no competitor on the horizon which can match this.

Third, its integrated system may be priced so that laboratories can prepare and screen a Pap smear at a price per slide which is almost half of existing liquid preparation systems. This would be a significant competitive advantage.

Eliminate Redundant Costs

Four, both companies can eliminate redundant overhead costs. This reduces their rate of cash burn and preserves their existing capital base.

“You may be aware of published information that indicates both our companies have already reduced staff,” stated Dr. Nelson. “The staffing and overhead synergies were compelling. At least $6 million in annual savings were identified during the first survey. There is also the possibility of additive revenues from the merger by year-end, assuming the merger can occur as early as September.”

Fifth, both companies understood that without the merger, they would be fighting for a market which is very small and will not grow rapidly. Rationally, joining forces insures the survival of the combined company.

Beneath the surface, the merger of AutoCyte and NeoPath reflects sophisticated shifts in business strategies. With Neuromedical Systems, Inc. now out of the marketplace, AutoCyte/NeoPath will only have Cytyc as a competitor, and only for the preparation half of the Pap smear testing process.

Slow Acceptance By Labs

Clearly the merger of the two companies was a consequence of the slow acceptance by clinical laboratories of the current automated Pap smear technologies in the marketplace. Both companies know it will take considerable time and money to build demand for their products.

On the other hand, high-volume laboratories like SmithKline Beecham Clinical Laboratories, Unilab Corporation and Kaiser Permanente–Northern California continue to incorporate the AutoPap Primary Screening System in their cytology programs. They are accumulating ever-increasing volumes of data about clinical outcomes and costs.

The fact that these labs continue to increase their use of automated Pap smear screening indicates that cytology’s future lies with automated procedures, not with manual procedures.

THE DARK REPORT predicts that ongoing developments in reimbursement will serve to support this technology, particularly as successive generations improve clinical outcomes at decreasing costs.

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