ChromaVision Targets National AP Market

Automated cellular imaging technology will support company’s expansion

CEO SUMMARY: Three new business strategies are moving ChromaVision into different segments of the laboratory testing marketplace. The company has built a new laboratory facility and will support local pathology groups with advanced diagnostic technology. It is also expanding its presence in the research and development area of pharmacodiagnostics, with an emphasis on oncology.

PROFIT AND OPPORTUNITY are the motivations behind a new business strategy and a new executive team at ChromaVision Medical Systems, Inc., based in San Juan Capistrano, California.

Profit, or rather the lack of it, caused ChromaVision to rethink its existing business model. It was 2000 when it received FDA clearance to sell its Automated Cellular Imaging System (ACIS®). During the past four years, the number of ACIS instruments placed in clinical use has increased steadily. But profits at ChromaVision have proved elusive.

Two New Executives

Faced with the need to boost profitability, the company is transforming itself. It adopted a three-pronged business strategy. To implement this strategy, it recruited a new senior executive team. On July 22, it announced that Ronald A. Andrew, Jr. was to be the new President and CEO. Then, on August 18, ChromaVision announced that Kenneth J. Bloom, M.D. had joined the firm as Medical Director, effective that day.

Andrews was most recently the Senior Vice President, Global Marketing and Commercial Business Development, for Roche Molecular Diagnostics. Bloom was Senior Medical Director at US LABS, Inc., based in Irvine, California.

ChromaVision’s two new executives will tackle the company’s new, three-pronged business strategy. First, it will expand sales of its Automated Cellular Imaging System into markets outside the United States. Second, it has built a new laboratory facility and will compete directly for specimens with other anatomic pathology (AP) specialty laboratories. Third, ChromaVision is beefing up its involvement with pharmacodiagnostics, including participation in clinical trials to develop proprietary companion diagnostics.

ChromaVision has ample cash to execute these new business strategies. In February 2004, the company received $5 million in new funding from Safeguard Scientifics, Inc. ChromaVision is a majority-owned subsidiary of Safeguard. One month later, in March, ChromaVision closed a $21 million securities offering. It also announced a research collaboration with UCLA.

ChromaVision’s transformation from a manufacturer and distributor of AP imaging systems based on proprietary technology into a provider of direct testing is an unexpected turn for the company. It now becomes a direct competitor in the lab services marketplace.

ChromaVision’s new business strategy is directly rooted in the firm’s experience since it introduced ACIS earlier in this decade. It has an automated micro- scope with computer-based color imaging technology. ACIS can detect, count, and classify cells of clinical interest based on recognition of cellular objects of particular color, size and shape.

Diagnostics Marketplace

In 2000, ChromaVision obtained a broad clearance from the FDA and focused on market penetration and commercialization of ACIS. This broad FDA 510K allows customers to use ACIS in a variety of ways. In addition ACIS has three specific FDA clearances: MRD Micrometastases (2000), Estrogen Receptor and Progesterone Receptor (2002), and HER2 (2003).

ChromaVision estimates that about 30% of all new cases in these areas run on its ACIS at hospitals and research labs across the country. It says it has about 261 customers in the clinical market and 35 customers in the research market.

To pursue its new business strategies, ChromaVision ended its longstanding relationship with US Labs, Inc. in June 2004. The partnership processed specimens and provided imaging to customers via CD/ DVD/Web. The referring pathologists determined the cells to be evaluated, performed the diagnosis, and billed for the professional component.

ChromaVision intends to perform these services itself. It built a new laboratory in San Juan Capistrano. As a reference laboratory service provider, ChromaVision starts from a strong position. It has an installed base of 166 ACIS placements and 95 ACCESS workstations. It is also modeling its operations on the successful things done by other national AP labs. A number of its recently-hired laboratory staff have come from these companies, including IMPATH.

As its three new business strategies gain traction in the marketplace, ChromaVision Medical Systems has the potential to become a new type of laboratory/diagnostic business model. It is using ACIS, a proprietary imaging technology, to develop a unique relationship with its anatomic pathologist-clients.

ChromaVision can sell its full ACIS system to pathology laboratories seeking to do 100% of the work themselves. Alternatively, ChromaVision can have a role as an esoteric reference laboratory, providing technical services, then transmitting the resulting AP images to the referring pathologist. Alternatively, it can perform both the technical and the professional services at a client’s request.

Diagnostics Marketplace

ChromaVision Medical Systems demonstrates that the national marketplace for anatomic pathology services continues to evolve. New business forms and new professional relationships between diagnostic technology developers and laboratories are steadily reshaping all aspects of the laboratory testing marketplace.

It is another example—and another early warning—to local anatomic pathology group practices that their profession is evolving.

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