InCyte Pathology Buys DSM Lab in Walla Walla

Pathology super-group has strategy to grow into an integrated provider in the Pacific Northwest

CEO SUMMARY: For the nation’s thousands of private pathology group practices, consolidation is now a growing trend. The latest example is last week’s acquisition of the three-pathologist practice known as the Davis-Sameh-Meeker Laboratory in Walla Walla, Washington, by InCyte Pathology, P.S., of Spokane Valley. There are growing numbers of these mergers and consolidations involving independent pathology practices, but few are reported by local newspapers or other media.

ONE MORE EXAMPLE of how the anatomic pathology profession will transform in coming years occurred last week in Western Washington. On April 1, 2011, InCyte Pathology, P.S., of Spokane Valley, acquired the Davis- Sameh-Meeker Laboratory (DSM) of Walla Walla.

In the sales transaction, InCyte Pathology, a regional pathology super practice of 21 pathologists holding contracts with 23 hospitals in Washington and Idaho, acquired what was a three-pathologist practice in Walla Walla, Washington. The motivations behind DSM’s decision to sell to InCyte are what gives this small laboratory M&A transaction significance.

The Davis-Sameh-Meeker Laboratory was founded in 1948 by pathologist Frederick Davis, M.D., who retired in 1971. Abbas Sameh, M.D., joined the practice that year, and David Meeker, M.D., joined in 1972. Meeker retired in 2009. After 41 years, Sameh, the last shareholder, also was retiring, leaving two employed pathologists with the option to purchase the practice.

“The retirement of Dr. Sameh, after a distinguished career of 41 years at DSM, created a business dilemma for DSM’s two remaining employed pathologists,” stated Gary Gemar, COO of InCyte Pathology. “The practice of anatomic pathology is evolving rapidly as new technologies and new diagnostic tests become available.

“To keep current, the Davis-Sameh- Meeker Laboratory needed an infusion of cash for new equipment to update their infrastructure,” he said. “This recapitalization was necessary because the new histology processing equipment required today is costly. Then there is the cost to acquire and deploy digital pathology capabilities.

“DSM faced another challenge,” con- tinued Gemar. “It is difficult to recruit pathologists to work in rural areas. That dovetails with another issue, which is the need for every pathology group to have the right mix of subspecialist pathologists that many clients demand today.

Trends in Pathology Market

“At InCyte, we see these same trends,” he noted. “More and more of our clients demand subspecialty interpretations. Gastroenterologists want our GI pathologists to read their cases. Dermatologists want our dermatopathologists to read their cases.

“In this regard, the merger of DSM and InCyte benefits both groups of pathologists,” observed Gemar. “Our group has a wide range of subspecialty expertise. At DSM, the two pathologists joining our practice are both board certified in anatomic and clinical pathology, They are Alan P. Peterson, M.D., and Jon V. Rittenbach, M.D. They will continue to oversee the medical duties of InCyte’s new lab operations in Walla Walla and utilize the subspecialty expertise in the practice.

“The addition of Drs. Peterson and Rittenbach now gives us 23 pathologists and 20 of them are shareholders,” he commented. “Drs. Peterson and Rittenbach will be on a shareholder track and can become shareholders in two years.

Pathology Sales Program

“In addition to the need for subspecialization, DSM recognized that it must have an effective sales and marketing program to stay competitive in the marketplace,” Gemar added. “Competition for specimens is increasingly intense and every pathology group needs to invest in sales development.

“Upon closing this transaction on April 1, InCyte has begun to implement an integrated laboratory informatics capability at DSM,” explained Gemar. “The pathologists and staff will run on our computer network and use our computer products so that both the Spokane Valley and Walla Walla sites are standardized.

“In addition to computerizing the whole facility, we also are remodeling and adding new equipment at DSM,” he explained. “The laboratory was built in a former physician practice. There were several small rooms throughout the facility. It will be opened up to create better lab, office, and meeting room space. A new grossing area will be built, and a gross workstation will be installed. DSM will have a cassette printer to print bar codes on the cassettes. This gives both our lab sites a common accessioning process.

A Strategic Acquisition

“For InCyte, the purchase of DSM was done for very strategic reasons,” said Gemar. “We already have a large share of the market in Spokane but we have competitors now coming into this market.

“In 2007, we decided that we needed to expand our service range beyond the Spokane and North Idaho areas because of these competitors,” he said. “Since then, we have looked at pathology groups in our wider region that need a better business strategy to continue to serve those communities. InCyte believes it can be a part of that solution for these local pathology group practices.

“Walla Walla illustrates this strategy,” explained Gemar. “The DSM facility has histology and cytology services which we will use to continue service to the three hos- pitals in the community. These are Providence St. Mary Medical Center, Walla Walla General Hospital, and the Jonathan M. Wainwright Memorial Veterans Administration Medical Center. “We will have medical directorships at all three of those facilities, which allows us to continue those relationships with those hospitals and gives us an opportunity to grow our services within the community,” Gemar continued. “Also, because DSM didn’t do much outreach business, that is one opportunity we intend to develop.”

InCyte Pathology will use integrated informatics to support that outreach strategy. “Sometime this fall, we intend to interface our lab information system with the main hospitals in Walla Walla,” he said. “We will also offer electronic interfaces to those physicians in the community who have electronic medical record (EMR) systems.”

Gemar also pointed out that the Davis-Sameh-Meeker Laboratory gives InCyte a useful base for additional expansion. “This acquisition gives us an opportunity to move into some of the smaller communities in Northeast Oregon, which is very close to Walla Walla,” he stated. “We are already serving clients in Montana, Idaho, Washington, and Alaska, and we plan on moving into Oregon.

The Southern Idaho Strategy

“Over the past year we implemented a Southern Idaho strategy,” explained Gemar. “We stationed a sales representative in Boise. Historically, we have provided services only to several counties in Northern Idaho. This market is made up of about 300,000 people. We have two pathologists at Kootenai Health in Coeur d’Alene every day, which is only about 30 miles or so east of Spokane.”

Gemar and his colleagues at InCyte expect to make similar acquisitions in the coming years as smaller pathology groups need to hire replacements for retiring pathologists and as these two-and three-physician groups need capital to upgrade equipment and computer systems.

InCyte’s goal is to create an integrated, multi-site pathology group practice that emphasizes its ability to be a local pathology provider in the smaller communities throughout its service area.

In this regard, InCyte demonstrates to other private pathology groups that it is possible to use consolidation and mergers to build a local pathology resource that can compete effectively against national competitors. Although the smaller pathology groups may lose their independence, they will gain access to the capital, subspecialists, and sales expertise they need to defend their market share from national competitors.

InCyte Will Go Digital Because of Geography

TO DEVELOP AND SUPPORT REGIONWIDE PATHOLOGY SERVICES in the Pacific Northwest, InCyte Pathology, of Spokane Valley, Washington, is developing an efficient logistics system. It also plans to implement the use of digital pathology technology.

“The extensive geography of our service area makes it important for us to install digital pathology systems to shorten turn-around time on consults between the many hospital locations our pathologists serve,” stated Gary Gemar, COO of InCyte Pathology.

“Instead of having to send slides from Walla Walla to Spokane for consultations—which is 188 miles and three hours by car—that laboratory can prepare digital images and transmit those images to us electronically,” he stated. “Then pathologists here can perform the analysis immediately, eliminating the wait for the slides to be transported.”

“To move our specimens, we have to be very creative because we serve a rather large geographic area,” he said. “We have contracted with a courier service to do the local pickups and deliveries in the communities we serve in such states as Washington, Alaska, Idaho, and Montana.

“In most areas, our drivers pick up the specimens, package them, and put them on commercial air flights,” he added. “However, in Kalispell-Whitefish, Montana, couriers put the specimens on an Amtrak train that arrives in Spokane every morning at 2:00 am.”

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