Merger Creates “New” Pathology Competitor

Two venture capital-backed pathology firms combine and form national path company

CEO SUMMARY: Pathology business consolidation and regionalization continues. Pathology Consultants of America, Inc. (PCA) and PathSOURCE, Inc. announced their intention to merge last month. The combined company will be called Inform DX, Inc. and will compete nationally for anatomic pathology business. Inform DX represents a new business model for the anatomic pathology profession.

TWO WELL-FINANCED anatomic pathology companies joined forces to create a “new” company with ambitions to become a national anatomic pathology powerhouse.

Pathology Consultants of America, Inc. (PCA), based in Nashville, and PathSOURCe, Inc. of Port Chester, New York signed a definitive agreement to merge in May.

The merged company is to be renamed Inform DX, Inc. and will maintain its corporate headquarters in Nashville, Tennessee.

“Probably the simplest way to describe the motivations behind this merger,” said Brian Carr, PCA’s CEO, “is that both companies were developing the same capabilities to implement virtually identical business plans.

“In particular, PCA and PathSOURCE were each investing heavily to develop enhanced information capabilities for anatomic pathology,” noted Carr. “This merger allows us to combine our efforts and move faster.”

“This is a superb marriage because both companies strongly believe that pathology information products are the future of the profession,” stated Robert Friedman, M.D., CEO of PathSOURCE.

“Inform DX has a new business model that helps pathologists in academic and general practice settings increase revenue and income by offering ‘best medicine’ pathology services,” he added. “In coming months, we expect to announce several partnering arrangements with respected pathology groups across the country.”

The post-merger Inform DX has two competitive strengths. First is strong financial backing, including improved access to expansion capital. Second is sophisticated management expertise on its board and senior executive team.

Both PCA and PathSource were amply funded by venture capital companies. (See TDR, November 9, 1998.) These venture capitalists will continue to participate in the post-merger company.

Post merger, the executive line-up at Inform DX will be as follows: Brian Carr becomes CEO. Robert Friedman, M.D. is Vice Chairman and Richard Jacoby, M.D. is Chief Medical Officer. Haywood Cochrane (formerly CEO of Allied Medical Laboratories) will be Chairman. Dan Lufkin, a PathSOURCE investor and one of the founders of Donaldson, Lufkin and Jenrette, a major Wall Street brokerage, will be on Inform DX’s board of directors.

Inform DX has pathology operations in 11 sites around the United States, involving 92 pathologists. (See sidebar above.) Its business plan calls for continued expansion through acquisitions and affiliations with locally-based pathology groups around the country.

“Our business strategy has five components,” noted Carr. “These improve the way pathology services are performed and delivered.

“First, we seek pathology affiliates in key markets,” he said. “We want to partner with local pathology groups that have good reputations and can be our anchor for growth in that market.

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Pathology Sales Force

“Second, as we move into new local markets, we deploy our sales force to support our local pathologists,” continued Carr. “Our financial plan requires double-digit growth in specimen volume and revenue growth. During the past two and one half years, we’ve successfully accomplished this for our affiliated pathology groups.

“Third, we differentiate our pathologists and our services by offering enhanced pathology information services,” he said. “We plan to give referring physicians, patients, and payers a full menu of useful pathology information services.

“Fourth, we want to promote ‘best medicine’ and ‘best information’ practices—externally to our customers and internally to our pathologists,” stated Carr. “Our growing expertise in pathology subspecialties gives us competitive advantage in local markets and with various HMOs.

“Fifth, we stress ‘local pathology’ as the main characteristic of our company. Inform DX exists to nurture and support the clinical and financial success of our local pathology partners,” explained Carr.

“To achieve this, we have a unique financial model that PathSOURCE developed. It blends the best of the employment business model for investors with the best of the equity business model for pathologists. It basically centers around the acquisition of the laboratory, accompanied by a bonus compensation agreement that provides performance incentives to all partners.”

Executives of the new Inform DX believe their recent business experience validates these five strategic business goals. “In the marketplace, we’ve seen the importance of local pathology services,” noted Bill McDowell, Senior Vice President of Development for PCA. “Most pathologists have an excellent market position that gives them a competitive market advantage over national pathology companies.

“For example, local pathologists are known and recognized by area physicians,” he explained. “They see inpatient and outpatient specimens that are never sent to national pathology labs. The variety of specimens seen by hospital-based pathologists is also broader than specimens from the physicians’ office environment. As part of Inform DX, these local pathology groups can use our sales and marketing skills to build specimen volume and revenues from physician office referrals.

“Inform DX can assemble anatomic pathology information for patients that covers inpatient, outpatient, and outreach testing across several markets,” he noted. “It allows our local pathologists to differentiate themselves to managed care plans in their area.

Competitive Advantage

“This competitive advantage at the local level is further enhanced by the subspecialty expertise within Inform DX and our enriched information capabilities,” said McDowell.

“Managed care plans recognize and value these attributes. Our pathology groups in Denver and St. Louis have achieved critical mass,” he continued. “Managed care companies recognize this. Effectively, we’ve leveraged the work our pathologists do for inpatients to create access to pathology specimens originating in the physicians’ offices.”

Inform DX recognizes the importance that laboratory data has to the healthcare system. “We believe that sophisticated information capabilities will be a key market differentiator among pathology competitors,” said Carr, “and we are already boosting the information capabilities of our existing pathology affiliates.”

Information Strategy

“Our information management strategy has three components,” noted McDowell. “First, we are moving to web-browser based test ordering and results reporting for all our practices.

“Second, we created a data repository at our Nashville headquarters,” he said. “Some practices already feed us, on a daily basis, data on costs, sales/marketing results, QA/QC information and similar items.

“Third, we have a company intranet operational at all sites. It permits us to plug in additional information capabilities as they are developed,” commented McDowell.

Inform DX will not standardize information systems across all local practices in the short term. “It doesn’t matter whether our practices use AP systems such as CoPath, Cortex, and the like,” observed Carr. “We are developing a product that will sit atop their pathology information systems and feed data into our central repository.

Collect Global Data

“We’re working with Stonebridge Technologies to develop this capability,” added Carr. “We expect to roll it out by year’s end. It will allow us to generate pathology reports across all sites and collect global data. Stonebridge just finished helping Esoterix, Inc. create a similar product. It allows Esoterix’s individual labs to feed data into the corporate repository.”

The merger of PCA and PathSource into Inform DX creates a formidable new force in the national marketplace for anatomic pathology services. The pathologists and executive team at Inform DX are developing a comprehensive array of pathology services and information products.

Against the trends of healthcare consolidation and clinical integration, Inform DX is investing time and money to help local pathologists move past a single-hospital business focus and position themselves as state-of-the-art pathology providers to physicians, payers and patients.

The market seems to recognize the value of pathology services. Sustained growth in revenues and profits of such national pathology companies as AmeriPath, DIANON Systems, IMPATH, and UroCor during the past five years demonstrates that anatomic pathology can be a highly lucrative business.

Outmoded Practice Model

But it won’t be lucrative for small, hospital-based pathology practices that refuse to recognize that the 1980’s group practice model, based on fee-for-service medicine, is increasingly outmoded in today’s healthcare world of integrated hospital networks, managed healthcare, and Internet-based information services.

THE DARK REPORT recommends that pathologists and laboratory administrators explore new ways to package anatomic pathology services. The efforts of companies like Inform DX show how competition is raising the bar and making enhanced pathology services essential for financial success in today’s healthcare market.

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