GROWTH IN SPECIMEN VOLUME and revenues is the major challenge at the nation’s two largest laboratory corporations.
How Laboratory Corporation of America and Quest Diagnostics Incorporated solve this problem will affect and influence every remaining clinical laboratory and pathology group practice in the United States. That’s because the marketing and pricing strategies of the two blood brothers tend to establish new competitive norms in the healthcare marketplace.
Until this year, public laboratory companies relied on acquisitions of smaller independent laboratories as the most reliable way to generate growth in revenues and earnings. However, as clients and regular readers of THE DARK REPORT know, in 2002, LabCorp and Quest Diagnostics purchased four of the largest remaining public laboratory companies (American Medical Laboratories, Dynacare, Unilab, and DIANON Systems). Only a handful of potential lab acquisition candidates remain.
Lab Test Distribution
Because this situation makes the “growth by acquisition” strategy less viable, the two multi-billion-dollar lab testing behemoths are transitioning to a different strategy. Each hopes to increase both specimen volume and revenues by using their unique position as a lab test distribution channel. It is a way to gain advantage from their relationship with hundreds of thousands of the nation’s doctors.
Laboratory directors and pathologists can watch this strategy unfold in real time. The first big play involves colorectal cancer. Both national labs want to transform the market for colorectal cancer screening. To accomplish this, each is ramping up a marketing campaign for their particular assay. At LabCorp, its Pregen-Plus™ test has been available since August. LabCorp licensed technology from Exact Sciences. Quest Diagnostics is offering a test it calls InSure™ which uses technology it licensed from Enterix.
Substantial Market Potential
Colorectal screening was identified as a potentially lucrative market because it currently lacks a viable screening methodology that is patient-friendly, reasonably priced, and offers acceptable levels of diagnostic sensitivity and specificity. The need for a better test is obvious. Each year, approximately 147,000 new cases of colorectal cancer are diagnosed and 53,000 deaths occur. It is ranked as the number three cause of death for men and women in the United States.
The marketing formula is simple. Both national labs want an assay with patent-protected technology. They want to brand the name with physicians and consumers. This excludes other laboratory competitors from offering that test. The test must be reimbursable by major payers at levels sufficient to make the test profitable and must have clinical research that demonstrates its effective- ness over existing methodologies.
Payer Acceptance
Quest Diagnostics is pricing its InSure test at $95. LabCorp’s Pre-Gen Plus is priced at $795. Quest Diagnostics reports that 50 payers, including Aetna, have agreed to reimburse for InSure.
Acceptance by insurers is an essential part of this growth strategy. Quest Diagnostics introduced ten new assays during the past year and claims that all ten tests were accepted by at least 35% of the health insurance industry. Internally, it considers 50% acceptance to be an attainable goal.
To drive acceptance of these colorectal screening tests, both national laboratory companies are gearing up their sales and marketing teams. Collectively, several thousand sales reps from the two companies are even now calling on physicians and providing information and encouragement to add these assays into their regular ordering mix. Local laboratory competitors tell THE DARK REPORT that they are seeing evidence of this effort.
Watching Sales Success
It’s not just laboratory competitors that are watching this emerging new marketing model for new diagnostic tests. Wall Street is keenly interested to see whether or not the two blood brothers can generate substantial increases in sales volume from this strategy.
It takes regular increases in revenues and earnings to support the share prices of these companies. If the two national labs cannot demonstrate the ability to push revenues up by introducing proprietary new tests which clinicians find useful, then their stock prices will lag behind the general market.
Moreover, some of the savvier investors know one of the ongoing weaknesses in the commercial laboratory business model is field sales. Historically, few of the public lab companies have been able to generate sustained revenue increases because of the new accounts opened by their sales representatives. New accounts were generally offset by the number of accounts lost to competitors.
For this reason, both lab companies have an extra challenge in demonstrating that this market strategy can work. They must demonstrate that they can organize and manage a force of sales reps that can predictably and profitably sell these new assays to physicians. Physician education about the series of new assays they want to introduce is the linchpin to the success of the “proprietary test” marketing model.
Competitive Strategy
In the short term, neither LabCorp nor Quest Diagnostics have enough proprietary assays to gain competitive advantage in winning physicians’ office accounts from local competitors. The question that local lab administrators and pathologist must ask is “will either or both of these companies eventually lock up enough clinically-useful assays so that clinicians find the national lab option to be compelling over that of a local laboratory competitor?”
Expect the noise level to increase in the marketplace as the publicity machines of both blood brothers kick into gear. There will be news stories, TV reports, and media mentions of “the new tests that promise to improve existing medical practices.” Early evidence of this is already visible in the news releases trumpeting clinical studies that validate the ability of Pregen-Plus or InSure to detect colorectal cancer at improved rates over other methodologies.
