Why DIANON Sale Alters Anatomic Path Market

LabCorp’s $598 million investment is a major bet on AP-based diagnostics

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CEO SUMMARY: By acquiring DIANON Systems, LabCorp raises the level of competition for tissue specimens originating in physicians’ offices. LabCorp’s acquisition is also a validation of predictions that cancer diagnostics will be a high-growth segment of laboratory medicine. Anatomic pathologists have ample warning that new national competitors will soon attempt to capture local physician accounts.

WITHIN the anatomic pathology profession, news of the pending acquisition of DIANON Systems, Inc. by Laboratory Corporation of America is an earthquake that scores high on the Richter Scale.

It fulfills a long-standing prediction by THE DARK REPORT that the two blood brothers want to develop more business in anatomic pathology and have been laying groundwork to intensify their competition against local pathology group practices.

Simply put, anatomic pathology is a profitable business, particularly when compared to relatively low reimbursement levels for clinical lab testing. Since the mid-1990s, a handful of companies organized specifically to provide anatomic pathology services nationally have enjoyed phenomenal growth, not to mention significant profits and net earnings.

Their stories have been regularly chronicled in THE DARK REPORT to alert and inform pathologists. After all, companies like UroCor, DIANON, IMPATH, and AmeriPath do represent a threat to local pathology groups. But they also represent an opportunity. By studying their successes and business strategies, local pathology groups can copy what works. Local pathologists can use this knowledge to improve the services they offer to their local medical community and improve their financial stability.

Regional Pathology Winners

There are numerous examples of local pathology groups which are responding to the changing healthcare marketplace. These groups are building critical mass that allows them to finance an expanded menu of clinical services. They are fielding sales reps to sustain and increase the number of business relationships feeding specimens—and revenues—into the group. But there are too few of these regional pathology winners.

With its acquisition of DIANON Systems, LabCorp raises the competitive stakes. LabCorp has extensive managed care contracts. It has extensive client relationships with physicians in communities throughout the United States. It has a large sales force that regularly visits all its clients. Once the DIANON acquisition is complete, LabCorp will use these additional capabilities to move tissue specimens from anywhere in the nation into a centralized pathology laboratory.

Both LabCorp and DIANON believe that most cancer care will be delivered outside the hospital in physicians’ offices and other ambulatory settings.

LabCorp is spending $600 million so it can to deploy those resources and increase the number of tissue specimens referred by its physician-clients to the post-merger LabCorp/DIANON. Any expansion of its market share in tissue specimens will come primarily at the expense of local pathology groups.

There is another strategic consideration driving the LabCorp/Dianon deal which is important for pathologists to understand. LabCorp sees oncology as an outpatient disease. In speaking to analysts last week, LabCorp Chairman and CEO Thomas P. MacMahon said “Both DIANON and LabCorp believe that cancer is really treated as an outpatient disease. Patients prefer to stay home as much as possible during the course of their treatment.

Outpatient Opportunity

“We see the combination of LabCorp and DIANON as an opportunity to leverage our skill base in the outpatient physician community. Many of the cancer test licenses we’ve signed are for outpatients,” explained MacMahon.

Alert pathologists understand the ramifications of this strategic vision.
With each passing year, more cancer care will move out from the hospital into outpatient/outreach settings. That is why LabCorp and DIANON both want to position themselves to benefit from this trend.

Over time, this trend puts many local pathology groups at financial risk. Hospital-based pathologists may have an automatic “lock” on inpatient specimens, but they must compete for outreach specimens.

Traditionally, in many cities there has been little true competition for tissue specimens originating in physicians’ offices. Local pathology groups accessed those specimens because of their personal relationships with physicians and the absence of any serious competition.

That is changing. The multi-year success of DIANON Systems and IMPATH has attracted Wall Street’s attention. LabCorp is investing more than a half billion dollars to position itself to compete more effectively for tissue specimens in the physicians’ office segment. What has been a quiet market niche, occupied mostly by local pathology group practices, will soon become an intensely-competitive battleground for several well-financed national laboratory companies.

New Corporate Culture

If this type of competitive situation develops, THE DARK REPORT believes it will begin to drive consolidation within the pathology profession. There were specific evolutionary forces which drove wide-scale lab consolidation, first in the commercial lab sector between 1987-1994, then in the hospital lab sector between 1995-1999.

In 2002, these same evolutionary forces are visible. If THE DARK REPORT is reading the tea leaves correctly, our industry may be ready to experience a wave of consolidation in the anatomic pathology sector.

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