Less funding for clinical pathology laboratory testing is just one of several market developments


Australia’s competitive market for clinical pathology laboratory testing seems poised for some major changes. Unfolding events are upsetting the pathology testing status quo in at least three ways. Caught in the middle of these disruptive forces are Australia’s big three of pathology testing: Healthscope Limited (ASX:HSP), Primary Health Care Limited (ASX:PRY), and Sonic Healthcare, Ltd. (ASX:SHL ).

The first change is linked to the federal government’s decision in recent years to scrap a decades-long pathology testing reimbursement arrangement. In 2009, it allowed the most recent price contract with the pathology testing industry to expire without renewal. Then, in November 2009, the government instituted a reduction in pathology testing fees.

More than 500 new pathology collection centres have been approved to open. Photo: The Australian

The second change involves removal of a government prohibition on the opening of new phlebotomy collection centers by commercial laboratories in Australia. These new rules took effect on July 1, 2010. In the first two weeks of July, more than 500 applications for new phlebotomy collection centers were approved by government officials.

The third change may come about if Healthscope is acquired. It has been the target of takeover offers because of the private hospital business it owns and operates in Australia. Investors have brought up the possibility that the new buyer—chiefly interested in the private hospital business—would want to divest Healthscope’s pathology business unit, which operates under the name of Gribbles.

In fact, earlier this month, the board of Healthscope recommended that the company’s shareholders accept a takeover bid by the U.S. private equity firms Carlyle Group and TPG Capital. The proposed acquisition price is A$2 billion (US$1.72 billion).

If this happens and Gribbles was to be put up for sale, its subsequent sale to either Sonic or Primary Health Care would significantly shift the competitive market dynamics in Australia. In fact, a similar thing happened in the United States in 1999. At that time, Quest Diagnostics Incorporated (NYSE:DGX) was able to purchase SmithKline Beecham Clinical Laboratories from its parent, SmithKline Beecham PLC (now GlaxoSmithKline). (See The Dark Report, February 22, 1999: Quest Diagnostics to Pay $1.27 Billion to Acquire SmithKline Beecham Clinical Labs.)

Not only did this acquisition significantly boost Quest Diagnostics’ share of the commercial laboratory testing marketplace, but it removed a major competitor. In 1999, that left only Laboratory Corporation of America (NYSE:LH ) as a member of the $1 billion revenue club.

Thus, if Gribbles were to be put on the market, its acquisition by either of Australia’s other two dominant pathology companies could prove to be a game-changer—just as it was in the United States when Quest Diagnostics removed SmithKline Beecham Clinical Laboratories from the competitive market in 1999.

What also bears watching is how the government health program decides to fund pathology testing services in the next couple of years. Australia collects more complete statistics about laboratory testing utilization than most other countries. Thus, it may be possible to see how that government’s changes in pricing policies for clinical laboratory testing affects physician utilization of pathology laboratory tests. Different government pricing policies for lab tests may also cause changes in how the nation’s commercial pathology companies make new diagnostic tests available to physicians in Australia.

In fact, some odd things are already happening in Australia’s market for pathology services and clinical laboratory testing. Data from Australia’s Medicare program revealed that national pathology volumes shrank by 3.4% during the first four months of 2010. Further, in May, the number of pathology tests funded was 2.9% less than May of 2009.

Financial analysts watching this market sector predict that the volume of clinical lab tests will rebound back to former levels. But this decline in utilization was unexpected and has yet to be understood or explained.

All of these developments mean that the pathology testing marketplace in Australia will continue to be closely watched. On one hand, the federal government is cutting back on funding for pathology testing. On the other hand, in order to compete and expand their market share, the nation’s major pathology laboratory companies are expanding the number of phlebotomy collection centers they operate. That will increase their expenses. Simple arithmetic says that lower prices and increased expenses means a squeeze on profit margins.

Related Information:

Deregulation of pathology sector to raise costs for all players

Pathology plague sparks overservicing and land-grab fears

Healthscope recommends Carlyle, TPG takeover bid

The Dark Report laboratory intelligence service