Clinical Diagnostic M&A Developments

• Composition
  The U.S. clinical testing industry consists of two segments: (a) hospital inpatient and outpatient testing (40%) and (b) commercial clinical laboratories, physician-office laboratories and other locations, as well as hospital outreach testing (60%).Hospital-based and affiliated laboratories account for ~60% of the total industry; commercial clinical laboratories approximately 33%;and physician-office laboratories and other locations account for 7%.See adjacent chart.

• Geographies
  The U.S. represents the largest (40-50% of the global market) and one of the most highly regulated markets, followed by Europe (~25%), and Japan (~10%); Emerging geographies (e.g., Brazil, India, China) are relatively small but growing quickly. (Decibio Research).

• Growth
  The market is expected to grow at 5-7% in the next few years, with molecular diagnostics (MDx) remaining the fastest growing segment.  Next generation sequencing and point-of-care segments will also continue to expand.

• Demographics favor growth
  As the population continues to grow and age, the burden of chronic diseases and unmet diagnostic needs will likely increase the demand for diagnostic testing and analytics.

• Our Healthcare System should place more value on prevention and wellness
  Historically, far more emphasis has been put on treating patients rather than rewarding them to prevent pathologies. The value of detection, prevention, wellness, and disease-oriented personalized care are becoming more pronounced and should lead to a more favorable climate for diagnostics. Providers, consumers and payers increasingly recognize the value of diagnostic information services as a means to improve health and reduce the overall cost of healthcare through early detection, prevention and treatment.

• Medical innovation is fostering greater diagnostics utilization
  Medical advances provide more accurate and earlier diagnosis and treatment of diseases. Continuing advances in genomics and proteomics are expected to yield new, more sophisticated and specialized diagnostic tests. These advances also are spurring interest in and demand for precision medicine, which relies on diagnostic and prognostic testing and data analytics.

• Competition remains intense but size matters
  The clinical testing industry remains fragmented, is highly competitive and is subject to new competition. Increased hospital acquisitions of physician practices enhance physician ties to hospital-affiliated laboratories and may strengthen their competitive position. Consolidations, however, have resulted in several industry leaders equipping them with wider and more advanced offerings, greater negotiating strength, and more pricing flexibility.

• Reimbursement pressure rewards efficient providers
  Healthcare market participants, including governments, are focusing on controlling costs by managing reimbursements, revising test coding, requiring pre-authorization of lab testing, and raising co-pays and deductibles.  While pricing pressure will continue, it creates opportunities for high value, low-cost, efficient diagnostic players.

• Informatics will be increasingly critical in diagnostics and treatment
  The increased level of available healthcare data and more powerful tools to analyze it are making medical decision-making more precise and contoured to patients’ circumstances. Healthcare market participants, including pharmaceutical companies, health plans, physicians, ACOs and hospitals, are striving to leverage interoperability, informatics and analytics to positively influence the health of patient populations. Diagnostics can play a critical role in contributing to these dynamics.