We interview Eric Souêtre, chief executive of Labco, Europe’s largest medical diagnostics group, on his plans to move into the public sector, why Spanish lab tests are 30% cheaper than French and on the appeal of imaging.

Founded in 2002 in France, Labco quickly expanded into Germany, Belgium, Italy, Spain and Portugal through acquisitions. Recent buys include General Lab and Sampletest, both leaders in Iberia, and AescuLabor Karlsruhe in Germany in April 2009. Today, it is majority owned by 3i.

Labco’s 2008 sales came to €416m.

Labco has extended its coverage of France to the whole country, while keeping a balanced geographical distribution (more than 60% of the network's laboratories are located in municipalities of less than 30,000 inhabitants).

In other countries, Labco adapts to the local markets, with large technical platforms in Germany and Spain.

HCE: Perhaps you could start by giving a quick overview of the European market?

ES: Sure. Within the EU, diagnostics is a €20bn market, of which roughly half is public and half private. Imaging is the largest sector, at roughly €10bn, laboratory testing represents around €8bn and pathology is the smallest, at €2-3bn.

The lab market splits into two €4bn markets, one private and one public. The lab sector is gaining when compared with imaging and pathology, and is more profitable than imaging, because you don’t need such expensive equipment.

In the EU, lab test volume is growing by 5-10pc a year. But the value is affected by price cuts, as governments seek to reduce their deficits.

We have already seen such cuts in Germany, we expect a 4% price cut in France and we expect further cuts in Germany, probably in 2011.

These price cuts mean the growth trend in lab test value is just over 4%. But each market is very different, depending upon reimbursement regimes.

Spain is the only really free market, and there is a danger of further cuts as governments seek to reduce their deficits. But margins remain reasonable.

HCE: You have been highly acquisitive. Tell me about your business model.

ES: We want to work with entrepreneurs and, when they sell to us, they become shareholders in Labco by reinvesting part of the funds earned from the sale of their laboratory.

This typically amounts to 20%, of the selling price. So, in fact, the Labco company is 60% owned by biologist-entrepreneurs, with private equity investors holding the rest.

I think there are two ways to rationalise after an acquisition.

The classic, private equity approach is top down, with change being superimposed by the new owner. This approach doesn’t work in healthcare at all, because the managers and doctors are fiercely independent and fight such moves. Such an imposition merely leads to de-motivation and failure - as we have seen with competitors.

The second approach is where the managers are sufficiently motivated to implement the changes themselves, and this is central to the Labco business model.

HCE: Who do you see as your competitors?

ES: Well, perhaps the main competitors are the people we are trying to buy!

In general, I would say there are three types: Firstly, we have national laboratories, many of whom reach high quality standards. However, they need to have enough critical mass to maintain quality of service. That means that in Spain they need sales of around €50m, in Germany €15-20m and in France around €5-10m.

Secondly, we have the hospitals, both public and private, and, thirdly, we have international networks, such as Futurelabs in central Europe and Sonic.

But the market does remain very fragmented; in Europe, we are the largest player in the private labs market with around 10% market share.

HCE: So what makes you stand out? How do you differentiate yourself?

ES: A key difference is that we reinvest to reach the highest possible quality standards in all our labs.

We also see ourselves very much as providing medical services, not as a factory, just processing stuff.

Instead, we focus on providing these services. For instance, we have created an online service for the 10,000 physicians we work with, which not only provides medical results, but also provides guidelines on how to diagnose the patient, based upon their physical profile.

So, to summarise, we don’t provide data, we provide information.

Equally, we are keen to move into new markets in areas like genetic diagnosis. We have agreements with biotech companies to help them market their tests in Europe. And new acquisitions take us into new skills sets.

Our latest acquisition in Germany has expertise in oncology and gynaecology tests. The strategy is to buy labs which are medically driven. We are not just buying labs with machines and management, but also businesses with strong skills and links with the medical community and to patients, physicians and insurers.

HCE: What about the future? Where do you see the growth opportunities?

ES: Until now, we have worked purely with the private sector, often taking over and running laboratory services for outpatients, but also for private hospitals, who, of course, will typically be serving the general public in the Bismarckian systems, such as France and Germany. In fact, in Italy, Spain and Portugal a third of our labs already operate in private hospitals.

I am now keen to work much more closely with the public sector, outsourcing the running of laboratories in public sector hospitals. We find that the public hospital authorities are very keen to do this across all the countries where we are active. The problem is that decisions take time in the public sector.

Also, you must appreciate that running laboratory diagnostics in a hospital is much harder and generates lower margins than for outpatient services, as far more is expected to maintain services in public hospitals, where presence is needed 24 hours a day, 7 days a week. This means that, to do this successfully, we will really have to reach critical mass.

We're also looking at whether we should move into imaging and create diagnostic centres providing imaging, labs and pathology all under one roof. So far, in Europe, this has only happened to some extent in Italy. Of course, the customers are the same for all diagnostic services, but I do not see many other synergies. Imaging calls for different skills, different equipment and different personnel from labs.

If you look at the USA, lab and imaging groups are still separate although, in Brazil, Diagnosticos da America, is making it work. I also hear that Sonic is making diagnostic centres work in Australia.

HCE: How different are the national markets?

ES: Oh, they vary enormously. Spain is a free market where we have to negotiate with multiple health insurers and this means much more rationalisation.

In Spain, labs specialise in particular processes and are automated. By contrast, in France, regulations stipulate that every lab must be able to carry out the full gamut of tests. This is very wasteful and explains why the cost of lab tests in France is on average around 30% higher than Spain. In Italy, we have seen the development of diagnostic centres with imaging and labs under one roof. The way a patient uses laboratory services varies from country-to-country.

In France, for instance, the customer has a choice as to which lab is used, so marketing has to take the patient into account. Being international really pays off, as we can learn what works well, and then export the positive aspects to other countries.

HCE: What changes to do you see in the regimes in different countries?

ES: Oh, big changes. In France for example, the sector is currently undergoing important reforms, and we expect that the law will come into effect by the end of the year.

The French health ministry has really grasped the costs associated with the current organisation of the French diagnostics sector. And this change will put a lot of pressure on smaller competitors who have been protected up until now.