CEO SUMMARY: To the surprise of very few, IMPATH, Inc. filed for Chapter 11 bankruptcy protection. During 2003, most of IMPATH’s key executives departed as different problems within the company became known. IMPATH’s new executive leadership is dealing with a host of difficult issues. Caught up in this situation is Tamtron, the division of IMPATH which sells IT systems to pathology groups.
AN IGNOMINIOUS END MAY BE NEAR for a company that pioneered a unique new business model in anatomic pathology services.
IMPATH Inc. filed a Chapter 11 bankruptcy petition in the Southern District Bankruptcy court of New York on September 29. Among other things, it hopes to gain court approval to access a $15 million Debtor-in-Possession (DIP) line of credit provided by Fleet National Bank.
The company claims there will be no interruption in services provided to its clients. However, IMPATH has not made any statements about how the Chapter 11 bankruptcy filing may affect pathology group customers using its Tamtron PowerPath® pathology information system. In January 2002, IMPATH purchased Tamtron. (See TDR, January 28, 2002.) PowerPath is used in at least 350 pathology sites, so any disruptions caused by the bankruptcy action which directly affect this operating division could be troublesome for some pathology group practices.
The serious magnitude of IMPATH’s problems is reflected in the fact that it has been unable to file a financial report for second quarter 2003. As well, throughout recent months, IMPATH has laid off staff from various facilities and laboratories. At a minimum, this employee turnover disrupts the service continuity clients experienced with IMPATH during the time they have referred cases to the New York-based company.
There are reports that clients of IMPATH have begun to switch to other sources. Competitors like US LABS, Inc. report strong growth in new client accounts during the year. But since IMPATH has not filed its most recent quarterly report, it is difficult to estimate how much fall-off in business the company has experienced, particularly in recent months.
Finding A Buyer
In filing bankruptcy, the company has publicly stated that a primary goal is to find a buyer. However, that may prove difficult. IMPATH has disclosed financial irregularities in how its business was conducted in past years by the former executive team. But the specifics of these financial irregularities have not been publicly disclosed. If they include compliance violations with government health programs such as Medicare and Medicaid, then any buyer might face substantial financial exposure for these “past sins.” It would be difficult for IMPATH to indemnify a buyer from such claims, since it has inadequate net worth.
Mounting Legal Bills
Legal expenses at IMPATH will be considerable in the coming months. Along with its Chapter 11 bankruptcy filing, the company has been served with multiple lawsuits on behalf of investors. These lawsuits claim that investors were misled by the statements and actions of executives at IMPATH.
Another source of legal expenses will be the formal investigation by the
Securities and Exchange Commission (SEC). On September 9, IMPATH disclosed that the SEC had sent notification that it “has issued a formal order of private investigation to determine whether there have been violations of the federal securities laws and regulations.”
During most of the 1990s, IMPATH was a high-flying company. Its business plan was simple and different. It offered services that helped community hospital-based pathologists diagnose “difficult-to-diagnose” cancers.
At a time when most academic center laboratories could take up to three weeks to provide complex diagnostic tests on a case, IMPATH provided a faster answer. Its strategy was “send us the specimen and the supporting information. In 48 hours we will provide a diagnostic report and return all the submitted materials.”
Faster TAT Was A Benefit
Many pathologists found this fast turnaround time appealing. The proof is in IMPATH’s fast growth in case volume. When IMPATH did its IPO (initial public offering) in the mid-1990s, its annual revenues were about $25 million. By 2002, it ended the year with revenues of $226 million.
IMPATH’s Cinderella story began unraveling about two years ago. As its stock price posted hefty gains, more financial analysts began to study the company and recommend its stock. IMPATH had an unusually high DSO (days sales outstanding). Its accounts receivable and bad debt accounting were different from other laboratories.
This caught the attention of financial analysts. More than one analyst concluded that IMPATH was manipulating its accounting. From that point on, scrutiny by the investment community increased. With additional scrutiny, more questions were raised about other aspects of IMPATH’s business.
Within the laboratory community, IMPATH was known to be aggressive about many of its sales, marketing, and compliance policies. Its bankruptcy filing may be the reckoning that some lab industry observers have long believed would occur.