Bostwick Labs Prepares For Public Stock Offering

Noted uropathologist David G. Bostwick, M.D. is pathology’s newest successful entrepreneur

CEO SUMMARY: In recent years, annual revenue at Bostwick Laboratories has skyrocketed, reaching $102.8 mil- lion in 2007. Now the company, known for its national uropathology expertise, has filed documents in preparation for an initial public stock offering (IPO). Bostwick Laboratories is the latest success story in anatomic pathology. It hopes to raise $100 million and is preparing to expand its diagnostic services into other anatomic pathology subspecialties.

EARLIER THIS MONTH, Bostwick Laboratories, Inc., filed its registration statement for an initial public stock offering (IPO). The laboratory company hopes to raise $100 million.

Should Bostwick Laboratories successfully complete its IPO, it will be significant for several reasons. First, it will affirm that the pathology profession has produced its newest successful entrepreneur pathologist. Second, it will demonstrate that going public still remains a viable way for a growing laboratory company to raise capital. Third, the price investors prove willing to pay for Bostwick stock will indicate how Wall Street currently values a lab testing company.

There is another significant fact about Bostwick Laboratories, which has its headquarters in Glen Allen, Virginia. The company is disclosing spectacular growth. For 2007, it reports annual revenue of $102.8 million. Yet just four years earlier, in 2003, it posted only $10.7 million in revenue.

Founder, Chairman, President, CEO, and Chief Medical Officer David G. Bostwick, M.D., M.B.A., gets full credit for this performance. After building his reputation as an expert in urology at the Mayo Clinic, Bostwick left and launched his own laboratory business in 1999.

One important distinction sets Bostwick Laboratories apart from most of the fast-growing lab companies of the past 15 years. Bostwick did not accept investment capital from equity funds, private investors, or other Wall Street sources. Instead, Bostwick built his business in true bootstrap fashion. Bostwick used his own money and the lab’s retained earnings, plus bank loans, to finance year-to-year growth. That has allowed him to retain control over his company. In fact, currently Bostwick owns 99.68% of the outstanding shares in Bostwick Laboratories.

Multi-Year Growth Pattern

Starting in 2003, Bostwick Laboratories began an unbroken four-year run of solid growth in specimen volume and revenue. It now has laboratories in six locations, including Virginia, Arizona, New York, Florida, Tennessee, and London, England. The London laboratory is primarily supporting a nascent clinical trials business.

Having seen how UroCor, Inc., and Dianon Systems, Inc., grew rapidly during the second half of the 1990s by offering uropathology services directly to office-based physicians, Bostwick jumped into the same market in 1999. Today, urology represents 86.8% of the company’s revenues.

In recent years, however, Bostwick Labs has established other testing services. It is now organized around four divisions that offer anatomic pathology services in urology, gynecology, gastroenterology, and nephrology. Now, the company is preparing to enter the dermatology market as well. Bostwick Labs employs 30 pathologists and has more than 750 total employees.

100 Sales Reps At Bostwick

In keeping with Bostwick’s careful study of the success of UroCor and Dianon during the 1990s, Bostwick Laboratories supports an aggressive and professional sales and marketing operation. It currently maintains 100 sales representatives in the field. The sales and marketing effort is led by Jed Fulk, who is Executive Vice President of Sales and Marketing and has been with Bostwick Labs since 2003.

Earlier in his career, Fulk held senior sales positions at UroCor. Also, Fulk is a graduate of the United States Military Academy at West Point. This point is note- worthy, because, in its heyday, the top- performing Dianon sales force was heavily populated with graduates of the military academies. Bostwick seems to have observed this fact and appreciated how it contributed to Dianon’s remarkable rates of growth in specimen volume and revenue during its go-go growth years.

For 2007, Bostwick Labs reports that specimens totaled 291,000 and revenues were $102.8 million. That was an increase of 82.6% over the 159,000 specimens received in 2006, when revenues totaled $58.4 million. These numbers imply an average revenue per accession last year of about $353.26.

Pathologist As Entrepreneur

It should be recognized that the accomplishments of Bostwick Laboratories, Inc., are a direct result of the business and clinical leadership of David G. Bostwick, M.D. The fact that this pathologist owns 99.68% of a $100 million-per-year lab company is just the starting point.

Including Bostwick, the current executive team consists of four individuals. Only one, Fulk, was hired before 2007. This fact demonstrates how Bostwick has maintained direct control over the operations of the company and its expansion in recent years.

Further, a new board of directors was assembled in February of this year. Of the seven outside directors, none has direct experience in the clinical laboratory industry. That’s a sign that Bostwick wants fresh thinking and a different mindset guiding the strategic development of his laboratory company.

Bostwick’s hands-on management style is evocative of another well-known pathologist-entrepreneur. Pathologist James B. Peter, M.D., Ph.D., founded Specialty Laboratories, Inc., in the 1980s and, also using a hands-on management style, built the steadily growing laboratory into one the nation’s major reference and esoteric lab companies. Peter was also the last pathologist-entrepreneur to bring a laboratory company to the public markets. In December 2000, Peter guided Specialty Laboratories, Inc. (with revenue of $153.2 million in 2000) to a successful IPO that raised $92 million.

Since founding his lab company in 1999, Bostwick’s business strategy has been contrarian in one significant way. He has consistently refused to accept private equity investment capital during a time when most new lab company start-ups relied on private equity investors as the source of funding and management expertise to develop the business.

By not accepting private equity investment funds, Bostwick has accomplished two goals. One, he has retained total control of his enterprise. Two, he has not needed to refinance his company five to seven years down the road to raise the funds needed by private equity firms to repay their own investors.

The design of the initial public stock offering for Bostwick Laboratories will allow Bostwick to maintain control of his company while tapping a new source of capital that he can use to further expand his testing activities. It is likely that one element of this strategy is to position the company to operate independently for some time in the future.

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Government’s Heavy Hand Impedes Labs in California

GOVERNMENT REGULATIONS CAN DISTORT the healthcare marketplace and California provides a good example. In recent years, the state has refused to issue new laboratory licenses to serve MediCal, its Medicare program. The stated purpose is to control MediCal fraud by preventing fly-by-night operators from establishing lab companies that fraudulently bill the MediCal program for lab tests never performed or that are medically unnecessary.

But this same ban on new lab licenses affects Bostwick Laboratories, Inc., which is unable to gain a California state license. Bostwick addresses this issue in its public filing, stating that:

Each of our laboratories is certified by CLIA, where such certification is required, and has all licenses required by the state in which it is located. However, many state licensure laws require a laboratory that solicits or tests specimens from individuals within that state to hold a license from that state, even if the testing occurs in another state. We currently accept testing from California, New York, Pennsylvania, Maryland, New Jersey, and Rhode Island, which require out-of-state laboratories to hold state licenses. However, we do not have licenses from California or Rhode Island. (TDR underline.) While we have applied for or are in the process of applying for licenses in these states, we have accepted specimens from such states in the past and are continuing to accept specimens from such states. For the year ended December 31, 2007, specimens from patients in California accounted for 4.9 percent of our revenues and specimens from patients in Rhode Island accounted for less than one percent of our revenues.

We are in the process of implementing changes to the way we do business in California in order to bring our company into compliance with California law during the pendency of our California licensure application. However, our performance of clinical laboratory testing during the period in which we do not have a California license may subject us to sanctions…The government could also assert that a claim for payment from Medicare or another federal health care program for a test that was performed by a laboratory that was not properly licensed to perform the service was a false claim under the False Claims Act, providing for penalties of between $5,500 and $11,000 for each such claim.

As this example shows, California’s ban on issuing state licenses to new laboratories has locked its lab marketplace into an arbitrary status quo. It denies California residents and physicians access to new laboratories which may offer better service or other innovations and new laboratory test technology that is not offered by labs currently holding California state licenses.

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