Regional Tox Laboratory Shows Sustained Growth

Laboratory Specialists of America implements acquisition game plan with consistent success

CEO SUMMARY: Over a three-year period, this regional substance abuse laboratory has shown dramatic growth in revenue and operating profits. Strong leadership combined with good implementation skills fuel this lab’s success.

HERE’S ANOTHER QUIET SUCCESS story about a regional laboratory. At a time when most clinical laboratories are struggling to maintain a flat revenue base, Laboratory Specialists of America, Inc. (LSA) has nearly doubled in size in only 24 months.

When THE DARK REPORT first wrote about LSA in December, 1995, the company was announcing its first acquisition. Since that date, LSA closed three deals and has one pending. (See TDR, December 4, 1995.)

LSA’s strategy is to acquire a geographically-concentrated base of substance abuse testing clients. For example, the 1995 acquisition of National Psychopharmacology Laboratory in Knoxville involved toxicology accounts primarily located in Tennessee and Georgia.

After completing an acquisition, LSA will integrate client services, sales reps, and marketing staff from the acquired company. The goal is to maintain and improve customer service levels. LSA’s success in that effort is demonstrated by its low rate of client turnover.

In October, the brokerage house of Barber & Bronson, Inc. recommended LSA’s shares as both a good short-term and long-term investment. This stock recommendation is based on LSA’s consistent financial performance during the last three years.

“Since 1983, the number of Fortune 500 companies that test their employees for drug use increased from 3% to 98%.”
—Jeffrey Hasse

It is THE DARK REPORT’s opinion that substance abuse testing is an overlooked profit engine for regional laboratories. To support this opinion, the performance of LSA should be matched against two other publicly traded substance abuse companies: PharmChem, Inc. and MedTox Scientific, Inc.

At PharmChem, annual sales in 1992 were $27.3 million, increasing to $41.2 million in 1996. Medtox’s growth rates parallel those of Laboratory Specialists of America. Annual revenue at Medtox climbed from $6.2 million in 1994 to $26.5 million in 1996.

Another laboratory doing well with its drugs of abuse testing program is LabOne, Inc. in Lenexa, Kansas. As described in this issue, LabOne’s substance abuse testing volumes in the third quarter increased by 106% over the same period last year.

Clearly this market segment is growing at a rapid pace. Jeffrey Hasse, Analyst at Barber & Bronson, believes that demand for substance abuse testing will climb by 15% per year. Hasse also believes that revenues at Laboratory Specialists of America will increase by 30% per year, double the industry growth rate.

$700 Million Market

Substance abuse testing is estimated to be a $700 million market annually. Testing is dominated by the three blood brothers. Laboratory Corporation of America, Quest Diagnostics Incorporated and SmithKline Beecham Clinical Laboratories perform about half of the substance abuse testing in the United States.

The majority of the remaining business is done by SAMSA certified laboratories. Hasse notes that most of these labs generate annual revenues of less than $5 million. It is this market dispersion which provides LSA the opportunity to consolidate testing through acquisition and to use the acquired client base as a platform for further sales and marketing.

LSA’s latest acquisition tender illustrates this management strategy. It signed an agreement on September 30, 1997 to acquire the drugs of abuse operations of Accu-Path Laboratory, Inc. This involves an estimated $500,000 per year in testing.

After LSA assimilates the Accu-Path toxicology business, LSA will concentrate sales and marketing efforts into that area to expand revenues. LSA uses the acquired revenue base as a beachhead to pursue untapped potential in that market area.

From a strategic market perspective, substance abuse testing has several appealing aspects. First, as Hasse of Barber & Bronson points out, the market for substance abuse testing has grown rapidly in recent years. It is expected to continue growing at rates of 15% per year. If true, then this market will double in size, from $700 million to $1.4 billion during the next five years. This is certainly contrary to the shrinking volumes of clinical diagnostic testing.

Second, prices for substance abuse testing are not declining like those of clinical diagnostics. By marketing carefully to select categories of employers, a regional laboratory can generate adequate pricing to protect operating profit margins.

Laboratory Specialists of America‘s sustained success over three years demonstrates that this market segment strategy has been a viable way to maintain a dynamic and profitable laboratory.

11-17-97 image 2


Leave a Reply


You are reading premium content from The Dark Report, your primary resource for running an efficient and profitable laboratory.

Get Unlimited Access to The Dark Report absolutely FREE!

You have read 0 of 1 of your complimentary articles this month

Privacy Policy: We will never share your personal information.