Ampersand Buys Calloway Labs, Enters Pain Management Market

Acquisition gives Ampersand a stake in lab test niche that has had Medicare/Medicaid compliance issues

URINE DRUG TESTING for pain management may be a challenging business for clinical labs given that compliance officers in the states and in the federal government have successfully pursued lab compliance abuses in this line of business in recent years.

Now comes news that private equity firm Ampersand Capital Partners of Wellesley, Massachusetts, is to acquire Calloway Laboratories Inc., a company in Woburn, Massachusetts, that offers pain management and drugs of abuse testing services. The deal was announced last month, but no purchase price was disclosed.

The added twist to this story is that Gail Marcus will be the new President and CEO of Calloway Labs. Marcus was CEO of Caris Diagnostics (now Miraca Life Sciences) when it was purchased by Miraca Holdings for about $725 million. That deal closed in November 2011.

Credibility For Calloway

For Calloway Labs, its prospective new owner and CEO will add credibility to a laboratory company that has run afoul of the Medicaid program. Back in 2010, Massachusetts Attorney General Martha Coakley filed a 42-count indictment involving Calloway Laboratories, Inc., two of its officers, and three individuals. The charges accused the defendants of Medicaid fraud and kickback schemes.

Last spring, Calloway paid $20 million to the Commonwealth of Massachusetts and $7.7 million to the federal government to resolve allegations of kickbacks involving the state Medicaid program and the federal Medicare program. Calloway has operated under a three-year corporate integrity agreement with the Office of Inspector General of the federal Department of Health and Human Services since that time.

Wary Of Pain Management

Many pathologists and lab executives have been wary of pain management testing as it is marketed by a number of lab companies typically started, owned, and managed by individuals who do not have a background in more traditional areas of clinical laboratory testing. There is ample evidence to indicate that these are justified concerns.

Healthcare prosecutors at the federal and state levels have successfully brought enforcement actions against numerous pain management lab companies over the past eight years. A list of some pain management companies named in federal and state enforcement actions is presented in the sidebar on page 18.

Because of this checkered past in Medicare and Medicaid compliance, Wall Street investors have been shy about putting money into this class of lab testing companies. Ameritox, Inc., is a good example.

During the 2000s, Ameritox posted impressive yearly rates of growth in specimen volume, revenue, and operating profit. However, during the past six to eight years, its investors have engaged investment bankers several times to find buyers for the company—with no takers.

Similarly, the first sales book offering Calloway Laboratories for sale appeared as early as 2008. But despite its record of fast revenue growth, the owners of Calloway Labs were unable to find a buyer until Ampersand showed up last month.

Demand Poised To Increase

Thus, the willingness of Ampersand Capital Partners to acquire Calloway Laboratories at this time—and while Calloway Laboratories is under a corporate integrity agreement with the federal government—may be a sign that Ampersand believes the demand for pain management testing by office-based physicians is poised to take off.

Ampersand does know its way around the clinical lab testing marketplace. In 2007, it invested in Signature Genomics of Spokane, Washington. In 2010, PerkinElmer, Inc., paid about $90 million to acquire Signature Genomics. Similarly, Ampersand had equity interests in two Kansas-based lab companies, which were ViraCor Laboratories and IBT Laboratories. In 2009, the two firms merged to become ViraCor-IBT Laboratories.

Why Physicians Want To Test

Based on its experience with clinical lab testing, Ampersand may see opportunity in pain management testing. After all, physicians have legitimate clinical and medical malpractice liability reasons to use lab tests to monitor their patients’ compliance with prescription drugs prescribed to manage pain. Oxycontin is a good example.

Physicians need answers to three primary questions: 1) Is the patient regularly taking a therapeutic dose of oxycontin as prescribed? 2) Is the patient taking too much oxycontin and at risk of becoming addicted? 3) Is the patient not taking the oxycontin because he/she is illegally selling these pills to individuals who are addicted?

Given the rising use of prescription drugs for pain management, accompanied by a recognition among physicians of the need to better manage their patients who are taking these medications, Ampersand may consider that the time is right to serve this market. What will be watched is how Ampersand changes past practices at Calloway Laboratories and what new lines of laboratory testing it may introduce in coming months.

Checkered Compliance Past For Pain Management Testing

AS A NICHE SECTOR, LAB COMPANIES primarily offering urine testing for pain management and drugs of abuse screening have a dismal record of compliance with the Medicare and Medicaid programs.

For example, Amertox, Inc., of Midland, Texas, has been a fast-growing laboratory that provides urine testing for pain management purposes to office-based physicians. In 2010, it agreed to pay $16.3 million to settle a federal qui tam lawsuit that had been filed in 2007 by one of its sales representatives. Ameritox denied the claims of the lawsuit.

Starting in 2007, Massachusetts Attorney General Coakley brought enforcement actions against five other laboratories offering pain management testing besides Calloway Laboratories. She won settlements in each of these cases. The labs are:

  • Preventive Medicine Associates, Inc. (PMA), Brookline
  • Diagnostic Laboratory Medicine, Inc. (DLM), Bedford
  • Clinical Science Laboratory, Inc., Mansfield
  • Life Laboratories, Springfield
  • Willow Street Medical Laboratory, LLC, Lynn


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