How Dr. Al Nichols Changed The Lab Testing Marketplace

He Created A New Lab Business Model

CEO SUMMARY: At a time when lab testing meant routine assays performed within a few miles of the collection, Albert L. Nichols, M.D. envisioned a centralized national laboratory devoted to performing specialized, highly-complex testing to clinicians everywhere. Not only did his vision become the reality of the lab we know today as Nichols Institute, but in building his dream Dr. Nichols literally created the business structure for the fast growing esoteric testing industry.

With Nichols Institute, he fundamentally altered the lab testing industry and created a new channel for developing esoteric testing and delivering it to clinicians.
–Albert L. Nichols, M.D.
Founder and Chairman of Nichols Institute, 1935-2002

ON JANUARY 26, 2002, Albert L. Nichols, M.D., founder of Nichols Institute, died quietly in his home in Aspen, Colorado. His death was a surprise, as he was 67 years old and in good health.

Within the lab industry, news of his passing spread quietly, but quickly. It triggered a moment of reflection among those who knew Dr. Nichols personally. He was a remarkable individual, whose strength of character and mission to advance patient care created a unique business model for lab testing. His business model is widely emulated today.

It is because of Dr. Nichols that the lab industry today has a thriving class of lab companies organized to provide reference and esotoric testing to national and international healthcare markets. It is no coincidence that the name “Nichols Institute” continues to command respect as a source of quality, innovation, and service, despite that fact that Dr. Nichols ended his active role at the institute when he sold it in 1994, some seven years ago. Such is the deep impact he left upon the laboratory industry.

For that reason, I believe it is useful to review the accomplishments of Dr. Nichols. The marketplace for reference and esoteric testing today was greatly stimulated and shaped by his activities at Nichols Institute.

The ways in which Nichols Institute grew and evolved still have much to teach us today about lab and pathology management. In reviewing the business story of Nichols Institute, I will use the recollections of individuals who worked at Nichols Institute during its earliest days.

The personal experiences of these individuals speak most accurately to how and why Nichols Institute grew and became a business role model for reference and esoteric testing. As well, these personal insights into the character of Dr. Nichols also provide clarity about his personality and beliefs.

Fascinating Story

The story of Nichols Institute has many interesting facets. An endocrinologist by training, Dr. Nichols was a research fellow at the UCLA Harbor Medical Center in San Pedro, California. As the 1960s ended, he developed a specialty test for thyroid testing and recognized that it had important clinical potential. To commercialize and offer this test, in 1973 Dr. Nichols organized the laboratory company that became Nichols Institute. Its first home was upstairs over a bait shop in San Pedro. The building was owned by Mary Pickford, the silent screen movie star. Like all new businesses, the institute had its share of growing pains. One person who started his 23-year career at the company was Ref Lindmark, now living in Seattle, Washington.

“I was hired on Valentine’s Day, February 14, 1974,” stated Lindmark. “I was to be the courier for San Francisco, and I was the first employee to be based outside of Southern California. At that time, I believe there were between 30 and 50 employees. Courier services were active only in the Los Angeles area, Santa Barbara, and San Diego.

“When I started in 1974, we offered only 13 tests,” he continued. “These were mostly thyroid assays. Compared to lab operations today, things were very basic. That’s because most lab testing was per- formed locally. So all the methods and infrastructure to collect specimens, transport them, report results, and keep track of things had to be invented as Nichols Institute expanded its business.”

In fact, the system used by Lindmark to shuttle specimens and test reports back and forth between San Francisco and San Pedro was state-of-the-art at the time. “My transport container was a Coleman ice chest. In the evenings, I would load in the specimens, stuff it to the top with dry ice, drive it down to the Greyhound bus station and load it on a bus heading south. Each morning I would return to the bus station and pick up another ice chest coming from the laboratory. This was filled with lab test reports, which I would distribute during the day.”

Those were pioneering times for the entire commercial lab industry. Lindmark watched, first-hand, as the business grew and Dr. Nichol’s success began to shape the competitive marketplace for lab testing. “His enthusiasm and commitment touched everyone around him,” recalled Lind-mark. “He built this business exclusively on specialty testing.

“Until Dr. Nichols came along, commercial labs offered only routine testing,” he added. “That changed once clinicians had the opportunity to order specialty lab tests from us. His success in the marketplace forced Bio-Sciences Lab (acquired in the 1980s by SmithKline Beecham Clinical Laboratories), then one of the dominant commercial lab companies in Los Angeles, to add specialty tests to their existing menu of routine tests.”

Steady Revenue Growth

Dr. Nichols’ fledgling lab company was growing steadily. By 1979, sales were a respectable $3 million per year. In 1980, Nichols Institute moved to San Juan Capistrano. The move was timely, because the company was about to expand at an accelerated rate.

Bernie Ness, once Vice President of Sales at Nichols Institute and now President of B.J. Ness & Associates, based in Toledo, Ohio, was joining the company just prior to the move from San Pedro. “It was June 1979 when I took a job as a sales rep at Nichols Institute,” stated Ness. “At that time, there were six other sales reps. What set me apart from them was that I was the first individual hired in sales at Nichols who did not have an advanced scientific degree, like an M.S or Ph.D.!”

Clinical Integrity, not Marketing Hype

Academic Associates were involved in all aspects of the business, not just research. In any given week, you would see the Academic Associate in the lab refining the technology, but also working in finance or marketing alongside the staff to bring the test to the local clinician. Many times the Reference Lab ate the cost of a new brochure when, as the academic associate reviewed it, they would say, “Hey, this is too much hype. This isn’t the clinical truth!”

It was this type of integrity that Wayne Patterson, PhD, observed while serving as president of Nichols Institute Laboratories from 1980 until 1991. “It all came from Dr. Nichols,” Patterson said, “and was emulated by the people closest to him—that strong commitment to the patient —that the right test and the right result were what was best, and that the profit would follow.” This ideal was quickly assimilated by the staff and even clients of the “Institute.”

Lots of Ph.D.s In Sales

Even in the 1970s it was unusual to have a sales force comprised exclusively of Ph.D.s. However, that reflected Dr. Nichols’ philosophy about the importance of science. His lab company was deeply rooted in the application of medical science to diagnostic testing. This is one reason why, throughout his business career, Dr. Nichols’ favored placing individuals with advanced scientific degrees in positions of executive authority.

“Not surprisingly, all these sales reps with technical degrees were spending most of their time prospecting researchers and selling testing that supported the researchers’ studies and projects,” said Ness. “Dr. Nichols had assembled a sales team of degreed people who knew this market well.

“From a sales perspective, however, this was a relatively limited market and it sometimes took months for a new study to actually begin,” he recalled. “Since I was new with the company, I needed to find clients that could generate testing on a faster basis, so I started calling on hospitals.”

“I discovered there were two tests I could sell at just about any hospital,” Ness explained. “The tests were the estrogen and progesterone receptors for breast cancer and the parathyroid hormone test (PTH). At the time, there was only one other laboratory in the United States offering these tests and its turnaround time was 40 days. That gave us a real competitive advantage.”

Ness had enough success selling to hospitals that Nichols Institute began shifting its marketing emphasis away from the research segment. “We learned that hospitals were eager to find a quality source for reference and esoteric testing,” commented Ness. “And hospitals certainly represented a large potential market.”

Rapid Growth to $50 Million

During the decade of the 1980s, Nichols Institute would prove that hospital demand for reference and esoteric testing was larger than anyone imagined. At the time of the move to San Juan Capistrano in 1980, Nichols Institute was generating annual revenues of $3 million. In 1985 it successfully placed an initial public offering (IPO), making it a public company. By 1988, revenues at Nichols Institute had reached $50 million.

By 1988, another significant characteristic of Albert Nichols had revealed itself—Dr. Nichols was doggedly unwilling to give up control of his company. Even after taking his company public and raising debt capital that would eventually total $100 million, he retained 80% control over the class of stock entitled to vote.

Sustained Growth

Maybe he accomplished this because investors were impressed by his company’s success. As well, the growth of Nichols Institute was matched by other labs competing in this market. Mayo Medical Laboratories was growing in a similar fashion. Also, by mid-decade, ARUP Laboratories, Inc. was formed specifically to compete for reference and esoteric testing. Most of the public lab companies were establishing reference and esoteric testing lab divisions during this decade as well.

Certainly the financial success of the Nichols Institute business model in the late 1970s and early 1980s had attracted the attention of competitors. But the next chapter in the story of Nichols Institute would take the lab company in a different direction.

Flush with cash from its public stock offering, during the second half of the 1980s, Nichols Institute went on a buying spree. It acquired commercial laboratory operations in California, Texas, Missouri, Nebraska, South Dakota, and Oregon.

The first laboratory acquired at the start of this buying spree was Bio-Diagnostics Laboratories (BDL), based in Torrance, California. At the time, Alfred Lui, M.D. was President and CEO. “Because of our proximity to Wilmington and San Pedro, most of our pathologists knew Dr. Nichols personally,” he said. “The business relationship with Nichols Institute was expected to benefit both parties.”

Under the arrangement, Nichols Institute had a 51% interest in BDL. “It would not be an understatement to say that Dr. Nichols felt frustrated that he was not able to exercise full control over the venture,” noted Dr. Lui. “It didn’t take too long before both sides agreed to end this business arrangement and BDL was repurchased by its original owners.”

Academic Associates Concept

Dr. Lui’s professional relationship with Dr. Nichols and Nichols Institute continued for many more years. “Al Nichols was brilliant in creating a business out of specialty testing,” observed Dr. Lui. “His creation of ‘Academic Associates’ was a master-stroke. He really grasped the opportunities that could come from bridging knowledge created in research laboratories with the needs of clinicians.”

The experience of the BDL investment did trigger one significant change in Dr. Nichols’ lab acquisition strategy. From this date forward, he only purchased laboratories where he would have 100% control.

It is also important to remember that this was a time when all the public lab companies were competing to buy local independent commercial labs. Such companies as SmithKline Beecham Clin Labs, MetPath, Damon, National Health, Roche Bio- medical, and Allied were racing each other to buy the best independent labs.

Lab Consolidation Wave

As long-time readers of THE DARK REPORT know very well, this wave of commercial lab consolidation ended badly for all these companies. By 1995, only MetPath, SmithKline Clinical Labs, and Laboratory Corporation of America (formed when Roche bought National Health) remained. All three companies endured several years of financial disaster before regaining profitability.

But that gets us ahead of the story. By 1990, Nichols Institute was approaching $300 million in annual revenues. But only about $80 million of that came from the reference and esoteric testing division. The regional routine testing labs were actually the largest revenue generator for the company. These labs offered routine testing to physicians’ offices and were generating about $170 million per year in revenues for Nichols Institute. Divisions selling diagnostic kits and toxicology testing rounded out the balance of Nichols’ revenue base.

1990 would be the high water mark for Nichols Institute as an independent public company. It was profitable, its share price was up, and the future looked good. But in Dallas, the seeds of Nichols’ downfall were sprouting.

As the 1990s started, Dr. Nichols was spending almost $20 million to construct a state-of-the-art laboratory in Dallas, Texas. Approximately 25 hospitals had indicated that they would feed specimens into this lab. It had the potential to be a financial home run for everyone involved. But success was not to be.

Dallas Lab Lost Money

As this laboratory opened for business, it did not receive specimens as expected from hospitals in the region. Losses mounted and by 1991 Nichols Institute posted a significant loss. Things unfolded rapidly after 1991.

With $100 million in debt, the creditors of Nichols Institute became increasingly restless with the company’s dismal financial performance in 1992 and 1993. These creditors began to exert substantial pressure on Dr. Nichols and his executive team. Share values had declined from a high approaching $20 to under $5 by 1994.

The direct cause of Nichols’ sale to MetPath, announced in May 1994, was the fact that the Institute could not make a sizable pay down of principal on its credit line that spring. It was the classic business squeeze: adequate assets but inadequate amounts of liquid cash.

As a result of MetPath’s purchase, Dr. Nichols received around $40 million for his ownership interest in Nichols Institute. MetPath took title to the company in September 1994 and Dr. Nichols became a director on the board of MetPath’s Nichols Institute Division. Within a year or so, Dr. Nichols resigned from these duties and began to pursue professional and personal interests that were primarily outside the diagnostic testing industry.

Institute’s Mission Described by “QRISP”

ALTHOUGH HIGHLY-RESPECTED for the technical quality of his lab’s testing, Dr. Nichol’s did not overlook the importance of profits to the success of his laboratory company. He believed that profit would drive the highest level of innovation and service, to the benefit of patients.

“Everybody who worked at Nichols Institute knew the acronym ‘QRISP’ and what it stood for,” said Ref Lindmark, a 24-year employee at the institute. It was Dr. Nichols’ concise mission statement and he wanted everyone connected with his company to live up to the full meaning of these concepts.”

The QRISP acronym breaks down as follows:

Q is for QUALITY
R is for RESPECT
I is for INNOVATION
S is for SERVICE
P is for Profits

“Profits were included because Dr. Nichols wanted everyone to know that profits were necessary if Nichols Institute was to have the resources necessary to fulfill its clinical mission and develop more diagnostic assays that would help clinicians and patients,” explained Lindmark.

Strong Development Team

Although the ending for Dr. Nichols was bittersweet—he retired with ample money, but was not in control of his company—his legacy is unquestioned. The esoteric and reference testing industry which flourishes today is based, in large part, on the business model pioneered by Dr. Nichols.

As an individual, his energy and charisma touched and inspired many individuals who remain active and influential in the lab industry today. I am one of those, having been hired by Nichols Institute in 1991. As a businessman, he pointed the lab testing industry toward the boundary where research can contribute to improved patient care.

If he had a mantra, it was patient care. Lindmark recalls it succinctly, “Dr. Nichols continually said that ‘if you focus on the patient and do what’s best for the patient, you’ll be right 99% of the time.’ As a physician, he was committed to improving medicine and patient care.”

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