New Esoteric Lab Firm Does Two Acquisitions

American Esoteric Laboratories, Inc. has plenty of cash and ambitious plans

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CEO SUMMARY: Armed with $70 million, American Esoteric Laboratories (AEL) wants to build a national laboratory that offers a full menu of esoteric tests. It is building a primary laboratory in Dallas, which has one of the nation’s best air transport hubs. ThromboCare Laboratories and Viral Diagnostics, both based in the Dallas area, are just the first of several acquisitions planned by the nation’s newest lab company.

TWO VETERAN LAB ENTREPRENEURS announced the birth of the nation’s newest laboratory company on April 6, 2004.

The new enterprise is American Esoteric Laboratories, Inc. (AEL). It has already acquired two specialty testing laboratories in the Dallas, Texas area and is building a new laboratory facility in the Dallas suburb of Las Colinas.

“AEL was founded to provide esoteric testing to hospitals and specialty physicians,” stated Brian Carr, Chairman and CEO of the new lab company. “We think there is room in the marketplace for a laboratory that offers a broad menu of esoteric tests, a discernably high level of service. and a commitment to support, rather than work against, a hospital’s laboratory outreach efforts. We want to build this company from a blueprint created by customers—incorporating exactly what they want (and don’t want) in a reference laboratory partner.”

Those are ambitious words, since AEL is still a fledgling business. However, certain attributes of AEL give it the potential to become a tough competitor. One attribute is ample cash upon which to build the business. Another attribute is its veteran management team, which has experience, credibility, and lots of industry connections.

If cash is king, then AEL has plenty of it. It received $70 million in funding from ABS Capital Partners and Oak Investment Partners, two respected, billion-dollar investment companies.

The management team at AEL includes some names known to long-time clients and readers of THE DARK REPORT. Chairman and CEO Brian Carr was a founder of Pathology Consultants of America, Inc. (PCA). This pathology physician practice management (PPM) company evolved into an owner of pathology labs under the name InformDX. It was acquired by AmeriPath, Inc. in 2002. (See TDR, November 13, 2000.)

Executive Team

AEL’s President and COO is Jim Billington. Billington was also a key executive at PCA, InformDX, and AmeriPath. Rounding out the initial team is William Sledge, Ph.D., Vice President of Operations and Mark Farrington, Chief Information Officer. All four of these individuals have a common history at Allied Clinical Laboratories and its acquirer, National Health Laboratories.

AEL did not waste any time putting its $70 million war chest to work. It recently acquired ThromboCare Laboratories and Viral Diagnostics. “ThromboCare specializes in coagulation testing and Viral Diagnostics offers virology and infectious disease testing,” noted Billington.

“It’s not a coincidence that both laboratories are located in the Dallas- Fort Worth Metroplex,” he added. “It has a great air transport hub for national operations. That is one reason we are building a laboratory here. Also, we have existing business relationships with a number of respected hospitals in Texas.”

“Our target markets are hospitals and specialty physicians,” explained Carr. “We want to differentiate ourselves in several ways. First, our core competency will emphasize esoteric tests which have high clinical utility and generally require a more intense support relationship between the referring clinician and the laboratory’s technical staff. We don’t plan to do any material amount of routine testing, and in fact, see that as a conflict in our mission.”

“Furthermore, we believe the growth of molecular diagnostics and the development of new technologies in esoteric testing will increase the need for clinicians to interact more actively with their laboratory professionals,” he added.

“Second, we believe ‘top quality service’ is a term often used by labs, but seldom recognized by hospitals and physicians. That is AEL’s opportunity. If we can excel at the simple things that affect the daily life of our clients, like logistics and customer service, that will differentiate AEL in a way that hospitals and physicians will notice,” Carr said.

Informatics As Trump Card

“Third, everyone recognizes that laboratories must become increasingly competent in informatics capabilities,” noted Carr. “Our goal is to develop information management systems which give us the ability to seamlessly link AEL, hospital laboratories and physicians’ offices.”

“There is a reason we think we can be better than competing labs in this area,” interjected Billington. “That’s because we get to build our information systems from scratch, using current and next-generation technology. Unlike other labs which must deal with the legacies of MUMPS and other archaic technologies, AEL is building its platforms with customized, ‘off the shelf’ software modules designed to interact efficiently with the Internet, as well as interface with the wide range of software systems found in hospitals and physicians’ offices.”

Billington noted that AEL is developing informatics solutions to support three IT strategies. “First, all of our in-house functions will be on a common platform for testing and billing,” he explained. “We don’t know of any laboratory which does this well and most labs struggle to move data between systems like LIS, billing, data storage and ultimately to the customer.

Outreach Software Solution

“Second, we are cultivating an outreach software package that would allow specialty physicians to use a single portal to order routine tests and access results from their local hospital outreach laboratory and order esoteric tests and access those results from AEL.

“The third IT strategy involves our internal capability to warehouse data and access it for management and customer service needs. The system we are developing will tie together lab test results, billing and collection data, and operational performance data. We will be able to manage the business accurately and in real time to deliver a measurably higher level of service to our clients.”

It’s an Allied Labs Reunion Centered Around Dallas

DALLAS, TEXAS WILL BE American Esoteric Laboratories’ (AEL) primary laboratory site for an interesting reason. Its current management team ran a national laboratory there more than ten years ago.

Before Allied Clinical Laboratories was acquired by National Health Laboratories (now Laboratory Corporation of America) in 1994, its national reference and esoteric laboratory was located in Dallas. At that time, the lab’s General Manager was Brian Carr. The Director of Finance was Jim Billington. But there’s more! Mark Farrington ran Allied’s corporate informatics department. Then, upon the acquisition of Allied by National Health Laboratories (NHL), William Sledge, PhD., became technical director of the operation.

“All four of us worked together in the Dallas laboratories of Allied (later NHL),” observed Carr. “Because those labs received specimens from a national network of labs, we are familiar with the Dallas air hub and all the logistical issues of Dallas from a nation-wide service perspective. We also know many of the folks still running laboratories in hospitals throughout Texas. So it is a logical place for us to launch AEL.

“Because of these professional relation- ships in the region, our initial strategy is to focus building our business in Dallas/Fort Worth and the rest of the Southwest,” he said. “Both Thrombocare and Viral Diagnostics have good clients in this same market. That gives us the opportunity to cross-sell existing clients of each lab.”

National GPO Contracts

If AEL is to succeed on a national level, it must address the issue of GPO (group purchasing organization) contracts. “Our goal is to offer esoteric testing services services through a ‘superior service channel’ that already exists today,” stated Carr. “That is already the bread-and-butter business of ThromboCare and Viral Diagnostics.

“When the referring hospital laboratory or referring specialist has a tough case or needs a fast answer, these cases come to ThromboCare and Viral Diagnostics regardless of GPO or managed care contracts. Differentiated quality and patient care issues drive the need for special expertise or a reliably fast answer,” he explained.

“That’s the type of market niche AEL is developing capabilities to serve,” added Billington. “It’s our bridge to build the business. As our test menu broadens and we develop our service network, we expect to win our share of GPO and managed care contracts.”

During the next six months, AEL will be concentrating on some basic organizational goals. First, it must finish construction of its new laboratory facility in Dallas, currently scheduled for October. Second, it must then consolidate its two existing acquisitions into the new laboratory. Third, it must acquire the additional instruments and personnel necessary to give it a broad esoteric test menu. Fourth, it must finish development and installation of its customized information software systems. That may take extra time, because software developers are notoriously optimistic in their completion deadlines.

AEL’s acquisition strategy is to seek niche esoteric labs, not just in Texas, but in all parts of the United States. “With one primary laboratory in Dallas, we anticipate developing ‘special esoteric centers’ in other locations around the country,” explained Carr. “That will be based on where high quality laboratories have already built their business base. These operations will operate under one laboratory information and billing system.”

Impact On Marketplace

Because of this strategy, THE DARK REPORT believes that AEL will have a slightly different impact on the lab marketplace than most would assume. It wants to buy niche labs doing specialty testing. This strategy has been followed by a number of lab companies in recent years, including Specialty Laboratories, DIANON Systems, and IMPATH, among others.

Each of these lab companies has acquired specialty labs doing just a few million dollars per year in sales. They bought niche labs with a solid base of clients and demonstrated expertise in a segment of esoteric testing that was positioned for growth.

In fact, specialty testing labs may be to this healthcare market cycle what the pathologist-owned, local independent laboratories were to the last healthcare cycle. During that cycle, public lab companies gobbled up independent laboratories as a primary way to grow.

In this cycle, it seems most start-up laboratories are organized around the skills and clinical interest of a physician or laboratory scientist specializing in one area of esoteric diagnostics. Once these entrepreneurs build annual revenues above two or three million dollars, they become attractive acquisition candidates.

Looking at Reference Testing Market Share

HOW BIG IS THE NATIONAL MARKET for reference and esoteric testing? Executives at American Esoteric Laboratories (AEL) were willing to share some of their analysis with THE DARK REPORT and its readers.

“In assessing the existing market, we used several methods. Each brought us close to a similar number,” stated Jim Billington, President and COO of AEL. “We accept $36 billion per year as the cumulative value of diagnostic testing done in the United States. Hospital inpatient testing accounts for roughly half that number, or $18 billion.

“We believe that a good estimate of what hospitals and office-based physicians refer out as esoteric testing is between $3 billion and $4 billion per year,” he continued. “Between them, Quest Diagnostics Incorporated and Laboratory Corporation of America probably do 50% of this type of testing. The balance of this testing is done by ARUP, Specialty Labs, Esoterix, Mayo, academic centers, and smaller, specialty niche laboratories.

“What is important about this reference and esoteric testing market segment, however, is not its size today,” observed Billington. “It’s the rate at which it is growing. Because growth rates are in double digits, reference and esoteric testing will comprise a larger proportion of all diagnostic testing than it has in past years.”

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