Specialty Laboratories, IMPATH, Roche, Abbott Laboratories, Celera Diagnostics

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SPECIALTY LABORATORIES RESTORING STABILITY IN SPECIMEN VOLUME

IT’S NO SURPRISE THAT COMPETITORS of Specialty Laboratories, Inc. have been willing to spread a variety of rumors about the laboratory company, given its well-publicized troubles with government regulators last year.

Notwithstanding these rumors, the reality at Specialty Labs is quite different. On April 24, the company, based in Santa Monica, California, released its operating results for the first quarter. There was some surprising news for those who believed the company was experiencing ongoing erosion among its customer base.

For second quarter, patient accessions totaled 616,000. Although this was lower than the 830,000 patient accessions for first quarter 2002, it was essentially level with fourth quarter’s 614,000 accessions. It is a credible sign that Specialty’s existing customers are willing to work through the company’s organizational and philosophical restructuring.

This is a particularly strong showing because of long-awaited changes at Unilab Corporation, which was once Specialty’s largest single client. During first quarter, Quest Diagnostics Incorporated completed its acquisition of Unilab and begin to shift reference work away from Specialty Labs. For Specialty to have maintained patient accessions at the same level as the previous quarter, it had to generate more specimens from existing accounts as well as gain new clients.

Revenue for first quarter was $30.3 million, compared to $43.6 million in first quarter 2002. Specialty posted a $2.4 million loss, compared to a $1.6 million profit the previous first quarter.

Frequently, companies which undergo a business crisis emerge from the turmoil leaner, better organized, and with intense focus. Although it is too early to make this conclusion about Specialty Laboratories, its public face is energized and enthusiastic.

There’s a similar case of enthusiasm within the hospital marketing division at Quest Diagnostics. That’s because executives from the American Medical Laboratories acquisition are taking a lead role in driving Quest’s sales and marketing to hospitals. During the balance of 2003, expect competition for hospital send-out testing to heat up.

IMPATH BEGINS WORKING ITS WAY THROUGH MAJOR CORPORATE MAKE-OVER

EVEN AS SPECIALTY LABORATORIES, INC. recasts its corporate operations, a similar endeavor is under way at IMPATH, Inc., the sole remaining public company that is organized to offer anatomic pathology services nationally.

IMPATH would like to characterize its internal reorganization in a favorable light, but the reality is somewhat different. Its corporate culture, responsible for impressive growth in specimen volume, revenues, and net profits throughout the 1990’s, had a number of weak spots. These finally surfaced over the past year.

One weak spot proved to be IMPATH’s CEO. Following an internal audit which uncovered various improprieties, IMPATH’s board removed Anu Said, Ph.D., the company’s long-time Chairman and CEO. IMPATH offered few specifics about the problems, other than the departing CEO would repay the company $250,000 in a matter characterized as a “lapse of corporate integrity.” (See TDR, February 10, 2003.)

Since the arrival of its new Chairman and CEO, Carter H. Eckert, IMPATH has embarked on a wide range of internal initiatives. It has closed a laboratory facility in Southern California, reduced its FTEs by 12%, and slashed capital spending.

Billing and collections is proving to be the company’s Achilles’ heel. It has already experienced considerable criticism by the investment community over the way it has reported revenue, accounts receivables, and bad debt. In response to that, and for other reasons, IMPATH shifted its accounting to a different method, effective January 1, 2002.

With an underperforming billing and collections department, the company is in a cash squeeze. It only has $1 million in cash on its balance sheet dated 3/31/03. In comparison, at the end of fourth quarter 2002, its cash totaled $5.8 million.

For first quarter, IMPATH reported accounts receivable of $69 million (against 2002 annual revenues of $191 million. Its DSO (days sales outstanding) was 154, an increase from 134 in fourth quarter 2002. To help improve this situation, the company is in the midst of installing a new laboratory information system and billing program.

The anatomic pathology marketplace has seen rapid changes. During the past 12 months, DIANON Systems was acquired by Laboratory Corporation of America, AmeriPath was acquired by Welsh, Carson, Anderson, & Stowe and taken private, and IMPATH is side-tracked with internal problems. These developments demonstrate how rapidly the competitive marketplace can change.

Hospital-based pathology groups have a window of opportunity to market their services to office-based physicians. With the national anatomic pathology companies distracted with internal management priorities, they will tend to put less attention and resources into their sales and marketing programs.

DIAGNOSTIC TESTS FOR SARS HEADING INTO THE MARKET

THERE’S A RACE TO BRING the first effective diagnostic test for the SARS virus to market. Development work is taking place at several diagnostic companies around the world.

Last week Roche Holding AG announced that it expected to launch a diagnostic test for the SARS virus by late July this year. Roche disclosed that the test would incorporate its PCR technology. It has been collecting specimens from SARS patients in Singapore, Hong Kong, and Malaysia to help in the development of its test.

Just a week earlier, microbiologists at the University of Hong Kong announced the development of a non-invasive diagnostic test for the SARS virus. It detects the presence of the coronavirus in nasal swabs or throat cultures. It looks for the RNA of the SARS virus.

Public health authorities are hopeful that an effective laboratory test for detecting the SARS virus can be developed and validated rapidly. The first tests developed to detect SARS are “home brew” and are not automated.

Abbott Laboratories has formed a consortium with Celera Diagnostics to develop a SARS tests. Unlike Roche, Abbott has not provided details about its project, nor an estimated date when it believes its test will be ready for widespread clinical use.

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