Management Execution Makes a Difference

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THERE’S PLENTY OF HOOROAR AND EXCITEMENT about skyrocketing stock prices for several public lab and pathology companies in 2000! But this crusty old curmudgeon has been around the investment industry too long to accept Wall Street’s new-found enthusiasm for clinical laboratories as definitive proof of the lab industry’s financial turnaround.

For example, it’s exciting to see the stock of Quest Diagnostics Incorporated blast through the roof, jumping from $23 in October 1999 to as high as $141 on September 5, 2000. But do soaring stock prices of labs represent a true shift in the fundamental financial picture for clinical laboratories? I think not. Let me explain.

Within the clinical laboratory segment, reimbursement continues to be parsimonious. Utilization of some lab tests by physicians is coming under tighter scrutiny. Technology to enable point-of-care and near-patient testing steadily approaches a point where the quality of test results and the economics of the instruments make it feasible, even desirable, to decentralize such tests from the core laboratory. So, from these perspectives, a multi-year, fast-growth profit curve from performing routine lab tests is not likely.

Within the anatomic pathology (AP) segment, I believe the sustained financial successes of DIANON Systems, Inc. and IMPATH, Inc. cannot be attributed to the fundamentally different market for AP services. Rather, I think the success of these companies is primarily dependent on their willingness to adopt corporate management techniques from non- healthcare industries and apply them to anatomic pathology. For example, unlike most pathology group practices, DIANON and IMPATH fund a well-managed sales and marketing program that generates big increases in specimens and revenues year after year.

Similarly, I believe much of the recent operating profit gains at the two blood brothers resulted from improvements in their management systems and management execution. That’s why I consider it premature for Wall Street to characterize the entire clinical lab industry and the pathology profession as “hot profit opportunities.” The healthcare system which supports these businesses is still undergoing radical change. Profit gains in certain lab and pathology firms are more likely attributable to their shift away from “cottage industry” management styles in favor of Fortune 100 corporate management methods.

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