Pathology PPM Attempts Public Offering Of Shares

A bigger AmeriPath, Inc. intends to become first publicly traded pathology company

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CEO SUMMARY: AmeriPath’s efforts to become a public company make it the most visible management experiment in the pathology world today. Already considered controversial by many pathologists, should AmeriPath successfully pull off its proposed initial public stock offering, it will assume a leadership position in the industry which cannot be ignored.

PATHOLOGY MAY SOON have its first “800 pound gorilla.” AmeriPath, Inc. of Riviera Beach, Florida announced its intent to sell common stock to the public.

A successful offering would make AmeriPath the first public pathology-based physician practice management (PPM) company. With consolidated annual revenues of $122 million, no other pathology operation approaches AmeriPath’s size and reach. Including three pending acquisitions, the company will operate 15 practices in seven states. There are 115 pathologists employed by, or affiliated with, these practices.

It is AmeriPath’s second attempt at an initial public offering (IPO) this year. In March, AmeriPath was forced to withdraw its proposed stock offering because of bad market conditions and terms offered by the underwriting syndicate which the company deemed unacceptable.

AmeriPath proposes to sell five million shares of common stock at a price between $13.00 and $15.00 per share. This would raise between $65 and $75 million. Proceeds will be used primarily to retire existing debt. Upon completion of the offering, there will be 16.5 million shares of common stock outstanding.

Company officials refuse comment on any aspect of the transaction, stating that SEC “gun jumping” rules preclude them from making statements which could be construed as promoting the company during the time prior to a public equity offering. Despite this “news blackout,” AmeriPath executives will be exhibiting at the ASCP/CAP convention in Philadelphia next week.

When AmeriPath began to aggressively pursue the acquisition of large pathology practices, the company assumed a high profile in the pathology industry. This high profile was intensified because AmeriPath was willing to pay unprecedented prices for the pathology practices it wanted to acquire.

Last March, as AmeriPath first attempted to tap public equity markets, it boasted annual revenues of $82 million. This represented aggregate sales from AmeriPath’s 12 pathology practices. To buy those practices, AmeriPath spent approximately $144.5 million. This number includes the maximum payout if all acquired pathology practices meet their contingency profit objectives during the next five years.

A look at how AmeriPath paid the sellers is revealing. To acquire those $82 million in annual revenues, AmeriPath paid the selling pathologists $78.6 million in cash, $4.5 million in subordinated notes and $24.8 million in shares of common stock, with a weighted price of $6.41 per share. A maximum of $36.5 million would be paid to the selling pathologists during the next five years if their practices achieve designated profitability targets.

Three Pending Acquisitions

Apparently pathologists involved in the three pending acquisitions will do even better. Total annual revenues at the three practices are $35.3 million. AmeriPath will pay $58.9 million in cash plus another $19.2 million in common stock. Contingency payments could total an additional $25.7 million if these three pathology practices hit their profit objectives during the next five years.

The three pending acquisitions are: Unipath, Inc. of Dallas, Texas; Colab, Inc. of Indianapolis, Indiana; and Sturgis, Henderson & Proctor of Jackson, Mississippi.

AmeriPath’s aggressive acquisition of pathology practices during 1996 and 1997 was an essential element in the firm’s business strategy. AmeriPath was specifically formed with the help of venture capitalists to become a public company. In order to achieve that, AmeriPath created a flow of revenue and operating profits by buying existing pathology practices.

AmeriPath’s strategy is to acquire pathology practices, integrate them into existing operations, squeeze out cost savings, then try to expand the acquired pathology practice’s business through local sales and marketing efforts.

In fact, AmeriPath’s greatest challenge will be to increase the revenue base of individual pathology practices on a year-by-year basis. Competition for new business among local pathology practices is still a rare phenomena.

Growth By Acquisition

On the other hand, growth by acquisition is much simpler. This was the same strategy followed by the national clinical laboratories during the 1986-1994 period. Because growth by acquisition is easier to accomplish, THE DARK REPORT expects AmeriPath to continue buying up pathology practices.

Because AmeriPath is the first pathology PPM to reach a large size and attempt a public offering, it will probably enjoy a position of strength for the next two years. But many pathologists question whether AmeriPath can sustain this market strength in the future.

Critics point out that pathology is still a local service, based on personal relationships. They question if a national company can effectively support its pathologists at the local level. This has certainly been a weakness with the national laboratories. In many cities, they often are viewed as inflexible and offering less service than a regional independent laboratory serving the same city.

Within the pathology world, AmeriPath’s business activities will trigger a cascade of marketplace changes. (See related story, pages 6-8.) The way pathology services are organized, delivered and sold will be irrevocably changed by the activities of AmeriPath and its emerging competitors.

The most direct competitors to AmeriPath are American Pathology Resources and Physician Solutions, both based in Nashville. Both companies seek to create a pathology-based PPM. Yet neither company has advanced as far, nor grown as fast, as AmeriPath.

There are other interesting business models developing as well. Probably the most successful of these is Pathology Service Associates (PSA) of Florence, South Carolina. Instead of a PPM, PSA is organized as a provider network of pathology practices. Its goal is to preserve local pathology practice autonomy, support pathology at the point of care and still bid for statewide managed care contracts.

With these competitors joining the marketplace, AmeriPath will have to work hard to maintain its early advantages. But by getting a head start, they have positioned themselves ahead in the race. AmeriPath’s hardest work will come after the public offering. This is when the company must demonstrate its economic viability in the marketplace.

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