CEO SUMMARY: It was 1995 when several specialty testing lab companies were acquired by a new company called Esoterix. Immediately the lab industry viewed Esoterix as a “put-together” lab company. However, since 2000, executives at Esoterix have invested $50 million to integrate operations, create a new informatics platform, and position the company to compete for reference and esoteric testing.
FOLLOWING ALMOST THREE YEARS of preparation, Esoterix, Inc. is ready to stake its claim as a major player in the nation’s market for reference and esoteric testing.
“Esoterix is going to surprise a lot of people in the laboratory business,” declared James A. McClintic, President and CEO of Austin, Texas-based Esoterix. “Today’s Esoterix is not a chain of specialty labs located in different cities around the country. In recent years Esoterix has developed an integrated operational structure supported by what we believe is a ‘best of class’ informatics capability.
“Timing couldn’t be better for us,” added McClintic. “Lots of relationships are changing in the hospital send out market this year as a result of new owners at American Medical Laboratories (AML), regulatory problems with Specialty Laboratories, and other marketplace events. These developments occurred just as we implemented our new informatics system and added to our sales team.”
Strategic business planning for the “new” Esoterix took place in early
2000. Since that date, Esoterix spent almost $50 million to reshape itself. “It’s unheard of for a $68 million laboratory to spend that kind of money in just three years,” explained McClintic. “It demonstrates the level of support we have from our owners.
“It’s our view that information technology is critical to the success of an esoteric testing laboratory,” he said. “That’s why we spent $30 million of the $50 million on creating an entirely new informatics system. It uses the latest software technology and allows us to do things that competing labs cannot match.”
New Business Strategy
In early 2000, as part of its strategic planning process, Esoterix decided to organize itself around three core businesses: clinical trials, oncology, and laboratory services. “Our core business was sound,” recalled McClintic, “but we weren’t getting synergy from our several specialty testing labs. We decided that it was time to centralize the operational functions of the corporation and evolve toward a different business model.
“As this occurred, it allowed our scientists to concentrate exclusively on laboratory testing. Among other things, during the past three years our test menu expanded from about 1,000 tests to over 1,600 tests. This closed gaps in our test menu and positioned us to be a full-service reference and esoteric testing resource for hospital labs and other clients,” noted McClintic.
“Because of the tremendous opportunities in clinical trials, one of the first things we did back in 2000 was create the Esoterix Center for Clinical Trials,” he continued. “We hired a sales team to market our clinical trials services and this line of business has grown rapidly. In the past 30 months, revenues from clinical trials have tripled.”
McClintic believes that information technology will be a key asset in competing for reference and esoteric testing business. “Esoterix now possesses one of the most modern and capable IT systems in the lab industry—bar none!” he declared.
“When Esoterix was first formed, it found itself with seven legacy IT
systems,” noted McClintic. “Each was a custom system and none could talk to each other. That proved to be a blessing. None of our legacy systems could support our new business plan. That is why we created, from scratch, an entirely new informatics system.
“As a multi-site laboratory doing reference testing we have unique operational needs,” he added. “We are a ‘send-out lab’s’ send-out lab. Much of our testing is done in support of very sick patients.
“One big issue in our business is logistics. How do we pick up specimens in a way that meets the needs of our client hospitals and physicians?” McClintic asked. “For example, we don’t pick up routine chemistry and hematology specimens and feed them into a high volume lab. A single pickup can involve specimens for testosterone, allergy, and bone marrow testing. We wanted our IT solution to support this type of specimen mix.
Building IT From Scratch
“Not surprisingly, we quickly recognized that a comprehensive information system was needed before we could apply work flow and process redesign techniques to all aspects of our operations. For example, logistics benefits from bar code capability. Because we had no legacy IT platforms that could be scaled up, we built one from scratch,” McClintic said.
“We’ve developed our IT system through eight different projects. One
early project was the implementation, in January 2001, of a single report, regardless of how many Esoterix lab sites performed tests for a specific patient. Our IT system offers this same uniformity for most other lab functions,” observed McClintic.
“Our IT system was also developed to support another corporate goal,” he continued. “Our promise to clients is ‘make one phone call and you’ll have your answer about specimens, billing, results, and access to scientific expertise.’ We’ve just invested in a state-of the art digital phone product that creates a single phone network serving all our labs and facilities nationwide.
“By March 31, 2003, this phone system and our IT software will insure that any caller can connect, without delay, toa lab scientist and that the scientist can swiftly access pertinent information from the computer,” said McClintic.
Even as Esoterix underwent its operational and strategic transformation during the past three years, few in the lab industry took notice.
Esoterix is also taking inspiration from two masterful laboratory pioneers who shaped the esoteric testing industry that exists today. “We’ve studied the success Dr. Al Nichols had in using academic associates to push Nichols Institute into the forefront of advanced diagnostic technology,” noted McClintic. “In a complementary way, Dr. James Peter demonstrated that branding of esoteric testing was a powerful method to establish a competitive market presence.
Science Is Trump Card
“Because we believe strong science trumps all when meeting the reference testing needs of hospitals and physicians, Esoterix is building close relationships with academic experts,” he explained. “These are marketed in a way that builds brand identity and loyalty to Esoterix. In fact, in the last 12 months, we’ve launched 12 new brands. Eight are molecular genetics assays because we recognize the growing role of molecular diagnostics.”
As Esoterix implemented its corporate reorganization and made sizeable
investments in new information technology solutions, it continued to post strong gains in revenue. “We are on track to increase revenue by 25% during 2002, following two years of 17% per year of growth,” McClintic said. “We also have a goal of increasing EBIDTA (Earnings Before Interest, Depreciation, Taxes, and Amortization) to 15% per year and we are right on top of that. We believe we are the fastest-growing lab in the United States, when measured on same-store growth from year-to-year.”
Changes Went Unnoticed
Even as Esoterix underwent its operational and strategic transformation during the past three years, few in the lab industry took notice. That may soon change. With most of its new IT capabilities in place and many operational reforms completed, Esoterix is beefing up its three sales forces (clinical trials, oncology, and laboratory services). It aims to develop a higher profile in the reference and esoteric testing market.
The most unusual part of the Esoterix story is the willingness of its
owners to invest almost $50 million over three years in a company generating annual revenues of $68 million. If informatics is a key to success in the coming age of genomic and proteomic testing, then Esoterix’s new $30 million IT platform should help it become a tougher competitor.
Armed with its $50 million “better mousetrap,” Esoterix is ready to test the market. However, as the acquisitions and regulatory actions of 2002 demonstrate, the marketplace for reference and esoteric testing continues to upset the business plans of even the most well-established reference lab competitors.