AmeriPath To Go Public, Files SEC Registration

Florida firm seeks to raise $71.7 million by selling 36% of the company’s shares

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CEO SUMMARY: AmeriPath’s Initial Public Offering will make it the first publicly traded physician practice management company specializing in pathology. It represents a unique attempt to restructure traditional pathology practices to meet the needs of managed healthcare organizations.

PATHOLOGY ENTERS A NEW ERA when AmeriPath, Inc. completes its proposed Initial Public Offering (IPO) during the next 30 days.

With the acquisition of several pathology practices in the last quarter of 1996, Florida-based AmeriPath now represents $82 million in annual revenue. Currently there are 12 pathology practices owned by or affiliated with the AmeriPath organization. The company intends to acquire more. Future acquisitions will be funded by money raised from the IPO.

The public offering seeks to raise $71.7 million. A total of 6.2 million shares will be available. Of that, 500,000 shares are currently owned by Summit Partners, the venture capital group in Boston which helped launch AmeriPath.

AmeriPath’s arrival as a public company will force pathologists to compare the professional practice model represented by Ameripath against current forms of pathology organizations. Because of the ground-breaking nature of AmeriPath, it is already a much discussed development in the pathology world.

During the last two years, AmeriPath used cash, notes and stock to acquire 12 practices. Most are located in Florida, but others are in Texas, Ohio, Alabama and Kentucky. (See complete list of pathology practices here.) From company documents, it appears that the cash portion of these purchases was financed with credit extended by a bank syndicate led by First National Bank of Boston.

AmeriPath sprang from a company called American Laboratory Associates (ALA) in Fort Lauderdale, Florida. Owners of ALA were Evangelos Poulos, M.D., Michael Demaray, M.D. and A.P. Kowalczyk, M.D. Together with Thomas Roberts and E. Roe Stamps of Summit Partners, they put together the concept of a pathology-based physician practice management company in 1994.

James New was brought aboard as President in January 1996. AmeriPath itself was formed as a holding company in February 1996. At that time, only two pathology practices were owned by the company.

During the balance of 1996, AmeriPath’s key executives worked swiftly. Ten more pathology practices were added between June 1996 and November 1996.

As of year end, AmeriPath counted 81 pathologists in the system, with 77 board certified, and 4 board eligible in anatomic pathology. From this group, 39 are also board certified in the sub- specialties of dermatopathology, hematopathology or cytopathology.

AmeriPath provides pathology services through 12 outpatient pathology laboratories owned and operated by the company, 46 hospital inpatient laboratories and 17 outpatient surgery centers.

“There are some interesting aspects to Ameripath,” stated a consultant who advises pathology practices on business and financial strategies. “As I compare the revenue base and number of pathologists to the industry norm, I see that AmeriPath is generating about $82 million in annual revenues from their 81 pathologists.

“This means that AmeriPath has pathologists who generate unusually high volumes of revenue, since they average about $1 million per pathologist. That top line number is commiserate with what a dermatopathologist typically generates. I would estimate that the national average is probably close to $500,000 in revenue per pathologist per year.”

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Business Perspective

“I consider this significant from a business perspective,” he continued, “because I would want to learn more about how pathologists at AmeriPath will sustain an average revenue of $1 million per pathologist per year. If they can successfully maintain that over several years, such productivity would definitely give them a competitive advantage.”

AmeriPath’s business plan is ambitious. The company intends to evolve into a national provider of pathology services. It will accomplish this by developing regional pathology networks. Because it already has seven pathology practices in Florida, the first regional network will be in that state.

Funding Acquisitions

Further acquisitions of pathology practices will probably continue to be funded with a combination of borrowed cash (from the credit line) and stock. Although AmeriPath expects to net $71.7 million from the sale, virtually all that money is earmarked. It will retire notes, pay accrued dividends on preferred stock and pay down $59.6 million of the outstanding $81.7 million in bank debt.

In fact, after the offering, the bal- ance sheet projects that AmeriPath will have only $4 million in cash and $13.3 million in accounts receivable. Total assets project to be $143 mil- lion. The bulk of assets are goodwill, at $58.5 million, and “identifiable intangibles” of $59.9 million. “Identifiable intangible assets” relate to hospital contracts, physician referral lists and laboratory contracts obtained in the recent acquisitions.

Columbia Contracts

Another interesting aspect to AmeriPath is the number of contracts with hospitals owned by Columbia/HCA Healthcare Corporation. Of the 46 hospital contracts held by the subsidiaries, 20 are with Columbia hospitals. On the pro forma statement, those Columbia hospital contracts account for 24.5% of AmeriPath’s net revenues.

Columbia represents both a threat and an opportunity for AmeriPath. The threat comes from Columbia’s ability to move the business away from AmeriPath, thus depriving the company of up to one quarter of its revenues.

The opportunity comes from the existing relationship with Columbia hospitals. That may make it easier for AmeriPath to increase the number of pathology contracts it holds with Columbia.

No Easy Road

There is no easy road for AmeriPath to follow. Although the concept of a physician practice management company has proved successful, there has never been a publicity traded company organized around pathology.

Because of this fact, AmeriPath will have a high profile in the pathologist community. Pathologists throughout the country are keenly interested in what happens to AmeriPath. Should AmeriPath prove successful, expect many competitors.

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