AML & Dynacare Next To Try a Public Offering

Two more lab companies are encouraged by surging investor interest in lab business

CEO SUMMARY: There will be plenty of competition for investors’ dollars this fall. American Medical Laboratories and Dynacare will join Specialty Laboratories in the effort to place an initial public offering (IPO). Three laboratory companies coming to market during the same period will certainly demonstrate whether professional investors truly believe that good times lie ahead for the lab industry.

DO PROFESSIONAL INVESTORS believe the commercial laboratory industry is ready for a financial turnaround? The answer to this question may be only weeks away.

It was big news when Specialty Laboratories, Inc. announced on September 12 that it would seek to raise $86.3 million through an initial public offering (IPO) of its stock. After all, this is the first clinical lab testing company to seek an IPO since UroCor, Inc.’s IPO in 1996.

Now comes news that two more private lab companies will offer stock to the public. On September 29, both American Medical Laboratories, Inc. and Dynacare, Inc. filed registration documents for their own IPOs. American Medical Laboratories, (AML) based in Chantilly, Virginia, intends to raise $115 million. Dynacare, Inc., headquartered in Toronto, Canada, seeks to raise $89 million.

The fact that three private lab companies believe they can raise as much as $290 million from investors in upcoming weeks is a major story for the laboratory industry. It might also mark the start of a new competitive cycle in both the hospital reference testing marketplace as well as the physicians’ office environment.

Lab executives and pathologists should also know that each of these three lab companies has different reasons why it wants to sell its stock to the public. There is a unique story behind each company’s decision to launch an IPO.

For example, ownership at Specialty Laboratories is concentrated in the hands of one individual. That is Chairman and CEO James B. Peter, M.D., Ph.D., who is nearing retirement age. One way to position his laboratory company for ongoing growth in the future is to adopt the corporate management structure of a public company. It also provides several options for his estate planning.

Although three lab companies are attempting an IPO at the same time, financial analysts tell THE DARK REPORT that investors are expected to support all three IPOs.

At American Medical Laboratories, the need for an IPO is very different. Back in 1997, its new owners used borrowed money to buy the lab. In 1999, they borrowed again to finance their acquisition of Associated Pathologists Laboratories. (See pages 4-6.)

In 2000 and 2001, AML must begin to make substantial principal paydowns on its outstanding debt. AML’s public stock offering will provide it with the capital it needs to restructure this debt. It will also replenish AML’s stock of working cash, allowing it to continue funding an aggressive sales program.

More Stock Liquidity

At Dynacare, there are several reasons for an IPO. Two investment groups hold large equity positions in Dynacare. They want their Dynacare stock to have more liquidity. Like AML, Dynacare also used debt to go private and fund acquisitions. It now faces the need to pay down principal and restructure its long term debt. (See pages 7-8).

Further, there is an interesting link between AML and Dynacare. A private equity investment firm, Golder Thoma Rouner & Cressy (GTCR), provided expertise and capital to help the executives of each lab company acquire their laboratory assets. Like venture capitalists, private equity investors want their portfolio companies to go public. A publicly-traded stock makes it easier for GTCR to recover its original investment and realize potential profits.

Despite the fact that several lab companies want to place their stock at the same time, financial analysts tell THE DARK REPORT that investors are expected to support all three IPOs.

“Right now there’s lots of money that can be placed in lab stocks,” explained one Wall Street Analyst. “For example, when Roche offered its Laboratory Corporation of America stock on October 16, investors quickly snapped up $430.5 million worth of LabCorp stock. That stock offering was also the largest healthcare services deal of 2000!”

Branded Esoteric Assays

In the pages which follow, THE DARK REPORT analyzes public filings made by American Medical Laboratories and Dynacare. Combine these with the analysis of Specialty Laboratories in our last intelligence briefing and an interesting picture emerges.

All three labs posted healthy gains to revenue and profits during the blackest financial years of the 1990s. Their performance is both a lesson and an example for hospital lab administrators. Effective business strategies, combined with professional laboratory management methods, can improve the financial performance of almost any hospital lab. The direction taken by these three lab companies might also be considered a call to action for all thoughtful lab executives and pathologists.

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