Dynacare Sets Sights On Raising $89 Million

Canadian-based company’s U.S. operations provide most specimen and revenue growth

CEO SUMMARY: Throughout the 1990s, Dynacare weathered the wholesale restructuring of health services in several key Canadian provinces where it operates. In the United States, it sought to build a national base of lab testing even as lab consolidation raged and capitated managed care contracts were common. Having survived in both countries, Dynacare now wants to tap the public markets for capital.

ONE APT DESCRIPTION for Toronto-based Dynacare Inc. might be the “laboratory company with the split personality.”

One one hand, Dynacare is a well-established Canadian laboratory. On the other hand, its United States operations are growing rapidly. Lab testing revenues from the U.S. now dwarf the revenues Dynacare generates from its Canadian laboratories.

Revenue Growth

It is this track record of revenue and operating profit growth in the U.S. that Dynacare believes will attract investors to its stock. Dynacare filed for its initial public offering (IPO) on October 2 and hopes to raise $89 mil- lion in the coming weeks.

Dynacare’s public filings open a revealing window on the financial performance of its American strategy. Since 1993, Dynacare has been in the United States offering to do joint ventures with hospital laboratories.

Also since 1993, Dynacare has been an aggressive buyer of independent commercial laboratories. This twin business strategy seems to work.

Dynacare’s modest start in the United States generated $46 million in revenues in 1993. But for 2000, the company will hit estimated revenues of $240 million from its U.S. laboratory ventures.

During the past five years, Dynacare’s U.S. revenues have grown at an annual compounded rate of 43%! Net earnings have shown similar growth. From a loss of $3.2 million in 1995, earnings have grown to an estimated $9 million for 2000.

In contrast, during the 1993-2000 period, Dynacare’s Canadian lab revenues fluctuated from a low of $91 million to a high of $99 million (in U.S. dollars). Financial troubles in the Canadian healthcare market make it difficult for any laboratory to achieve a fast-growth strategy. That is specifically why both Dynacare and its main Canadian rival, MDS Health Group Ltd., invaded the United States laboratory market during the 1990s.

Dynacare’s high-profile attempts to woo hospitals into laboratory joint ventures attracted much attention in the United States. After seven years of marketing efforts, Dynacare has four active joint ventures with hospitals. These include Memorial Hermann Hospital (Houston, Texas–1995), Ellis Hospital (Schenectady, New York–1997), Froedert Hospital (Milwaukee, Wisconsin–1997), and University Health System (Knoxville, Tennessee–1999).

During this same period, Dynacare purchased 17 independent laboratories. The largest of these acquisitions were Laboratory of Pathology (Seattle, Washington–1995), Louisiana Reference Laboratories (Baton Rouge, Louisiana–1997), and LabSouth (Birmingham, Alabama–2000).

Debt Restructuring

Since 1995, Dynacare has used debt to finance both its lab acquisitions and its share of start-up costs for the hospital joint ventures. Dynacare’s long term debt stands at $213 million. It must make principal reductions of $9.1 million during 2000 and 2001. Proceeds from Dynacare’s public stock offering will be used to restructure existing debt and provide additional working capital.

As with any lab company pursuing a “growth by acquisition” strategy, Dynacare has unique problems to deal with, such as multiple billing systems. During 1999, it installed three new billing systems and upgraded three more in its U.S. labs.

Days Sales Outstanding

Inevitably, days sales outstanding (DSO) climbed, reaching 93 days at the end of 1999. That number was reduced to 78 days by June 30, 2000. As a point of contrast, Dynacare’s DSO in Canada averages 40-45 days, because the government is the single payer in that healthcare system.

Also, like many of the lab companies during the 1990s which grew by acquisitions, Dynacare’s balance sheet is heavily weighted with goodwill and intangibles. In 1997, Dynacare wrote down almost $80 million for licenses and goodwill. These items resulted from changes to its lab operations in Ontario; Alberta; Cheyenne, Wyoming; and Skagit, Washington.

Strong Revenue Growth

This sizeable write-down does offset the profits earned by Dynacare during the 1990s. But on a go-forward basis, Dynacare’s sustained growth in its U.S. lab revenues and operating profits since 1997 demonstrate that there is still opportunity within the laboratory testing marketplace.

That is why, armed with additional capital from its impending public stock offering, Dynacare may be positioned to do more lab acquisitions—and create more lab joint ventures with hospitals and hospital systems in the
next few years.

Dynacare Inc. At-A-Glance

  • Headquarters: Toronto, Ontario (with corporate offices in Dallas, Texas)
  • Canadian lab operations in Ontario and Alberta:
    4 central labs
    21 rapid response labs
    139 patient service centers
  • United States lab operations (including joint ventures and owned labs in 17 states):
    19 central labs
    66 rapid response labs
    149 patient service centers
  • 13 million patient requisitions annually
  • 50 sales representatives
  • 50 customer service representatives

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