Is it Early-90s “Deja Vu” For Today’s Lab Industry?

As the decade of the 1990s opened, it was a roaring stock market for lab companies

Share on facebook
Share on twitter
Share on linkedin
Share on print
Share on email

CEO SUMMARY: Stock prices for laboratory and pathology companies have skyrocketed since the new decade of the 2000s dawned on January 1. Is investor optimism warranted by the opportunities ahead in diagnostic testing? Or will history repeat itself if the continuing evolution of American healthcare proves as financially unhealthy to independent lab and pathology firms as it did in the 1990s?

TO USE A FAMOUS MALAPROPISM, attributed to baseball’s beloved Yogi Berra, it may be “deja vu all over again” in the clinical laboratory industry!

Lab executives and pathologists with long memories will remember the opening years of the last decade as boom years for the clinical laboratory industry. It was similar to the rampant optimism investors now shower on public lab companies in this first year of the new decade.

As the 1990s dawned, public lab companies were posting record profits. Investors loved the performance of such stocks as Allied Clinical Laboratories, Damon Laboratories, National Health Laboratories, and Nichols Institute.

Strong Profit Contributions

Laboratories which were divisions of larger corporations were making strong contributions to the revenues and earnings of their parent. These included MetPath (Corning Corporation), SmithKline Beecham Clinical Laboratories (SmithKline PLC), and Roche Biomedical Laboratories (Roche Holdings).

Boomtime in the laboratory industry encouraged additional lab companies to go public. MetWest was formed and became Unilab. Universal Standard Medical Laboratories, Physician Clinical Laboratories, and Meris Laboratories all tapped public equity markets with successful IPOS in the first years of the 1990s.

Flush Times in Early 1990s

However, flush times in the early 1990s didn’t last. By the mid-1990s, declining reimbursement from Medicare and the growing impact of capitated managed care contracts combined to seriously erode the revenue base of commercial laboratories.

Throughout most of the 1990s, Medicare fraud and abuse investigations led to multi-million dollar settlements by almost every large laboratory company. HCFA’s establishment of onerous laboratory compliance programs in 1997 added further financial burdens to the beleaguered clinical laboratory industry.

The results were remarkable. By 1999, not one of the laboratories listed above had survived in its original corporate form or with its original investors intact! The lab industry’s go-go years of 1990-1994 collapsed into financial turmoil and widespread restructuring for the remainder of the decade.

Handful Of Surviving Labs

As 1999 ended, the independent commercial lab industry consisted of the two blood brothers plus a comparative handful of surviving, independent regional lab companies. There was similar consolidation and contraction in the hospital lab segment. Expansion of integrated hospital networks during the last half of the 1990s meant that consolidated hospital core lab organizations were now the dominant business form for hospital lab testing.

Now we have the birth of a new decade. Circumstances seem eerily similar to 1990. In the first year of the 2000 decade, Wall Street investors are bidding up share prices of public laboratory and pathology companies. As the table in the sidebar illustrates, share price increases for the year are spectacular for this class of companies.

The results were remarkable. By 1999, not one of the laboratories listed above had survived in its original corporate form or with its original investors intact!

The growing interest by investors in the lab industry is precisely what motivated Specialty Laboratories, Inc. to announce its initial public offering (IPO). As noted elsewhere in this issue, THE DARK REPORT predicts that, if Specialty Lab’s IPO is successful during the next 18 months a number of other private laboratory and pathology companies will attempt their own IPOs.

If professional investors decide to shovel significant amounts of capital into the laboratory industry and pathology profession, there will be profound changes. Such money always comes with accountability for how it is used to generate revenue growth and increased earnings.

That is why the question about “birth of the decade” deja vu is relevant. Many aspects of the lab testing marketplace remain challenging and formidable. THE DARK REPORT believes that accomplishments of public lab companies in 1999 and 2000 have more to do with improved management execution than with an “easy” lab marketplace.

Notwithstanding that fact, it is clear that changing circumstances in the laboratory marketplace are creating new profit opportunities for those lab organizations willing to pursue them.

10-02-00 image 4

Comments

Leave a Reply

;

You are reading premium content from The Dark Report, your primary resource for running an efficient and profitable laboratory.

Get Unlimited Access to The Dark Report absolutely FREE!

You have read 0 of 1 of your complimentary articles this month

Privacy Policy: We will never share your personal information.