CEO SUMMARY: Timing is everything when launching a new clinical laboratory business. The March 23 grand opening of Incyte Pathology’s clinical lab came in the midst of the collapse of daily routine specimen referrals. But once the lab was operational, Incyte had the capability, the expertise, and the facilities to validate and perform COVID-19 testing. Cash flow from SARS-CoV-2 tests is sustaining the operations of both Incyte’s clinical laboratory business and its anatomic pathology group.
IN THE EARLY WEEKS OF THE PANDEMIC, Incyte Diagnostics of Spokane, Wash., opened a new clinical laboratory business.
It was the worst possible timing for such a venture because, nationally, the inflow of both clinical lab and anatomic pathology specimens was falling by as much as 70%. Thus, when the clinical laboratory began operating on March 23, it opened to a flood of red ink.
About a year earlier, the pathologist partners at Incyte had made a bold strategic decision that is often the subject of rigorous debate among private pathology groups, but seldom implemented: by operating a clinical laboratory, the pathology group would be able to provide referring physicians with the full range of diagnostic testing services.
However, while SARS-CoV-2 infection rates rose in Washington state and throughout the nation, the flow of routine lab specimens collapsed, causing Incyte’s new clinical lab venture to operate at a loss. The pathologist-owners had every reason to shut down the new business.
But at the same time, there was an unexpected opportunity to bring up molecular COVID-19 testing to meet the rising demand for these tests. As Louis Pasteur said, “Fortune favors the prepared mind” and Incyte’s pathologist-partners were prepared to serve this new demand.
Thus, if chapter one in this story is that pathologists opened a clinical laboratory business at the worst possible time, then chapter two is that the savvy business strategy of the pathologists to build a new clinical laboratory created the opportunity to serve the needs of physician clients for molecular SARS-CoV-2 testing.
Cash Flow from COVID Tests
Another positive element to this story came in the form of increased cash flow as the clinical lab operation began processing growing volumes of molecular COVID-19 tests, helping Incyte Diagnostics support its anatomic pathology operations during the months when routine tissue specimen volume had fallen dramatically.
“Our pathology group took what you might call an unusual approach to surviving the COVID-19 pandemic by opening a clinical laboratory in the middle of March,” stated Patty Sipes, Incyte’s CEO. She explained the strategy during a presentation at The Dark Report’s
Executive War College, a virtual event that began this summer and concluded at the end of October.
“Having a grand opening for a new clinical laboratory business on March 23 wasn’t the best timing, but we had planned it for over a year,” she explained. “Looking back, our pathologists have come to see that the clinical lab was a two-fold opportunity. It builds revenue from routine testing, while it became an important source of COVID-19 testing revenue that helped both the clinical lab and the anatomic pathology (AP) operations survive those early months of the pandemic.
“From an AP perspective, Incyte experienced reductions in case volume that probably were similar to that of other pathology practices,” she reported. “We had, for example, a 62% decrease in biopsies in March. That included a 65% reduction in gynecology biopsies that were related to our core business of women’s health, and a 45% reduction in biopsies that were not related to gynecology.
Reduced Specimen Referrals
“These reductions all occurred within the first few weeks of the pandemic,” she noted. “In March, we had cash projections showing a decrease of about 65% over the next two to three months.
“That projection told us that we needed to move quickly because Incyte is similar to many other pathology groups in that our business model doesn’t call for us to carry over a significant amount of cash from one year to the next,” she commented. “We needed to ensure the long-term financial viability of the practice. That meant that our number one goal was to keep the company operating.
“Our strategy for April and May was to ensure that the business remained intact,” Sipes reported. “We wanted to avoid layoffs and planned to use furloughs instead. We also instituted pay cuts for shareholders and eliminated merit raises for staff.
“At the same time, we decided to pay health insurance and benefit premiums for all employees and made no changes to the 401k match program that we offer,” she noted. “As we responded to the deep drop in cash flow, we saw the importance of bringing in new funding. That’s when we saw that the clinical lab operation could become a source of revenue.”
Clinical Lab’s Opening
Coronavirus infections began rising in late February and early March even as the staff at Incyte worked to keep the scheduled March 23 opening date for the new clinical laboratory business. During this time, Sipes and the administrative team noted that the lack of normal AP volume freed up staff who would normally be devoted to reviewing AP cases each day, so that they could work on making the clinical lab operational.
“Having lower than normal AP volume gave us time to work out the kinks we had early on with the clinical lab,” she recounted. “Our newly-installed LIS, a new billing system, and the need to interface with EMRs all required time to bring them into smooth operation.
“In addition to fixing problems with our new systems, we assigned a project manager to lead the clinical lab project,” she noted. “That’s one tip I would suggest to anyone else doing something like this.
“Having a project manager made a big difference because now one person was in charge of every aspect of the venture,” Sipes commented. “It sounds basic to assign a project manager, but we didn’t have one during the first three weeks. Once we had a project manager, I wished we had done that from day one.
“During those three weeks without a project manager, there were so many items to track every day that the volume of detail became overwhelming,” she reported. “Not having someone in charge created a lot of stress for everyone.
“The project manager helped us to add structure, organization, and improved communication among those of who were working on the project,” she said. “The project manager instituted daily huddles, for example, and those made a huge difference in terms of what we needed to do each day.
“Another decision we made during this period was to hire additional staff for the clinical lab operation as we hit certain milestones in terms of rising volume,” she said. “At first, we looked for regular clinical lab clients, but the result of our sales and marketing efforts was a growing flow of COVID-19 test orders from physicians and hospitals. This was a welcome development because it meant our clinical lab business was generating revenue.
“Our clinical lab also benefited from the fact that most of the clinical lab companies in our region had not yet geared up for molecular COVID-19 testing, yet the demand was huge and urgent for these tests,” added Sipes. “Therefore, a number of those providers sent specimens to us because we were already doing COVID-19 testing. We had a window of opportunity to capture market share as these other labs worked to get their own COVID-19 tests validated and into production.
Staffing to Meet Demand
“For us to handle the growing number of COVID-19 specimens, we eventually hired about 80 new staff members,” noted Sipes. “These positions were filled as the demand for testing grew over time.
“Another lesson we learned was that we should have taken more risk with supply orders by not relying on just one or two vendors,” recounted Sipes. “We should have identified alternative sources for supplies faster than we did.”
Since those early days, Incyte’s clinical lab operation has done COVID-19 testing almost exclusively and ran 111,000 COVID-19 tests since March, she reported. “Our pathologists have watched the progress of the pandemic to identify the point at which we can begin switching over to regular clinical lab testing,” commented Sipes. “The result of doing COVID-19 testing is that it strengthened Incyte’s cash position.
“If we compare year-over-year through August, our financial performance was better than at the same time last year. In fact, we had a record month for Incyte in July. By that, I mean we had our highest billed charges and highest level of collected revenue.
“Our pathology group is financially stable today because we have a strong cash position, and our total volume this year has increased over last year,” she added. “Things are still not normal, of course. Some client accounts are down over the entire year by about 7%. But overall, our group is in much better shape than we thought we would be last spring.”
One Reason for Success: Getting Bankers’ Support
AMONG THE FIRST STEPS THAT INCYTE DIAGNOSTICS TOOK IN FEBRUARY when the coronavirus pandemic hit was to have the administrative team meet with officials at their bank.
“At that time, we were doing what we called ‘worst-case-scenario’ planning,” said Incyte CEO Patty Sipes. “We wanted to know if the bank could be flexible with our credit line. We also wanted to know about our federal funding options and how long it would take for the feds or the bank to process our request for a loan through the federal Paycheck Protection Program.
“For many years, we had worked with that same bank,” she noted. “It helped the banking relationship that we were creating a new source of revenue by starting a clinical lab. Having that strong banking relationship was a significant benefit. During these meetings early in the pandemic, our bankers assured us that we didn’t need to worry about our credit line and existing debt covenants.”
Contact Patty Sipes at psipes@Incdx.com or 509-892-2700.