CEO SUMMARY: Timing is everything when launching a newĀ clinical laboratory business. The March 23 grand opening ofĀ Incyte Pathologyās clinical lab came in the midst of the collapseĀ of daily routine specimen referrals. But once the lab was operational,Ā Incyte had the capability, the expertise, and the facilitiesĀ to validate and perform COVID-19 testing. Cash flow from SARS-CoV-2 tests is sustaining the operations of both Incyteās clinicalĀ laboratory business and its anatomic pathology group.
IN THE EARLY WEEKS OF THE PANDEMIC, Incyte Diagnostics of Spokane, Wash.,Ā opened a new clinical laboratory business.
It was the worst possible timing forĀ such a venture because, nationally, theĀ inflow of both clinical lab and anatomicĀ pathology specimens was falling by asĀ much as 70%. Thus, when the clinicalĀ laboratory began operating on March 23,Ā it opened to a flood of red ink.
About a year earlier, the pathologistĀ partners at Incyte had made a bold strategicĀ decision that is often the subject ofĀ rigorous debate among private pathologyĀ groups, but seldom implemented:Ā by operating a clinical laboratory, theĀ pathology group would be able to provideĀ referring physicians with the full range ofĀ diagnostic testing services.
However, while SARS-CoV-2 infectionĀ rates rose in Washington state andĀ throughout the nation, the flow of routineĀ lab specimens collapsed, causing IncyteāsĀ new clinical lab venture to operate at aĀ loss. The pathologist-owners had everyĀ reason to shut down the new business.
But at the same time, there was anĀ unexpected opportunity to bring upĀ molecular COVID-19 testing to meet theĀ rising demand for these tests. As LouisĀ Pasteur said, āFortune favors the preparedĀ mindā and Incyteās pathologist-partnersĀ were prepared to serve this new demand.
Thus, if chapter one in this story is thatĀ pathologists opened a clinical laboratoryĀ business at the worst possible time, thenĀ chapter two is that the savvy businessĀ strategy of the pathologists to build a newĀ clinical laboratory created the opportunityĀ to serve the needs of physician clientsĀ for molecular SARS-CoV-2 testing.
Cash Flow from COVID Tests
Another positive element to this storyĀ came in the form of increased cash flow asĀ the clinical lab operation began processingĀ growing volumes of molecular COVID-19Ā tests, helping Incyte Diagnostics supportĀ its anatomic pathology operations duringĀ the months when routine tissue specimenĀ volume had fallen dramatically.
āOur pathology group took what youĀ might call an unusual approach to survivingĀ the COVID-19 pandemic by openingĀ a clinical laboratory in the middleĀ of March,ā stated Patty Sipes, IncyteāsĀ CEO. She explained the strategy duringĀ a presentation at The Dark Reportās
Executive War College, a virtual event thatĀ began this summer and concluded at theĀ end of October.
āHaving a grand opening for a newĀ clinical laboratory business on March 23Ā wasnāt the best timing, but we had plannedĀ it for over a year,ā she explained. āLookingĀ back, our pathologists have come to seeĀ that the clinical lab was a two-fold opportunity.Ā It builds revenue from routine testing,Ā while it became an important sourceĀ of COVID-19 testing revenue that helpedĀ both the clinical lab and the anatomicĀ pathology (AP) operations survive thoseĀ early months of the pandemic.
āFrom an AP perspective, Incyte experiencedĀ reductions in case volume thatĀ probably were similar to that of otherĀ pathology practices,ā she reported. āWeĀ had, for example, a 62% decrease in biopsiesĀ in March. That included a 65% reductionĀ in gynecology biopsies that wereĀ related to our core business of womenāsĀ health, and a 45% reduction in biopsiesĀ that were not related to gynecology.
Reduced Specimen Referrals
āThese reductions all occurred within theĀ first few weeks of the pandemic,ā sheĀ noted. āIn March, we had cash projectionsĀ showing a decrease of about 65% over theĀ next two to three months.
āThat projection told us that weĀ needed to move quickly because Incyte isĀ similar to many other pathology groupsĀ in that our business model doesnāt callĀ for us to carry over a significant amountĀ of cash from one year to the next,ā sheĀ commented. āWe needed to ensure theĀ long-term financial viability of the practice.Ā That meant that our number one goalĀ was to keep the company operating.
āOur strategy for April and May was toĀ ensure that the business remained intact,āĀ Sipes reported. āWe wanted to avoid layoffsĀ and planned to use furloughs instead. WeĀ also instituted pay cuts for shareholders andĀ eliminated merit raises for staff.
āAt the same time, we decided to payĀ health insurance and benefit premiumsĀ for all employees and made no changes toĀ the 401k match program that we offer,āĀ she noted. āAs we responded to the deepĀ drop in cash flow, we saw the importanceĀ of bringing in new funding. Thatās whenĀ we saw that the clinical lab operationĀ could become a source of revenue.ā
Clinical Labās Opening
Coronavirus infections began rising inĀ late February and early March even as theĀ staff at Incyte worked to keep the scheduledĀ March 23 opening date for the newĀ clinical laboratory business. During thisĀ time, Sipes and the administrative teamĀ noted that the lack of normal AP volumeĀ freed up staff who would normally beĀ devoted to reviewing AP cases each day,Ā so that they could work on making theĀ clinical lab operational.
āHaving lower than normal AP volumeĀ gave us time to work out the kinksĀ we had early on with the clinical lab,ā sheĀ recounted. āOur newly-installed LIS, aĀ new billing system, and the need to interfaceĀ with EMRs all required time to bringĀ them into smooth operation.
āIn addition to fixing problems withĀ our new systems, we assigned a projectĀ manager to lead the clinical lab project,āĀ she noted. āThatās one tip I would suggestĀ to anyone else doing something like this.
āHaving a project manager made a bigĀ difference because now one person wasĀ in charge of every aspect of the venture,āĀ Sipes commented. āIt sounds basic toĀ assign a project manager, but we didnātĀ have one during the first three weeks.Ā Once we had a project manager, I wishedĀ we had done that from day one.
āDuring those three weeks withoutĀ a project manager, there were so manyĀ items to track every day that the volumeĀ of detail became overwhelming,ā sheĀ reported. āNot having someone in chargeĀ created a lot of stress for everyone.
āThe project manager helped us to addĀ structure, organization, and improvedĀ communication among those of who wereĀ working on the project,ā she said. āTheĀ project manager instituted daily huddles,Ā for example, and those made a huge differenceĀ in terms of what we needed to doĀ each day.
āAnother decision we made duringĀ this period was to hire additional staff forĀ the clinical lab operation as we hit certainĀ milestones in terms of rising volume,ā sheĀ said. āAt first, we looked for regular clinicalĀ lab clients, but the result of our salesĀ and marketing efforts was a growing flowĀ of COVID-19 test orders from physiciansĀ and hospitals. This was a welcome developmentĀ because it meant our clinical labĀ business was generating revenue.
āOur clinical lab also benefited fromĀ the fact that most of the clinical lab companiesĀ in our region had not yet gearedĀ up for molecular COVID-19 testing, yetĀ the demand was huge and urgent for theseĀ tests,ā added Sipes. āTherefore, a numberĀ of those providers sent specimens to usĀ because we were already doing COVID-19 testing. We had a window of opportunityĀ to capture market share as these otherĀ labs worked to get their own COVID-19Ā tests validated and into production.
Staffing to Meet Demand
āFor us to handle the growing numberĀ of COVID-19 specimens, we eventuallyĀ hired about 80 new staff members,ā notedĀ Sipes. āThese positions were filled as theĀ demand for testing grew over time.
āAnother lesson we learned was thatĀ we should have taken more risk withĀ supply orders by not relying on just oneĀ or two vendors,ā recounted Sipes. āWeĀ should have identified alternative sourcesĀ for supplies faster than we did.ā
Since those early days, Incyteās clinicalĀ lab operation has done COVID-19 testingĀ almost exclusively and ran 111,000Ā COVID-19 tests since March, she reported.Ā āOur pathologists have watched theĀ progress of the pandemic to identifyĀ the point at which we can begin switchingĀ over to regular clinical lab testing,āĀ commented Sipes. āThe result of doingĀ COVID-19 testing is that it strengthenedĀ Incyteās cash position.
“If we compareĀ year-over-year through August, ourĀ financial performance was better than atĀ the same time last year. In fact, we had aĀ record month for Incyte in July. By that,Ā I mean we had our highest billed chargesĀ and highest level of collected revenue.
āOur pathology group is financially stableĀ today because we have a strong cashĀ position, and our total volume this yearĀ has increased over last year,ā she added.Ā āThings are still not normal, of course.Ā Some client accounts are down over theĀ entire year by about 7%. But overall, ourĀ group is in much better shape than weĀ thought we would be last spring.ā
One Reason for Success:Ā Getting Bankersā Support
AMONG THE FIRST STEPS THAT INCYTE DIAGNOSTICS TOOK IN FEBRUARY when theĀ coronavirus pandemic hit was to have theĀ administrative team meet with officials atĀ their bank.
āAt that time, we were doing whatĀ we called āworst-case-scenarioā planning,āĀ said Incyte CEO Patty Sipes.Ā āWe wanted to know if the bank couldĀ be flexible with our credit line. We alsoĀ wanted to know about our federal fundingĀ options and how long it would takeĀ for the feds or the bank to process ourĀ request for a loan through the federalĀ Paycheck Protection Program.
āFor many years, we had workedĀ with that same bank,ā she noted. āItĀ helped the banking relationship thatĀ we were creating a new source of revenueĀ by starting a clinical lab. HavingĀ that strong banking relationship was aĀ significant benefit. During these meetingsĀ early in the pandemic, our bankersĀ assured us that we didnāt need toĀ worry about our credit line and existingĀ debt covenants.ā
Contact Patty Sipes at psipes@Incdx.com or 509-892-2700.