Successful Specialty IPO Can Open Door for Others

Several laboratory companies waiting for the right moment to offer their stock

CEO SUMMARY: It’s no secret that a handful of laboratory companies would like to complete an initial public offering (IPO). If Specialty Labs’ public offering goes well, expect these lab companies to bring their own stock offerings to the public equity markets. As the number of public lab companies increases, the competitive marketplace for laboratory services will undergo fundamental change.

ARE SOARING STOCK PRICES for public lab companies going to trigger a stock market “gold rush” in the clinical lab industry?

If Specialty Laboratories, Inc. does well with its $86.3 million initial public offering (IPO), then several other clinical laboratory and pathology companies will be encouraged to offer their own IPOs.

More Lab-Related IPOs

THE DARK REPORT was first to predict that a wave of laboratory-related IPOs would soon occur during the next 18 months. The obvious candidates with stated ambi- tions to go public are Dynacare, Inc. (Toronto, Ontario), Esoterix, Inc. (Austin, Texas), and AML-APL, Inc., the laboratory company made up of American Medical Laboratories, Inc. (AML) in Chantilly, Virginia and Associated Pathologists Laboratories, Inc. (APL).

One common denominator among these companies is their primary emphasis on clinical lab testing. At these labs, the major source of revenues is laboratory testing rather than anatomic pathology procedures.

The other category of lab companies which are likely candidates for an IPO are the pathology practice management companies (PPM). During 1997 and 1998, venture capitalists funded several pathology PPMs with the specific objective that, at some future point, the company would become public.

The most likely candidates in this group are InformDX, Inc. (Nashville—formed by the recent merger of Pathology Consultants of America and PathSOURCE), USLabs, Inc. (Irvine), and Pathology Partners, Inc. (Dallas).

Premature Time For An IPO

For those familiar with the business activities of these pathology PPMs, it might seem premature for them to attempt an IPO. However, the impressive financial performance of DIANON Systems, Inc. and IMPATH, Inc. may be creating an IPO window of opportunity. Investor money would support another pathology company IPO. Armed with the funds from a successful IPO, any of these pathology PPMs would have the additional capital needed to move faster in the healthcare marketplace. Each could swiftly carve out market share and build the customer base necessary to maintain a profitable business in anatomic pathology services.

First Lab IPO Since 1995

When Specialty Labs’ $86.3 million IPO is funded, it will become the first clinical laboratory to accomplish this feat since UroCor, Inc. did it in 1996. Pathology-based IMPATH and AmeriPath, Inc. did their IPOs in 1996 and 1997, respectively.

Owners of the handful of sizeable independent commercial labs still operating in the United States will also benefit from increased Wall Street interest in the clinical lab industry.

In recent months, investment groups have begun to approach many of these independent labs to open acquisition discussions. Their business plan is to roll up enough individual labs to create a sizeable company which would eventually sell its stock to the public. If that business plan sounds familiar, it is. It’s precisely what fueled the laboratory consolidation tidal wave of 1985-1994.

Next Generation Of Lab IPOs

However, there is something more significant about this next generation of lab-and pathology-based IPOs. As the number of publicly-traded lab companies increases, there will be a corresponding increase in the management sophistication of the clinical laboratory industry and pathology profession.

The reason is simple. As various lab companies go public, they acquire an investor base of sophisticated business people. These investors will insist that both clinical labs and pathology companies operate with the same types of professional corporate management techniques used by such well-run companies as Intel and Motorola.

Public lab companies will need to demonstrate sustained growth in revenues. They will also have to continuously lower costs while simultaneously improving product quality and customer service.

The new generation of managers and administrators in the nation’s hospital labs, commercial labs, and pathology group practices may have lots of technical education (M.D.s, Ph.D.s, etc.), but they will have equal competence in skills such as business administration, finance, marketing, sales, and operations.

For this reason, THE DARK REPORT believes that the next crop of lab companies which go public will have a beneficial impact on both the clinical lab industry and the pathology profession. The era of modern corporate management is about to supercede the remnants of our fading “cottage industry” situation that still lingers from the 1980s-vintage healthcare system.

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