Two Labs Complete IPOs, AML May be Next in Line

Recent difficulties in the stock market proved challenging for new lab stocks

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CEO SUMMARY: During the year 2000, investors liked the performance of clinical labs. When stock market woes surfaced this fall, it was not enough to dampen investor interest in Dynacare and Specialty Laboratories. Both companies funded their initial public stock offering in a difficult market. Still on deck is American Medical Laboratories. It has yet to schedule a closing date for its initial public offering (IPO).

DURING THE PAST 60 DAYS, both Dynacare, Inc. and Specialty Laboratories, Inc. successfully funded their respective IPOs (initial public offering).

With the expiration of the SEC-mandated “quiet period,” executives from both laboratories and their underwriters can now comment publicly. As it turned out, the timing of the two lab IPOs coincided with a troubled and declining stock market.

“In recent months, the stock market became an unfriendly environment for many companies hoping to place an IPO,” stated Financial Analyst William B. (Bill) Bonello of USBancorp Piper Jaffray. Bonello’s firm participated in the underwriting of both stock offerings. Bonello is a specialist in the clinical laboratory and diagnostic testing market segments.

“It is one measure of success that Dynacare and Specialty Labs were able to fund their offerings despite the troubled financial markets,” explained Bonello. “There were quite a few companies which attempted an IPO during the same period and were forced to withdraw their offering because of lack of investor interest.

“From that perspective, the financial community looked favorably at both lab companies,” he added. “That’s not surprising, since clinical laboratory stocks were hot during most of 2000.”

However, the market did not give the two lab companies carte blanche. Dynacare had hoped to raise as much as $89 million, selling shares at $13. Instead, it raised $50 million by selling five million shares at $10. Specialty Laboratories did better. It raised $92 million, against its target of $86.3 million. It sold 5.75 million shares at a price of $16 per share.

There is definite excitement in the professional investment community about the future of esoteric and genetic testing.

“There’s a number of reasons why the market responded somewhat differently to the two lab companies,” Bonello noted. “First, investors found the business niche at Specialty Labs to be much more compelling. Esoteric and genetic testing is a hot topic on Wall Street. You could say that investor excitement about the as yet unproven, but highly anticipated future for esoteric testing worked in favor of Specialty Laboratories.

“Second, Dynacare is in a ‘show me’ situation with investors. Its routine testing yields a lower revenue per accession than an esoteric laboratory. Investors want to see Dynacare’s management team deliver the revenue growth and operating profits promised in its business plan,” said Bonello.

AML May Be Next

Now that Dynacare and Specialty Laboratories have completed their IPOs, only American Medical Laboratories (AML) remains “in the queue.” It filed its registration statement in September. But no closing date has been scheduled. Company officials and underwriters involved in the AML offering are under “quiet period” rules and cannot comment publicly.

However, indications are that AML intends to proceed with its IPO. It has posted strong growth in revenues in recent years, which is always a plus with investors. Some investment professionals speculate that AML may be responding to specific points raised by regulators at the SEC. Once these regulatory hurdles are addressed, it can proceed with its IPO.

In researching this story, THE DARK REPORT made an interesting conclusion. There is definite excitement in the professional investment community about the future of esoteric and genetic testing. That accounts for the stronger interest shown in Specialty Lab’s stock offering as compared to Dynacare’s stock offering.

In fact, as the following story reveals, executives at Dynacare apparently made this same observation during their “road show” with the investment community. Dynacare’s activities in esoteric and reference testing generated the strongest interest from professional investors. For that reason, Dynacare’s strategic business plan now places a strong emphasis on expanding its esoteric and reference testing services.

Strong Revenue Growth

This should be no surprise to laboratorians. The promise and profit potential of pharmacogenomics is getting lots of hype with the professional investment community. Any lab company with a credible business plan involving esoteric and/or genetic testing will find a warm reception on Wall Street.

Meanwhile, both Dynacare and Specialty Laboratories have successfully funded their respective war chests. Each company will be spending money to expand its presence in the lab testing marketplace. This will certainly intensify competition among the growing number of national reference laboratories.

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