New & Stefanelli Launch Anatomic Path Venture

Aurora Diagnostics is the latest company to gain investor backing and start operations

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CEO SUMMARY: With little fanfare, Aurora Diagnostics, Inc. opened for business last summer. It states that it has already signed acquisition agreements with five different pathology groups. Former AmeriPath executives James C. New and Martin J. Stefanelli are leading Aurora Diagnostics. Handling business development activities for Aurora will be Christopher Jahnle and Kirk Rebane of Haverford Healthcare Advisors.

FOR THE TWO SENIOR EXECUTIVES of newly formed Aurora Diagnostics, LLC, it’s an opportunity to build a national anatomic pathology company a second time.

Aurora’s Chairman and CEO is James C. New, and its President and COO is Martin J. Stefanelli. Clients and long time readers of THE DARK REPORT will recall that, from 1996 through 2003, New was Chairman and CEO of AmeriPath, Inc., and Stefanelli served as COO. (See TDRs, November 4, 1996 and March 3, 2003.)

Aurora Diagnostics, with headquarters in Palm Beach Gardens, Florida, has a simple business plan. It wants to acquire pathology companies, pathology group practices, and clinical laboratories that meet specific criteria. It will then provide capital, management expertise, and advanced informatics to expand the market share of each acquired pathology laboratory in its local community. Aurora Diagnostics also expects to use certain of these laboratories to develop a national business in some types of testing.

Aurora Diagnostics became operational in July. To fund its acquisitions, it has a $300 million commitment from Summit Partners of Boston, Massachusetts, and GSO Capital Partners of New York, New York. According to New, Aurora has signed letters of intent with five different pathology companies and has already closed three of those deals.

Having learned important lessons about running an anatomic pathology company during his time leading AmeriPath, New is measured and cautious when describing what will be different about Aurora Diagnostics.

Buying AP Businesses

“Our primary objective is to acquire outreach-oriented anatomic pathology (AP) businesses,” explained New. “However, we are open to acquiring hospital-based pathology practices and potentially a clinical laboratory that has a solid business in one of several key markets where we want to compete.

“New diagnostic technology is steadily breaking down the traditional barriers between AP and the clinical laboratory,” he continued. “Going forward, we know that we will need resources in both anatomic pathology and clinical laboratory to compete effectively for test referrals from office-based physicians.”

New discussed five key strategies that will guide Aurora Diagnostics as it builds its business. “Our first strategy is to partner with the best pathology and laboratory businesses that we can find,” he observed. “Ideally, I’d like to have a roadmap that says ‘buy this practice here and buy that practice there.’ But it’s not that simple.

Acquisition Candidates

“We must find practices that want to work with us. It then takes time to complete the acquisition and build their core business,” added New. “Right now, we have no geographic constraints. However, we don’t have much interest in the far western areas. In particular, we are unlikely to acquire any groups in California.

“The second strategy is to focus our growth on the outpatient side of the business—in both anatomic and clinical pathology,” New said. “There is double- digit growth each year in the outpatient segment of the pathology business and that’s the segment we want to serve. We also believe that the outpatient market must be developed by having a specialty sales force in the field.

“At this point in our business development, we have a definite preference for dermatopathology,” stated New. “One of our goals is to develop a fairly large dermatopathology business over time.”

Aurora’s business interest in outpatient pathology services is a direct result of New’s experience at AmeriPath. “AmeriPath built a significant business in inpatient pathology,” he noted. “We became the nation’s largest company providing inpatient pathology services. But growth in this market segment can be difficult, often in the low single digits. That’s because it is linked to the growth in inpatient volume at the hospitals served by AmeriPath.”

Lean Corporate Staff

Another AmeriPath lesson inspires the third strategy Aurora will follow. “Each time we acquire a company, we will keep the assets of that company in the field,” New said. “That means the physicians, the financial people, the human resource staff, and all the sup- port people will remain at the lab sites. They will not be sitting in a large corporate office removed from the healthcare market they serve.

“We are determined to have our corporate office keep a small profile.” he continued. “The resources at corporate will be organized to support and advance the local business activities.

“Strategy number four is to hire skilled people with excellent track records for any position that we have in this company,” New added. “Ongoing consolidation in the laboratory services marketplace means that there is a sizable pool of good, skilled people who have been in the lab business for a long time. We know many of these individuals and will be tapping this experience as our business grows.

“Because the laboratory business is an information business, our fifth strategy is to devote a considerable amount of capital and resources to build a solid information technology group,” he said. “To achieve this goal, we are working with ‘best in class’ suppliers. Our goal is to develop an industry-leading IT platform that we can deliver to the small or mid-sized pathology practices that we acquire.

Upgrading IT Capability

“In our discussions with different pathology groups, most say they are investing in upgrading their IT capabilities,” observed New. “But in reality, many pathology groups are struggling with information technology. When they need to do an HL-7 interface, it’s a major event. Yet, this interface activity will be critical for any pathology group seeking to stay in business over time. To achieve this capability in the groups with whom we acquire or partner, we are developing in-house skills and platforms.

“At the same time, we have other business capabilities that many small and mid-sized pathology practices lack,” he added. “For instance, we are developing self insurance programs for both malpractice coverage and healthcare benefits. These services enhance our business and make it a more attractive place to work for pathologists and staff. We have extensive experience in these areas and we want to apply that experience.

Acquisition Criteria

“We are frequently asked if Aurora is seeking to acquire pathology groups outright and the answer is, yes,” stated New. “Primarily we are offering to acquire 100% of the assets of these businesses.

“We think an acquisition is the right thing to do,” he said. “Joint venture relationships can work in certain situations. But, by and large, when everyone is on the same team, it is easier to implement strategies that generate new specimens and revenue.

Providing Growth Capital

“In return, the selling laboratory gets our considerable expertise in this business,” New emphasized. “This expertise includes dedicated sales and marketing resources, enhanced information systems, economies of scale on insurance, and money to invest in growth, which many pathologists don’t have.

“All of these factors are important, but probably the single most useful resource for a regional laboratory is our experience at negotiating with payers in many different areas of the country,” stated New.

“Over time, as Aurora gets bigger and gains access to numerous payer networks, we believe our pathologists can be increasingly competitive in the managed care world,” New added. “Pathologists practicing in small group settings find it ever tougher to gain access to managed care patients and remain competitive. For example, it got even harder for private pathologists to operate once UnitedHealth Group announced its national contract with Laboratory Corporation of America last month. Aurora Diagnostics has the experience and the managed care relationships needed to negotiate acceptable contracts and retain access to patients.”

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Dermatopathology Groups

New, who was known for keeping his cards close to his vest while at AmeriPath, has yet to publicly identify any of the pathology groups Aurora has acquired or has under signed acquisition agreements. THE DARK REPORT speculates that at least a few of these groups will offer dermatopathology as a major pathology subspecialty.

Dermatopathology was a primary acquisition interest of New’s, particularly during AmeriPath’s early years. It is an office-based pathology subspecialty and is enjoying particularly strong growth in the volume of specimen referrals. There is ongoing, rapid growth in the number of dermatology patients, which makes this a particularly attractive segment of the AP marketplace.

Aurora Diagnostics has a number of reasons why it wants to concentrate its acquisition activities on anatomic pathology laboratories and group practices that are not hospital-based. Not the least of which is the belief of its management team that there are a significant number of acquisition candidates who possess limited strategic alternatives. Since Aurora Diagnostics has an initial capital commitment of $300 million, it certainly has the funding resources to pursue any laboratory acquisition candidate that it considers attractive.

Haverford Principals To Work With Aurora Diagnostics

THERE’S ANOTHER INTERESTING ASPECT TO THE STORY of Aurora Diagnostics, LLC, which will change the way a long-standing industry resource to local pathology group practices will serve the industry in the future. It is the involvement of Haverford Healthcare Advisors of Paoli, Pennsylvania, in the management of Aurora Diagnostics’ merger and acquisition program.

Chris Jahnle and Kirk Rebane, who are Managing Directors at Haverford Healthcare Advisors, will handle business development at Aurora. It was Jahnle and Rebane who contacted New and Stefanelli this year and suggested that a different pathology business model could succeed in the current healthcare marketplace. Jahnle and Rebane worked with New and Stefanelli to refine a business plan, obtain equity capital, and open acquisition negotiations with a number of interested pathology laboratory companies. They have founder’s shares in the business.

“Since Haverford’s principals will handle business development for Aurora, Haverford will no longer provide merger and acquisition advisory services to pathology groups in connection with pathology lab transactions,” Jahnle said. “Instead, we will leverage our contacts and experience to spread the word about what we consider to be the compelling strategic alternatives Aurora Diagnostics can offer to anatomic pathology companies. Also, Haverford will continue to provide valuation and M&A advice to independent clinical laboratory companies, and valuations to pathology practices.

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