Non-Pathologists Altering U.S. Laboratory Industry

Lack of entrepreneurial pathologists holds back the entire profession

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CEO SUMMARY: It’s an interesting contradiction. On one hand, most pathologists enthusiastically recognize the value that diagnostic testing services provide to the healthcare community. On the other hand, too often it is non-laboratorians who provide the investment capital and entrepreneurial effort required to build the laboratory organization capable of delivering these diagnostic services.

IS THE APPARENT PAUCITY of pathologist-entrepreneurs causing the
pathology profession to lose control over its destiny?

This is an important question for the pathology profession. During the 1980s, virtually all laboratory companies had been founded by pathologists, and pathologists held major leadership and management roles. Pathologist domination of the lab testing industry gave them control over their destiny and significant influence in legislative and regulatory activities that affected their profession.

Dwindling Path Influence

That situation changed during the 1990s. The number of influential laboratory companies owned and controlled by pathologists dwindled. Not surprisingly, as this trend played out, it diminished the pathology profession’s collective clout and influence with legislators, regulators, and the investment banking community.

During this fresh decade of the 2000s, the diminished role of pathologists in the laboratory testing marketplace is apparent. A handful of public laboratory and anatomic pathology companies dominate the headlines.

Public Labs Set Agenda

It is their agenda which too often frames the debate about legislation affecting diagnostic technology and reimbursement. It is their missteps and inappropriate actions which often subject the entire lab industry to greater scrutiny and criticism.

The counterweight to this cluster of public lab and anatomic pathology
companies continues to be the 3,500 or so local pathology group practices. However, the small size and parochial interests of these private pathology groups means that they have relatively little influence in some of the most important debates that affect the pathology profession.

In the 1980s, there was a sizeable middle-market between the big public lab companies and the private pathology groups. That’s because larger numbers of pathologists were then willing to assume entrepreneurial risk to expand their business. As their labs grew and became strong regional competitors, so also did their influence and leadership in legislative and regulatory matters affecting the pathology profession.

Entrepreneurial Vacuum

The story of Esoterix, Inc. illustrates how non-pathologists have filled the entrepreneurial vacuum. As explained in the sidebar at right, it was two professional investors, doing their homework, who recognized the value of esoteric testing as a profitable business opportunity. Starting in 1995, they began acquiring specialty testing labs and have continued to provide working capital to boost the growth of their acquired labs.

At Quest Diagnostics Incorporated and Laboratory Corporation of America, pathologist-founders Paul Brown, M.D. and James B. Powell, M.D., respectively, are long gone. The perspective these pathologists brought to these companies, as significant owners and high-level executives, has also vanished and has not been replaced in a comparable manner.

It is a similar story at AmeriPath and IMPATH. Pathologists and lab people initially played a key role in the launch of these public companies. But as the years passed, the ownership interest and executive-level involvement of pathologists was diminished.

Pathologists Own ARUP

In contrast, ARUP Laboratories of Salt Lake City, Utah represents an example of a significant pathologist-owned and pathologist-led national lab company. As such, it brings a different business philosophy to the marketplace than its non-pathologist owned competitors.

This difference in philosophy is recognized across the hospital lab marketplace. Even where hospital labs do not use ARUP for send-out testing, lab directors and pathologists generally have positive things to say about ARUP’s business philosophy versus its competitors. The belief is that pathologist-entrepreneurs understand the needs of clinicians better than non-technically trained laboratory executives.

It is also widely-recognized that ARUP is a profitable, growing, and dynamic company. Thus, with ARUP as a prominent example, why are so few pathologists willing to invest in their own business? Why are there fewer pathologist-entrepreneurs in this decade, unlike the 1970s and 1980s?

Lack Of Support & Nurture

On one level, it is a failure of the pathology profession’s associations and trade groups to recognize, support, and nurture pathologists who might assume an entrepreneurial role. At one time, the American Pathology Foundation (APF) was considered to be the best place for a business-minded pathologist to network and gain support for new pathology-based business concepts. But in recent years, few new pathology ventures have been associated with that group.

Pathology Service Associates(PSA), the national umbrella for state pathology business networks, was a promising source of proactive support for business-minded pathologists. But even PSA has yet to demonstrate that it can act as an incubator for launching promising business concepts centered on pathology services.

It is time that the pathology profession recognizes the high value that pathologist-entrepreneurs bring. To prevent its fate from resting in the hands of non-pathologist businessmen, leadership of pathology professional associations should develop active programs to identify and nurture the dwindling number of those aspiring pathologist entrepreneurs among us today.

Professional Investors Spot Opportunity In New Esoteric Testing Technologies

BACK IN 1995, IT WAS NOT PATHOLOGISTS and trained laboratorians who created Esoterix, Inc. as a vehicle to offer complex esoteric testing to the healthcare community.

“Esoterix is the brainchild of two brothers, Darryl and Grant Behrman,” stated James A. McClintic, President and CEO of Esoterix. “They are professional investors and operate Behrman Capital. Prior to Esoterix, they had little experience with the lab testing business.

“The Behrmans were looking for high quality investment opportunities in three sectors: healthcare, services, and technology,” explained McClintic. “They wanted to invest in businesses which emphasized cutting-edge science. In healthcare, this search quickly brought them to laboratory testing.

“As they toured laboratories around the country, the Behrman Brothers were impressed with both the science and the market potential of Cytometry Associates (Nashville, Tennessee) and Endocrine Sciences (Woodland Hills, California),” he continued. “They came up with a business plan that would preserve and boost the science offered by these types of specialty lab companies while creating a different kind of laboratory business organization.”

Independent Lab Operation

Under this original business plan, the Behrmans envisioned acquiring successful specialty testing lab companies. Post acquisition, the lab company would retain its independence and would receive the capital and management support it needed to build its core business. Esoterix’ corporate structure would remain lean and would function primarily to seek out and acquire additional specialty laboratories. The goal was to build size and scale—then go public.

“Under this business plan, Esoterix did eight more acquisitions,” recalled McClintic. “But in 1999, revenues fell short of the projections needed to support an IPO (initial public offering). That’s what led to a reassessment of our business plan in early 2000.

“In the strategic planning which followed, it was recognized that obvious synergies had not been harvested. For example, sending seven sales forces into the same client was counterproductive,” he added. “It was also obvious that advances in information technology and the Internet could now allow us to support a “virtual laboratory organization.”

Different Business Model

“With the financial support of the Behrmans, Esoterix altered its business model,” McClintic said. “Complex and high quality esoteric testing would remain its emphasis. Acquisition opportunities would still be pursued. But Esoterix would now centralize operational functions and build, from scratch, an IT system capable of allowing its network of specialty labs to function as a single entity, regardless of the geographical location of that lab.”

In the three years since that strategic planning exercise, Behrman Capital has supported the investment of $50 million into Esoterix. It sees the potential of diagnostic testing and is willing to judiciously provide capital necessary to build and improve its laboratory organization.

The story of how Esoterix was created illustrates a simple truth about the pathology profession. Too often it is outsiders who see the opportunities to build a flourishing business from laboratory testing. Many pathologists, despite their ardent belief that lab testing has immense value to clinicians and the healthcare system, are reticent to invest their own money in their own business. That leaves the door open for non-laboratorians to come in and capture that value.

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