AD PathLabs Is Closed, Assets & Clients Are Sold

Local pathology laboratory picks up pieces, but considers the transaction as fraught with risk

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CEOSUMMARY: AD PathLabs, Inc. was a regional anatomic pathology company built around a unique business model: It would provide technical AP services to local hospitals and other clients and allow referring physicians to perform the professional services on the cases they referred to AD PathLabs. After four years of operations, AD PathLabs closed its doors and investors liquidated the company.

IT WAS A FASCINATING EXPERIMENT. AD PathLabs, Inc. was launched in 2001 as a regional pathology company that would provide anatomic pathology (AP) technical services to hospitals and other clients in the Greater Los Angeles area.

However, in the waning days of 2005, venture capitalists pulled the plug on the struggling lab company. Unable to find a buyer for the going business, the owners of AD PathLabs sold the client list and assets to Pathology, Inc., an independent anatomic pathology laboratory based in Torrance, California.

“We’ve approached this with great caution,” stated Alfred Lui, M.D., pathologist and President of Pathology, Inc. “Although the evidence shows that a national or regional anatomic pathology laboratory can convince referring physicians to use its services, it may not be as profitable a business model as some have initially assumed.”

Pathology, Inc. announced in November 2005 that it had “assumed” the pathology laboratory services of AD PathLabs. “AD PathLabs provided inpatient and outpatient technical services ranging from basic to esoteric anatomic pathology,” stated Lui. “They were in several lines of business that were complementary to ours. That’s the major reason for our interest in the client list and assets we gained.”

Service Levels Were Good

What Lui doesn’t say is what caused AD PathLabs to fail. “Service levels and product quality were very good,” stated Lui. “It was not a question of poor performance in the technical operation of the laboratory and the work it delivered to its client hospitals and referring pathologists.”

AD PathLabs was the creation of Charles Madden. He founded the company and served as its President and CEO until investors replaced him in the final years of AD PathLab’s business life. Madden had worked with Michael Danzi at the venture capital-funded company that became US Labs, Inc.

Taking a cue from the business evolution of Danzi’s national AP company, Madden decided to create a regional version and began developing that business concept in 1999. He attracted some investors and then began to look for customers.

What gave AD Pathlabs the critical mass to launch operations was a contract with Catholic Healthcare West (CHW) to provide AP technical services to six of its hospitals. AD PathLabs’ corporate offices were in Newport Beach, California and its laboratory was located in El Monte, California, a city central to the CHW hospitals.

Technical Service Hub

“From its central lab, AD PathLabs provided pathology technical services for local hospitals while continuing to use the professional services of pathologists based in these hospitals,” observed Lui. “The idea was that this would permit the pathologists to remain independent. Beside routine services, it could provide them with esoteric services from a local laboratory, allowing them to provide greater value and faster turnaround time to referring physicians.”

In February 2003, AD PathLabs received third-round funding of $8.9 million from venture capital companies, including Pacific Joint Ventures, Blue Chip Venture Company, Forrest Binkley & Brown Capital Partners, existing angel investors, and management.

At the time, AD PathLabs issued a press release trumpeting four “proven” success components to its business model: 1) reduced costs for the hospital, 2) improved turnaround time, 3) enhanced pathologist-referring physician relationships; and, 4) increased income for the local pathologist.

In early 2003, AD PathLabs was serving 30 hospital clients in Southern California, including its exclusive relationship with Catholic Healthcare West. one of the area’s largest health systems. Even though the 14 month-old company was attracting significant numbers of specimens from referring physicians, it could not support its operational costs.

Not Covering Its Costs

Informed sources tell THE DARK REPORT that, even after four years of operation, AD PathLabs was incurring losses at a rate of $50,000 per month and that the company never had a profitable month. Sources familiar with AD PathLabs and the Southern California market for lab testing say that the young company failed to gain traction under Madden’s leadership. It never attracted enough new clients to offset monthly expenses.

THE DARK REPORT is unclear whether the failure of AD PathLabs is due to a flawed business model—that of offering only technical pathology services—or simply poor execution of the business plan. THE DARK REPORT visited AD PathLab’s laboratory during 2003, but did not write a story about this new pathology company because we had reservations about its business prospects.

For the pathology profession, there are interesting implications from the failure of AD PathLabs. These will be examined in the pages which follow. AD PathLabs represents another example of a pathology company which was able to attract a critical mass of specimens, but could not earn the profits necessary to sustain a healthy business over the long haul.

Assuming this to be true, then Pathology, Inc. is likely to be challenged as it tries to make something of the AD PathLabs’ client list and assets it now has in its possession.


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