AmeriPath Successfully Completes Public Offering

Stock of first pathology-based PPM now trades on NASDAQ Market as “PATH"?

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CEO SUMMARY: AmeriPath’s new status as a public company gives it even greater visibility than before. As the first public pathology-based physician practice management firm, AmeriPath has the potential to introduce many innovations into the business organization of pathology services. With the IPO behind it, AmeriPath now faces hard work.

WEDNESDAY, OCTOBER 22 was the milestone day for AmeriPath, Inc. of Riviera Beach, Florida. The completion of its initial public offering (IPO) made AmeriPath the first public pathology-based physician practice management (PPM) company.

AmeriPath sold 5.6 million shares of common stock at a price of $16.00 per share. Investor demand for shares was strong enough that underwriters exercised their over-allotment for 600,000 additional shares of common stock. Observers think that the timing of Ameripath’s IPO worked in the company’s favor.

AmeriPath’s offering raised $89.6 million. The original target in the offering prospectus was to get $13-$15.00 per share. Since AmeriPath sold shares at $16.00, the company generated more proceeds from the IPO than expected. Trading in the stock commenced Wednesday on the NASDAQ exchange under the symbol “PATH.” Since Wednesday, shares have traded between $18.00 and $21.00.

Another month must go by before company officials will speak publicly. According to SEC rules, the “quiet period” continues for 24 days after the IPO date. During this time, company officials must refrain from public comments which could be considered as boosting the stock.

AmeriPath accumulated a sizable revenue base during the last 24 months. Annual revenues currently top $122 million. The company acquired 15 separate pathology practices in seven states. There are 127 pathologists affiliated with AmeriPath, along with 951 employees. AmeriPath operates 14 out-patient laboratories and has contracts with 72 hospitals.

Detailed coverage of AmeriPath’s business plan and activities was presented in earlier issues of THE DARK REPORT. (See TDR, January 27, 1997 and September 15, 1997.) With the completion of AmeriPath’s IPO, the hard work begins. Company executives must demonstrate that a pathology-based PPM can add value in the managed care marketplace.

The company’s pioneering efforts to restructure pathology into a more effective and profitable business model will provide worthwhile lessons in new management concepts.

AmeriPath will pursue three basic management strategies. The first strategy is to grow through acquisition. AmeriPath can increase its quarterly earnings by buying additional pathology practices and “folding them in.” If they do it successfully, it can boost the share price. Higher share prices can then enable them to use stock to buy additional pathology practices.

Acquisition Tactic

This acquisition tactic was used by Columbia/HCA and MedPartners. Both companies rapidly grew to billion-dollar size through acquisition. Both companies used the appreciating value of stock to partially pay for acquisitions.

AmeriPath’s second strategy to watch is how the company increases revenue from year-to-year for its individual pathology practices. Wall Street calls this “same store” growth. For example, if AmeriPath owns a $5 million pathology practice, can AmeriPath increase those revenues by 10% in each of the next three years? To do so would require revenues to climb to $6.7 million in year three.

This strategy is intriguing for a simple reason. Historically, few pathology practices ever grew at such rates over a multi-year period. Should AmeriPath accomplish this, they will have done something seldom seen before in the pathology profession.

The third strategy is to consolidate operations and administration, thus cutting costs, improving productivity and realizing economies of scale. Like “same store” growth, this is unexplored territory within the pathology profession. No company has yet tried to put 127 pathologists into one business model. No example exists where pathology operations were consolidated and supported across a multi-state environment.

AmeriPath would defend its ability to deliver on these three strategies by pointing out the experience of other physician practice management companies, such as MedPartners, PhyCor, American Oncology Resources and others. These companies have demonstrated that it is possible to profitably implement all three strategies in a PPM setting.

Hospital-Based Specialty

However, unlike these other PPMs, AmeriPath must deal with pathology, a medical specialty that is primarily hospital-based. This provides some unique business challenges, and is why AmeriPath’s successes and setbacks will be instructive. The company’s pioneering efforts to restructure pathology into more effective and profitable business forms will provide worthwhile lessons in new management concepts.

Regardless of AmeriPath’s future, its successful IPO last week represents a milestone event in pathology. The pathology marketplace is about to evolve in radical new ways.

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