R. Lewis Dark: Management Execution Makes A Difference

There's plenty of hooroar and excitement about skyrocketing stock prices for several public lab and pathology companies in 2000! But this crusty old curmudgeon has been around the investment industry too long to accept Wall Street's new-found enthusiasm for clinical laboratories as definitive proof of the lab industry's financial turnaround.

For example, it's exciting to see the stock of Quest Diagnostics Incorporated blast through the roof, jumping from $23 in October 1999 to as high as $141 on September , 2000. But do soaring stock prices of labs represent a true shift in the fundamental financial picture for clinical laboratories? I think not. Let me explain.

Within the clinical laboratory segment, reimbursement continues to be parsimonious. Utilization of lab test by physicians is coming under tighter scrutiny. Technology to enable point-of-care and near-patient testing is steadily approaching a point where the quality of test results and the economics of the instruments make it feasible, even desirable, to decentralize such tests from the core laboratory. So, from these perspectives, a multi-year, fast-growth profit curve from performing routine lab tests is not likely.

Within the anatomic pathology (AP) segment, I believe the sustained financial successes of DIANON Systems, Inc. and IMPATH, Inc. cannot be attributed to the fundamentally different market for AP services. Rather, I think the success of these companies is primarily dependent on their willingness to adopt corporate management techniques from non-healthcare industries and apply them to anatomic pathology. For example, unlike most pathology group practices, DIANON and IMPATH fund a well-managed sales and marketing program that generates big increases in specimens and revenues year after year.

Similarly, I believe much of the recent operating profit gains at the two blood brothers resulted from improvements in their management systems and management execution. That's why I consider it premature for Wall Street to characterize the entire clinical lab industry and the pathology profession as"hot profit opportunities." The healthcare system which supports these businesses is still undergoing radical change. Profit gains in certain lab and pathology firms are more likely attibutable to their shift away from"cottage industry" management styles in favor of Fortune 100 corporate management methods.

Bill Bonello Sees Opportunities in Diagnostic Services Companies
He explains why professional investors have increased interest in lab testing & anatomic pathology

CEO Summary: With the clinical laboratory industry now enjoying growing interest by professional investors, The Dark Report traveled to New York City to meet with financial analyst William B. Bonello, of U S Bancorp piper Jaffray. Bonello co-authored a just-released overview of what he calls the "diagnostic services industry." He is bullish in the future prospects for both clinical laboratories and anatomic pathology companies. In this interview, Bonello explains why fundamentals in the lab industry are providing new opportunities for lab companies to boost revenues and earnings.

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Special Labs Prepares for Public Stock Offering
National reference lab hopes to raise up to $86.3 million by selling its stock

CEO SUMMARY: Stock prices for public lab companies zoomed upwards through 2000. For this reason, executives at Specialty Laboratories, Inc. believe it is an auspicious time for their laboratory to bring an initial public offering (IPO) to market. Company officials recently filed a stock registration document with the SEC which proviedes new insights about the internal workings of this fast-growing laboratory.

Successful Specialty IPO Can Open Door for Others
Several laboratory companies waiting for the right moment to offer their stock

It's no secret that a handful of laboratory companies would like to complete an ititial public offering (IPS). If Specialty Labs' public offering goes well, expect these lab companies to bring their own stock offerings to the public equity markets. As the number of public lab companies increases, the competitive marketplace for laboratory services will undergo fundamental change.

Is it Early-90s "Deja Vu" For Today's Lab Industry?
As the decade of the 1990s opened, it was a roaring stock market for lab companies

CEO SUMMARY: Stock prices for laboratory and pathology companies have skyrocketed since the new decade ofhte 2000s dawned on January 1. Is investor optimism warranted by the opportunities ahead in diagnostic testing? Or will history repear itself if the continuing evolution of American healthcare proves as financially unhealthy to independent lab and pathology firms as it did in the 1990s?

Piper Jaffray Illustrates "New" Paradigm for Role of Lab Tests
When Financial Analyst William B. Bonello issues his overview report on the diagnostic services industry last week...

Intelligence:
Late-Breaking Lab News
• Kaiser permanente-Southern California and Kaiser Permanente-Northern California are preparing for an ISO-9000 certification effort. Specialty Laboratories, Inc. expects to pursue ISO-9001 certification during 2001.

• ADD TO: Lab ISO-9000 Quest Diagnostics Incorporated is moving rapidely to expand the number of its lab facilities with ISO-9000 certification...

• Growing Numbers of Docs sign up for Web Services: For skeptics who say that doctors won't embrace Internet-based services, here's some interesting information. EPocrates.com now....

• TLA Retrospecitive Scheduled in London: At the upcoming EuroLab Automation program, scheduled for October 24-27 in London, there will be an interesting presentation. Titled Clinical Automation Case Studies...

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