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Make money on a blood-sucking vampire
Give your portfolio a shot in the arm with this imminent healthcare IPO
by Siu-Yee Ng
To be quite frank, I dread going to see my doctor. Especially when there’s a needle involved. Even the bravest men squirm at the sight of a needle. Trust me. I know.
I never gave much thought to why my doctor sends me to another clinic to draw blood. Ideally, I would just like to get it over with. But there I was, driving to the clinic, and I figured that I was OK and didn’t need any vampires sucking my blood. So I just decided not to go. (No, you shouldn’t do this. Always listen to your doctor…)
Many hospitals and independent clinical laboratories don’t do esoteric testing because of the complexity and high cost of performing these tests in-house.
Physicians use esoteric tests to obtain information not provided by routine tests. They are performed less frequently than routine tests and require specialized equipment, highly trained staff, and may involve significant non-automated processes.
In 1998, the esoteric testing market represented approximately US$2.0 billion. With the advances in medical technology and the accelerating pace of new genetic-based testing, esoteric tests will continue to grow. They generally command a higher price and are more profitable.
Blood from a stone
Now think about the market opportunity for a company like American Medical Laboratories, Inc., which provides esoteric laboratory testing services. Lab testing is critical for detecting, diagnosing, evaluating, monitoring and treating diseases and other medical conditions. This creates significant market demand for clinical laboratory testing services.
In 1998 alone, over 5.6 billion tests were performed in the United States. According to industry sources, more than 70% of all healthcare decisions and spending are impacted by clinical lab test results.
According to Washington G-2 Reports, the U.S. clinical laboratory industry generated US$31.8 billion in revenues in 1999, which represented approximately 3% of total healthcare expenditures. And clinical lab spending can only get bigger, what with the general aging of the U.S. population, the growth in new, highly specialized tests, including genetic testing, and increased testing by employers for substance abuse.
100% satisfaction
Hospital-affiliated laboratories, physician-owned laboratories and independent clinical laboratories perform these tests. The clinical laboratory testing market is highly fragmented, with over 165,000 federally regulated labs, 8,900 of which are hospital-based clinical laboratories and 4,900 of which are independent clinical laboratories.
Washington G-2 Reports estimates that in 1998, 63% of all laboratory testing revenue was derived from hospital-based labs, 26% from independent clinical labs and the remaining 11% from physician-owned labs.
Because of cost and complexity of performing esoteric testing, hospitals and independent clinical laboratories will continue to use outside testing labs.
American Medical Laboratories markets esoteric testing services to hospitals and independent clinical laboratories nationwide. As of September 15, 2000, AML served over 380 hospitals and 160 independent clinical laboratories in 31 states.
With two main laboratories located in metropolitan Washington, DC and Las Vegas, Nevada, AML is the leading provider of comprehensive testing services in each of those markets. Customers are satisfied with AML’s services. AML had a 99% client retention rate from January 1999 to June 2000.
Fluid suckers
AML performs tests on body fluids such as blood and urine, as well as on tissue and other samples, such as human cells. AML not only performs esoteric tests but also toxicology and routine tests. It’s a one-stop lab.
Toxicology tests are used to discover and identify chemical and drug substances present in the body’s metabolism. More employers are requiring toxicology tests to lower their overall healthcare costs and improve their workplace environment by maintaining a healthy, drug-free work force.
According to Washington G-2 Reports, approximately 70% of U.S. firms test employees or job applicants for illegal drug use. The toxicology testing market in the U.S. has been estimated at US$750 million per year. Toxicology tests are often classified as a subcategory of esoteric tests.
Physicians use routine tests in general patient care to establish or support a diagnosis and to monitor disease. These tests typically measure the functionality of organs such as the kidney, heart, liver and thyroid. Routine tests are conducted 24 hours a day, 365 days a year, with results often provided electronically within 24 hours of testing.
Another satisfied customer
The highly competitive esoteric clinical laboratory business is served by several national laboratories, as well as many niche and regional organizations. Competitors include large independent labs like Quest Diagnostics (DGX:NYSE) and Laboratory Corporation of America (LH:NYSE). These big boys hold market caps of US$5.01 billion and US$4.59 billion respectively.
AML also competes with niche labs like Specialty Laboratories (SP:NYSE), Impath (IMPH:NASDAQ) and Athena Diagnostics, as well as laboratories affiliated with educational institutions such as Mayo Medical Laboratories and Associated Regional University Pathologists.
In the toxicology testing business, AML competes with Quest Diagnostics, Laboratory Corporation of America, Psychemedics and PharmChem. The routine laboratory testing business is highly fragmented and also very competitive.
AML, however, has something else going for it. Customer satisfaction. Its clients are happy with its superior service, excellent quality and rapid turnaround time.
Adding value
In October 1999, AML acquired APL Healthcare Group, the leading laboratory services provider in Nevada. Since this acquisition, AML has seen significant growth.
Net revenue increased to US$129.9 million for the six months ended June 30, 2000, up from US$58.6 million for the same period of 1999, an increase of US$71.3 million or 121.7%.
During 2000, AML successfully attracted new customers while maintaining a very high retention rate for existing customers.
AML’s clients include Kaiser Permanente, Consorta Catholic Health Resource Partners, Health Trust Purchasing Group, and Massachusetts General Hospital.
AML is performing more than 330,000 total tests per week. There are a couple of things I don’t like about AML. I usually hate to see the proceeds from the IPO used to repay debt. But considering the high percentage rate on the loans, it may be a good idea for AML to pay down a portion of its debt.
AML is also undergoing an IRS audit relating to its 1997 tax year. There’s been no verdict yet, but AML believes any penalty wouldn’t be material to its bottom line. We’ll have to see.
But think about the potential of American Medical Laboratories: DNA and RNA genetic testing is increasing. Screening for sexually transmitted diseases is a necessity. Forensic toxicology procedures like drug and alcohol tests are becoming a common requirement. Routine tests like pap smears, pregnancy tests, blood chemistry tests, and HIV screenings will continue. American Medical Laboratories is in a high demand market.
Keep an eye out for this IPO. But don’t worry if you can’t get in at the offer. There’s more and more opportunity now to pick up solid IPOs in the aftermarket.
According to the SEC filing, AML plans to raise US$115 million in its IPO. The proposed ticker symbol is AMLS. The underwriters are Credit Suisse First Boston, Banc of America Securities LLC, and First Union Securities, Inc. A date has not been set.
For more information, contact AML, 14225 Newbrook Drive, Chantilly, VA 20153, tel. 703-802-6900, website: www.aml.com.
Siu-Yee Ng is the editor of IPO Trader, an IPO alert service that helps readers profit on IPOs and, more importantly, the IPO Aftermarket. Click here to find out how you can put Siu-Yee's expertise and extensive contacts to work for your portfolio.
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