Specialty Laboratories Inc. filed for an $86 million initial public offering just as investors are bidding up clinical lab stocks.
The company, based in Santa Monica, performs tests ordered by doctors and hospitals to diagnose and monitor patients. While other clinical lab companies focus on doing routine lab work, Specialty concentrates on more complex tests that command higher prices.
Wall Street’s sudden appetite for clinical lab stocks may have played a key role in the company’s decision to sell stock after operating as a privately run business for 25 years. Rivals such as Quest Diagnostics Inc. and Laboratory Corp. of America Holdings have seen their share prices triple since April.
“That is why Specialty is going public,” said Todd Richter, an analyst who follows companies such as Quest Diagnostics for Banc of America Securities. Clinical testing, Richter added, “may be the best business in the health care services field.”
The aging of the baby boomer generation is one of several trends that favor the clinical laboratory industry. Another involves recent advances in genomics, which could lead to a slew of new tests, also known as assays, for diagnosing and evaluating patients.
Nevertheless, the clinical laboratory industry is marked by an unusual dynamic: lab companies both rely on and compete with hospitals for testing work. Specialty has sought to avoid this conflict by pursuing esoteric testing that hospitals aren’t equipped to perform while avoiding the routine testing that provides a big source of hospital revenue.
This strategy has helped increase the percentage of revenue that Specialty generates from hospitals to 51 percent during the first six months of this year, from 33 percent back in 1997.
Previously, the company got burned while relying more on revenue from clinical labs that didn’t do their own esoteric tests. Specialty officials couldn’t be reached for comment on that issue.
The company recorded revenue of $38.6 million for the second quarter of this year, up from $32.6 million during the same period in 1999. The company’s second quarter adjusted net income rose to $2.5 million in 2000 from $927,000 last year.
Specialty, which says it spends heavily on research to develop new tests, offers more than 3,500 esoteric assays to clients. However, the company relied on a core group of just 20 assays to provide about 52 percent of net revenue during the first six months of this year, according to a registration statement filed with the Securities and Exchange Commission.
Providing a further breakdown in the SEC filing, Specialty has said about 25 percent of its revenue comes from tests related to gastroenterology, with an additional 40 percent tied to infectious diseases.
James Peter, 67, has served as chairman of Specialty since founding the company in 1975. He added the title of chief executive in July 1995. Peter at present controls almost 96 percent of Specialty’s common stock, most of which is held in a family partnership.
The company is holding the stock sale in part to repay $13.7 million of debt. Specialty will devote the remaining money for expanding sales and marketing, increasing research and working capital, and for potential acquisitions.
Bloomberg News
