IMPATH Inc.

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IMPATH Inc.

521 W. 57th Street, 6th Floor
New York, New York 10019
U.S.A.
Telephone: (212) 698-0300
Fax: (212) 258-2137
Web site: http://www.impath.com

Public Company
Incorporated: 1988
Employees: 948
Sales: $138.2 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: IMPH
NAIC: 621511 Medical Laboratories

Based in New York City, IMPATH Inc. describes itself as a cancer information company. Originally founded to conduct cancer testing and analysis on an outsourcing basis for smaller hospitals that lacked the sophisticated technology and requisite personnel of larger institutions, IMPATH has taken advantage of a resulting database of more than 800,000 cases and other unique resources to expand its product offerings. The company’s Physician Services business employs its testing expertise to assist physicians in determining both a prognosis of various forms of cancer as well as an appropriate treatment plan and the monitoring of recovery. Although Physician Services still accounts for nearly 90 percent of the company’s revenues, IMPATH is optimistic about the potential of its Predictive Oncology unit, which uses its large database of case histories and tissue and serology archive linked to outcomes information to assist genomics, biotechnology, and pharmaceutical companies in the development of targeted drugs made possible by the mapping of the human genetic code. Through its Information Services business, IMPATH licenses software to some 600 hospitals to enable them to maintain their mandated cancer registries, while helping IMPATH to continue to populate its database of treatment and outcomes information, now totaling some two million patients.

Changes in Cancer Diagnosis in the 1980s Leading to IMPATH

For many years cancer diagnosis was based on morphology, or the size of a tumor, combined with the rate it was spreading to other organs. Diagnosis was far from precise and treatment options were quite limited. With advances in microbiology and other areas, researchers learned that cancers came in many varieties that required different approaches. An important key to providing better treatment options was the rise of immunohisto-chemistry, in which the fields of molecular biology, biochemistry, and immunology were joined together to develop a more precise understanding of tumors. In breast cancer, for instance, it was learned that a large majority of tumors contained estrogen receptors, which were receptive to the drug Tamoxifen. The necessary diagnostic expertise, however, was limited to the laboratories of teaching hospitals and other major medical centers. In 1988 two doctors who were involved in this research at New York’s Memorial Sloan-Kettering Cancer Center—Carlos Cordon-Cardo and Richard J. Cote—created IMPATH as a resource to make the new cancer tests (and, later on, new technologies) available to smaller, community-based hospitals.

The concept for IMPATH had obvious appeal. The new tests were difficult to process and required the kind of day-to-day familiarity that was simply not feasible at a smaller hospital. While a pathologist might see a certain type of cancerous tissue two or three times a year, IMPATH would see it on a regular basis and thus be more capable of providing an accurate diagnosis and prognostic assessment. Moreover, by outsourcing the tests a hospital could save on the expense of equipment and personnel. The company turned to venture capitalists to fund IMPATH, receiving $400,000 each from the Indianapolis firm of Middlewest Ventures and New York’s Salomon Brothers Venture Capital, and set up shop in the Upper East Side of Manhattan, at Third Avenue and 60th Street, focusing at first on “difficult to diagnose tumors.” As more information became available about breast cancer, and because it was often detected early and presented doctors with a number of therapeutic options, breast cancer testing and analysis soon became a major revenue stream for IMPATH. Within a year of start-up, the company was servicing some 50 hospitals in the greater New York area, analyzing about 2,000 cases a month at a cost of $300 to $325 per case. Although a test kit might cost the hospitals only $75 if purchased directly from the manufacturer, the interpretation of the results was still complicated and the analyses from IMPATH’s more experienced technicians were much more reliable. In addition, the kits had a six-month shelf life, preventing hospitals, with far less need than IMPATH, from purchasing in bulk.

IMPATH gradually began to expand outside of the New York area, as more hospitals became aware of the benefits the company had to offer through the interaction with its national salesforce. In addition to growing in geographic reach, IMPATH looked to add other types of tests, including DNA probes and new technologies such as flow cytometry, cytogenetics, FISH, and PCR. In 1990 the company had $1.63 million in revenues while posting a net loss of $720,000. The next year IMPATH generated $3.46 million in revenues and turned a negligible $8,000 profit, followed in 1992 with revenues of almost $5 million and a net profit of just $32,000. The board of directors was not satisfied with the company’s progress, however, and in 1993 the then CEO was removed in favor of Anu D. Saad, an Indian-born molecular biologist who had been teaching at Cornell University when she joined IMPATH in 1990 as scientific director, then subsequently took on the role of director of business development. Because of the expenses incurred in the change in management and the hiring of additional laboratory personnel, IMPATH lost almost $1 million in 1993, despite increasing revenues to more than $7 million, but the company was now better positioned for the future.

Opening a California Facility in 1996

In 1994 IMPATH became a consistently profitable business, earning $900,000 on revenues that grew by more than 40 percent to $10 million, the result of a general increase in case volume, as well as an increase in the company’s higher margin breast cancer prognostic analyses and tumor diagnosis. By now, IMPATH was seeing about 10 percent of all breast cancer cases in the United States. It was steadily building a database of information that would offer even more opportunities for the company. Revenues in 1995 grew by another 47 percent, exceeding $14.7 million, and net income topped $1 million. Because it had all but outstripped its operating capacity in New York and desired to be viewed by financial analysts as a national company, IMPATH opened a second facility in southern California in January 1996, a move that also helped to increase its geographic reach. Moreover, IMPATH was poised to expand on a number of fronts, from increasing its diagnostic and prognostic database through increased business with hospital groups and managed care companies, to becoming involved in the development of new cancer therapies.

To fund its ambitious plans, IMPATH made an initial public offering of stock with the help of Salomon Brothers and Prudential Securities in February 1996. IMPATH sold almost two million shares at $13 each, raising nearly $24 million. The timing was certainly propitious. Health maintenance organizations (HMOs) had become increasingly more influential in the healthcare system, and they, along with government programs such as Medicaid and Medicare, were pressing hospitals to cut costs. Outsourcing to a specialized company like IMPATH was clearly a trend that would continue to grow. Furthermore, IMPATH with its experience in some 500,000 cancer cases had the potential of saving money by more precisely providing treatment-defining information. With breast cancer, for instance, approximately 80 percent of all cases were treated with chemotherapy, yet only 20 percent actually required it. If doctors, therefore, were better able to target chemotherapy cases using IMPATH’s analysis, the cost savings could be dramatic. In addition, whereas other companies recognized the potential in the business, IMPATH’s head start placed it in a commanding position.

IMPATH continued its impressive rate of growth in 1996, increasing revenues by almost 50 percent to nearly $22 million, and almost doubling net income to $2 million. In 1997 the company began to grow externally through a series of acquisitions that expanded its product lines as well as bolstered its database of case information. A wholly owned subsidiary, IMPATH-HDC, acquired Oncogenetics, Inc., a cancer testing facility that employed molecular and cytogenetic testing, which were considered growth areas. IMPATH then acquired the oncology division of Immunodiagnostic Laboratories, Inc. In September 1997 the company acquired the GenCare Division of Bio-References Laboratories, followed by the purchase of Aeron Biotechnology, a California-based testing facility specializing in breast cancer prognostic analyses. Not only would Aeron allow IMPATH to make full use of its California facility, it added tissue samples and data from more than 56,000 analyzed cases. The company also initiated a joint venture with Medical Registry Services Inc., makers of cancer registry software products, a move that would allow IMPATH’s clients to monitor data electronically instead of manually. (A year later, IMPATH would purchase Medical Registry outright, using $13.75 million in stock.) Also during the course of 1998, IMPATH relocated from its original Manhattan offices to much larger accommodations on West 57th Street. For the year, the company again produced strong revenue and profit growth.

Company Perspectives:

IMPATH’s mission is to be the definitive, comprehensive resource for the cancer care community.

Acquiring Physician Choice in 1998

In March 1998 IMPATH made a secondary offering of common stock, selling two million shares at a price of $33.25 per share, in order to fund its continuing expansion. In addition to the Medical Registry acquisition, IMPATH paid $3.6 million for certain assets of Biologic & Immunologic Science Laboratories, Inc., a private California company that was a world leader in the field of lymph node and bone marrow micromestastases analyses, a new area for IMPATH. In September 1998 IMPATH paid $1 million in a cash and stock deal for Physician Choice, Inc., a company that offered post-clinical, pre-marketing, cost-benefit analyses to pharmaceutical and biotechnology firms that were developing new oncology drugs for the marketplace. This acquisition allowed IMPATH to better utilize its growing database of case histories. The company had collected this information as a result of years of analyzing cancer cases, but it was now large enough to provide predictive value for drugmakers. Furthermore, the scientific landscape was altering dramatically with the completion of the mapping of the human genome. Rather than relying on a chemotherapy cocktail, for instance, that killed healthy tissue along with malignant growths, researchers were gaining the ability to target drugs for more precise treatments. As a result, IMPATH’s database was valuable in a number of areas. Not only could it save drugmakers time and money by predicting outcome, it could also help determine the market size for a new drug, and even be used to recruit patients for clinical trials. Nevertheless, the privacy of patients was closely guarded, with names and Social Security numbers eliminated from profiles before use in generating reports.

In 1999 information services and specialized analyses performed for biotech and pharmaceutical companies generated only $8 million in sales out of $85 million in total revenues for the year (a significant increase over 1998 revenues of $56.3 million), but it was clearly an area that held great potential for profits for IMPATH, as well as leading to better treatments for cancer patients. One of the first major clients for the company’s new BioPharmaceutical Services division was the pioneering biotech firm Genentech, Inc., which was working on drugs to fight breast cancer. In March 1999 the two parties signed a deal to work together. Also in that year, IMPATH created a joint venture with Affiliated Physicians Network, Inc. (APN) to provide clinical research and information to the biopharmaceutical industry. APN was composed of a number of community-based cancer specialists, founded in 1996 by 75 oncologists in private practice. Later in 1999, IMPATH and APN participated in a multi-year pilot project with the National Cancer Institute to provide cancer patients with greater access to clinical trials. IMPATH also made two acquisitions in 1999 that added to its testing business and expanded its database of case histories, tissue samples, and other specimens. It paid $6.9 million in cash plus stock for BioClinical Partners, Inc., a worldwide medical research network. IMPATH also signed a $5.4 million deal to acquire Pacific Coast Reference Laboratories, Inc., a California testing business that specialized in anatomic pathology, employing immunohistochemistry and flow cytometry technologies. IMPATH, at the cost of $5 million, gained a direct involvement in the clinical trials area by investing in ILEX Oncology Services, Inc., a contract research subsidiary of Ilex Oncology Inc.

More drug manufacturers in 2000 signed deals with IMPATH for use of its data, state-of-the-art technologies, and access to its well-characterized tumor specimens linked to outcomes information, including Millennium Pharmaceuticals Inc., Bristol-Myers Squibb Co., and Glaxo Wellcome Inc. IMPATH also continued to make acquisitions, purchasing certain assets from M.I.T. Consultant, Inc., a Los Angeles histology business, as well as assets from InterScience Diagnostic Laboratories, Inc., a Brooklyn, New York, cytogenetics company. Investors took notice of this activity at IMPATH. In 2000 the price of IMPATH stock soared to a record high of $81.56 (after taking into account a two-for-one stock split effected in August 2000), and even though it settled to the $50 level, it had realized a 423 percent gain over the prior year. For the year, IMPATH increased revenues by more than 60 percent over the previous year to $138.2 million, while net income of $12.9 million reflected similar gains.

Saad was named chairman of the board in 2001 and Richard Adelson was installed as president (as well as chief operating officer, his prior position) as IMPATH continued its robust pattern of growth. It acquired the oncology clinical studies network of Innovative Clinical Solutions, Ltd., a company that specialized in clinical trial support services. It also signed an agreement with the University of Pennsylvania Cancer Center and its 28-community-hospital network to make its tissue and serology archive (GeneBank) available, and in the process add to the collection by some 4,000 specimens each year. IMPATH signed another agreement to provide services to a major biopharmaceutical firm, Abgenix, Inc. In September 2001, Fortune magazine listed IMPATH as one of the country’s fastest growing companies, and there was every reason to believe that the business would continue to prosper. With the population living longer, thus becoming more likely to have an eventual brush with cancer, the demographics favored the company’s testing services. The company, through its extensive database and unique resources, would also profit from the development of new drugs to combat cancer. As survival rates continued to improve, IMPATH also would be involved in monitoring recovered patients and patients undergoing treatment. The prospects for the company, therefore, appeared quite positive for the foreseeable future.