LabOne, Inc.

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LabOne, Inc.

10101 Renner Boulevard
Lenexa, Kansas 66219
U.S.A.
Telephone: (913) 888-1770
Fax: (913)888-0771
Web site: http://www.labone.com

Public Company
Incorporated: 1987 as Home Office Reference Laboratory
Employees: 1,625
Sales: 233.9 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: LABS
NAIC: 621511 Medical Laboratories

LabOne, Inc. is a laboratory testing and information services provider. The company operates in three main areas: risk-assessment testing for the insurance industry; clinical diagnostic testing for employers, HMOs, and physicians; and substance abuse testing for employers. LabOne receives blood, urine, and oral fluids samples from clients across the nation, conducts testing at its laboratory headquarters in Lenexa, Kansas, and sends results electronically to insurers, physicians, managed health care organizations, and employers. Through its subsidiaries, the company also underwrites requirements acquisition services, paramedical services, and claims investigation services to the insurance industry.

1970s: New Business, New Industry

LabOne was founded in 1971 by Jim Osborn and Joe Jack Merriman, two Kansas City-area businessmen. Originally called Home Office Reference Laboratory, the business was formed to provide risk-assessment testing for insurance companies who wanted to screen policy applicants. Home Office’s service was easy to use and effective. Insurance agencies sent their policy applicants to a local medical professional, who obtained a blood or urine sample. The medical professional then shipped the samples to the Home Office lab in Kansas City for testing. The lab ran tests that checked for specific disorders that might make the insurance applicant a high risk for the insurer. For example, a urine test might reveal kidney problems, or a blood test might indicate heart or liver disease. In addition, Home Office tested blood and urine for nicotine and illegal drugs—substances that would indicate health risk to the user—and for prescription drugs used to treat high blood pressure, heart disease, or diabetes—illnesses the policy applicant might have lied about having.

When Osborn and Merriman launched their business, most large insurers maintained their own labs for risk-assessment testing. Home Office Reference Laboratory essentially spawned a new industry, becoming one of the first independent testing labs in the United States. “When I started the company, it was a niche market,” Jim Osborn explained in a 1987 interview with Barrons’s magazine. “Highly specialized…. A very small, very sleepy market.”

The market did not stay small—or sleepy—for long. As large insurers recognized the value of outsourcing testing, they gradually began closing down their in-house labs and sending the work to outside labs. Within a dozen years of its inception, Home Office saw annual revenues grow to $7 million.

1980s: Changes in Ownership

In 1983, Osborn and Merriman sold their company to Business Men’s Assurance Company of America, a large and well-established insurance company headquartered in Kansas City. Business Men’s Assurance (BMA) was itself a subsidiary of, a Kansas City-based holding company.

The timing of the acquisition proved highly fortunate for BMA. Within just a few years, the United States found itself in the grip of the AIDS epidemic. Insurers, already facing massive claims for AIDS-related illness and deaths, began scrambling to limit their exposure. Until that time, insurance companies had typically only called for blood or urine tests on those individuals who applied for sizable life insurance policies—for example, those in excess of $250,000. However, the rapid spread of the HIV virus—and the fact that it was detectable only through such testing—caused them to lower that threshold. This meant testing more applicants, which translated into more business for Home Office.

In October 1985, as insurance companies were tightening their screening processes, Home Office introduced a test that detected whether a person had been exposed to the AIDS virus. Called the Enzyme-Linked Immunosorbent Assay—or ELISA—the test screened not for the virus itself, but for antibodies present in the blood of a person who had been exposed to the virus. The company’s sales skyrocketed, growing by more than 50 percent from year-end 1985 to year-end 1986. Revenues for the same period more than doubled.

In July 1987, Business Men’s Assurance took Home Office public, selling 5.75 million shares, which totaled slightly less than 40 percent of the company. As revenues and earnings continued to mount during the remainder of the year, Home Office handily dominated the insurance lab-testing market, holding an 80 percent share.

Early 1990s: Responding to Challenges

In 1990, Seafield Capital sold off its Business Men’s Assurance subsidiary, but retained its stake in LabOne. It also began buying back stock in Home Office, increasing its ownership to more than 80 percent by 1993. The new decade ushered in some challenges for the testing company, however. Competition was growing in the once-tiny lab-testing market. Jim Osborn, who had founded and owned Home Office before selling it to Business Men’s, reentered the testing business with a new venture called Osborn Laboratories. And by the early 1990s, Osborn was beginning to siphon revenues away from Home Office. In addition, intensifying competition from Osborn and other labs drove testing prices down, inflicting still more damage to Home Office’s bottom line.

The threat to business was not only from other third-party labs. In early 1991, the company lost one of its largest clients—Metropolitan Life—when the mammoth insurance company moved all of its testing business in-house. MetLife had accounted for between 5 and 6 percent of Home Office’s sales. Effects of the lost business were soon evident: sales dropped from $80.77 million in 1990 to $75.74 million in 1991 and continued to decrease over the ensuing three years to $69.38 in 1993. Earnings followed suit, sliding from $13.46 in 1990 to $10.57 in 1993.

In August 1993, Home Office got an infusion of fresh ideas when it appointed Bert Hood as its new chairman. Hood came from a background in the clinical laboratory industry, having served 14 years as senior vice-president for SmithKline/Interna-tional Clinical Laboratories and two years as president and CEO of Unilab. He came to Home Office with the belief that the company needed to diversify into clinical testing. “The clinical laboratory testing market is over $30 billion with several niche markets that appear to fit HORL’s structure as a centralized laboratory,” he stated in an August 5, 1993 press release. “While further study needs to be completed before these markets are identified, HORL’s core competency … could enable the company to be the low cost provider in defined markets. Moreover, the diversification opportunities reviewed to date can be adequately funded out of free cash flow.”

Home Office wasted little time in pursuing Hood’s suggested course of action. In December 1993, the company restructured into two divisions—one to continue focusing on insurance testing and another to market diagnostic lab services to the health care industry. Concurrent with this restructuring came a new name for the company—LabOne, Inc. The division of LabOne that retained its traditional, insurance-testing business also retained its former name, Home Office Reference Laboratory Division. The new, clinical testing division was named Center for Laboratory Services.

Mid-1990s: Ups and Downs

LabOne’s first big accomplishment in its new line of testing came in May 1994 when the company announced a partnership with PCS Health Systems, one of the nation’s largest providers of managed pharmaceutical services. The partnership provided for LabOne and PCS to develop a managed lab program that would parallel PCS’s existing managed pharmaceutical plan. The resulting program—called the “Lab Card” plan—used a point-of-service card system, similar to PCS’s prescription card system. The system was designed to reduce the total expense of outpatient lab testing—thereby reducing the cost of health insurance.

The company also moved into the northern-California market, opening a series of clinical labs in the region. The labs were developed to collect specimens, which would then be shipped to LabOne’s Kansas headquarters for testing. Results would be faxed or e-mailed to physicians and insurers the following day.

LabOne’s foray into clinical testing was not enough to turn its finances around in 1994; the company posted year-end earnings of $5.7 million—down 46 percent from the previous year. The summer of 1995, however, brought some brighter news. The company announced that it had signed an agreement with Guardian Life Insurance Company of America and would soon be offering its Lab Card program to some 30,000 Guardian plan enrollees as a pilot. If all went well, there was huge potential for expanding the plan; Guardian had a customer base of more than 1.5 million.

Company Perspectives:

At LabOne, we continually strive to offer solutions to our clients—the methods, processes, and results to improve their business. From the latest diagnostic and technical innovations to new products that meet ever-changing information needs, LabOne is always in the process of improving and exceeding clients’ expectations.

In 1995, LabOne added a third division to focus on substance abuse screening. Although the company had offered drug screening for several years, it was only in the mid-1990s that it became certified by the Substance Abuse and Mental Health Services Administration (SAMHSA), a part of the U.S. Department of Health and Human Services. This certification allowed LabOne to offer drug screening services to federally regulated employers. It also gave the company access to a range of potential private-sector clients they had previously been unable to approach, since many major companies with drug-testing programs required their laboratories to be SAMHSA certified.

In October 1995, after just two years at the helm, LabOne’s CEO Bert Hood left the company. He was replaced by Thomas Grant, the chairman and CEO of the company’s parent, Seafield Capital. The news of Hood’s departure was soon followed by news of yet another decline in sales and revenue. Year-end results for 1995 showed a 6 percent decrease in sales and, more significantly, a 51 percent decrease in earnings.

Despite his short tenure, Hood’s efforts at LabOne ultimately proved effective; in 1996 and 1997, benefits from the company’s restructuring began to accrue. The company signed agreements to provide its Lab Card to employees of a number of businesses, including Wal-Mart and Arvin Industries. It also was awarded an estimated $1 million contract with Principal Health Care of Kansas City, one of the area’s largest managed health care organizations. Revenues began a steady increase. From year-end 1996 to year-end 1997, the company’s clinical testing sales increased 91 percent, its insurance testing business increased 22 percent, and its substance abuse testing revenue increased 101 percent.

Having just struggled through a business slowdown, LabOne was, by late 1997, facing a new problem: how to accommodate its sudden growth. The company’s solution was a new headquarters. In October, LabOne broke ground on a $32 million, 270,000-square-foot facility located on 54 acres in Lenexa, Kansas. The headquarters was completed in the spring of 1999.

Late 1990s: Full Steam Ahead

In 1998, LabOne continued to expand. The company purchased Systematic Business Services Inc., a company that provided health insurers with various information services, including motor vehicle reports, claims investigations services, and physician statements. The acquisition, which added approximately $7 million in annual revenues, gave LabOne the ability to offer a broader range of underwriting services to the insurance industry. Additionally, all three of LabOne’s divisions continued to experience excellent growth. At the end of 1998, the company reported record revenue of $102.2 million. Net earnings rose to $9.2 million—up from $2.2 million in 1997.

In 1999, LabOne merged with its parent company to form a single entity. The parent company, formerly called Seafield Capital, had changed its name in 1997 to Lab Holdings, Inc. to better reflect its focus on the lab testing industry. The newly merged company retained the LabOne name.

The remainder of 1999 was marked by a series of partnerships for LabOne. In May of that year, the company was chosen by Pennsylvania-based STC Technologies Inc. to be the exclusive testing facility for a new drug screening product that used oral fluids rather than blood or urine. The new product, named Intercept, was introduced in early 2000 and was marketed primarily to small and medium-sized businesses.

In June 1999, LabOne partnered with USA Managed Care Organization, a Kansas-based company, to market the Lab Card program to USA Managed Care’s large client base. And in November of 1999, LabOne acquired World Wide Health Services Inc., a New Jersey company that provided exam and information services to the life and health insurance industry. The new subsidiary was renamed ExamOne World Wide.

2000 and Beyond

LabOne suffered a bit of turbulence as the 20th century rolled into the 21st century. The company came under federal investigation as part of a dispute between Delta Airlines and some of its employees who had been fired due to questionable drug test results. The employees, who were terminated when LabOne reported that their urine tests had been tampered with, challenged the validity of the company’s reports, launching a probe by the U.S. Department of Health and Human Services. Delta dropped LabOne as its testing agent in 2000, and, in 2001, one of the employees in question filed suit against the company. A jury found LabOne negligent in conducting validity testing and ordered it to pay the plaintiff $400,000 in damages.

The company also posted a net loss for 2000 of $524,000—down from earnings of $2.9 million the previous year. The company attributed the loss to write-downs of certain accounts receivable and to expenses incurred in efforts to develop its paramedical testing, risk-assessment testing, and substance abuse testing businesses.

Key Dates:

1971:: Jim Osborn and Jack Merriman form Home Office Reference Laboratory.
1983:: Business Men’s Assurance Company, a company owned by Seafield Capital, acquires Home Office Reference Laboratory.
1985:: Home Office introduces a test for exposure to the AIDS virus.
1987:: Home Office goes public.
1990:: Seafield Capital sells off Business Men’s Assurance but retains its stake in Home Office.
1993:: Home Office restructures in order to begin pursuing clinical diagnostic testing and changes its name to LabOne.
1994:: LabOne introduces its Lab Card program.
1998:: LabOne acquires Systematic Business Services Inc.
1999:: LabOne acquires World Wide Health Services Inc.
2001:: LabOne acquires Osborn Group Inc.

Even with setbacks, however, LabOne continued to grow. Revenues increased steadily throughout 2000 and into 2001. In late 2001, the company launched a significant expansion by purchased its rival, Osborn Group Inc., for $49 million. With the acquisition, LabOne was expected to have annual revenues of $250 million and to perform lab testing for some ten million people each year. Once Osborn Group was fully integrated into LabOne, the company expected to realize up to $10 million in annual cost reductions by eliminating redundant operations.

Principal Subsidiaries

ExamOne World Wide, Inc.; Intellisys; LabOne Canada Inc.; Systematic Business Services, Inc.

Principal Divisions

Insurance; Drug Testing; Healthcare.

Principal Competitors

Hooper Holmes, Inc.; Laboratory Corporation of America Holdings; Quest Diagnostics Inc.; American Bio Medica Corporation; ChoicePoint Inc.; Employee Information Services, Inc.; Kroll Laboratory Specialists, Inc.; Medtox Scientific, Inc.; PharmChem, Inc.; Psychemedics Corporation.