Prognosis Good, Lab Firm Says : American Cytogenetics Looks to Health-Test Growth

For a company that specializes in detecting diseases, American Cytogenetics took a long time to diagnose and treat its own ailments.

The North Hollywood-based company, which owns three clinical testing laboratories, has dreams of becoming a leader in screening for genetic disorders and sexually transmitted diseases. But it first has to cure its sickly financial condition.

American Cytogenetics lost money in all but two of the past 13 years and hasn’t turned a yearlong profit in three years. During the nine months ended Oct. 31, it posted meager earnings of $28,545 on revenue of $3.0 million. Company officials, however, are confident that the profit expected for the current fiscal year ending Jan. 31 foreshadows better times.

“I’ve been a board member since 1981, and this is the strongest I’ve seen us do in that whole time,” said Edward M. Young, an outside director and consultant for the health care industry from Pasadena.

The indications of a turnaround are good news for Biotech Capital, the New York-based venture capital investment firm that acquired control of American Cytogenetics in 1981 and now owns 55% of its stock.

Links to Reagan Administration

Biotech Capital, which has backed such fledging companies as Financial News Network, also is known for its ties to the Reagan Administration. It is headed by Dr. Earl W. Brian, an old friend of President Reagan and Atty. Gen. Edwin Meese III. Brian served as California’s secretary of health and welfare when Reagan was governor.

The names of Biotech Capital and American Cytogenetics surfaced in a 1984 congressional investigation of Meese, then a White House counselor. Meese eventually was cleared of any financial wrongdoing. The Securities and Exchange Commission was asked at one point by Rep. John D. Dingell (D-Mich.), chairman of the House investigations and oversight subcommittee, to review investments by Meese’s wife, Ursula, in the two companies.

It later was disclosed that Ursula Meese sold stock in American Cytogenetics at a profit of $1,000 to $2,500 on an investment of less than $1,000. She also sold Biotech Capital stock at a $3,398 loss.

Eventual Sell-Off

As is typical of venture-capital investors, Biotech Capital hopes to profit by selling American Cytogenetics, said Carolyn Lewis, a Biotech Capital vice president who serves as American Cytogenetics’ chairman. She said her company does not have a deadline for selling its stake, but typically tries to cash in on its investments after three to seven years. Meanwhile, the value of Biotech Capital’s 700,000 shares has risen sharply, climbing to nearly $4 a share from less than 50 cents as recently as early 1985.

American Cytogenetics’ North Hollywood laboratory each year processes about 1 million Pap smears, tests used primarily to screen women for cervical and uterine cancer. The company claims its volume surpasses that of any other lab in the nation.

The company charges most doctors $4.20 a test, although large-volume customers, such as government agencies, may pay as little as $3.25. Doctors mail the tests to the laboratory, where workers examine the samples using microscopes.

The company has similar laboratories in San Diego, where it plans to move its headquarters this summer, and Teaneck, N.J. The New Jersey facility specializes in screening for genetic disorders such as Down’s Syndrome, and the San Diego lab specializes in testing for chlamydia, one of the most widespread and least publicized venereal diseases. The North Hollywood lab is by far the largest, employing 95 of the company’s 120 workers.

Directors give much of the credit for American Cytogenetics’ financial improvement to Harry L. Lawrence Jr., 43, a former Revlon executive who was recruited in 1984 to be president and chief executive. He replaced Allen J. Manzano, a board member brought in during 1983 as interim president to replace Steven M. Besbeck, who had left to become president of Calabasas-based Creative Computer Applications.

Sued by Former Executive

Besbeck, contending American Cytogenetics owes him stock, is suing the company for breach of contract, fraud and securities-law violations. American Cytogenetics denies it owes Besbeck the stock.

American Cytogenetics also has had turbulence in its past, and changed its name twice as it switched courses. At first it was American Health Foods, a firm that never had more than a single laboratory.

Later it was known as American Cytology Services. It got its current name when Biotech Capital took over.

Lawrence said the company, until recently, suffered because its marketing was lackluster and its costs were excessive. He said the company also undercharged.

‘Mom-and-Pop Operation’

“It was basically a mom-and-pop Pap smear operation. Biotech put some oomph into it,” Lawrence said.

Since taking over as president in May, 1984, Lawrence has pumped money into the company’s efforts to attract business and also trimmed expenses, cutting so deep as to eliminate three of the six water coolers the company had in its North Hollywood offices. “We looked at all the nickel-and-dime items,” he said.

Now that American Cytogenetics appears to be in the black, Lawrence wants to expand by buying laboratories to process tests for some of the nation’s most troubling diseases. Most of the labs, he said, will specialize in screening for genetic disorders and sexually transmitted diseases such as chlamydia, herpes and acquired immune deficiency syndrome, or AIDS.

Lawrence took the first step toward that expansion last summer, when the company bought a small San Diego lab and converted it into a chlamydia testing facility. By this summer, American Cytogenetics plans to have a walk-in laboratory near San Francisco’s predominantly gay Castro district to screen patients for AIDS.

Lawrence’s financial goal is to have the company post after-tax profits of $2 million on revenue of $25 million in five years.

Testing Industry May Burgeon

Pieter Halter, president of Biomedical Business International, a Tustin-based health industry research firm, said the market for testing for sexually transmitted diseases such as chlamydia is about $10 million and could grow to $80 million by 1990. He cautioned, however, that much of that testing may be done entirely in doctors’ offices as in-house testing technology becomes available.

“Five years from now, the tests will all be much simpler,” Halter said. “A patient will go into a doctor’s office and, once the specimen is taken, be able to expect the results in half an hour.”

Lawrence, however, believes that the diseases American Cytogenetics tests focus on require too many specialists, such as cytologists, who are skilled in studying cells, to be done in offices.

“We are dealing in labor-intensive laboratory tests that cannot be done in a physician’s office unless the physician goes out and hires a certified cytologist to read the tests for him in his office. That would take a high-volume physician,” Lawrence said.

Market Tough to Crack

James McCamant, editor of the Medical Technology Stock Letter in San Francisco, said the overall laboratory testing market is $15 billion a year. He noted, however, that it is tough for small, specialty laboratories such as American Cytogenetics to expand because marketing is costly.

“Marketing to doctors’ offices is a difficult job,” McCamant said. “There are so many of them. It can be very expensive.”

But Lawrence said specialty laboratories such as American Cytogenetics’ will fare well in comparison to larger competitors more dependent on Medicare spending, which has been tightened under new federal regulations.