How Lab Contracts are Constraining Practice Valuation

26min
Season 1
Listen directly on:

This week on the Consolidate That! Ryan and Ivan talk with Mark DeCourcy, CEO at Ellie Diagnostics, about diagnostics’ role in the patient journey and the significant impact on EBITDA for veterinary consolidators.

Topics discussed:

  • Percentage of revenue from diagnostics;
  • Optimization of the clinic’s workflow by transitioning to a laboratory partner;
  • How eliminating contracts increases the practices’ value;
  • Impact of preventive diagnostic tests on the total revenue for the clinic;
  • Ellie Diagnostics’ innovative business model;

Speakers

Mark is the founder and CEO of Ellie Diagnostics. Mark has really deep experience in healthcare diagnostics. Prior to founding Ellie Mark served as the Vice President of Strategy at True Health Diagnostics, where he played a critical role in driving strategic growth and oversaw mergers and acquisitions. Mark holds an MBA and Masters of Science and Finance from the University of Texas at Dallas. And a BS from Texas Tech University with majors in finance and economics.

Transcript

Ivan-Zak
Dr. Ivan Zak

Hi everybody and welcome to consolidate that. Today we have an exciting guest. We’re going to talk about diagnostics and the value for consolidation. Ryan, why don’t you introduce our guests?

Ryan Leech, Director of Sales
Ryan Leech

Happy to! So we, like you said, we’ve got a great guest with Mark DeCoursey.
Mark is the founder and CEO of Ellie Diagnostics. Mark has a really deep experience in healthcare diagnostics. Prior to founding Ellie Mark served as the Vice President of Strategy at True Health Diagnostics, where he played a critical role in driving strategic growth and oversaw mergers and acquisitions.
Mark holds an MBA and Masters of Science and Finance from the University of Texas at Dallas. And a BS from Texas Tech University with majors in finance and economics. Mark, thanks for joining us.

Mark-DeCourcy
Mark DeCourcy

Thanks for having me on guys, Ryan and Ivan it is great to be on the show.

Ivan-Zak
Dr. Ivan Zak

So Mark, we’re going to jump in right away.
So you’re not from the vet space and there are big giants that are right now in the diagnostics and you are bringing something unique from the human space. And you came up with the idea to enter the space where there’s now three, sort of, big companies, two giants in one kind of was recently acquired.
So can you tell us what did inspire you to jump into this and into veterinary medicine?

Mark-DeCourcy
Mark DeCourcy

Yeah, there are actually a few different things, but I am new to the veterinary space and I didn’t know much about it just a few years ago, but what kind of caught my eye was when I took my dog to the vet and I found myself paying a pretty large cash price for diagnostic testing, which I was acutely aware of the exact costs to process those same tests.
And it was a much, much lower fraction of the price that I was paying. So that really surprised me. The end product was a little bit different than what I was used to and in terms of diagnostics, you know, we have, in my prior worlds in healthcare, we’d been providing very engaging reports to doctors, which they could use as a conversation point with their clients.
So they with the patients. And I think there may be an opportunity as we really dug into Ellie to create a different kind of product that is more compelling for our diagnostics results, which can drive great conversations between veterinarians and pet owners.

Ivan-Zak
Dr. Ivan Zak

Awesome. So diagnostics are a pretty significant contribution to the bottom line of the veterinary hospital.
Since you entered the space, can you tell us what are you observing? What is sort of the average percent of revenue is in diagnostics?

Mark-DeCourcy
Mark DeCourcy

One thing that stands out is how much that number varies by. For some clinics, it’s a massive percentage of their business and their daily operations. And other clinics it’s kind of an afterthought.
So what we’ve kind of seen across the board is an average of about 15 to 25%, somewhere in that range of total revenue associated with diagnostics. And what we have learned, what I’ve learned is that those clinics that have the higher end of that percentage are typically the ones that are going to be more well-run. Their operations are processing very quickly, and efficiently, and naturally, there’s a financial benefit to having a higher percentage of diagnostics. It’s one of the most profitable things that a clinic can do. And it drives a lot of really valuable clinical information that can be used to treat patients.

Ryan Leech, Director of Sales
Ryan Leech

So Mark, you said that you see the clinics that are maybe a little bit better run or a little bit more streamlined run, seeing the improvement in the EBITDA with those. What are sort of the ways that you consider a practice to be well-run?

Mark-DeCourcy
Mark DeCourcy

I guess I have my own perspective of it. I think of, you know, my experience where the doctors are spending all of their time doing, when I think of doctors as should be doing, which is helping create solutions, truly diagnosing the patients, hands-on time, very little administrative time. So when I think of a well-run clinic, I’m thinking of a clinic where it’s efficient, the patients, the clients are in and out relatively quickly with a positive experience. They get the information they need efficiently, and that there’s a process in place to follow up with diagnostic information after the visit.
And a lot of that is managed by the technicians and the staff of the clinic. And so you can really see the difference in how those processes work in terms of how that workflow looks. When you look at that percentage of revenue that’s associated with diagnostics.

Ivan-Zak
Dr. Ivan Zak

So we talked before the recording and you mentioned that preventative is one of those differentiating factors that show the successful clinics are more successful when they have a bigger percentage of preventative tests run.
So Mark for the tests and how they’re split, what do you see the most contribution to the successful clinics? What kind of tests are those?

Mark-DeCourcy
Mark DeCourcy

Yeah, the focal point really is those preventative diagnostic testing, where you can take a pet before they get sick, while they look healthy, they seem healthy and you can run testing and identify as using advance.
There’s a really deep impact on how that can drive value to a clinic.

Ivan-Zak
Dr. Ivan Zak

So, Mark, in those hospitals that are more successful, what kind of diagnostic do you see run more frequently?

Mark-DeCourcy
Mark DeCourcy

Really the concentration of tests are there preventative diagnostic tests. And I think that has a lot of different reasons that drive success for different clinics.
You know, those are highly profitable tests. So, you know, most of our clients do about a 2.5 times markup on our tests. So that’s about a 60% profit margin, which is an easy workflow. It’s a, you know, 30-sec blood draw and then you can essentially move on at the next service that you’re working through. So you’re gonna drive a lot of financial benefits right away, but then the long-term impact really comes by your ability to identify those issues in advance and be proactive about those.
So you’re gonna drive additional follow-up. So if you have, you know, you’re on diagnostic testing on maybe 10 healthy pets. If you can catch on two of those pets, something that’s gonna drive ancillary testing, you know, they’ll come back the next day. That’s highly impactful. It’s additional revenue events for the clinic.
It’s also going to help that patient stay healthy and that ultimately leads to happier clients, which is going to make the clinic’s life much easier. So the folks who run a lot of diagnostics, a lot of preventative testing generally have, from my perspective, which is a little bit removed, but a happier population, the technicians are typically a little bit more upbeat and you can see really through the financials, how that can play out.

Ivan-Zak
Dr. Ivan Zak

That makes sense. And then we talked a lot about different growth levers for consolidators. Usually, when the practice is acquired, they are looking for opportunities in the clinics and ideally they assess them before the acquisition. And this is something that I think is possible to find out from the data that you take from the practice management system, which could be done pre-acquisition, and then just determine what sort of a number of tests has run.
Especially if they’re preventative. I think that can guide the consolidator to the conclusion that then post-acquisition, they can implement growth levers in the sector of marketing and then drive those preventative tests. So I think that is one of those areas that having good data that is coming either from PIMS or from the diagnostics companies could actually guide the consolidator in the acquisition.
Is that something that data can tell you on your side rather than the clinic? Because sometimes it’s messy to get the data from Practice Management Systems.

Mark-DeCourcy
Mark DeCourcy

Definitely. I think I understand the question. You can kind of look at it a couple of different ways. If you’re looking at what a post-acquisition strategy would look like in terms of, you know, if you buy a clinic and you can understand their numbers and then plan towards what you’d like for those numbers to be on, we certainly have a wealth of data that we make available to our partners to look at for best practices. In terms of what types of tests are performed? What volume per clinic, per doctor? And you can use those to really sketch out what your strategy would look like for, you know, if you buy a clinic and you say, okay, this clinic said 15% of their revenue or 15% of their tests, however, you want to look at it are preventative diagnostics based on the best practices which we can develop by working with Ellie.
We can get that number to 28%. Then you can essentially walk in and say, we’re going to drive this financial impact and this clinical impact right away by doing nothing but changing diagnostics.

Ivan-Zak
Dr. Ivan Zak

Yeah, that’s exactly where I was going with this because usually, you know, you’re buying a clinic, you know, their EBITDA and then you’re not really digging… Well, some consolidators maybe do, but no, those that I spoke to… They’re not digging into exactly where those opportunities are before they acquire the clinic to know exactly where they are margin expansion that they can work on. But there’s another question that I had that you probably work a lot against. Because currently, you guys don’t really have in-house equipment or anything like that. You’re a diagnostic lab outside. So what is the financial impact for consolidators? For example, if they’re looking at this combination of whether to use outside lab or especially if they have an influence on the hospital staff, for the most part, those are de-novo ones. So those that have built new hospitals or those that create a franchise. So they can actually have the decision upfront what they built with. So in-house versus the outside lab. Do you have any comments on that?

Mark-DeCourcy
Mark DeCourcy

It’s an interesting question. At first, we thought that we were going to have to compete against in-house equipment and analyzers, but what we’ve found is it’s very complementary to what we do. Down the road, where we believe we’ll have access to those and make those available to our clients.
But in the interim, there’s really no conflict there. Most of our clients do have in-clinic analyzers and we encourage them to use those analyzers. They play a key role in the clinic and helping getting quick access to information for those pets that are sick or about to go into surgery. But at the end of the day, there’s a lot of work that goes into that.
If you’re gonna run a test on an in-clinic analyzer, there’s, you know, you gotta sketch in 20 minutes of time to process the test, you gotta manage the inventory. Process the reruns do the maintenance. So what we’ve seen is, as clinics grow and as consolidators grow through additional acquisitions, they’ll tend to transition the majority of their business to reference diagnostics, which is by far more efficient, from a workflow perspective.
And that frees up the technician’s time to focus on other areas. So they’re very complimentary, but we see, we definitely see that migration towards a reference laboratory at scale.

Ivan-Zak
Dr. Ivan Zak

So at scale, essentially, you’re right, because they don’t have to use the workforce. They don’t have to use more space in their schedule.
And then it’s more predictable on the schedule where they can say we’re doing 20-minute appointments. And then that 20-minute appointments drag into, you know, 30 and 40 while you’re wrestling with a cat and then you’re doing the calibration on the machine, and then, so then you just package your blood and you send it out.
So its scale does sound like a better solution for them.

Ryan Leech, Director of Sales
Ryan Leech

That’s nice because we’re always talking about ways to figure out inefficiencies and improve the ways that the consolidators are working and consolidation as a business model is all about scale. You don’t become a consolidator until you have some scale.
So when should a consolidator look to sign a lab contract?

Mark-DeCourcy
Mark DeCourcy

Yeah, it’s really… Ideally, you don’t sign a long-term contract, right? Because consolidators especially are so uniquely positioned to grow their leverage, their business leverage for negotiations over time.
I’ve seen some horror stories when you sign a contract and you’ve got six clinics. But you plan to add 10 clinics per year or 30 clinics per year. So you sign it right away because you feel like you need to get access to the services and you need to sign a contract to do that. But then three years later, you’ve grown your business by a thousand percent. And you’re still in the same contract that you signed three years ago.
So especially for the clinics that are the consolidators that are growing quickly, ideally you want to hold off on signing those contracts, at least until you get to a point where you can come in to leverage that you can plan to get to in pretty short order.

Ryan Leech, Director of Sales
Ryan Leech

Is that something, obviously as Ellie, is that something that you guys differentiate versus a lot of the competition?

Mark-DeCourcy
Mark DeCourcy

Yeah, we don’t do contracts, so that’s, you know, in my mind, that’s, we want to make our services available without the contracts, with transparent prices. You know, I don’t wanna give you guys the whole spiel, but it’s a big part of why we started the business here.
As we saw that as a large business opportunity and the opportunity to modernize the space.

Ivan-Zak
Dr. Ivan Zak

So right now you’re entering this space, there are these giants that already have the contracts. And how do you see yourself working with the consolidators and how do you explain to consolidators where are the opportunities for consolidation when you choose the lab partner?

Mark-DeCourcy
Mark DeCourcy

Well, it’s interesting. The large groups you mentioned are actively signing contracts with clinics in anticipation of the consolidation that’s happening because if they have a clinic that’s under contract when it’s acquired that consolidator, who requires it will typically not be able to change the lab out over time until the contract expires. So, you know, that’s going to create a couple of issues for that consolidator, you know, you’ve got to work with, you know, a different lab process for that clinic than you may have with your other clinics, you’ve got to manage multiple workflows across your clinics, which is always a little bit tough.
And I think that there’s a huge opportunity to simplify that process. What we’re doing is kind of unique. We’ve had quite a few consolidators reach out to us and ask us about building a lab for their clinics directly and are they’re thinking about building their own lab because it’s such a huge part of their ecosystem, their financials, and we’ve crunched the numbers and ultimately found it doesn’t make a ton of sense to build a lab just for your clinics.
Because really the value of a lab is having scale. And until you get to that scale, you’re going to be really at a pretty low margin business. So we’re working with our consolidators to do is saying, you know, “We can give you access to owning the lab, it’s processing, the volume for your clinics”. But also benefit from the scale that Ellie can command by working with additional clinics, additional consolidators, independent clinics around the country.
So, you know, there’s a different kind of benefit that you can get by working with Ellie.

Ivan-Zak
Dr. Ivan Zak

So I don’t know if I’m digging too deep into your business model, but is this something like a, I don’t know is it a JV or is it sort of a rev share model where you integrate them into the region where they have sort of the central location?
How does that work if that’s not your sort of business secret?

Mark-DeCourcy
Mark DeCourcy

Yeah, no, I’m happy to share it. We actually started out the model. I built Ellie with the initial plan to bring in the industry as the owners and invite the clinics to invest in the business. We started out with independent clinics.
So we actively have a large number of independent veterinarians that have ownership in the business. We’ve built a model where they can invest in what we call pods, which are essentially different tranches of investments. So as our share price grows, we can actively have investors come in and get access to the most current share price.
Now, what we’re offering for consolidators is we’ve created a model where they can come in and they can participate in a pod and come in and invest into a portion of the overall business. But we’ve also had a few conversations we’re exploring building labs that are specific to the geography of the consolidator.
So we can actually have them invest directly into that laboratory specifically, which manages the business for all of their clinics in the area.

Ivan-Zak
Dr. Ivan Zak

That is a very innovative business model. I mean, I don’t think that current large labs work like that with the consolidators or the vet clinics. Is that completely new?

Mark-DeCourcy
Mark DeCourcy

Yes. We tried to do the exact opposite of what the current models are. So, yeah, I don’t think that there are any other groups doing the same thing.

Ivan-Zak
Dr. Ivan Zak

So, what does the future look like? So you are right now expanding geographically. And what is the big dream? What is the big goal? And how do you see your business expanding?

Mark-DeCourcy
Mark DeCourcy

Well, I’ll be totally honest. My goal at first was to build one lab that did all the volume for the country. But I learned quickly that’s not gonna work. Veterinarians are very time-sensitive as they should be. So we’ve pivoted a bit. And our plan now is to have 20 labs by 2025.
So we’re going to build about a lab per quarter for the next five years. And those will be in the primary cities where we can service those businesses. We’ve got a pretty unique logistics relationship set up, where each laboratory actually has a much longer reach than a standard stat lab or day lab would have.
So we think with 20 labs, we can easily manage people from pretty much anywhere in the country with courier business, with, you know, first thing turnaround time, same-day turnaround times. So, you know, we’ve got some exciting long-term growth goals, and really, we just got done building out the infrastructure that we need to scale to that level.
We invested in it the software integrations, the equipment, the processes so that we can add each laboratory very efficiently. It’s going to be much more efficient than going out and acquiring different labs, which I’ve done quite a few times. And I can tell you that there’s a little bit more than a headache when you’re trying to merge the lab systems of two different labs and the logistics and the menus.
So, you know, we really like the organic approach of building each one with a fresh model and a scalable platform.

Ryan Leech, Director of Sales
Ryan Leech

Mark, why is Ellie a better option for consolidators?

Mark-DeCourcy
Mark DeCourcy

Yeah, thank you for the softball, Ryan, I appreciate it.

Ryan Leech, Director of Sales
Ryan Leech

You know, with the weather, it’s a snowball, it’s not a softball.

Mark-DeCourcy
Mark DeCourcy

We’ve had plenty of that. Yeah, I’m a little biased, I guess, in my opinion there, but you know what, Ellie is a true partner. We work with our clients to create solutions that are custom for their business, and we’ve gained the experience and the know-how to help identify and implement diagnostic strategies that are not, you know, it shouldn’t be what’s the easiest way to make my expenses reduce. Diagnostics as a growth strategy it is a massive growth opportunity in my mind. But the number one lever for every consolidator is how effectively they can implement diagnostics. And that’s both financially and clinically that you can drive that impact. And what we did, what we can do is help consolidators create a custom solution that they can use to dramatically enhance the business, both from a margin expansion perspective and from a top-line growth perspective.
And we can do it all without walking into a contract is going to prohibit you from having that leverage down the road to go negotiate different prices and continue to scale your business effectively. So, for that and a few other reasons, I think that we can provide a good partner for quite a few consolidators.

Ryan Leech, Director of Sales
Ryan Leech

I think that’s amazing. Yeah, I think that’s pretty cool. I’ll be Frank with you. You know, I’ve thought of labs as a tool, obviously, there’s better and worse and faster results and better results and sort of a gradient of ability. But I think it’s really interesting for people to talk with you about how. You know, it can be a growth lever. It can be something that grows and drives your business. And also, that was pretty cool how you talked about the labs as a way to improve your customer satisfaction and the way that your clients work.
A question that I like to ask everyone that comes on, it’s another softball for you, but I think there’s a lot of people that should reach out to you, but who would be the perfect person when they listened to this to say, I got to get on the phone with Mark and learn more about Ellie.

Mark-DeCourcy
Mark DeCourcy

No, there’s no limit to the number of softballs you can give me, you know. We’re in our aggressive growth mode right now. We’re expanding rapidly and that’s, in my mind, that’s the right type of partner for us is someone who’s in the growth phase of business they’re earlier on. If you’ve got a five-year time horizon, maybe you’re in year two, year three, where you’ve got whether it’s 20 or 50 clinics, but you’re planning to add another hundred.
That’s the right time in my mind to go and have a conversation with us and really puts your diagnostic strategy in place. That’s going to drive an increase in your margin right away, but that’s something that’s can be scaled over time and we can help you create that model. So someone that’s growing.
Regressively, that’s early on and it probably feels like I don’t know if I have time to do diagnostics right now. That’s the right time to do it before you can put yourself into a contract and you lose that flexibility. Then specifically, if there’s, you know if you have clinics that are concentrated in one geographic region, or maybe a few geographic regions that fits in really well with our strategy of adding new laboratories, because our criteria to build a new lab is where we have partners or we have a density of clients in a specific area. So, you know, if we have a partner who has a lot of clinics in a specific area, that’s going to be something that we’ll prioritize, putting a lab in place, specifically catered to the locations of their clinics. So that can be a really nice mutual benefit for both groups.

Ivan-Zak
Dr. Ivan Zak

So there’s another magic word that you mentioned talking about the technologies. Integration. So there’s been sort of a struggle in the veterinary domain for me for quite a few sort of products and Smart Flow was one of them where it was very dependent on integration.
To implement or to become a customer of Ellie do they require integration with their PIMS of some sort, or is it sort of a standalone solution?

Mark-DeCourcy
Mark DeCourcy

When do you say that you’re talking about our clients?

Ivan-Zak
Dr. Ivan Zak

Correct. Yeah. So when the clinic is coming on board, do they need to integrate their practice management system with Ellie? And do you have any integrations that are in place right now?

Mark-DeCourcy
Mark DeCourcy

Yeah, it’s going to vary dramatically for each clinic. Every clinic has a different software system that they use. Every clinic that has the same software uses it totally differently. We’ve got plenty of large clients that send us, you know, many, many samples per day who prefer to use our cloud-based portal platform to order samples and get results.
And they’ll interact with that. But the majority of our clients, they do like to have that integration set up upfront. And we do have bi-directional integrations with, I’d say 95% of the systems that are out there. So essentially if we don’t have one, it’s a pretty quick process to put that in place. And once we put it in place, some of the bigger kind of the older platforms, there’s a little bit less flexibility in terms of what we can do.
But with some of the newer groups that the more cloud-based groups, you know, we have the ability to go and do some really creative things. And cater the integration around the clinic, the group, and put processes in place that can actually further enhance workflow beyond where you think of as standard lab workflow processes.

Ivan-Zak
Dr. Ivan Zak

Yeah, that sort of leads to the conversation that we had with another software provider with Vetstoria. And there’s this whole concept that we talk about, which we call a patient corridor. It’s really what the patient is going through when they need to interact with the hospital. So starting from the client that needs to find the veterinarian. So those are marketing tools then, you know, booking appointments. So those appointment booking tools then check in the hospital. So I consider lab is one of those components that plugs in as software, that sort of corridor or it’s like a patient journey if you will. So then I think that there’s quite a lot of information that we could extract from the lab that has open APIs and the information about the patients for consolidators to compose KPIs that are relevant, not only about the financial metrics but also for operational.
So how open are you to share that data with the consolidators and whether there’s access to it?

Mark-DeCourcy
Mark DeCourcy

Yeah, that’s an interesting question. There’s a concept in healthcare called population health, which is, I believe, you know, not used quite as often in the veterinary space, but I think it will be. Where you can really manage not just the health of a single client that walks in your door but you keep your eye on the health of the entire population of the area you serve as a clinic. And diagnostics is one of the key tools to both manage that proactively as well as track the success of that long-term. And you know, we’ve put, I’ve put in place in previous lives, implementation strategies for hospitals, where they can proactively reach out to their patient population and maintain it.
And diagnostics is essentially the tip of the spear. We know as a laboratory, we’re the first ones to know when something is wrong and the way we deliver that information to the clinic, how efficiently we can deliver that information will determine how effectively they can treat their patients. We can do that in a way, where we give you actionable information and in a way that you can process it quickly, then you can have a really long-term benefit impact on the patient population and on your business’s financials.
So there’s a lot of data that comes out of diagnostics. You know, I think the numbers about 55 data points per patient. And we’ve got processes in place to analyze that information and feed that to our partners. And that can all be customized. So really finding the platforms and the partners that have the ability to bring in that kind of data that’s a really interesting point of growth that we’re looking forward to.

Ivan-Zak
Dr. Ivan Zak

Yeah. And I think that it will be interesting to connect you with our friend Rivers from easyvet because they have this solution, a Marketing Pro is the software that closes the loop between the active campaigns that you send out through Google campaigns and everything else. And then it locks it back into conversion at the hospital and they check-in.
So I think if you merge it with also the diagnostic data and back into campaigns to recheck, I think that would be an interesting solution at the level of consolidation at scale.

Mark-DeCourcy
Mark DeCourcy

I met the guys a couple of weeks ago, actually in their Frisco location. And I also heard that podcast from you guys. So that was fascinating.
I agree with you. I think there’s a lot of opportunities there to add diagnostics as a really key part of that equation.

Ivan-Zak
Dr. Ivan Zak

Well, Mark, it’s been exciting to chat with you. I am excited to see where the Ellie labs go in the next couple of years, and hopefully, we introduced you enough with the softballs that Ryan gave to you. And, I’m looking forward to working with you in the future.

Mark-DeCourcy
Mark DeCourcy

I love it guys. Well, thanks again for having me on the show. I appreciate the invitation and loved listening to the show over the last couple of weeks. So, thanks. Thanks again so much.

Ryan Leech, Director of Sales
Ryan Leech

Thanks, Mark.

Ivan-Zak
Dr. Ivan Zak

Thank you!