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Impath, On the Ropes, Likely Snubbed Quest Acquisition Offer 3 Months Before SEC Inquiry

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Three months ago, at the height of internal financial and management turmoil, Impath turned down an offer by Quest Diagnostics to buy it out, SNPtech Reporter has learned.

Impath snubbed Quest’s advances — which came three months before it would begin considering bankruptcy protection, and before the US Securities and Exchange Commission would launch an investigation into alleged accounting irregularities — because the terms were not favorable, according to Jorge Leon, a former vice president of applied genomics at Quest.

However, Leon, a widely respected molecular diagnostics insider who heads an industry consulting practice, speculated that Impath’s newest legal and financial troubles might not only encourage Quest to try a second time, but would also likely become a boon for small diagnostics shops and big reference labs, which stand to profit as vendors and as customers.

Officials from Impath and Quest declined to comment.

In a statement issued late last month, Impath said that the SEC had launched an investigation into “possible accounting irregularities” involving its GeneBank asset, a database of cancer tissue samples and clinical data. Impath also said it had hired legal and financial advisers to help it create a restructuring plan that might lead to a Chapter 11 bankruptcy filing — a move the company previously shelved because of “limited available cash.” The restructuring also calls for Impath to appoint a chief restructuring officer.

The company said it will cooperate fully with the SEC investigation, and stressed that Nasdaq officials said the inquiry “should not be construed as an indication by the SEC … that any violation of the federal securities laws has occurred.”

The company noted that its ability to provide products and services hasn’t been affected by any of these events.

Additionally, Impath’s stock was delisted from the Nasdaq exchange on Aug. 27 because the company failed to file its second-quarter earnings report on time with the SEC due to the accounting issues. Impath said it is evaluating its options regarding the delisting.

Finally, Impath disclosed that it is the subject of 13 lawsuits seeking class-action status in connection with the accounting problems. The company said the suits include allegations of false and misleading statements regarding its business prospects and financial condition, and other reasons.

A Window Opens

The SEC’s investigation centers on Impath’s GeneBank asset, and the possibility that the company inflated income from that program. Indeed, on July 30, Impath said its audit committee had begun investigating possible irregularities, and warned investors they should not rely on previously filed financial reports. The company’s vice president of finance and corporate controller both resigned at that time.

To some, however, the inquiry uncovered an inherent weakness in the GeneBank business model — namely, that the program was too expensive, and that it was not generating enough revenue. Though Impath had some deals with pharma companies that were paying it “good cash, it wasn’t really substantial to drive the value of the company at all,” said Leon, the former Quest executive. He said potential customers shied away from buying access to the GeneBank database because Impath “was charging a fortune” for it. “This is what [companies like] Sequenom have done very successfully,” he added, describing the pharmacogenomics company’s SNP database.

Leon said that whether or not Impath is acquired by Quest or another erstwhile competitor — and it is widely believed that only an acquisition will save the floundering company — the hole left by Impath in the diagnostics market will clearly benefit other reference labs. “Especially LabCorp,” said Leon, “which can take advantage of Impath’s esoteric business in anatomic pathology — a growing business.”

He said he can also see smaller boutique labs “taking advantage” of Impath’s likely disappearance from the marketplace. Specifically, he said shops like Phenopath Laboratories, in Seattle, and New York-based Aureon Biosciences — which, ironically, was founded by an Impath alumnus — that conduct research in molecular tissue pathology. Though Aureon is a research company, Leon said Impath’s cloudy future might spur the firm to commercialize its technology.

“Some of the big labs that are looking for new markers for cancer and new markers for [various other] diseases were relying on Impath to do this for them,” he said. In the absence of Impath these smaller — and usually less expensive — companies can pick up the slack.

Impath’s business “will go back to the big labs,” Leon said.

He also suggested that if Impath were to disappear, it would “create a vacuum” among its customers, which would turn to smaller shops. “Customers will never get the same type of service from big reference labs” as they did from Impath, he said. “Never. This is the beauty of boutique labs.”

Though Impath’s forte is its tissue immunostaining program and its consultation services, its problems now center on GeneBank.

The database, which is part of Impath’s Predictive Oncology division, comprises more than 1 million patient profiles and outcome data on more than 2.3 million individuals, according to Impath’s web site. The samples are used by more than 8,750 pathologists and oncologists from around 2,100 hospitals and 630 independent oncology centers.

The SEC inquiry, the delisting, and the probable bankruptcy filing are the latest in a string of misfortune that began in February, when the company’s chairman and CEO resigned following an internal review of expenses she submitted during her three-year tour of duty. One month later, the company sacked 80 staffers as it struggled with a cash crisis, only to lay off 690 additional employees in April.

In May, the firm’s president and chief operating officer resigned to pursue other opportunities.

— KL

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