CEO SUMMARY: Many lab executives and pathologists will be surprised to learn that five independent laboratory companies were acquired between December 1, 2004 and February 11, 2005. Only one acquisition was announced to the public. The other four were private sales and both buyers and sellers preferred to avoid any publicity associated with these acquisitions.
OVER THE PAST TEN WEEKS, at least five clinical laboratory acquisitions occurred. This flurry of acquisition activity attracted little attention, since four of the laboratory companies being acquired were relatively small and there was no public announcement of the sale by either buyer or seller.
The three smallest deals involved Clinical Laboratories of Black Hills (Rapid City, South Dakota), Omega Medical Laboratories (Allentown, Pennsylvania), and Cytology Services of Maryland (Laurel, Maryland). Each lab has estimated annual revenues of about $12 million or less.
Laboratory Corporation of America bought Black Hills Clinical Labs. Quest Diagnostics Incorporated purchased Omega Medical Labs, and Adventist Health Corp. was the buyer of Cytology Services of Maryland.
The biggest transaction was the $175 million sale of Irvine, California-based US LABS to LabCorp. Publicly announced in December, the sale was completed on February 3, 2005. US Labs has an estimated $75 million in annual revenue.
Probably the most interesting lab acquisition during this period was the sale of Universal Diagnostic Laboratories (UDL) in Brooklyn, New York to National Laboratory Partners, LLC. Estimates are that UDL has annual revenues of about $22 million. Most of its lab testing business originates from Brooklyn and the surrounding boroughs of New York City.
National Laboratory Partners (NLP) is a new arrival in the laboratory industry. NLP’s President and CEO is E. Craig Dawson and its General Manager and Chief Scientific Officer is Len Poikey, Ph.D. Both individuals have extensive lab management careers. They both worked together at American Medical Laboratories in Chantilly, Virginia. Dawson held executive positions at LabCorp and National Health Laboratories.
New Owners At Universal
NLP took title to Universal Diagnostic Labs on December 23, 2004. Universal’s former owner, Marvin Numeroff, will consult with UDL during the transition to new ownership. During the past year, National Lab- oratory Partners has quietly negotiated for several laboratory acquisitions, particularly in the New York metropolitan area. It would like to acquire laboratories which meet its strategic business criteria.
Around New York City, laboratory competitors are still reacting to the news that an unknown group—National Laboratory Partners, LLC—now owns and operates Universal Diagnostic Laboratories. No operational or sales changes at UDL have been observed in the marketplace to date.
The sales of Universal, Black Hills, and Omega Medical are significant for several reasons. First, it demonstrates that consolidation in the independent commercial laboratory sector continues. Any laboratory with a critical mass of annual revenue continues to receive acquisition offers, whether solicited or not.
Second, in the case of LabCorp, over the past 24 months, it has quietly acquired a number of small lab companies. Under SEC guidelines, its purchase of small laboratories like Black Hills Clinical Laboratories is considered an immaterial event, so these are not announced to the public. However, string together enough $1 million to $10 million lab acquisitions and there are enough specimens and revenues to add a couple of points to LabCorp’s year-over financial statements.
In contrast, Quest Diagnostics Incorporated does not seem to have the same appetite to acquire these types of small laboratory companies. Its purchase of Omega Medical Labs in Allentown, Pennsylvania is a rather exceptional occurrence.
Third, for owners of small laboratory businesses, these acquisitions demonstrate that buyers can still be found. Because the purchase prices of these recent sales were not disclosed, it is impossible to know whether the buyers were willing to pay a strong price, relative to EBITDA (earnings before interest, taxes, depreciation, and amortization).
Where Are Pathologists?
Fourth, the appearance of a new investor/operator group—National Laboratory Partners, LLC—is a sign that experienced lab executives continue to believe that owning a commercial laboratory company is a good business opportunity. That raises the question as to why there are no pathologists actively looking to acquire or to build commercial laboratory companies.
Pathologists who owned such laboratories and sold them to the national laboratory companies over the last two decades often “threaten” to re-enter the business and establish a new commercial laboratory in their city. This makes sense. They know the market and they have existing relationships with referring physicians in the area. However, no pathologists have yet taken tangible steps to seize this opportunity by establishing such a new lab company in their town.