Lab Owners Selling Stock To Harvest Big Profits

Unilab’s proposed IPO is one of three major stock sales by laboratory owners

CEO SUMMARY: Three huge stock sales involving the nation’s largest laboratories have been announced in recent weeks. If these stock sales are enthusiastically received by Wall Street investors, independent regional lab owners may benefit because of higher valuations for clinical laboratory companies. In particular, Unilab’s IPO will be seen as a benchmark of laboratory business values.

DURING THE NEXT FEW MONTHS, owners of three large laboratory companies will sell major blocks of stock totaling more than $1 billion dollars.

Resurging investor interest in clinical laboratory company stocks encourages these owners to harvest profits. But in so doing, they will also help establish new valuations for independent clinical laboratory companies.

On May 2, GlaxoSmithKline PLC sold 1.5 million shares of Quest Diagnostics Incorporated. Glaxo realized $179.3 million from the sale.

The following day, May 3, Unilab Corporation filed a registration statement with the Securities and Exchange Commission (SEC). Unilab hopes to raise $115 million from this initial public offering (IPO) while increasing the liquidity of its stock.

Following these two announcements, on May 10, Roche Holdings, Inc. filed an offering to sell 5.5 million shares of Laboratory Corporation of America. At current prices, Roche could realize as much as $763.8 mil- lion from this offering.

There is a different motive behind each lab company’s stock sale. In the case of GlaxoSmithKline and Roche, the two pharmaceutical companies both want to raise cash to fund research into new drugs.

Also, the financial performance of both companies has been lackluster in recent quarters. As a result, investors are pressuring both companies to take active steps to boost earnings. Selling passive stock investments in Quest Diagnostics and LabCorp allows these pharma giants to lock-in recent profits and invest these funds into drug discovery programs.

…it is a significant fact that the stock market will absorb $1 billion of clinical lab stocks from these three sales. It is a sign that independent regional laboratories will find it easier to raise capital.

Even after these big stock sales, GlaxoSmithKline and Roche will hold major stakes in Quest Diagnostics and Lab Corp. GlaxoSmithKline still owns 11.1million shares of Quest Diagnostics. This is 24% of Quest’s outstanding shares and is worth about $1.3 billion. Roche will continue to own 16.7% of LabCorp. Its 5.8 million remaining shares are worth about $731 million.

Unilab’s impending stock sale has several interesting aspects. Since it is already the dominant commercial laboratory in California, Unilab’s IPO is not expected to change the existing competitive balance among labs in that state. There are other reasons why Unilab wants to raise cash and create a public market for its stock.

Currently Unilab’s major share- holder is Kelso & Company, Inc., a private equity investment company based in New York City. Kelso and its affiliates bought Unilab and took it private in 1999. They own 82.7% of Unilab. At some point Kelso wants to sell its Unilab stake and harvest what it hopes will be ample profits. The objective of Unilab’s IPO is to strengthen the lab’s balance sheet and increase the liquidity of its stock.

For lab executives and pathologists, the Unilab story is interesting for several reasons. First, Unilab’s IPO will demonstrate whether or not the investment community remains bullish on clinical laboratories. A strong IPO will reinforce higher prices for other lab stocks.

Second, investors will use this deal as a benchmark to establish values for independent regional lab companies. A strong price for Unilab’s shares will mean that pathologist-owners of independent labs can realize a higher sales price for their labs.

Third, it is known that Kelso paid a very high price for Unilab when it acquired the company in 1999. At a time when labs were selling for rather modest multiples of EBITDA (earnings before depreciation, interest, taxes, and amortization), Kelso paid almost 12 times EBITDA.

Regional Lab Valuations

To support a similar high valuation of regional labs in the future, Kelso needs to earn a sizeable profit from its Unilab investment. Thus, both professional investors and independent regional laboratory owners will be watching to see how Unilab’s revenue growth translates into the high levels of profits necessary for Kelso to recover its original investment and a size- able profit to compensate for the risk of that investment.

Taken collectively, it is a significant fact that the stock market will absorb $1 billion of clinical lab stocks from these three sales. It is a sign that independent regional laboratories will find it easier to raise capital. Hospital- based laboratories with outreach programs will also benefit. Professional investors are already known to be exploring opportunities to invest in hospital lab outreach programs.

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