LabCorp Buys Hospital Outreach Lab in Florida

National lab company acquires an improved market presence along Florida’s West Coast

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CEO SUMMARY: Once again, a national laboratory has seized the opportunity to acquire a strong regional laboratory. This time it’s the sale of DSI Laboratories, Inc., of Naples, Florida, to Laboratory Corporation of America. DSI’s owner is NCH Healthcare System, which owns two hospitals in Naples. Terms of the deal were not revealed. LabCorp will buy the outreach testing assets of DSI, and NCH will retain the inpatient laboratories.

PATHOLOGISTS AND LAB DIRECTORS operating hospital laboratory outreach programs expressed surprise at the news, announced last week, that Laboratory Corporation of America would acquire DSI Laboratories, Inc., of Fort Meyers, Florida.

LabCorp will purchase DSI from NCH Healthcare System, which operates two hospitals in Naples, Florida. DSI Laboratories is a successful laboratory outreach program. According to the Naples Daily News, in 2006, DSI had revenues of $39.3 million and expenses of $38.5 million, which produced income totalling $794,000.

Founded in 1984 as a stand-alone enterprise operated by NCH, DSI Laboratories manages the consolidated laboratory services for the hospital system. It also is a major provider of laboratory outreach testing services to office- based physicians and has enjoyed steady growth in specimen volume and in revenue in recent years. It currently operates 20 patient service centers in Collier, Lee, and Sarasota counties.

The terms of the deal were not disclosed and LabCorp declined to comment beyond statements in a press release. A spokesperson told THE DARK REPORT that LabCorp’s strategy in Florida was “competitively sensitive.”

NCH and LabCorp announced the agreement to DSI employees on Monday, June 18. LabCorp is buying everything but the two inpatient laboratories at NCH Downtown Naples Hospital and NCH North Naples Hospital. DSI said its employees would remain after the sale and that LabCorp intends to retain the DSI name. NCH plans to keep 120 of the current employees to run the clinical laboratories at its Downtown Naples and North Naples hospitals.

NCH Needed Cash

THE DARK REPORT observes that a major motivation for NCH to sell its laboratory outreach business is the need to realize the capital value of this business asset. Because of increased competition from another hospital in Naples, NCH is expected to post operating losses in 2007. (See sidebar at right.)

Using recent sales of laboratory companies as a guide, it is likely that NCH was paid a handsome price for DSI Laboratories. For example, if LabCorp was willing to pay either 1.5 times annual revenue or 2 times annual revenue, that would generate a sales price to NCH Healthcare System of $60 million or $80 million, respectively. The sale of DSI Laboratories to LabCorp is subject to review by the federal government. Neither party disclosed an expected closing date for the transaction.

Reallocating an Asset

The NCH sale of DSI is one of several in recent years in which a hospital has sold its laboratory outreach program to generate cash. In 2005, the health system owners of Spectrum Laboratory Network, in Greensboro, North Carolina, sold a majority interest in this laboratory company and its outreach testing business, to Apax Partners, LP. It is estimated that the health system owners realized more than $100 million cash as a result of the sale. (See TDR, November 14, 2005.)

Another similar transaction was the sale by Health Alliance in Cincinnati, Ohio, of its laboratory outreach business to LabOne, Inc. (now part of Quest Diagnostics Incorporated). That sale in 2004 brought the selling hospital organization $43.9 million in cash. (See TDR, February 23, 2004.)

NCH Is Using DSI Sale To Raise Needed Capital

FACING OPERATING LOSSES DUE TO NEW COMPETITION IN NAPLES, FLORIDA, NCH Healthcare System is raising needed cash by selling DSI Laboratories, Inc., to Laboratory Corporation of America.

The new competitor is Hospital Management Associates (HMA), a national for-profit hospital company with headquarters in Naples. It operates 61 hospitals in 12 states. In May 2006, HMA paid $125.5 million to buy the 83-bed hospital and outpatient medical center known as Cleveland Clinic Naples. It renamed the facility Physicians Regional Medical Center.

It is estimated that NCH Healthcare System will lose as much as $20 million during 2007. NCH acknowledged the need for capital, stating that the sale of DSI represents a reallocation of hospital assets. “Those assets are better used in our core function,” said Chairman Carl Westman of NCH Healthcare System.

Allen Weiss, M.D., President and CEO of NCH, agreed. “NCH will benefit by enabling us to reallocate resources and maximize our efforts in enhancing the core service for which we are most respected throughout the region and the state: inpatient care,” he said. “In addition, the transaction will help fortify our balance sheet and help support our ability to offer competitive wages and benefits to continue to retain and attract quality employees.”

NCH is an integrated healthcare system with 681 licensed beds. In the two hospitals, 535 independent physicians care for more than 31,000 patients each year. NCH does about 500 open heart surgeries and delivers 4,500 babies each year.

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