MDS Intends to Divest All Lab Testing Assets

One of Canada’s major lab companies is actively selling its laboratory business

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CEO SUMMARY: As part of a major corporate restructuring, MDS Inc. is selling three business units, including MDS Diagnostic Services. Within the Canadian healthcare system, this is a major event. MDS operates some of the nation’s largest laboratory facilities in its most populous provinces. However, finding buyers may be difficult. Since announcing divestiture plans five months ago, MDS has yet to sell a lab.

JUST AS IT EXITED the laboratory testing business in the United States, MDS Inc. of Toronto, Ontario is moving to sell all of its laboratory testing assets in Canada.

This is a noteworthy development for the Canadian healthcare system. MDS has been one of the major independent providers of laboratory testing services in Canada. Its laboratory testing division, called MDS Diagnostic Services, generates revenues of about US$350 million per year.

Intent To Divest

On September 1, 2005, MDS Inc. announced a major corporate restructuring. It intends to divest three of its six business divisions. This will allow it to focus on its existing business in the “fast growing life sciences markets.”

Along with the diagnostics business, MDS disclosed its intent to also sell Source Medical (Canada’s largest distributor of medical, surgical and laboratory supplies) with annual revenues of US$350 million and MDS Capital (source of venture capital to emerging life sciences companies) with assets of about US$870 million.

On December 6, 2005, MDS Inc. disclosed that it was in negotiations to sell its 25% interest in Calgary Laboratory Services (CLS), a joint venture, regional laboratory organization based in Calgary, Alberta. The MDS interest is likely to be purchased by the Calgary Health Region, which already holds a 50% interest in CLS. The remaining 25% interest in CLS is owned by Dynacare Kasper Medical Laboratories, based in Edmonton, Alberta. This is a laboratory business unit of Laboratory Corporation of America.

CLS makes up about 17.5% of MDS’ lab testing revenues. During 2005, MDS says it booked revenues of US$61 million and net income of US$1.3 million from its 25% share of Calgary Laboratory Services.

CLS is one of three major laboratory operations owned by MDS. Toronto Medical Laboratories
(TML) is a joint venture partnership between MDS and University Health Network (Toronto General Hospital, Toronto Western Hospital, and Princess Margaret Hospital). TML also includes two community hospitals and four specialty hospitals.

Another MDS laboratory in Ontario is Integrated Health Laboratory Services, which is a partnership between MDS and hospitals in the Windsor area. The company also partners with hospitals in the Niagara region, as well as several other organizations in Ontario.

In British Columbia, MDS Metro Laboratory Services is one of the province’s two largest independent laboratories. Its main lab facility is in Burnaby and a smaller lab is located in Victoria.

Major Changes Ahead

The decision by MDS to exit the laboratory testing business in Canada is a significant development. In the private sector, MDS and Dynacare have been dominant providers of lab testing services. One factor behind MDS’ decision is likely to be the difficult politics of trying to sustain a profitable business that serves a single-payer, government-directed health system.

In fact, knowledgeable observers of the laboratory marketplace in Canada say there are no obvious private buyers for the MDS laboratory assets, notwithstanding the usual rumors of interest by Dynacare/LabCorp and Quest Diagnostics Incorporated.

If no private buyers step to the table to acquire MDS’ laboratory assets, they are likely to be picked up by the regional health authorities, similar to the negotiations now involving Calgary Laboratory Services. How- ever, that is likely to be a time-consuming process and would probably not result in strong sales prices for MDS’ share of the laboratory assets.

For lab executives and pathologists in the United States, events in Canada may be relevant in at least one respect. Canada’s universal health system, funded and directed by the government, tends to have certain biases against private health providers, including laboratory companies.

Chronic Underfunding

Combine chronic underfunding for lab- oratory testing services over time with an institutional bias by government health program administrators against for-profit laboratory companies, and it should be no surprise that one of Canada’s major laboratory testing providers is looking for the door.

How will the vacuum left by MDS’ departure be filled? That is the key element to watch in this unfolding story. Just as Medicare and Medicaid reimbursement for lab testing has declined precipitously in the United States during the past 22 years, so also has the Canadian health system squeezed significant amounts of money out of laboratory testing budgets.

Private vs. Public Labs

The laboratory industry may soon learn whether the sustained reductions in laboratory reimbursement over the past 15 years now make most Canadian provinces unattractive for private laboratory operators. That is certainly one conclusion that could be argued if no private companies step forward to acquire the MDS laboratory operations and they are absorbed back into the various regional health authorities.

That may prove to be the case. After all, it’s now been five months since MDS Inc. publicly declared that it would sell its laboratory interests. As of press time, no buyer for any MDS lab property has been announced.

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