CEO SUMMARY: Following three years of rapid growth in specimen volume and revenues, US LABS has accepted a purchase offer from Laboratory Corporation of America. Both US LABS’ fast growth and its sale to a national lab demonstrate that there is still opportunity in laboratory testing—and that one of the two blood brothers is ever ready to open its purse and offer a tidy sum to acquire such a lab.
COMPARED TO THE LAST BIG ROUND of laboratory acquisitions in 2002, the purchase of US LABS for $155 million by Laboratory Corporation of America shows how the laboratory marketplace has shifted in recent years.
First, US LABS is focused on a particular slice of the diagnostics testing market: reference and esoteric cancer testing. It is not the standard laboratory business model of offering routine chemistry and hematology testing services to office-based physicians.
Earlier Lab Acquisitions
Second, at an estimated $75 million in annual revenues, US LABS is not “big” in the traditional sense. During 2002, the four biggest laboratory companies acquired that year had anywhere from three to six times that revenue.
Three, US LABS is a fast-growth success story. In 2001, the first full year it pursued the oncology testing market, annual revenues were $16 million. For 2004, analysts estimate US Labs will close the books with approximately $75 million in annual revenues.
So, having demonstrated the ability to sustain strong growth in specimen volume and revenues over several years, why is US Labs selling now?
“US LABS had just begun working with investment advisors to prepare for an IPO (Initial Public Offering) in the second half of 2005,” explained Judd Jessup, CEO of US LABS. “During the early phases of this process, LabCorp stepped up with a price that the Board considered reasonable, particularly when it considered the uncertainties and risks involved in waiting to try an IPO in future months.
“Because US Labs was launched and funded with venture capital, it was always intended that the probable exit strategy for the venture capitalists was either an IPO or a direct sale,” explained Jessup. “LabCorp’s combination of timing and price was viewed favorably by the Board and shareholders.”
The two companies believe the sale will close sometime in the first quarter of 2005. The management team of US LABS is expected to remain. Few details about LabCorp’s plans have been made public. However, it is believed that LabCorp intends to operate US LABS as a wholly-owned subsidiary, using its own name at its present location in Irvine, California.
“…we offered pathologists a way to practice more sophisticated pathology without competing against them. It proved to be a win-win business relationship.”
Jessup attributes the company’s growth to its strategic business plan. “US LABS is a national anatomic pathology company offering sophisticated reference and esoteric cancer testing primarily to community hospital-based pathologists,” he said. “Our unique twist was to partner with these pathologists. We offered them the option of having us provide the technical services and allowing them to perform the professional services.
“Along with fast turnaround times and an advanced menu of testing services, we offered pathologists a way to practice more sophisticated pathology without competing against them. It proved to be a win-win business relationship,” he noted.
Technical & Professional
US LABS was first to develop the use of the ChromaVision Automated Cellular Imaging System (ACIS®) as a way to provide technical services on a cancer case, then digitally transmit the pathology images to the referring pathologist so he/she could diagnose the case and sign it out. That part of US LABS’ business became attractive enough that ChromaVision restructured itself, built its own laboratory and became a competitor. (See TDR, August 30, 2004.)
Another facet of the US LABS story is that it represents a significant business turnaround. In the early years, US LABS struggled to attain profit margins desired by its professional investors. In fact, Jessup was made CEO of the company back in 2001 specifically to help the company regain its financial balance, following a breakneck year of growth where costs outpaced revenue.
Jessup does acknowledge that current market uncertainties involving the IPO and Medicare reimbursement policies played a role in US LABS’ decision to sell at this time. “Reimbursement is always an issue,” he observed. “For example, this year Medicare made significant changes to reimbursement for flow cytometry procedures.”
Looking forward, Jessup believes there won’t be much change at US LABS under its new ownership. “LabCorp has a major commitment to sophisticated reference and esoteric testing,” he noted. “It is investing to expand its presence in the cancer testing marketplace, which is exactly where US LABS is already positioned. Both companies expect this to be a good marriage.”
Jessup will give credibility to those words because he, as well as most of the US LABS executive team, intend to stay after the company’s sale to LabCorp. But Jessup has an added motive. US LABS is his first management assignment in the laboratory industry. Through 1996, he was active in managing some of the nation’s largest managed care companies.
This gives him some unique insight that he wanted to share with readers of THE DARK REPORT. “Having sat at both sides of the managed care table, I can tell you that it is much more pleasant to be on this side. It is invigorating to work in a laboratory that clearly does good for both physicians and their patients.”