Opko Pays $1.47 Billion to Buy Bio-Reference Lab

Nation’s third largest lab company to become business unit of a pharma and diagnostics firm

CEO SUMMARY: It’s a case of the little fish gobbling the big fish, as Opko Health – with revenue of $91 million – will be acquiring Bio-Reference Laboratories, with revenue of $832 million. But the more interesting aspect of the story is that the CEO of Opko Health is a physician worth $5 billion and highly respected by Wall Street. It could be that Bio-Reference CEO Marc Grodman, M.D., has gained a shrewd advisor and powerful ally in Phillip Frost, M.D., the Chair and CEO of Opko Health.

MANY LAB INDUSTRY EXPERTS and Wall Street investors were caught by surprise when, on June 2, they learned that Opko Health Inc., of Miami, Florida, had agreed to pay $1.47 billion in an all-stock deal to acquire Bio-Reference Laboratories Inc., of Elmwood Park, New Jersey.

Bio-Reference is the nation’s third largest publicly-traded lab company and had revenue of $832 million for its fiscal year ending October 31, 2014. Opko Health, by contrast, is a much smaller company. It posted revenue of $91 million for 2014. Opko is focused on pharmaceuticals and diagnostics. Currently it has only a small presence in the clinical laboratory testing marketplace.

There were several reasons why the lab industry and Wall Street were caught off guard by this acquisition announcement. First, there was no prior indication or rumor that Bio-Reference had an interest learned that in being acquired. Second, the acquiring company is much smaller, with just one-eighth the annual revenue of BRLI.

Third, Opko is better known for its pharmaceutical products than its diagnostic services. Fourth, many financial analysts have always assumed that, were Bio-Reference Laboratories to be sold, the most likely purchasers would be Laboratory Corporation of America or Quest Diagnostics Incorporated-or even a big private equity company-but not a relatively small company involved in therapeutic drugs and diagnostics.

Opko and BRLI expect this transaction to close in the second half of 2015, subject to regulatory approvals. Officials stated that Bio-Reference Laboratories would continue to operate with its existing management team and would begin distributing Opko’s diagnostic products and lab testing services following the completion of the sale.

Wall Street’s Mixed Response

News of BRLI’s acquisition met with a mixed response by investors and analysts on Wall Street. For example, Todd Campbell at Investopedia saw benefits to Opko Health from this deal. He wrote, “As a result, Opko Health’s acquisition instantly transforms it from a small-cap company with little revenue and no profit into a lab testing leader with annualized revenue north of $900 million that can help offset some of Opko Health’s spending.”

Other investors voted with their feet against the deal. In the days following the acquisition announcement, Opko shares fell from $19 on Wednesday, June 3 to under $16 by Friday, June 12. Because Opko is swapping its shares for BRLI, this reduces the market value of the transaction.

Assuming that the acquisition is completed during the second half of 2015, the question then becomes: what is next for Bio-Reference Labs? For the better part of two decades, it has been one of the nation’s fastest-growing public lab companies. During this time, it regularly posted quarterly gains greater than 10% to 15% in revenue and specimen volume.

Both a Local, National Lab

Bio-Reference has also accomplished a unique feat. Within its core geography of New York City and the Tri-State Metro, it provides the full range of routine, reference, and esoteric testing services to office-based physicians in competition with Laboratory Corporation of America and Quest Diagnostics Incorporated.

More significantly, from this foundation, Bio-Reference has built a steadilygrowing regional and national business in reference and esoteric testing. During its quarterly conference call on Monday, June 8, company executives reported that reference and esoteric testing represented 68% of total revenue for the quarter ending April 30, 2015.

Because of this quite large proportion of reference and esoteric testing, in its overall lab test mix, Bio-Reference Laboratories enjoys a very high average revenue per requisition. BRLI reported that revenue per patient was $86.69 in the most recent quarter. This was a 3% increase from the $84.18 recorded for second quarter of 2014. It is almost double the average revenue-per-requisition generally reported by BRLI’s two large national lab competitors, which is in the $45 range.

Overlooked Aspect of Deal

One aspect of this acquisition that most financial analysts have overlooked is the fact that Opko Health has a Chairman and CEO who is widely-respected by the financial community. He is Phillip Frost, M.D. Forbes estimates his net worth at $5 billion.

Frost has been active in the pharmaceuticals industry since the mid-1980s. He is probably best known for having led Ivax Pharmaceuticals, a generic drugmaker, from small size in 1987 to a $7.6 billion sale to Teva Pharmaceuticals in 2005.

Frost was a dermatologist and served as Chairman of the Department of Dermatology at Mt. Sinai Medical Center of Greater Miami, in Miami Beach, Florida from 1972 to 1990.

As Forbes noted, “While practicing in Miami in the 1960s, he (Frost) tinkered with a disposable device to make biopsies easier. He recognized the tool had potential both in the examination room and the marketplace, and partnered with Michael Jaharis to build a company around it. Jaharis took care of the boardroom and ran the day to day. Frost stayed in the lab and added new patents. Their duet was a hit and Jaharis has become a billionaire too. They sold Key Pharmaceuticals to Schering-Plough in 1986 for $835 million.”

Experience with Diagnostics

As this profile shows, Frost has direct clinical experience with biopsies and diagnostic technology. He understands the potential for clinical lab testing to significantly improve diagnostic accuracy and patient outcomes.

Thus, Frost and his executive team may fully appreciate the way BioReference Laboratories built a thriving business on sophisticated molecular diagnostics and genetic testing. They could see some useful synergies among the products under development by both companies.

This opportunity was specifically mentioned in the press release announcing the acquisition. The two companies said, “Through GeneDx, Bio-Reference Laboratories’ genetic sequencing laboratory, and GenPath Diagnostics, its Oncology and Women’s Health business units, Bio-Reference Laboratories has accumulated a vast array of genetic and genomics data that OPKO will make available to industry and academic scientists to enhance their drug discovery and clinical trial programs.”

New Diagnostic Opportunity

Another element to this pending acquisition pathologists and clinical laboratory managers should recognize is that ongoing advances in molecular and genetic technology are creating new opportunities to apply these developments to clinical care in unique ways. Companion diagnostics-a specific clinical lab test to determine how the patient may benefit from a specific therapeutic drug-is just one example of such an opportunity. Therefore, we may see other unexpected buyers come into the market and acquire clinical laboratory companies for these reasons.

In 2012, Okpo Acquired Oppenheimer Urologic Lab

IN NOVEMBER 19, 2012, Opko Healthcare announced an agreement to acquire rost-Data, Inc., the owner of OURLab (also known as Oppenheimer Urologic Reference Laboratory).

At that time, in an exclusive interview with THE DARK REPORT, Jonathan Oppenheimer, M.D., the founder of OURLab, discussed the reasons behind his interest in selling his lab company to Opko. Among those reasons was the opportunity to go beyond lab testing and collaborate on therapeutic solutions. (See TDR, November 19, 2012.)

“This merger is important for OURLab because it creates the opportunity to use our existing resource base in three ways,” explained Oppenheimer. “First, because of proprietary diagnostic and therapeutic technologies at Opko Health, our clinicians will be engaged in activities that go beyond laboratory medicine and pathology.

“Second, it leverages our sales force by giving them more products to sell,” noted Oppenheimer. “Third, in addition to our work in diagnostic medicine, we can now get involved in the development of pharmaceuticals, which is a fast-growing area of medicine today.” (See TDR, November 19, 2102.)

One specific opportunity for synergy in Opko’s acquisition of OURLab was Opko’s 4Kscore test. This proprietary assay uses a blood specimen to provide the patient and the physician with a risk score for prostate cancer. Both companies expected that OURLab would be a channel to market the 4Kscore test and other diagnostic products developed by Opko.

The press release announcing the agreement between Opko and BioReference Laboratories, noted that BRLI would distribute Opko’s diagnostic products. That would include the Opko’s 4Kscore assay.

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