"Dark Index"

Quest Buys New Jersey Lab, Lab Investors Cash In Stock

Major shareholders of AmeriPath, Unilab, and Dynacare offer their stock to public

THERE’S LOTS OF BUYING and selling taking place among the public laboratory companies.

On one side of the spectrum, Quest Diagnostics Incorporated announced the acquisition of Clinical Diagnostic Services, Inc., a private laboratory company based in Englewood, New Jersey.

Clinical Diagnostic Services (CDS) was one of the largest independent lab companies remaining in the United States, with annual revenues of approximately $80 million. In recent years, majority owner Guy Seay had entertained offers from many buyers, but had always said no. Some were surprised by the decision to sell to Quest Diagnostics, but it makes sense for many reasons.

Savings From Integration

First, most clients of CDS are located in the New York metropolitan area. This is also prime geography for Quest Diagnostics. Thus, savings from operational integration should be significant.

Second, Quest Diagnostics holds many of the major managed care contracts in this region. This may help it generate more specimens from the physician offices served by CDS. That would provide additional revenues to Quest Diagnostics as a result of the CDS acquisition.

Third, CDS has a pool of talented medical technologists which, in light of the nationwide shortage of med techs, Quest Diagnostics can readily use. Quest’s main laboratory in Teterboro currently has about 250 job openings. It’s expected that current CDS employees will fill many of those open positions.

Secondary Stock Sales

Even as Quest Diagnostics was acquiring a major regional competitor, other public lab companies were busy. At AmeriPath, Inc., Dynacare, Inc., and Unilab Corp., primary shareholders decided it was an auspicious time to sell blocks of their shares to the public in secondary offerings.

AmeriPath filed its secondary offering on September 17. Three major investors sold 4,125,000 of their AmeriPath shares for $107.25 million. The offering was priced on October 23. These shares represented 14.06% of Ameripath’s 29.3 million outstanding shares.

Unilab Tests The Market

Next was Unilab, which filed on October 3.Investors connected with Kelso & Company, the private equity firm which acquired Unilab in 1999, offered 8 million shares. The secondary offering was priced on October 18 at $20.50 per share, representing a total of $164 million. However, the participating shareholders decided the price was not sufficient and the offering was not closed.

Just last week, on October 26, Dynacare filed for a secondary offering. The company will sell 2.7 million shares. Stockholders, including the private equity investment firm Golder, Thoma, Rauner, and Cressy (GTCR) and several senior Dynacare executives, want to sell 2.3 million shares. Total value of the offering would be about $79 million at current prices. This would be about 25% of Dynacare’s total outstanding shares. As of press time, this offering was neither priced nor closed.

Stock Sales By Equity Firms

Both Kelso and GTCR have moved to sell shares and recover their original investment, and subsequent profits, in Unilab and Dynacare, respectively. If the financial markets continue to be viewed as auspicious, the logical next lab company to make a public offering would be American Medical Laboratories (AML) of Chantilly, Virginia.

GTCR is a major investor in this lab company and wants to create a public market for AML’s shares. In fact, this was attempted last fall. AML filed for an initial public offering (IPO) on September 29, 2000. This occurred at about the same time that Specialty Laboratories, Inc. and Dynacare were also filing their own IPOs.

However, although Specialty and Dynacare did complete their IPOs, AML did not follow through with its own offering. Logically, American Medical Laboratories would be the next lab company to tap the financial markets.

Good News For Lab Owners

For those pathologists who continue to own and operate independent clinical laboratories, these recent events are a good sign. The financial fortunes of the public lab sector are strong. At a time when the general stock market is dragging, investors like the opportunities for profits and growth in lab testing.

This translates into higher prices when private laboratories are available for sale. Although terms of the sale of Clinical Diagnostic Services to Quest Diagnostics were not disclosed, knowledgeable sources believe that CDS was profitable and Quest Diagnostics paid a strong price to acquire the lab.

…knowledgeable sources
believe that CDS was profitable and Quest Diagnostics paid a strong price to acquire the lab.

Like LabCorp’s acquisition of profitable PathLabs, Inc. of Portsmouth, New Hampshire last fall, these sales of profitable private labs stand in stark contrast to most of the lab acquisitions done in the second half of the 1990s. Those were private labs, either bankrupt or at the courthouse door. Public labs acquired these money-losing operations for little more than the value of core assets.

Opportunity For Pathologists

There’s another important insight to be gained from these recent deals by public lab companies. The professional investment community is ready to commit significant dollars to those lab- oratory ventures they see as promising. THE DARK REPORT observes that pathologists with good management skills and a strong core business can readily attract financial backers.

Pathologists with entrepreneurial ambitions should take advantage of this market opportunity. The keen interest by professional investors in molecular and genetic testing means there is a ready ear for pathologists with a good business plan. The sustained revenue growth in the quarterly financial reports of public lab companies confirms that the laboratory test business is enjoying a time of prosperity.

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