Quest Pays $934 Million In Acquisition of LabOne

Quest Diagnostics came a’ courting... and LabOne decided to say “yes!”

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CEO SUMMARY: In many ways, this acquisition would appear to be the “same old story” of lab consolidation that has marked the lab industry for almost 20 years. Yet, beneath the surface is an unexpected dimension: a motive to use the resources of both companies to better position Quest Diagnostics Incorporated to compete in the rapidly-evolving national market for wellness services.

WITH AN AGREEMENT TO PAY almost $1 billion to buy LabOne, Inc., laboratory industry giant Quest Diagnostics Incorporated is back in the lab acquisition game.

The deal was announced on August 9, 2005 and is expected to close during fourth quarter. LabOne, based in Lenexa, Kansas, is on track to post revenues in excess of $500 million during 2005. By contrast, Quest Diagnostics’ revenue in 2004 was $5.12 billion.

LabOne was not actively looking for a buyer. Earlier this year, the company was approached by Quest Diagnostics. Negotiations over recent months led to the agreement announced on August 9.

In buying LabOne, Quest Diagnostics is continuing the pattern of the two blood brothers acquiring those smaller laboratory companies which achieve critical mass. Along with an adequate revenue base, these smaller companies usually enjoy a strong share in some local markets, or they have a significant market position in specific segments of the laboratory testing marketplace.

Quest Diagnostics’ interest in LabOne was for both of these reasons, along with a third: LabOne represents an interesting springboard to develop laboratory testing services that serve the evolving wellness market. It is this dimension of the acquisition which indicates how Quest Diagnostics wants to position itself in coming years.

Kansas City & Cincinnati

In terms of geography, LabOne has two particular assets which Quest Diagnostics considers quite valuable. One is LabOne’s clinical testing business in Kansas City, Missouri. The other is LabOne’s HealthAlliance lab- oratory operation in Cincinnati, Ohio.

These are both markets where Quest Diagnostics does not already have a strong presence. Further, each of these markets is supported by a state-of-the-art laboratory facility. In fact, LabOne only recently moved into its new, 138,000 square foot laboratory in Cincinnati.

Looking at lab testing market segments, LabOne has a modest and growing business in drugs of abuse. But the most attractive segment play for Quest Diagnostics is LabOne’s solid business in providing “risk assessment services to the life insurance industry,” including blood testing. In recent years, it has also expanded into health screening for employers.

Wellness Strategy

Here is the key to understanding one important reason why Quest Diagnostics paid such a strong price to acquire LabOne. It wants to become a major player in the growing market for wellness services. LabOne already has an established presence in this market segment, along with management experience and important business relationships.

Both laboratory companies understand how employers, health insurers, and the life insurance industry are devoting more resources to help their employees and beneficiaries live a healthier life. Laboratory testing plays a key role in this effort.

Hoping For Synergies

There are interesting synergies in this market segment. For example, LabOne operates a network of mobile paramedics. These professionals travel to the customer to provide relevant health services.

By contrast, Quest Diagnostics has an extensive national network of patient service centers, rapid response labs, regional lab testing centers—all supported by client and field service personnel. This opens up new opportunities with LabOne’s existing clients, since the local Quest patient service center would be in a position to serve those LabOne clients following the pending merger.

THE DARK REPORT observes that the expressed interest by Quest Diagnostics in the wellness marketplace is a note-worthy development. It is a major motive behind Quest Diagnostics’ agreement to approach LabOne and negotiate the pending acquisition.

Lab administrators and pathologists should take this as a cue to pay closer attention to new health and wellness initiatives being introduced in their region by local employers and health plans. This is consistent with THE DARK REPORT’S prediction that consumer-directed health plans (CDHPs) will be a focal point for reform of the American healthcare system. As this happens, laboratory testing services will cease to be considered a “commodity.” Instead, consumers will opt for value when selecting their laboratory.

Quest’s Strategy Shifting With New CEO

SINCE THE ARRIVAL OF SURYA N. MOHAPATRA, PH.D., as Chairman and CEO of Quest Diagnostics Incorporated, there has been a subtle shift in the company’s laboratory acquisition strategy.

Knowledgeable sources say that, because Mohapatra has an engineering and a science background, he has a keen interest in developing product and raising the value of services Quest Diagnostics provides in the marketplace. For that reason, the company is primarily seeking acquisitions that have an intrinsic and clear value to support that strategy.

This contrasts somewhat from the acquisition strategy of former CEO Kenneth Freeman. Freeman’s long career in finance and business development gave him a different perspective on growth by acquisition. During Freeman’s tenure, Quest Diagnostics was a regular and aggressive bidder for most lab acquisition opportunities. Under Mohapatra’s leadership, Quest Diagnostics is showing more selectivity when it negotiates and bids for lab acquisitions.

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