CEO SUMMARY: Laboratory acquisition activity was surprisingly high during 2004. One reason is that new buyers appeared in the marketplace. However, all buyers have specific acquisition criteria. When a selling lab meets that criteria, it can expect multiple bidders and a strong purchase price. Here’s a review of 2004’s lab acquisition activity, with commentary about which types of labs are in high demand.
THREE NEW LABORATORY BUYERS appeared during 2004. At least two of these buyers are actively hunting additional acquisitions.
“Many pathologists and laboratory executives will be surprised to learn how much merger/acquisition activity took place during 2004,” stated Chris Jahnle, Managing Director at Haverford Healthcare Advisors, located in Paoli, Pennsylvania. “We know of 13 laboratory acquisitions and it is likely that several more sales of smaller laboratories happened, but were never announced to the public.”
“The biggest acquisition was Genzyme Corporation’s purchase of IMPATH, Inc. last March,” added Jahnle. “It paid $215 million for IMPATH. It also purchased Alfigen, Inc., a specialty testing lab company in Pasadena, California for $47.6 million.
“The second biggest lab deal of 2004 was the sale of US LABS, Inc. to Laboratory Corporation of America for $175,” he said. “Announced in December, this acquisition closed just 11 days ago.”
If laboratories are selling, who is buying? This is a relevant question because it identifies new competitors in existing markets. The answer also helps determine how the laboratory testing marketplace is evolving.
Who is Buying Labs?
“A look at the buyer’s side of our transaction summary (below) shows how certain buyers were the most active during 2004,” observed Jahnle. “American Esoteric Laboratories, Inc. and LabCorp each did three acquisitions during the year—four for LabCorp if you count the US LABS purchase that was announced in December 2004 and closed in February 2005.
“American Esoteric Laboratories (AEL) is a new lab company. It states that it wants to acquire specialty niche laboratories that support its menu of reference and esoteric testing,” Jahnle said. “However, its purchase of Memphis Pathology Laboratories in September put it squarely in the physicians’ office testing market, at least in the Memphis, Tennessee Metro area.
“The most active buyer of independent commercial laboratories seems to be LabCorp,” he explained. “It has consistently been a bidder whenever larger laboratories came up for sale. But in contrast to Quest Diagnostics Incorporated, LabCorp seems to have a continuing interest in buying smaller independent laboratory companies.
Interest in Smaller Labs
“Two examples are LabCorp’s purchases of Redding Pathologists Laboratory (Redding, California) and Clinical Laboratories of Black Hills (Rapid City, South Dakota) during 2004,” continued Jahnle. “It is estimated that each of these lab companies had annual revenues in the range of $5 million to $15 million.”
LabOne, Inc. purchased the laboratory assets of the Health Alliance in Cincinnati, Ohio early in 2004. It paid approximately $42.4 million for about $50 million per year in laboratory revenues. “During the past 24 months, LabOne has actively sought to acquire private lab companies,” noted Jahnle. “Expect them to continue bidding, particularly if the transaction includes a laboratory providing both hospital inpatient and outreach testing services.
National Lab Partners, LLC
“One laboratory acquirer which surfaced at the end of the year is National Laboratory Partners, LLC,” he said. “It purchased Universal Diagnostic Laboratories of Brooklyn, New York in December. This is a new company, made up of experienced laboratory executives who, over the years, have worked at some of the nation’s largest public lab companies.
“National Laboratory Partners will continue to seek to grow by acquisition, whenever possible. Depending on its access to venture capital, it may be a bidder whenever larger laboratory companies are listed for sale,” observed Jahnle.
“There is one buyer who didn’t do a laboratory acquisition during 2004. That is Clinical Pathology Laboratories, Inc. (CPL) of Austin, Texas,” he stated. “During 2003, CPL had acquired a laboratory in Virginia and another in Toledo, Ohio. I believe CPL remains an interested buyer for laboratory companies they see as a good strategic fit for their business plan.”
Overall, Jahnle considers that the lab acquisition activity of 2004 demonstrates that laboratory consolidation will continue. “Existing buyers, such as LabCorp and LabOne, remain active bidders,” he explained. “In addition, each year new buyers appear. In 2004, that was American Esoteric Labs and National Lab Partners.
Multiple Offers To Sellers
“This field of buyers means that laboratory sellers have a high degree of probability that more than one buyer will offer to purchase their lab company,” continued Jahnle. “It is an outcome that was not expected just a couple of years ago, when, between themselves, the two national lab firms bought American Medical Laboratories, Dynacare, Unilab, and DIANON Systems. Each of these lab companies was an eager buyer of laboratories in their own right.”
THE DARK REPORT can identify three distinct segments to the laboratory services market that attract the interest of potential buyers. They are: independent lab companies which offer routine testing services to office- based physicians, specialty testing/niche laboratories, and pathology group practices, particularly those with technical laboratories serving the outreach market. Jahnle concurs, and offered these insights about each.
“Commercial lab companies offering routine testing are truly a vanishing breed,” he said. “That supports a strong sales price in situations where a routine clinical lab company has significant market share in second-tier cities and rural markets.
“Because these types of labs are generally pathologist-owned and operated, they have a tight lock on their client base and market share,” explained Jahnle. “That makes it tough for national labs to win new clients in such regions. As a result, such laboratories are in high demand by buyers.
“This is not true of most independent labs still operating in urban areas. Often their client base is heavily weighted to nursing homes, forensic toxicology, and other types of low-margin clients. Lacking access to man- aged care contracts, these types of commercial laboratories are much less desirable to buyers,” he observed.
High Demand By Buyers
“In the specialty testing/niche laboratory segment, demand can be quite high for select sellers,” noted Jahnle. “When there is a match between the buyer’s strategic needs and the specific test menu of the seller, a transaction will result.
“If you look at the sales transaction summary, there are several examples of this,” he continued. “Genyzme’s purchase of Alfigen (cytogentics), AEL’s purchase of Thrombocare Laboratories (coagulation), and Bio-Reference Laboratory, Inc.’s purchase of Cancer Genetics’ cytogentics laboratory aptly validate this market trend.
“That brings us to anatomic pathology,” declared Jahnle. “For anatomic pathology group practices, one expected buyer would be AmeriPath, Inc., but only if the pathology group practice meets its acquisition criteria. We have not seen any other public laboratory companies actively seeking to acquire hospital-based pathology groups.
“However, it is a different situation for pathology sub-specialty laboratories, particularly in urology, gastroenterology and dermatology,” he added. “Often these types of pathology laboratories exclusively serve an outreach market. There are multiple buyers whenever such pathology labs come up for sale.
Pathology Technical Labs
“In situations where a pathology group is based in a hospital, but owns a technical laboratory that serves the outreach market, I’ve seen strong buyer interest,” observed Jahnle. “I believe this reflects a marketplace reality.
“The reason there is strong buyer demand for pathology laboratories serving primarily an outreach market is that buyers understand that hospital inpatient volumes continue to decline relative to outpatient and office-based services. They want pathology outreach labs which serve this fast-growing outreach market.”
Jahnle’s observations and opinions complement a long-standing prediction by THE DARK REPORT. Laboratory consolidation will continue. As it does, it will concentrate market share—and market power—in the hands of a select group of large laboratory companies.
If this pattern plays out, it means that new buyers entering the lab services market will build their laboratory companies to a certain size, then sell to the larger lab companies—who have good business reasons to offer a generous price.
It will take several more years to validate this prediction. Will lab companies, as they reach a revenue base of $100 million, choose to remain independent? Or, will they choose to sell to a larger laboratory company?