Sonic HealthCare In US: How Will Market Change?

In the same month, LabOne sells to Quest and Sonic Healthcare buys CPL in Austin

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CEO SUMMARY: LabOne, Inc.’s acquisition by Quest Diagnostics Incorporated, announced in early August, removes, as a competitor, a lab company that was growing and beginning to credibly challenge the two blood brothers. Just weeks later, Sonic Healthcare Ltd.’s purchase of Clinical Pathology Laboratories, Inc. of Austin, Texas brings a brand-new competitor into the national lab market.

IT APPEARS TO BE A CASE of lose one–gain one. Within the space of a single month, the laboratory industry lost one dynamic national lab company while welcoming a brand-new entrant into the competitive market for laboratory testing services provided to office-based physicians.

Of course, I am referring to the separate acquisitions where LabOne, Inc. was purchased by Quest Diagnostics Incorporated and Clinical Pathology Laboratories, Inc. was sold to Sonic Healthcare Ltd. These deals were announced to the public on August 9 and August 23, respectively.

Individually and collectively, change of ownership at LabOne and CPL will definitely alter the existing competitive landscape in specific regions across the United States. But what lab directors and pathologists may find even more interesting is how specific healthcare trends may work in ways that magnify the impact on the competitive balance expected from each of these lab acquisitions.

First, a look at how the LabOne sale may impact the competitive landscape. At over $500 million in annual revenues, LabOne was steadily expanding its business in providing lab tests to office-based physicians. It was doing this in at least three primary ways.

Steady Growth at LabOne

One, it was competing aggressively in its home market of Kansas City. During the past decade, its share of this regional market has grown steadily. Two, it was using acquisitions to selectively expand into other regional markets. LabOne’s purchase of the HealthAlliance Laboratories in Cincinnati was an important milestone for this business strategy. (See TDR, February 23, 2004.)

Third, LabOne’s LabCard program was opening doors with TPAs (third party administrators) and payers in various regions throughout the United States. (See TDR, March 18, 1996.) The LabCard program was designed to utilize LabOne’s unique ability to provide lab tests from its national testing center in Lenexa, Kansas, for office-based physicians in most areas of the United States.

In recent years, the cumulative growth from these three business lines was positioning LabOne to become a credible competitor at the national level. That was evident when LabOne outbid the two blood brothers and other interested parties during the Health Alliance Laboratories’ sales process.

National Lab Oligopoly

Now that LabOne is soon to become part of Quest Diagnostics Incorporated, it will no longer be a “third option” in the national lab services marketplace. In the weeks following the acquisition announcement, it appeared that the national oligopoly enjoyed by the two blood brothers in providing lab testing to office-based physicians had tightened its grip.

That is why the news of CPL’s sale to Sonic Healthcare is a particularly interesting development. Sonic Healthcare is well-managed and has access to capital. It has a demonstrated track record for profitable growth. Its entry into the U.S. lab services marketplace via CPL immediately makes it a credible new competitive force.

Two Strong Companies

That’s because the Sonic–CPL combination is a marriage of two strong companies. Over the past 15 years, CPL has successfully expanded its lab testing business in Texas. This large state is highly competitive. Both Quest Diagnostics and LabCorp have a significant presence in the state, anchored by labs in cities like Dallas and Houston.

CPL has grown tough because Texas is a tough healthcare market. Like California and Florida, managed care was a disruptive factor in the state during the 1990s. At the same time, the competition among labs for the lab testing business of office-based physicians in Texas has always been intense. To survive and thrive, it has been necessary for the executive team at CPL to execute with precision, operate at maximum productivity, and maintain a professional sales and marketing program.

It is precisely these corporate strengths that promise to make the Sonic-CPL combination an important factor in the national lab testing marketplace. CPL will continue to be led by Chairman and CEO Robert Connor, M.D., and President and COO David Schultz. Under the sales agreement, both men have equity in CPL and plenty of motivation to expand CPL’s business in the United States.

Aggressive Growth At CPL

This is evidence that, after the close of the sale, at least two things can be expected. First, Clinical Pathology Laboratories will continue to be a tough, intense competitor as it pursues increased market share. Second, CPL can be expected to expand into new regions of the country. Sonic Healthcare is aggressively managed to produce sustained growth in clients, specimens, revenues, and net profits. It can be expected to provide the capital and manpower needed to support double digit rates of growth at CPL.

What will be of greatest interest, however, to pathologists and lab directors watching how CPL is handled after the sale, is one dimension of Sonic Healthcare’s core business strategy. That is its belief that regional laboratories should keep their original identity and management should be allowed a fair degree of local flexibility and initiative.

As noted in the preceding story, Sonic Healthcare’s CEO, Colin Goldschmidt, M.D., calls this a “federation model…whereby each member of the [Sonic] group enjoys management autonomy.” This management philosophy contrasts rather starkly with that of most publicly-traded labs in the United States since the mid-1980s.

The norm in the U.S. is for the acquiring laboratory to move quickly to put its brand on the newly-acquired laboratory, thus losing the often-considerable goodwill of the acquired lab’s name and reputation. Speedy consolidation, often involving the closure of labs and patient service centers, gives the acquiring lab immediate economic benefits, but often alienates patients and long-time physician-clients of the acquired lab.

Sonic Healthcare is saying that it will do the opposite with CPL. CPL will keep its name, its identity, its people, and its existing service infrastructure. CPL’s executive team will have a wide degree of autonomy to craft the most appropriate business strategies to meet their growth objectives.

Think Local, Act Local

Since Sonic Healthcare is interested in other lab acquisitions in the United States, its “federation” business model means that each lab company acquired is likely to continue under its existing identity, with its management team empowered to do serve its physician-clients, and its local healthcare community, in whatever unique ways are best.

This is why Sonic Healthcare has the potential to roil the status quo in the lab testing marketplace. If it does acquisitions and allows each local lab to keep its identity, while providing capital and management acumen to support growth, a number of independent lab companies that refuse to sell to the two blood brothers may be acquisition candidates for Sonic. Over time, this could challenge the existing hegemony that the two blood brothers hold over many regional markets in the United States.

Sonic’s Appearance At the Exec. War College

THERE ARE SOME PATHOLOGISTS and lab executives who already know quite a bit about Sonic Healthcare, Ltd., Australia’s largest laboratory company.

At the Executive War College of 2000, conducted at the Fairmont Roosevelt Hotel in New Orleans, Managing Director and CEO Colin Goldschmidt, M.D., presented a strategic case study of Sonic Healthcare to an audience of more than 450 pathologists and lab industry leaders.

Goldschmidt captured the full attention of the audience as he described the market dynamics in Australia which were fueling laboratory consolidation in the commercial sector. It was an uncannily parallel story to the commercial lab consolidation experienced in the United States since the mid-1980s.

In 2000, Sonic Healthcare was already the largest laboratory company in Australia. But one part of Sonic’s business performance caught the attention of careful listeners. Not only was Sonic growing by the acquisition of smaller laboratories, but it was consistent at taking these acquired laboratories and generating double-digit growth in revenues and profits.

This was contrary to the experience of most lab acquisitions in the United States. Too often in this country, when a smaller lab was acquired by a bigger lab, the bigger lab was challenged to retain the business it had just bought. Acquiring labs in the United States were seldom able to generate substantial increases in clients, specimens, and revenues in the months following the sale.

In fact, in the years following that 2000 War College, executives from Sonic Healthcare traveled from Australia several times to participate in later War Colleges. They did their homework on the U.S. market for lab services and developed personal contacts with other laboratory executives at each War College.

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