Sonic Lands in New York with Sunrise Purchase

Australia’s Sonic Healthcare inks its seventh laboratory acquisition agreement in 24 months

CEO SUMMARY: Sonic Healthcare Limited of Sydney, Australia, continues to open its checkbook and purchase independent laboratory companies here in the United States. The latest deal is its agreement to purchase Sunrise Medical Laboratories of Hauppauge, New York, for as much as $168 million. This gives Sonic Healthcare a solid foothold in the Tri-State market of New York, New Jersey, and Connecticut.

COMPETITION FOR LAB TESTING in greater New York just heated up another notch with news that Sonic Healthcare Limited is buying its way into the market.

On July 5, Sonic Healthcare announced it had signed an agreement to purchase Sunrise Medical Laboratories of Hauppauge, New York. Based on Long Island, Sunrise gives Sonic a firm foundation to expand in the Tri-State area.

Sonic will purchase 100% of Sunrise Medical for $148 million. The deal also includes another $20 million for an earn- out agreement. Sunrise Medical has annual revenue of about $75 million, and Sonic disclosed that the purchase price reflects a 9.5 multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA).

There are five significant aspects to Sonic’s acquisition of Sunrise Medical. First, this deal puts Sonic Healthcare squarely into one of the nation’s largest urban and suburban markets. The 2000 census identified the metropolitan area of New York, Long Island, and Northern New Jersey as the biggest in the United States, with 21 million residents.

Second, the Sunrise acquisition is significant because the Long Island laboratory has earned a reputation as a tough competitor in its service area. It is well-run and provides a consistently high level of service. Further, Sunrise Medical Laboratories has a philosophy of leveraging its high service levels with effective sales and marketing. This strategy has helped the company to more than double in size during the past six years.

Third, it can be expected that Sonic Healthcare is buying Sunrise in order to use it as a platform for growth in the Tri-State area. As a billion-dollar, international laboratory company, Sonic Healthcare is capable of supplying additional management support and the ample amounts of capital that will be needed to expand Sunrise’s presence into new service areas.

Market Valuation

The fourth significant aspect about this acquisition is the market valuation for Sunrise, as validated by the sales price agreed to by Sonic Healthcare. As noted earlier, Sonic will pay 9.5 times EBITDA for Sunrise. This valuation multiple is significantly more than what was prevalent just five or six years earlier.

The sales price and the multiple show a continuing trend toward higher valuations for laboratory companies. Earlier this year, Quest Diagnostics Incorporated paid $2 billion for Ameripath, Inc., a company with annual revenue of $750 million. Analysts estimate that this valuation was at about 10 times EBIDTA. (See TDR, April 23, 2007.)

Fifth, this acquisition continues the rapid expansion of Sonic Healthcare into the United States. When the Sunrise deal closes later this year, it will be at least the seventh laboratory company that Sonic has acquired since the summer of 2005. (See sidebar above.) Sonic Healthcare has only publicly announced four of its seven laboratory acquisitions.

For the two founders and owners of Sunrise Medical Labs, the agreement with Sonic Healthcare will preserve the name and operational integrity of the lab they established in 1972. CEO Larry Siedlick and President Pat Lanza will remain after the sale closes and continue to operate the business as part of the growing national network of Sonic labs in the United States.

Finally, is it coincidence that, for the second year in a row, an owner of an independent lab company spoke at the Executive War College and, within months, Sonic Healthcare acquired that lab? Siedlick spoke at the program in May this year, and this sale was announced eight weeks later. In May 2006, Philip Chen, M.D., Ph.D., founder and former president of Cognoscenti Health Institute in Orlando, Florida, made a War College presentation. About 12 weeks later, in September 2006, Sonic acquired Cognoscenti. Today Chen is the Vice President and Chief Medical Informatics Officer for Sonic’s Clinical Pathology Labs (CPL) of Austin, Texas.

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