Is PAML to Be Sold? ‘No Comment!’ Say Execs

Rumors persist that Spokane-based lab firm is having talks with at least one potential buyer

CEO SUMMARY: It is one of the 10 largest lab companies in the United States. Thus, if Pathology Associates Medical Laboratories in Spokane, Washington, were to be sold, it would trigger a major shift in the competitive market for lab testing services-both in the Pacific Northwest and nationally. Owners and executives at PAML have neither confirmed nor denied the ongoing rumors that the lab company’s two health system owners are exploring a sale of PAML.

WHEN THE SUBJECT is whether or not the owners of Pathology Associates Medical Laboratories (PAML) of Spokane, Washington, are open to sell the lab company, plenty of people are talking, while those “in the know” are not talking. The owners of PAML did not respond to inquiries by THE DARK REPORT about this matter. One executive at PAML did provide the following statement:

Thank you for your recent inquiry regarding PAML, LLC. As an organization we regularly explore opportunities that would help us improve quality, reduce the cost of care, and enhance patient experience. However, we don’t discuss details publicly until all parties involved agree to do so.

Readers can judge for themselves what this statement means. As written, it does leave open the possibility that the lab company might be holding conversations with interested buyers. So why write a story about the possible sale of PAML if company officials decline to declare that they want sell the lab company? The answer is that many lab professionals throughout the Northwest believe that PAML’s owners have been consider- ing a sale of the company. Such rumors started more than one year ago and persist today. One consistent theme is that lab’s owners have been in conversations with at least one prospec- tive buyer. Veteran lab executives know that, if a consistent rumor pops up over many months, there is high probability that some elements of these rumors are connected to real events.

PAML’s Sale Would Be News

Another reason to comment on this situation is that PAML is one of the 10 largest lab companies in the United States. Thus, if it were sold, it would shift the competitive balance in the lab testing market, both nationally as well as in the Pacific Northwest. That is why many lab executives are interested in this story. PAML is owned by Providence Health Associates of Seattle, Washington, and Catholic Health Initiatives of Denver, Colorado. (See TDR, November 2, 2009.)

It is a sizeable lab company. Counting its different joint ventures, including the PACLAB regional network, estimates are that PAML’s annual revenue exceeds $300 million. Its lab testing facilities and joint ventures operate in at least eight states. Because PAML is one of the largest employers in Spokane and in several other cities where it operates, were it to be sold, its fate would be of significant interest to government officials and business leaders in those cities. Equally concerned would be the lab employees in these communities, along with the physicians and other healthcare providers PAML serves.

What Would New Buyer Do?

Setting aside, for the moment, the reason why PAML’s owners might want to sell the lab company, who are the most likely candidates to buy PAML? And, were PAML to be sold, how might different buyers manage this lab company after the sale closed? Of course, the first potential buyers to come to mind are the nation’s two largest public lab companies. They regularly state they are interested in lab acquisitions and each has ample cash to close most any lab deal. Both Laboratory Corporation of America and Quest Diagnostics Incorporated would be expected to have strong interest in acquiring PAML.

Post-acquisition, with their existing regional lab facilities in Seattle, LabCorp and Quest Diagnostics would gain major economic benefits were they to shut down PAML’s large central laboratory in Spokane and move the bulk of that testing to Seattle. Moreover, since a generous portion of PAML’s specimen volume originates in the Seattle/Tacoma metropolitan area, there would be savings in transportation to divert those specimens away from Spokane and do the testing in Seattle. Such a step would leave several hundred medical technologists and other lab professionals living in Spokane with few employment options in their career field. Another prospective buyer would be Sonic Healthcare Limited, based in Sydney, Australia. With about $900 million of lab testing business in the United States, it has experience successfully acquiring and managing labs in this country.

Sonic Would Need Facilities

Sonic has the financial capability to purchase PAML. Post-acquisition, what would distinguish it as a buyer from LabCorp and Quest is that it would need all the existing lab facilities and staff currently operated by PAML. Sonic has no lab facilities in Washington State and its closest existing

lab facilities are in California. Also, Sonic Healthcare regularly tells investors that it operates a “federal model” with the labs that it purchases. Sonic has a history of keeping the existing management team and lab staff in place. Thus, Sonic would probably continue to operate PAML with few lab closures. The Spokane lab would maintain its oper- ations and its existing employees without the layoffs and multi-year downsizing typically seen after the two blood brothers acquire a lab. Another potential buyer mentioned in the rumors about PAML’s possible sale is Bio-Reference Laboratories, Inc., of Elmwood Park, New Jersey. This public company has annual revenues of about $800 million. It has the resources to finance the purchase of PAML.

BRLI Has Not Done Big Deals

What makes BRLI different than the three labs mentioned earlier is that BRLI does not regularly acquire sizable regional lab companies the way LabCorp, Quest Diagnostics, and Sonic have done over the past decade. This acquisition would be out of character for Bio-Reference Labs. Notwithstanding that fact, there are sound business reasons why Bio-Reference could benefit from acquiring PAML were that opportunity to become available. It would give BRLI a major central laboratory facility on the west coast and the ability to sell its speciality and esoteric testing services into the different communities where the PAML-hospital joint ventures are located.

Why Outsiders Think LabCorp Has an Inside Track to Possibly Acquire Spokane-based PAML

PERSISTENT RUMORS about the possible sale of Pathology Associates Medical Laboratories of Spokane, Washington, exist because outsiders are connecting multiple dots in ways they think lead to an obvious conclusion.
As these knowledgeable observers interpret recent events, they believe there are reasons why PAML’s owners would consider a sale and why one national laboratory com- pany—LabCorp—would have the inside track to buy PAML.

PAML is owned by Providence Health & Services of Seattle, Washington, and Catholic Health Initiatives (CHI) of Denver, Colorado. (See TDR, November 2, 2009.)

First, why would PAML’s owners consider selling the company? The speculation cen- ters on two ideas. First, revenue growth and profits at PAML are believed to be flat or slightly declining in recent years.

Second, PAML has substantial needs for capital to grow and sustain its lab testing operations. However, as a division of Providence and CHI, PAML must compete for capital with the hospitals and other clinical services the two owners control.

Competition For Capital

This could be a significant factor, because the hospitals and certain other clinical services generate the overwhelming majority of revenue and operating margin for both health systems. That is why Providence and CHI would want to give priority to capital requests from those services over the capital needs of PAML.

This is one reason why informed observers speculate that PAML’s owners would be open to selling the lab company. Another reason that supports this conclusion is the fact that, if sold, PAML’s purchase price would likely generate several hundreds of millions of dollars of cash to Providence and CHI—cash they can put to work developing their core clinical services.
So why would LabCorp have an inside shot at purchasing PAML, were a sale to be considered? On this point, outside observers in the Northwest connect an interesting series of dots.
They point out that LabCorp’s Dynacare has a long-running laboratory joint venture with Swedish Health Services in downtown Seattle. Starting in 2007, the President and CEO of Swedish was Rod Hochman, M.D.

System Operations Merged

In February 2012, Providence and Swedish merged their operations in the Puget Sound Region. Then, five months later, on July 1, 2012, Hochman became President and CEO of Providence Health & Services.

Rumor mongers in the Northwest point out that Hochman has much personal expe- rience with LabCorp and Dynacare, because the lab joint venture provides all the inpatient testing to Swedish Hospital. They point out that it would be natural for Hochman—now CEO at one of PAML’s owners—to take phone calls from LabCorp CEO Dave King relating to LabCorp’s interest in buying PAML.

LabCorp’s potential to have the inside track gets reinforcement from another fact. Outsiders speculate that because PAML’s current CEO, Francisco R. Velázquez, M.D., SM, was recruited directly from Quest Diagnostics Incorporated in 2012, there may be some residue of ill will that would make a deal with this national lab company a bit more difficult, but not impossible.

It must be noted that all of this is speculation. At the same time, these facts and interesting connections demonstrate why rumors of a possible sale continue to float throughout the Pacific Northwest. They are valid business reasons why PAML’s two owners would consider a sale of the lab company to be a reasonable strategic option.

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