"Acquisition Update"

Quest Gets into Wellness By Acquiring Summit Health

An early example of how the national lab companies may use acquisitions to diversify their revenue base

IT IS NO SURPRISE THAT THE NATION’S largest laboratory companies are looking for new revenue opportunities now that fee-for-service payment for lab tests is soon to end.

One striking example of this trend was the move last week by Quest Diagnostics Incorporated to acquire Summit Health, a company in Novi, Michigan, that provides on-site illness prevention and wellness programs for employers. Neither party disclosed the terms.

Summit Health uses a network of nurses to staff on-site wellness programs for employers, health plans, retail clinics, and other organizations. In its press release about the purchase, Quest stated that, in these clinics, nurses do biometric and other health screenings primarily by finger stick specimen collection. They also provide immunizations, wellness coaching, and conduct educational seminars.

In its work providing on-site wellness programs, Summit Health sends nurses to client companies’ offices to test cholesterol, blood pressure, and body mass index levels of employers. The nurses also have workers complete a health risk assessment survey.

Some useful analysis of the deal came from Amanda Murphy and J.P. McKim at William Blair & Company LLC in Chicago. “We estimate Summit Health generated revenue of roughly $50 million in 2012 and $80 million in 2013 (60% growth),” Murphy and McKim wrote. “We project it to generate revenue of $100 million in 2014 (25% growth), adding 1% to Quest’s revenue growth annually.”

Summit’s growth is driven in part by provisions in the Affordable Care Act, which provide incentives to employers to establish wellness programs.

Estimated Purchase Price

“Assuming Quest paid somewhere between 2.0 times and 2.5 times 2014 revenue (which seems reasonable given higher growth rates of Summit and historical lab multiples), that implies a purchase price of $200 million to $250 million,” Murphy and McKim added.

“We believe Summit has roughly 175 full-time employees and 100 to 150 temporary workers,” they wrote.

Interestingly, Murphy and McKim noted that the Summit deal was announced one day after Quest Diagnostics completed its acquisition of Solstas Lab Partners Group, a commercial laboratory in Greensboro, North Carolina. Quest paid $570 million for Solstas.

“Quest is trading at 13.2 times next-12-months’ earnings, above its three-and five-year averages of 12.6 and 12.7 times, respectively,” Murphy and McKim wrote. “The acquisitions (of Solstas and Summit Health) play into our thesis that a tough operating environment for labs, especially on the reimbursement front, will drive consolidation in the space to low-cost providers, Quest and LabCorp, particularly as larger labs seek top-line growth.”

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