Quest Ready to Move on Unilab, Announces Its 2002 Earnings

Nation’s largest laboratory company expects to close the long-delayed Unilab acquisition

Share on facebook
Share on twitter
Share on linkedin
Share on print
Share on email

PERSISTENCE IS ABOUT TO PAY OFF for Quest Diagnostics Incorporated. After ten months of effort, it expects to finalize its acquisition of Unilab Corporation within weeks.

But the Unilab acquisition soon to close looks different than the acquisition that was originally announced by the two companies back on April 4, 2002. At that time, Quest Diagnostics was to pay approximately $900 million in stock and cash. It would also assume $200 million of Unilab debt, giving the deal a total value of almost $1.1 billion. (See TDR, April 22, 2002.)

The months since last April proved expensive to Unilab and its shareholders. Because of a decline in the value of Quest’s stock and a $83 million downward adjustment in the purchase price, it is now calculated that Quest Diagnostics will pay about $673 million in cash and stock, plus the assumption of the $200 million in Unilab debt.

Antitrust Issues

The deal was delayed once it became known that the Federal Trade Commission (FTC) had concerns about aspects of the transaction it believed would violate antitrust laws and regulations. In particular, the FTC seemed most concerned that, after acquiring Unilab, Quest Diagnostics’ would have no significant laboratory competitors in Northern California. To allay the FTC’s
concerns, Quest Diagnostics shopped a package of laboratory assets it currently holds in Northern California to likely buyers during October and November.

On February 4, 2003, it was announced that Laboratory Corporation of America would be the purchaser of these assets. Although speculation was rampant that Quest had offered its laboratory in Dublin, California for sale, that lab was not in the package of assets that LabCorp purchased. LabCorp is paying $4.5 million and the sale will be consummated after Quest Diagnostics closes its acquisition of Unilab.

Northern California Assets

LabCorp is buying leases on 41 patient service centers and five rapid response laboratories. It is also buying laboratory testing contracts that Quest Diagnostics currently holds with four IPAs (independent physician associations). Quest Diagnostics has noted that these four contracts represent approximately $27 million in revenues, attributable to capitated fees and related fee-for-service testing sourced from the IPA physicians. The IPAs have consented to the assignment of the contracts.

At this time, the FTC has not completed its review of the Quest/Unilab transaction nor the asset sale to LabCorp. However, executives at Quest Diagnostics must be optimistic that these arrangements will pass FTC review and allow it to close both transactions. On the same day it announced the asset sale to LabCorp, it commenced a cash tender offer for $101 million of Unilab’s subordinated notes that bear an interest rate of 12.75%.

Strong Numbers For 2002

Although Quest Diagnostics had wanted the Unilab acquisition to close during 2002, its financial performance for the year was still strong. On January 23, 2003, the company released its earnings report for fourth quarter 2002 and the full year.

For the year, Quest Diagnostics’ revenue grew 13.2%, to $4.1 billion. During Q4, revenue grew 13.5% over fourth quarter 2002, totaling $1.033 billion. Quest noted that revenue per requisition was up 3.4% for the year.

There are interesting statistics which reflect the company’s strategic priorities. Quest Diagnostics reduced its days sales outstanding (DSO) to 49 days, compared to 54 days at the end of 2001. That reduction in DSOs reduced its accounts receivables balances by $54 million during fourth quarter.

Reductions In Bad Debt

Quest Diagnostics also improved its bad debt performance. At the end of 2002, its bad debt ratio stood at 5.1% of net revenue, compared to 5.8% at year end 2001. That represents increased collections of almost $29 million for the year, certainly a good payback for efforts to reduce and control write-offs from uncollectable bills.

In comments to the investment community, Chairman and CEO Kenneth Freeman observed that, during 2002, Quest Diagnostics had fully repaid the $475 million it had borrowed to acquire American Medical Laboratories and finished the year with cash of $93 million. It’s an indication that the integration of AML with Quest Diagnostics has proceeded at least as well as expected.

Four Business Strategies

Also discussed with Wall Street analysts were Quest Diagnostics’ strategic plans. Freeman outlined four basic strategies the company is pursuing.

First, it is improving customer service. Its company-wide Six Sigma program is a major tool used to raise performance levels. Quest keeps score by surveying customers each year. It dis- closed that, during 2002, all its laboratory divisions showed improvement over the previous year, as measured by the company’s customer service index.

Second, Quest Diagnostics intends to pursue selective acquisitions. It will also build new laboratory infrastructure in areas of the country where it currently has a minimal presence. Free- man specifically indicated that expansion in the Southern United States would occur.

Third, it is concentrating on building revenues from new diagnostic technologies. In particular, Freeman said that prospects in cardiovascular testing looked good. Demand for such assays as C-Reactive Protein is increasing and the company’s volume of homocystine testing increased 50% during 2002.

More Use Of The Web

Fourth is electronic connectivity. Quest Diagnostics is working to move its clients onto its latest generation of streamlined lab test ordering and resulting. It says that, for fourth quarter 2002, 10% of all its test orders were placed electronically and 15% of its lab test reports were distributed electronically.

Lab executives and pathologists should pay close attention to this last item. One major priority inside of Quest Diagnostics over the last three years has been to reduce DSOs and drive down the bad debt percentage. As most veteran laboratorians know, the single biggest source of uncollectable claims is inaccurate information provided at the time that tests are ordered.

Not surprisingly, Quest Diagnostics has realized that modest investments in changing the way lab tests are ordered by clients can lead to big payoffs in billing and collections. One way to improve the quality of the information contained in lab test requisitions to shift the ordering process onto a computer (which requires all necessary fields to be completed before the ordering client can transmit the lab test order). As noted earlier on Page 16, during 2002, Quest’s lower bad debt percentage meant it collected an extra $29 million on the same base of business. Savings of that magnitude finance a lot of improvements to the billing and collections process!

Need For Phlebotomists

Another point of interest is the observation by Quest Diagnostics that growing numbers of physicians are declining to draw blood in their offices. As a result, Quest is seeing greater traffic in its patient service centers (PSC) and is hiring more phlebotomists to meet this demand. Approximately one-third of all the test requisitions handled by Quest Diagnostics pass through its net- work of PSCs.

Because 2002 is the last year that Quest Diagnostics and LabCorp have sizeable public laboratory competitors in the physicians’ office marketplace, it will be useful to compare their financial performance during 2003 with earlier years. The disappearance of major national and regional competitors such as American Medical Laboratories, Dynacare, DIANON Systems, and, soon Unilab, during the past 14 months has to trigger changes in the competitive marketplace that benefit the two blood brothers.

Shift In Acquisition Activity

Among the consequences of this most recent wave of commercial lab consolidation will be more aggressive attempts by Quest Diagnostics and LabCorp to purchase hospital laboratory outreach programs. THE DARK REPORT has noted many times on these pages that privately-owned, independent commercial lab companies serving the physician office market are few enough in number as to almost be extinct.

Also on the competitive radar screen is anatomic pathology. In their incessant thirst for more specimens and revenues, the two blood brothers will be actively looking to build their market share of anatomic pathology.

Will Quest Diagnostics Ever Bid For AmeriPath?

THERE’S A QUICK ANSWER TO THAT QUESTION. Quest Diagnostics already has!

AmeriPath, Inc., headquartered in Riviera Beach, Florida, is the single largest laboratory company remaining in the United States that could be considered an acquisition candidate for either of the two blood brothers.

THE DARK REPORT knows that Quest Diagnostics seriously looked at acquiring AmeriPath during the past two years. Word is, however, that the price Quest offered at that time was not enough to trigger a sale.

Currently AmeriPath is being taken private by Welsh, Carson, Anderson and Stowe, an equity investment firm. However, most knowledgeable observers believe this transaction is simply to position the company for an eventual sale to either Quest Diagnostics Incorporated or Laboratory Corporation of America.

Will that happen? During recent public presentations, whenever Quest Diagnostics Chairman and CEO Kenneth Freeman is asked if Quest is interested in buying AmeriPath, the answer to the question is always “no comment!” Stay tuned, because there’s probably another chapter to come in the Quest/AmeriPath story.

Comments

Leave a Reply

You are reading premium content from The Dark Report, your primary resource for running an efficient and profitable laboratory.

Get Unlimited Access to The Dark Report absolutely FREE!

You have read 0 of 1 of your complimentary articles this month

Privacy Policy: We will never share your personal information.