Quest Sells OralDNA, HemoCue To Clear Its Decks for 2013

Company wanted to divest both business units because they were small and growing slowly

THIS WEEK, Quest Diagnostics Incorporated will issue its fourth quarter and full year 2012 financial report. In anticipation of this, the nation’s largest lab company has been cleaning out its closets, so to speak.

With its new CEO finishing out his first eight months of service, Quest Diagnostics is taking the opportunity to dispose of some of the more disappointing business lines within the company. This is within the window of the time when financial analysts expect the new CEO to take bold steps to restructure the company and prepare it for more aggressive growth. Thus, the analysts won’t punish the company’s share price for divesting poor performing businesses and writing down any costs associated with these divestitures.

First to go on the chopping block was OralDNA Labs. On December 31, 2012, Quest Diagnostics announced the sale of this business to Access Genetics of Minneapolis, Minnesota. The purchase price was not disclosed. Access Genetics had provided services to OralDNA Labs since 2008. OralDNA Labs was acquired by Quest Diagnostics in 2009.

HemoCue To also Be Sold

Next to go was HemoCue, a company that manufactures and sells point-of-care tests. On January 16, Quest Diagnostics stated that it intended to sell HemoCue and it would report both HemoCue and OralDNA Labs as discontinued operations when it files its fourth quarter 2012 earnings report.

Long-time readers of THE DARK REPORT may recall that Quest Diagnostics purchased HemoCue back in February, 2007. This was in the weeks after the January 1, 2007 date that Laboratory Corporation of America’s exclusive 10- year national contract with UnitedHealth had become effective.

At that time, Quest was telling investors that it would write off as much as $400 million in revenue associated with the loss of the UnitedHealth contract. Thus, executives at Quest were looking for ways to give investors a brighter picture of the company’s future.

Quest Diagnostics paid approximately $420 million for HemoCue, a company that had annualized revenues of about $90 million at that time. Numbers recently released by Quest Diagnostics indicate that the HemoCue acquisition did not work to Quest Diagnostic’s financial benefit.

In announcing the sale of HemoCue, Quest Diagnostics stated that, in the fourth quarter financial report, the combined sales of OralDNA and HemoCue were to be reported as $117 million in 2012 and $119 million in 2011. The company also stated that, for fourth quarter 2012, it would “take related after-tax charges in discontinued operations for the estimated asset impairment associated with HemoCue and the loss on sale associated with OralDNA, totaling $89.5 million…”

What still remains at Quest Diagnostics that is believed to be an underperforming business unit is AmeriPath. For the past six years, insiders have told stories about the struggles Quest executives have had in increasing the revenue and net margins of this business division.

However, for many reasons, it would be difficult for Quest to find a buyer willing to pay an adequate price for these assets at this time. That is even more true, given the recent cuts in Medicare fees for CPT code 88305-TC and uncertainty over how molecular diagnostic tests will be reimbursed by both government and private payers.

New Lab in Marlborough

The other significant development at Quest Diagnostics that will be closely watched is its acquisition of the laboratory outreach business from UMass Memorial Medical Center of Worcester, Massachusetts. This transaction was closed before the end of 2012.

The surprise twist to this acquisition is that, in a separate agreement, Quest was also able to buy the anatomic pathology outreach laboratory business of UMass Medical Center. That deal was closed before the end of 2012.

Now Quest Diagnostics plans to build a large laboratory facility in Marlborough, Massachusetts. This “super lab” will consolidate testing from Quest’s existing Cambridge lab facility, from its Athena Diagnostics division, and from the newly-acquired UMass lab outreach business. The new lab is expected to be fully operational within 18 to 24 months.

UMass’ Option To Invest

One of the terms of the deal with UMass is that the health system has an “option to invest in a minority financial stake in Quest Diagnostics’ business in Massachusetts.” That may mean that both parties are hopeful that, once the Marlborough lab facility is in full operation, UMass may want to refer some portion of its inpatient testing to the facility in order to benefit from the lower costs that would result from economies of scale at that location.

Speculation and Rumors About AmeriPath

FROM ITS INCEPTION IN 1996 as an employee-model pathology practice management company, AmeriPath, Inc., has had its share of ups and downs.

Yet there was always a buyer willing to pay a strong price for the company. By 2002, the company was reporting revenue of $478 million, but its share price was not meeting many investor’s expectations. That is when Welsh, Carson, Anderson & Stowe stepped in and paid $627 million and assumed AmeriPath’s debt to acquire the company and take it private. (See TDRs, November 4, 1996 and March 3, 2003.)

In 2005, AmeriPath paid $344 million to acquire Specialty Laboratories, Inc. At that time, Specialty Labs had annual revenue of about $150 million, but was losing money every quarter. For that reason, some financial analysts questioned the high price that AmeriPath paid for Specialty Labs. (See TDR, October 4, 2005.)

Then two years later, in April, 2007—and while still feeling the sting of the loss of its national contract with UnitedHealth—Quest Diagnostics paid $2 billion to acquire AmeriPath. At that time, AmeriPath had annual revenue of about $800 million. Financial analysts estimated that Quest Diagnostics paid one of the highest prices ever for a lab company—about 17 times EBITDA (earnings before interest, taxes, depreciation, and amortization).

This is the backstory to the struggles Quest Diagnostics has had with its integration of AmeriPath. Some former AmeriPath employees have said that premium price paid for AmeriPath has made it challenging for Quest Diagnostics to generate an acceptable return on investment from this big acquisition. As to the truth of these statements, Quest executives have not publicly provided details that deny or confirm these rumors.


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