Will Esoteric Testing Soon Undergo Consolidation?

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WITH EACH INSTANCE OF LAB CONSOLIDATION, the commercial lab sector of the laboratory industry comes closer to a true duopoly. Economists define duopoly as a market substantially controlled by two companies. Economists believe that a duopolistic market shares many characteristics of a monopolistic market. Of course, in the clinical lab industry, the likely candidates for a duopoly are Quest Diagnostics Incorporated, with 2001 revenues of $3.6 billion, and Laboratory Corporation of America, with 2001 revenues of $2.2 billion.

When the market for physicians’ office testing is viewed at the national level, many of us would agree that the two blood brothers have come to dominate. Dynacare and Unilab, both with estimated 2001 revenues slightly more than $400 million, are the next closest competitors. In selected regional markets around the United States, Quest Diagnostics and LabCorp, individually or together, have market shares which would meet the economists’ definition of monopoly or duopoly.

But in pondering the impact of Quest Diagnostics’ acquisition of American Medical Laboratories, Inc. (see this article), I see another segment of the lab testing industry possibly evolving toward oligopoly (a market dominated by a handful of companies) if not duopoly. That lab testing segment involves hospital send-out testing. Today, at least seven labs compete actively in this segment and perform the majority of testing for hospital customers. These seven include AML, ARUP Labs, Esoterix, LabCorp, Mayo Medical Labs, Quest Diagnostics (including its Nichols Institute division), and Specialty Labs.

With AML becoming part of Quest Diagnostics (which had acquired Nichols Institute in 1994), that leaves six lab competitors in the hospital send-out market. ARUP, Esoterix, Mayo, and Specialty all have annual revenues of $250 million or less and could easily be purchased by either of the two blood brothers, if their owners were willing to sell.

I will be first to observe publicly that consolidation of the hospital send-out testing market is a real possibility. Generous purchase offers often cause recalcitrant owners to sell. The $500 million offered to AML’s owners was certainly a big factor in their decision to sell the company and leave the marketplace. During the next five years, don’t be surprised if the two blood brothers manage to acquire a couple more of the four remaining independent players serving the hospital send-out testing market.

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