Bankruptcy Court Okays Unilab’s Offer For Meris

Financial pressure and market competition force another California laboratory to close

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CEO SUMMARY: Meris Laboratories, Inc. is now history. California’s intense competitive market pushed the company into bankruptcy and eventual sale to Unilab, Inc. Even as Unilab moves to consolidate and integrate Meris’ clients and operations into its system, attention is focusing on BioCypher Laboratories. Observers believe this troubled laboratory may be next on the chopping block.

ONCE THE BANKRUPTCY COURT approved Unilab, Inc.’s bid to purchase Meris Laboratories, Inc., it took little more than a week to consummate the sale.

As of last Friday, November 6, Unilab was the new owner of Meris Laboratories. “The transaction was closed on Thursday,” stated Philip Tremonti, President and CEO of Meris. “We handed the keys to Unilab on Friday morning. They now own Meris lock, stock, and barrel.”

Unilab was the only company to place a bid to purchase Meris with the bankruptcy court. Laboratory Corporation of America and Smith-Kline Beecham Clinical Laboratories, each with a significant presence in California, declined the opportunity to bid for Meris.

Only One Bidder

“With no other bidders, the bankruptcy judge approved our purchase of Meris,” said Richard Michaelson, a Unilab Director and former CFO. “Because of Unilab’s familiarity with Meris and the primary market areas it serves, we intend to move expeditiously to integrate their operations with ours.”

Annual revenues at Meris are about $28 million, compared to Unilab’s $216 million. After integration, Unilab will approach $250 million in revenues, all of it originating in California.

“No Cash” Transaction

Unilab acquired Meris in a “no cash” transaction for $16.52 million in notes, payable over an eight-year period. (See TDR, September 28, 1998). According to Michaelson, the price was based on Meris’ EBIDTA (earnings before interest, depreciation, taxes and amortization). Financial analysts consider EBIDTA to be a more relevant benchmark for determining the market value of a company.

“We think the price paid for Meris fairly reflects its value to us in today’s marketplace,” noted Michaelson. “One can certainly make the presumption that other laboratories, comparing Meris’ assets against their own laboratory infrastructure, decided it was not in their interest to enter a higher bid.”

Unilab, the largest commercial laboratory operator in California, pursued the Meris acquisi-tion as a good match to its existing operational structure. “Unilab is thrilled about the Meris acquisition,” commented Michaelson. “We believe that cost efficiencies in our organization make it possible to do these kinds of acquisitions in a profitable manner.

“Furthermore, we believe the Meris acquisition demonstrates that we will consider these types of transactions if they make economic sense,” he added. “Given our laboratory infrastructure, there are any number of business options Unilab can explore in the future.”

With the closure of Meris, another financially-troubled laboratory becomes the center of attention. BioCyper Laboratories, headquartered in Sacramento, California, is the company reorganized from the Chapter 11 bankruptcy in 1996 of Physicians Clinical Laboratories (PCL).

BioCypher’s financial travails have spawned a cascade of rumors and stories. It is known that a significant number of BioCypher’s executives and middle managers terminated their employment in recent months.

Further, negative cash flows at BioCypher caused it to borrow money on more than one occasion during the last 18 months. Apparently a major cause for the negative cash flow are problems in billing and information systems.

Ex-employees have said that as many as one in three requisitions cannot be billed, for various reasons. One unconfirmed story in circulation says that BioCypher has as many as 130,000 test requisitions in suspense.

Despite its financial problems, BioCypher still handles a specimen volume worth $50 million to $60 million per year. This means BioCypher is still a significant laboratory competitor in the marketplace. Should BioCypher fail to resolve its financial problems, it may be forced to enter bankruptcy for the second time in two years. (See TDR, November 25, 1996.)

Were BioCypher to enter bankruptcy, it is not certain how a second bankruptcy would be be resolved. Would a rescuer be willing to invest more money and management resources toward restoring BioCypher to fiscal health as an independent company? Given California’s punishing market for lab services and BioCypher’s deteriorating condition, it would seem unlikely that another White Knight would appear.

It is more likely that the bones of the former PCL would be picked over by competing laboratories in California. Since BioCypher would be a crippled organization, only commercial labs with a lot of expertise and turnaround resources are logical bidders to buy whatever is left of BioCypher in such a bankruptcy action.

California’s Commercial Lab Shake-Out Leaves Fewer Big Laboratory Players

Financial pressures and tough competition continue to push weaker laboratories out of business. The closure of Meris Laboratories helps reduce laboratory overcapacity in California. This map shows the location of regional laboratory
sites operated by the state’s largest clinical laboratory companies.

The pressure on prices for laboratory testing in California seem to be easing somewhat, but no major increases are expected.

Claims Another Victim

It will take several more months before the fate of BioCyper is known. In the meantime, the demise of Meris Laboratories means that California’s intensely competitive managed care marketplace has claimed another victim.

The dismantling of Meris’ central laboratory further reduces overcapacity in the state and comes on the heels of the various Chapter 11 and Chapter 7 bankruptcies by clinical laboratories in California during the past three years. Each laboratory closure is a direct result of the fact that managed care refuses to subsidize unused laboratory capacity.

As the overcapacity of laboratory testing is whittled down through bankruptcies, downsizing, and re-engineering, it is uncertain whether the current “supply” of laboratory testing capacity is reaching equilibrium with the existing volume of laboratory specimens.

Until supply (capacity to provide testing) reaches a balance with demand (the volume of lab specimens), price levels for lab tests in California will remain at rock bottom levels. Any commercial laboratory with excess capacity has an incentive to bid for additional work using a marginal cost pricing strategy.

Point Of Equilibrium

It is the belief of THE DARK REPORT that such a point of equilibrium may soon be reached in California. BioCypher’s laboratory operations represent a considerable amount of laboratory capacity. Common sense economics says that no investor will chose to sink additional capital in the company to keep it afloat.

During the last three years, laboratory operations at all the major commercial labs have undergone continual downsizing and re-engineering. As a result of these efforts, not much “fat” remains to be squeezed from the California operations of Unilab, SBCL, and LabCorp. On the plus side, these activities have helped improve the financial situation at these labs.

Add these facts up and it is reasonable to conclude that, during 1999, competitive dynamics for laboratory testing in California will enter a new market phase.

However, these developments in the clinical laboratory marketplace will play out in a managed care environment where the HMOs are undergoing their own financial problems. Even if clinical laboratories find the resolve to hold out for improved reimbursement and better pricing, California-based HMOs may not have the cash flow to accommodate such increases to the cost of laboratory testing.

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