Bi-Coastal Powerhouse Formed by Lab Merger

Respected Las Vegas laboratory company joins with American Medical Laboratories

CEO SUMMARY: Changes to healthcare continue to stimulate responses from independent commercial laboratories. This time it’s a merger of Las Vegas-based Associated Pathologists Laboratories with American Medical Laboratories of Chantilly, Virginia. This combination creates the third-largest commercial laboratory organization in the United States and shows that size is still important.

CONSOLIDATION OPPORTUNITIES continue to fuel mergers and acquisitions among commercial laboratories.

It was announced today that Associated Pathologists Laboratories (APL) of Las Vegas will merge with American Medical Laboratories (AML) of Chantilly, Virginia. The merger is expected to occur in October.

This merger creates the third largest commercial laboratory organization in the United States. THE DARK REPORT estimates that the two labs’ combined revenues total about $250 million per year.

The business implications of this merger are several. First, it gives AML an operational base west of the Rocky Mountains. This supports AML’s goals of developing a national business in reference and esoteric testing. (See TDR, April 5, 1999.)

Second, the combined resources of the two laboratory organizations should improve their competitive position in offering routine testing to physician offices in their service areas of Las Vegas and the Washington, D.C. metropolitan area. Both labs are tough competitors in their home markets.

Third, although company executives emphasize that a primary reason for this merger is to position the lab company to better serve hospital labs with reference and esoteric testing, it does put the company in an excellent air hub (Las Vegas) to enter new markets for physician office testing, such as Phoenix, Los Angeles, and Sacramento.

“The owners of these two laboratories have had close relationships for many years,” stated Bob Collier, Vice President of Marketing and National Accounts at AML. “They are both long-time members of TIPII [The Independent Pathology Institute, Inc.] and have explored this kind of merger more than once in past years.

“Also, this past year, AML has provided reference laboratory testing for APL,” added Collier. “This has given both labs increased familiarity with each other’s operations and staff members.”

Combined Lab Enterprise

According to Collier, a holding company called AML/APL, Inc. will be formed to operate the combined laboratory enterprise. “The plan is for each laboratory to continue business operations under its current name and operational structure.”

Clients and readers of THE DARK REPORT should not be surprised that AML and APL decided to join forces. Discussions about how to combine the two labs have occurred as long as five years ago. In fact, there was one period, around 1995-1996, when both lab’s Boards of Directors engaged financial consultants to value each laboratory and identify the issues involved in forming a single laboratory company from the two firms. For many reasons, no action was taken at that time.

Tough New Competitor

THE DARK REPORT expects this merger to create a tough new competitor. Since new owners took control of AML in 1997, it has enjoyed rapid growth. AML’s primary goal is to develop into a national provider of reference and esoteric testing to hospital labs.

APL is an equally hard-nosed business operation. Within Nevada, APL has achieved a virtual lock on the laboratory business. It has accomplished this by always bringing sophisticated laboratory services to its customer base ahead of laboratory competitors.

APL also benefited from the fact that, since the early 1970s, Las Vegas has consistently topped any list of the fastest-growing urban areas in the United States. In this market, population growth has fueled a steady increase in the volume of laboratory testing that needs to be performed.

Given the individual successes of these two commercial laboratory companies, a merged AML/APL should be expected to have significant impact on the laboratory industry. There are several reasons why this would be true.

The merger does combine two strong leadership teams. At AML, Tim Brodnik and Jack Bergstrom have energized both the sales and operations of a long-established and respected regional laboratory.

Delivering New Business

At APL, President John Schwartz has similarly developed a tight operational capability. Under the direction of Craig Shanklin, Vice President, Marketing, APL’s sales force has a reputation for delivering new business. It’s also created a thriving, national drugs of abuse testing business, supported by a patented hair testing assay.

It should be expected that the blending of these two proven management teams will work to the favor of combined laboratory company.

Next, APL’s location in the well-served air hub of Las Vegas provides AML with an important operations base for developing its reference and esoteric business in the Western United States. Indications are that reference and esoteric testing will continue to be done at AML’s main lab in Chantilly, Virginia. But the operations and logistics support offered by the Las Vegas location will help AML serve new clients from that region.

Finally, the AML/APL combination continues to enjoy the financing and support of Golder, Thoma, Cressy, Rauner, Inc. (GTCR) of Chicago. This investment firm stands ready to provide the capital necessary to expansion, as well as the financial resources to do future acquisitions.

Laboratory owners should recognize that GTCR’s involvement in AML/APL will not stop with this deal. They want to actively build this laboratory organization. Thus, further laboratory acquisitions should be expected, probably during the first half of next year.

AML and APL are Successful Labs Because of Top-Flight Client Service

One canny observer believes that customer service will definitely be a success factor in this merger between Associated Pathologists Laboratories (APL) and American Medical Laboratories (APL).

“Both of these laboratories know how to treat customers,” observed Stephen J. Brase, Executive Director of The Independent Pathology Institute, Inc. (TIPII). “What a good regional laboratory knows how to do best is to take care of their physician clients and patients. Historically, this has not been the strong suit of national laboratory organizations.

“For example, within regional labs like AML and APL, there is a strong interest by personnel to go above and beyond in serving clients. This is reinforced and supported by management,” continued Brase. “That doesn’t happen in many other laboratory settings.”

Played An Active Role

Brase is a long-time lab industry executive with senior management experience in both private regional laboratories and public commercial lab companies. As Executive Director of TIPII since 1995, he actively supports its membership, comprised of independent laboratories located throughout the United States.

“I believe the merger of APL and AML demonstrates that continuing changes to healthcare still make it important for labs to find ways to work together,” said Brase. “This will be expressed by other mergers and joint ventures among independent labs in coming months and years.

“I also believe that many of these regional efforts will succeed because of their emphasis on the need to serve customers,” explained Brase. “As long as national labs concentrate on cost management, the customer focus of regional labs will give them a competitive advantage.”

Customer Service Focus

Brase describes an unusual reason why some labs lose their focus on customer service. “Although most big lab companies have a CEO with extensive lab industry experience, frequently the CFOs and COOs come from outside the lab field.

“These individuals tend to reduce laboratory testing to a commodity product because they consider low price to be the competitive advantage,” he noted. “This attitude moves that laboratory further from the customer. But people working in regional laboratories tend to personalize their work. They understand that each specimen tube represents someone’s father, mother or child.

“That is why regional labs tend to support ‘unnecessary’ costs that add service value to patients and physicians,” said Brase. “They are in close contact with their customers and see the difference it makes.

“As long as national labs emphasize cost over individual service, I believe that regional laboratories will continue to service and thrive within the markets they serve,” concluded Brase. “Top service is their big competitive advantage!”

Reshape The Lab Industry

The combination of Associated Path Labs and American Medical Labs has the potential to reshape several aspects of the laboratory industry as it exists today. THE DARK REPORT has already written about how AML’s ambition to become a national provider of reference and esoteric testing will alter the send-out marketplace. (See TDR, August 30, 1999.)

For routine testing, it is unclear what business strategy AML/APL will follow. Its central laboratories in Chantilly and Las Vegas are well-positioned to support a higher volume of specimens from physician offices.

Increase Routine Testing

APL/AML can increase the amount of routine testing volumes in either of two ways. One, by direct sales and marketing to doctors’ offices. Two, by acquiring other regional independent laboratories.

It is the belief of THE DARK REPORT that AML/APL follow a different path for expanding routine testing than what was used earlier this decade by national laboratories. Any laboratories acquired by AML/APL in the future will be financially strong and dominant in their regional service area.

After acquisition, THE DARK REPORT predicts that AML/APL will not consolidate and standardize the acquired labs, but will instead allow that regional laboratory to continue operating under its old name, guided by its key executive team. AML/APL will provide corporate services, set ambitious goals, and offer the necessary capital to achieve these goals.

Assuming this to be an accurate prediction, then Associated Pathology Laboratories can be expected to continue operating the way it always has.

The most noticeable difference will be an increased focus on growth and profitability at APL, so long as customer service remains at high levels. If this business strategy works at APL, then other laboratory acquisitions are sure to follow.

STRUCTURE OF THE DEAL BETWEEN AML AND APL

None of the principals to the merger of AML and APL will comment on the financial structure of the deal nor the price paid for APL.

THE DARK REPORT believes that APL was purchased under a similar formula used to acquire AML. (See TDR, May 12, 1997.) If so, then all owners of APL, primarily five pathologists, were paid for their stock. They were then given the opportunity to buy an interest in the “new” company.

This was how AML’s founder’s, Ira Godwin, M.D. and C. Barrie Cook, sold their company, yet remained with the new group as executives with an equity interest. Thus, it should be understood that the APL transaction is not just a merger, it is an acquisition. Once the deal is closed, APL will operate under its own identity, using the same executive team and staff as before the acquisition.

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