Bio-Reference Labs Buys New York-Based Medilabs

Acquisition activity by this publicly traded laboratory helps sustain multi-year growth

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CEO SUMMARY: Here is an independent commercial laboratory that shows sustained growth while it maintains profitable operations. One key strategy is the selective acquisition of laboratory business in small, profitable chunks. The sales price paid for Medilabs demonstrates how much decline has occurred to the value of clinical laboratories.

DESPITE THE PROFIT SQUEEZE on commercial laboratories, a limited number of acquisitions continue to occur. However, most of these deals involve special circumstances and do not represent large transactions.

Bio-Reference Laboratories, Inc. (BRLI) of Elmwood, New Jersey announced last Thursday that it would acquire Medilabs, a small regional laboratory in Valley Cottage, New York.

Bio-Reference Laboratories will pay not more than $7 million to buy Medilabs. Medilabs is a division of Long Term Care, Inc., also based in New York. Medilabs’ net revenues during fiscal 1997 were approximately $14.7 million.

Bio-Reference Laboratories serves New York City and the tri-state area of New York, New Jersey and Pennsylvania. Medilabs is based on the west bank of the Hudson River, just above the Tappan Zee Bridge, so its service area is complementary with that of Bio- Reference Laboratories.

“Because the activities of Bio- Reference and Medilabs overlap in many markets, there will be an opportunity to promote efficiencies by combining the two operations,” stated Marc Grodman, M.D., President and CEO of BRLI. “Further, senior management of Medilabs has agreed to remain with the combined entity.”

For Bio-Reference, this is the latest in a regular pattern of trading for chunks of laboratory business. During the past three years, Bio-Reference made several purchases. It even bought the dialysis testing business of SmithKline Beecham Clinical Laboratories at the end of 1996.

As a result of this careful acquisition strategy, Dr. Grodman has quietly built the laboratory’s net revenue from $22.9 million in fiscal 1994 to $38.7 million in fiscal 1997. With the addition of Medilabs’ $14.7 million in revenue, Bio- Reference will have doubled in size during the last five years.

Operating Profits

The challenge for Bio-Reference, as with its commercial laboratory competitors, is to maintain and increase operating profits and net earnings. For the most recent quarter ending January 31, 1998, Bio-Reference’s net income was a paltry $37,993 on quarterly revenue of $8.9 million. This demonstrates the razor-thin profit margins common to commercial laboratories operating in aggressive managed care markets.

The stock price of Bio-Reference Laboratories reflects the challenges for improving net income and earnings per share. Recent stock prices were $1.74 per share. The stock has fluctuated between a low of $0.71 and a high of $2.18 during the last 12 months.

Laboratory Valuation

Another market trend which is validated by the Medilabs acquisition is current valuation levels for commercial laboratories. Bio-Reference is paying a price which is less than 0.5 times Medilabs’ annual revenue. This price is in line with other recent laboratory acquisitions. It certainly demonstrates the decline in market value for commercial laboratories since the glory days of 1993-94. At that time clinical laboratories could get a purchase price that was equal to 1.0 to 1.25 times annual net revenues.

Bio-Reference Laboratories makes a good bellweather for market conditions on the east coast. The healthcare markets in New York state are undergoing wrenching change as traditional reimbursement arrangements for financing hospitals in that state are revamped.

Managed care companies in New York and New Jersey are struggling to maintain financial solvency. Several HMOs are pulling out of state Medicaid programs. Commercial laboratories are affected by the market turmoil. Bio-Reference and its laboratory competitors must provide testing services into this relatively hostile healthcare environment.

Despite the financial pressure from declining reimbursement, Bio-Reference seems to have a viable strategy for achieving economies of scale within its regional market area. Growth by acquisition means that BRLI can maintain a sizeable market presence. Such a strategy may permit Bio-Reference Laboratories to survive while its regional competitors fall by the wayside.

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