CEO SUMMARY: Market forces in California continue to put independent laboratories under sustained financial stress. One laboratory owner decided it was an auspicious time to sell his lab. That sale, of POISONLAB to Laboratory Corporation of America, was announced earlier this month. There are persistent, but unconfirmed, rumors that another independent lab is negotiating to sell itself.
EVENTS IN CALIFORNIA INDICATE the market environment continues to be tough on modest-sized independent commercial laboratory companies.
During the past 30 days, one independent laboratory was sold to Laboratory Corporation of America. Another independent laboratory was rumored to be in the midst of sales negotiations with LabCorp, but no definitive announcement was made as of press time.
POISONLAB, Inc. of San Diego will be acquired by LabCorp. On March 6, the two companies announced that a definitive sales agreement had been signed. A specific closing date for the acquisition was not provided.
POISONLAB is a specialty laboratory which offers drugs of abuse testing. It is SAMSHA-certified. Its primary market focus is on California and the Western United States. Estimates are that POISONLAB’s 1999 revenues did not exceed $5 million.
Indications are that LabCorp will integrate POISONLAB’s operations into its San Diego division. As a SAMHSA-certified lab, POISONLAB gives LabCorp a stronger drugs of abuse testing presence along the West Coast. LabCorp currently performs drugs of abuse testing in its laboratories in North Carolina, New Jersey, Tennessee, Florida, and Texas.
Rumors Of Another Sale
Even as the POISONLAB-LabCorp transaction was announced, there were sustained rumors that another independent commercial laboratory was negotiating to sell itself. Calls by THE DARK REPORT to several laboratory owners in Southern California revealed some interesting information about current market conditions, but no confirmation that any of these rumors were true.
Lab owners did confirm, however, that financial times were precarious for the small and mid-size independent laboratories that continue to operate in California. Reimbursement for laboratory testing remains at unsatisfactory levels. Because of the financial struggles at many managed care plans, California lab owners do not expect that reimbursement for lab testing will increase in the near future.
California’s Difficult Market
Clients of THE DARK REPORT are familiar with California’s difficult financial marketplace. The 1990s saw continual pressure on lab prices and service levels. It has been a tough environment for all laboratory operators, including the blood brothers.
Currently Unilab, Inc. is the dominant player in California, with almost $300 million per year in annual net revenues. Because it acquired SmithKline Beecham Clinical Laboratories’ California operations, Quest Diagnostics Incorporated has a strong position in California.
LabCorp maintains a modest market share in California. Its volume does not quite give it the best economies of scale within the region. Thus, it is not surprising that LabCorp is willing to do selected acquisitions to build its specimen volume.
Process of Consolidation Continues in California
Laboratory Corporation of America’s acquisition of San Diego-based POISON-LAB, Inc. is a reminder the process of laboratory consolidation continues, although at a slower pace.
California is one of the nation’s largest markets for diagnostic testing. For that reason, it still supports a surprising number of independent laboratories. Many are small labs, owned by an immigrant and organized to serve the needs of a specific ethnic market niche. These might be characterized as “affinity labs,” since they concentrate almost exclusively on their particular market niche.
Because these affinity labs are so closely connected to specific ethnic markets, they will probably never be good acquisition candidates for the state’s largest lab companies.
But there remain a handful of mid- sized independent commercial lab companies which have loyal customers, good reputations, and a long history of quality service. These labs are the most likely candidates for further consolidation.
What Did LabCorp Pay?
One aspect of this impending acquisition is the sales price paid by LabCorp. Independent lab owners will watch with interest to see what multiple of EBDITA LabCorp is willing to pay for this laboratory operation.
It certainly will not approach the price that Kelso & Company paid to acquire Unilab last year. Kelso paid about $420 million to acquire 93% ownership of Unilab. Financial analysts have told THE DARK REPORT that Kelso paid a multiple of 12 times EBDITA to acquire Unilab. If true, that is probably the most aggressive price paid by a buyer for a commercial laboratory company in many years.
Assuming that LabCorp closes on the POISONLAB acquisition, it will only mark the beginning of other similar acquisitions. THE DARK REPORT predicts that a number of other small and medium-sized commercial laboratory companies will decide that the time has come to exit the business. They will put their labs up for sale.
Assuming that happens, likely buyers will be UniLab, LabCorp, and Quest Diagnostics, in that order. It is unlikely that any of California’s integrated healthcare systems will want to acquire a stand-alone commercial laboratory. That leaves these three companies as the buyers with both motivation and money to make these deals work.