CEO SUMMARY: Laboratory Corporation of America is serving notice that it intends to increase its competitive presence in California, the largest market for diagnostic testing in the United States. It recently signed agreements to purchase two respected independent laboratory companies, one in Los Angeles, the other in San Diego. Owners of both acquired companies had different motives for selling.
CALIFORNIA’S STATUS as a bellwether state for the laboratory industry was affirmed again with the news that Laboratory Corporation of America would acquire two independent labs in Southern California.
On April 19, 2000, LabCorp completed the purchase of Bio-Diagnostics Laboratories (BDL) of Torrance, California. Just 12 days later, LabCorp signed an agreement to purchase Pathologists Medical Laboratories (PML) of La Jolla, California. The sale is expected to close around June 1, 2000.
Both labs were founded early in the 1980s. BDL had annual revenues of $12 million, while PML is estimated to have a similar amount of business from physician office testing.
“BDL just completed its best financial year ever,” stated Al Lui, M.D., President and CEO of BDL. “For the past couple of years, the competitive market in California was quiet. The big labs, like Unilab, LabCorp, SmithKline Beecham, and Quest were all distracted by internal priorities.
“As a result, independent laboratories like ours had the opportunity to perform the things we do best, without the pressure of deep discounting in the California marketplace to retain existing accounts,” noted Dr. Lui.
Decision To Sell BDL
“We decided to sell BDL at this time because we want to concentrate on our core competency, which is pathology,” he continued. “In Southern California, the new marketing efforts of pathology companies like DIANON, UroCor, and USLabs caught our attention. The sale of BDL allows us to reallocate our strategic resources and management priorities exclusively on pathology services.”
One interesting aspect to the BDL/LabCorp relationship is the fact that Dr. Lui’s pathology group, Affiliated Pathologists Medical Group (APMG), began providing pathology services to LabCorp in Southern California last September. “It was this ongoing interaction with LabCorp that gave us the trust factor to proceed with the sale,” noted Dr. Lui. “We became impressed with its renewed commitment to both the California market and to higher levels of customer service.”
Different Story At PML
At PML, the story was slightly different. During 1999, the long-standing joint venture between PML and Scripps Healthcare was dissolved. PML had built a tightly-integrated laboratory organization to serve the hospital lab testing needs of Scripps along with PML’s physician office business.
“We’ve had an excellent business throughout San Diego County,” observed Phillips I. Gausewitz, President and CEO of PML. “In considering our strategic options after the dissolution of the JV, we wanted to build upon the business franchise we had developed with the local healthcare community. We decided the best thing for our customers and employees was to align ourselves with a lab company that had both the money and the motivation to expand our business.”
PML’s business achievements were recognized when it became the only lab in 1999 to receive the Betty Martin Innovative Leadership Award from the Clinical Laboratory Management Association (CLMA).
At LabCorp, the business reputation of both acquired labs is an important asset. “These are well-known, respected labs,” said Al Troub, Senior Vice President and Divisional Manager at LabCorp. “BDL and PML provide us with an important foundation for additional growth in California.”
LabCorp also has keen interest in the caliber of the people it is gaining from BDL and PML. “The quality of the people is just as important as the core business,” declared Troub. “We are retaining large numbers of these people at all levels. They know these markets and have long-established relationships with these customers. We want to leverage these assets.”
Since the mid-1980s, one common characteristic of almost every lab acquisition has been a high rate of lost client accounts after the sale. LabCorp is aware of this “acquisition curse.” Like Quest Diagnostics after the purchase of SmithKline Beecham Clinical Laboratories, LabCorp is making retention and successful integration of BDL and PML a high priority.
What remains to be seen is how other California competitors react to these developments. A change of ownership has traditionally been an opportune time for competing lab sales reps to woo away major accounts. There may be some interesting sales wars yet to take place in Southern California.
Customer Satisfaction Is Now A Prime Goal
“We’ve learned something very interesting from our customer satisfaction surveys,” stated Pam Sherry, Vice President of Investor Relations at LabCorp. “High levels of customer satisfaction translate directly into increased profits.”
“Under Chairman Thomas MacMahon’s leadership, LabCorp is working to build service levels and the satisfaction of our lab customers,” she continued. “As a result, we regularly monitor both our service performance and the satisfaction of our clients. It allows us to measure and correlate how changes in service lead to similar changes in profitability. With our California acquisitions, we will be using these surveys to help us maintain the tradition of good service that BDL and PML have established over the years.”