New Lab Company Intends to Buy Outreach Labs

Regional Diagnostic Laboratories wants to acquire outreach lab programs from hospitals

CEO SUMMARY: Based in Brentwood, Tennessee, Regional Diagnostic Laboratories (RDX) says it wants to purchase the laboratory outreach programs of nonprofit community hospitals. RDX is a partnership with Warburg Pincus, a New York investment company. It is a credible buyer and has $250 million available to fund these acquisitions. Brian Carr, RDX’s CEO, predicts that his company may close as many as three lab outreach purchases before the end of this year, based on active negotiations with hospitals.

THERE’S A NEW LAB COMPANY READY to make its mark in the laboratory testing marketplace. Regional Diagnostic Laboratories, Inc. (RDX), of Brentwood, Tennessee, says it has $250 million available to use to acquire hospital laboratory outreach programs.

RDX’s CEO is serial lab entrepreneur Brian C. Carr. His partner in the new venture is Warburg Pincus, an investment firm headquartered in New York City.

The strategic plan for Regional Diagnostic Laboratories is a familiar one—but updated with a fresh twist. According to Carr, RDX will approach not-for-profit hospitals with an offer to purchase all or a majority share of their laboratory outreach business.

Many Hospitals Need Cash

Carr thinks hospitals and health systems will be interested in this business proposition because they need cash—and lots of it! “Hospitals today must have access to the substantial amounts of working capital required for them to effectively respond to all the different reforms now occurring within our healthcare system,” noted Carr.

Some hospitals proved quick to be attracted to Carr’s business proposal. “Given the talks we are having with different hospital administrators at the moment, we believe that we may be able to announce two different lab outreach acquisitions in coming months, and possibly a third by year end,” he said.

Were that to happen, RDX would be off to a fast start, since there are few examples in the past 25 years of an independent laboratory company purchasing laboratory assets from several different hospitals during the same calendar year.

Timing may be in Carr’s favor. “At this moment, a significant number of hospitals are forming accountable care organizations (ACO) and are aggressively acquiring physician practices,” Carr observed. “This requires capital. First, to fund the purchases. Second, to assemble the resources required to operate the ACO.

“At the same time, hospitals and health systems are spending heavily to purchase and deploy electronic medical record (EMR) systems,” continued Carr. “As they implement these EMRs, hospitals must demonstrate compliance with ‘Meaningful Use (MU)’ requirements to qualify for federal incentives.

Carr puts the number of nonprofit hospitals in the United States that have a sizeable outreach program at about 1,000. “And, many of them need capital in areas ranging from physician practice acquisitions to facility expansion campaigns, all in an attempt to remain competitive in a rapidly changing landscape,” he emphasized. “Importantly, many of these health systems don’t consider their outreach labs as ‘core’ to their overall mission.

Seeking Lab Partners

“When seeking to acquire hospital labs, we call our model the ‘have your cake and eat it too’ approach,” he explained. “I say that because we aim to acquire the laboratory and the outreach program in return for a capital investment and—unlike some of our competitors—we intend to keep and operate those existing lab facilities and assets with the current lab staff.

“Our business plan is to remain in that regional market as a partner with that hospital,” he said. “We will invest our own capital into each acquired lab outreach program with the intent of growing it into a strong local laboratory that serves a region that extends out as far as 200 miles from the hospital and core laboratory location.

“By contrast, most existing hospital lab outreach programs serve an area that doesn’t extend past a 10-mile or a 20-mile radius from their main lab facility,” added Carr. “Post-acquisition, we think we can grow by substantially expanding the surrounding territory that our lab services.

“We consider this an important distinction in our business plan that will be recognized and valued by health systems,” emphasized Carr. “After purchasing each laboratory outreach program, we will continue to operate the lab facility with the existing lab staff to provide local lab testing services within that community.

“This contrasts sharply with the business practices of some lab companies, when—after purchasing a local lab—they ship specimens elsewhere and downsize or reduce staff in that community.

“One recent example is last January’s acquisition of S.E.D. Medical Laboratories in Albuquerque, New Mexico, by a major national laboratory company,” he said. “Within months, we understand that the aquirer announced its plans to layoff lab staff and downsize S.E.D.’s facilities and operations.

“This is not what Regional Diagnostic Laboratories will do after it acquires a hospital laboratory outreach program,” explained Carr. “After all, it is the physicians practicing around the campus of these non-profit community hospitals who will be our primary customers for lab testing services.

“Additionally, nonprofit hospitals tend to have a broader community view of their mission,” continued Carr. “And these hospitals are quite sensitive about any layoffs and downsizing that might occur following their sale of an existing asset, like the sale of the lab outreach program.

“Our proposition is that, by working with RDX, these community hospitals can keep lab testing services local,” he empha- sized. “We believe most physicians value a local lab, and, when all other factors— such as price and turnaround time—are equal, physicians prefer to work with a local lab. This is a major reason why we intend to maintain that local presence when we acquire a lab outreach program from a community hospital.

Three Trump Cards to Play

“In fact, we think we have three trump cards to play that will make us a tough competitor in each local market,” Carr noted. “These trump cards are: 1) to be competitive on price; 2) to offer fast turnaround times; and, 3) to deliver an efficient LIS-to-EMR interface.

“These are essentials for us to win the business of these local doctors,” he said. “We want to tap the loyalty physicians have to their local laboratory provider.”

Carr emphasized that, in addition to the purchase of a hospital laboratory outreach program, Reference Diagnostic Laboratories is prepared to negotiate other types of lab testing arrangements with community hospitals.

“Our primary strategy is to make an investment to acquire outright a hospital’s laboratory and outreach system,” he explained. “But we recognized that different community hospitals have different needs. For that reason, we also have an a la carte menu.

“For example, if hospital administrators prefer, we can also manage the hospital’s inpatient lab for them,” noted Carr. “Similarly, if the hospital simply wants management and/or capital to further develop its existing laboratory, we can offer both.

“Of the two potential deals now being negotiated, one multi-hospital health system wants us to manage the inpatient labs for its four hospitals (in addition to also acquiring the outreach lab). In the second deal, the administrators at this hospital are interested in selling us the outreach laboratory program. Post-sale, they would continue to manage their own inpatient laboratory.

Retaining an Interest

“It is also important to recognize that we are inviting hospitals to take a minority interest in the lab as part of these transactions, if they so desire,” explained Carr. “It would allow these hospitals to share in the growth of the outreach business.”

Regional Diagnostics Laboratories’ war chest of $250 million can certainly catch the attention of administrators at nonprofit community hospitals. With so many hospitals requiring capital to invest in physician practices, develop ACOs, and acquire EMR systems, RDX’s business proposition might be the right opportunity at the right time.

Regional Diagnostic Laboratories Brings Together Several Veteran Lab Industry Executives

FOR BRIAN C. CARR, it’s déjà vu all over again. The Chairman and CEO of Regional Diagnostics Laboratories, Inc., is once again leading a venture capital-funded start-up laboratory company.

Carr’s lab industry career began with Allied Clinical Laboratories before it was acquired in 1994 by National Health Laboratories. Several years later, he founded Pathology Consultants of America. This became InformDX, which was acquired by AmeriPath in 2000. Carr served as President of AmeriPath.

At the founding of American Esoteric Laboratories (AEL) in 2003, Carr was Chairman and CEO. AEL was acquired by Sonic Healthcare in 2007. Carr then followed up in 2008 with a new business called OralDNA Labs. That company was sold to Quest Diagnostics Incorporated in 2009.

Among the executives working at RDX are several individuals who worked with Carr at these other lab companies. President and COO of RDX is John G. Mazzei, who worked with Carr at AEL. RDX’s Chief Information officer is J. Mark Farrington. He worked with Carr at both OralDNA Laboratories and AEL. Sam Daniel is the Chief Financial Officer at RDX and he also served at OralDNA Laboratories and AEL.

Another notable development with Regional Diagnostic Laboratories is that Haywood Cochrane will serve on its board of directors. Cochrane was CEO of Allied Clinical Laboratories through its sale to NHL in 1994. He has served as a board member on several of Carr’s earlier laboratory ventures.

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