Quest Holds Off on SBCL, Leaves the Door Open

Disagreement over SB’s terms of access, price for future Quest lab data is hold-up

CEO SUMMARY: It’s a cryptic situation as of press time. Quest Diagnostics issued a public statement on July 1 stating that its acquisition of SmithKline Beecham Clinical Laboratories would not close on July 2, as expected. Since that date, there’s been no further comment on the situation. Wall Street analysts and Quest competitors are watching daily to see whether or not this merger is finalized.

IT WAS JULY 1 WHEN Quest Diagnostics Incorporated issued an unexpected public statement concerning its acquisition of SmithKline Beecham Clinical Laboratories (SBCL).

It was a statement that the acquisition of SBCL “would not close on July 2, as previously indicated.” As of press time, Quest Diagnostics has made no further public statement about the acquisition and its status. As part of this announcement, the laboratory company also declared that it would not close the $300 million financing package which was scheduled to fund on July 2.

In Quest’s second quarter earnings release last Friday, the only reference to the SBCL acquisition was a comment by Quest Chairman and CEO Kenneth W. Freeman that he remains “hopeful that we will resolve the remaining issues and complete the transaction.”

The point of dispute between SmithKline Beecham PLC (SB) and Quest Diagnostics apparently involves an ancillary contract to the purchase agreement. This agreement gives SB non-exclusive access to Quest Diagnostic’s proprietary clinical laboratory database, for an unspecified amount of money.

As THE DARK REPORT has noted, clinical laboratory information will be the true added-value product for clinical laboratories in the future. The lack of agreement between SB and Quest Diagnostics thus involves a major issue, since both companies appreciate how valuable that information will be in coming years.

That the two companies would get into a serious squabble about access and payment terms for future lab data provides an interesting validation of THE DARK REPORT’S predictions that laboratory data is the gold mine for future income and profits. Because SB and Quest have not agreed on terms and price for SB’s access to this data, a transaction valued at almost $1.4 billion and involving 25,000 employees is in limbo.

No Comment On Negotiations

Officials at Quest Diagnostics tell THE DARK REPORT that they cannot comment on the status of negotiations. Nor will they speculate on whether the acquisition will ever take place. Among Wall Street analysts following this situation, there are many rumors, but little certainty that rumors have truth.

One individual who understands the dilemma facing Quest Diagnostics and SB believes there is a major point of dispute on this issue. “Proprietary laboratory data, particularly as it relates to clinical trials, has great value to Quest,” said Joe Plandowski, President of The Lakewood Consulting Group in Lake Forest, Illinois. “It also has value to SmithKline. Therein lies the rub.”

Potential Business Problem

“In coming years, Quest Diagnostics wants to provide clinical trials and laboratory testing for any pharmaceutical company while maintaining total confidentiality for each drug company client,” continued Plandowski. “Yet, if those drug companies perceive that SmithKline might access that data, it creates a business problem for Quest.”

Plandowski speaks from personal experience on this issue. While an executive with SBCL during the 1980s, Plandowski was involved in clinical trials done by SBCL for Eli Lilly & Co. “Eli Lilly was very concerned about the ties between SBCL and SmithKline,” recalled Plandowski.

“This was in the mid-1980s. Relations between Lilly and SB were strained. Lilly eventually helped start another clinical trials company to handle its testing,” he recalled. “So I have seen, first-hand, how tricky it is for a lab connected to SB to do clinical trials work for another pharmaceutical competitor.

“Thus, I believe that there is genuine concern at Quest Diagnostics on how to handle the way SB can access its lab database,” mused Plandowski. “There is also another aspect to why this particular issue may be a deal-stopper so late in the acquisition process.

“That involves the CEO of SmithKline Beecham, Jan Leschly. In recent years he has demonstrated a willingness to take his toys and go home if he can’t get what he wants,” observed Plandowski. “Just in the last 18 months, separate merger deals with SB and American Home Products and SB and Glaxo Wellcome were dissolved at Leschly’s initiative.

“The press was full of comments about Leschly’s insistence that certain aspects of the merger be done to his liking or else,” added Plandowski. “There are certainly similar aspects of that in the Quest-SBCL deal, particularly coming the day before the scheduled closing.”

Plandowski’s two points certainly fit the facts as they can be ascertained at this time. But his final comment may yet prove the most prophetic. “I have negotiated many laboratory sales transactions. These kinds of problems, so late in the game, make it tough, both professionally and emotionally, for both parties to go through with the sale. No one should be surprised if this acquisition is now unraveling and never takes place!”

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