CEO SUMMARY: In Dallas, the relatively short-lived lab company known as Med Fusion has a new owner. After seven years, the lab partnership of Baylor Scott and White, US Oncology Network, Texas Oncology, and Pathologists Bio-Medical Laboratories decided to sell their ownership stakes to Quest Diagnostics. The sale comes despite $100 million of capital and the opportunity of the partners to collaborate in ways that could create diagnostic services that add value.
ON THE SURFACE, MED FUSION IS ONE MORE SALE of a health-system-owned lab company being sold to one of the big national labs. That’s how media outlets have reported the story. But there is a story-behind-the-story for hospital lab administrators and pathologists.
On June 12, Quest Diagnostics announced its acquisition of Med Fusion and its sister company, ClearPoint Diagnostics Laboratories. Both labs are based in Lewisville, Texas. Price and terms of the sale were not disclosed.
When this transaction closes and Quest becomes the new owner, it will mark the end of an unusual lab partnership and an unusual vision for lab testing services and integrated diagnostics. That aspect of the story should be of interest to hospital and health system laboratory managers.
It will also be the second time in 13 years that a well-funded lab start-up company based in Dallas attempted to develop a regional and a national reference and esoteric testing business serving hospitals, but was unable to achieve its goals.
Med Fusion organized in 2009 and opened for business in 2010. Four founding partners held equal shares in the business. The partners were Baylor Scott and White Health, the US Oncology Network (which McKesson acquired in 2010), Texas Oncology, and Pathologists Bio-Medical Laboratories (PBML). Each partner invested $10 million in start-up capital, for a total of $40 million.
Facility Housed Two Labs
A 172,000 square foot lab was built in Lewisville to house Med Fusion. The same building also would house a separate lab company that US Oncology owned. Cancer testing would be performed in that lab and the PBML pathologists were in a preferred position to provide professional component services to both lab companies.
In an interview with THE DARK REPORT in 2010, then-CEO Keith Laughman described Med Fusions’s goals. “As a source of reference and esoteric testing for hospitals and health systems, we will perform at least 95% of the laboratory testing that is typically sent out by a hospital,” he explained. “We will also provide other low volume tests that hospitals must generally perform internally in order to meet clinical service requirements.” (See TDR, March 8, 2010.)
Raised Another $61 Million
Just four years later, in 2014, Med Fusion raised $61.245 million from 30 investors who paid a minimum of $9,000 each for equity stakes in the company, according to an SEC report. Med Fusion had intended to raise $65.745 million from the equity sales, the company reported to the SEC.
Yet, after this investment of almost $100 million, Med Fusion’s owners deemed it advisable to exit the business and sell the lab company. This mirrors the experience of American Esoteric Laboratory (AEL), which was launched in 2004 with $70 million in private equity funding. Its goal was to develop a national reference and esoteric testing business, in competition with ARUP Laboratories, Mayo Medical Laboratories, and others. (See TDRs, April 24, 2004.)
AEL executives believed that its Dallas location would be a benefit in several ways. First, it made AEL a local provider for the 378 hospitals in Texas, thus helping it offer attractive turnaround times for its testing services. Second, DFW Airport’s logistics services would make it easy for AEL to provide reference testing services for hospitals throughout the nation.
AEL Acquired After 3 Years
In subsequent years, however, AEL’s national reference business never grew sufficiently and it acquired smaller regional clinical labs. Just three years later, in 2007, Sonic Healthcare acquired AEL for $180 million.
The fact that both Med Fusion and AEL were unable to develop profitable regional and national businesses in reference and estoric testing for hospitals and health systems is a sign of the level of competition in this segment of the clinical lab industry.
In the case of Med Fusion, it’s disappointing that a consortium of a major health system, a strong regional pathology group, and two large oncology companies, with $100 million of capital, could not find the right key to creating an integrated and profitable diagnostic service. This effort had the potential to be innovative and ground-breaking. It had savvy players and access to a large volume of specimens.
In its effort to gain useful insights about this situation, THE DARK REPORT got no response to requests for comment sent to Med Fusion, ClearPath, Quest, and Baylor Scott and White Health.
Is Dallas a ‘Black Hole’ For Hospital Reference Labs?
MIGHT DALLAS BE A BLACK HOLE OR A BERMUDA TRIANGLE for new lab companies seeking to serve hospitals in the region and nationally? Lab administrators will recall that Dallas had a significant role in the eventual demise of Nichols Institute as an independent public company.
In 1990, Nichols Institute announced a joint venture with three hospital systems representing 18 hospitals in Dallas-Fort Worth. It would act as the general partner in an alliance with Baylor Health System and Presbyterian Healthcare System, both based in Dallas, and Harris Methodist Health System, in Fort Worth.
Nichols Institute built a 58,000 square foot state-of-the-art lab in Irving. But the other joint venture partners never referred enough test volume to make that lab financially sustainable. The cash flow drain from that laboratory division was a contributing factor in the eventual sale of Nichols Institute to MetPath (now Quest Diagnostics) in 1994.