CEO SUMMARY: Sonic Healthcare, Ltd., announced that it would pay $540 million—a multiple of 9.2 times EBITDA—to acquire Aurora Diagnostics, the anatomic pathology company based in Palm Beach Gardens, Fla. Sonic will gain 32 pathology practice sites and add 220 pathologists to its network of regional clinical and pathology laboratories. The transaction marks the end of a pathology company that struggled to achieve sustained financial success.
IN YET ANOTHER YEAR-END TRANSACTION THIS MONTH, Australia’s Sonic Healthcare Ltd. of Sydney, Australia, agreed to buy all of Aurora Diagnostics LLC, of Palm Beach Gardens, Fla., for $540 million.
In an announcement Dec. 12, Sonic said it expects to complete the deal next year, pending antitrust and other reviews. It will mark the end of the independent life of Aurora Diagnostics, a company founded in 2006 to acquire and manage anatomic pathology group practices. Aurora says it has 220 pathologists in 32 practices located nationwide.
Struggling Pathology Firm
Since its inception, Aurora Diagnostics has struggled to find an effective, profitable business model. Observers noted that it often paid premium prices to acquire private practice pathology groups. Because many of these groups were serving community hospitals, it was difficult to generate the successive year-over-year increases in specimen volume and revenue that would satisfy investors.
For this reason, each time Aurora’s private equity owners attempted to sell the company over the past 10 years, there was little interest among potential buyers.
Despite this history, the soon-to-be-new owners of Aurora Diagnostics are excited about this transaction. Sonic Healthcare considers this an opportunity to combine anatomic pathology services with its existing clinical laboratory capabilities in ways that will benefit its clients.
“We see a convergence of anatomic pathology (AP) and clinical pathology (CP)—including molecular and genetics—here in the United States,” stated Jerry Hussong, MD, Sonic’s Chief Medical Officer, who as of Jan. 1 will become the CEO of Sonic Healthcare USA.
“We think pathologists have great value as members of the healthcare delivery team,” Hussong said in a written response to questions from The Dark Report. “Within Australia, Sonic Healthcare holds the number one market position in both AP and CP. It operates with anatomic and clinical pathologists residing in the same laboratories and practicing together.
“In a similar way, we believe the acquisition of Aurora Diagnostics will allow us to integrate the AP and CP markets and build upon these synergies within the United States,” he said. “Sonic does not plan to close any of the practices Aurora operates.”
If this synergy is successful, then the two companies might be a better fit than if another lab, or an investment company, acquired Aurora. That’s because any other acquiring company might struggle to get a return on its investment given Aurora’s recent financial problems.
Losses in Recent Years
Last year, for example, Aurora reported that in 2016 it had a net loss of $29 million on revenue of $284 million. When added to the losses the company incurred since 2012, Aurora lost a total of $401 million over five years. This included net losses of $83 million in 2015, $55 million in 2014, $73 million in 2013, and $161 million in 2012. (See, “Aurora Diagnostics Acquires Pathology Groups, Posts Loss,” TDR, April 24, 2017). These amounts were impacted by significant interest expense on debt and intangible asset impairments related to years of extensive acquisition activity, Sonic said in its written response.
Acquisitions Last Year
Despite these loses, Aurora continued to acquire pathology groups. Last year it acquired five pathology practices:
- University Pathologists in Warwick, R.I.;
- Pathology Associates of Princeton in Plainsboro Township, N.J.;
- Cleveland Skin Pathology Laboratory, Inc., in Cleveland;
- CytoPath in Alabaster, Ala.; and,
- CBM Pathology in Gaithersburg, Md.
Earlier this year, Aurora acquired Cascade Pathology Services in Portland, Ore.
From 2014 to 2016 Aurora’s acquisitions helped the company increase its net revenue from $242.6 million to $284.0 million, an increase of 17%, according to Randy Durig who wrote about Aurora for for the stock site, Seeking Alpha.
For pathologists and lab executives watching the valuation of clinical and pathology laboratories, the Sonic–Aurora Diagnostics transaction provides an interesting insight about the current state of the laboratory marketplace. In its announcement about the deal, Sonic said that Aurora had revenue of about $310 million for the fiscal year that ended on Sept. 30, and of that amount, $59 million was earnings before interest, taxes, depreciation, and amortization (EBITDA).
It also said that the $540 million that it would spend on Aurora represented a multiple of 9.2 times EBITDA. After one year, Sonic said it expects its return on invested capital (ROIC) in Aurora would be in the range of 9% to 10%. Any return in this range would exceed that of Sonic’s fiscal 2018 group ROIC, the company said.
Sonic’s CMO Lays Out Benefits of Acquisition
IN AN EMAIL TO THE DARK REPORT, Sonic Healthcare USA’s Chief Medical Officer Jerry W. Hussong, MD, explained that Sonic’s acquisition of Aurora Diagnostics will allow Sonic to add some 200 pathologists to its current team of pathologists. Sonic Healthcare USA has pathologists operating at CBLPath in Rye Brook, N.Y., at Sunrise Medical Laboratories on Long Island, and at Clinical Laboratories of Hawaii, in Honolulu, Hussong said.
“We see pathologists as natural leaders in the laboratory space—as laboratory directors and team builders—in addition to their professional roles in AP and CP,” he said. “They will become integrally involved with our lab operations and businesses. This will enable us to ‘keep our business medical,’ as has been done so successfully by Sonic Healthcare in Australia, Germany, Switzerland, and the United Kingdom.
“As one part of our overall strategy, Sonic will continue to partner, as appropriate, with hospitals and health systems,” Hussong added. “These partnerships will be enhanced by our pathologists and strengthen us as a laboratory company. We do not have any plans to consolidate or close practices; this is not the reason for our acquisition of Aurora.”
More Lab Acquisitions?
Also, Sonic expects to retain capacity for other acquisitions, in part by raising $600 million in Australian dollars (or $427.3 million in U.S. dollars) in what it called a fully underwritten institutional placement and by raising $100 million Australian ($71.2 million in U.S. dollars) through a non-underwritten share purchase plan to retail shareholders in Australia and New Zealand.
So why would Sonic, a company that operates clinical laboratories in the United States, be willing to invest in a large anatomic pathology company? Hussong explained that Sonic recognizes the value of comprehensive care delivery that spans a range of diagnostic services including AP, CP, and molecular genetics in the era of precision medicine and value-based care.
“As a medically-led company, Sonic Healthcare is excited about the signing of a binding agreement to acquire Aurora Diagnostics,” he wrote in the e-mail. “This acquisition will allow us to build upon our medical leadership model. By medical leadership, we mean leadership that keenly has a deep understanding of physicians and the healthcare profession.”
Hussong is referring to the fact that Sonic Healthcare’s CEO is Colin Goldschmidt, MD, a pathologist. It is the only billion-dollar lab company operating in the United States that has a board-certified pathologist as CEO.
Some may speculate that Sonic was willing to pay a strong price to acquire one of the nation’s largest independent anatomic pathology companies because it believes that the location and hospital affiliations of Aurora’s pathology practices complement the regions and scope where Sonic has coverage with its existing clinical laboratory facilities.
Economies of scale also have a role in Sonic’s strategic planning. Toward that end, Sonic said it expects to use Aurora Diagnostics to transform its operations in the United States, saying, Aurora “adds significant scale” to the company’s existing AP practices, which operate as CBLPath in Rye Brook, N.Y., Sunrise Medical Laboratories on Long Island, and Clinical Laboratories of Hawaii in Honolulu.
The price Sonic Healthcare will pay to acquire Aurora Diagnostics does bring it a substantial volume of anatomic pathology work. Sonic Healthcare USA said that Aurora’s pathologists process about 2.5 million accessions each year.
Those specimens come from more about 23,000 referring physicians. These pathology groups hold contracts with more than 100 hospitals and health networks nationwide.
Molecular Testing Center
One asset that may have been attractive to Sonic is the molecular testing center that Aurora Diagnostics developed and operates in Jacksonville, Fla.
Another aspect of this acquisition also is notable. Aurora Diagnostics is a sizeable lab company that was not acquired by either Quest Diagnostics or Laboratory Corporation of America. That may be evidence that Sonic believes there are substantial synergies it can harvest from buying Aurora Diagnostics.
Contact Jerry Hussong, MD, at firstname.lastname@example.org or 512-439-1600.