CEO SUMMARY: With growing regularity, owners of larger independent clinical laboratories are opting to sell to one of the public lab companies. This time it’s New Hampshire-based Path Lab, which agreed to be acquired by Laboratory Corporation of America. One intriguing aspect of this acquisition is LabCorp’s interest in learning more about PathLab’s successful joint venture arrangements with hospital labs.
WITH STUNNING SWIFTNESS, Laboratory Corporation of America will become the new owner of Path Lab Holdings, Inc., based in Portsmouth, New Hampshire.
The deal was publicly announced on March 26 and both parties expect the deal to close by the end of April. Path Lab’s sale to LabCorp ends the independence of a nationally-respected regional laboratory company.
Since its founding in 1971, Path Lab has succeeded in building a profitable business from long-lasting cooperative testing arrangements with hospitals. Currently, it provides lab testing services to six hospitals in New Hampshire and Massachusetts.
For LabCorp, Path Lab offers two key attractions. “First, Path Lab is located in areas where LabCorp has only a limited presence,” stated Bradford T. Smith, Executive Vice President at LabCorp. “PathLab is particularly strong in the corridor extending from New Hampshire south into Boston, Massachusetts and Providence, Rhode Island.
“Second, the type of lab testing business Path Lab does is complementary with LabCorp’s primary strengths,” he continued. “This is particularly true of Path Lab’s hospital lab business, which uses more esoteric testing.
“Tom Hirsch [Path Lab’s President] and his management team have pioneered a number of innovations in hospital laboratory management which they can teach us,” noted Smith.
“The longevity of Path Lab’s hospital testing relationships demonstrates that this lab has been close to its customers and knows how to meet their needs. LabCorp would like to draw upon that experience and expertise,” observed Smith.
Once the Path Lab sale is completed, LabCorp also intends to do something unusual in the way it operates Path Lab. “After closing, Path Lab will retain its name and identity,” Smith said. “It will continue operations under its existing management system and executive team.
Path Lab’s sale to LabCorp surprised many in the lab industry. It was considered one of the financially-strongest independent regional laboratories still operating in the United States.
“Existing LabCorp testing business in Path Lab’s service area will be folded into Path Lab,” explained Smith. “Since Path Lab has demonstrated the success of its business model, we want to retain Path Lab’s resources and give it the freedom to serve the market as appropriate.
“This will include retaining existing information systems at Path Lab,” noted Smith. “These information systems have unique capabilities and are an integral part of the service infrastructure used to support the cooperative testing with Path Lab’s hospital partners.
Valuable People Skills
“LabCorp also considers Path Lab’s people skills to be just as valuable as any other asset owned by the lab,” added Smith. “This sale has been structured to leave all the people in place and provide them with the capital and support they need to grow and enhance their lab testing services.”
Smith’s enthusiasm is mirrored by P. Thomas Hirsch, President of Path Lab. “Our executive team wanted to stay together and continue building this laboratory organization,” he said. “Also, Path Lab has never laid off employees and we were concerned about providing a secure future for our staff.
“The arrangement with LabCorp means our management team can continue working together,” added Hirsch. “It also means a good future for all the people now working at Path Lab.”
Hirsch was also willing to discuss some of the management qualities he believes contributed to Path Lab’s sustained growth and financial success, despite the turmoil in healthcare during the 1990s. “Compared to many labs in the United States, we fully understood the economics of the business from a pricing and cost perspective,” he said. “That helped us stay focused on key business factors.
Good Management Reports
“Because we were originally owned by hospitals, and most recently by a private investment group, we had more financial and other reporting discipline than many labs our size,” continued Hirsch. “We aggressively lever- aged our information systems to help us manage the business. Consequently, we had better information to monitor performance, push down accountability, and properly evaluate new business opportunities.
“I’ve always found it interesting that laboratorians require accurate and complete data to make clinical decisions and report test results, but these same laboratorians, as lab managers, will work for years in a lab that lacks the detailed business data required to help them make sound management and financial decisions,” observed Hirsch.
“We firmly believe that it’s important to manage to results,” he added. “If you can’t readily measure and track the effectiveness and quality of outcomes, your ability to produce ‘above average’ operating results is seriously compromised. That’s why we try to give our managers both accurate information and the resources they need to make good decisions.”
Path Lab’s Sale Is A Surprise
Path Lab’s sale to LabCorp surprised many in the laboratory industry. With revenues in excess of $40 million per year, it was considered one of the financially-strongest independent regional lab companies still operating in the United States. It was a fiercely-independent laboratory. That may be partly rooted in New Hampshire attitudes, best typified by the state’s license plate motto of “Live Free or Die!”
However, unknown to many was the fact that, about six years ago, Madison Dearborne Partners, an investment fund linked to First National Bank of Chicago, had acquired a significant equity stake in Path Labs. In recent years, Madison Dearborne decided it was time to convert its equity investment in Path Labs into cash.
However, Hirsch and his executive team wanted to stay together and continue to operate and expand Path Labs. The solution was to look for a buyer willing to acquire Path Labs, and, as part of the sale, allow the management team to continue running the lab under the existing business model.
Neither LabCorp nor Path Lab will comment on this situation. But it is known that, for a number of months, Path Lab’s owners discreetly shopped for either a new equity investor or a buyer.
Presentation In New York
This included a presentation to professional investors by Path Lab at the U.S. Bancorp Piper Jaffray Investment Conference on Diagnostic Companies, held in New York City in September 2000. Among the prospective buyers who looked at Path Labs was Quest Diagnostics Incorporated, but no deal ever resulted from those talks.
LabCorp, which has only a modest market presence in the geographical areas served by Path Lab, has a keen interest in developing lab testing arrangements with hospitals. As noted by Smith, LabCorp viewed the Path Lab’s acquisition as an opportunity to build its presence in a new market while simultaneously gaining access to lab executives skilled at developing and maintaining cooperative lab testing arrangements with hospitals.
THE DARK REPORT believes it is significant that LabCorp has announced that it will allow Path Lab to continue operating as a regional division with its existing name, marketing identity, and management team.
This is a sign that LabCorp recognizes the intrinsic advantages a well-run independent laboratory has in its local service area over national lab competitors. LabCorp intends to maintain its local advantage by retaining Path Lab’s identity in that regional market.
If LabCorp has the discipline to maintain Path Lab’s local identify and unique business structure, it may be one of the rare times in the past 15 years that the acquisition of a regional lab by a national lab company did not result in a reduction of service and mass layoffs, but rather, contributed new resources into the local market that benefited lab and clients alike.
Path Lab Offers Web Test Orders & Results
BEGINNING IN JANUARY THIS YEAR, Path Lab began offering Web-accessed lab test ordering and results reporting to its physician office clients.
Path Lab is using the test ordering and reporting system of Labtest.com, based in Midland Park, New Jersey. “We’ve been selectively introducing this service to our existing clients,” said Tom Hirsch, President of Path Lab. “It’s not been a casual process. Few physicians’ offices have broadband Internet access and it does take time and effort to educate the doctors and their staff about how to use this system to order lab tests and access results.
“So far this type of service has not reduced our costs,” he continued. “We are still maintaining dedicated phone lines and printers in the physicians’ offices. However, we recognize that it’s important for our lab to develop this capability, along with the expertise to work with Internet-based technologies.
“We can see changes occurring to the way hospitals and physicians’ offices handle clinical information,” added Hirsch. “As these providers become accustomed to using the Internet for clinical and administrative purposes, it is important for Path Lab to provide state-of-the-art lab testing services.
“The way physicians use the Internet is like a moving target,” Hirsch said. “They may not be ready today to fully embrace Web-accessed lab test ordering and results reporting, but the transition will happen.”