New Lab Company to Buy Westcliff, Health Line

Ex-Specialty Labs’ CEO leads executive team in acquisition of two Southern California labs

CEO SUMMARY: In Southern California, no one’s talking for the record, but everyone’s talking about the impending acquisition of Westcliff Medical Laboratories and Health Line Clinical Laboratories by a new laboratory company. The deals are expected to close by the end of this month. The new laboratory company is likely to be led by Douglas S. Harrington, M.D., formerly CEO of Specialty Laboratories, Inc.

IT HASN’T BEEN ANNOUNCED YET, and the two acquisitions are not expected to close until the end of this month, but details are leaking out about an impending sale of Westcliff Medical Laboratories and Health Line Clinical Laboratories Inc. Westcliff is located in Newport Beach and Healthline is based in Burbank, California.

Both labs are expected to be acquired by a new laboratory company. CEO of this new firm is likely to be Douglas S. Harrington, M.D., who was President and CEO of Specialty Laboratories, Inc. until March, 2005. Rumors also say the executive team will include Joe Barlow (currently at Health Line) and Dan Angress, who was formerly a Vice President at Specialty Laboratories until the spring of 2005.

This two-pronged deal was surprising, on several counts. First, Health Line Clinical Labs (HLCL) has a history of regulatory problems with Medicare and MediCal, the state’s Medicaid program. In 2004, HLCL and its owners, Aramis Paronyan, M.D. and his wife, Netalee Lalabekyan, agreed to pay approximately $10 million to settle allegations of Medicare/Medicaid fraud and abuse involving the period 1996 through 2003.

Because of this history, and because of the terms of the Medicare/Medicaid settlement, potential buyers of Health Line Clinical Laboratories in recent years were especially careful in evaluating the lab’s compliance. There was a perception in Southern California that a buyer of HLCL might find additional, unwelcome compliance problems after the sale.

In the case of Westcliff Medical Laboratories, the surprise was that Richard E. Nicholson, President, CEO and owner of the lab, was willing to sell at this time. Nicholson has been one of California’s more successful laboratory owners over the past 15 years. Despite its relatively small size, Westcliff survived the intensely-competitive, HMO-dominated market in Southern California. In recent years, Westcliff has posted steady growth in specimens and revenue.

Combining Two Labs

Assuming that the acquisitions of Westcliff and Health Line close by month’s end, the combination of the two labs would create one of the nation’s larger labs with a primary business of providing routine testing to office-based physicians. It is estimated that each lab- oratory currently has annual revenue of between $40 million and $50 million. Combined, this would give the new lab enterprise a revenue base approaching $100 million.

Despite its relatively small size, Westcliff survived the intensely- competitive, HMO-dominated market in Southern California. In recent years, Westcliff has posted steady growth in specimens and revenue.

However, combining the two laboratories is likely to be a tough challenge. In recent weeks, the owners of both laboratories informed their employees about the impending sale of their labs. Employees have told others that, post-sale, the new owners intend to consolidate all the testing at the WestCliff laboratory facility in Orange Country. Historically, such laboratory consolidations have been disruptive to customers and created an opportunity for competing labs to pick up new accounts from dissatisfied clients.

However, the new lab owners may benefit from the fact that the major competitor in Southern California, Quest Diagnostics Incorporated, is already in the midst of its own consolidation. Quest Diagnostics is moving the operations from its two major lab- oratories into its new laboratory facility in West Hills, California. The fact that both laboratory organizations are undergoing consolidation at the same time is likely to make it tougher for these competitors to steal business from each other.

Once they take title to Westcliff and Health Line, the new owners will probably have a new primary business strategy. THE DARK REPORT considers it unlikely that Harrington and his executive team are buying these two laboratories simply to compete for the laboratory testing referrals of office-based physicians.

After all, Harrington has spent a large portion of his career at national esoteric laboratories, like Nichols Institute and Specialty Laboratories. He appreciates the profit potential of esoteric and molecular testing, compared to the reimbursement from chem panels and CBCs provided to primary care physicians.

Lab Talent Pool In So. Calif.

Thus, it is likely that the business plan of this new laboratory company will focus on specialty reference and esoteric tests, marketed nationally. What adds interest to this speculation is the fact that, around Southern California, this new laboratory company has the opportunity to recruit proven talent with experience in such companies as US Labs, IMPATH, Specialty Labs, Clarient, Quest Nichols Institute, Focus Diagnostics, and Esoterix’s lab divisions in the region.

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