Who’s Buying Labs? Activity Shifts Down

Remaining independent labs doing well, few sales of anatomic pathology practices

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CEO SUMMARY: As the number of independent clinical laboratories dwindles, most remaining owners seem content to continue building their business—at least until a buyer makes them an offer “they can’t refuse.” Acquisitions of pathology group practices were also few in number during 2003. However, the reduced number of labs in the United States is causing some local pathologists to consider starting up new labs.

HAVING BOUGHT UP their largest remaining competitors in 2002, few obvious acquisition opportunities remain for the two national laboratory companies.

However, the deal-making market for laboratory transactions is anything but quiet. Behind the scenes, the two blood brothers continue to actively approach any laboratory organization that they see as a useful fit for their company to discuss a potential sale.

Other Laboratory Buyers

Quest Diagnostics Incorporated and Laboratory Corporation of America are not the only interested buyers. Clinical Pathology Laboratories, Inc. (CPL) of Austin, Texas has begun to move outside its historical market area to do acquisitions in such faraway states as Virginia and Ohio in recent months.

The deal-making environment is different this year in several ways. First, most lab acquisitions now involve small laboratories. In some cases, these acquisitions involve laboratories which basically serve a single large medical office building. These types of acquisitions are not disclosed by the public laboratory companies because they do not consider such purchases to be “material” changes to their financial performance.

In other cases, hospitals and health systems which own successful laboratory outreach programs have shopped their laboratories for potential sale. The most prominent example is the ongoing sales process involving Health Alliance in Cincinnati and its attempts to sell the physicians’ office segment of its laboratory testing business. LabOne, Inc. of Lenexa, Kansas has announced that it is negotiating with Health Alliance to finalize an arrangement where Health Alliance would maintain ownership of its six hospital laboratories and purchase testing from LabOne.

Another laboratory owned by multiple hospitals and health systems that has been shopped for possible sale is Spectrum Laboratory Network of Greensboro, North Carolina. For a number of months, its owners have entertained offers for the laboratory.

In the case of both Health Alliance Laboratories and Spectrum Laboratory Network, the motive behind a possible sale is the desire of the hospital/health system owners to raise capital. Selling the outreach laboratory business is one way to realize the capital value of those outreach programs.

Changes In The Market

Given the national oligopoly that now exists in the physicians’ office testing segment by the two national laboratories, the range of laboratory acquisitions known to have closed during 2003 point to some interesting characteristics in the laboratory services marketplace.

Thus, the interesting market trend which may emerge
during the next 30 months is the formation of new, locally-focused laboratories in smaller cities around the United States.

First, most remaining independent commercial laboratories (defined as having no hospital/health system equity ownership) with revenues of more than $20 million per year continue to maintain their independence. Across the United States, only a handful of these types of laboratory companies remain. In general, these companies are posting strong growth and are not financially distressed.

Second, the majority of laboratories that have some hospital equity ownership are similarly doing well. There seems to be little motive for most of these lab companies to sell. There are exceptions, such as the two laboratories mentioned above.

Third, the interest by the two nation- al laboratories to acquire small laboratories, including some that serve only a single medical office building or do specialty testing, is a new phenomenon. Over the last 20 years, these types of acquisitions were done by public laboratory companies, but they were not as common as what has been seen in 2003.

Fourth, the acquisitions of anatomic pathology practices remains limited to a handful of deals each year. Not surprisingly, AmeriPath, Inc. is the major buyer. It would be a significant development if either of the two blood brothers began to acquire pathology group practices in certain cities as a way to add capacity and build market share in anatomic pathology specimens. To date, there is no pattern of such acquisitions.

New Labs To Be Formed?

There may be another reaction to the market dominance of the two multi-billon-dollar national laboratory companies. In smaller cities around the United States, growing numbers of pathologists are beginning to seriously evaluate the opportunity to establish a new laboratory company.

In many cases, these are pathologists who had operated an independent company and sold it to one of the public lab companies sometime in the past 15 years. Observing the service deficiencies of the laboratories serving their communities—and with non-compete agreements that expired years ago—these pathologists recognize a clear need for a local laboratory that features the same high levels of service they provided prior to selling their laboratory.

Thus, the interesting market trend which may emerge during the next 30 months is the formation of new, locally-focused laboratories in smaller cities around the United States.

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