Laboratory M&A in 2015: Flat but With Possibilities Moving Forward

When it came to mergers and acquisitions in the laboratory arena, 2015 has proven to be pretty much more of the same.

Altogether, there were 29 transactions announced during the 2015 calendar year, according to data provided to Laboratory Industry Report by Tampa, Fla.-based Crosstree Capital Partners. That compares to 27 deals in 2014.

Momentum picked up during the second half of the year. There were just five deals announced during the first five months of the year; the remainder were announced on June 1 or afterward.

While the deals remained about the same, the value of the deals announced last year were significantly smaller than they were in 2014. Total volume for the 12 transactions where a price was announced equaled $2.12 billion. That compares to $7.87 billion for the 14 deals where a price was disclosed in 2014.

Jeff Ellis, a Crosstree managing director, said that the numbers for 2014 were skewed by its largest announced deal: LabCorp’s acquisition of Covance for nearly $6 billion, or about 80 percent of the value of all deals announced that year.

“It’s a bit of an anomaly, and I think the trends (over both years) are fairly consistent,” Ellis said.

There is a toss-up for the biggest deal of 2015. By dollar amount, Roche’s acquisition of Foundation Medicine was the biggest. However, that was not a full acquisition per se; Roche merely took a majority stake in the Cambridge, Mass.-based Foundation.

Lisa Phillips, an editor with Irving Levin & Associates, a Connecticut-based research firm that studies merger activity in the health care sector, said that OPKO Health’s $1.5 billion acquisition of Bio-Reference Laboratory—an odd transaction where the acquirer was much smaller than the acquired—was the biggest completed deal of 2015. According to Levin, the sector that includes labs saw 52 deals announced in 2015, up from 33 in 2014. However, that also includes imaging clinics and dialysis clinics. The company does not break out labs specifically.

According to Levin, the (slight) bump up of deals in the lab sector may have to do with the overall bottom line. “I think more (acquirers) targeted diagnostic labs because of the cash flow” that many of them were generating.

More Outreach Deals
Hospitals are continuing to sell their outreach operations, and Quest Diagnostics, the second-largest national laboratory, continues to be an eager acquirer.

Quest closed three outreach deals during the second half of last year: It picked up the outreach operations of MemorialCare Health System, a six-hospital system in California in late June. Toward the end of the year, it picked up the outreach operations of the five-hospital Hartford HealthCare. In Mid-December, it entered into an agreement to manage the seven hospital laboratories operated by Barnabas Health, New Jersey’s largest hospital chain. Terms of all three deals were not disclosed.

“Hospitals are increasingly focusing on their core business and turning to Quest to help them evaluate and execute their lab strategy so they can do what they do best—deliver great patient care,” Quest Chief Executive Officer Steve Rusckowski said in a statement. “This partnership follows a model for delivering high-value diagnostic information services for our nation’s cost-pressured health systems.”

As for the outreach or other hospital-based laboratory businesses, Ellis is unsure if there are many more targets that are left for Quest and other larger players to acquire.

“It’s not due to limited demand, but there are a limited number of hospitals with outreach operations that have the scale or size” to attract a big national lab, he said. Moreover, should hospital labs be excluded from the reimbursement calculations under PAMA, their attractiveness to have all or part of their operations acquired will be limited.

Although rival LabCorp has also acquired its share of outreach operations in recent years, it was not nearly as active on this front as Quest was last year. Instead, it focused on bread-and-butter acquisitions of other labs, such as North Carolina- based ILS Genomics, Physicians Reference Laboratory and Pathology, Inc.

LabCorp’s most intriguing acquisition was Safe Foods International Holdings, which provides food testing services for large companies, and two affiliated firms, International Food Network and The National Food Laboratory.

“It represent(s) our first major expansion in this important area, and we are delighted that these high-quality companies and their outstanding teams are joining our company,” said LabCorp CEO Dave King in a statement. “With this acquisition, we extend our capabilities to offer a full range of product-development and product-integrity services to food and beverage manufacturers and retailers, industry organizations, and academic institutions.”

Another significant operator that made some big deals is Eurofins Scientific SA, the Luxembourg- based health care conglomerate. It acquired Diatherix Laboratories and Emory Genetics Laboratory in June in separate deals for $50 million and $53.3 million respectively. Those deals came right on the heels of its late December 2014 acquisition of Boston Heart Diagnostics for $200 million.

Ellis believes that Eurofins and other foreign operators will be acquiring more U.S. labs in the coming years. He noted that interest is beginning to grow from larger labs in Asia.

“There are companies overseas with unique assays and test menus that want to access the U.S. market, and see (an acquisition) as a viable route,” he said.

Takeaway: Mergers and acquisitions in the laboratory sector were relatively level in 2015, and while the momentum of deals picked up during the second half, 2016 is not expected to have a huge number of surprises.