Dx Deals: Quest Makes Big North American Expansion with LifeLabs Acquisition

Quest Diagnostics has taken a big leap in expanding its footprint in North America, recently acquiring LifeLabs from the Ontario Municipal Employees Retirement System (OMERS), a Canadian pension fund that also dabbles in private equity.

OMERS had announced earlier this year it was shopping Toronto-based LifeLabs, which calls itself the largest community lab system in Canada. It was seeking a price close to the $2.5 billion Canadian it had invested in LifeLabs since it acquired the business in 2007—that’s about $1.8 billion in U.S. dollars—but appears to have fallen significantly short of that goal.¹

In total, Quest is paying about $1.35 billion Canadian for LifeLabs, or roughly $1 billion in US dollars at the current exchange rates.² That is nearly identical to the price OMERS paid to acquire LifeLabs 17 years ago.¹ Even though that may not have been the price OMERS was seeking, it is still among the biggest deals Quest has ever announced in the company’s history. The transaction closed at the end of August.²

“Our purchase in 2007 and subsequent investments have helped LifeLabs grow into a great Canadian success story,” said OMERS executive vice president Michael Hill in a statement. “Quest is uniquely equipped to expand the service offering at LifeLabs, bringing new innovations to this market while extending access for patients in Canada.”³

LifeLabs is a huge operation, with more than 5,700 employees. Through a network of 16 labs and 332 service centers, LifeLabs services British Columbia, Saskatchewan, and Ontario, which contain about 60 percent of Canada’s population.⁴ It performed 112 million tests in 2017, the most recent year for which such information was available.⁵

Quest said in a statement that all the employees would keep their positions once the transaction has closed, and that LifeLabs would remain in Toronto.

The lab testing giant estimated that the deal will initially generate $710 million in additional annual revenue.² That’s approximately a 7 percent revenue boost—a tough accomplishment considering that only rival Labcorp is larger than Quest, and no other lab businesses even approach their size. Sonic Healthcare is a distant third, with about half the annual revenue of Quest.

The acquisition has been a tonic to Quest’s stock, with it rising from about $136 a share just before the deal was announced in early July to currently more than $151 per share, or about an 11 percent increase over just a six-week period.

Moreover, the deal gives Quest entrée into a new market where it has had very little impact. Although it has provided some advanced reference testing for LifeLabs, Quest spokesperson Wendy Bost noted in an email that Quest has “limited operating presence in Canada,” with a few reference relationships but nothing beyond that. The deal will immediately make Canada Quest’s second-largest market after the US, Bost added. Quest also has a significant presence in Mexico, Ireland, and India.

The purchase also allows Quest to expand dramatically in a foreign country without having to venture far to do so. Its New Jersey headquarters are less than 500 miles from LifeLabs’ corporate offices.

According to Bruce Carlson, publisher of the Eye on IVD newsletter, Canada is slightly more than 10 percent of the size of the US market. That and Canada’s geography—it is the second-largest country in the world in terms of land mass—may pose some challenges for expansion into the seven provinces where LifeLabs does not have any business.

However, Carlson suggests that Quebec may be an opportunity for Quest and LifeLabs. With 8.5 million people, it is the nation’s second-most populous province. And Quebec has a liberal policy toward some particularly pricey tests.

“Genetic tests often contested by payers in the US are free in Quebec,” he says.

Once the deal is formally completed, Bost suggested that Quest would initially focus on improving efficiencies for its operations as opposed to any aggressive expansion. “Quest has made improvements in key service areas in our US operations that may be transferrable to LifeLabs,” Bost remarked. “For instance, we have automated areas of our online appointment scheduling to make it easier to schedule an appointment. We plan to explore these opportunities further after we complete the transaction.”

References:

1. https://www.benefitscanada.com/canadian-investment-review/alts/cppib-sells-stake-in-visma-buys-portion-of-commercial-real-estate-asset-joint-venture/
2. https://newsroom.questdiagnostics.com/2024-08-26-Quest-Diagnostics-Completes-Acquisition-of-LifeLabs,-Enhancing-Access-to-Diagnostic-Innovation
3. https://newsroom.questdiagnostics.com/2024-07-03-Quest-Diagnostics-to-Acquire-LifeLabs-from-OMERS,-Enhancing-Diagnostic-Services-for-Canadians
4. https://www.lifelabs.com/about-us/about-lifelabs/
5. https://www.lifelabs.com/news/news-room/?myProvince=on

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The following mergers, acquisitions, and joint ventures were announced by laboratories between late July and mid-August:

Mergers and Acquisitions

Strategic Alliances

Government Contracts/Grants