Inside the Lab Industry: The 2013 Laboratory M&A Market: Strong Yet Flat

The laboratory sector has been beset by reimbursement issues from both public and private payers that have led to flat revenues and a similar perspective for the short term. And while mergers and acquisitions are continuing at a brisk pace, they too have plateaued. M&A activity in the lab sector was nearly the same in 2013 as it was in 2012. There were 23 deals consummated in the calendar year, compared to 25 in the prior year, according to data from Haverford Healthcare Advisors, a Paoli, Pa.-based health care advisory firm. Christopher Jahnle, a Haverford managing director, believes several  more deals agreed to earlier in the year could be finalized this month. However, Jahnle does not expect to see a spike in dealmaking in 2014 and beyond. “It’s going to continue to be flat,” he said. “I think we have reached a new normal of averaging two deals per month.” There were 33 lab deals consummated in 2011, but Jahnle said many of those were spurred by impending changes in tax law that  motivated sellers to close deals in that calendar year. This new normal of a relatively low volume of deals is primarily because of supply, not due to flagging demand. “It’s definitely a seller’s market, but demand is outstripping supply,” Jahnle said. He added that the value of deals are up about 10 percent to 15 percent compared to 2010. “They’re at historically high levels and are remaining there.” Pathology Labs Big Exception The one exception to that pricing trend are pathology labs, which have been hit particularly hard by the more than 50 percent cut in reimbursement to the technical component of CPT code 88305. “There aren’t the . . . buyers lining up as in past years,” Jahnle said. He added that the decline in demand for pathology labs has been exacerbated by other subspecialists building their own labs and continued uncertainty regarding reimbursement. Dennis Weissman, president of Dennis Weissman and Associates and executive editor of G2 Intelligence, observed that if anatomic pathology laboratories are selling, they are likely at the bottom of the market. “You always have that handful of groups that feel if people are desperate, they can buy them out at well below market and see what happens after the dust clears,” he said. Nationals Under Pressure to Acquire As for the national labs, Jahnle and other industry observers view acquisitions as a necessary way to boost organic growth and revenue that they have been unable to do otherwise over the past couple of years. Many of 2013’s significant deals involved Quest, LabCorp, or other big players. LabCorp made six deals; Quest, three. “They need to buy their volume,” said Donna Hochberg, a vice president at Health Advances, a Weston, Mass.-based consulting firm that specializes in laboratory and product strategy including transaction support.  She noted that labs are competing against hospitals purchasing medical practices, which is one way of keeping lab volume in-house. “The more volume they can get, the better able they are to control costs and get their margins in a better place,” Hochberg said. Weissman concurred. “I don’t see how they get their growth unless they find additional properties,” he said.

CLINICAL LABORATORY TRANSACTIONS – 2013
	Date	Acquirer	Target	Target State	Purchase Price
1	Jan-13	Illumina	Verinata Health	CA	NA
2	Jan-13	Access Genetics	Oral DNA (sold by Quest)	TN	NA
3	Jan-13	Management (Selah Genomics)	Lab 21 Ltd.’s So. Carolina clinical lab operations	SC	NA
4	Jan-13	Ascend Clinical, LLC	PathCentral	CA	NA
5	Apr-13	Laboratory Corporation of America	Dignity Health’s Outreach Clinical Lab Operations	AZ	NA
6	May-13	Quest Diagnostics	Dignity Health’s Outreach Clinical Lab Operations	CA, NV	NA
7	May-13	Quest Diagnostics	Concentra’s Advanced Toxicology Networks	TN	NA
8	Jun-13	Laboratory Corporation of America	Laboratory Partners’ MedLab Physician Office Business	OH, IN	10,700,000
9	Jul-13	BelHealth Investment Partners	General Genetics Corporation	NM	NA
10	Aug-13	Sterling Reference Laboratories	Norchem Drug Testing Laboratory	AZ	NA
11	Aug-13	Metamark Genetics Inc.	HealthTronics Laboratory Solutions Inc.	GA, PA	NA
12	Aug-13	Bio-Reference Laboratories	Hunter Laboratories	CA	NA
13	Aug-13	Gardiner -Smith Laboratories	ARUP-Animal Reference Pathology	UT	NA
14	Aug-13	Laboratory Corporation of America	Genesis Clinical Laboratory Outreach Business	IL	NA
15	Aug-13	Laboratory Corporation of America	Bendiner Schlesinger	NY	NA
16	Sep-13	Laboratory Corporation of America	John Muir Health Clinical Laboratory Outreach Services	CA	NA
17	Sep-13	Clinical Genomics Technologies Pty Ltd.	Quest Diagnostics	NJ	NA
18	Oct-13	Spectra Laboratories Inc.	Shiel Medical Laboratory Inc.	NY	NA
19	Oct-13	Quest Diagnostics	ConVerge Diagnostic Services LLC	MA	NA
20	Oct-13	Miraca Life Sciences	PLUS Diagnostics	CA	NA
21	Nov-13	Levine Leichtman Capital Partners	Genova Diagnostics	NC	NA
22	Nov-13	Laboratory Corporation of America	SEPA Labs	GA	NA
23	Nov-13	Viracor IBT Laboratories	Lab Operations of National Institute of Transplantation/NIT	CA	NA
Source: Haverford Healthcare Advisors

  Lack of Pricing Data The biggest deal—and also the only one with a publicly disclosed dollar amount—was LabCorp’s acquisition of MedLab’s physician office business from parent company Laboratory Partners for $10.7 million. The sale was spurred by financial issues faced by Laboratory Partners/Medlab, which filed for bankruptcy protection later in the year. Although Jahnle indicated he had valuations for other transactions his company was involved with, he declined to disclose financial details. Jahnle noted that this lack of price data was primarily because of an imbalance in size—Quest and LabCorp are so large compared to the companies they are acquiring that they are not reaching the regulatory threshold for disclosing the purchase price. Many of the other deals involve companies that are not publicly traded and have no legal obligation to disclose terms at all. Hospital outreach business was also a significant generator of activity in 2013. Dignity Health, the large Catholic health care system, sold portions of its outreach business to both LabCorp and Quest last spring. LabCorp purchased Dignity’s outreach operations in Arizona, while Quest purchased its outreach operations in California and Nevada. And in September, LabCorp purchased the outreach operations of John Muir Health, a two-hospital system east of San Francisco. “We see that as many hospitals are facing challenges from a budget perspective they can avoid the capital expenditures of funding or expanding their outreach operations by selling them,” Jahnle said. Sometimes, they can even go further. A deal that occurred in 2009 involving LabCorp’s acquisition of Centrex Clinical Laboratories, which was operated by Faxton St. Luke’s Healthcare in Utica, N.Y., was an acquisition of the system’s entire lab operations, with the hospital lab employees becoming LabCorp employees. In turn, Faxton St. Luke’s was able to negotiate discounts on its laboratory services. More Outreach Deals Expected Although there was no such turnkey deal consummated last year, Jahnle noted that the cost and operations inefficiencies in many hospital labs could spur such deals in the future. He, Hochberg, and Weissman expect to see more hospital-related transactions in 2014. “I would expect there to be a number of health system and hospital labs that will be sold in 2014,” Weissman said. He added that he has spoken to a number of hospital operators that are currently in active negotiations. Hochberg was not as sanguine regarding the potential number of outreach deals. “Hospitals that have really attractive outreach programs—there are not many targets left,” she said. “That will keep the numbers down.” She added that the management of some hospitals may also hesitate to take the plunge and sell some or all of their laboratory operations. Takeaway: Although there is a strong market driving M&A in the laboratory sector, the dearth of desirable companies is likely to keep the number of transactions down for the foreseeable future.