December 2006
In 2005, merger and acquisition (M&A) activity in the laboratory industry was characterized by larger acquisitions for greater sums and culminated in Quest Diagnostics’s acquisition of LabOne for $934 million. LabCorp also had two major acquisitions in 2005—US Labs for $155 million in February 2005 and Esoterix in May 2005. Sonic Healthcare also spent $380 million to acquire Clinical Pathology Labs in November 2005. As a result, 2005 total counted acquisitions were worth $1.741 billion, second only to 2003’s $2.362 billion.
2006 is also booming, although the acquisitions tend to be smaller, with one notable exception. Not all purchase prices were available, but the largest 2006 U.S. acquisitions were Becton, Dickinson’s acquisition of TriPath Imaging, AmeriPath’s acquisition of Specialty Laboratories for $344 million, Quest Diagnostic’s purchase of Focus Diagnostics for $283 million, and Fisher Scientific’s acquisition of Athena Diagnostics for $283 million. Most striking about the 2006 M&As is the relative lack of participation on the part of Quest and LabCorp. AmeriPath had two acquisitions early in the year, but otherwise the majority of acquisitions in 2006 were smaller deals between small to midsize laboratories.
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The notable exception mentioned previously is the acquisition of Canada’s largest clinical laboratory chain, MDS, by Borealis Infrastructure Management. Borealis, a private equity company owned by the Ontario Municipal Retirement Board, purchased MDS’s diagnostic division for $900 million Canadian, or $806 million in U.S. dollars.
Also striking about the MDS deal is that it marks yet another large acquisition by a private equity firm, for a total of five such transactions in 2006 alone. Other examples of this are Parthenon Capital’s purchase of Health Line Clinical Labs (July 2006), Water Street Capital Partners’s acquisition of Lakewood Pathology Associates (May 2006), American Capital’s acquisition of Redwood Toxicology (April 2006), Welsh Carson’s acquisition of AmeriPath (March 2003), Behrman Capital’s purchase of Athena Diagnostics (December 2002), Caris Ltd.’s acquisition of Metroplex Pathology Associates (May 2006) and Pathology Partners (May 2005), and Apax Partners’s acquisition of Spectrum Laboratory Network in January 2006.
Acquisition Pricing
The average acquisition price appears to be bouncing upward from its previous peak of 2.07 times annual revenue in 2002. 2006 registers at 2.9 times annual revenue, driven by the acquisition of Athena Diagnostics by Fisher Scientific for 5.2 times its annual revenue, as well as the American Capital acquisition of Redwood Toxicology (3.3), Bio-Reference’s purchase of GeneDx (3.4), and Becton Dickinson’s acquisition of TriPath Imaging for 3.6 times annual revenue. Private equity firms often acquire laboratory firms for higher average price multiples than laboratory firms do.
The year 2004 showed a marked drop in an average revenue multiple of 1.55, while 2005 rose sharply to 1.72 times annual revenue. Average revenue multiples appear to be increasing. LIR suggests that part of this increase is driven by heightened competition of fiscally healthy companies, which often boosts the price considerably. This was the case for the Borealis/MDS deal, in which they were bidding against Australia’s Macquarie Bank and CML Healthcare Income Fund, which owns Canada’s second largest laboratory company.
A Closer Look at Six Big Lab Deals
• LabCorp Buys Esoterix for $150m
In May of last year, LabCorp acquired Esoterix, Inc. (Austin, TX) for $150 million in cash. Esoterix’s majority owner was the venture capital firm Behrman Capital (New York, NY). In April 2005 Washington G-2 Reports estimated that a sales price for Esoterix would range from $200 to $300 million. Other analysts were surprised at the lower acquisition price, which was 1.2 times the company’s annual revenue, which was $125 million in 2004.
Esoterix operated nine specialty laboratories around the country, including an allergy and asthma facility in Gainesville, Florida, a molecular genetics lab in Eden Prairie, Minnesota, and a coagulation lab in Aurora, Colorado. In addition to its U.S. labs, Esoterix also runs a laboratory in Western Europe.
• VC Firm Caris Ltd. Buys Pathology Partners for $120m
In May 2005, Caris Ltd (Irving, TX) acquired Pathology Partners (Irving, TX) for $120 million, 2.18 times its estimated annual revenue of $55 million in 2004. Pathology Partners’ previous investors included Sprout Group, Salix Ventures, and Alliance Technology Partners.
Pathology Partners employs 150 people, including 15 pathologists. It provides services to 1,200 physicians in 31 states. At the time of acquisition, they focused primarily on gastrointestinal cases, but planned to branch out further.
• Sonic Healthcare Acquires Clinical Pathology Laboratories for $300m
Sonic Healthcare, Australia’s largest commercial laboratory company, purchased an 80% to 85% share in Clinical Pathology Laboratories (CPL; Austin, TX) in October 2005 for $300 million. Sonic employs more than 11,000 people in Australia, Germany, and Britain and creates approximately $1 billion in revenue annually. The acquisition was for twice CPL’s annual revenue, which in 2004 was $173 million.
CPL has 1,400 employees. Its primary markets are Austin, Dallas/Fort Worth, Houston, and San Antonio. It also has facilities in the Washington, D.C., area and throughout Ohio. Sonic Healthcare is the company to watch in the future, as it is a potential significant competitor with LabCorp and Quest Diagnostics for managed care and Medicare and Medicaid competitive-bid contracts, as well as for the acquisition of other laboratories in the U.S.
• Quest Purchases LabOne for $934m
In November 2005, Quest Diagnostics (Lyndhurst, NJ) acquired LabOne (Lenexa, KS) for $935 million in cash or $43.90 per share. In the first six months of 2005, LabOne generated $187 million annual revenue and $41 million in operating profits before overhead allocation. LabOne’s clinical laboratory business focused on serving physician offices in states including Missouri, Kansas, and Tennessee. It has exclusive contracts to cover outpatient lab services for 800,000 managed care enrollees, including United Healthcare, Cigna, and Humana.
A significant factor in Quest’s purchase of LabOne was their life insurance program, Lab Card, which covers approximately 3.3 million enrollees/employees under a discount fee schedule. In addition to Lab Card, LabOne also provides tele-underwriting, specimen collection, paramedical examinations, and laboratory testing. LabOne’s revenue breaks down this way:
In the Washington G-2 Reports Laboratory Industry Strategic Outlook 2005, LabOne was considered the third-largest laboratory in the United States after Quest Diagnostics and LabCorp. LabOne has a 27% market share in the life insurance testing sector. This sector in the United States and Canada is estimated at $1 billion annual revenues and is growing by about 5% per year.
• AmeriPath Acquires Specialty Laboratories for $344m
In January 2006, AmeriPath, Inc. (Riviera Beach, FL) acquired Specialty Laboratories, Inc. (Valencia, CA) for $344 million or $13.25 per share. The purchase was 2.0 times the annual revenue of Specialty Labs, which was approximately $160 million in 2005. In April 2005 Washington G-2 Reports speculated that Quest or LabCorp might purchase Specialty Labs for $300 to $400 million and that Specialty was one of three laboratories most likely to be of interest to purchasers (the other two being Esoterix and SED Medical Laboratories).
AmeriPath is a leading provider of cancer diagnostics, genomics, and related services. The company employs 400 pathologists throughout the United States. They also provide anatomic pathology, dermatopathology, and molecular diagnostics. In 2005, they reported $563.6 million in revenue. Specialty Labs is a full-service clinical reference laboratory. Since the merger they have become the Esoteric Testing Division Headquarters for the combined operation.
• Quest Acquires Focus Diagnostics for $185m
Quest Diagnostics acquired Focus Diagnostics in July 2006 for $185 million. The acquisition is expected to add annual revenues of approximately $75 million. Focus is a leader in infectious disease test development and testing, offering an infectious disease menu of 1,200 tests. They offer reference testing services to academic medical centers, hospitals, and commercial laboratories. They have been first to introduce new assays to the market for tests for Lyme disease, West Nile Virus, and SARS. This acquisition further strengthens Quest’s focus on infectious disease reference testing. Prior to this acquisition, Focus was owned by two venture capital firms: CSFB Merchant Bank and the Sprout Group.
For much more on lab industry M&A, including a complete transaction listing, see G-2’s Lab Industry Strategic Outlook 2007: Market Report Trends & Analysis. Order using the form on pg.12 or by calling 212-629-3679.
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December 2006 - Table of Contents
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