Inside the Lab Industry: Laboratory M&A Heating Up Again—On a Smaller Scale

Laboratory transactions have simmered down over the past couple of years, due to a dearth of still-available acquisition targets and reimbursement cuts that have hit the pathology sector—and the value of its individual practices—particularly hard. The biggest blow was the Centers for Medicare and Medicaid Services’ 52 percent cut in the technical component of Current Procedural Terminology code 88305 that was implemented last year, which led to overall reimbursement for 88305 dropping by a third. This caused many pathology practices to suffer double-digit percentage drops in their revenues. That dramatically dropped overall practice valuations, taking many pending deals off the table and prompting other pathologists who were pondering selling their practices to change their mind. But evidence is now emerging that mergers and acquisitions (M&A) are perking back up again, particularly in the realm of pathology. However, they are being driven by deals on a significantly smaller scale than in the past, and possibly at lower valuations. That’s the assessment of Jeff Ellis, the managing director of Crosstree Capital Partners, a Florida-based investment banking firm that provides mergers and acquisitions advisory services to diagnostic laboratories. Ellis’s firm has estimated that 16 mergers and acquisitions in the laboratory realm took place during the first half of 2014, compared to just 10 in the first half of last year, an increase of 50 percent. That includes two deals that occurred in Canada, meaning 14 overall took place in the United States. There were also two deals reported in the first part of July, putting the year-to-date total at 16 in the United States and 18 overall. If you add the acquisition of employee wellness firm Summit Health by Quest Diagnostics last March (which is not on Crosstree’s list) the total in the United States rises to 15. By comparison, another transaction list kept by the Pennsylvania-based Haverford Healthcare Advisors toted only eight laboratory deals that took place in the United States during the first half of 2013. Moreover, six of those transactions involved a lab either focused on the practice of pathology or that offers pathology services. The first two deals that were recorded in the second half of 2014 also involved anatomic pathology laboratories. “Last year, we tracked one or two. The reimbursement cuts had hamstrung the market, but we are now seeing signs of stabilization,” Ellis said. Haverford’s list confirms that—there was only one pathology deal during the first half of the year. That was Ascend Clinical’s acquisition of Path Central.

Clinical and Pathology Laboratory Transactions, First Half of 2014
Number	Date	Acquirer	Target	Segment	Target State	Value of Deal	Multiple of Revenue	Multiple of EBITDA
1	January	LabCorp	Covance Genomics Laboratory	Specialized	NJ	NA	NA	NA
2	January	Health Enterprises Medical Laboratory	Skiff Medical Center	Outreach	IA	NA	NA	NA
3*	January	Gamma-Dynacare	Lab Bio-Medic	Clinical	Canada	NA	NA	NA
4*	January	Quantum Genetix	GenServe Laboratories	Specialized	Canada	NA	NA	NA
5	February	LabCorp	Laboratory Partners Inc./Talon	Anatomic/ Clinical	OH	$10.5 million	NA	NA
6	January	Myriad Genetics	Crescendo Bioscience	Specialized	CA	$270 million	9.3	NA
7	March	Quest Diagnostics	Solstas Lab Partners Group	Anatomic/ Clinical	NC	$570 million	1.6	NA
8	March	ABRY Partners	Aegis Sciences Corp.	Toxicology	TN	NA	NA	NA
9	March	Quest Diagnostics	Summit Health	Specialized	MI	NA	NA	NA
10	April	Quest Diagnostics	Steward Healthcare System	Outreach	MA	NA	NA	NA
11	May	Cellnetix	Highline Pathology Associates	Anatomic	WA	NA	NA	NA
12	May	Incyte Diagnostics	Medical Center Laboratory	Anatomic	WA	NA	NA	NA
13	May	American Health Associates	Medlab Nursing Home Labs	Clinical	OH	$5.5 million	NA	NA
14	May	BelHealth Investment Partners	Precision Toxicology	Toxicology	CA	NA	NA	NA
15	June	Aurora Diagnostics	Hallmark Pathology	Anatomic	MA	NA	NA	NA
16	June	Aurora Diagnostics	Mid-Atlantic Pathology Services	Anatomic	VA	NA	NA	NA
17**	June	Cancer Genetics	Gentris Corp.	Specialized	NC	$6.25 million	NA	NA
18**	July	Incyte Diagnostics	Accupath Laboratory Services	Anatomic	WA	NA	NA	NA
19	July	Neo- Genomics	PathLogic	Anatomic	CA	$6 million	0.6	NA
Source: Crosstree Capital Partners *Transaction is limited to Canada only. **Occurred in second half of 2014

  Aside from the stabilization of the pathology market, Ellis noted that some regional players are making their own moves, figuring that acquiring a smaller nearby practice can help them add scale easier than growing business organically. One example of that is Seattle-based InCyte Diagnostics. It has acquired two local practices so far this year: Medical Center Laboratory and AccuPath Laboratory Services. Ellis also cited Aurora Diagnostics, which acquired Hallmark Pathology and Mid-Atlantic Pathology Services, both regional labs in Massachusetts and Virginia. Aurora was previously fairly active in M&A but had been on the sidelines for about the past 18 months. “Our sense is that the smaller anatomic pathology groups are in a defensive mode given all the cuts, and the likelihood of further reimbursement cuts in the future,” Ellis said. “They have concerns about their sustainability and profitability at their size, and they are looking for ways to combine or continue their operations.” They are also apparently resigned to smaller asking prices than in the past. “The company may have done 10 million in revenue [before the 88305 cuts] and had $5 million in EBITDA [earnings before taxes, depreciation and amortization],” Ellis said. “Now, they’re doing $7 million in revenue with $2 million in EBITDA with the same volume” and are therefore cutting the potential sales prices for their practices. While more deals have taken place in 2014, there has also been slightly more disclosure of financial terms. Five purchase prices have been disclosed to date, for a total of $866.25 million. That does not include the $6 million price NeoGenomics paid to acquire California-based Path Logic, a July transaction that applies to the second half of this year. The biggest deal according to Crosstree’s list was New Jersey-based Quest Diagnostics’ acquisition of Solstas Lab Partners from a private equity fund for $570 million. At the time the deal was announced, Quest Chief Executive Officer Steve Rusckowski described the deal as in support of the company’s strategy, which includes “restoring growth and driving disciplined capital deployment through strategically aligned, accretive acquisitions.” Quest did not disclose the price it paid to acquire Summit Health. Another substantial deal in the first half of the year was Utah-based Myriad Genetics’ acquisition of Crescendo Bioscience for $270 million. Those were the only deals recorded so far this year with a valuation of more than $100 million. Takeaway: Since the reimbursement for pathology practice has stabilized, the market for practices has as well, helping drive overall laboratory M&A.