Laboratory M&A: A Shrinking Window of Opportunity

Mergers and acquisitions of laboratories during the first half of 2013 appear to be flat, with the number of transactions remaining about the same as compared to the first half of 2012. Altogether, seven deals were reported by two firms that monitor such transactions, England & Co. in Washington, D.C., and Haverford Healthcare Advisors in Paoli, Pa. According to Haverford, seven deals also occurred during the first half of 2012, suggesting a market that is stable if not dynamic. By comparison, 16 deals were consummated during the first half of 2011. Industry observers say that the environment for deal-making has been dampened by a variety of issues. Among them are reimbursement pressures, particularly regarding the technical component of CPT code 88305, the 2 percent across-the-board cuts to Medicare reimbursement as part of the budget sequester, reductions to the Part B lab fee schedule, and additional cuts to payments as a result of gap-filling new molecular pathology test codes in lieu of the older code-stacking payment methodology. “You have quite a few headwinds in the industry right now. Private equity-backed labs are taking a breather and many of the previous acquirers are no longer active,” said England & Co. Managing Director Tim Johnson. Two of the leading firms in that arena in prior years—Aurora Diagnostics and Solstas Lab Partners—have not consummated a deal since 2011, when combined they were involved in nine transactions. And Regional Diagnostic Laboratories (RDL), founded last year to focus on the hospital outreach market and backed with $250 million in capital from Warburg Pincus, has not pulled the trigger on a single deal. Brian Carr, RDL’s chief executive officer, told Laboratory Industry Report in May that the company was on the sidelines.

M&A Activity, First Half of 2013
Month Closed	Acquirer-Acquired
January	Quest Diagnostics-UMass Memorial Medical Center
January	Access Genetics-OralDNA
January	Ascend Clinical-PathCentral
January	Selah Genomics-Lab 21 Ltd. (SC)
April	LabCorp-United West Laboratories (AZ)
May	Quest Diagnostics-Concentra
June	Quest Diagnostics-Dignity Health Lab Outreach (CA and NV)
Sources: Haverford Healthcare Advisors, England & Co.

  Quest Diagnostics is the most active of the acquirers, having closed three of the seven deals during the first half. They included the Dignity Health outreach business in California and Nevada, the laboratory business of Humana subsidiary Concentra Health, and the laboratory business of University of Massachusetts Memorial Medical Center. Although the UM Memorial deal was announced in 2012, it did not officially close until January. That the nation’s two largest labs had their hands in the majority of the deals is even more of an indicator of how stilled the M&A landscape is at the moment, according to Thomas Hirsch, president of Laboratory Billing Solutions (Portsmouth, N.H.) and a senior consultant with Nichols Management Group (York Harbor, Maine). “Most of the deals happening are now strategic in nature,” Hirsch said, with publicly traded companies such as Quest and LabCorp under pressure from shareholders to make deals in order to beef up what have been relatively flat bottom lines as of late. Johnson also noted that Quest and LabCorp are making deals as part of their plans to grow revenue. Moreover, Hirsch noted that unlike hospitals, laboratories tend not to gain the same kind of leverage with insurers by becoming larger, creating some disincentives toward merging.