Three Quick Deals in October May Signal Resurgence of Laboratory M&A

Could there be a trickle in the currently dammed-up world of laboratory mergers and acquisitions? That question floated around after three high-level deals occurred within days of each other last month. Industry giant Quest Diagnostics acquired Peabody, Mass.-based ConVerge Diagnostics from Water Street Healthcare Partners, a strategic investor firm in Chicago. Days later, Water Street sold its other laboratory—Irvine, Calif.-based PLUS Diagnostics—to Miraca Life Sciences, based in Irving, Texas. “We expect to be able to extend our world-class pathology services to a broader base of physicians and patients thanks to this transaction,” said Frank Basile, M.D., Miraca’s chief executive officer. The third deal involved New Jersey-based Spectra Laboratories acquiring Shiel Medical Laboratory, which has significant operations in New York City. The flurry of transactions occurred after a year in which there has been a significant drop in volume. One notable acquisition-focused player, Regional Diagnostic Laboratories, all but dropped out from making deals because its management said there were none to be had. That seemed to portend an arid M&A climate: Regional had been staked with $250 million from Warburg Pincus specifically to snap up labs. According to data from Haverford Healthcare Advisors, just 23 deals were consummated in 2012, about one-third less than in 2011. There were only three in the first quarter of this year. ACA Prompting Deals Web site problems aside, the rollout of the Affordable Care Act is prompting more deals throughout the health care sector, laboratories included. “The health care M&A markets, including laboratory and related diagnostic niche sectors, are seeing robust activity and increasing numbers of closed transactions,” said Jonathan Sadock, managing partner and chief executive of Paragon Ventures, a Wayne, Pa.-based firm that helps negotiate health care transactions. “Corporate buyers and strategic private equity firms are actively pursuing both platform and accretive acquisitions as evidenced by Spectra Labs’ acquisition and several of Water Street’s recent portfolio exits.” Sadock added that he expects a heightened level of activity to continue through 2014 as it becomes clearer how many more Americans will wind up being insured as the result of the ACA. That Water Street shed its two labs within a few days of each was completely coincidental, according to company vice president Kelly Zitlow. “It really was part of our long-term strategy to grow both companies and our goal was to sell them to leaders in our space,” she said. Zitlow added that communications with potential buyers had been ongoing while the labs’ business was being grown. Water Street had been overseeing PLUS’s operations since 2006 and ConVerge’s since 2009. We’re very pleased with the outcome. . . . [B]oth companies are now with leading industry organizations, [and] we achieved a strong return for our investors,” Zitlow said. Neither acquisition will add significantly to the bottom lines of their buyers—at least not immediately. Stock analyst firm Zacks noted that the ConVerge deal will be neutral to Quest’s earnings this year, and expects it to be “modestly accretive” to adjusted earnings in 2014. However, Zacks noted that the acquisition “is expected to synergize perfectly with the Quest Diagnostic[s’] business portfolio. The acquisition will extend the range of diagnostic information services for [Quest], facilitating greater accessibility of patients in the region and enhancing better patient outcomes in the long-run.” Kevin Ellich and Bradley Maiers, analysts for Piper Jaffray, noted that ConVerge will operate as a Quest subsidiary for the time being but will eventually be integrated into the large lab Quest is currently building in Marlborough, Mass., 40 miles west of ConVerge’s current corporate headquarters. Takeaway: A recent flurry of deals in the laboratory sector could signal a resumption of merger and acquisitions.