Deal may be just the first of more clinical laboratory acquisitions in the U.S by Japan’s largest medical lab testing company

Pathology and clinical laboratory testing companies continue to go global and last week’s big acquisition in anatomic pathology gave one of Japan’s biggest clinical laboratory companies an important foothold in the United States.

Miraca Holdings Inc. (TYO: 4544.T) of Tokyo, Japan, announced that it would acquire the anatomic pathology business of Caris Life Sciences, Inc., of Irving, Texas. Miraca says the purchase is the first ever by a Japanese company of a clinical laboratory testing company in the United States.

Miraca is Japan’s Largest Clinical Laboratory Company

Miraca is reported to be Japan’s largest clinical diagnostics and laboratory testing service provider. It will pay $725 million (80 billion yen), including the repayment of debt, for Caris Diagnostics, which is a subsidiary of Caris Life Sciences (CLS) of Irving, Texas. The deal is expected to close by before the end of the year.

This table shows the relationship of the Japanese company Miraca Holdings, Inc., and its two primary subsidiaries. Fujiburo Inc. sells diagnostic products to laboratories in 100 countries. SRL is Japan’s largest clinical laboratory testing company. Miraca is using its acquisition of Caris Diagnostics to make its first entry in the lab testing marketplace of the United States.

This table shows the relationship of the Japanese company Miraca Holdings, Inc., and its two primary subsidiaries. Fujiburo Inc. sells diagnostic products to laboratories in 100 countries. SRL is Japan’s largest clinical laboratory testing company. Miraca is using its acquisition of Caris Diagnostics to make its first entry in the lab testing marketplace of the United States.

There are several notable aspects to this acquisition. First, it brings a major Japanese player in clinical laboratory testing into the United States for the first time. That could mean tougher competition for such national medical laboratory companies as Quest Diagnostics Incorporated (NYSE: DGX), Laboratory Corporation of America (NYSE: LH), and Sonic Healthcare, Ltd., (ASX: SHL).

Second, because Miraca is paying a strong price for Caris, this deal will probably be used to support high valuations for anatomic pathology companies in the current marketplace. It is reported that annual revenue at Caris is $207 million per year and operating profit is $34 million. Thus, the purchase price of $725 million is 3.6 times Caris’ annual revenue and represents a multiple of 21.3 times operating profit. Private pathology group practices should take note of these significant facts.

Pathologists and clinical laboratory managers tracking acquisition activity in anatomic pathology companies will recall two earlier transactions that carried high prices. One was the purchase of Clarient, Inc., by GE Healthcare, a unit of General Electric Company (NYSE: GE). It paid $587 million to buy Clarient’s $91.6 million in annual revenue. (See Dark Daily, “GE Healthcare Pays $587 Million to Purchase Clarient, the Specialty Pathology and Cancer Testing Firm,” October 22, 2010.)

Novartis Acquired Genoptix in Earlier This Year

Similarly, Novartis (NYSE: NVS) paid $470 million to acquire Genoptix, Inc., based in Carlsbad, California. Genoptix had annual revenue of about $196 million. (See Dark Daily, Novartis To Pay $470 million To Buy Pathology Testing Company Genoptix, January 21, 2011.)

Third, this deal may open the door for other Japanese companies involved in clinical diagnostics to come into the United States and acquire medical laboratory companies in this country. In the press release announcing the acquisition, Miraca’s executives noted that, over the past 10 years, the clinical laboratory testing market in Japan has contracted at an average annual rate of 1% while this same market in the United States grew by an average of 6.4% per year over the same decade.

With the population of Japan actually declining in recent years, it’s no surprise that Miraca liked the growth prospects for clinical laboratory testing in the United States. Not only is the population of the United States growing steadily, but utilization of medical laboratory testing, and in particular, anatomic pathology testing, have been growing at strong annual rates.

Miraca was also helped by another factor. To grow, Miraca is doing what other Japanese companies are doing, which is using the strong yen to their advantage by buying companies overseas, The Wall Street Journal reported. Miraca will use cash on hand and up to 50 billion yen in loans from Japanese banks to finance the deal. Earlier this year, the Japanese government announced a $100 billion program to encourage Japanese companies to pursue overseas acquisitions, the newspaper added.

Miraca has two primary businesses. Through its subsidiary Fujiburo, Inc., it sells diagnostic products to laboratories in more than 100 countries. It performs clinical laboratory testing in Japan through the subsidiary known as SRL, Inc., based in the Tokyo area. Miraca says its SRL laboratory division is the largest in Japan and that it performs 220,000 clinical laboratory tests daily. Dark Daily believes that the central SRL laboratory is one of the largest in the world and may perform testing on behalf of between 60,000 and 80,000 patients per day at that site.

One question being asked by many clinical laboratory executives is whether Miraca will want to do further laboratory acquisitions in the United States. It was in 2005 when Sonic Healthcare surprised the American lab testing marketplace with its acquisition of Clinical Pathology Laboratories, Inc., in Austin, Texas, for $500 million dollars. Since then, Sonic has actively expanded its market share in the United States using targeted acquisitions. Given the limited growth prospects for Miraca in Japan, it won’t be a surprise if it follows its acquisition of Caris with other acquisitions in coming years.

—Joe Burns

Related Information:

Miraca $725M Bid For U.S. Pathology Business Latest Overseas Push By Corp Japan

Miraca Holdings to Acquire Caris Life Sciences’ Anatomic Pathology Business

Acquisition of U.S. Anatomic Pathology Business

Japan’s Holdings to buy US-based Caris Life Sciences for $725 million news

Miraca to acquire Dallas-based Caris Diagnostics

What is THE DARK REPORT laboratory intelligence?

THE DARK REPORT Genoptix Coverage January 2011

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