More consolidation in the clinical laboratory and pathology testing industry
It was announced yesterday that MEDTOX Scientific, Inc. (NASDAQ:MTOX), of New Brighton, Minnesota, will be acquired by Laboratory Corporation of America (NYSE:LH) of Burlington, North Carolina. The purchase price is approximately $241 million and represents a 37% premium over Medtox’s closing price of $19.70 on Friday, June 1.
Significantly, LabCorp’s purchase of MEDTOX removes one more independent laboratory company from the market. This continues the trend of medical laboratory consolidation that has marked the lab testing industry for the past 25 years.
Clinical Laboratory Acquisition Priced At 2.6 Times Annual Revenue
MEDTOX had revenue of $108.1 million in 2011. This means that LabCorp will pay approximately 2.6 times annual revenue. Given past transactions, this premium could be considered a fairly generous price, although Ben Haynor, an analyst with Feltl and Company, Inc., in Minneapolis, characterized the acquisition price as “fair.”
Haynor told the St. Paul Pioneer Press that the price to be paid by LabCorp was within the range of prices offered for other clinical laboratory companies when comparing the sales price as a percentage of actual sales. Nevertheless, a price of 2.6 times revenue affirms a continuing belief among investment advisors about the potential profits that are possible from medical laboratory companies.
“We believe this is a fair price for MEDTOX, representing 2.0x our 2012 revenue estimates,” Feltl said in an analysis of the deal that was reported by Zolmax News. “Lab acquisitions typically take place between 1.5x and 2.5x sales.” Feltl added that the acquisition price of $27 per share represents 35.1x of its estimate based on earnings per share and 14.2x of its estimate based on earnings before interest, taxes, depreciation and amortization (EBIDTA), Zolmax reported.
MEDTOX is known for its expertise in therapeutic drug monitoring and clinical toxicology reference lab services. These two testing services generate almost half (48%) of its earnings. Its clinical lab business is growing quickly and represents 41%. The remaining 11% comes from its clinical trials business. The company’s drugs of abuse testing services are subject to the ups and downs of the employment market and the last recession—and its accompanying downturn in employment—resulted in a decline in the volume of these types of specimens at MEDTOX, as it did for other lab companies competing in the drugs of abuse testing market.
LabCorp Expands Its Clinical Lab Testing Market Share in Twin Cities
In recent years, MEDTOX’s clinical laboratory business has been fast-growing. Because most of these specimens originate from physicians’ offices in the Minneapolis-St. Paul metro area, these clients will give LabCorp a useful foothold in this market. Since 1999, Quest Diagnostics Incorporated (NYSE: DGX) has been the dominant independent lab company in Minneapolis-St. Paul. That is the year when Quest Diagnostics acquired Smithkline Beecham Clinical Laboratories and its lab facility in the Twin Cities.
Finally, this acquisition demonstrates that LabCorp remains an opportunistic acquirer of clinical laboratory companies it considers to be complementary. For that reason, other acquisition announcements can be expected over the balance of this year.
—By Joseph Burns