Consolidation continues in the lab testing sector that serves physicians’ offices

Last week it was disclosed that the health system which owns Centrex Clinical Laboratories, Inc. is selling its laboratory testing business to Laboratory Corporation of America (NYSE: LH ). Faxton-St. Luke’s Healthcare stated that it expected the transaction would be finalized by the end of the year.

Several times in recent years, Faxton-St. Luke’s Healthcare shopped Centrex Clinical Labs to interested buyers. For that reason, news of the sale to LabCorp did not surprise informed observers.

Centrex Clinical Laboratories sold to LabCorpWhat distinguishes the sale, by this health system, of its laboratory outreach testing business from sales, in recent years, of the outreach testing businesses owned by several other hospitals or health systems, is that Faxton-St. Luke’s Healthcare is not financially-strapped for cash. To the contrary, it is doing well financially and regularly is recognized for excellence in clinical services and operations. Faxton-St. Luke’s motive appears to be an interest in tapping the capital value of the laboratory outreach program at an auspicious time. Based in New Hartford, New York—a city about halfway between Syracuse and Schenectady—Centrex Clinical Labs serves a market that has declined in population during the past few decades. That increases the difficulty of building the lab outreach business.

The sales price was not announced. Faxton-St. Luke’s disclosed that Centrex Clinical Labs posted $43 million in revenue for 2008. Assuming a 20% EBITDA (earnings before interest, taxes, depreciation, and amortization) and a multiple of between five and nine, it can be estimated that the sales price may have been as low as $43 million and as high as $77.4 million. Faxton-St. Luke’s is a multi-hospital system with $312 million in annual revenue. Accordingly, if the sales price was around $40 million to $50 million, this demonstrates why the laboratory outreach testing business can be a valuable source of capital to the parent hospital or health system.

For LabCorp, the sale continues its pattern of opportunistic acquisitions. It has a particular interest in the Northeast and New England states, because these are regions where it has not had as strong a market presence as its national competitor, Quest Diagnostics Incorporated (NYSE: DGX ). In 2001, LabCorp acquired Path Lab Holdings, Inc., of Portsmouth, New Hampshire. Path Labs had collaborative testing agreements with six hospitals in the area. (See The Dark Report, April 30, 2001, New England’s Path Lab is Acquired by LabCorp ).

Another acquisition which beefed up LabCorp’s presence in upstate New York was its acquisition of MDS Hudson Valley Laboratories, Inc., in Poughkeepsie as part of a larger transaction that included the MDS laboratory operation in Atlanta, Georgia. (See The Dark Report, April 5, 2004, LabCorp Buys MDS Labs in New York and Georgia.)

Faxton-St. Luke’s Healthcare plans to stash the proceeds from the sale of Centrex Clinical Laboratories into a nest egg to help protect it from a future rainy day. “The sale of Centrex creates an incredible opportunity for the healthcare system. The Board of Directors has elected to wholly invest the funds generated from the sale and allow the fund balance to grow over time,” stated Joan W. Compson, Chair of the Board of Directors. “This strategy is an investment in our future. By creating an investment savings account and allowing the money to grow, it better positions us for the future, to help us build a hospital designed for the 21st century.”

Finally, the sale of Centrex Clinical Laboratories to LabCorp continues the trend of consolidation within the doctor’s office testing sector of the laboratory marketplace. Centrex was founded in 1969. Therefore, once the LabCorp takes ownership, New Hartford loses an independent laboratory company which had served it for 40 years.

Related Information:

Centrex Clinical Labs Purchased by LabCorp

The Dark Report, April 5, 2004, LabCorp Buys MDS Labs in New York and Georgia

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