Laboratory Services Industry Enjoys Plentiful M&A Deals

Laboratory Services Industry Enjoys Plentiful M&A Deals

Laboratory services businesses took part in five deals in Q1. This puts the sector on pace to close a similar number of deals to prior years.

Kaufman Hall, a financial consultancy firm, published first-quarter data in a recent report, which looked at recent numbers compared to deal-making activity from 2017 to 2019. In that time period, laboratory services businesses averaged nearly 20 transactions a year.

This steady M&A performance took place even with Quest Diagnostics noting last week that mergers and acquisitions have “understandably slowed” during the COVID-19 pandemic. Quest and the analysts believe that COVID-19 ultimately will hasten additional M&A activity by adding more stress on smaller labs.

Fluctuation of Laboratory Services Deals

Quest and its main rival LabCorp early this year both anticipated more M&A opportunities would arise up as the impact of the Protecting Access to Medicare Act​ on smaller laboratories became more apparent.

In 2019, the level of M&A failed to meet expectations, as it took the laboratory services leaders longer than anticipated to close deals. The pace of discussions slowed even further as the coronavirus impacted the United States.

In the first week of March 2020, prior to stay-at home orders being put into place around the U.S., both LabCorp and Quest Diagnostics announced their launch of COVID-19 testing capabilities. Since that time, both companies have developed at-home test collection kits and teamed with major national retailers to expand testing capacity.

With this challenging business environment, laboratory services companies have kept on closing transactions. Analysts say that it’s too soon to estimate the COVID-19 pandemic’s effect on M&A deals. However, at this point, there appears to be no discernable negative effect.

Pandemic Enhances Likelihood of Laboratory Services Deals

The coronavirus pandemic may even have a positive impact on M&A levels as 2020 goes on. Kaufman Hall predicts “an acceleration of transactions through the end of the year” as hospitals negatively affected by the COVID-19 outbreak seek additional operational support, monetization, and efficiencies.

This prediction harmonizes with comments made by Quest CEO Steve Rusckowski on a conference call with investors in late July. Rusckowski told investors that, while COVID-19 initially slowed M&A, the pandemic “could be an additional catalyst to help drive industry consolidation” as it may make hospitals and regional labs more open to conversations about working with Quest.

That process has already started. CEO Rusckowski says that talks concerning M&A that ceased as a result of COVID-19 are being reexamined “based on the new realities that the healthcare system is experiencing at this time.“

These new realities may cause organizations to consider selling or partnering with Quest. Hospital laboratories face sizeable challenges, and in recent years, labs have had to contend with new policies at Anthem and UnitedHealthcare, PAMA (The Protecting Access to Medicare Act of 2014 ) price pressures, and the impact of COVID-19.

Regional Laboratories Have Their Own Challenges

Quest and LabCorp see many of the same challenges as hospital and regional labs. However, as far larger organizations, they look to be better equipped to address these issues. This thought supports the belief that PAMA and the pandemic will develop added opportunities for tuck-in acquisitions.

Recent deals show the type of opportunities that are available to the large players. In recent months, LabCorp has acquired rheumatologic and autoimmune testing company RDL Reference Laboratory and an ambulatory testing business. The laboratory services company has also signed an agreement for a laboratory services relationship with a large health system in Louisiana and Mississippi.

Likewise, Quest paid $120 million for Memorial Hermann Health System’s outreach laboratory, $108 million for Blueprint Genetics, and agreed to buy out its partners in the Mid America Clinical Laboratories joint venture.

Quest and LabCorp continue to search for deals. LabCorp CFO Glenn Eisenberg on a recent earnings call said the company has set a “heightened threshold of strategic fit and financial returns” but will strike tuck-in acquisitions that meet those higher thresholds. Quest continues to look for 2% growth through acquisitions.