TRENDS AND PERSPECTIVES
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Pathologists at Quest Diagnostics
Inc. (Lyndhurst, NJ) meet to discuss cases. |
Nancy Fitzsimmons, director of external communications for Quest Diagnostics, said the company acquired AmeriPath so that it could “establish the leading position in cancer diagnostics with a focus on dermatopathology, anatomic pathology, and molecular diagnostics.” The combined company will have annual anatomic pathology and dermatopathology revenues of about $1.2 billion, and approximately 900 MDs and PhDs working for it, she said.
“We believe the combination of the two companies will enhance the value of clinical laboratory testing services we provide and create shareholder value,” Fitzsimmons said.
The market did not react favorably to the acquisition when it was announced in April as shares of Quest Diagnostics declined 6.1% versus a 2.2% increase for the S&P 500 during the same period. However, in an equity research report, William Bonello, senior analyst for Wachovia Capital Markets LLC, said the AmeriPath acquisition could be more positive than the market expects.
“We estimate that Quest can generate $75 million of cost synergies over time … and may be able to cross-sell esoteric tests to the AmeriPath physician customer base,” Bonello wrote. He also wrote that the acquisition leaves Quest in a stronger pricing position. Jeff Ellis, head of diagnostics M&A for CrossTree Capital Partners (Tampa, FL), agreed that gaining pricing leverage on suppliers is a common rationale for diagnostic lab mergers and acquisitions, and was likely a motivation in this case.
“Because Quest paid a full price for AmeriPath, it likely will need to be fairly aggressive in negotiating better terms with the IVD providers with which it will now have a greater combined test volume,” Ellis said.
However, Ellis said, the problem is that since Quest and AmeriPath are both fairly large players, “they likely already enjoy some of the best pricing in the industry, especially with instruments they do a lot of volume on.” So the question becomes: “How much additional room could there be for pricing flexibility from key vendors if they are already getting the best in the industry?”
Fitzsimmons said that Quest viewed the deal as a growth acquisition so it plans for the two companies to remain independent. No widespread layoffs, facility closings, or cost cutting are planned, she said.
Still, Quest expects some cost synergies from the deal, Fitzsimmons said. “The biggest opportunities for cost synergies are in logistics efficiencies, improved purchasing capabilities, and duplication of corporate costs,” she said.
Bonello also noted in his report that Quest has a proven track record of successfully integrating large lab companies. With each of its previous four large-scale acquisitions, it has met or exceeded expectations, he wrote. Indeed, he said, “Quest actually lost very little business with each of its large lab acquisitions.”
However, analyst Tom Taulli (Newport Beach, CA), author of the Complete M&A Handbook, said that while Quest bought a good company with good growth potential, it would take some time for the two to mesh and for Quest “to get something out of the deal.”
In this case, Taulli said, Quest was not buying a direct competitor, but rather a complementary company. “And when you’re getting into a new category, integration can be difficult. There’s always a learning curve.” Typically, he added, “those types of deals don’t tend to do well.”
Like Ellis, Taulli believes that Quest was interested in AmeriPath because it lost UnitedHealthcare and “was trying to find ways to diversify its business and find more customers.” He also said that the deal was typical of the consolidation that is happening in many industries of late, including the IVD industry.
