Coronavirus could fuel clinical lab M&A by stressing smaller hospital players

Dive Brief:

Laboratory services businesses entered into five acquisitions and other transactions in the first quarter, putting the sector on track to close a similar number of deals to prior years.
Consultancy Kaufman Hall, which shared the first-quarter data in a recent report, compared the figure to deal-making activity from 2017 to 2019, when lab services businesses averaged close to 20 transactions a year.
The in-line performance occurred despite Quest Diagnostics noting last week that mergers and acquisitions have “understandably slowed” during the coronavirus pandemic. Quest and Kaufman Hall both see COVID-19 ultimately accelerating M&A by placing additional strains on smaller labs.

Dive Insight:

Quest and its chief rival LabCorp early this year both predicted more M&A opportunities would open up as the impact of the Protecting Access to Medicare Act on smaller laboratories became clear. In 2019, the level of M&A fell short of expectations as it took the laboratory services leaders longer than anticipated to close deals. The pace of talks slowed further still as COVID-19 hit the U.S.

Against that challenging backdrop, lab services companies have continued to get deals done. Kaufman Hall said it is “too soon to estimate the COVID-19 pandemic’s impact on transactions,” but for now there is no discernable negative effect.

The coronavirus pandemic may even have a positive effect on M&A levels as the year progresses. Kaufman Hall is predicting “an acceleration of transactions through the end of the year” as hospitals negatively affected by the outbreak look for operational support, monetization and efficiencies.

The prediction is in keeping with comments made by Quest CEO Steve Rusckowski on a conference call with investors last week. 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 discussions about working with Quest.

That process is already underway. According to Rusckowski, talks about transactions that stopped in response to COVID-19 are being revisited “based on the new realities that the healthcare system is experiencing at this time.“

Those new realities could make organizations more likely to want to sell up or partner with Quest. As Kaufman Hall noted, hospital laboratories face “significant headwinds.” In recent years, labs have had to contend with new policies at Anthem and UnitedHealthcare, PAMA price pressures and COVID-19. Rusckowski said regional labs “have had their own challenges.”

Quest and LabCorp face many of the same challenges as hospital and regional labs but as far larger organizations may be better equipped to cope. That thinking underpins the belief that PAMA and the pandemic will create more opportunities for tuck-in acquisitions.

Recent deals illustrate the sort of opportunities open to the big players. In recent months, LabCorp has acquired rheumatologic and autoimmune testing company RDL Reference Laboratory and an ambulatory testing business, while also entering into a laboratory services relationship with a large health system in Louisiana and Mississippi. Meanwhile, 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 remain on the hunt for deals. LabCorp CFO Glenn Eisenberg on Tuesday's 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 bars. Quest continues to aim to achieve 2% growth through acquisitions.