Quest Announces Purchase of PeaceHealth Labs

At the same time, Providence is still planning to sell its laboratory services to the Laboratory Corporation of America.

Quest Diagnostics announced today that it will purchase PeaceHealth’s outreach laboratory, a story that was first reported in The Lund Report last week.

In its press release, Quest said it also intends to manage PeaceHealth’s 11 inpatient hospital laboratories under a professional lab services agreement, which is not the norm for Quest, according to Bill Bonello, a financial analyst with Craig-Hallum Capital Group based in Minneapolis.

Although the purchase price has not been disclosed, industry insiders estimate that Quest is paying $50 million, which represents close to 1 percent of Quest’s overall revenue, estimated at $7.5 billion.

“We’re going to see more and more of these transactions,” Bonello told The Lund Report. “There’s a trend by hospitals to exit the outreach businesses and put those resources into something more akin to their core operations.”

“Because it was known that PeaceHealth was shopping PeaceHealth Laboratories for sale, this announcement did not surprise lab industry insiders,” said Robert L. Michel, Editor-in-Chief of The Dark Report, a business intelligence service for clinical lab executives based in Spicewood, Texas. “Typically, when a health system decides to sell its laboratory outreach business, the motivation is convert the capital value of that lab business into cash. Assume, for the moment, that PeaceHealth Laboratory was generating $50 million in net revenue annually. A lab buyer (in this case Quest Diagnostics) would probably pay between $50 million and $100 million, depending on the lab’s EDITDA. Therefore, with the sale of its lab business, PeaceHealth gets a big infusion of cash that it can redirect to other priorities.”

It’s unknown how many PeaceHealth employees will lose their jobs once the deal is finalized, but the director of human resources has already left. Chaim Hertz who held that position for the past 10 years now works for the city of Springfield.

In the press release, Quest said:

  • The outreach acquisition will help us deliver on our goal to add 1-2% in annual revenue growth through strategically aligned, accretive acquisitions. We expect the acquisition to be accretive to earnings in 2017.
  • Quest’s major regional laboratory in Seattle and eight rapid response labs in this area (Oregon, Washington) will absorb the new volume.
  • We expect to complete the transaction in the second quarter.
  • We are not disclosing financial terms of the transaction.
  • Quest has now completed six hospital outreach acquisitions since 2012 including: UMass Memorial; Dignity Health; Steward Health; MemorialCare; CLP; and PeaceHealth.
  • Quest will manage 11 labs in PeaceHealth medical centers in Oregon, Washington and Alaska.
  • Quest employees will manage these labs, while PeaceHealth laboratory personnel will remain employees of the hospital (similar to our Barnabas and HCA PLS partnerships).
  • Quest’s Professional Lab Services business was launched in 2012 as hospitals are increasingly turning to Quest to assist in developing their lab strategy with the goal of helping hospitals and health systems run their laboratory businesses more effectively. Quest’s services include lab management, supply chain management, outsourcing and can include outreach laboratory acquisitions and joint ventures.
  • Quest has completed nine professional lab services agreements since 2012 including: RWJ Barnabas; HCA HealthONE; Montefiore; and PeaceHealth.

Providence Health and Lab Corp.

Providence Health & Services is also planning to announce the sale of Pathology Associates Medical Lab which it owns in collaboration with Catholic Initiatives, a minority shareholder, but the timeline is unclear.

Michel, an industry analyst, also shared his insights with The Lund Report:

“In the Pacific Northwest, there have been continual rumors for more than 24 months now that Providence Health was negotiating a sale of PAML, its gem of a laboratory outreach business, to Laboratory Corporation of America. Many people have pieces of information about the activities of administrators at Providence, LabCorp’s C-suite, and executives at PAML during this time that are consistent with sales negotiations. But, in response to questions from the media and others, no one from these three organizations will confirm something as basic as that discussions of PAML’s sale between Providence and LabCorp have occurred. Yet, the market chatter is continual and credible, leaving lab industry professionals to believe that some type of deal is under development.

“Because PAML’s annual net revenue is in excess of $300 million, an outright sale of the lab company would yield a huge purchase price for Providence Health and CHI, which both hold ownership shares in PAML.”

Diane can be reached at diane@thelundreport.org.

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