THERE'S A NEW TRANSITION JUST GETTING STARTED in the laboratory testing industry. For the past two decades, laboratory acquisition activity has primarly centered around independent clinical laboratories-often owned by local pathologists. This was true in both the size of the transactions and in the volume of transactions. Our stories on pages 3-9 describe these processes.

That is about to change. From 2010 onward, laboratory acquisition activity is likely to center around two different segments of the laboratory testing industry. One segment involves the laboratory outreach businesses owned and operated by hospitals and health systems. The second segment is comprised of the regional and local anatomic pathology laboratories and group practices owned by pathologists. For both segments, a new cycle of acquisition activity is now beginning.

In segment one, in the 14 months since January 2009, four significant acquisitions of hospital/health system-owned lab outreach businesses have taken place. Plus, there is the investment by Catholic Health Initiatives (CHI) in Pathology Associates Medical Laboratories (PAML) that happened in November 2009.

Collectively, these laboratory acquisitions and investments demonstrate that hospitals and health systems are waking up to the substantial value that is created from a profitable laboratory outreach program. It is reasonable to expect that-as hospital CEOs learn about these acquisitions and the prices realized by the sellers-more hospitals and more health systems will be willing to entertain the sale of their laboratory outreach businesses.

For segment two involving anatomic pathology laboratories, the simple fact that will drive laboratory acquisitions is the pending retirements of baby boomer pathologists who are partners in these laboratories and pathology group practices. Thatmotive played a role inmost of the pathology laboratory acquisitions announced during the past 14 months. (See table on page 5.)

I believe the longer-term impact of these developments will be the further consolidation of both segments of the laboratory testing industry. Deal-by-deal, hospital laboratory outreach business will be sold and resold into the hands of the nation's largest lab operators. A similar process will unfold in anatomic pathology. It will take some time to consolidate the 3,300 independent pathology practices that exist today, but that cycle of change is now under way.

Pace of Lab Acquisitions Increased during 2009

Lab buyers show strong interest in acquiring both clinical labs and anatomic pathology groups

CEO SUMMARY: After two years of relatively slow sales of clinical labs, there is pent up demand for lab acquisitions and a declining supply of independent labs available for sale. That's the assessment of one expert on laboratory mergers and acquisitions, who predicts that the accelerating pace of clinical lab and anatomic pathology practice acquisitions seen in the second half of 2009 is likely to carry on well into 2010. Professional investors continue to look for opportunities to buy into the laboratory testing market.

Predict 2010 To Be Busy For Lab Owners & Buyers

Capital gains tax rates may rise next year and that may motivate laboratory sellers to do deals soon

CEO SUMMARY: Along with a recovering economy, the possibility of an increase in the capital gains tax rate for 2011 may encourage owners of clinical labs and anatomic pathology companies to sell their businesses during 2010. That could make 2010 a busy year for laboratory mergers and acquisitions, particularly if valuations for laboratory companies hold or increase from current levels. A growing number of credible buyers is another reason why laboratory sellers are likely to make 2010 a busy year for laboratory M&A.

(LIVE! Mergers and Acquisitions Audio Conference Recording by Chris Jahnle - LEARN MORE)

Multispectral Tests Use "Smart" Systems To Analyze Tissue

Research Pathologists Use Next Research Pathologists Use Next Generation Methods

CEO SUMMARY: ogists at the Hospital of the University of Pennsylvania are using a new system that combines image analysis software and algorithms to evaluate images containing numerous stains and biomarkers. Pathologists teach the system to identify tumor cells and distinguish them from non-tumor cells. Now used for research purposes, this sophisticated digital pathology system is designed to do much of the manual activity required of a pathologist when assessing an image while producing highly accurate quantitative data.

LAB BRIEFS: BECKMAN COULTER REPORTS EARNINGS THAT INCLUDE OLYMPUS
ANTHEM CRITICIZED AFTER RAISING PREMIUMS BY 39% IN CALIFORNIA
LABCORP EXPANDS ITS BILLING OPERATIONS IN GREENSBORO, NC
MEDTOX REPORTS GAIN IN CLINICAL LAB VOLUME AS DRUG TESTING DECLINES

INTELLIGENCE: Late & Latent

ADD TO: GENETIC & MOLECULAR TESTS

TRANSITIONS: Philip Chen, M.D., Ph.D., resigned from Sonic Healthcare

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