Is Australia’s largest pathology provider facing a new competitive landscape?

MedTech News: Australia’s competitive market for pathology testing seems poised for major changes.

Diagnostics company Australian Clinical Labs (ACL) has announced its intention to make an offmarket takeover bid to acquire its larger rival Healius. The merger of ACL and Healius will create Australia’s largest pathology provider, knocking Sonic Healthcare off its perch, with a combined group of more than 171 laboratories and 3413 approved collection centres nationally.

While Healius has announced several operational turnaround initiatives since 2018, these initiatives have faced implementation issues and Healius’ margins have continued to deteriorate. Prior to the COVID-19 pandemic, Healius’ main business in pathology reported four years of declining performance and a 2.1% fall in earnings before interest and taxes (EBIT) margins over that period.

ACL Chairman, Michael Alscher, said “The merger of Healius with Australian Clinical Labs and the synergies and value creation that are expected to be unlocked is expected to create a fundamental step change in value for both shareholder groups.”

ACL management has acquisition experience successfully integrating five acquisitions, including Medlab in 2021, and St John of God Health Care’s pathology business and Perth Pathology in 2016.

ACL Chief Executive Officer, Melinda McGrath, said “Our vision is to create Australia’s largest pathology provider, with enhanced scale, profitability, and potential for expansion. The proposed merger is expected to unlock $95 million in synergies and de-risk the required operational turnaround at Healius, with the potential for an additional $95 million of Potential Operational Improvement Benefit to be achieved through improved performance at Healius. Together, this is expected to deliver stronger earnings, and has the potential to create a value uplift for the merged group of $2.1 billion.

“The increased balance sheet strength achieved through the proposed merger will enable acceleration of investments to enhance and expand a range of patient and doctor services, including developing and bringing new tests into Australia, creating centres of clinical excellence, enhancing regional service sustainability, and investment in digital and automated solutions. We believe the merged group will deliver stronger outcomes for both groups of shareholders, and for doctors and patients, and deliver environmental benefits through a reduced carbon footprint.”

Healius in a separate statement confirmed it received the offer and advised its shareholders not to take any action. 

“The Board will evaluate the offer and ACL’s bidder’s statement and provide shareholders with a recommendation in due course. Until then, there is no need for shareholders to take any action,” the company said.

In 2020, Healius rejected a $1.3 billion buyout offer from Partners Group, saying at the time it undervalued the medical centre operator.

As the combination between the two companies would produce a market share of 40% across Australia, including 50%-plus in Victoria, Western Australia and Northern Territory, the Australian Competition and Consumer Commission (ACCC) may oppose the deal.

ACL’s offer closes on 29 September 2023, unless extended or withdrawn.

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