Laboratory Corporation of America Holdings

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Laboratory Corporation of America Holdings

358 S. Main St.
Burlington, North Carolina 27215
U.S.A.
Telephone: (336) 229-1127
Fax: (336) 513-4806
Web site: http://www.labcorp.com

Public Company
Incorporated: 1982
Employees: 18,850
Sales: $1.92 billion (2000)
Stock Exchanges: New York
Ticker Symbol: LH
NAIC: 621511 Medical Laboratories

Laboratory Corporation of America Holdings (LabCorp) owns one of the largest medical testing labs in the United States. It performs 4,000 different tests at 24 testing facilities and 900 service centers across the country. One of the company’s predecessors, National Health Laboratories Incorporated, profited wildly until it was busted for Medicare fraud in 1992. After the 1995 merger that joined National Health with Roche Biomedical to create LabCorp, profits and share price plummeted until an aggressive cost competitor was removed, managed care restrictions were loosened, and new molecular diagnostic testing capabilities revived investor interest in the company.

Origins

Roche Biomedical was created by Hoffman-La Roche, the American arm of Roche Holding, Limited, an international biomedical conglomerate based in Switzerland. In 1905 Hoffman-LaRoche began operations in the United States, with headquarters in Nutley, New Jersey. It was not until 1969, however, that the company entered the clinical laboratory business. At that time, it purchased Kings County Research Laboratories, which was based in Brooklyn, New York. Throughout the 1970s, Hoffman-La Roche added to its research laboratory holdings. In 1982 the company made one of its most significant acquisitions in this area, buying a major independent clinical laboratory business, Biomedical Reference Laboratories of North Carolina. In the following year, Hoffman-La Roche merged all of its laboratory properties into one company, which it called Roche Biomedical Laboratories.

Biomedical Reference Laboratories, Formation of Roche Biomedical: 1960s–80s

The headquarters for the newly formed Roche Biomedical were established in Burlington. This site was chosen because it was the home of Biomedical Reference Laboratories, the largest of the laboratories that Hoffman-La Roche had combined into Roche Biomedical. Biomedical got its start in the late 1960s, when three brothers founded a clinical laboratory in the town of Elon College, North Carolina. In doing so, the brothers were joining a family tradition. Their father, Thomas Edward Powell, Jr., had taught biology at Elon College for 15 years early in the century. Unable to obtain suitable supplies for his students to perform their experiments, he founded Carolina Biological Supply in 1927 to provide dissection specimens. During the Great Depression of the 1930s, when Elon College was unable to pay its faculty’s salaries, Powell left the college and entered business full time. As the New Deal increased federal funding for education programs, Carolina Biological Supply prospered. In the 1960s, Powell handed down the family business to his son, Thomas Edward Powell III.

In 1969, Thomas Powell joined with his twin brothers, James B. Powell, a doctor, and John, to form Biomedical Reference Laboratories. With 16 employees, the lab performed testing for physicians, hospitals, researchers, and small companies in the nearby North Carolina Research Triangle. In 1970, the lab moved from its location at Elon College to an old empty hospital in Burlington. James Powell was in the army, stationed in Washington, D.C., and he came down on the weekends to work. During the 1970s, the lab grew quickly, as scientific research in the area surrounding it intensified.

In 1979 Biomedical sold stock to the public for the first time. The company offered $7.2 million worth of stock, which made the lab itself worth about $50 million. With this infusion of funds, Biomedical moved from its old quarters to a nearby office and laboratory complex called York Court. Three years after Biomedical went public, Hoffman-La Roche purchased the lab for $163.5 million. The company’s original owners, the Powell brothers, became multimillionaires. Only one, James, was still involved with the company at that time, and he stayed on as its head.

By the early 1980s, the town where Roche Biomedical was located had suffered a dramatic decline, as businesses fled to the suburbs. This exodus had left a large number of vacant buildings available, and Roche Biomedical seized this opportunity to expand rapidly in Burlington. Although Roche Biomedical comprised labs located all over the country, the North Carolina operations became the company’s fastest growing. In 1984, the U.S. Congress approved more stringent Medicare regulations, which forced testing laboratories to provide greater billing information. Because this change required more space for office work, Roche Biomedical moved into larger quarters in Burlington, taking over an 80,000-square-foot building rented from a hosiery company.

In addition to its clinical testing operations, Roche Biomedical also conducted extensive research to develop quicker and more sensitive diagnostic assays. The company focused its efforts on products for which society seemed to have a growing need. “We follow the demands of the health-care system,” Powell told Business North Carolina in 1993. “But we like to think that we are innovators also. We want to be more than just a service lab.” To promote development of new products and procedures, Roche Biomedical established a Center for Molecular Biology, which conducted research on promising ideas in Research Triangle, North Carolina.

In February 1987, Roche Biomedical joined with Pragma Bio-Tech, Inc., a New Jersey-based company, to provide workplace drug and alcohol testing. Under the agreement, Pragma employees would take samples from employees at their jobs and then convey them to Roche Biomedical, which would conduct sensitive gas chromatography/mass spectrometry tests to detect the presence of controlled substances. Results would be available within 48 hours. With this joint venture, Roche Biomedical hoped to tap into the growing concern among employers about drug abuse.

With the help of such corporate programs as employee drug and alcohol testing, Roche Biomedical’s business continued to grow throughout the 1980s. In 1989, the company established a new division, the Roche Insurance Laboratory. This enterprise was set up to perform the tests required by insurance companies in determining whether to extend coverage or pay a claim.

At the start of the 1990s, Roche Biomedical consolidated geographically, selling its western regional operations in August 1990. Labs in Sacramento, California, and Denver, Colorado, were sold to the Unilab Corporation for $41 million. These facilities included clinical, anatomical, and cytology testing businesses. Under the terms of the sale, Roche Biomedical retained its esoteric and specialty testing operations in those areas. Overall, however, it had withdrawn from participation in the West Coast market.

In 1991, Roche Biomedical used its newly developed DNA technology to help identify the remains of American soldiers killed in the Persian Gulf War. By examining the so-called genetic fingerprint of tissues, the lab was able to help the Armed Forces Institute of Pathology identify all of the missing combatants. Because of this work, Desert Storm was the first war in which no American fighter was buried at the Tomb of the Unknown Soldier. Bodies were also able to be returned to families as intact as possible.

In that same year, Roche expanded its operations by establishing its Consulting Physicians Network in May 1991. This service was established by a subsidiary of Roche Biomedical, the Roche Insurance Laboratory. With this service, the company sought to provide access to a medical insurance board-certified physician to underwriting companies without a full-time physician on their staff. The doctors provided by Roche Biomedical would rate patients according to risk, read EKGs, and review files within one to two days. “The Consulting Physicians Network complements our existing businesses and allows us to respond to the changing needs of the insurance industry,” a Roche Biomedical executive told Business Wire .

Number Two in Medical Testing: 1991

By the end of 1991, Roche Biomedical had become the second largest medical testing company in the United States, with revenues of more than $600 million. The company had more than 8,000 employees in 400 locations across the country. In February 1992, Hoffman La Roche purchased the CompuChem Corporation, based in North Carolina, for $75 million. When this company’s operations were combined with those of Roche Biomedical, the Roche laboratory became the second largest drug-screening provider in the United States. Roche Biomedical had previously attained the position of the second largest paternity tester, as well. In May 1992, Roche Biomedical dedicated a new 94,000-square-foot extension of the company’s laboratory facilities in Burlington. With this addition, the Roche Biomedical space became one of the world’s largest clinical laboratories. More than 850 people worked at this location.

Also in May 1992, Roche Biomedical announced that it would sell off CompuChem’s environmental division. Despite the fact that CompuChem had spent several million dollars developing its environmental testing products, the company had discovered that the market for these expensive processes was small, as confusion about state and local regulations left companies in doubt about whether they were necessary. “The environmental operation does not fit with our business,” Powell told Triangle Business in explaining Roche Biomedical’s decision to seek a buyer for the unit.

Company Perspectives:

LabCorp is at the forefront of providing crucial information for disease management. Applications include sophisticated HIV/AIDS and hepatitis C diagnosis and monitoring, oncology, and genetics. It also offers the most up-to-date techniques for clinical trials testing, where it assists pharmaceutical, biotechnology, and contract research organizations working on new drug development .

In July 1992, Roche Biomedical announced that its Raritan, New Jersey, and its North Carolina operations had been licensed by the New York City Department of Health to perform tests for the Human Immunodeficiency Virus (HIV). Roche Biomedical was the first laboratory to receive this approval, of 59 that applied. Earlier, Roche Biomedical had also been licensed by the State of New York to perform these tests. With this move, Roche Biomedical stepped up its participation in the rapidly growing field of HIV testing. The company offered all of the available technologies for testing, including antibody tests and a sophisticated DNA test. The latter test involved the use of polymerase chain reaction technology, which duplicated one strand of DNA millions of times to reveal the presence of the virus. This test was particularly useful for detecting the presence of HIV in newborn babies, since their bodies often had not yet formed antibodies to the virus.

In September 1992, Roche Biomedical made a breakthrough when it introduced the first automated allergy test that used histamine levels to determine sensitivities. The company planned to make this test commercially available and sell it to allergy clinics and allergists through 200 sales representatives. In addition, Roche Biomedical planned to make presentations at professional meetings and send out brochures advertising the test. Roche Biomedical’s new product employed leukocyte histamines. Before, this test had been labor intensive and expensive, costing from $300 to $400 per antigen and requiring a large blood sample. With the new technology, however, physicians would be able to run 23 tests for $115, using only 2.5 milliliters of blood. During the test, allergens were mixed with the blood to see if a histamine reaction was provoked.

In October 1992, Roche Biomedical made another technological advance that allowed it to fulfill a need in a rapidly growing market. At that time, the lab introduced a new test to detect the tuberculosis bacterium in just 48 hours—a vast improvement over the old test, which took three to six weeks. Because the advent of AIDS and antibiotic-resistant strains of tuberculosis had caused a resurgence of the disease, this product responded to a growing demand, as state and federal health officials struggled to control the outbreak of the disease. The new test was particularly helpful because it permitted treatment to begin earlier, thus shortening the period in which an infectious person might contaminate others while waiting for test results.

The new test achieved its rapid results by applying polymerase chain reaction technology in another context. Technicians duplicated DNA found in sputum and other samples of respiratory matter to detect the presence of tuberculosis. In announcing the test, Powell said that he expected it “to become a major weapon in the war against tuberculosis, which has increased in incidence by 15.5 percent in the U.S. since 1984,” as Business Wire reported.

In addition to the tuberculosis test and the HIV test based on polymerase chain reaction technology, Roche Biomedical also offered a variety of other assays using this technology. These included tests for HTLV-1 and HTLV-2, viruses thought to cause certain leukemias and lymphomas; a screen for the Lyme disease agent, Borelia bungdorferi; and diagnostic procedures for the human papilloma virus and chlamydia trachomatis. In addition, this technology could be used to identify people, as had been done in the wake of the Gulf War.

At the end of 1992, Roche Biomedical dedicated a new laboratory and patient service center in Greenville, North Carolina. This facility consolidated operations that had previously been conducted in two locations. By that time, Roche Biomedical also ran facilities in 11 different office buildings in downtown Burlington.

Throughout 1993, Roche Biomedical worked to enhance its testing procedures for HIV, cancer, heart disease, and other illnesses. At the company’s Roche Image Analysis Systems center, located in the town of Elon College, the company refined a new approach to cancer screening that used computers to standardize interpretation of pap smear results. In addition, the company further developed its forensic uses of DNA testing and enhanced its already large share of the growing market for paternity testing. In the spring of 1994, Roche Biomedical updated its data management mechanisms to better manage reporting of laboratory results. With a leading position in a rapidly growing field and the backing of a multinational parent, Roche Biomedical appeared assured of continuing success in the years to come.

Formation of LabCorp Through 1995 Merger

It was handsomely profitable, but before merging with Roche Biomedical, National Health Laboratories Incorporated had been the star villain in a highly public Medicare fraud case. In 1992, it agreed to refund $100 million to the federal government and $10 million to state-funded insurance programs, and pay a $1 million fine for billing for unnecessary blood tests. Even after the hefty settlement, the company posted a net income of $40 million. The episode earned company president Robert E. Draper a brief stint in jail and a $500,000 fine.

Ron Perelman, whose MacAndrews & Forbes group owned 20 percent of National Health, then hired investment banker James Maher to head the company and look for strategic acquisitions. National Health had 16 labs in 1993, each of them turning out an impressive five million tests a year, reported Forbes .

Key Dates:

1969:: Hoffman-La Roche enters the clinical lab business.
1979:: Biomedical Reference Laboratories goes public.
1982:: Biomedical is acquired by Hoffman-LaRoche.
1983:: Hoffman-LaRoche’s lab businesses are consolidated at Roche Biomedical Laboratories.
1992:: National Health Laboratories pays largest ever Medicare fraud settlement.
1995:: Roche Biomedical merges with National Health, forming LabCorp.

The merger between National Health and Roche Biomedical was announced in December 1994. It combined the third and fourth largest medical testing companies in the United States. The new entity, Laboratory Corporation of America, would have annual revenues of about $1.7 billion and 39 labs across the country. It was expected that the merger would generate about $90 million in savings within two years, making the new company more competitive in landing managed care contracts, according to the Los Angeles Times .

Forbes later reported that the deal was less of a merger between equals than a takeover of National Health by Roche Biomedical. Even though National Health shareholders were to initially receive a 50.1 percent interest in the new company, many took advantage of lucrative payout options. National Health’s managers, feeling a clash in corporate culture, were the next to abandon ship, said Forbes. Further, the new headquarters were in Burlington, North Carolina, not National Health’s La Jolla, California locale, and the CEO of the new entity was Roche Biomedical’s former head, Dr. James Powell. Unfortunately, said Forbes, Roche Biomedical sorely lacked National Health’s management expertise, which kept annual returns in the range of 25 percent or better.

Ultimately, the projected savings from the merger simply did not come through. National Health already had $600 million in debt before the merger; the new company was saddled with twice as much. The freewheeling era that had profited Perelman so greatly ($1.6 billion from taking National Health public and from the merger) was also coming to an end. By 1996, LabCorp was losing money, and its share price was in the dumps, losing three-fourths of its value in a year.

Quest Diagnostic Incorporated, LabCorp’s largest rival, had acquired SmithKline Beecham Clinical Laboratories in 1999, removing an aggressive price competitor. Profits eventually did return to LabCorp, which earned $65 million in 1999 and $112 million in 2000.

To combat image problems associated with a low stock price, LabCorp executed a one-for-ten reverse stock split in 2000. However by the next year, the company wanted to increase stock liquidity to gain cash for acquisitions, and initiated a two-for-one stock split.

Investors’ latest interest in the company was spurred by revolutionary molecular diagnostic tests—among the first practical applications of new knowledge of the human genetic code. In fact, LabCorp described itself as the first company to fully embrace genetic testing, noted the New York Times .

LabCorp bought Los Angeles-based National Genetics Institute Inc. in July 2000 to gain NGI’s ultra-sensitive hepatitis C testing capability. Specialty testing was a growing, high-value market, noted a LabCorp spokesperson. By this time, LabCorp already had one molecular testing lab in North Carolina.

Another lab, based in New Hampshire, was acquired several months later. Path Lab Holdings Inc., based in New Hampshire, allowed LabCorp to both strengthen its presence in the Northeast and to expand to a new type of client base—hospitals (the company had previously specialized in serving doctors). LabCorp, seeking national accounts with managed care companies, had also recently inked deals with insurance companies including Aetna and US Healthcare.

Principal Subsidiaries

Executive Tower Travel, Inc.; Lab Delivery Service of New York City, Inc.; LabCorp Delaware, Inc.; LabCorp Limited (U.K.) ; LabCorp Virco, b.v.b.a. (Belgium) ; Laboratory Corporation of America; Tower Collection Center, Inc.; National Genetics Institute, Inc.; POISONLAB, Inc.