Laboratory Corporation of America will also acquire Diamond Reference Laboratory

Last week, financially-troubled Westcliff Medical Laboratories, Inc., of Santa Ana, California, filed a Chapter 11 bankruptcy action in federal court. The news was disclosed to Westcliff clients in a letter signed by Westcliff’s Chairman and CEO. Even as this news became public, Westcliff announced that its assets would be acquired by Laboratory Corporation of America (NYSE: LH), subject to approval by the bankruptcy court.

In a separate transaction, LabCorp is acquiring Diamond Reference Laboratory of Diamond Bar, California. Diamond Reference Laboratory has estimated annual revenue of $10 million. Westcliff Medical Laboratories reported annual revenue of $97 million for 2009. When these two clinical laboratory acquisitions close, LabCorp will have picked up a 5% increase in its share of California’s estimated $2 billion laboratory testing market.

For Westcliff Medical Laboratories, both the bankruptcy and sale to Labcorp is a sad end to its life as an independent lab company. Under its previous owner, Richard Nicholson, Westcliff grew into California’s third largest independent laboratory company. Throughout the 1990s and 2000s, it was respected for its consistent financial discipline and strong service to physicians and patients. Now its fate is bankruptcy and absorption into LabCorp.

It was June, 2006, when Parthenon Capital Partners, a private equity company with offices in San Francisco, California, created BioLabs, Inc., which was a partnership with Douglas Harrington, M.D., and Dan Angress. With funding arranged by Parthenon, BioLabs acquired Westcliff Medical Laboratories. At the same time, BioLabs also purchased Health Line Clinical Laboratories of Burbank, California. (See The Dark Report, “New Lab Company to Buy Westcliff, Health Line,” June 12, 2006. )

The two laboratory companies were consolidated under the name of Westcliff Medical Laboratories, with Harrington serving as CEO and Angress serving as COO. Both gentlemen had previously held executive positions at Specialty Laboratories, Inc., in Valencia, California.

The combination of Westcliff and Health Line puzzled clinical laboratory executives in California who were familiar with the history and corporate cultures at both laboratory companies. Westcliff had a strong customer base in Orange County, particularly in the wealthier coastal cities like Newport Beach and Laguna Beach. Under its previous owner, Westcliff had a reputation for price discipline with bidding for managed care contracts and IPA (independent practice association) agreements.

Health Line Clinical Laboratories was based in the San Fernando Valley. It was viewed as an aggressive price discounter. Lab competitors always claimed that its sales force had a reputation for offering deep-discounted client billing arrangements as a way to bring on new physician accounts.

Health Line Clinical Laboratories had also been the target of regulatory actions. This included a civil settlement with the federal government in 2004. Health Line Clinical Laboratories and its then-owners, Aramais Paronyan, M.D., and his wife, Natella Lalabekyan, agreed to pay $10 million to resolve allegations of fraudulent billing of the Medicare and Medi-Cal programs for laboratory tests that doctors had not ordered. (See The Dark Report “Health Line Clinical Labs Signs $10 Million Fraud Settlement With Feds,” May 17, 2004. )

The contrasting corporate cultures and business philosophies at West Cliff and Health Line proved to be troublesome for the new owners. By 2007, executive turnover within Westcliff Medical Laboratories was taken as a sign that the consolidation and integration of Westcliff with Health Line Clinical Labs had not gone smoothly. Bob Whalen assumed the role of Chairman at Westcliff during the summer of 2007 and became CEO in the summer of 2008.

In recent years, Westcliff’s financial position continued to deteriorate. Just weeks ago, around April 1, 2010, holders of its long-term debt used “debtor in possession” clauses to assume control of Westcliff. That’s when Matthew Pakkala become the Chief Restructuring Officer (CRO) at Westcliff. Pakkala is a Managing Director of FTI Consulting, Inc., and is based in Los Angeles, California.

For pathologists and clinical laboratory administrators, the Chapter 11 bankruptcy of Westcliff Medical Laboratories is a reminder that not all private equity investors understand the unique dynamics of the medical laboratory testing marketplace. The upcoming June 1 issue of The Dark Report will have detailed coverage about the events involved in the bankruptcy of Westcliff Medical Laboratories and its proposed sale to Laboratory Corporation of America, subject to approval by the bankruptcy court.

Related Information:

Westcliff Chairman and CEO Bob Whalen’s letter to clients about the bankruptcy and sale

Parthenon Capital Announces Investment in BioLabs, Inc.

The Dark Report, “New Lab Company to Buy Westcliff, Health Line,” June 12, 2006