McEvoy and Farmer
Research on the business of cancer testing in The Americas, Asia & Europe


McEvoy & Farmer News

The Miraca Deal

Move over Mr. Andrews; step aside Mr. VanOort
David Halbert has emerged as the new Darwinian Dealmaker in cancer testing
Say hello to David Burgstahler, the new rocket scientist in the oncology business, soon to own a lab near you.

This morning (September 25th) Miraca - Japan’s biggest clinical lab, fourth-biggest in the world, and in many ways the world’s most efficient - accepted $135m from a private equity firm for their US anatomic pathology business. That’s the same business Miraca paid $725m for at the end of 2011. And this is the world’s leanest clinical lab, running on margins that Quest and Labcorp shareholders would never tolerate. If such a sophisticated, low-profit-tolerant owner as Miraca was so desperate to bail out of US histology and flow cytometry markets that they were willing to do it under these terms, then the outlook for the US oncology testing market is even scarier than I thought.

Take a look at how Miraca’s US business deteriorated between 2012, the first full year they owned it, and 2015, the most recent year for which CMS numbers have been published. And it seems to have gotten worse over the last year and a half…

CPT Code      Test                       2012           2015           Remarks
CMS $/test
88313             special stains        $50              $44             • Ouch!
88305            primary stains       $79              $50             • Please quit twisting my arm.
88342            IHC                       $81               $63             • This is really starting to hurt.
88185             flow cytometry      $135             $44            • I guess I can live with one arm.

# CMS tests
88313             special stains        55,980         79,462       • They tried doing more when they got paid less: Exhibit A
88305            primary stains       357,539       470,412      • They tried doing more when they got paid less: Exhibit B
88342            IHC                       88,924         59,906       • And they tried doing less when they got paid less: Exhibit A
88185             flow cytometry      77,036         53,895       • And they tried doing less when they got paid less: Exhibit B

88313             special stains        $2.8m         $3.6m           • The only good news
88305            primary stains       $28.5m       $23.1m        • Could be worse…
88342            IHC                       $7.2m          $4.5m          • Still could be worse…
88185             flow cytometry      $10.4m       $2.4m          • …can it still get worse?

Please pardon my crocodile tears, but after studying how labs get paid in China, Japan, Europe, and South America for seven years, this
reckoning in the US seems long overdue. I hate admitting it too, but we do have twice as many traditional anatomic labs as we need in this
country and more than twice the pathologists we need, and the CMS just made it clear that we can expect another year or two of these 10%
maximum rate reductions. Another wave of consolidation is on the way. Many POLs will close. Manufacturers will be unwillingly
demonstrating solidarity with their customers by sharing the pain. Everybody’s boss needs to understand this new environment.

We smell another lab rollup in the works. Mr. David Burgstahler, the head of Avista Capital Partners, now owns the sixth largest cancer testing
lab on the planet, and he probably wants to own the third largest. His undergraduate degree was in aerospace engineering. He’s owned pieces of
Prometheus, Nycomed, and Focus in the past; he owns part of VWR at present. So he’s no rookie in the diagnostic business, but this is his first
investment in oncology testing. Guys like this don’t buy just one lab; we expect to see some recidivism with this fellow. At present there are four
or five vultures circling the stumbling, overloaded-with-debt pack animal that is Aurora, and he’s probably one of them. Mr. Burgstahler is
looking like the next prime mover in our trade.

Two years ago, when GE sold Clarient to Neogenomics for $310m, having paid $587m for the same lab five years prior, the Clarient CEO
Ronnie Andrews was the heavyweight champ of selling high and Neogenomics’ CEO Douglas VanOort was the master at buying low. GE won
the buyer’s remorse award that year, then the Omnyx fiasco delivered a second buyer’s remorse award to GE in 2016. As the CEO of Caris
drove to work today he must have been smirking; Mr Halbert is the new king at selling labs at the top of the market, David Burgstahler is the
new buying-at-the-bottom champ, and Miraca is out $600m. I’ve got all the material I need here for a country-western song; too bad I can’t sing.

The farther backward you can look, the farther forward you can see.
- Churchill

Chad McEvoy