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Sonic Healthcare’s $198 million Acquisition of Medical Laboratories Duesseldorf

Updated: Oct 30, 2023

Acquisition Overview

Australian-based healthcare company Sonic Healthcare Limited has entered into a binding deal to acquire German-based laboratory service provider Medical Laboratories Duesseldorf for 180 million Euros ($198 million). This acquisition not only helps Sonic Healthcare Limited expand into the German market, but also gives it access to Medical Laboratories Duesseldorf’s hub-and-spoke infrastructure around its central laboratory and multiple branches and hospital sites across the Duesseldorf region, which is the capital of Germany’s most highly-populated state. This deal is consistent with Sonic Healthcare Limited’s strategy of expansion through active mergers and acquisitions, having previously acquired the Doctors Laboratory, Britain's largest private pathology practice in 2002 and an 82% interest in Clinical Pathology Laboratories, Inc. which is the largest privately owned regional pathology laboratory in the US in 2005.

Deal Structure

Sonic will be directly funding the purchase in Euros using its existing debt and cash facilities. Most of the purchase price is tax deductible in Germany for the coming 15 years as goodwill amortization. The transaction is expected to take place by the end of 2023. There is no published information regarding the financial advisors. One day after the announcement of the binding acquisition deal on April 24, 2023, the share price of Sonic Healthcare Limited dropped by 1.07% from 24.27 USD to 23.85 USD.

Sonic Healthcare Overview

Sonic Healthcare Limited is an Australian-based company which provides the following medical diagnostic services: Laboratory medicine or pathology testing services e.g. biochemistry, radiology services e.g. Magnetic resonance imaging (MRI), and primary care medical care services such as general practice clinics. Sonic Healthcare Limited has a strong global outreach: It is the largest medical laboratory provider in Australasia and in Europe, and third largest in the United States. Its CEO and Managing Director is Dr Colin Goldschmidt.

Date founded: 1987

Number of (full-time) employees: 41000

Enterprise value: 19.45 Billion AUD

TTM Revenue: 8.67 Billion AUD

LTM EBITDA: 1.8 Billion AUD

Market Cap: 17.15 Billion AUD

Medical Laboratories Duesseldorf Overview

Medical Laboratories Duesseldorf is a German-based company offering a plethora of laboratory services in different areas e.g. laboratory medicine, HIV test or drug detection in urine.

Date founded: 1968

Number of employees: 300 (including 13 pathologists)

Industry Insight

According to a market analysis report on the clinical laboratory industry by Grand View Research, the global clinical laboratory service market had an estimated market size of 217.53 billion USD in 2022 and is expected to grow at an annual rate of 3.2% from 2023 to 2030, reaching a market size of 280.67 billion USD by 2030. There are a few factors driving growth in the clinical laboratory industry: On the demand side, there is an increasing burden of chronic diseases and a subsequent surge in demand for early diagnostic tests such that patients can access treatment as soon as possible. On the supply side, the strong development and advancement in data management and sample preparation due to the growing volume of testing samples is also a growth factor.

Breaking the clinical laboratory industry by region, Asia-Pacific has the highest projected-growth, with a compounded annual growth rate of 4.8% from 2023-2030. There are multiple factors that lead to this projection: The high volume of scientific research activities, unmet medical needs, economic growth and improvements in healthcare regulations. Furthermore, increased healthcare benefits and awareness among the APAC region as well as availability of high-end medical treatment also leads to the strong growth in the region’s clinical laboratory industry. Some examples include the service agreement GC Labs entered with Biotrust in Cambodia in 2022 to increase its presence in Asia and the Middle East. Despite the strong growth in Asia’s clinical laboratory sector, North America still holds the largest revenue share (38.7%) in the market.

In terms of sectors within the clinical laboratory market, clinical chemistry had the largest market share of 54.05% in 2022. However, what is notable is that the human and tumour genetic segment took about 24% of the market share in 2020. This is potentially due to the increase in acceptance of cancer testing and the increased availability of analytical tools that quantify and identify various types of cancer. For instance, in 2020, there were approximately 19 million new cancer cases reported globally.

Strategic Rationale

The main strategic rationale behind Sonic Healthcare Limited’s acquisition of Medical Laboratories Duesseldorf is to further its expansion into the German market. Medical Laboratories Duesseldorf operates multiple hub-and-spoke infrastructure across its central laboratory and multiple branches and hospital sites within the Duesseldorf region. The acquisition is also expected to generate increased revenue for Sonic Healthcare Limited, as it forecasted that Medical Laboratories Duesseldorf will have about 50 million euros in revenue in 2024. In addition, given that Medical Laboratories Duesseldorf focuses on service provision to hospitals, this acquisition can also increase Sonic Healthcare Limited’s presence in German hospitals, or even the overall German healthcare sector.

Long-term Prospects

It should be noted that this acquisition is not material, and there is also no immediate benefit for Sonic Healthcare Limited: One day after the announcement of the binding acquisition deal on April 24, 2023, the share price of Sonic Healthcare Limited dropped by 1.07% from 24.27 USD to 23.85 USD.

I believe this is a good deal in the long-term: Based on Sonic Healthcare Limited’s forecast of Medical Laboratories Duesseldorf’s revenues in 2024 (50 million euros), Sonic Healthcare will increase its revenue shortly after the transaction takes place. Furthermore, given that Duesseldorf is the capital of Germany’s most populated state, there is a strong, existing consumer base for Medical Laboratories Duesseldorf’s services which generates stable revenues that Sonic Healthcare Limited can inherit when it formally acquires Medical Laboratories Duesseldorf.

While this is a good deal, it is not certain the magnitude of benefit this acquisition will bring to Sonic Healthcare Limited, given that it already is the largest medical laboratory provider in Europe and has a presence in Germany. For example, in April 2023, the firm signed a deal to acquire Diagnosticum group of laboratories in the South East of Germany. It may be possible that acquiring Medical Laboratories Duesseldorf only brings marginal benefit e.g. a marginal increase in market share for Sonic Healthcare Limited. However, this may also reflect Sonic Healthcare’s strong intent to expand into specifically the German market. (Note: this is only a potential constraint)

Written by Wong Yin Chi Jade (St. Anne’s College)

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