National Health Laboratories Incorporated

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National Health Laboratories Incorporated

4225 Executive Square, Suite 800
La Jolla, California 92037
U.S.A.
(619) 454-3314
Fax: (619) 456-0688

Public Company
Incorporated: 1971 as DCL Health Laboratories, Inc.
Employees: 7,700
Sales: $760.5 million
Stock Exchanges: New York
SICs: 8731 Commercial Physical Research

One of the leading companies in the rapidly growing U.S. blood-testing industry, National Health Laboratories Incorporated provided clinical diagnosis services to physicians, hospitals, clinics, nursing homes, and other clinical laboratories through a national network of laboratories. National Health conducts tests of patients ’ blood, urine, and other bodily fluids and tissues, the results of which assist the medical profession in diagnosing and treating a broad range of diseases. As the clinical laboratory industry consolidated during the early 1990s, National Health emerged as one of the industry’s leaders, poised to garner an appreciable share of an approximately $30 billion market and intent on increasing the size of its operations. By 1993, the company’s network of facilities comprised 17 major laboratories, a national reference laboratory, and 662 patient service centers, which together served customers in 44 states.

In the summer of 1971, Revlon, Inc., a diversified manufacturer of cosmetics and ethical drugs, as well as a host of other, related products, purchased a small clinical laboratory business, founded three years earlier, called DCL BioMedical, Inc. DCL was incorporated as a subsidiary of Revlon that same year and its name changed to DCL Health Laboratories, Inc., the predecessor to the company that would later become National Health Laboratories Incorporated. Initially, DCL operated as a division within another Revlon subsidiary, USV Pharmaceutical Corporation, which oversaw Revlon’s ethical pharmaceutical operations. DCL remained positioned as such, a second tier subsidiary, until roughly the end of the decade, but during the intervening years the geographic scope of its operations widened and the variety of tests conducted by its laboratories increased.

Under the Revlon corporate umbrella, DCL benefitted from the stability and financial security provided by its much larger parent company, an enviable position for an independent laboratory to occupy in a fragmented and highly competitive industry. In the blood-testing industry, hospitals accounted for the bulk of the testing work performed, with individual doctors and independent laboratories performing the balance of the country’s blood-testing. The market niche occupied by independent laboratories comprised scores of small laboratories scattered throughout the nation, each competing in their geographic regions for a share of the national blood-testing market. Even though some doctors conducted blood and tissue tests for their patients on their own premises and some hospitals operated their own diagnostic laboratories, independent laboratories such as DCL, had an interdependent rather than a purely competitive relationship with doctors and hospitals because they were independent laboratories’ primary customers.

Positioned as such within the blood-testing industry, DCL subsisted on work supplied by doctors and hospitals, and competed against a bevy of small independent laboratories, each of which vied for a share of a decentralized market. Although DCL represented an appreciable force within the segment of the blood-testing market controlled by independent laboratories, the fragmented nature of the market meant that the leading laboratories garnered only a negligible percentage of the total blood-testing market. Accordingly, DCL was a prominent company during the early 1970s, but a company that generated relatively little revenue. Growth would come as the market consolidated and as DCL widened the scope of its operations and expanded its geographic presence, efforts made easier under the sponsorship of DCL’s much larger parent company, Revlon.

In 1974, DCL underwent a name change, becoming National Health Laboratories Incorporated. After the name change, the company began to expand, operating clinical testing laboratories in 13 cities and maintaining auxiliary service centers and satellite laboratories in 15 other cities by 1977. The following year, National Health’s expansion efforts received a considerable boost when Revlon purchased American Biomedical Corporation and fused its assets with National Health. The acquisition extended National Health’s presence into the Southwest and gave the company valuable and sophisticated data processing technology that enabled it to improve the operating efficiency of its laboratories ’ test results through telecommunication capabilities.

By the beginning of the 1980s, organizational changes at Rev-Ion had recast National Health’s position in the network of subsidiaries owned by the parent company. Revlon’s diagnostic products and services operations were conducted now through three subsidiaries instead of operating as an adjunct to the company’s ethical pharmaceutical business. These three subsidiaries were National Health, Meloy Laboratories, Inc., and a 1980 Revlon acquisition, Technicon Corp. Each of these companies commanded one of the three subdivisions composing Revlon’s diagnostic products and services division, with National Health’s subdivision constituting Revlon’s interests in clinical diagnostic laboratories.

By this time, National Health operated one of the leading clinical diagnostic laboratory companies in the United States, but still garnered only a small portion of the independent clinical diagnostic laboratory business in the country, a portion excluding clinical testing performed by hospitals for their patients and by doctors on their own premises. To secure a greater stake in the market, National Health had continued to increase the number of its facilities, and, as it entered the 1980s, it operated 15 major laboratories, including two central reference laboratories in Vienna, Virginia, and Dallas, Texas, and 75 satellite laboratories and client service centers. Any dramatic market share increase, however, was dependent largely on the consolidation of the independent laboratory industry. Lacking the ability to control the forces that shaped the industry, National Health did what it could, strengthening its position in extant areas of operation and looking to expand into new regions.

Additional data processing and communications equipment was installed in 1982, concurrent with the introduction of six new test procedures, which augmented the battery of testing services National Health offered to the medical profession. That same year, the testing capabilities of the company’s two reference laboratories were expanded and its regional laboratory in south Florida was relocated to a new 21,000 square foot facility.

The 1980s would be a decade of tremendous change for National Health, engendered by the significant changes effected by Revlon. In the mid-1980s, Revlon underwent sweeping organizational and structural changes, as the company adjusted its corporate strategy and prepared for a series of mergers that would devolve ownership of Revlon, Inc. to another corporate body. As part of this transformation, Revlon sold its ethical pharmaceutical business in 1986, and with it Meloy Laboratories, one of the three subsidiary companies through which Rev-Ion conducted its diagnostic products and services operations. Plans were announced that year for the sale of Technicon Corp., also one of Revlon’s diagnostic products and services subsidiaries, leaving National Health, by this time operating in 24 states through 15 major laboratories, as the sole operating company for Revlon’s clinical services interests. While these divestitures and organizational changes were being effected, Revlon Group Incorporated purchased Revlon, Inc. in 1985 through a subsidiary created expressly for purchasing Revlon, Inc. The following year, New York-based MacAndrews & Forbes Holdings Inc. acquired approximately 32 percent of the outstanding voting shares of Revlon Group Incorporated, then purchased the remaining shares in 1987, making, after the developments of the previous two years, MacAndrews & Forbes Holdings Inc. the ultimate parent company of National Health.

In this new corporate hierarchy, National Health operated as a division of Revlon Health Care Group, but the clinical diagnostic laboratory would not remain in this position for long. In 1988, National Health filed with the Securities and Exchange Commission for an initial public offering of 9 million shares of common stock, then, three years later MacAndrews & Forbes Holdings reduced its ownership in National Health to roughly 20 percent, giving the independent laboratory its first taste of independence.

Now essentially operating on its own for the first time, National Health faced its future in an industry that was demonstrating signs of appreciable growth potential. The reason for this optimism stemmed, in part, from an aging population, as the bulk of the country’s citizens were reaching an age that portended greater medical difficulties. The early 1990s was also a period during which doctors were becoming increasingly apprehensive about the threat of malpractice lawsuits, apprehension that led them to be more cautious in their diagnosis and treatment of patients, which spurred the demand for blood and tissue tests. Adding to the demand for services provided by companies like National Health was the growing trend of organizations to test their employees for illegal drugs, coupled with the desire of individuals to monitor their medical conditions more assiduously.

All of these factors contributed to the growth of the blood-testing industry, which by the time National Health emerged on its own in 1991 represented a $26 billion business. Hospitals accounted for half of the test work completed, with doctors performing 25 percent and independent laboratories performing the balance. The independent laboratory niche of the market, however, was still highly fragmented. The largest five companies accounted for only 14 percent of the market controlled by independent laboratories, but this decades-old characteristic of the industry was changing during the early 1990s, educed, in part, by more restrictive federal government safety standards, which dramatically reduced the profitability of the country’s smaller clinical laboratories. Market consolidation translated as greater profit potential for the industry’s largest companies, such as National Health, that now competed in a significantly different business environment.

As this new era in the independent diagnostic laboratory industry began, the four largest companies were, in ranking order, SmithKline Beecham Clinical Laboratories, Corning Inc., National Health, and Damon Corporation, an order National Health hoped to alter. In June 1993, the company announced it had agreed to acquire Needham Heights, Massachusetts-based Damon Corporation, which operated 13 clinical laboratories in the United States and one in Mexico City. Combined with National Health’s $721 million in sales in 1992, the addition of Damon would create a company with $1.2 billion in annual revenues and vault National Health to the industry’s number two position behind SmithKline’s $1.5 billion in annual revenues. The $260 million proposed acquisition was stalled, however, when Corning Inc., then the industry’s second largest company, offered $368 million for Damon. Unwilling to pay such an amount for Damon, National Health withdrew from the bidding contest and Corning acquired Damon in mid-1993. National Health’s president and chief executive officer, James R. Maher, reacted to the failed acquisition by responding to the Wall Street Journal that he “would have been pleased to acquire Damon, but not at the premium that the Corning offer required.”

Although the purchase of Damon would have strengthened substantially National Health’s position in the blood-testing industry, the disappointment surrounding the failed acquisition was overshadowed by a greater disappointment for National Health that year, which resulted in a prison sentence for Maher’s predecessor, Robert E. Draper, the leader of National Health for the previous two decades. The legal turmoil began in 1990, when a grand jury investigation was launched in response to accusations made the year before that National Health had manipulated doctors into ordering unnecessary blood tests. During the investigation, the company’s employees were questioned and reams of corporate documents were taken from National Health laboratories across the country. After reviewing the material, federal prosecutors were convinced that National Health had persuaded doctors from as far back as 1987 to order unnecessary blood tests by misleading them about how much the company was billing Medicare, the federally sponsored health care program.

As the evidence mounted and prosecutors were preparing to ask the grand jury for an indictment in 1992, settlement talks between the government’s attorneys and National Health intensified, spurred by National Health’s fear that it would face automatic exclusion from the Medicare program, a major source of the company’s revenue. In December 1992, National Health plead guilty to two felony counts of submitting false claims to the Civilian Health and Medical Program for the Uniformed Services, which provided health care to military families. By admitting to such violations, National Health avoided automatic Medicare suspension, but was forced to pay $111.4 million as part of the settlement, which ranked as the largest Medicare fraud case in history. Following the settlement, Robert E. Draper, the president and chief executive officer of National Health, was sentenced to three months in prison in early 1993 and fined $500,000 for his involvement in the illegal activities, the maximum amount permissible.

The effect of the legal battle was severe, but if any optimism could be drawn from the losses incurred as a result of National Health’s guilty plea, it was found in the fact that the company recorded $40 million in profit for the year, despite the $111.4 million settlement payment and a $136 million charge related to the settlement. With the resignation of Draper, National Health gained Maher, a former vice chairmen of First Boston Corp., who was selected for his history of managing successful acquisitions and charged with increasing the scope of the company’s operations. This he did in earnest, acquiring 34 clinical laboratories in 1993 and completing the purchase of Nashville, Tennessee-based Allied Clinical Laboratories Inc., one of the country’s largest blood-testing companies, in mid-1994.

Entering the mid-1990s, National Health continued to look for additional properties, involved in both the blood-testing industry and unrelated industries, as a means for growth. In June 1994, the company’s shareholders approved a resolution to reorganize National Health into a holding company to facilitate such acquisitions. As part of the company’s restructuring, plans were announced to change its name to National Health Laboratories Holdings Incorporated, giving the company a new name and a new focus in an industry undergoing rapid change. With its legal difficulties behind it, National Health charted its future, intent on strengthening its position in the blood-testing industry.