Perth's suburban dental laboratories have joined GPs, physiotherapy clinics and pathology labs as healthcare sectors to experience a major shake-up courtesy of a loss-making listed company.
PERTH’S suburban dental laboratories have joined GPs, physiotherapy clinics and pathology labs as healthcare sectors to experience a major shake-up courtesy of a loss-making listed company.
Melbourne-based Pearl Healthcare bought 26 dental labs across Australia during the past three years but unfortunately for its shareholders has presided over a dramatic fall in sales and big losses.
The company is trying to reverse the losses, including though merging five of its Perth labs into a new ‘super lab’, but the evidence from other companies to have pursued an aggregator business model is not encouraging.
Independent Practitioner Network – better known as Michael Boyd’s Foundation HealthCare – acquired more than 100 medical practices in the late 1990s but the company is still not making a profit.
Another Boyd company, Lifecare, acquired a series of physiotherapy, dental and healthcare practices but was unable to succeed as an independent business.
But failed aggregators aren’t confined to healthcare.
Stockford acquired a national network of accounting practices before going into administration, while RMG bought 22 debt collection agencies but failed to make any money.
Pearl’s problems have been extensive.
It has admitted that it paid too much for some of its practices and it has failed to hang on to the principals.
Pearl has stated that the average annual revenue of its labs was $900,000, so collectively the company should generate revenue of $23 million.
In practice, its revenue was $19.4 million in 2003-4 and fell to $16.8 million in 2004-05.
The company has pinpointed Sydney as its biggest problem, after acknowledging that the prices it paid to acquire some labs were “overly generous”.
“The acquisition multiples were too high and the earn-out period too short to ensure that the amounts paid were justified by medium term results,” the company said in its 2004 report.
It added that the performance of some labs “has fallen significantly short of their apparent pre-acquisition profitability”.
The principals of three Sydney labs left in 2004, so Pearl responded by merging them into a single CBD lab.
The merger did not halt the fall in revenue, and the directors’ 2005 report said they were “surprised by the severity of the decline in sales revenue”.
Despite admitting that it paid too much for some labs, Pearl is still paying what appear to be generous prices for new acquisitions.
It paid $210,000 in cash for a dental lab in Adelaide with annual turnover of $300,000, and it paid $177,500 in cash for Delta Dental, a high-end prosthetics lab in Perth with annual turnover of $250,000.
Industry talk is that the Delta purchase was more strategic than financial, designed to widen the company’s capabilities and keep key customers – believed to include David Bailey’s 10-practice DB Dental chain, Perth’s biggest dental chain – onside.
Delta has been integrated into Pearl’s recently completed super lab in Osborne Park, which cost $450,000 to establish.
Pearl’s aim is to create a more flexible and efficient lab but critics say it has created a faceless production line, without the personal touch and service standards associated with privately owned practices.
The company has also had to contend with the loss of key people; the principal of the Westside lab has left and started a new competing business.
Pearl has survived to date only because of the support of its two biggest shareholders, chairman Greg Plummer and director Louis Niederer.
They joined the company last February and, as well as buying shares, have loaned the company nearly $3 million.
Another business that goes through regular restructuring is Independent Practitioner Network, which has a national network of 83 medical centres.
IPN was formed in 2002 from the merger of 1990s high-flyer Foun-dation HealthCare and Lifecare.
Last year it acquired a further 18 medical centres (14 in WA) from another 1990s high-flyer, Endeavour Healthcare, which had been backed in its heyday by the likes of Kerry Packer.
IPN is still making big changes to its business to try and find the right formula.
It closed or sold seven loss-making medical centres over the past year and is currently negotiating to sell the Lifecare business to private Melbourne company Health Networks Australia, after belatedly concluding that co-location of GP and physiotherapy services did not generate the expected synergies.
Despite losing money in each of the past four years, some people still see value in IPN.
Primary Healthcare launched a hostile takeover bid in 2003 but was outfoxed by the highly profitable Sonic Healthcare, which is chaired by Mr Boyd’s father-in-law, wealthy Perth investor Barry Patterson.
Sonic, which was previously the biggest shareholder in IPN and currently has a controlling 72 per cent stake, clearly has the right formula.
It makes big dollars from its national pathology and radiology businesses, helped of course by referrals from the 600 GPs in IPN’s medical centres.
