22/06/2016 - 15:56

St John sells pathology business

22/06/2016 - 15:56

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St John of God Health Care has agreed to sell its pathology division to private equity backed rival Clinical Labs, after acknowledging the sector was intensely competitive and difficult.

SJGHC chief executive Michael Stanford.

St John of God Health Care has agreed to sell its pathology division to private equity backed rival Clinical Labs, after acknowledging the sector was intensely competitive and difficult.

The sale agreement includes St John of God Health Care acquiring a minority shareholding in Clinical Labs, which was created last year when Crescent Capital Partners funded a buyout of Healthscope’s domestic pathology business.

Clinical Labs will also have a long-term contract to provide pathology services to SJGHC hospitals.

SJGHC chief executive Michael Stanford said the sale would allow the Perth-based not-for-profit group to focus on its hospital operations.

He added SJGHC was keen to support Clinical Labs build up its business, and this may include further equity contribuitions to support acquisitions.

"Australia needs a third large pathology provider," Dr Stanford said.

He added that SJGHC was not able to purchase medical centres but this would be an option for Clinical Labs, as it sought to compete with Sonic and Primary Healthcare.

"Its a growth path we didn't have."

The sale follows a fall in earnings from St John of God Pathology.

“Unfortunately we are finding pathology to be a very difficult industry environment with collection centre rentals continuing to escalate in a slow growth market,” Dr Stanford wrote in last year’s annual report.

“With healthy inpatient growth of 4.3 per cent but below trend outpatient growth of 1.2 per cent, our pathology revenue grew only 2.5 per cent (to $127.1 million).

“Pathology-generated EBITDA fell 12.4 per cent.”

The group said the outpatient growth of 1.2 per cent reflected intense competition and resulting high rental payments.

SJGHC did not disclose the sale proceeds.

However, Healthscope reaped $105 million from last year's sale of its Australian pathology operations, which had annual revenue of nearly $300 million - roughly 2.3 times the size of St John of God Pathology.

Assuming the SJGHC business had similar profit margins and obtained a similar earnings multiple, its pathology business would have sold for about $45 million.

Clinical Labs is Australia’s third-largest pathology provider, with 50 accredited laboratories and 600 collection centres in NSW, Victoria and the Northern Territory.

St John of God Pathology is the number four player, with 19 laboratories and 180 collection centres in Victoria and Western Australia.

Subject to regulatory approvals, ownership of the business is expected to be transferred to Clinical Labs by late September.

Combined, the two businesses have 3,700 staff.

SJGHC currently employs 13,500 staff (including 8,500 in WA), and has 2,998 beds across 17 hospitals in Australia.

Dr Stanford said the sale of the pathology division would allow the group to prioritise its core activities.

“For decades our dedicated professionals have delivered the full range of pathology services at St John of God Pathology,” he said.

“However, our main capability and mission is in providing hospital services – an area which already accounts for 90 per cent of our services.

“As a leading national hospital operator, this decision will allow us to focus on that core strength and continue to invest in delivering the highest quality hospital services to our patients.”

SJGHC has invested $860 million in hospital redevelopment since 2005.

Dr Stanford said SJGHC would be able to benefit from joining with a specialist pathology operator.

“Clinical Labs is a large, specialised pathology operator with the scale, expertise and ability to grow and develop these essential services in our hospitals,” he said.

“We are confident this provides the best assurance of long-term, sustainable high-quality pathology services for our hospitals.

“It will be business as usual for our staff in the months ahead as we transition to the new owners.”

Clinical Labs chief executive Melinda McGrath said the group was building an iconic, focused pathology provider of scale, specialisation and expertise.

“The acquisition of SJGP represents an exciting and significant step in extending both our presence and specialist capability,” she said.

Ms McGrath said pathology would be central to the development of modern healthcare with the clear trend towards greater personalisation of medicine, new diagnostic testing, and earlier disease management programs.

“Meeting future needs requires both investment and scale and the bringing together of Clinical Labs and SJGP represents an important step on that journey,” she said.   

SJGHC was advised in the transaction by Azure Capital.

 

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