With the majors knocking, independent analytical labs face the temptation to sell

The giant analytical lab company Eurofins Scientific purchased 136 smaller labs in the 3 years ending in 2019, spending $3.4 billion along the way. Overall, from 2014 to 2019, Eurofins tripled its full-time staff to 43,320 employees and tripled its revenue to $5.4 billion per year.

Eurofins is the largest of a handful of firms that have led a wave of mergers and acquisitions in the analytical services industry. Other buyers include Pace Analytical, ALS, LabCorp, Intertek, and SGS. TestAmerica had been snapping up smaller lab businesses until Eurofins bought it in 2018.“I get a letter every year about this wonderful opportunity to join the Eurofins family,” says Élan Sudberg, CEO of the herbal supplements testing specialist Alkemist Labs. “When that happens, I get an email from two or three other labs saying, ‘Hey did you get your letter?’ ”

The acquisition wave has subsided somewhat as purchasers focus on integrating their new assets. Eurofins, for example, spent 86% less on M&A in 2019 than in 2018, on 26 buyouts. But the industry continues to be fragmented, and many small labs still dot the landscape. Their owners say they are torn between their desire for independence and the access to capital, equipment, and technology that being part of a larger company would bring.

Several factors came together to jump-start the acquisition spree. Environmental testing consultant Robert Wyeth says firms with the financial capacity to make acquisitions saw an opportunity in the fragmented analytical services market. They could increase their market shares, diversify their businesses, and become big enough to play on a global scale.All the large lab companies C&EN contacted declined to comment for this story.

Also, a lot of smaller-lab owners were looking for an exit strategy, Wyeth says. Most of the environmental testing laboratories in his niche were started in the 1970s. By the 2010s, their owners were looking to retire. If there wasn’t a second generation of leaders to take over, the lab got sold.

But the biggest reason behind the spree is that testing is a growing market. Although environmental testing is in a lull—because of the Trump administration’s deregulatory push—new fields such as cell and gene therapy require new kinds of testing, drugs are under constant and changing scrutiny, industries such as cannabis and herbals require testing to become legitimate, and an increasingly skeptical population wants to know what’s in the products they consume.

Mark Jordi, president of the polymer extractables and leachables analysis firm Jordi Labs, says his biggest competitors have been bought up by larger corporations. “I’ve been seeing an uptick in activity,” he says. “These aren’t mergers of equals, these are really large laboratories purchasing out smaller companies.”

Jordi traces the growth and interest in his niche to 2017, when the US Food and Drug Administration started expressing a preference for chemical tests over biological assays to determine what might be leaching out of the plastics in drug packaging and medical devices. Regulators in Europe and Asia are making similar pushes.

The boom in biotechnology is sustaining a boom in the analytical services that support it, says Jeffrey Evans, who has been an executive in the drug analysis industry for many years, most recently at the plasma analytics firm Bionique Testing Laboratories. Biotech drug testing requires a different set of skills, equipment, and accreditation than is typically possessed by a firm developing and producing a novel therapeutic, he says. It usually makes sense to outsource that work to specialists, Evans adds.

The same is true in herbal supplements, including hemp and marijuana. A more accepting regulatory environment is giving rise to new products, which require testing for plant identification, potency, metals, pesticides, and microbiologicals.

Such growth in the customer base makes analytical firms attractive targets for acquisition. “I think there’s a lot of interest,” Evans says. “Any business that would be available for acquisition could be acquired.”Growing demand for analytical services is motivating independent labs to expand and entrepreneurs to launch new analysis firms. Either way, they

need capital, and the ability to supply it is part of the sales pitch of the lab giants.Alkemist, for example, currently only does plant identity and potency testing. Sudberg says his customers have promised him high-six-figure contracts if he can add other tests, and he’s looking for an investor to help him purchase the additional equipment.

“It’s not like I have to go and get new clients. The St. John’s wort or goldenseal that came to us for identity and potency are also going to other labs for metals, pesticides, and biologicals,” Sudberg says. “The work is here, I don’t have to go get it. I just have to add on those services.”

That need for equipment is even more acute for newcomers. Shawn Wyatt is taking a shot at analytical entrepreneurship. After 20 years in the drug industry, he launched Scout Scientific in January with an eye toward testing and contract research on cannabis and per- and polyfluoroalkyl substances (PFAS). As is the case for many scientific start-ups, COVID-19 has impaired his fundraising. He has the office and lab space, but he needs more instruments.

A large lab service firm offers working capital, more diverse opportunities, and a larger footprint, Wyeth says. Of course, merging with another lab or selling to a lab conglomerate isn’t free money with no strings attached.

Entrepreneurs often define themselves by the company they lead. Selling out may bring a big payday, but “they get into the process, and they realize that by effecting that sale, they’re going to, essentially, sell their soul,” Evans says.

A personal connection to the brand is key for Jordi. “This is a second-generation family business. It’s my passion, and I love directing it. I care deeply about patient safety, and I want the development of our methods to be for the sake of doing the best science.”After a sale,

the small lab’s brand is typically erased in favor of the acquirer’s. That might not be a big deal for everyone, but it would be for Sudberg. “I personally love my brand. I started it with my father. It’s been in my life more than it hasn’t been.”

Dana Garves, CEO and founder of Oregon BrewLab, also takes pride in the brewing analysis company she’s built. “I feel strongly about BrewLab’s mission statement to be steadfastly woman-built and woman-owned. I think these corporations may have a passion for science, but I don’t think it matches mine.” And they don’t have her passion for beer, Garves adds.

“The personal element is lost when you’re owned by someone else,” she says. “I don’t want to be ‘just another analysis lab.’ I want BrewLab to be a lab that specializes in beer so that brewers utilizing the service can ask beer-related questions and get beer-related answers.”

Sudberg strikes a similar tone. “I’m so used to the autonomy of being my own boss,” he says. “We have this brand, this momentum, this culture, and I’d really love to maintain it, to be myself and have a good time with my employees. I think that would be lost.”

Jordi likes the freedom to set priorities that aren’t always monetary. “I don’t ever want to be put in the position of having to choose between profits and what’s best for the patient. I’m not saying anyone else is doing that. My concern, if I wasn’t at the top of the organization able to make those decisions, would be that there would be a tension between them.”

The vendors who sell to labs big and small can confirm a difference between them in how decisions get made. The ERA division of the instrumentation firm Waters sells testing and reference materials to a wide range of analytical labs. Melissa McNamara, ERA’s director of sales and marketing, says that after an acquisition, she has to wrangle both the local management she’s been working with and the new corporate overseers. “Some will have very centralized purchasing and try to consolidate cost,” McNamara says.

That consolidation process can be intense. When a lab gets bought, Sudberg says, the acquiring firm often starts by cutting management, accounting, marketing, IT, and administrative staff that it considers redundant. “Those are some of my favorite people,” he says. Members of the sales team are benchmarked and let go or brought into the larger organization.

Another risk for staff is that the new management might move them. If the acquiring firm has a centralized liquid chromatography facility in, say, Chicago, it might move all those instruments from a lab it buys. The scientists can choose to move or be let go.

Still, being acquired isn’t necessarily all bad. Andy Eaton knows what it’s like to become part of a big analytical service firm. Starting in 1980, he led a potable water analysis team at a water systems engineering firm. After the parent company merged with two other engineering firms to become MWH Global, the role of chemical analysis diminished. In 2012, MWH sold Eaton’s team to Eurofins.

Eaton says he had mixed feelings about the move. He’d been with the same company for 32 years and had close friends throughout. But he was excited to finally be part of a true lab organization like Eurofins, where he could improve his offerings through collaboration with other analytical chemistry professionals and learn best practices for growing and managing the business. He remembers thinking, “We’re no longer going to be a flea on the tail of a dog; we’ll be part of the dog.”

Eaton had a lot of discretion to purchase new equipment at MWH. At Eurofins, he had more access to capital, but he had to justify purchases and new hires to owners with more expertise and skepticism. Eurofins also had a tighter focus on return on investment, a factor that became more important as the company grew.

Eaton recommended Eurofins over another suitor because he was convinced it would leave him more autonomy. The pitch by Eurofins was to make his team a stand-alone subsidiary rather than be digested by the larger firm. And that was pretty much how it went. Eaton says he was able to keep his group’s culture and mostly local control, though that freedom required consistent strong results—and a willingness to push back against corporate now and then. Eaton retired in 2018, content with his time under the Eurofins banner.

So what makes a lab ripe for acquisition? When Evans was hunting for analytical firms to buy, he says, the first thing he looked for was technical superiority and a specific expertise—“a company that really owns whatever space they’ve mapped themselves out to be in.”

Jordi Labs, for example, developed and built specialized chromatography systems that use three or more detectors on the same analyte stream, an approach that allows it to test simultaneously for a range of potential adulterants. Jordi says the firm’s scientists used the system to figure out that a contaminant was getting into a pharmaceutical from the wood pallets that the packaged medicine was shipped on.

“That’s why other companies are trying to buy companies like us, because if they could just go out and reinvent the wheel, they wouldn’t need any of us,” Jordi says. “I think they know this is highly specialized and that to do it right requires a lot of expertise.”

Evans also looked for modern business practices and software. If they’re in place, the firm is easier to integrate into a larger company, he says.

Industry insiders say merger activity will slow in the next few years as firms digest what they’ve acquired. There is also a sense that the desirable targets—at least those willing to sell—have been snapped up. “There aren’t really a lot of places available for sale,” Evans says.

Evans doesn’t see anything ahead like the volume of acquisitions in 2016–19. For one thing, Eurofins appears happy with its size. In its 2019 annual report, the firm wrote that it had “already managed to build its desired laboratory platform and geographic footprint.” Pace is still active, but it mostly goes after very small labs.

Going forward, Wyeth, the consultant, says, “If there’s a wave of acquisitions, I think it’ll be more toward smaller companies trying to join forces rather than very large lab networks such as Eurofins, Pace, or ALS trying to grow.”

Overall, he points out, the analytical services industry isn’t mature. Not all labs are accredited, and some states and services don’t require it. Quality among labs is uneven, both in terms of results and customer service.

“Despite the consolidations, it will continue to be a very, very competitive marketplace,” Wyeth says. “There are still literally thousands of small, independent commercial laboratories that are fighting for their very existence.” That competition keeps prices down and creates incentives for innovation, he says. “Maybe merging and consolidating is just part of that maturing process.”