As we discussed in a blog post last month, pathology markets around the world are predominantly supported by government funding. This is a blessing and a curse for private operators, evidenced by Sonic Healthcare’s latest announcement.
In October 2014, Sonic Healthcare (ASX: SHL) was announced as the preferred proponent to provide laboratory services in Alberta, Canada. Like many Governments around the world, Alberta Health Services recognised that additional expertise and capacity were needed to handle the growing demand for lab services. This was the largest tender in Sonic’s history and was expected to contribute C$200m in revenue annually over a 15 year term.
Yet in a case of “easy come, easy go”, Alberta’s Health Minister has just ordered that no steps shall be taken to expand the level of laboratory services delivered by private entities at this time, and has launched a review of all lab services in the province.
This is a very good example of the risk inherent in companies that are dependent on a single funding source or are highly concentrated in terms of clients and contracts. (This risk was perhaps underappreciated by Alberta Health Services in their FAQ flyer promoting the initial agreement.)