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This web page examines the meteoric growth of Sonic Healthcare to dominate diagnostic services in Australia and then expand into New Zealand, Asia, Europe, and America. It examines its relationship with general practice corporations and its difficulties in this. It looks for any sign of dysfunctional behaviour and questions some of its practices.

 Australian section   

Sonic Healthcare

(and its partners Foundation Healthcare, LifeCare and IPN)



This page discusses and analyses the different facets of Sonic's story.

A separate web pages lists Sonic's story chronologically year by year


Brief Overview

Sonic Healthcare's success story started in 1992 when a young accountant Michael Boyd bought into a struggling small company for only a few cents per share. He appointed histo-pathologist Dr. Colin Goldschmidt as CEO and switched to concentrate on pathology. The company divested its other interests and over the next 13 years built a massive global empire spanning Europe, the USA, Asia, New Zealand and Australia. It consistently exceeds its positive financial forecasts. Its performance has been incredible and its track record for socially responsible conduct impeccable. It is almost too good to be true. This page describes these developments and looks for any pointers which might suggest that all is not as it appears.


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Sonic Healthcare -- History

Oct 2002 Origins

The Company was incorporated in Victoria in 1948 as Gunnersen Nosworthy Ltd. It was delisted in 1961. The Company changed its name from Sonic Technology Australia Ltd to Sonic Healthcare Ltd in 1995.

The listed shell was used to acquire interests in metallurgical ore extraction including Fidel (No. 61), Gematove Pty Ltd and Fidel (No. 71).
Sonic Healthcare Limited Jobson's Year Book October 31, 2002

Sonic was another failing mining company which was simply looking for somewhere to make money when it purchased a pathology company Douglass Laboratories Pty Ltd in 1987, the same year a young pathologist Colin Goldschmidt joined the firm. It listed on the stock exchange in 1987.

Sonic struggled. Its share price fell as low as 3 cents and in 1990 was 5 cents. Twenty seven year old Michael Boyd saw the potential in Medicare funding. In 1992 he chipped in $1 million to buy 14% himself and raised a total $4 million, much of it from his father in law, Barry Patterson to give them control over 23% of the company. Both were to become Medicare funded multimillionaires from their investment.

Sept 2000 Boyd's investment

He (Boyd) outlaid $1 million for his stake in Sonic in 1991; his 14% share of the company is now worth $140 million
Corporate Medicine, Business Review Weekly September 29, 2000

Oct 2004 Boyd's investment

Until now, Boyd's reputation has hung solely on a 1992 plunge into Sonic, then a failing mining technology business with a side interest in pathology. For an outlay of $4 million, mainly borrowed, the then 27-year-old junior employee in a second-string accounting firm acquired a 23% stake in Sonic, invested in the pathology side of the business, injected new management, and watched his investment soar.
Deal maker in a drought Business Review Weekly October 21, 2004

Mar 2005 Boyd's investment

Sonic Healthcare founder Michael Boyd has turned a $4 million stake in the company into $255 million in just 13 years. Sonic started to consolidate the private pathology market in 1998.
RICH PICKINGS THE PEOPLE WHO GET RICH AS YOU GROW OLD Australian Financial Review March 19, 2005

Boyd appointed Colin Goldschmidt as CEO. The company has not looked back since. It became more and more profitable and a darling of the marketplace.

Nov 1996 A market darling

A small, listed company called Sonic Healthcare has become the darling of that sector, growing over the past year to become Australia's largest pathology services group.
A Private BONANZA, Australian Financial Review 9 Nov.1996

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Sonic expanded rapidly by consolidating the marketplace in pathology and then radiology. When takeover opportunities in Australia were exhausted it became an international player buying first in the United Kingdom in 2002, in Germany in 2004, and in the USA in 2005. It is now one of the largest pathology providers in the world.

CLICK HERE for a detailed chronology of Sonic's progress and purchases (with references)

The benefits of consolidation and efficiency were key ideological planks in Sonic's thinking. Corporatisation was the means to achieve this. Goldschmidt set out to make his dream real.

Oct 2002 Consolidation and efficiency

According to Goldschmidt, Australia's pathology market is one of the most efficient in the world, which opens up opportunities in overseas markets.

"The pathology industry started corporatisation seriously through the 1990s. Sonic was a leading player. We've now reached a point that 10 years later something like 80 per cent of the market is in the hands of four or five players. The consolidation and corporatisation of pathology in Australia has been an amazing phenomenon on the world scale because it has brought a level of efficiency and a level of quality that is unmatched in the world today." Salomon Smith Barney analyst Andrew Goodsall says Sonic is now the third largest diagnostic service provider in the world.
Sonic's boom bursts. Shares Magazine October 1, 2002

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Diversification vs Core Business
Where others diversified Sonic concentrated on its core diagnostic businesses. In the beginning Sonic did not put all of its eggs in the pathology basket. It came to own the uranium technology company Australian Nuclear Enterprises. Australian Nuclear Enterprises was spun off as Silex systems in 1996 - largely funded by Barry Patterson. It did extremely well over the years and contributed to Patterson's fortune. Goldschmidt remained a director of Silex.

The Singapore-based pharmaceutical subsidiary SciGen Pte Ltd was purchased in 1999. It lost money and was spun off in 2002. Both Boyd and Patterson had interests outside health care - Boyd in Quadrant which invested in satellites.

Oct 2002 Core business

- - - Sonic has decided to focus on its core businesses and its decision to expand overseas is a reflection to some degree that consolidation in Australia may have reached its limit, particularly in pathology.

"We call ourselves a medical diagnostic company, which means that we practice in pathology and radiology only," says Goldschmidt. "There have been temptations to go beyond that. The country appeared to be moving towards a vertically integrated healthcare structure and some of our competitors are known as vertically integrated companies. We took the decision a few years ago that we wanted to stay narrowly focused on diagnostics only."

Sonic's acquisition of biopharmaceutical company SciGen, in 1999, was one of those temptations. SciGen is based in Sydney and manufactures biopharmaceuticals, such as vaccines and human growth hormone for the Asian market. The company has just announced it will spin SciGen out in the near future, presumably when the next window for biotech floats opens.
Sonic's boom bursts. Shares Magazine October 1, 2002

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Defining moments
Sonic could not put a foot wrong. It consistently made excellent profits. It expanded its pathology business into all states rapidly over the years becoming a market darling.

In 1999 Sonic bought the Swiss company SGS's Australasian pathology business; doubling in size, gaining a footing in each state, and entering New Zealand. This was a defining time for Sonic.

Oct 2002 Reviewing a defining moment

Sonic's defining moment
Sonic's acquisition history began in 1987 when it acquired the Sydney pathology company Douglas Laboratories and its then recently employed histo-pathologist, Colin Goldschmidt. It listed on the Australian Stock Exchange at the same time and five years later, Goldschmidt became CEO. Between 1992 and 1999, sales increased from $12 million to $175 million. However, the company really entered the big league in 1999, when it acquired the SGS Medical Group, as Goldschmidt explains.

"I think that [acquisition] was a defining step in our evolution. This was a group of pathology and radiology practices in Australia [with] combined revenue of about $300 million. So it more than doubled the size of the company, but perhaps more importantly than that, it gave us geographic breadth that we didn't have before."
Sonic's boom bursts. Shares Magazine October 1, 2002

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Consolidation : pathology and radiology
With 80% of the pathology market in corporate hands by 2000 opportunities were drying up. Sonic turned to the still fragmented radiology sector gaining a large market share in NSW, West Australia, Queensland and South Australia.

Aug 2000 Radiology next

At this point, radiology is the key expansion target for Sonic. The radiology business is now in much the same position that pathology was in about five years ago. Although 80% of the Australian pathology market is controlled by four large groups, three of which are public companies, the more lucrative field of radiology is still largely conducted in smaller, doctor-owned practices.
Sonic's Boom Comes At A Cost, Business Review Weekly August 18, 2000

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Going Global
By 2002 radiology too was largely corporatised. In March 2002 Sonic expanded into the United Kingdom buying The Doctor's Laboratory (TDL), the largest pathology business in the UK. It added to this by buying Omnilabs from Medical Imaging of Australia and then building a large state of the art laboratory in London.

Oct 2002 Going global

When Colin Goldschmidt joined a Sydney pathology company in 1987 after graduating as a pathologist that year, he probably didn't expect to be running a billion dollar healthcare business 15 years later. With the job of consolidating the industry in Australia all but over, Sonic Healthcare is testing the water in Britain to see if it can export its valuable and efficient diagnostic business model that has been successfully implemented in Australia.
Sonic's boom bursts. Shares Magazine October 1, 2002

In 2004 Sonic purchased a controlling interest in Schottdorf Group, a large German company. In 2005 it did the same with the USA's third largest pathology group, Clinical Pathology Laboratories (CPL) Inc.

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The Golden Touch
Everything Goldschmidt touched seemed to turn to gold - well almost everything! Companies linked to Sonic have benefited Sonic but not their other shareholders.

Sonic's profits, its size and its share price all increased progressively over the years -- the share price reached $9 in the early 2000s. By the end of 2005 it was approaching $15.

During this period it had an impeccable reputation for professional relations and for the quality of its service. Its facilities won several awards. There have been no scandals and no suggestion of unsavoury practices. Its almost too good to be true.

Sonic turned Boyd and Patterson into multimillionaires within a very few years. Although they have been media shy they could not escape publicity when they each bought homes for $9 million in the Perth millionaires residential area - Peppermint Grove. Barry Patterson was chairman and Boyd a director of Sonic for much of its successful life. About 80% of this money comes from Medicare. 



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The Business  

Nov 1998 Goldschmidt's vision

I believe that our health system will ultimately be market driven. In a setting of market driven pathology, Sonic will be well positioned to provide low-cost, exceptional services and so gain an advantage over its competitors.
Managing Director`s AGM Statement to Shareholders
2 Nov 1998

Where does the money come from?
It is important to remember that radiology and pathology are both entirely dependent on Medicare largesse. Medicare funds close to 80% of Sonic's income. The success of the company, the profits their shareholders get and the emergence of Medicare multimillionaires Boyd and Patterson are all paid for by the tax payer. We pay for the luxury $9 billion homes owned by Patterson and Boyd. These companies are targeting Medicare for their profits.

The many millions of dollars paid to radiologists, and pathologists who sell their practices is ultimately funded by the taxpayer through Medicare. The success of these companies is entirely dependent on the continued support of governments, and the willingness of citizens to vote for politicians who fund profits as well as care. In Australia we have a government driven by an ideology which favours corporatisation. We should worry that they will be over-generous with funds which could have provided more and better services if these did not include a large profit - and they have been very generous. A challenge to the ideology is not welcomed. In this supportive climate regulatory oversight of corporate businesses also does not work well.

Nov 2001 Underwritten by Medicare

Sonic's performance came despite a severe downturn in the health sector -- and private hospitals in particular -- in large part because its key pathology business is largely underwritten by the Medicare system.
Sonic's boom a boon for investors - 10-year winner /
SHAREHOLDER SCORECARD, The Australian November 1, 2000, Wednesday

Nov 2001 A Medicare millionaire

Boyd reportedly bought his first Sonic shares for 15cents a piece. Today they are worth $8.50. With a market capitalisation of almost $2 billion, the stock owned by Boyd's family company, Jardvan, is now worth close to $200 million.
The Rise And Rise Of Medicare Millionaires,
Australian Financial Review 20 November 2001

Jul 2003 Political support

Australia's listed diagnostic imaging players received a welcome dose of certainty this week when federal Health Minister Kay Patterson signed off on a new $1.5 billion, five-year funding agreement.

A draft agreement of a new diagnostic imaging deal had been before Patterson for more than a month and in the end she decided to maintain the status quo with an agreement which is largely in line with market expectations.
Radiology gets a $1.5bn boost. Australian Financial Review July 2, 2003

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Contrasting philosophies
It is interesting to contrast the philosophy and business practices of Sonic Healthcare and its linked companies (Foundation and LifeCare) with its major rivals including
Mayne Nickless, Gribbles pathology and Primary Health Care. They all depend on Medicare. While all believe that the future of health care lies in the corporate marketplace very different approaches were adopted by Sonic's MD, Dr. Colin Goldschmidt when contrasted with that of Barry Catchlove and Peter Smedley at Mayne Health.

Nov 1996 Mayne philosophy

In the words of HCOA chief executive Dr. Barry Catchlove: "From the moment a patient feels a bit crook, we are interested in the revenue stream that HCOA could participate in."
A Private BONANZA, Australian Financial Review 9 Nov.1996

Nov 1998 Goldschmidt philosophy for the market

The essential vision of Sonic Healthcare is to deliver consistent and focussed value to its three main stakeholders - shareholders, customers and staff.
We strive to create value for staff by way of secure employment and by providing the appropriate working environment which fosters delegated responsibility, teamwork, ongoing education and job fulfilment. This in turn creates the setting whereby our customers in health care may enjoy added value through exceptional personal service and excellent technical operations.
Managing Director`s AGM Statement to Shareholders
2 Nov 1998

Feb 1999 Goldschmidt philosophy for the public

His (Goldschmidt) priorities are staff, service and financial performance - in that order - and his focus is on growing earnings per share rather than revenue or market share.
Put People First, Profit Will Follow
, Australian Financial Review February 5, 1999

Note the interesting difference in Goldschmidt's priorities revealed above when he is talking to the public and to shareholders. Fiduciary duty requires and experience indicates that when the interests of shareholders conflict with those of the "customers" (does he mean patients here and not doctors?) the shareholder interest trumps all others. The flowery words which follow in the next paragraph become hollow intentions.

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Customers and Keys to Success
Ramsay Healthcare, Sonic saw its customers as the medical profession and in one sense this included its own pathologists on whose efforts Sonic depended. Mayne in contrast saw the public as its customer and sought to provide them with commercial packages, ignoring the doctors on whose support their success depended. Mayne opted for a vertically integrated diversified one stop shop. Sonic concentrated on its core business, diagnostic services and gave its subsidiaries and their doctors more autonomy.

Oct 2002 A federation of practices

If Sonic can show its "federation of practices" model for the pathology industry is exportable to Britain, then a wider expansion into mainland Europe will be an obvious direction for the company.
Sonic's boom bursts. Shares Magazine October 1, 2002

Dec 2005 Keys to success

He (Goldschmidt) is convinced a big reason for Sonic's success is its management model. "When I became CEO I wasn't expecting to move into management. But the one thing I wanted to achieve was to keep the company as medical as possible, so that it would remain a medical/pathology practice, because that's what I believe the customer - that is, the referring doctor - wants to see."

Apart from the medical services, Goldschmidt says, personalised service (for doctors and patients) is an essential way of differentiating pathology providers. Instead of trying to centralise everything, Sonic has always allowed individual pathology laboratories some management autonomy.
Keys to success

Positioned as a professional medical company
1. No glitzy advertising. The senior management and members of Sonic Healthcare's board are drawn from the medical profession, which means there is a high level of knowledge of the pathology business within the company. The medical emphasis also appeals to the company's most important customers - referring doctors.

Decentralised management of business divisions
2. By allowing pathology laboratories autonomy in running their businesses, local management can focus on developing the businesses.

Stable, involved management; flat management structure
3. Chief executive Colin Goldschmidt and finance director Chris Wilks have been running Sonic Healthcare since 1993 and remain closely involved in the details of business operations.

Supportive board
4. Important decisions are determined by senior management, but the board provides the balance of practical business, financial and medical experience.

Focus on customer service, ethics
5. Management understands the value of goodwill, good relations with the medical profession, and the value of a clean image. Sonic Healthcare has never been linked with any illegal practices, which was common in the pathology industry a decade ago.
Path test BRW December 1, 2005

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Dysfunctional ideas and practices
Unlike its competitors
Mayne, Macquarie Pathology, Gribbles and Primary Health Care, Sonic has maintained an unblemished public face of propriety. It guards this jealously and is proud of it. There has never been a whisper of scandal. But ethics and propriety are terms which lend themselves to different understandings. Sonic's philosophy and business practices may be far preferable to their competitors but that does not make them desirable. I question the ethics and propriety of incentives in the form of arrangements, joint ventures, and share options in health care - particularly when the profits generated from them are not publicly available. These are not classed as illegal kickbacks but serve the same purpose. They are considered essential to Sonic's successful relationship with staff.

Jun 2003 Commercial agreements and secrecy

Because most bids for listed companies are designed to deliver 100% ownership the market rarely sees proportional bids. With its proportional bid SHL is saying it is not interested in owning a medical centre business but is determined to control IPN's management. SHL has never disclosed the value of pathology and radiology referrals from IPN GPs under the strategic alliance but the value is significant enough that SHL has been motivated to make this bid. Obviously SHL thinks 45%+ ownership is sufficient - one-third ownership, for example, would not be enough - to control management and ensure the alliance continues (historical note: kickbacks for referrals are illegal but "alliances" and "understandings" are not - interesting).
INDEPENDENT PRACTITIONER NETWORK (IPN) $0.07 Smaller Companies Guide June 23, 2004

Sonic evaluated its targets for signs of corporate illegality and for cultural congruence. It purchased selectively on this basis.

Aug 2002 Careful who as well as what it buys.

Dr. Goldschmidt said that the cultures of these businesses match Sonic's medically focused management style.
Financial Results for Year ended 30/06/2002. Media Release August 22, 2002

Sonic Healthcare and Dr. Goldschmidt are undoubtedly among the best examples of functional corporatised health care we have - that is until you look at its alliance partners IPN, Foundation Health, and LifeCare and the relationship it has with them. There is much to suggest that IPN shareholders and medical staff may have been shafted in the interest of Sonic and its shareholders. Sonic is primarily a business and not a health care service. When businesses were not profitable Sonic dispensed with them on the basis of cost rather than need.

Aug 2003 Not if its unprofitable

Dr. Goldschmidt said Sonic had already closed between five and 10 underperforming radiology clinics, including Brookvale in NSW, which would improve radiology margins this financial year.
Sonic Slows Locally But Forecasts Growth Australian Financial Review August 26, 2003

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Pathology and to a lesser extent radiology differ from much of the rest of medicine because they are capital intensive rather than people intensive. Both depend on costly machines, and (pathology particularly) on streamlining and process. Fees and Medicare payments are much higher than for general practice and specialist consultations. This is to cover the cost of equipment and the skilled paramedical staff needed to operate them. However once these costs have been covered the high fees ensure that the profits increase dramatically with increased turnover.

Feb 1999 Benefits consolidation

Consolidation will reduce duplication of staff, equipment, collection centres and instruments, and reduce labour costs on higher volume automated pathology tests.
Put People First, Profit Will Follow
, Australian Financial Review February 5, 1999

Nov 2000 Compare with Mayne

Sonic Healthcare is the top performer over 10 years and Mayne Nickless is one of the worst performers among the top 50 companies. Belatedly, Mayne moved into pathology but paid a high price to enter the market.
, The Australian November 1, 2000, Wednesday

There are large gains to be made from rationalisation and reorganisation in pathology. Costs can be reduced. Costly equipment can be centralised and used to maximum effect. Standards of care can be maintained provided cost cutting does not squeeze staff and resources. Time absorbing direct patient contact and prolonged interaction is limited particularly in pathology. The advantages of integration and efficiency for improving standards and costs are clear.

Rationalisation of radiology has fewer financial benefits because it is more staff intensive. Much of the expensive equipment must be located in or near the medical centres where the patients come so must be duplicated and cannot be centralised in a laboratory.

General practice and hospitals in contrast are people intensive and the benefits are limited. Staff levels and the time taken to provide the services cannot be reduced without compromising care. The economic benefits from consolidation and integration are limited. Cooperative professional consolidation and integration has much to offer in improving care but the corporate environment is not conducive to this. Proceedures cannot be automated in the same way.

Sept 2000 The problem with General Practice

General practice, on its own, is not where the big money is made in medicine. The average Medicare payment to radiologists in 1999-2000 was $650,000 and the average to pathologists was more than $600,000, however the average to general practitioners (including those working part time and full time) was about $110,000. A bulk-billing general practitioner wanting to generate an after-expenses but pre-tax income of $130,000 (assuming the cost of running the business is taking 35% of revenue) needs to conduct 37 standard consultations a day, five days a week, 48 weeks a year. In other words, one patient every 11 minutes, seven hours a day, with public holidays and a couple of weeks off over Christmas.
Corporate Medicine, Business Review Weekly 29 September 2000

Nov 2000 And the problem with hospitals

It is important to invest in the growth segments of an industry. Sonic Healthcare and Mayne Nickless both selected health as a future area of growth. Mayne Nickless invested in hospitals and Sonic Healthcare invested in pathology. Owning hospitals was a miserable experience for Mayne Nickless but pathology proved a wonderful investment.
After the tech crash - INVESTING FOR VALUE / SHAREHOLDER SCORECARD, The Australian November 1, 2000

Like the rest of medicine pathology and radiology continued to be provided by professional individuals and small groups into the 1990's. Consolidation, led by Sonic, proceeded rapidly in pathology and by 2000 only 20% of pathology remained in the hands of smaller operators. Opportunities for growth were reduced. This was Sonic's first phase.

In the second phase starting in 2000 Sonic joined the scramble to consolidate radiology but it did not dominate this process.

By the end of 2002 radiology consolidation was nearing completion and Sonic was faced with diversifying further in Australia or expanding internationally. It chose the latter and this was its third phase.

The consequences of corporatisation and a focus on market competition are well illustrated by the scan scam. Large numbers of radiology groups rushed out to buy multimillion-dollar magnetic resonance scanners without any planning or evaluation of need. The only concern was to remain competitive. This resulted in an excess of scanners purchased without attention to the needs of the communities to be served and optimal distribution of resources. Had the system been cooperative and not profit driven then this would not have happened. Sonic was a late comer to radiology and this occurred before it entered the market.

The corporate argument is not, as the corporatists claim, about the need for change or about consolidation and integration. When focussed on care and apportioning limited resources, then both have significant benefits in all sectors for both care and cost. The objection is to the share market and competitive profit pressures. Health is an area which requires cooperative endeavour, broad planning, and a primary duty of care. Corporate pressures threaten all of these, particularly in hospitals and general practice.

Mayne's cost cutting and reorganisation in response to competitive pressures and a falling share price resulted in practices which alienated doctors over whom they had no hold and threatened care.

May 2002 Consequences of Mayne's policies

- - Mayne has lost key sections of its nursing staff because of staff ratios, and has allowed its skill base to decline.
Health crisis sparks punch-up by states, professions, The Australian 1 May 2002 (reporting doctor's concerns about Mayne)

In contrast in pathology and radiology the corporate pressures are towards overservicing. There is pressure to stretch the financial enticements to their legal limits and sometimes beyond regardless of professional ethical considerations. Kickbacks are illegal but arrangements, joint ventures, share holdings, and employee options all of which benefit doctors who use corporate services are not. The potential for undermining ethical responsibility and duty of care is no different. Not only are these incentive practices considered legitimate but desirable - even essential for success in the market.

Sonic has embraced these practices enthusiastically. It bought doctors radiology and pathology practices with shares and turned them into millionaires. Increasingly doctors have found ways to justify being part of this and rationalise the ethical implications.

Extensive fraud by pathology corporations in the USA was exposed by operation "labscam" during the 1990s. Even Goldschmidt acknowledges that there have been concerns about practices in Australia. The sector is not immune.

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Sonic takes its consolidation model and business philosophy international
In the 1980s and early 1990's Australian companies were reluctant to enter health care. Government went looking for multinationals to implement their policies and give concrete form to their economic ideology in health care. The conduct of most of these multinationals in their own countries was so disturbing that the majority of them departed Australia under a cloud. Local businessmen realised the potential for profit and moved to fill the gap.

Unlike the USA, where the power of doctors was eroded, in Australia companies with poor track records have not prospered and those who sought to serve the medical profession as customers have.

Radiology and pathology have consolidated rapidly. Because they have been very successful and have not blotted their copy books they now have a competitive advantage over US corporations in the international marketplace. Sonic has even gone into the USA. Instead of foreign multinationals helping Australia to corporatise and consolidate its health care system, Australian corporations are helping others to do this and are introducing a better corporate business model. Whether it will be competitive in other countries remains to be seen.

Dec 2005 Australian corporatisation leads the world

It is a fascinating experiment. Australia's pathology sector, of which more than 80% is controlled by publicly listed companies, is more highly consolidated than in Europe or North America. Even in the US, the two biggest companies control only 60% of pathology testing, and in Germany and Britain, corporate involvement is much less. Whether a small (by global standards) Australian company can cause further market consolidation is the billion-dollar question.
Path test BRW December 1, 2005

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Digital technology
The introduction of digital technology vastly improves the documentation and tracking of tests, the cost efficiency of automated machines, the ordering of tests and the reporting of results to doctors. It has an increasing and beneficial role in Medicine. It gives the company owning or supporting the technology a financial advantage. On the negative side it gives control and evaluation of the data to the company owning or buying the software. There are concerns about privacy and the use of confidential information. They decide what information will be evaluated and what will be publicly released - and this is seldom information adverse to the company's interests. In addition to this it tends to lock the users of the software into supporting the company.

Jul 2003 Reports via the internet

Sonic Healthcare will deliver radiology test results over the internet to general practitioners and medical specialists as part of new project to streamline the way tests are performed.

The project, under way at the company's Queensland radiology operations, is the start of what will become a nationwide system over the next few years.
Sonic screens radiology tests. Australian Financial Review July 8, 2003

Sept 2003 An all embracing system

In a five-year project, Sonic has been rolling out a first-time, object-oriented laboratory information system since early 2000 - a mission-critical system controlling almost every business process.

Employees rely on the system, called Apollo, to register patients, provide the interface between the use of all medical applications, perform all client billing and electronic delivery of patient results.
Sonic standardises on object-oriented path. IDG Data September 9, 2003

Apr 2004 Tying in the referring GPs

Health Communication Network Ltd announced a long term agreement with Sonic Healthcare Ltd to enable users of Medical Director electronically to send orders for pathology and radiology tests to Sonic laboratories over the internet.

Under the agreement with Sonic, revenue to HCN will increase as the number of pathology and radiology tests ordered electronically by Medical Director users increases.


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The Success story

Each year Sonic promised large improvements in profits and each year it met or exceeded the profits it had promised. It became a dream company and over the years analysts have been enthusiastic about the company and the skills of its management. The reports are reminiscent of those by US analysts during the periods when fraudulent Tenet/NME, Columbia/HCA and HealthSouth were so profitable.

Jul 2002 Corporate services and revenue

After a series of takeovers it now provides pathology services through 13 practices throughout Australia and in New Zealand with revenue this year projected to be around $840 million.
Sonic boom shows signs of slowing. Herald-Sun July 8, 2002

Oct 2002 Size and global presence

Sonic Healthcare is the largest pathology service provider in Australia. It commands about 40 per cent of the private pathology market in the country and has smaller operations in Hong Kong, New Zealand and now the British market after an acquisition earlier this year. Its other business focus is in radiology, which is a more fragmented market, that the company has an estimated 10 per cent share in.
Sonic's boom bursts. Shares Magazine October 1, 2002

Nov 2003 Distribution

The group currently has operations in every state and territory in Australia except the Northern Territory. It also has operations in NZ, Hong Kong and the UK.
Sonic targets offshore growth Courier-Mail November 28, 2003

Feb 2004 Profited from consolidation

Sonic has made the most of the consolidation of the domestic pathology and radiology markets to build an impressive platform from which managing director Colin Goldschmidt intends to continue scoring.
Sonic Gets Runs On Board Australian Financial Review February 24, 2004

Mar 2004 Better margins

Diagnostic testing company Sonic has consistently delivered better margins than market rivals such as Gribbles Group , Mayne Group and MIA Group .
Consistent Performers Humming Along Australian Financial Review March 17, 2004

Aug 2004 Sustained and increasing profitability

Sonic Healthcare Ltd lifted net profit 41 per cent to $57.63 million in the 12 months to June 30 from $40.86 million for the previous year.
Sonic Healthcare posts ninth year in row of EPS growth Ralph Wragg Australian Business News August 23, 2004

Nov 2004 A market darling

Sonic Healthcare has been a market darling in recent years and the news just keeps getting better.

The stock soared 8.3 per cent yesterday on news that Britain's National Health Service will buy in several hundred million pounds a year of diagnostics from health service providers as part of steps to improve the health system.
STREET TALK : Sonic benefits from sick health system Australian Financial Review November 11, 2004

Dec 2004 Excellent management

Throughout the 1990s SHL blazed a superb trail of shareholder value creation as it pioneered the consolidator business model, where a company acquires many firms in a fragmented industry. In SHL's case the industries were pathology and radiology. The pace slowed domestically this decade with the decline in the number of local firms left to be acquired, so the company is now expanding offshore. With its first two international acquisitions both performing well SHL is one of the Australian companies most likely to succeed at overseas acquisitions.
Excellent management has been the key. We do not use the word excellent lightly. This has been one of the most successful management teams we have covered during our 30 years in the investment advice business. To integrate multiple acquisitions, often simultaneously, without losing customers and staff, and then also to extract lasting synergies, requires a great capacity for getting the details right. SHL's senior management has demonstrated this capacity since the late 1980s. To do this overseas in new and unfamiliar markets would seem an even greater challenge but SHL is proving itself up to the challenge with The Doctor's Laboratory, a UK pathology firm acquired in March 2002, and a 56% stake purchased in Germany pathology concern Schottdorf in April this year.

SHL's management of its cashflows and balance sheet has enabled the company to stay in the sweet spot where it can lift the dividend each year while still funding its growth without regular equity capital raisings.
SONIC HEALTHCARE (SHL) $11.70 Your Money Weekly December 16, 2004

Feb 2005 Promising even more

Radiology and pathology specialists Sonic Healthcare Ltd has lifted its full-year earnings guidance, saying it was shaping up to be a "dramatic" financial year.
Sonic lifts full-year profit guidance after strong first half Australian Associated Press Financial News Wire February 22, 2005

Aug 2005 and more

Sonic has outdone market expectations with its ability to maintain profit margins while consolidating the Australian pathology sector and is now expanding in Europe.
Street Talk : Health stock Sonic booms in wake of successful Quest Australian Financial Review August 11, 2005

Aug 2005 Ten successive years of double digit growth

Sonic Healthcare Ltd (ASX code: SHL) lifted net profit 34.4 per cent to $77.46 million in the year to June 30 from $57.63 million for the previous year.
Managing director Dr. Colin Goldschmidt said: "I am pleased to report that once again Sonic Healthcare has delivered record earnings, which have exceeded our upgraded guidance given in February 2005.
"This year Sonic has also reached a significant milestone, with our 10th successive year of double-digit earnings per share growth.
"The group's more recent expansion into offshore pathology markets in Europe - and now the USA - provides enormous growth opportunities for the company and I am confident that we will continue to deliver superior shareholder value into the future."
Sonic Healthcare net profit up 34pc to $77.5m for year Ralph Wragg Australian Business News August 23, 2005

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Response to a downturn
The intense pressures exerted by the share market and the vulnerability of companies to marketplace scares is well illustrated by developments early in 2002. Sonic indicated a possible profit that did not meet expectations. When the market learned of this from Sonic its share price fell by 50% and Boyd's fortune was halved. The market panicked.

The board may well have learned a salutary lesson. This would have pressured Sonic to be more circumspect about the information it released to the share market. Thereafter Goldschmidt was always very upbeat about the company's profits and its prospects. At the end of 2002 he announced a 29% increase in profits and in 2003 it was 41%.

It is worth noting that HealthSouth similarly promised record profits and regularly exceeded them. Maintaining the value of the company and the illusion of profitability became HealthSouth's most important corporate activity. To accomplish this the company perpetrated a US $4 billion fraud over a period of over 15 years. I am not suggesting that Sonic is doing the same thing but we will only detect problems like this if we are alert to them.

May 2002 Share price dropping

SHL's share price has dropped more than two dollars since the disappointment of the interim result. Readers will remember that the only problem with the result was some temporary margin contraction, but for a stock on a super-premium multiple the slightest disappointment has devastating consequences for the share price. The new discount in the shares reflects the disappointing result and the consequent loss of some management premium, as well as general nervousness about high-PER stocks, particularly in the healthcare sector.
The main reason the interim result disappointed was margin contraction in the Melbourne practice but margins in the Melbourne practice have since been partially restored.
Health care duo opt for merger. The West Australian May 13, 2002

May 2002 Results of disclosure

Radiology and pathology group Sonic Healthcare crashed to a low for the year of $4.90 in trading yesterday as concerns about a writedown combined with fears that the health-care sector's growth outlook is subdued.
Writedown Fears Send Sonic Into Casualty, Australian Financial Review May 15, 2002

May 2002 Further troubles?

Recent announcements by the company have indicated potential for further troubles on the horizon.
This would be on the back of a disappointing interim result which savaged the share price a couple of months ago and has been in a downward trend since. Sonic cited severe margin contraction as it tries to integrate its acquisitions
Sonic Healthcare (SHL), Nationwide News Pty Limited May 15, 2002

May 2002 Pressure on management

Sonic Healthcare managing director Colin Goldschmidt, a highly regarded operational manager whose achievements in the diagnostics industry are in no doubt, is obviously feeling the pinch, with his stock down a third since January

Macquarie Equities' John O'Connell felt Goldschmidt's wrath a fortnight ago after he posed the question in a report whether Sonic's auditors would force it to write down the value of its investment in the troubled Foundation Health Care by more than $20 million
Sonic MD booms, Australian Financial Review May 27, 2002

Jun 2002 But instead reports increased profits

Sonic reported a 29 per cent jump in net profit for the twelve months to end-June 2002 due to increased sales.
Stock to Watch: SONIC HEALTHCARE Australian Associated Press Ralph Wragg Equities News August 26, 2002

Sept 2002 Back to being positive

But positive earnings news is being rewarded. Sonic Healthcare's share price, which had been as high as $9.04 in September 2001 thanks to strongly rising earnings per share since 1995, was dumped to $4.37 in July this year by the sector's slide. However, the company had good news ahead. Sonic surprised the market with a strong profit rise for 2001-02. Even better, Sonic has made an upbeat forecast for 2002-03. Although well short of last year's highs, the share price had recovered to $5.99 on August 30.
Sonic boom Business Review Weekly September 5, 2002

Dec 2004 Explaining it later

The company's only publicly known recent failure was more to do with not keeping the market fully informed than poor profit performance. In March 2002 the stock plunged after the revelation of margin contraction at a time when the stock was priced for perfection. The margin contraction was understandable after the loss of a large contract and the acquisition of lower-margin firms but the company did not disclose it ahead of a capital raising in November the previous year. The anger many institutional investors felt towards the company combined with a derating of high-PER stocks, particularly healthcare stocks, to halve SHL's share price between November 2001 and July 2002. SONIC HEALTHCARE (SHL) $11.70 Your Money Weekly December 16, 2004


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International Expansion

Health Care companies are growth companies and their success in growing is reflected in their share value. Companies which are not aggressively growing are soon acquired by those which are not. As opportunities for growth in Australia dried up Sonic was faced with having to diversify in Australia or else become a multinational. It had prospered at the expense of others by not diversifying and it is understandable that it chose the latter option. Aware of the problems created by cultural differences Sonic has followed the advice of international health care advisers and purchased only a controlling holding in most acquisitions. Original shareholders and the existing facade are retained. The commitment and service of previous owners is retained by ensuring they have shares and options.

Jul 2002 Moment of truth

The moment of truth for Sonic Healthcare's management team has arrived. Its "phase II" expansion-by-acquisition program in Australia has come to a close and new strategies are to be employed.

Sonic refers to this new period as "phase III", in which it has promised to expand through rationalisation and overseas growth.

"Acquisition-led growth is over in Australia, which means management now has to deliver on potential," Salomon Smith Barney analyst Andrew Goodsall said.
Sonic enters next phase of growth. Australian Financial Review July 10, 2002

Another seldom stated advantage of a large and diverse foreign holding relates to dependence on tax payer funding. Profits are vulnerable to the vagaries of political policy and the exposure of fraud. Sooner or later the peoples representatives will want to stop the system being exploited for the benefit on millionaires, or stamp out fraud. A secure foreign income provides a buffer as corporations use their political influence and market power to subdue competitors and outmaneuver political opponents. The dispute with BUPA in South Australia illustrates the competitive advantage. The subversion of the massive backlash against managed care in the USA during the 1990s illustrates the use of corporate influence and power. Both Columbia/HCA and Tenet/NME scrambled to expand their international operations before their massive frauds became global knowledge.

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New Zealand
Sonic entered New Zealand in 1999 and acquired its first radiology business there when it bought the Australasian business of the Swiss company SGS Group. Although it has grown this business the operation has been relatively low key with little information in the Australian press. Sonic attempted a takeover of a rival in 2005 but the deal was rejected by New Zealand authorities on competition grounds.

Oct 2002 New Zealand holdings

NZ Subsidiaries) Diagnostic Medlab, Medlab Central, Medlab South, Valley Diagnostic Laboratories and New Zealand Radiology Group operate in NZ.
Sonic Healthcare Limited Jobson's Year Book October 31, 2002

Sept 2005 Merger blocked

New Zealand's Commerce Commission has blocked the merger of the diagnostic lab services of New Zealand Diagnostic Group Ltd and Sonic Healthcare (New Zealand) Ltd (ASX:SHL) in six health districts.

Commission chairman Paula Rebstock said the NZCC was not satisfied that the proposed acquisition would not lessen competition in the relevant markets.
NZCC blocks Sonic/NZ Diagnostic merger in 6 districts Ralph Wragg Australian Business News September 29, 2005

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United Kingdom
Unlike Australia the public in the United Kingdom is wedded to its public hospital system. Although private care and medical insurance has increased among the wealthy most care is still provided free through the public system. Pathology has been provided by the NHS itself. Since the time of Margaret Thatcher repeated attempts have been made to address the problems of the heavily bureaucratised system by introducing competition and economic forces into it. By and large these have not been successful.

In spite of strong opposition and evidence from studies, done by academics like Allyson Pollock, showing that such a system does not meet cost objectives or improve care, the Blair labour government has embraced a policy of contracting public health care services to private corporate contractors on a competitive basis. Sonic's plans to capitalise on the largesse of the British taxpayer in order to make profits for its shareholders and grow its empire. Its experience in Australia should serve it well.

Sonic purchased the large London based The Doctors Laboratory (TDL) from local pathologists and then went on to buy the struggling Omnilabs from Medical Imaging Australia (MIA), incorporating it into TDL. It formed an alliance with University College to build a large state of the art laboratory which would undertake the NHS pathology services which it was confident it would be contracted to provide. One wonders if they would have spent this capital if they had not had some political assurance. The private sector in the UK was fragmented and disorganised and as happened in Australia in the 1990s government may have been courting experienced multinationals.

It was clear that many contracts offered would be for centres and include more than just pathology. Sonic entered into a cooperative arrangement with MIA's UK radiology business to bid jointly for these contracts. It also planned to diversify or form alliances so that both the building contracts and the provision of other services like Day Surgery could be included in their bids.

Although Sonic entered the UK in 2002 by the end of 2006 there was little information about contracts won and not much solid information about the profits made from these - other than the glowing statements, Sonic's large promised and declared profits, and comments by Goldschmidt and the company.

Jul 2002 Acquires TDL

SHL completed the acquisition of UK pathology practice The Doctors Laboratory (TDL) on April 10. Directors are confident that the acquisition is a positive step in Sonic's growth as acquisition opportunities in Australia are becoming limited.
Sonic boom shows signs of slowing. Herald-Sun July 8, 2002

Oct 2002 Success reliant on government policy

If an outsourcing model of pathology services in Britain is successfully maintained, then international expansion will be a driving force for this company.
Sonic's boom bursts. Shares Magazine October 1, 2002

June 2003 Acquires Omnilabs

Sonic Healthcare Ltd has signed a heads of agreement to acquire MIA Group Ltd's UK pathology operation, Omnilabs.
The heads of agreement also outlines the establishment of a strategic alliance between Sonic and MIA for joint development of public and private sector opportunities in pathology and radiology respectively.
Sonic Healthcare to buy MIA's UK Omnilabs business Ralph Wragg Australian Business News June 5, 2003

Aug 2003 A new pathology laboratory

Pathology and radiology provider Sonic Healthcare Ltd said today its United Kingdom business, The Doctors Laboratory Ltd, would open a new pathology facility - the biggest of its kind in the UK.

Sonic said TDL had agreed with University College London Hospital NHS Trust (UCLH) to open a high-volume, state-of-the-art automated pathology laboratory at TDL's new premises in London.
Sonic in agreement to open new UK pathology lab. Australian Associated Press Financial News Wire August 7, 2003

Aug 2003 Merges pathology businesses

Omnilabs will be merged into TDL in two stages - a move into the TDL site in September 2003 before both groups move into the new Whitfield Street site in December.
Sonic Healthcare says expects EBITA of $185-195 mln in 03/04. Australian Associated Press Financial News Wire August 26, 2003

Feb 2005 Upbeat but still not contracts

Managing director Colin Goldschmidt doubled his previous guidance on the potential size of UK Department of Health pathology contracts to around 15 per cent of an estimated total of ££3 billion to ££4 billion ($7.2 billion to $9.6 billion).

He said the UK Department of Health was showing a "sense of great urgency" in developing the outsourcing program, with more information expected within three weeks.
UK to give Sonic a shot in the arm The Sydney Morning Herald February 23, 2005

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Sonic planned to use its UK business as a basis for expansion into Europe. It entered Germany by buying a controlling interest in a large German company which it felt shared its cultural values and norms. It is possible that there have been some problems here as Sonic has not spoken much about this since or purchased in Europe. Sonic does not disclose the profits of individual businesses in its reports.

Feb 2004 Being positive about Europe

"Now that we have established a really healthy, vibrant beachhead in the UK, we are finding that there are all kinds of opportunities opening up for us," he said. "We continue to look for further opportunities in certain markets in Europe where pathology is frag-mented, unconsolidated and uncorporatised."
Dr. Goldschmidt, who described the result as a "cracking" start to the year, said the size of Sonic, which owns 14 pathology businesses in Australia, would preclude it from further significant expansion domestically.
Sonic Lifts Earnings 34% In A `cracking' Half The Sydney Morning Herald February 20, 2004

Apr 2004 Buys into Germany

Sonic Healthcare Ltd has signed an agreement to acquire a 55.9 per cent interest in one of the leading companies in the German pathology market, the Schottdorf Group for euro28.46 million ($A46.7 million). Of this euro8.13 million will be deferred for one year and tied to the performance of the group for the fiscal year ending December 31, 2004.

In addition, a total of 3 million Sonic options exercisable at $A6.75 over 5 years will be granted to Sonic's new partners, Dr. and Mrs Schottdorf.

Apr 2004 The Schottdorf Group

The Schottdorf Group based in Augsburg near Munich is one of Germany's four major pathology companies with about 10 per cent of the market.
Sonic Gains European Foothold Australian Financial Review April 7, 2004

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There are several references in reports to activities in Hong Kong but I did not find any information in the Australian press about them. SciGen which Sonic divested operated in Asia.

Oct 2002 SciGen's operations

Lifescreen Australia operates in major Australian capital cities and SciGen operates in Singapore, Korea and Australia.
Sonic Healthcare Limited Jobson's Year Book October 31, 2002

Aug 2005 Hongkong

About 35 per cent of Sonic's earnings now come from overseas markets, including the UK, Germany, New Zealand and Hong Kong.
Sonic in $300m foray into US The Australian August 24, 2005

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The United States of America
Sonic was not planning to enter the US market at this time although it had looked at this marketplace. It seems that it was sought out by a private US pathology group because of its doctor friendly management strategies.

Surprisingly the $40 billion US pathology system was less corporatised and consolidated than the Australian system. Following the labscam scandal of the 1990s large companies like Dow Corning spun off their pathology businesses into separate companies. These then consolidated and by 2005 there were only two market listed corporations in US pathology owning 60% of services. These were Quest Diagnostics (which operates in Australia) and Laboratory Corporation of America (Labcorp). The ancestors of both had paid heavy fines in the Labscam scandal. Both had adopted a market focussed management structure. The third largest company, Texas-based Clinical Pathology Laboratories, was run by doctors. It was threatened by and a potential target for the two large corporations. It was looking for a white knight to rescue it.

Aug 2005 Buys into the USA

The company will take an initial 80 per cent stake in the Texas-based company, with a view to acquiring the remainder by 2012.
Sonic shares surge on $US300m CPL acquisition Australian Associated Press Financial News Wire August 23, 2005

Aug 2005 Sonic upbeat

"Pathology lends itself to sharing of ideas and locking in synergies," Goldschmidt said. "This provides us with a growth path, and CPL will be our vehicle to expand in the U.S."

He said the independent pathology sector in the U.S. was highly fragmented, although it boasted annual revenues of about $13 billion.
Sonic buys Clinical Pathology August 24, 2005

Aug 2005 One of the highest prices ever

An Australian company has bought a majority stake in Clinical Pathology Laboratories Inc. for $300 million, one of the highest prices ever paid for an Austin company. CPL is the largest privately owned medical lab company in the country, with operations in Texas and five other states and annual revenue of about $190 million a year.

The buyer is Sonic Healthcare Ltd., based in Sydney. CPL is its first foray into the $40 billion U.S. pathology market.

Dr. Robert Connor, the chief executive, and David Schultz, the president, will keep their positions and remain minority owners for several years.
Austin lab firm sold for $300 million ; Clinical Pathology Labs' price tag is among highest ever for an Austin venture Austin American-Statesman August 26, 2005

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Clinical Pathology Laboratories (CPL)
CPL was a private company formed and run by doctors some of whom had left other pathology groups when they were acquired by the two large corporations. They were a major force in Texas and had expanded into a number of other states. The two big pathology corporations were looking for acquisitions and CPL was a potential target.

A search through US press reports failed to reveal any information other than CPL's involvement in local functions and charities in Texas. They have been low key. There is no hint of US corporate dysfunction. Most information comes from reports after Sonic announced its purchase.

Aug 2005 Background in the USA

The debt-funded purchase, scheduled to close Sept. 30, continues a recent flurry of deal making within the U.S. lab industry, a fragmented arena with high fixed costs that make consolidation attractive, according to analysts.

Earlier this month, Quest agreed to acquire LabOne Inc. (LABS), a provider of health screening and risk assessment services to life insurance companies. Quest's next-largest rival, LabCorp, has also been making acquisitions.

Sonic said CPL is the largest privately owned routine pathology laboratory in the U.S., with annual sales of US$190 million.
Australia's Sonic Steps Into US Via US$300M Buy Dow Jones Commodities Service August 24, 2005

Aug 2005 CPL story and Sonic's plans

In 1991, with the help of private equity firm Summit Partners, CPL began moving into other states, first in the Southwest and more recently in the Midwest and East.

CPL avoided being gobbled up by the testing giants Quest Diagnostics Inc. and Laboratory Corporation of America Holdings, which acquired regional private labs at a quick pace during the 1990s, said Robert Michel, editor of The Dark Report, which holds an annual meeting on lab management. Those two companies own 59 percent of the U.S. market.

"They (CPL) continued to do what they have always done," said Michel. "That was the distinction, that CPL was largest holdout."
Sonic "had an interest and a motive to take CPL as it exists today and take that into a growth platform to expand into other markets in the U.S.," he said.

Because the buyer is new to the U.S. market, CPL will be able to keep its network of patient centers and labs and continue business as usual. That wouldn't have been the case had the buyer been Labcorp or Quest, which already have large networks of labs, including facilities in Houston and Dallas.
Austin lab firm sold for $300 million ; Clinical Pathology Labs' price tag is among highest ever for an Austin venture Austin American-Statesman August 26, 2005

Aug 2005 The CPL story

In 1989, the pair (Connor and Schultz) took CPL, a decades-old lab with nine pathologists, and reorganized it to help it fend off competition from bigger lab testing companies that were swallowing up smaller labs.
Their (Labcorp and Quest) size made them strong competition for companies such as CPL that wanted to remain independent, said Schultz, who moved to Austin from Dallas in 1989 after what is now GlaxoSmithKline bought the lab he worked for.

He and Connor, who joined the group in 1984, split CPL into two entities. One was the lab-testing business; the other is a professional association of pathologists who work as contractors for the lab.

The nine original pathologists also became investors in the company.
CPL's setup allowed its owners to keep the personal touch they felt was an advantage over large lab-testing facilities, he said.

"Our business is not unique: It's the delivery of routine tests," Schultz said. "We focus on servicing the client."
"It was just the fact that physicians know physicians doing the interpretation," Jupe said. "They talk. It's more of a close, collegial practice of medicine."

The approach didn't prevent CPL from growing. CPL now has 22 pathologists in Austin, about 1,500 employees overall and major labs in Austin; Toledo, Ohio; and Chantilly, Va. CPL also has about 150 walk-up testing centers, including two in Austin.

"The breaks went our way, so we didn't have to sell to another big company," Connor said.
About the same time, Connor and Schultz thought it was time to buy out Summit Partners and pay off investors. Within months they came upon Sonic.

For CPL it was a chance to cash out much of the value of the business but keep operating it. If it had sold to a larger U.S. player, CPL probably would have had to shutter its Austin facilities.

But now CPL will remain a Texas corporation, with Sonic holding 80 percent of the company and Connor and Schultz remaining part owners. Under the terms of the deal, Sonic will buy CPL completely by 2012.

"We don't see anything is going to change," Connor said. "This is a way to make CPL self-preserving. It was the best alternative we came up with to continue long term."
From a small medical practice a big lab grew and grew ; Newly sold Clinical Pathology Labs' next test: Stay successful, independent Austin American-Statesman August 30, 2005

Oct 2005 Cultural congruence

Similar to SHL, CPL uses a regional franchise model to align the returns of the pathologist with the parent company. The super lab model means CPL has three large and recently opened laboratories in each state and so don't need immediate capital expenditure as there is 50% surplus capacity. Bolt on acquisitions can be made in each state to leverage off this sunk infrastructure cost. CPL's culture, similar to SHL, provides the physician with a layered level of technical skill and service to provide not just a test result but a valuable tool in diagnosis.
SONIC HEALTHCARE (SHL) $14.41 Your Money Weekly October 20, 2005

Dec 2005 Why CPL liked Sonic

"One of the attractions for CPL in selling to us was our model," Goldschmidt says. "They didn't want to go down the pure business-driven path; they liked our model where we retain the medical emphasis."
Successfully securing a foothold in such an enormous market clearly offers Sonic huge potential. But as one long-term observer of the US medical sector notes: "It is a tough business and operates very differently to Australia. The margins are tighter, competition is fierce. Sonic will be a minnow swimming in a sea of sharks."
Path test BRW December 1, 2005


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Foundation Healthcare, LifeCare and IPN

Nov 2001 The One-stop shop

Boyd's "one-stop shop'' is a reference to the growth of large medical centres housing doctors, pathology, radiology and other specialists, which are transforming Australia's health-care landscape. Increasingly, corporations have interests in GPs, as well as the in-house services to which they refer.
The Rise And Rise Of Medicare Millionaires, Australian Financial Review 20 November 2001

Brief Outline
In 1999 general practice became the latest target for consolidation and corporatisation. This had already failed in the USA. The reports suggest that Goldschmidt was philosophically opposed to owning general practitioners and in doing so competing with his referring practitioners. On the other hand if his referring GPs became corporatised by selling their practices and services to other corporations then Sonic risked losing its referral base.

As a way out Boyd set up the two companies LifeCare and Foundation. Foundation built medical centres. Sonic owned 10% of Foundation which in turn owned 10% of LifeCare. Sonic entered into an arrangement which gave it the right to run pathology and radiology services in Foundation Healthcare's medical centres. LifeCare had a similar arrangement for paramedical and other services. There was an arrangement with Sigma to run pharmacies in the centres. All of these services were clustered around the general practitioners, whose geographical proximity ensured their profitable referrals would be captured. At the same time Sonic maintained it did not own or operate general practices and was not competing with its referral base. Sonic had a "one-stop shop" medicine without calling it that and without obviously competing with other referring doctors.

Two issues arise. Was what happened due to a dispute between Boyd and Goldschimdt in 1999 with a later coming together to capitalise on what Boyd had done? Did Boyd (and perhaps Goldschmidt) really believe that general practice could be turned into a profitable business? Alternately was this simply a cynical and opportunistic well planned strategy by Boyd (and perhaps Goldschmidt) to secure a large GP referral base and con other investors and the doctors themselves into funding this by capitalising on the gullibility of the marketplace?

The Early development and practices of Lifecare and Foundation are described on separate pages.

Click Here to fo to the Foundation Healthcare web page

Click Here to fo to the LifeCare web page

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The following section was written early 2002
Both of these companies benefited from Boyd's reputation for making money. Their share floats were snapped up and the share prices rapidly rose. Both companies embarked on an aggressive acquisition program expanding across Australia from their base in WA. They went to the market for money to do this.

Foundation offered much more money for GP's practices than its competitors and was far more successful in securing market share. They soon had a commanding market share, employing 6% of General practitioners in Australia. Most competitors secured 1% or less. Foundation purchased the practices in part with its inflated shares and introduced an incentive scheme with options.

LifeCare bought physiotherapy practices as well as sports medicine and a number of allied businesses. They introduced strong profit based incentive programs. In addition to purchasing with shares and offering options they used other incentive schemes. They relied on a system of franchising to put pressures for profit on allied health professionals. The similarity with the USA is striking.

The problem for Foundation was that General Practice is people intensive and the financial benefits from consolidation were minimal. The profits come from GP referrals and not from their fees. Foundation did not have the money making pathology and radiology businesses. They consequently did not generate the promised profits from general practice. They failed to give an acceptable return for the investment shareholders had made or to justify the price paid for the practices. The model was fatally and obviously flawed.

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Goldschmidt wavers

May 2000 Goldschmidt's angst

Goldschmidt explained: This has given me a lot of angst ... there is a conflict here between Sonic's business interests as a pathology company and what we saw as maybe a compromise in our independent strategy.
Owning The Whole Kit And Caboodle
, Australian Financial Review May 24, 2000

The consolidation of the health care industry posed a threat to Sonic's referral base. If the GP's and hospitals were owned by competitors then referrals would dry up. Only a fraction of Sonic's referrals came from hospitals but when Mayne bought Australian Hospital Care Sonic lost these referrals and its profits briefly felt the breeze.

May 2000 Sonic's dilemma

In a first for the Australian health-care sector, listed pathology operator Sonic Healthcare Ltd is considering a radical expansion of its strategy through a business model embracing radiology, the internet and general-practitioner management.
It is feared the rise of privatised primary care will erode doctor's control of referral decisions to specialists such as pathologists, in turn threatening Sonic's revenues and the value of its financial statement goodwill if it does not compete in the same area.
Sonic Healthcare Plans Move Into GP Services
, Australian Financial Review May 15, 2000

May 2000 Speculation and the thoughts of the time

Billion-dollar pathology giant Sonic Health Care is set to make a high-risk move into general practice, becoming the latest corporate player to vertically integrate. Sonic's move comes as doctors' organisations want a major public debate about the rapidly growing corporate control of medicine.
Australian Financial Review understands the company will set up a subsidiary to run its general practice interests. GPs will then be able to buy shares in either the subsidiary or in Sonic.
The idea of your local GP becoming a shareholder in a giant medical corporation highlights just how quickly medicine in Australia is being transformed into big business, focused more on improving returns than the nation's health. While Goldschmidt is widely respected within medical circles, it's no secret that the Sydney pathologist was awarded 3 million options in Sonic late last year, exercisable at $5.50 each.
Owning The Whole Kit And Caboodle
, Australian Financial Review May 24, 2000

More worrying for Sonic was the consumption of general practices by Endeavour, Revesco, Primary Health Care, Mayne and a host of other opportunistic groups. This was a serious threat to Sonic's referral base. This was the marketplace and as the US experience shows the market and not principle dictates policy - expediency triumphs. Goldschmidt soon abandoned his policy of not competing with GP's. Sonic announced its plans to go into GP management in May 2000. This was despite the intense concern of the medical profession - his referral base.

May 2000 The dilemma for Sonic

But if Sonic does move to make some kind of financial links with doctors, the pathology company loses the independence which has been so important to its extraordinary success.

The minute Sonic joins forces with some GPs, it becomes a direct competitor to those GPs who don't join. The danger is that the company will effectively be competing with many of the doctors who refer pathology work to it. Because the goodwill Sonic has with its referring doctors is such a large part of its billion-dollar market capitalisation, the problem is an enormous one.
Owning The Whole Kit And Caboodle
, Australian Financial Review May 24, 2000

It is likely that by now Boyd realised that he was not going to make money from General Practice - if he ever really believed it. Sonic had the money and the credibility. Foundation could not compete. If he sold Foundation to a competitor Sonic would be the loser and he was a major shareholder in Sonic. The dilemma was resolved by an alliance between Sonic, Foundation and LifeCare. Sonic bought a 10% share in Foundation and Foundation a 10% share in LifeCare.

If the holdings of Boyd and other Sonic directors were added to Sonic's then there was sufficient joint ownership to make a hostile takeover unpalatable. Boyd rejoined Sonic's board and Goldschmidt became a director of Foundation. Foundation described the move as defensive - a way of neutralising a powerful competitor. It allowed Goldschmidt to claim that he had not abandoned his policy of horizontal integration.

Foundation set up medical centres for its doctors. Sonic and LifeCare provided pathology, radiology and allied medical services in these centres so benefiting from the referrals. Sigma pharmaceutical joined the alliance establishing pharmacies in Foundation's centres. This allowed Boyd to borrow Catchlove's policy of "One Stop" health care.

Jul 2000 Resolving the dilemma

A big part of Sonic's success has been based on the independence that may be in jeopardy if it pursues a more entrenched relationship with Foundation.

Mindful of those concerns, the managing director of Sonic, Dr. Colin Goldschmidt, said the new structure touches on vertical integration but it separates diagnostics from the clinical side''.
Corporate Medicine: Coming To The Local GP
, Australian Financial Review July 11, 2000

This was the vertical integration Goldschmidt could have without really having vertical integration. Both companies strongly asserted that Sonic and Foundation were separate companies and that no pressure was placed on doctors to refer.

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Foundation and LifeCare look sick

Foundation received no benefits from referrals to Sonic and its financial problems were unaffected. Its profits were way below expectations. Its share price fell and fell. By April 2002 its shares once up to $2.74 were 40 cents. One bank predicted bankruptcy.

The GP's who were paid in shares had lost badly as had shareholders. The options offered to employees were valueless.

The company is now cutting costs so providing less support for GP's. There are stories of discontent and of lawsuits. This is a very different picture to Sonic. Foundation is responding by offering doctors more incentives. The US experience tells us that this situation is a recipe for problems affecting care.

Sept 2001 "Indirect" vertical integration!

Through a strategic 8 per cent shareholding in Foundation Healthcare, Sonic has indirect vertical integration. Foundation provides a link to more than 1000 general practitioners and it has priority referral for pathology and radiology work from that huge network.
Diagnostics Providers Continue To Expand, Shares Magazine 1 September 2001

It is most unlikely that Foundation will go under but shareholders are unlikely to get much return on their investment. It will continue to make a small profit and Sonic will keep it solvent -- or else buy it. Sonic has secured its referral base and wont let it go.

LifeCare too has not done well. Its shares, once 65 cents were down to 11 cents in April 2000. It also had used shares to buy practices. Its response has been to increase the number of franchisees and increase incentives.

Mar 2001 Risk of kickbacks

Paying cash or other inducements to referring GPs is illegal, and could result in jail time. But the temptation to offer inducements is great. I'd venture that it won't be long before a major pathology lab is in trouble with the law over inducements.
Health Risks For Packer And Smedley,
Australian Financial Review 10 March 2001


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Update Foundation, LifeCare and IPN - Jan 2006

Merger to form IPN
Both LifeCare and Foundation continued to struggle. In mid-2002 the two companies merged under the name LifeCare, but soon after changed this name to Independent Practitioners Network (IPN). Sonic continued to support the company increasing its holding to 18.5%. It emphasized that this was a model in which professionals were independent operators. It did not own general practices!

As I had predicted IPN continued to lose money and its shares, once up to $2.50 fell to 3.5 cents. Sonic continued to lend support and act as a broker in negotiating loans so keeping IPN afloat. Whereas Mayne's losses from general practice impacted on its bottom line, Foundation's losses did not colour Sonic's stellar performance. With the exception of Primary Health other GP corporations lost money, went under or were sold. When Endeavour sold its clinics to IPN and its pathology labs to Sonic, Sonic lent IPN the money and one wonders if any one else would have!

May 2002 Foundation and LifeCare merge

THE Michael Boyd-founded Foundation Healthcare and its physiotherapy stablemate, LifeCare, have announced plans to merge after a torrid year for medical corporates generally.
Both Foundation and LifeCare have been hammered by the market in the past 12 months for failing to meet prospectus forecasts and, in Foundation's case, for an unexpected $28.3 million loss for the year to June 30.
The company hopes the co-location of a number of Foundation and LifeCare clinicians will create opportunities for the cross-referral of patients but this strategy relies strongly on GP loyalty.
Health care duo opt for merger. The West Australian May 13, 2002

Sept 2002 Changing name to IPN

At the November AGM shareholders will be asked to approve a change of name of the company to Independent Practitioner Network Ltd. The company sees the name as consistent with the business model, ie. the provision of services and infrastructure to independent clinicians, mainly GPs and physiotherapists. The name should assist in marketing the company's services to clinicians. Clinical sovereignty is to be the fundamental principle on which the business model is based. This is despite the alliance with medical diagnostics firm Sonic Healthcare. The relationship between the company and clinicians is a collaborative partnership, not an employer-employee relationship.
LIFECARE HEALTH LTD (LCH) $0.10 Smaller Companies Guide September 18, 2002

Dec 2002 The strategic alliance

The Board of Sonic Healthcare Limited (SHL) is pleased to announce that it has reached agreement with IPN (formerly LifeCare Health Limited (LCH)) to further strengthen Sonic's existing strategic alliance with IPN and to collaborate with IPN in the development of a new practice management software system for clinicians.

The Sonic/IPN strategic alliance originally commenced in July 2000, and includes rights for Sonic to operate diagnostic centres within IPN medical centres, as well as governing other areas of co-operation between the two companies.
Sonic Healthcare Limited (SHL.AX) Strategic Alliance with IPN. Australian Stock Exchange Company Announcements December 5, 2002

Jul 2003 Sonic increases its stake in IPN

Additionally, February had brought the welcome news that Sonic Healthcare had increased its stake in IPN from 10.0% to 18.5%. The background to Sonic's extra investment was an alliance which sees IPN doctors refer patients to Sonic pathologists and radiologists.
INDEPENDENT PRACTITIONER NETWORK - (IPN) $0.044 Smaller Companies Guide July 9, 2003

Jul 2004 IPN's parlous financial condition

The IPN target's statement released on Friday said its board audit committee was considering up to $5.5 million in write-offs, including provisions for the cost of vacant space in the centres, a write-down in the value of the Cliveden Hill Private Hospital and a goodwill write-down on a centre due to be sold.

IPN is also in breach of the gearing ratio covenant on its $17.4million loan facility and "under close monitoring by Westpac".

Despite its financial woes, IPN is considered to be of strategic value because of its control of 73 medical centres around Australia.
Surgeries network facing big write-offs The Sydney Morning Herald July 12, 2004

Sept 2004 Sonic keeps IPN afloat

Business risk is medium because although IPN's current business model is unviable, the balance sheet is weak and management is not speaking to the market (a danger sign), SHL cannot afford to let the company go broke. SHL knows IPN must be recapitalised and will provide the majority of the funding when the time comes. Currently SHL is using its reputation and financial strength to assist IPN in renegotiating bank debt facilities.
INDEPENDENT PRACTITIONER NETWORK (IPN) $0.28 Smaller Companies Guide September 1, 2004

Oct 2004 Buys Endeavour Healthcare with Sonic's help

Independent Practitioner Network Ltd (IPN) completed the sale agreements to purchase the medical centre assets of Endeavour HealthCare Ltd for $7.375 million. IPN will not be acquiring any of Endeavour HealthCare Ltd's entities.
To fund the transaction, IPN will enter into an $8 million, 2 year subordinated loan agreement with Sonic Healthcare Ltd on commercial terms. The loan agreement is subject to completion of the Endeavour acquisition.

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Primary Flushes Out Sonic
In 2004 the company was in dire straights and Primary Healthcare decided to end the charade and expose Sonic's double talk. It gradually bought 20% of IPN then launched a takeover offering 5 cents a share. Primary must have known that Sonic valued its holding in IPN at $33.5 million because of the referring GPs and could not afford to lose them. It would be forced to bid for a controlling interest.

Sonic did so offering to buy two thirds of the company at 8 cents a share. A bitter verbal dispute resulted with Sonic trying to rush shareholders and Primary warning that the remaining third of shares would be almost valueless as no one except Sonic would buy them. They would not offer much. Sonic's bid was therefore worth less than 8 cents and IPN's model had little prospect of profitability. Primary's criticisms gave Sonic's cosy relationship with IPN and its claims to professional independence a good airing.

Sonic was forced to increase its bid to 8.5 cents and secured 75% of IPN. Primary had acquired over 20% of IPN and sold this holding to Sonic making a profit of over $2 million.

The takeover attempt by Primary is also described on the Primary Health page where there are more extracts. This page looks at Sonic's role in defending its referral base.

Oct 2003 Primary prepares

Primary bought a 9.2 per cent stake in IPN for $4 million in August. The predatory move led investors to question Primary chief executive Edmund Bateman's motives, given that Sonic Healthcare owns 18.5 per cent of IPN and has a strategic relationship with it.
Sonic values its 18.5 per cent stake in IPN at about $33.5 million in an unusual accounting treatment that many analysts and investors have questioned.
Primary Moves On Rival IPN Australian Financial Review October 8, 2003

Jun 2004 Primary mounts takeover bid

The 5c-a-share bid comes as IPN was rumoured to be close to announcing a rights issue to erase its existing debt of roughly $14 million.
Primary Makes Its Move For IPN The Sydney Morning Herald June 8, 2004

Jun 2004 The takeover

Finally, IPN shareholders are about to be put out of their misery. Rival medical centre manager Primary Healthcare (PRY), which began accumulating shares in IPN in mid-September last year and has probably been stalking IPN for much longer, announced on June 7 it had increased its stake to 20%, the maximum permitted without making a bid. The same day PRY announced its long-awaited bid: an off-market cash payment of 5 cents per share.
INDEPENDENT PRACTITIONER NETWORK (IPN) $0.05 Smaller Companies Guide June 9, 2004

Jun 2004 Sonic responds

Pathology and radiology provider Sonic, which currently holds a 19.63 per cent stake in IPN, will offer eight cents per share to secure two thirds of the remaining IPN shares.
IPN recommends Sonic bid unless higher offer Australian Associated Press Financial News Wire June 22, 2004

Jun 2004 The verbal slanging begins

Primary Health Care managing director Edmund Bateman yesterday accused Sonic Healthcare of only looking after its own interests, after Sonic lobbed a rival 8 ¢-a-share, proportional takeover bid for medical-centre operator Independent Practitioner Network.
Sonic managing director Colin Goldschmidt said it supported IPN's business model and wanted to retain its management, led by Ralph Shreeve. The offer was "substantive proof that we believe in the strategy of IPN as an independent business".

"From our point of view, it's one of these situations where, in the scheme of Sonic's financials, this is not a very significant asset," he said. "However, we believe it has been a productive relationship and the value to us is increasing.

"The (IPN) management team are very keen on their particular strategy, which differs significantly from that of Primary Health Care."

But Dr. Bateman said IPN was losing its doctors and a prolonged battle was not in their interests and some of them wanted Primary to take over.
Sonic Bid Has Primary Ill-at-ease The Age June 23, 2004

Jun 2004 Exposing Sonic's pretense

Dr. Bateman said Sonic had enjoyed a strong pathology referral stream from IPN's doctors despite the importance of IPN remaining independent, but all IPN shareholders were left with were the tax losses.
But Dr. Bateman said IPN was losing its doctors and a prolonged battle was not in their interests and some of them wanted Primary to take over.

"The economic outcome suggests their management is not viable in the long run and if it's not viable in the long run, it's not viable for the doctors," he said.
IPN Bid Lacking, Says Primary The Sydney Morning Herald June 23, 2004

Jun 25 The value of the alliance and the threat to Sonic

The takeover is a purely defensive measure by Sonic, as it moves to defend the pipeline of referrals that flow between IPN's more than 150 medical centres and Sonic's pathology labs.

Sonic has a strategic relationship with IPN, giving it first right of refusal to place one of its pathology collection centres next to an IPN medical practice. When patients walk out of a doctor's room with a referral slip, they usually cross the hallway right into the open arms of a Sonic employee.

Andrew Goodsall, health-care analyst at Citigroup Smith Barney, makes this point clear, saying in a note to investors that Sonic's bid is an "unplanned impost to secure IPN's pathology referrals".
"This pathology referral relationship has enabled Sonic access to roughly 65 per cent of IPN's pathology referrals," he says.

"Sonic has not revealed the benefit in dollar terms [of this relationship]. However, assuming that IPN sees about 3.4 million patients in 2004-05, and applying industry averages for pathology referrals generated by this number [of] attendances, we estimate that Sonic could benefit by roughly $18 million in revenue from the relationship."
It threatened perhaps unintentionally Sonic's pathology business, which contributes more than 75 per cent of the company's revenue and profits. It also put in jeopardy Sonic managing director Colin Goldschmidt's vision of growing the group into a major diagnostics company with operations throughout Australia and overseas.

That's why analysts say Sonic had to act. It doesn't particularly want to be the owner of IPN but, more importantly than that, it doesn't want anybody else owning it, especially a company such as Primary Health Care, which has its own small but competitive pathology division.
Sonic sounds defensive with IPN Australian Financial Review June 25, 2004

Jul 2004 About the two in three share offer

- - - - and with Sonic's proposal to maintain the current strategy, one would suggest the one IPN share you are left with (having accepted Sonic's offer of two out of three IPN shares) may be worth something less than 1 per cent [of the company]."
"Additionally, you will be in a less liquid company that functions as a pathology collection system for Sonic, where Sonic gets the pathology, IPN shareholders get the bills, with the general practitioners getting the 'leftovers'."
Primary hits back over IPN offer The Age July 3, 2004

Jul 2004 Value of the alliance

Thanks to a cosy deal between Sonic and IPN, in which Sonic has first right of refusal to place one of its pathology collection centres next to an IPN practice, it gets roughly 75 per cent of IPN pathology referrals.

This translates into annual revenue of $11.25 million a year for Sonic.
Sonic opens mouth Australian Financial Review July 13, 2004

Jul 2004 Creating urgency

Dr. Bateman accused rival bidder Sonic Healthcare of creating "the appearance of urgency" in its bid documents by encouraging IPN shareholders to accept its rival 8c-a-share proportional offer for two of every three IPN shares.

"The word 'now' is the largest printed word in the 39-page document," Dr. Bateman said in a letter to IPN investors.

"It is seven times the normal print in size. It is underlined and in reverse print. One should ask, why now?
Primary boss may offer more for IPN The Sydney Morning Herald July 15, 2004

Jul 2004 Sonic increases its offer

It (Sonic) will waive all conditions to its takeover offer and increase the offer price to 8.5c an IPN share.
Sonic lifts IPN bid to 8.5c a share Ralph Wragg Australian Business News July 22, 2004

Jul 2004 The proportional bid

The unusual proportional structure of the Sonic bid has created the strange situation where the residual share can be bought separately at a shade below 2 ¢ each (under the "IPNE" listing), even though IPN in its totality has previously never traded below 3 ¢ a share, despite its loss-making past.
IPN crumbs Australian Financial Review July 27, 2004

Jul 2004 Primary gives up and walks off with its loot

On July 23, Primary accepted the 8.5¢-a-share proportional offer by the pathology and radiology company Sonic Health Care for two-thirds of its 18.3% stake in IPN. Having bought the shares at an average of 4.3¢, an outlay of $8 million, Primary says it has made a profit of close to $2 million on the sale.

It has also made a few more dollars with its on-market sales of IPN shares.
Health care Business Review Weekly July 29, 2004

Aug 2004 Sonic ends with 71% of a company it did not want to buy

Not surprisingly, Sonic Healthcare has shut off its proportional bid for medical centre group Independent Practitioner Network with about two-thirds control, ensuring Sonic maintains the pathology referral stream from IPN's doctors without having to carry the full pain of IPN's loss-making activities.
Sonic surprise Australian Financial Review August 17, 2004

Aug 2004 Dealing with IPN's losses

Having finished with 71.7 per cent of medical centre group Independent Practitioner Network after its proportional takeover offer closed on Monday, Sonic now has to look at ways to improve the performance of a business that is in loss-making mode.
Market Wrap Australian Financial Review August 20, 2004

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Buying all of IPN
Owning as much as 71% of of IPN had little propaganda value and was administratively clumsy. In April 2005 Sonic offered only 7 cents a share for the remaining shares. The shareholders refused to sell and Sonic was forced to offer 8 cents. IPN is now a fully owned subsidiary of Sonic Healthcare.

Apr 2005 Sonic bids for the rest of IPN

Last year's disputed takeover of Independent Practitioner Network had quite a postscript yesterday when the successful buyer, Sonic Healthcare, offered to buy out minority IPN shareholders.

IPN's shares jumped 2.7c - 75 per cent - to 6.3c ahead of an after-market announcement that Sonic would pay shareholders 7c in return for cancellation of all IPN's shares.
Healthy rumour mill in health : Sonic cleaning up The Sydney Morning Herald April 1, 2005

May 2005 Shareholders refuse it

Sonic will end up with 100 per cent of IPN if the proposal succeeds, but minority shareholders don't like the price.

One concern is that Sonic offered 8.5 ¢ a share last year to get to 72 per cent of IPN and the business has been improving. Another is that Sonic itself values IPN at a far greater sum on its balance sheet.
Sonic's higher bid just not the tonic Australian Financial Review May 7, 2005

May 2005 Increases offer to buy all of IPN

Sonic, which already owns 72 per cent of IPN, has agreed to increase its offer from 7c to 8c per share under a capital reduction which will see the remaining shares in the group cancelled and the minority shareholders bought out.
Sonic ups offer to get IPN nod The Australian May 11, 2005


Click Here for more about Foundation Healthcare

Click Here for more about LifeCare and a comparison of its practices with the US system.


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The People

There are three key players in the Sonic story. Boyd and Patterson were the key investors and they saw the opportunities which Medicare presented for pathology. Goldschmidt was the managing director and driving force behind the company's policy and its success.

Patterson was chairman and was also heavily involved in Silex. He was Boyd's father in law and there is little information about him.

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Michael Boyd
Boyd too kept well out of the limelight and left the talking to Goldschmidt. He did receive more attention from the media. His daring as a young man in putting all his money into Sonic drew the media's attention as did his purchase of a $9 billion mansion. His role in founding LifeCare and Foundation was extensively covered.

Some reports suggest that Boyd was not the market genius his success with Sonic suggests. One points out that all his other ventures have failed. Perhaps Sonic was pure luck and perhaps he really believed that general practice would be a big generator of profits. Perhaps he is not really as business savvy and I have maligned him by suggesting that Foundation and LifeCare were a shrewd business deal to support Sonic rather than simply a stupid blunder.

Oct 2004 Boyd's career and ambitions

The hunt for a second Sonic has taken Boyd on a strange journey. He has tried to play a role in consolidating the business side of doctors' practices, invested in a commercial construction firm, a pearl farm in Tahiti, a listed physiotherapy business first developed by his father, and a retractable-needle company. None have come close to Sonic, and some have failed. Consolidating doctors proved too difficult. Pearls are intensely competitive, physiotherapy failed to produce strong profits, and there are at least four retractable needle developers fighting for the same market. That is why his adventure in Quadrant Iridium, and its 10% stake in a failed global satellite business, is seen as an attempt to replicate what he did with Sonic.
Into the background
Boyd's style will make it easy for him to disappear into the background noise of Melbourne's bigger business community. His office will be in Collins Street, but he will look like a middle-aged technology player rather than a suit. Open-neck shirts are his preference and his appearance varies from clean-shaven to full beard, to a few days of stubble when BRW spoke with him in his downmarket office at the rear of a converted suburban picture theatre in Perth.

His low profile will almost certainly continue in Melbourne. One of his great regrets with life in Perth was his $9-million purchase in 1999 of a mansion on the Swan River. That deal earned him reams of unwanted publicity because of the price and the history of the property, which had been developed by Alan Bond's right-hand man, the late Peter Beckwith, and acquired by BRW Rich 200 member Jack Bendat, who fled the house after a traumatic armed robbery and then sold it to Boyd.

Boyd's deepest interest is in his children, who range in age from two to 13, and Melbourne may be a better place for them to grow without the attention that comes from being a big fish in the small Perth pond. His interest in growing young things can also be seen in his entrepreneurial style and his unstated role as chief business development manager for Quadrant.
Michael Boyd
BORN: Perth
AGE: 39
LIVES: Perth, moving to Melbourne
POSITION: Executive chairman of Quadrant Iridium, and big private shareholder in the medical services provider Sonic Healthcare
CAREER: Studied commerce at the University of Western Australia before embarking on a career in accounting, a choice he disliked because of a fear that he would spend of the rest of his life "paper shuffling". In 1992, aged 27, he took the plunge into the investment world, spending $4 million for a 23% stake in Sonic, which was then a failing technology investor. His average price was 15¢ a share, but some parcels cost as little as 4¢. His 21.45 million shares are now about $9.78 each and are worth $210 million.
GOAL: To prove that he is more than a one-hit wonder by creating value in Quadrant Iridium, which has slumped over the past three years from 80¢ to 5¢.
Deal maker in a drought Business Review Weekly October 21, 2004


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Dr. Colin Goldschmidt

Nov 2001 Who is the customer?

The groups that gain control of the customer will gain tremendous advantage. Many companies don't have experience in this area, providing opportunities for nimble players.
, The Australian November 1, 2000, Wednesday

The customer for the diagnostic corporation is the doctor - the general practitioner and the specialist. Goldschmidt's recognised this but his views were not always shared by the marketplace.

Boyd and Patterson were seen as shrewd businessmen and played a part in expansion policy. As I interpret the reports the secret of the company's success was Dr. Goldschmidt, a doctor with an excellent understanding of the health care context. While he believed that health care would inevitably end as a market driven activity he recognised the pitfalls and also the danger which economic pressure and managerial interference posed to patients when doctor's primary duty of care was threatened.

He accepted that the primary responsibility was to shareholders referring to "its three main stakeholders - shareholders, customers and staff" in 1998. Like other corporations he insisted that by putting people first profits would follow and this was serving the shareholder.

Sept 1999 Profitability

The company's profit has risen nearly 10-fold over the past six years and its share price has more than doubled since mid-October
Sonic booms in as country's top healthcare group,
Courier Mail September 11, 1999

Goldschmidt had the unusual luxury of entering a market where consolidation and efficient organisation generated the sort of profits he needed. He was never faced with competitive pressures to reduce staff and quality in order to survive - the sort of pressures faced by Mayne Nickless. Sonic's success was at Mayne's expense and it contributed in great measure to the stresses Mayne faced. Goldschmidt did not have to squeeze care to meet market expectations. In this situation his policies paid off handsomely.

Sept 1999 Coldschmidt's role

Dr. Goldschmidt deserves a lot of the credit for the Sonic success story. He may have never planned a career in management, but the style of the pathologist was pivotal in securing the nod from minority SMG shareholders over the closely priced competing bid from Mayne Nickless.
- - -
unlike some executives, he (Goldschmidt) appreciates that business is about people as much as it is numbers.
Pathological Buyer Does The Right Thing,
Australian Financial Review September 18, 1999 (commenting on a successful purchase by Sonic)

Nov 2001 Goldschmidt's views

"I am not ashamed to say that our people are the most important of our stakeholders they are the ones who will deliver satisfaction to our customers,'' says Sonic Healthcare managing director Colin Goldschmidt.
Making Good In Bad Times A True Skill,
Australian Financial Review November 20, 2001

Goldschmidt's relationship with staff and the medical profession remained excellent. Pathologists and radiologists played an important part in the organisation. The environment was congenial and allowed the doctors to exercise their professional skills. They were well rewarded. Radiologists selling their practices consequently favoured Sonic over competitors.

Catchlove at Mayne Nickless may well have started with similar ideals but he was never able to implement them. His initial chosen area hospitals did not allow this luxury. By the time Mayne entered radiology and pathology they were already in trouble. Catchlove did not have Goldschmidt's people skills and he embraced market thinking uncritically. Catchlove and Smedley both alienated the people on whose support their companies depended.

Feb 1999 Views on vertical integration

However, Dr. Goldschmidt is determined the group will not become vertically integrated in health care - owning medical centres, radiology operations, and hospitals - in competition with its referring doctors.
Put People First, Profit Will Follow
, Australian Financial Review February 5, 1999

Dec 2000 Views on owning GPs

We don't want to compete with doctors who are referring patients so we don't own medical centres,'' Dr. Goldschmidt says, adding this avoids pressure on GPs to over-service via excessive referrals to specialists.
Sonic Cuts A Swathe In Rationalisation Race
, Australian Financial Review December 2, 2000

Goldschmidt rejected vertical integration and embraced horizontal integration in a diagnostic services company. He believed that it was unwise to own hospitals and general practices as those groups not purchased would then become competitors and so less likely to refer patients. There was a potential conflict of interest and a risk of putting pressure on doctors to refer. He was careful not to upset the medical profession, particularly the general practitioners and the specialists who were Sonic's customers.

Feb 2001 No branding

In contrast to Mayne Nickless, Sonic has elected not to adopt a single-brand strategy, arguing that branding has limited impact on referrals, which are more influenced by geographic location and the reputations of specialists.
First-half Rise A Super Tonic For Sonic
Australian Financial Review February 16, 2001

Mar 2002 but more subtle marketing

Meanwhile, we hear that Sonic's marketing fortunes have been on the rise thanks to a strategy of employing very good looking women to take GPs out to lunch and hit them up for referrals.
Pain for doctors, The Australian March 19, 2002

Mayne and particularly Smedley adopted the Columbia/HCA branding strategy selling the Mayne name. Sonic recognised that doctors refer to their colleagues not companies. Corporate medicine is controversial and strongly criticised. He concentrated on promoting the local groups and their networks. This policy is carried to an extreme which is almost deceptive. I noticed that Sullivan and Nicolaides (S&N) Pathology "news and notes" (April 2002) edition which promotes this group and is sent to doctors does not carry a single reference to Sonic Healthcare. Its web site does not mention Sonic and even the page on which S&N proudly describes its history has no reference to its purchase by Sonic more than two years earlier. Probably most of these doctors hold Sonic shares and options. Their colleagues and their patients are surely entitled to know of this additional responsibility to shareholders and the potential conflicts of interest which can arise.

Nov 2000 Synergies

Dr. Goldschmidt added that the potential existed for QXR to work with Sullivan Nicolaides Pathology, Sonic's Queensland-based pathology practice, to achieve operational synergies and to establish a strong medical diagnostics operation throughout the state of Queensland.
Queensland X-Ray to merge with Sonic Healthcare, SONIC HEALTHCARE LIMITED Stock Exchange announcement 28 Nov 2000


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Some Worrying Practices

If we must have corporate entities Sonic is probably the best we can hope for. Corporate diagnostic services do not threaten the care of citizens to the extent that corporate clinical services do. Sonic has performed well for shareholders and if the relationship with IPN is ignored for its medical staff and the patients.

This web site is not about marketing companies. It is about looking for signs of dysfunction or situations which lend themselves to dysfunction. I am not suggesting that Sonic has indulged in fraud or illegal practices and I do not think that they have. Goldschmidt is not immortal and if Sonic runs into financial problems because of his policies he will be replaced by someone who will do whatever is required to make it profitable. I am looking for similarities with US practices.

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Extraordinary success
Based on an examination of the US system I listed
common features of dysfunctional companies. As many of the pointers relate to financial success and business practices which accomplish this Sonic qualifies in various degrees on red flags 1, 2, 4, 5, and 6 but on others it behaves very well. Disproportional financial success is a key pointer to dysfunction. Sonic qualifies for suspicion on this and other indicators. The comparable fraudulent company which springs to mind is HealthSouth. It too started as a small entity which expanded dramatically over a few years to dominate a defined sector of the marketplace (rehabilitation) in the USA and then spread internationally - even to Australia. It too had an impeccable history and not a hint of dysfunction. When it entered Australia in 1998 it seemed totally out of step with marketplace behaviour. I was unable to find even a suggestion of impropriety. The sort of success it had was simply not a fact of ethical behaviour in the US health care marketplace and I was suspicious.

Like Sonic, HealthSouth issued projections for ever increasing profits and growth. It always met or exceeded these profits. The market loved it to death. Share value and directors wealth spiraled. The entire success story was based on a massive 15 year accounting fraud directed to maintaining the value of stock. Staff later indicated that when the profits did not meet the projections the accounts were handed back to them to fix - which they did. Because HealthSouth was a growth company the fraud could be hidden in the complexity of the takeover transactions.

The difficulties in finding money for non-existing profits caused problems and in 1998 an attempt was made to reduce forecasts and profits. The backlash from the market caused them to revert to glowing forecasts and it was only in 2003 that the scandal broke. It is worth noting what happened to Sonic in 2002 (see above).

There were a number of factors important in the HealthSouth fraud. These included a close relationship with auditors, bankers and analysts and I have little information about Sonic in this regard. I note that in 2002 Citicorp was Sonic's largest institutional shareholder by a factor of two. Citigroup and its predecessors of which Citicorp is one have been involved in large fraud scandals over many years, the most alarming relating to deceptive market advice from its analysts. It has paid about $10 billion to settle allegations that it assisted others in their fraud. Salomon Smith Barney, a major component of Citigroup was banker, financial adviser and market analyst during the early part of HealthSouth's fraud. Citigroup analysts comment frequently on Sonic's progress.

Oct 2002 Citigroup the biggest owner of Sonic


Citicorp Nominees Pty Ltd 42,161,166 16.24

J P Morgan Nominees Australia Ltd 22,185,063 8.55

Sonic Healthcare Limited (SHL.AX) Annual Report/Top 20. Australian Stock Exchange Company Announcements October 14, 2002

Another factors important in the HealthSouth fraud was the complexity of the takeovers and the way in which deceptive accounts were submitted to and accepted by the market. Reports suggesting a paucity of information released by Sonic require comment.

Dec 2005 Paucity of data

A rare criticism of Sonic has been related to the paucity of data it gives investors. The group breaks down revenue into pathology and radiology but, for example, does not provide separate figures for domestic and international pathology. So although results look impressive, the earnings of individual international and Australian businesses are not detailed. Sonic has typically brushed off criticisms, saying it will not provide information competitors can use.

But it is also a fact that no health company likes providing governments and the numerous critics of corporate involvement in health with detailed figures on its profits, in the process giving them ammunition in subsequent revenue negotiations.
Path test BRW December 1, 2005

An inbred board with few independent directors and a failure in corporate governance all contributed to the HealthSouth fraud. Sonic is listed as one of the poor performers in corporate governance. Its board prides itself on its continuity and stability.

Nov 2003 Corporate governance and independent directors

Good corporate governance practices are designed to optimise company performance and promote accountability with stakeholders.

Companies that performed worse than expected included News Corp, Westfield Holdings and Southcorp, all with three stars. Publishing and Broadcasting Ltd, Aristocrat Leisure and Flight Centre were among 57 companies that received two stars and Harvey Norman, Sonic Healthcare and Reece Australia were some of the bigger names to receive the lowest ranking.

"This was primarily due to the fact that they did not have a single independent member on either the board of directors or the audit committee, nor did they have a remuneration or nomination committee."
Corporate Scorecard Falls Short The Age November 10, 2003

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Business practices which can encourage dysfunction
Various financial arrangements, bonuses, options and incentives tie the practice of medicine to corporate profitability. In the market they are seen as the key to productivity and compliance with corporate profit priorities. In practice they function as kickbacks diverting the focus of care from patients to profitability. Incentives linked to profitability lie at the root of the
corporate problem in health care in the USA. They were key factors in the massive frauds by Tenet Healthcare and Columbia/HCA.

Sonic granted options to employees which they could take up if their efforts produced profits. By the end of 2001 employees owned 20% of the company. Problems arise when practices required to improve profits, or keep the company solvent conflict with professional responsibilities. Their financial well being is compromised when they act professionally. In Sonic's case these conflicts have not yet arisen.

Sonic adopted a policy of incentivisation. Not only did it make radiologists and pathologists overnight millionaires when it purchased their practices, but it paid in shares so that the doctors and the company's financial interests were closely aligned.

Sonic controlled LifeCare, Foundation and IPN through the co-ownership of its major investors and directors. Ralph Shreeve was clearly Sonic's man in IPN. He was welcomed into Sonic as manager when IPN was acquired. Sonic's interesting arrangement with these three companies and the business practices of the companies themselves are relevant here. I have discussed them on the Foundation and LifeCare pages and also in the section on Sonic's relationship with them on this page. Some more relevant extracts follow.

Nov 2001 Employees own 20% of company

If our staff and customers are both happy, so too will our shareholders be contented with the resultant increasing value and returns.''

Employees of the medical diagnostic group, who own 20 per cent of its total issued equity, should be happy. In eight years it has grown from a market capitalisation of only $10million to a $2billion company with revenues of $635million.
Making Good In Bad Times A True Skill, Australian Financial Review November 20, 2001

Mar 2000 Radiologists get equity

Some observers believe a spin-off of diagnostics would help Mayne attract new radiologists by enabling it to offer direct equity, a strategy used successfully by Sonic in pathology.
Dalziel's Mayne Game Through Scale And Synergies, Australian Financial Review 6 March 2000

Dec 2002 Radiologists become rich

Dr. Dubois was one of Queensland X-Ray's 52 radiologists who collected an average $3.8 million in cash and stock last year after Sonic acquired their business for $200 million.
Dubois cashes in on the Sonic boom. Australian Financial Review December 6, 2002

Apr 2003 Options

The Board of Sonic Healthcare has agreed with its subsidiary companies in The Doctors Laboratory (TDL) group to grant options to existing TDL staff pursuant to the terms of the United Kingdom sub-scheme (established under UK tax law) to Sonic's approved Employee Share Option Plan as follows:
Sonic Healthcare Limited (SHL.AX) Grant of Options. Australian Stock Exchange Company Announcements April 11, 2003

Jul 2003 Sonic's man at IPN

Sonic Healthcare has been said by some to be grooming Ralph Shreeve, the chief of Independent Practitioner Network, as a potential successor to Colin Goldschmidt as Sonic MD. STREET TALK : Sonic eyes future Australian Financial Review July 7, 2003

Oct 2003 Shares to pay for purchases

Consideration will include a cash payment and the issue of 258,177 shares at $5.81 to the vendor radiologists, who have given long-term commitments to the business and Sonic.
Sonic to acquire private Brisbane radiology practice Ralph Wragg Australian Business News October 29, 2003

Oct 2005 Joining the interest of pathologists to that of shareholders

SHL established its model through aggressively consolidating the Australian pathology market. The ability to join the interest of the pathologist with that of shareholders through stock incentives has delivered 10 years of double digit EPS growth. The dependence on the Australian pathology market is diminishing and we expect this trend to continue with the balance sheet scaled to allow further strategic off shore acquisitions.
SONIC HEALTHCARE (SHL) $14.41 Your Money Weekly October 20, 2005

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Click Here for a chronological account of Sonic's progress and for more References

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Web Page History
This page created June 2002 by
Michael Wynne
Updated and largely rewritten January 2006