MetWest of Newport to Buy Sister Firm of Lab Closed by State

An Orange County medical firm has agreed to buy the western operations of Central Diagnostic Laboratory, the sister firm of a Pap-smear lab closed by the state for misdiagnosing too many tests.

MetWest Inc. in Newport Beach agreed to pay $85 million in stock, cash and notes for the CDL operations. Industry consultants said it is one of the highest prices ever paid for a private medical lab.

If the deal goes through, MetWest claims that it will become the sixth-largest laboratory chain in the country.

“We want to be the premier lab in the West,” said David Bush, MetWest’s president and chief executive.

Tarzana-based CDL, which performs blood and urine analyses as well as other medical tests, is owned by Dr. Allen N. Levy through a holding company.

The 62-year-old pathologist also owned Central Pathology Services Medical Group, which was closed by the state Department of Health Services in April after inspectors found that the Pap-smear lab had a 21% error rate.

Pap smears are routine tests used by physicians to detect cervical cancer and other abnormalities in women. Central Pathology processed about 700,000 smears a year, more than half of all smears taken in Southern California.

The state found during inspections that Central Pathology had failed to detect a range of diseases from herpes to cervical cancer. Central Pathology was criticized for requiring that some of its cytotechnologists read at least 100 slides a day, a level above the recommendation of the industry’s trade group.

One month after Central Pathology was closed, CDL sent letters to nearly 15,000 physicians advising them that the company would pay for follow-up Pap smears on millions of women who had been tested at Central Pathology.

Because Central Pathology also did business under the name Central Diagnostic Laboratories and had the same owner, CDL’s revenue fell by about 10% after the shutdown and has not recovered, company spokesman Martin Cooper said.

Bush said that MetWest wasn’t concerned about the controversy surrounding CDL, but he noted that CDL probably would undergo a name change.

“Let me be very explicit,” Bush said. “We are not buying any of the operations that had a problem with the state. We are not assuming any of those liabilities.”

MetWest is buying the assets of CDL’s western operations, including its computers, medical equipment and customer lists, but is not acquiring the company’s stock. By so doing, Bush said, his firm will not be responsible for any of CDL’s liabilities, including a $9-million judgment awarded to a former employee.

Before it can operate CDL’s California labs, MetWest will have to apply for a new license from the state.

MetWest was formed last August after New Jersey lab giant MetPath spun off its western operations. Unilab Corp., a publicly traded medical products and services firm in Norcross, Ga., later bought MetWest. MetPath owns a 20% stake in Unilab.

In addition to its agreement with MetWest, CDL has tentatively agreed to sell its operations in the Midwest and East to MetPath for an undisclosed sum.

For the first quarter, MetWest had $9.3 million in sales and net income of $202,000. CDL’s western operations had revenue of about $65 million for the fiscal year ended March 31, according to MetWest.

The tentative sale of CDL took many people in the lab industry by surprise because Levy has devoted much of his life to the company.

When it was founded in 1970, CDL was essentially a one-man, one-room company that grew over the years to more than 60 locations across the United States. The business made Levy a multimillionaire, allowing him to buy a fleet of classic automobiles and a $30-million house in Malibu.

Levy has maintained a low profile in the medical and business communities. But he left quite an impression with some employees, bestowing one with a briefcase containing $100 bills and another with a 35-ounce gold bar, according to court records.

He said in a recent deposition that CDL was the center of his life. “This was the only thing that I had,” he said. “This was my entire life--medicine and the laboratory.”