Nichols Institute Agrees to Buy Its First Bay Area Lab

Nichols Institute, a medical laboratory, said Thursday that it has reached a preliminary agreement to acquire a clinical laboratory operation in the San Francisco Bay Area.

The proposed acquisition of Associated Laboratories Inc. of Los Gatos calls for Nichols to pay $2 million cash upon close of the sale and additional cash payments during the next five years with a current value of $2.5 million.

Under the agreement, Nichols, based in San Juan Capistrano, said it would also give the sellers a new class of preferred stock that could be converted to about 120,000 shares of Nichols common stock.

The transaction would give Nichols its first regional diagnostic laboratory in the Bay Area. Associated Laboratories, which does business under the name Pathology Laboratory, serves physicians, hospitals and clinics in a five-county area south of San Francisco. For its fiscal year ended June 30, Pathology Laboratory’s revenues were approximately $6.5 million.

Nichols is known primarily for its reference laboratory in San Juan Capistrano, to which hospitals throughout the country send tests that are too complicated for their technology or expertise.

But in 1986, Nichols embarked on a strategy of expanding its business through acquisitions of far-flung regional laboratories. Once acquired by Nichols, those laboratories continue to do routine diagnostic work but send their more sophisticated tests to the San Juan Capistrano facility.

Since 1986, Nichols has purchased labs in San Diego, South Dakota, Minnesota, Iowa, Nebraska and Oregon.

Jim Whitmer, Nichols’ chief financial officer, said Nichols’ revenue and profits have burgeoned as a result of acquisitions and strong internal growth. He noted that the industry is undergoing a consolidation as small, privately owned laboratories are bought by larger publicly held organizations such as Nichols.