0210140

UNITED STATES OF AMERICA
BEFORE FEDERAL TRADE COMMISSION

In the Matter of

QUEST DIAGNOSTICS INCORPORATED, a corporation, and
UNILAB CORPORATION, a corporation.
Docket No. C-4074

COMPLAINT

The Federal Trade Commission ("Commission"), having reason to believe that Respondent Quest Diagnostics Incorporated ("Quest"), a corporation subject to the jurisdiction of the Commission, has agreed to merge with Respondent Unilab Corporation ("Unilab"), a corporation subject to the jurisdiction of the Commission, in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and Section 5 of the Federal Trade Commission Act ("FTC Act"), as amended, 15 U.S.C. 45, and it appearing to the Commission that a proceeding in respect thereof would be in the public interest, hereby issues its Complaint, stating its charges as follows:

I. DEFINITIONS

1. "Clinical laboratory testing services" means the full range of products and services provided by a clinical laboratory, including, but not limited to, the drawing, collection, and transportation of specimens over a coordinated courier route system; stat, routine, and esoteric clinical testing; the computerized tracking of specimens for testing, record-keeping, and billing functions; and the electronic communication of test results and other necessary data to customers.

2. "Physician group" means any group medical practice, individual practice association, physician service organization, management service organization, medical foundation, or physician/hospital organization, that provides, or through which physicians contract to provide, physician services to enrollees of pre-paid health plans.

3. "Respondents" means Quest and Unilab individually and collectively.

II. RESPONDENTS

4. Respondent Quest is a corporation organized, existing and doing business under and by virtue of the laws of the State of Delaware, with its office and principal place of business located at One Malcolm Avenue, Teterboro, New Jersey 07608. Respondent Quest is engaged in, among other things, the provision of clinical laboratory testing services.

5. Respondent Unilab is a corporation organized, existing and doing business under and by virtue of the laws of the State of Delaware, with its office and principal place of business located at 18448 Oxnard Street, Tarzana, California 91356. Respondent Unilab is engaged in, among other things, the provision of clinical laboratory testing services.

6. Respondents are, and at all times herein have been, engaged in commerce, as "commerce" is defined in Section 1 of the Clayton Act, as amended, 15 U.S.C. 12, and are corporations whose business is in or affects commerce, as "commerce" is defined in Section 4 of the FTC Act, as amended, 15 U.S.C. 44.

III. THE PROPOSED MERGER

7. On April 2, 2002, Quest and Unilab entered into an Agreement and Plan of Merger ("Merger Agreement") whereby Quest agreed to acquire all of the issued and outstanding voting securities of Unilab in exchange for cash, stock of Quest, or a combination of cash and stock of Quest ("Proposed Merger"). After completion of the Proposed Merger, Quest will be the surviving corporate entity. At the time of the Merger Agreement, the value of the transaction was approximately $877 million. On January 4, 2003, Quest and Unilab agreed to amend the Merger Agreement to extend the termination date and to reduce the purchase price for the overall transaction by approximately $60 million.

IV. THE RELEVANT MARKET

8. For the purposes of this Complaint, the relevant line of commerce in which to analyze the effects of the Proposed Merger is the provision of clinical laboratory testing services to physician groups.

9. Clinical laboratory testing services are basic health care services. Physicians rely on clinical laboratories to provide accurate and timely testing information to diagnose, assess, and treat their patients' health conditions. In Northern California, physician groups frequently assume the financial risk for providing clinical laboratory testing services for their patients who are affiliated with pre-paid health plans. For this reason, these physician groups often directly contract with clinical laboratories to purchase such services, usually under a capitated arrangement.

10. Physician groups require a clinical laboratory that offers, among other things, a comprehensive menu of clinical diagnostic tests; stat, or urgent, testing capabilities; as well as an extensive field collection and distribution system that includes conveniently located patient service centers and courier networks.

11. Most physician groups do not regard the internal performance of clinical laboratory testing services as a competitively viable or cost-effective substitute. Although physicians can perform a limited number of simple diagnostic tests in their own offices, this type of testing is generally not a substitute for the testing services provided by clinical laboratories. Physician groups that do not have their own clinical laboratories are unlikely to develop such capabilities, even in the event of a significant increase in the price of clinical laboratory testing services.

12. For the purposes of this Complaint, the relevant geographic market within which to analyze the effects of the Proposed Merger is Northern California, consisting of the counties in California north of, but not including, San Luis Obispo, Kern, and San Bernardino counties, where the transaction would reduce competition for the sale of clinical laboratory testing services to physician groups, as alleged below.

V. THE STRUCTURE OF THE MARKET

13. Quest and Unilab are the two leading providers of clinical laboratory testing services to physician groups in Northern California. If the Proposed Merger were to be consummated, Quest would have a market share of more than 70% in a highly concentrated market. Quest's next largest competitor in the relevant market would have a market share of approximately 4%. The Proposed Merger would increase concentration in the relevant market by more than 1,500 points to a Herfindahl-Hirschman Index level above 5,300.

VI. ENTRY CONDITIONS

14. Substantial and effective expansion by smaller competitors in the relevant market sufficient to deter or counteract the anticompetitive effects of the Proposed Merger is unlikely to occur.

15. New entry into the relevant market sufficient to deter or counteract the anticompetitive effects of the Proposed Merger is unlikely to occur.

VII. EFFECTS OF THE MERGER

16. The effects of the Proposed Merger, if consummated, may be substantially to lessen competition and to tend to create a monopoly in the relevant market in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and Section 5 of the FTC Act, as amended, 15 U.S.C. 45, in the following ways, among others:

a. by eliminating actual, direct, and substantial competition between Quest and Unilab in the relevant market;
 
b. by increasing the likelihood that the merged firm will unilaterally exercise market power in the relevant market; and
 
c. by increasing the likelihood that physician groups would be forced to pay higher prices for clinical laboratory testing services in the relevant section of the country.

VIII. VIOLATIONS CHARGED

17. The Merger Agreement described in Paragraph 7 constitutes a violation of Section 5 of the FTC Act, as amended, 15 U.S.C. 45.

18. The Proposed Merger described in Paragraph 4, if consummated, would constitute a violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and Section 5 of the FTC Act, as amended, 15 U.S.C. 45.

WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on this twenty-first day of February, 2003, issues its Complaint against said Respondents.

By the Commission.

Donald S. Clark
Secretary

SEAL: