April 16 (Bloomberg) -- Quest Diagnostics Inc., the biggest U.S. provider of medical tests, will buy AmeriPath Inc. for $1.2 billion to add sophisticated tissue screening for cancer, genetic disorders and infectious diseases.

Closely held AmeriPath, of Palm Beach Gardens, Florida, specializes in biopsies to detect and monitor skin cancers as well as malignancies of the gastrointestinal tract and reproductive organs. Those are among the fastest-growing areas in diagnostic testing, Quest said today in a statement.

The acquisition is the largest for Quest and the sixth since 2005 for the Lyndhurst, New Jersey, company. Quest is grappling with the loss of contracts with the health-insurance companies UnitedHealth Group Inc. and Blue Cross Blue Shield of New Jersey. Laboratory Corp. of America Holdings, the second- largest testing company, won both agreements.

``The addition of the AmeriPath testing menu will give Quest Diagnostics additional options when convincing physicians and managed care providers to use'' the company's services, said Andreas J. Dirnagl, an analyst at J.P. Morgan Securities Inc. in New York, in a note today.

The shares of Quest Diagnostics fell by $2.62, or 4.8 percent, to $51.69 at 4:01 p.m. in New York Stock Exchange composite trading. The drop was the biggest in six months.

The purchase ``ties up capital'' better used on other acquisitions, said Robert M. Willoughby, an analyst at Bank of America in New York, in a note today. AmeriPath and Specialty Laboratories, which AmeriPath acquired in 2006, had ``struggled as public companies,'' Willoughby said.

Financing

Quest, as part of the agreement, will also assume $770 million in debt, putting the value of the purchase at $2 billion. Quest said it will take out a 1-year bridge loan and a new 5-year, $1.5 billion term loan to pay for the acquisition, refinance AmeriPath's debt, and refinance the debt from a previous acquisition. Morgan Stanley will be underwriter.

AmeriPath was acquired by the current owners, the buyout firm Welsh, Carson, Anderson and Stowe IX, in 2003. AmeriPath has more than $800 million in annual revenue, compared with Quest's $6.27 billion in revenue last year.

The acquisition ``boosts their specialty testing business significantly, which is something they had been lacking compared to LabCorp,'' said Arthur Henderson, an analyst at Jeffries & Co. in Nashville, Tennessee. ``You could fantasize this is going to raise their specialty testing to over 20 percent of revenue from its current level, which is 12 percent.''

Specialty Testing

Specialty and anatomic pathology tests, which analyze tissue, examine less-common ailments, such as viruses and genetic variations in cancers and other diseases, that hospital and conventional laboratories don't deal with every day. Quest previously specialized in testing fluids, such as blood and urine, as well as cervical cells taken during a Pap smear, spokesman Gary Samuels said.

The market for anatomic pathology alone ``is estimated to be at $7 billion and is growing at 7 to 8 percent annually,'' said Chief Executive Officer Surya Mohapatra in a call with investors and analysts. ``The growth is driven by an aging demographic and increased reliance on anatomic pathology to monitor and treat disease, as well as diagnose it.''

Quest, as part of the agreement, will also assume $770 million in debt, putting the value of the purchase at $2 billion. Quest said it will take out a 1-year bridge loan and a new 5-year, $1.5 billion term loan to pay for the acquisition, refinance AmeriPath's debt, and refinance the debt from a previous acquisition. Morgan Stanley will be underwriter.

In 1999, Quest bought the clinical laboratory operations of SmithKline Beecham Plc, now part of GlaxoSmithKline Plc., for approximately $1.3 billion in cash and stock. Quest purchased LabOne Inc. for $869.9 million in 2005, adding risk assessment and drug screening for employers and insurers.

Job Plans

AmeriPath doesn't plan any widespread layoffs, facility closings or cost cutting, said Robert A. Hagemann, Quest's chief financial officer, in a conference call with analysts and investors today.

``AmeriPath will operate much as they do today,'' he said. ``There is going to be very little integration that goes on. We're doing this because it's a growth opportunity.''

Earlier this year, Quest announced the $420 million purchase of Hemocue AB of Angelholm, Sweden.

Ropes & Gray represented AmeriPath in the acquisition. Shearman & Sterling represented Quest. The deal is expected to close in the second quarter.

To contact the reporter on this story: Michelle Fay Cortez in Minneapolis at mcortez@bloomberg.net

Last Updated: April 16, 2007 16:07 EDT