Despite Big Write-offs, Quest & LabCorp Report Strong First Quarters

The first quarter of the year looked pretty good for the two national laboratories, as Quest Diagnostics reported strong revenue growth and LabCorp began reaping the benefits of its huge acquisition last year of pharmaceutical firm Covance. For the first quarter ending March 31, the New Jersey-based Quest reported net income of $61 million on revenue of $1.84 billion. That compares to first quarter 2014 net income of $122 million on revenue of $1.75 billion. Income was negatively impacted by an $80 million write-off associated with the early retirement of debt in association with the company’s recent $1.2 billion debt refinancing, as well as restructuring and integration costs. Altogether, Quest forecasts taking $115 million in charges related to the refinancing. But the write-downs did not eclipse strong growth: Requisitions were up 5.6 percent for the quarter, although revenue per test was down 0.7 percent. The performance for the quarter was strong despite the harsh winter weather in the Northeast, which Quest Chief Financial Officer Mark Guinan estimated impacted earnings by 8 cents per share, or about 8 percent overall. Yet despite the winter being the second harsh one in a row, the adjusted earnings per share for the quarter was $1.05, up from 93 cents during the first quarter of 2014. During a conference call with analysts, Quest Chief Executive Officer Steve Rusckowski indicated a variety of encouraging developments for the company. Among them was stability in test volumes from providers, as well as a continuing expansion of the Medicaid program as part of the Affordable Care Act (ACA). That has continued to drive growth in Quest’s Medicaid test volumes, according to Rusckowski, although the company did not break out revenue by payer for the quarter. Revenue from gene-based esoteric testing also grew at the fastest rate recorded in more than a year. The company’s risk assessment and clinical trials division saw revenue grow by 11 percent. And Invigorate, Quest’s cost-streamlining program, is expected to report total savings of $1.3 billion by 2018. Rusckowski also noted that the recent legislation repealing the Sustainable Growth Rate formula (SGR) did not include any cuts to laboratory reimbursements under the Medicare program. LabCorp Chief Executive Officer Dave King also acknowledged that fact during a conference call with analysts. Quest stood by its 2015 forecast of 2 to 3 percent revenue growth for the year. It did not provide any revenue forecasts for its recently announced joint venture with Quintiles, but did say that it would likely be neutral to revenues. Clinical trials testing currently represents only about 2 percent of Quest’s annual revenues. Meanwhile, North Carolina-based LabCorp, long the second-largest of the national laboratories based on revenue, began booking revenue from its acquisition of Covance on Feb. 19, or just a few days into the second half of the first quarter. As a result, it quickly closed a revenue gap with Quest that was close to $2 billion annually. For the first quarter, LabCorp reported net income of $700,000 on revenue of $1.8 billion. That compares to first quarter 2014 net income of $113.1 million on revenue of $1.43 billion. Like Quest, LabCorp’s minuscule net income for the quarter was tied to a hefty write-off—$138.7 million. Much of that was tied to closing the Covance deal ($113.4 million), with another $19.3 million tied to restructuring costs. Another $6 million in write-offs was tied to LabCorp’s Project Launchpad initiative, a cost-saving revamp of operations that is expected to save the company $150 million over the next three years. It projects $50 million in savings for calendar 2015. About $269 million of the quarter’s revenue was attributable to Covance’s operations, or about 15 percent. That is expected to rise in future quarters as the company’s revenue is fully integrated into LabCorp’s top line. With the Covance numbers mixed in, net revenue for the company grew 24.8 percent. But even with it removed, LabCorp reported growth of about 4.9 percent. However, Covance’s overall revenue of $625 million was down from $637 million for the first quarter of 2014. LabCorp’s acquisition volume grew by 6 percent, of which 5.2 percent was organic growth, although revenue per requisition was down 0.6 percent. Despite the fact that LabCorp’s revenue for the quarter was still a shade behind Quest Diagnostic’s, CEO King referred to the enterprise as the “world’s leading healthcare diagnostics company.” He noted in a conference call with analysts that “when we announced the acquisition of Covance, we said that the timing was excellent because the lab business was showing strength after a couple of very challenging years from a regulatory and reimbursement perspective ... our operating performance in the first quarter in my judgment demonstrates the wisdom of our decision.” King noted that the synergies between LabCorp and Covance are helping it land a major testing contract to help an unnamed biotech firm develop an antibiotic to fight MRSA, an infection that has been plaguing hospital patients in recent years. “If the study is successful Covance and LabCorp will have helped a client get a new treatment against deadly infections to doctors and patients sooner meeting an important medical need and vividly demonstrating how only months after the merger we are already capitalizing on the promise of our combined company,” King said. For calendar 2015, LabCorp issued guidance that included revenue growth of 39 percent to 42 percent, down from prior guidance of 40 to 44 percent growth. That included LabCorp Diagnostics’ growth of 3 to 5 percent, and Covance revenue growth of flat to 2 percent. Amanda Murphy, an analyst with William Blair & Co., said the numbers from Quest were in line with expectations and LabCorp’s organic growth was better than originally expected. However, LabCorp’s stock dropped about 7 percent after the earnings report, to $118 a share. Quest’s stock price took a similar downward bump, from $76 per share to $71 per share after its earnings were released. Both companies’ stock remained steadily in that trading territory. Takeaway: Quest and LabCorp reported solid growth for the first quarter outside of acquisitions and joint ventures, although write-offs and some shareholder doubts have blunted them somewhat.