Quest Diagnostics and LabCorp remain highly profitable companies and are by far the biggest players in the clinical laboratory sector, but they have bumped up against a growth ceiling. And if that ceiling is glass, it is a lot thicker than expected. Although Quest’s restructuring program under Chief Executive Officer Steve Rusckowski is now bearing fruit in the terms of a fatter bottom line, revenues continue to shrink. Meanwhile, LabCorp’s growth has almost come to a complete halt and failed to meet earnings estimates. “It is clear to us that health care utilization declined broadly in 2013. And it is conceivable that this trend could continue through 2014 based on the acceleration of employer-to-employee cost shifting and benefit plan design,” Rusckowski told investors during a call to discuss earnings late last month, adding that the slow rollout of the Affordable Care Act means it will take longer than expected for benefits to accrue. As a result, Quest projects that revenue for the year will be flat or down as much as 2 percent, excluding the earnings boost expected from its recent acquisition of Solstas Lab Partners for $570 million. Rusckowski said such deals are expected to grow the company’s revenue […]
Quest Diagnostics and LabCorp remain highly profitable companies and are by far the biggest players in the clinical laboratory sector, but they have bumped up against a growth ceiling. And if that ceiling is glass, it is a lot thicker than expected.
Although Quest’s restructuring program under Chief Executive Officer Steve Rusckowski is now bearing fruit in the terms of a fatter bottom line, revenues continue to shrink. Meanwhile, LabCorp’s growth has almost come to a complete halt and failed to meet earnings estimates.
“It is clear to us that health care utilization declined broadly in 2013. And it is conceivable that this trend could continue through 2014 based on the acceleration of employer-to-employee cost shifting and benefit plan design,” Rusckowski told investors during a call to discuss earnings late last month, adding that the slow rollout of the Affordable Care Act means it will take longer than expected for benefits to accrue.
As a result, Quest projects that revenue for the year will be flat or down as much as 2 percent, excluding the earnings boost expected from its recent acquisition of Solstas Lab Partners for $570 million. Rusckowski said such deals are expected to grow the company’s revenue by 1 percent to 2 percent per year, although industry observers have noted that there are few large targets remaining to acquire that would generate such growth.
The Madison, N.J.-based Quest reported net income for the fourth quarter ending Dec. 31 of $151 million on revenue of $1.76 billion. The bottom line was more than double the $66 million net income reported for the fourth quarter of 2013, but revenue was down slightly, from $1.77 billion.
For full-year 2013, Quest reported net income of $883 million, up more than 53 percent from 2012’s $556 million. But revenue was down nearly 3 percent to $7.14 billion, compared to 2012’s $7.4 billion.
LabCorp, meanwhile, also reported an uptick in net income, but it was far less dramatic than Quest’s: $126.3 million for the fourth quarter ending Dec. 31, compared to the year-ago’s $120.6 million—an increase of 5 percent. But revenue barely budged, reaching $1.44 billion, compared to $1.41 billion for the fourth quarter of 2012.
For all of 2013, LabCorp’s net income was $573.8 million, down from 2012’s $583.1 million. Revenue was $5.8 billion, up slightly from 2012’s $5.7 billion.
As for its 2014 outlook, LabCorp expects revenue to grow no more than 2 percent for the year, with operating cash flow projected between $780 million and $820 million, essentially unchanged from 2013 and down about 2.5 percent from 2012. Although test volume was up 5 percent for the fourth quarter, revenue per requisition was down 2.6 percent.
The company cited factors similar to those holding back Quest: decreased reimbursement from government payers (including payment for molecular diagnostics testing), uncertainty from the ACA, and more cost-shifting to patients. As a matter of fact, LabCorp recently increased its allowance for doubtful accounts by $5 million “due to an increase in patient responsibility,” Chief Financial Officer William Hayes told analysts during the company’s recent earnings call.
For the most part, LabCorp’s expectations were slightly below the expectations of stock analysts. And many remain skeptical of Quest in particular.
“We believe organic volume growth will remain weak and reimbursement headwinds will continue to pressure growth and margins throughout the year,” wrote Kevin Ellich and Bradley Maiers of Piper Jaffrey in a recent report on Quest. “While cost-cutting initiatives helped drive slightly better fourth quarter margins, we do not believe reductions in 2014 will be enough to offset the aforementioned headwinds.
Quest’s stock has dipped about 10 percent in price since late January, while LabCorp’s price has generally been unaffected in recent weeks. However, its current price of around $90 a share is down significantly from the $107 a share it commanded in late November.
Takeaway: Quest Diagnostics and LabCorp have yet to find the way to sustained and robust growth.
