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Inside the Lab Industry: Q3 Earnings Signal Beginning of the End of ‘COVID-19 Hangover’

by | Jan 4, 2024 | Inside the Lab Industry-lir, Lab Industry Advisor, Premium

What 2023 Q3 earnings from 30 key US lab companies indicate about the current state of the industry and outlook for 2024.

2023 was a difficult year for the global economy in general and the lab industry in particular. But while macroeconomic conditions remain challenging, recently released earnings reports from the third quarter of 2023 suggest that lab companies are starting to shake off post-COVID-19 pandemic conditions and return to normal. Here’s a briefing on Q3 earnings from 30 key US lab companies, what they tell us about the current state of the industry, and what they portend for 2024 and beyond.

The “COVID-19 hangover”

“Lab companies have been stuck in a kind of COVID-19 hangover in the past couple of years,” says lab market consultant Lawrence Worden, founder and principal of Dallas firm IVD Logix. During the public health emergency, diagnostic companies focused on COVID-19 products and services while relegating core business and long-term research to a back burner, he explains. In the process, these companies generated unprecedented and ultimately unsustainable revenues, establishing year-over-year (YOY) earnings benchmarks that they wouldn’t be able to match when the COVID-19 bubble burst. “The resulting declines in reported earnings have fed the perception, especially from Wall Street, that the diagnostics industry is in a free fall,” Worden adds.

One reflection of this is the GenomeWeb Top 40 index tracking the share prices of molecular diagnostics and omics companies. The index fell steadily throughout 2023, culminating in a 14 percent decline in October. By contrast, during that same month:1

    • Dow Jones Industrial Average stock prices fell only about 1 percent,

    • Nasdaq shares fell roughly 3 percent, and

  • the NASDAQ Biotechnology Index was down 7 percent.

The GenomeWeb index share price patterns have been consistent with G2 Intelligence’s own analysis of lab company quarterly earnings since the middle of 2022.

Global macroeconomic challenges

While falling COVID-19 revenue was the primary driver, macroeconomic headwinds also contributed to Q3 YOY declines. This was particularly true of global companies that have invested in China. “Chinese government policy requires companies that sell to also produce product in the country, typically via local partnerships and joint ventures,” Worden explains. In addition, although the COVID-19 lockdowns have ended, the Chinese market remains extremely soft, especially for diagnostic products. This has taken a toll on the life sciences businesses of companies like Agilent Technologies, which saw its Q3 YOY China revenues decline 31 percent, as well as Bio-Techne, Danaher, QuidelOrtho, 10x Genomics, and Thermo Fisher Scientific.2

Of course, weakness in life sciences and biotechnology is hardly confined to China. Having attracted record capital investment during the pandemic, the sector is now struggling to raise money. Meanwhile, demand for new instruments has dropped as many companies defer major capital investments until 2024. Despite the recent moderations, interest rates and inflation also remain high.

Like their customers, diagnostics firms felt the pressure and took a wait-and-see attitude for 2023. “Lab companies are just not spending money right now,” Worden says. The general perception is that 2023 was a bad year requiring austerity to ride out. That resulted in widespread corporate reorganization and refocusing, along with major layoffs, particularly at companies that invested heavily in COVID-19, like Agilent, Thermo Fisher Scientific, and Siemens Healthineers (which is rumored to be seeking to sell off its diagnostics business).3

Things are not as bad as they appear

This combination of falling earnings, Wall Street skepticism, and soft product demand has contributed to a general feeling of pessimism about the current state of the lab industry and its prospects for 2024, Worden says. At first glance, the Q3 earnings picture seems to reinforce the bleak outlook. Most of the industry’s biggest firms reported lower (or flat) YOY earnings, including Abbott, Danaher, Hologic, Quest Diagnostics, and Thermo Fisher Scientific, which all reported declines for the third quarter this year.

Top Lab Companies YOY Top Line Earnings Trends, 2023

CompanyQ3 Q2 Q1
Abbott-3%-11%-18%
Agilent Technologies-9%+7%+7%
Danaher-11%-8%-7%
Hologic*-1%-2%-29%
Illumina+1%+2%-9%
Labcorp+7%+4%-3%
Quest Diagnostics-8%-5%-11%
Thermo Fisher Scientific-1%-3%-9%
*Hologic’s fiscal year is one quarter ahead, with the period from July 1 to September 30 constituting Q4
Source: Company earnings reports

However, a closer look at the earnings picture and narrative behind it reveals strong grounds for positivity and optimism. First, the Q3 losses were less than what investors were expecting. Of the 30 companies in the G2 Index, 25 met or exceeded their top line Wall Street earnings estimates. That figure would have been even higher if not for Illumina’s very narrow miss.

More significantly, most firms reported positive growth in organic and core revenues excluding COVID-19. “Companies have been pulling back on their marketing and focusing on core products in 2023,” Worden notes. “The earnings reports suggest that those efforts are paying off.” Companies affected by COVID-19 losses that reported increases in core diagnostics businesses in Q3 included:

2023 Q3 YOY Top Line Earnings Trends, Total vs Core Revenues

CompanyTotal Core, Excluding COVID-19
Abbott-33%+10%
Hologic*-20%+11%
QIAGEN-5%+5%
Quest Diagnostics-7.7%+4.6%
Revvity-6%+1%
Thermo Fisher Scientific-1%+1%
*Hologic’s fiscal year is one quarter ahead, with the period from July 1 to September 30 constituting Q4
Source: Company earnings reports

Another bright spot was the performance of newer genomics and genetic testing companies without significant investments in COVID-19 products and services. Companies reporting double digit growth in Q3 included:

Prospects for 2024

Despite the negative press, Worden insists that Q3 was rather strong and might mark the beginning of the end of the US diagnostics industry’s COVID-19 hangover. “Core business is steadily improving, especially within lab services.” Thus, of the 30 companies in the G2 Index, 11 raised their total earnings or earnings per share bottom line guidance for the remainder of 2023. By contrast, 11 companies lowered their guidance in Q2.

There’s evidence that Wall Street is also feeling better about the industry and where it’s headed. Thus, the GenomeWeb Top 40 Index of share prices reversed its recent declines in November, rising 11 percent, the first increase in months and either at or above the share value of the Dow Jones, Nasdaq, and NASDAQ Biotech indices.1 Genomics company share prices have been especially strong in recent months, although even mature companies that reported flat or declining revenues have seen their share prices rise, such as Becton Dickinson, Worden notes. “Companies that were conservative in their expenditures seem to be spending again.”

Going forward, diagnostics companies will no longer be shackled with the COVID-19-inflated baselines that resulted in such significant YOY top line losses in 2023. Because YOY earnings comparisons in 2024 will be based on the 2023 numbers, the earnings reports will be closer to normal and provide a more reliable indicator of the performance of core lab business. Coupled with closer to normal inflation and interest rates and continued improvements in the supply chain, 2024 is shaping up to be a very positive year for lab companies.

References:

    1. https://www.genomeweb.com/business-news/genomeweb-top-40-down-14-percent-october-second-consecutive-month-double-digit

    1. https://www.insidermonkey.com/blog/agilent-technologies-inc-nysea-q4-2023-earnings-call-transcript-1226726/#q-and-a-session

    1. https://www.fiercebiotech.com/medtech/siemens-healthineers-reports-300-layoffs-amid-rumors-possible-diagnostics-unit-sell

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Diagnostics Earning Reports for FY 2023 Q3

CompanyTotal Revenue (vs Wall Street) YOY RevenuesEPS (vs Wall Street) Diagnostics Segment Performance
Abbott Laboratories*  $10.14 billion ($9.81 billion consensus)-3% (-10% organic)Adjusted +$1.14 (+$1.10 consensus)Global COVID-19 sales of $305 million vs $1.67 billion in Q3 2022; Total Dx down 33% to $2.31 billion but up 9% excluding COVID-19; Core Lab up 8% to $1.31 billion (but up 10% excluding COVID-19); Molecular down 28% to $133 million; Point-of-Care up 10% to $140 million from $127 million; Rapid Diagnostics down 59% to $862 million (up 13% excluding COVID-19, driven by early flu season, which increased demand for respiratory tests)
Agilent Technologies (FY 2023 Q4)$1.69 billion ($1.67 billion consensus)-9% (+7% in Q2)Non-GAAP +$1.38 (+$1.34 consensus)China revenues down 31%; Diagnostics and Genomics up 1% to $356 million from $352 million with double-digit growth from pathology and nucleic acid solutions division offset by declines in genomics instruments and consumables; Life Sciences and Applied Markets down 17% to $928 million due to lower capital spending, particularly among pharma, partly offset by growth in per- and polyfluoroalkyl substances (PFAS) testing and advanced materials; CrossLab up 6% to $404 million
Becton Dickinson (FY 2023 Q4)$5.09 billion ($5.02 billion average)+7% (+5% in Q2)Adjusted +$3.42 (+$3.43)Medical segment up 8% to $2.55 billion; Life Sciences up 3% to $1.33 billion, including 3% decline in Integrated Diagnostic Solutions to $447 million offset by 16% jump in biosciences to $159 million; COVID-19 testing down nearly 50% to $17 million; Interventional segment up 9% to $1.2 billion
Bio-Rad Laboratories**$632.1 million ($689.6 million average)-7%+$3.64 (+$2.78)YOY COVID-19 sales drop from $17.2 million to $300,000; Core revenue, excluding COVID-19, down nearly 6%; Life Sciences decline of 17% to $263.5 million, partially offset by 2% increase in Clinical Diagnostics sales
Bio-Techne (2024 Q1)$276.9 million ($287.8 million average)+3% (+5% in Q4)Adjusted +$0.41 (+$0.44)Stronger than expected headwinds from China; Diagnostics and Genomics up 4% to $72.8 million, but organically, segment was flat due to timing of large reagent orders and genetic lab test orders; ExoDx prostate test volumes up 49%, leading to revenue growth in upper teens driven, in part, by updated local coverage determination from CMS
*Bruker$742.8 million ($714.4 million consensus)+16% (+16% in Q2)Non-GAAP +$0.74 (+$0.63)All segments post strong growth despite slowdown in China; CALID unit, which includes life sciences and mass spec, up 15% to $239.3 million with strong demand for timsTOF mass spec platform; Bruker BioSpin up 13% to $198.3 million; Bruker Nano up 20% to $238.7 million from $199.1 million; Bruker Energy & Supercon Technologies (BEST) up 19% to $70.6 million; raises guidance for second quarter in a row
*Castle Biosciences$61.5 million ($48.5 million average)+66% (+44% in Q2)Net -$0.26 (-$0.76)Test volumes spike 52% with 18,409 total test reports driven by quadrupling of TissueCypher® Barrett’s Esophagus tests (2,829 results delivered), and doubling of IDgenetix® pharmacogenomic assays (2,791 test reports); MyPath® Melanoma test reports up 21% to 1,011; DecisionDx®-Melanoma tests up 16% to 8,559; raises guidance for second quarter in a row
Danaher$6.87 billion ($6.26 billion)-11% (-8% in Q2)Adjusted +$2.02 (+$1.76) Declines driven by losses in China and softness of life sciences market; 9% decline in COVID-19 more than offset 2% growth in base revenues; Life Sciences down 1% to $1.71 billion; Diagnostics down 16% to $2.25 billion; Cepheid up over 20% driven by 25% growth in group A Streptococcus and sexual health testing and $350 million in respiratory testing (exceeding expectations of approximately $100 million); Beckman Coulter Diagnostics up in mid-single-digits driven by instrumentation, clinical chemistry, and immunoassays
*Exact Sciences$628 million ($614 million)+20% (+19% in Q2)$0.00 (-$0.49)Core revenue up 23% to $624.8 million; Screening revenue up 31% to $472.0 million; Precision Oncology up 3% to $156.3 million; All-time high of over 1 million test results delivered, including Cologuard® and Oncotype DX®
Fulgent Genetics$84.7 million ($64.2 million)-17% (-46% in Q2)Non-GAAP -$0.39 (-$0.32)Core revenues, excluding COVID-19, up 17% to $66 million, but COVID-19 losses more than offset gains on YOY basis
Ginkgo Bioworks$55.4 million ($48.1 million consensus)-17% (-44% in Q2)Net -$0.41 (-$0.09)Losses driven by ramp down of COVID-19 school testing; Biosecurity down 56% to $18.3 million; Biosecurity Service revenues down 68% to $11.8 million; Biosecurity Products up 25% to $6.5 million; Cell Engineering up 51% to $37.2 million
*Guardant Health$143 million ($137.4 million average)+22% (+26% in Q2)Net -$0.73 (-$0.95)Precision oncology up 31% to $133.4 million, driven by 35% increase in clinical testing volume and 11% increase in biopharma sample volume, with 43,900 tests to clinical customers and 7,500 tests to biopharmaceutical customers; clinical revenues included $3.6 million from Medicare for successful appeal for 2018 to 2020 claims; development services and other revenue down 37% due to timing of milestone payments from partners; raises guidance for second quarter in a row
Hologic (FY 2023, Q4)$945.3 million ($940 million consensus)-1% (-2% in Q3 and -29% in Q2)Adjusted +$0.89 (+$0.84)All divisions experience double digit growth organically; Diagnostics down 20% to $416.4 million due to COVID-19 declines, but up 11% to $361.4 million excluding COVID-19; Molecular Diagnostics down 27% to $291.9 million, but up 15% excluding COVID-19, from vaginitis and Mycoplasma genitalium assays; cytology and perinatal up 2% to $115.2 million; blood screening revenues up 18% to $9.3 million
**Illumina$1.12 billion ($1.13 billion consensus)+1%Adjusted +$0.33 (+$0.02)Core Illumina sequencing consumables down 4% to $695 million driven by 12% decline in sales to research customers and lower NovaSeq 6000 consumables sales; instruments up 10% to $179 million driven by NovaSeq X sales, although firm placed fewer instruments than expected (97); COVID-19 revenues down from $28 million to $4 million; lowers guidance for second quarter in a row
Invitae$121.2 million ($120.8 million average)-9% (-12% in Q2)Adjusted -$0.10 (-$0.31)Losses due to $877.3 million restructuring and impairment charge compared to $125.2 million in Q3 2022; test revenue down $10.2 million to $117.6 million; other revenue down $1 million to $3.7 million
Labcorp$3.06 billion ($2.99 billion consensus)+7% (+4% in Q2/ -3% in Q1)Adjusted +$3.38 (+$3.32) Diagnostics revenue up 6% (3% organic) to $2.34 billion with 12% growth in base testing offsetting 8% drop from COVID-19 declines; total base testing up 16% and total requisition volume up 2%; decline in COVID-19 testing volumes accounts for 5% decline in volumes while rise in base testing increases requisition volumes by 3%; biopharma lab services up 8% to $719.1 million
*Myriad Genetics$191.9 million ($179.2 million average)+23% (+2% in Q2)Adjusted -$0.03 (-$0.08)Testing volume up 18%; hereditary cancer testing up 18%; GeneSight® pharmacogenomics tests up 19%; prenatal test volumes up 20%, excluding contributions from SneakPeek® Early Gender DNA Test
*Natera$268.3 million ($259.7 million—Zacks)+27% (+32% in Q2)Net -$0.97 (-$0.97)Product revenues up 33% to $265.2 million, driven by 21% increase in test volumes and higher average selling prices; Approximately 626,000 tests processed, including around 609,800 tests accessioned in its lab, an increase of 21%
*NeoGenomics$152 million ($142 million average)+18%Adjusted -$0.00 (-$0.08)Clinical Services up 20% to $128 million, driven by 7% jump in test volume and 12% increase in average revenue per clinical test to $440; Advanced Diagnostics up 8% to $24 million; next-generation sequencing-based testing up 35%, now representing about 25% of company’s total clinical revenue
OPKO Health$178.6 million ($174.8 million consensus)-<1%Net -$0.11 (-$0.10)Service revenues of $131.7 million vs $142.9 million in Q3 2022 with $10.0 million decline due to lower COVID-19 testing volume and reimbursement; clinical test reimbursement falls $6.6 million due to mix of testing ordered, partially offset by a $5.4 million increase in clinical test volume
OraSure Technologies$89.2 million ($75 million average)-23% (core revenues up 7% excluding COVID-19)Non-GAAP +$0.27 (+$0.04)COVID-19 revenues down 37% to $50.1 million; diagnostics up 59% to $19.6 million; molecular products down 4% to $15.2 million; other products and services up 13% to $3.2 million; molecular services down 57% to $834,000
*Pacific Biosciences$55.7 million ($48.8 million average)+72% (+34% in Q2, +17% in Q1)Adjusted -$0.27 (-$0.32)Instruments revenue more than triples to $34.7 million, including revenue from 52 RevioTM sequencing systems; consumables up $800,000 to $16.9 million; service and other revenue down $700,000 to $4.1 million
QIAGEN$476 million ($469.8 million)-5%Adjusted +$0.50 (+$0.48)COVID-19 product groups down 60% to $34 million; Non-COVID-19 products up 5% to $442 million; Molecular Diagnostics down 2% to $254 million (up 15% excluding COVID-19); Life Sciences down 10% to $221 million; sample technologies products down 13% to $160 million due to significant drop in pandemic testing demand; diagnostics up 10% to $179 million driven by double-digit growth in instrument and consumables sales; within diagnostics, QuantiFERON up 25% to $110 million, QIAstat-Dx up 4% to $20 million, and NeuMoDx down 59% to $8 million
*Quest Diagnostics$2.30 billion ($2.26 billion—Zacks)-7.7% (fourth quarterly decline in a row)Adjusted +$2.22 (+$2.19) 4.6% increase in base revenues to $2.27 billion only partially offsets 92% drop in COVID-19 testing to $26 million; revenue per requisition down 7.2% and requisition volume down 0.5%
QuidelOrtho$744 million ($723.2 million average)-5%Adjusted +$0.90 (+$0.60)Molecular Diagnostics down 64% to $5.6 million; point-of-care business down 14% to $233.1 million; respiratory revenues down 21% YOY due to COVID-19 declines, but more than double sequentially due to an earlier-than-usual respiratory illness season and increased demand for firm’s combination tests for COVID-19, influenza, and RSV
**Revvity  $670.7 million ($695.3 million consensus)-6% (-21% in Q2, -30% in Q1)Adjusted +$1.18 (+$1.19)Excluding COVID-19, revenues up 1%; COVID-19 losses drive 9% decline in Diagnostics to $363 million; Life Sciences down 2% to $313 million due to weaker demand from pharma and biotech customers for instruments; lowers guidance for second quarter in a row
*10x Genomics$153.6 million ($151.3 million average)+17%Net -$0.79 (-$0.46)Headwinds in China offset by 67% increase in instrument revenues to $34.9 million, driven by over threefold growth in spatial instrument sales to $22.7 million; impressive growth for new Xenium spatial biology platform; consumables up 6% to $114.4 million; total Chromium revenues flat at $112.5 million; total spatial revenues of $36.8 million
**Thermo Fisher Scientific$10.57 billion ($10.56 billion consensus)-1% (third straight quarter of decline)Adjusted +$5.69 (+$5.58)Continued slowdowns in China and weakness in biotech markets; Core organic revenues, excluding COVID-19 up 1%; COVID-19 testing revenues drop 4% to $50 million; Laboratory Products and Biopharma Services up 2% to $5.72 billion; Specialty Diagnostics flat at $1.08 billion; life sciences down 18% to $2.43 billion; Analytical Instruments up 8% to $1.75 billion; lowers guidance for second quarter in a row
Twist Bioscience (FY 2023, Q4)$66.9 million ($63.5 million average)+17%Net -$0.81 (-$0.92)Record annual revenue of $245.1 million; value of total orders received YOY in Q4 increased from $62.1 million to $71.1 million
Waters$711.7 million ($725 million)+<1%Non-GAAP +$2.84 (+$2.56)Instruments down 5% to $319.4 million; Service up 8% to $263.6 million; Chemistry sales flat at $128.7 million
Analysis covers the period ended September 30, 2023 and includes US companies with at least $50 million in sales.
Bold face: Companies that met or exceeded average or consensus Q3 Wall Street revenue estimates
* Companies that raised their revenue or EPS guidance during Q3
** Companies that lowered their revenue or EPS guidance during Q3
Source: Q3 Earnings reports and transcripts, and news reports.

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