Mid-Year Earnings: LabCorp Eclipses Quest As Biggest Lab Company

It's official: LabCorp has eclipsed Quest Diagnostics as the nation's largest laboratory company—both in terms of top line revenue, and for the moment, bottom line profit.

Having folded in revenue and earnings from its acquisition earlier this year of pharmaceutical firm Covance, LabCorp reported net income for the second quarter ending June 30 of $168.4 million on revenue of $2.2 billion. That compares to net income of $141.7 million on revenue of $1.5 billion the prior year. Revenue was up a total of 46 percent.

In a call with analysts, LabCorp Chief Financial Officer Glenn Eisenberg said Covance contributed $621 million in revenue during the quarter.

For the first six months of 2015, LabCorp reported net income of $169.7 million on revenue of $4 billion. During the first half of 2014, it reported net income of $254.4 million on revenue of $2.94 billion.

Growth from existing operations was strong. LabCorp's diagnostics division saw revenue growth of 5.4 percent, to $1.6 billion. Total test volume rose 4.7 percent, while revenue per requisition rose 0.2 percent. The latter has been rising rarely in recent years, suggesting that some of the pressure from payers on the lab sector may be easing.

LabCorp's earnings per share of $2.09 beat the consensus, which was $2.03.

"We are extremely pleased with our results this quarter, in which we began to see the power of our combined businesses," said LabCorp Chief Executive Officer Dave King in a statement. "We delivered impressive growth, as well as record revenue, earnings and free cash flow to our shareholders. We remain focused on executing our long-term growth strategy, and delivering on our mission of improving health and improving lives."

However, combining Covance has been a bit of a challenge. Revenue for that business was down 2.7 percent from the year-ago quarter. LabCorp also revised its estimates for growth in Covance for 2015, forecasting a decline of 1.5 percent to 5 percent, down from the original estimate of flat to 2 percent growth. By contrast, the company has forecast that its diagnostics division's revenue would grow 3.5 percent to 5.5 percent during this calendar year, up from the original guidance of 3 percent to 5 percent growth.

"The questions on Covance's growth are likely to limit the opportunity for nearterm multiple expansion and may limit upside until the next catalyst (be it a PAMA resolution, which we view as a meaningful headwind removal) or next quarter's earnings," said Michael Cherny, an analyst with Evercore ISI, in a report. "The earnings power opportunity for the new LabCorp remains firmly in place."

Quest Earnings
By contrast, Quest Diagnostics' growth was muted. It reported net income of $129 million on revenue of $1.93 billion. That compares to net income of $142 million on revenue of $1.9 billion for the second quarter of 2014. However, Quest took a $52 million after-tax writeoff. Of that, $41 million was associated with its recent debt refinancing, with the remainder connected to ongoing restructuring.

"We are not just driving growth, we are driving profitable growth," said Quest CEO Steve Rusckowski in a statement. "Our strategies to restore growth and drive operational excellence are delivering both a better customer experience and earnings growth."

For the first six months of 2015, Quest reported net income of $199 million on revenue of $3.76 billion. That compares to first half 2014 net income of $253 million on revenue of $3.65 billion. However, income from operations was $529 million, compared to $470 million a year ago, which company officials attributed to greater efficiencies due to ongoing restructuring and cost savings.

During a call with analysts, Rusckowski said that pressure from government payers on reimbursement has relented somewhat. "We don't see any significant headwinds for 2016," he observed. "Any changes to the clinical lab fee schedule proposed as part of the Protecting Access to Medicare Act, also known as PAMA, would go into effect in 2017."

Like LabCorp, revenue per requisition also rose modestly for Quest, up 0.9 percent— the first time it has done so in three years, which was attributed to a shift toward pricier molecular and esoteric tests. The company has also seen rising volumes in its Medicaid business and fewer uninsured patients. However, total volume by requisitions was down 0.4 percent, although CFO Mark Guinan told analysts that total test volume was actually up.

Quest did bump up its revenue guidance for calendar 2015 to between $7.49 billion and $7.57 billion, up 2 percent to 3 percent from 2014. But its guidance for earnings remains unchanged.

Amanda Murphy, an analyst with William Blair & Co., noted in a report after the earnings release that "We ... see upside to guidance driven by additional M&A activity (the company has indicated its intention to add 1 percent to 2 percent in revenue growth annually via acquisitions) and buybacks."

Other Lab Results
Florida-based NeoGenomics reported a loss of $176,000 on revenue of $24.4 million for the second quarter. That compares to second quarter 2014 net income of $274,000 on revenue of $20.7 million.

NeoGenomics Chief Executive Officer Douglas Van Oort said that business growth was strong, but partially masked by cuts in FISH reimbursement. Murphy noted that Medicare had cut FISH reimbursement by about 60 percent over the past couple of years, but that the 2016 Physician Fee Schedule includes a 42 percent increase in the technical component in FISH, but given the codes NeoGenomics uses, its reimbursement could be even higher.

"We expect NeoGenomics to drive meaningful earnings leverage into 2016 and 2017," Murphy wrote.

Massachusetts-based Foundation Medicine reported a $33.1 million net loss for the second quarter ending June 30. Although that loss was significantly higher than the $13.8 million reported for the second quarter of 2014, revenue for this most recent quarter was $22.5 million, up 55 percent from the $14.5 million reported a year ago. A good part of the widening loss was attributable to spending $14.4 million in advisor fees in connection to the recent collaboration with pharmaceutical giant Roche. Test volume was up 50 percent from the second quarter of 2014, and 13 percent from the first quarter of this year.

However, CEO Michael Pellini, M.D., noted that the company has had some issues obtaining local coverage determinations from the various regional MACs, particularly from Palmetto GBA regarding its non-small cell lung cancer test, for which it received coverage just last month. Partly as a result, the company cut revenue guidance from $105 million to $115 million to $85 million to $95 million.

"Prior guidance implied a meaningful acceleration in growth, which was difficult to rationalize given a lack of reimbursement announcements," Murphy wrote. William Blair cut its 2016 guidance from $186 million in revenue to $158.5 million, although it also reduced the projected loss per share from $2.63 to $1.90.

Takeaway: Among national laboratories, the lead has officially changed between LabCorp and Quest Diagnostics.