Quest and LabCorp: What the Future Holds For the Nation’s Two Largest Lab Companies
Quest Diagnostics and LabCorp could be described as the New York Yankees and the Boston Red Sox of the laboratory world. They both have a long history and much success. And while they remain profitable, both teams have fallen on more difficult times as of late—the same fate that has befallen these two national labs. […]
Quest Diagnostics and LabCorp could be described as the New York Yankees and the Boston Red Sox of the laboratory world. They both have a long history and much success. And while they remain profitable, both teams have fallen on more difficult times as of late—the same fate that has befallen these two national labs. The first-quarter earnings reports for both labs included flat revenues: LabCorp’s were up a grand total of 1.5 percent, to $1.44 billion from $1.42 billion, while Quest’s were down about 6.4 percent, to $1.78 billion from $1.9 billion. Both labs made a significant amount of money during the quarter—LabCorp reported net income of $147.2 million while Quest’s net was $143.6 million. However, those numbers were down 9 percent for LabCorp and 15 percent for Quest compared to the first quarter of 2012. LabCorp forecast revenue growth of 2 percent to 3 percent. Quest says its 2013 revenue will be flat. Both labs are in the middle of plans to streamline operations. Quest is consolidating operations and cutting jobs. LabCorp is automating its labs and merging some of its operations. Both are also buying back stock. These giants of the lab industry are in a tough operating environment, one that was greatly impacted by the recession that began in December 2007 and represented the single biggest economic contraction since the 1930s. Added to that are recent across-the-board reimbursement cuts to Medicare, steep cuts to the technical component of code 88305, and cuts in molecular test reimbursement. According to a recent study by the Kaiser Family Foundation, the recession was the greatest single factor behind the historic slowdown in health care spending, which rose only 3.9 percent annually between 2009 and 2011—far below its six-decade average growth of nearly 9 percent per year. With laboratories accounting for approximately 3 percent of all health care spending, they lack the leverage experienced by other health care segments, such as hospitals or outpatient clinics. Moreover, many of their components could be construed by clinicians as elective. As a result, traditional lab spending been hit hard in recent years, and the bottom lines of Quest and LabCorp reflect that. Not All Bleak The future for the two giants is not all bleak, however. For example, the Kaiser Family Foundation study concluded that health care spending growth will eventually rebound to its prerecession levels. The long-term financial outlook for both companies reflects the most positive future. Deutsche Bank, which has a hold recommendation for both Quest and LabCorp
stock, has forecast net earnings per share for Quest of $4.27 for 2013 and $4.96 for 2014, up from prior forecasts of $4.25 for 2013 and $4.92 for 2014. However, some of the earnings per share growth, at least for the near term, are based on streamlining operations and buying back shares. For Quest, “we believe market expectations are for buyback to play an increasingly important role in achieving 2013 EPS guidance,” it recently reported. As for LabCorp, Deutsche Bank is forecasting just 1.8 percent in revenue growth for 2013 and 2.7 percent for 2014. But William Blair & Co. is giving the operational edge, however slight, to LabCorp. “Medicare reimbursement cuts, weather, and fewer business days were a negative in the quarter offset by some acquisition-related tailwinds. The company’s reported volume and revenue per requisition growth were better than those reported by its large-cap peer,” wrote William Blair analysts Amanda Murphy and Sylvia Chao.