"DARK Index"

Assessing the Year-End Financials For Nation’s Biggest Lab Companies

Quest Diagnostics, LabCorp, Sonic Health, and Bio-Reference Labs report performance

IN RECENT WEEKS, the last of the nation’s largest public laboratory companies released year-end 2009 financial reports. Each lab firm’s financial report provides useful insights about active trends in the lab testing marketplace, particularly in lab testing referred by office-based physicians.

Quest Diagnostics Incorporated and Laboratory Corporation of America are the two dominant national companies competing for doctors’ office lab testing. The two other largest publicly-traded lab companies active in this segment of the lab testing market are Bio-Reference Laboratories, Inc., of Elmwood Park, New Jersey, and Sonic Healthcare Ltd., of Sydney, Australia.

It is not easy to directly compare these four public laboratory companies. Quest Diagnostics and LabCorp probably share the most characteristics among the four laboratories. However, all four major lab companies differ significantly from each other.

Regional Versus National

For example, Bio-Reference Labs primarily serves office-based physicians in the greater New York City region and has developed a number of regional and national specialty testing activities. It also reports its financial performance using a fiscal year that ends on October 31.

In the case of Sonic Healthcare, although it has annual revenue from laboratory testing in the United States that exceeds $500 million, the larger proportion of its annual sales come from countries outside the United States. Its stock is traded in Australia and its fiscal year ends June 30.

Keeping these differences in mind, the financial performance of these laboratory companies during 2009 reveals common perspectives on the current state of laboratory testing in the United States. Moreover, because 2009 was the second year of the deepest economic recession in the United States since 1980-81, it was a tough environment in which to increase specimen volume and revenue.

2009 Full Year Revenue

That fact was reflected in the performance of the two Blood Brothers. At Quest Diagnostics, full year revenue totaled $7.5 billion, up from $7.25 billion in 2008. This was a growth rate of 2.8%. LabCorp’s 2009 and 2008 full year revenue was $4.7 billion and $4.5 billion, respectively, representing a 3.8% growth rate.

During Q4-2009, revenue per requisition at Quest and LabCorp grew by 2.6% and 4.3%, respectively. Bad debt for the full year was 4.9% at Quest and 5.3% at LabCorp.

On a smaller revenue base, during its fiscal year ending October 31, 2009, Bio-Reference Labs reported full-year revenue of $362 million, which was a growth rate of 20%. The number of patients served (as measured by requisitions) grew 14%, to 4.7 million.

In its most recent quarter ending January 31, 2010, Bio-Reference said revenue had increased by 31% over Q1-09, to $99.3 million. Similarly, the number of patients served grew to 1.2 million, an increase of 29% for the quarter. Revenue per requisition increased 2%, to $79.21.

Sonic Healthcare’s Revenue

Sonic Healthcare, reporting on its fiscal year ending June 30, 2009, announced revenue from all businesses of US $2.7 billion, which was 26.7% growth from US$2.2 billion in FY2008.

For the first six months of FY2010, Sonic disclosed revenue of US $1.4 billion from all businesses compared with revenue of US $1.3 billion during the first six months of FY2009, a 3.5% growth rate.

Sonic says about 23% of its revenue comes from laboratory testing in the United States. That business division generated US $636 million during FY2009 and about US $306 million during the first six months of FY2010.

If there is one clear difference that stands out among these four laboratories, it is the growth rate posted by Bio-Reference Laboratories. Each year over the past decade, it has regularly reported double-digit growth in both specimen volume and revenue. It has accomplished this based on two primary strategies.

First, it maintains one of the nation’s best-performing sales programs that targets office-based physicians. Its sales reps are consistently effective at winning—and keeping—new client accounts from competitors in the greater New York City metro. Bio-Reference Labs’ “sales cost to acquire a new account” is much more effective than its larger peer lab companies.

Selling Esoteric Tests

Second, Bio-Reference’s second strategy is to build subspecialty expertise in reference and esoteric testing, then sell those services both in the local New York market and nationally. It has a high average revenue per requisition when compared to other laboratories that serve office-based physicians. (See TDR, July 16, 2007.)

In the case of Sonic Healthcare, it is regularly using acquisitions as a way to build its business in the United States. It was 2005 when Sonic made its first lab acquisition in this country. In just four years, its U.S. lab testing business has grown to almost two-thirds of a billion dollars. Sonic continues to be an opportunistic acquirer of laboratories in the United States.

On the other hand, it has been more challenging for Quest Diagnostics and LabCorp to consistently outbid rivals for the larger laboratory businesses that have come to market during the past 24 months. Along with Sonic Healthcare, a growing number of private equity companies are willing to bid aggressively to acquire any attractive laboratory company that comes to market.

New Buyers Bid For Labs

For example, last November, Quest Diagnostics filed public documents as a preliminary step to raising $750 million in senior notes. The prospectus indicated the proceeds would be used to repay existing debt, for general corporate purposes, and “to fund a potential cash acquisition in its entirety.” At that time, MassDevice.com speculated that Quest Diagnostics was preparing to close a deal “potentially worth $225 million.”

The following month, on December 11, it was announced that Spectrum Laboratory Network of Greensboro, North Carolina, had been acquired by Welsh, Carson, Anderson, & Stowe. Financial analysts indicated that Quest Diagnostics had taken steps to line up the money needed to acquire Spectrum, but found itself outbid in the final rounds of negotiations. Moreover, just a few weeks later, Carilion Labs, of Roanoke, Virginia, announced its merger with Spectrum Laboratory Network. Again, another party outbid Quest Diagnostics and LabCorp to acquire a large laboratory organization.

Laboratory acquisitions were a topic during the most recent quarterly conference calls. One executive at Quest Diagnostics answered an analyst’s question, stating that “We’ll continue looking for opportunities which leverage our core competency and diagnostic testing, whether that is domestic acquisitions or regional esoteric or hospital laboratories.”

During LabCorp’s conference call, its executives addressed the acquisition question by noting that LabCorp would be interested in opportunities to expand the company’s esoteric portfolio. Specifically mentioned were genetic testing, special- ized endocrinology, specialized coagulation, oncology, and infectious disease testing.

Esoteric Testing Emphasis

Both Quest Diagnostics and LabCorp are working to expand the proportion of esoteric testing because of its higher reimbursement and better profit margins.

At Quest, “gene-based, esoteric and anatomic pathology testing now account for approximately 36% of all revenues.” Similarly, LabCorp disclosed that, for Q4- 09, 37% of its revenues came from “genomics, esoteric, and anatomic pathology categories.” It stated a goal of increasing that to 40% of revenue within five years.

By point of comparison, Bio- Reference Laboratories stated in its Q1-10 conference call that esoteric testing was now 54% of net revenues. That was up from 51% in Q1-09.

Hot growth areas at Quest Diagnostics were “Vitamin D testing using tandem mass spec [which] grew more than 50%, allergy testing using ImmunoCap grew more than 10%, and our Leumeta family of leukemia and lymphoma tests grew more than 40%.”

At LabCorp, it was acknowledged that Vitamin D testing was a fast growth assay. LabCorp executives stated that they include Vitamin D tests in their esoteric test mix.

Information technology (IT) is a strategy both laboratories are emphasizing as a way to differentiate themselves with referring physicians. At LabCorp, activities are underway to “enhance our IT platforms with a focus on online services, client connectivity and analytic tools. We will also continue to improve the patient experience through such initiatives as online appointment scheduling and automating the work flow in our patient service centers.”

Offering IT Solutions

Quest Diagnostics has several important IT initiatives. It recently launched its Care360 electronic health record (EHR) system for physicians. Last year it introduced a specimen tracking system. Quest executives stated the number of physicians using its e-prescribing solution doubled during 2009.

Emphasizing the importance placed on IT as a point of competitive differentiation, during the conference call, one Quest executive observed “We’ve always thought about EHR and e-prescribing as something that helps us imbed ourselves into the work flow in the office and make the relationship with those physicians and hospitals even stickier.”

Current State Of Lab Market

As a window on the current state of the laboratory testing marketplace, the financial reports released by these four laboratories show the mature nature of the competitive market for the testing referred by office-based physicians.

The nation’s two largest laboratory companies continue to grow at single digit rates. Meanwhile, Both Bio-Reference Laboratories and Sonic Healthcare are using different strategies to sustain higher rates of growth. As these higher rates of growth compound over time, it should help them achieve attractive economies of scale. In turn, that could make them even tougher competitors.

Nation’s Four Largest Public Labs Report Financial Performance for Full Year 2009

IT CAN BE CHALLENGING TO COMPARE THE MARKET PERFORMANCE of the four largest public laboratory companies that compete in the United States for laboratory test referrals from office-based physicians. Each laboratory company has significant attributes that distinguish it from competing laboratory firms.

As the nation’s two largest public lab companies, Quest Diagnostics Incorporated and Laboratory Corporation of America have unique visibility. In the case of Bio-Reference Laboratories, Inc., of Elmwood Park, New Jersey, the fact that it primarily serves the doctor’s office market in New York City and surrounding states means that it doesn’t have immediate name recognition in other regions across the country. The newest member in this group is Sonic Healthcare, Ltd., a long-established laboratory company in Australia, but which only launched business operations in the United States in 2005.

Another challenge in comparing the performance of these four public laboratory companies is the different fiscal years used by Bio-Reference Labs and Sonic Healthcare. The table below provides information for the latest full year financial report released by each of these four public laboratory companies.

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