NEVER IN THE PAST THREE DECADES has there been so few laboratory companies—public and private—competing to offer lab testing services to office-based physicians.
At the end of 2002, THE DARK REPORT’S annual ranking of public laboratory companies showed just 11 firms. Of these, two (Unilab Corporation and DIANON Systems, Inc.) were under acquisition agreements at year-end and became part of Quest Diagnostics Incorporated and Laboratory Corporation of America, respectively, since January.
The concentration of ownership and market share for laboratories servicing office-based physicians takes the lab industry into uncharted territory. In this testing segment, the two blood brothers share a national oligopoly. At the same time, each company holds a monopoly share of selected regional markets around the United States. It is a combination of national oligopoly built on regional monopolies, much like the airline industry. (See TDR, May 13, 2002.)
Moving forward, it is unclear whether Quest Diagnostics and LabCorp will enjoy unprecedented competitive advantage because of their economies of scale, their ability to do exclusive contracts with diagnostic vendors for new assays, and their contracting clout with the nation’s largest health insurers.
It could be the opposite. Classical economics is full of examples of how monopolist and oligopolistic companies lost their pre-eminent position. It is common for such companies to lose touch with customers, to stifle innovation within the company, to maintain higher prices to support internal profits, and to fail to adopt new technologies and services. In such cases, nimble, lean competitors eventually capture significant chunks of market share.
Growth Is Tough Challenge
Sheer size has magnified the management challenges at the two blood brothers. For instance, to increase annual net revenues by 10%, Quest Diagnostics must grow revenues by $410 million, based on its 2002 base of $4.1 billion. At LabCorp, revenues must grow $250 million to support that same 10% growth rate. Even factoring in likely acquisition candidates, this is a daunting feat for either lab to achieve.
Within the anatomic pathology (AP) segment of the lab testing industry, there was equally interesting news. After enjoying spectacular growth in revenues and profits lasting almost a full decade, the public AP companies showed weakness in 2002. The boards at DIANON Systems, Inc. and AmeriPath, Inc. chose to sell their respective companies. At IMPATH, Inc., management issues that surfaced during the year led to radical changes in its executive team during the first months of 2003.
Even as the list of public laboratory companies shrinks, there is another business trend in the lab testing industry which has gone unreported. Notwithstanding the paucity of new lab start-ups dedicated to providing office-based physicians with routine testing services, there is great vitality in the specialty testing segment.
Companies organized to provide laboratory testing to specific medical specialties, or to offer lab testing based on proprietary technology, are springing up in growing numbers. If the two blood brothers are to continue their growth-by-acquisition strategy, the lab industry may see some “specialty lab” deals in the coming years. Until now, that’s one type of lab company which has generally not been an acquisition target.