JUST ONE DAY APART, the nation’s two largest laboratory testing companies reported second quarter and half-year earnings for 2011. Each financial report opened a window into marketplace developments for the first six months of this year.
First to release its earnings report was Quest Diagnostics Incorporated. On July 20, it announced that quarterly net revenue was $1.9 billion, up 1.5% from Q2-10, when revenue was $1.87 billion. For the first six months of 2011, revenue was $3.72 billon compared to $3.68 billion in 2010, an increase of 1.2%.
Quest Diagnostics said that clinical testing volumes declined by 0.9% for second quarter, compared to Q2-10. Its revenue per requisition increased by 1.6% over the same quarter last year.
The company is in the process of integrating its acquisitions of Athena Diagnostics and Celera. It said that 2.5% of second quarter revenue growth came from these business units.
For operating income in second quarter, Quest reported $316.8 million. This was a decline of 14% over the operating income of $365.9 million in Q2-10.
LabCorp’s Net Revenue
The following day, on July 21, Laboratory Corporation of America released its earnings report. In the second quarter, it posted net revenue of $1.4 billion, an increase of 13.3% over Q2-10, when net revenue was $1.2 billion.
For the first six months of 2011, LabCorp posted net revenue of $2.8 billion, compared to $2.4 billion in 2010. This was an increase of 13.9%.
LabCorp said that its testing volume, as measured by requisitions, grew 4.8% for Q2-11 versus Q2-10. Revenue per requisition increased by 8.1% at LabCorp over the same time period.
LabCorp’s Lab Acquisition
Operating income at LabCorp declined during the second quarter due to special charges. It was $225.7 million in Q2-11 versus $270.5 million in same quarter last year. Without the special charges, LabCorp said its operating income for second quarter was $279.6 million.
LabCorp is also integrating recent acquisitions. It attributes some of its increased numbers to the contribution of Genzyme Genetics. In fact, it identified Genyzme as accounting for 7.6% of its 13.3% increase in revenue growth.
For many years, the earnings statements and the market performance of Quest Diagnostics and LabCorp tracked relatively closely to each other. Divergences in growth rates and other measures were generally not great.
However, over the past 18 months, the quarterly growth in specimen volume at Quest Diagnostics has sometimes declined even as the same numbers at LabCorp have increased. For example, in second quarter, Quest Diagnostics’ clinical testing volume declined by 0.9% while LabCorp’s testing volume increased by 4.8%. LabCorp CEO David King told analysts that organic growth in test volume was 2% for his firm during the second quarter.
This divergence in the ability to grow specimen volume organically between Quest Diagnostics and LabCorp has caught the attention of analysts. In the case of Quest Diagnostics, its executives explained the second quarter volume decline as partially due to a drop in patients’ visits to physician offices during second quarter.
Growth in Lab Test Utilization
By contrast, when asked this same question by financial analysts during its second quarter conference call, LabCorp executives attributed the company’s 2% organic growth in volume to physicians utilizing more laboratory testing. Mentioned were demographics, new test offerings, and “better understanding of utilization of tests by physicians.”
As well, at least three other public laboratory companies that serve the physicians’ office marketplace enjoyed robust growth in net revenue during the second quarter of 2011. The sidebar at right provides the numbers reported by Bio-Reference Laboratories, Inc.; Enzo Biochem, Inc.; and MedTox Scientific, Inc. Each lab reported double-digit growth in net revenue from their clinical laboratory testing operations.
During their respective conference calls with financial analysts, the executives from Quest Diagnostics and LabCorp discussed very different business priorities and market strategies. Laboratory administrators and pathologists competing against the two blood brothers will see these differences play out in the competitive marketplace.
At Quest Diagnostics, one ongoing priority has been to expand the sales team—by hiring as many as 100 new sales reps—and to add more patient service centers and phlebotomists. Labs that compete against Quest Diagnostics will recognize that the company is restoring sales staff and draw sites that were probably removed during prior years’ cost-cutting efforts.
$500 Million in Cost Cuts
In fact, cost-cutting will be a major priority at Quest Diagnostics in coming years. It is making a commitment to eliminate $500 million in costs during the next 36 months. On 2010’s annual revenue base of $7.4 billion, this goal represents a 6.75% reduction of costs.
Moreover, it was back in January 2007 when Quest Diagnostics, responding to the loss of the UnitedHealth managed care contract, pledged to cut $500 million in costs by the end of 2009. So this is the second time in less than five years that Quest Diagnostics wants to trim $500 million in costs in a 36-month period.
Quest Diagnostics is also placing an emphasis on building its “genetic, esoteric, and anatomic pathology revenues.” The company wants to increase the percentage of esoteric testing, which it currently says is 36% of revenues.
Over at LabCorp, the business priorities are described as the “Five Pillar Strategy.” Pillar number one is deploying cash to “enhance our footprint and test menu.” The Genzyme Genetics acquisition was part of this strategy.
More Use of Informatics
Pillar number two is to enhance capabilities with information technology. LabCorp was boosting its Beacon product, which it says, for the first time, allows its customers to use a single web portal to electronically place orders for every LabCorp brand and service.
Pillar number three is to improve efficiency to increase service levels and customer value. This focuses on operational improvements and better use of automation, among other things. LabCorp says that these initiatives have allowed it to raise “per employee output in our core laboratories by 30% over the last four years.”
Pillar number four is to use innovation in science to deliver new lab tests that deliver value at “reasonable and appropriate pricing.”
Pillar number five is to consider alternative delivery models. LabCorp executives say they are holding talks with managed care plans to identify how healthcare reform and new reimbursement initiatives may change existing payment arrangements.
LabCorp did mention that it has an agreement in principle with the State of California and the qui tam relators to settle the Medi-Cal lawsuit, “without an admission of liability.” The amount of the settlement is expected to be $49.5 million.
If there was one common strategy that both laboratory companies are using over the course of 2011, it is buying back their own shares. Since January 1, Quest Diagnostics says it has paid $835 million to re-purchase shares. LabCorp has used $335 million to repurchase shares since the beginning of the year.
One way to better appreciate the magnitude of the cash flow that is generated by these two lab testing behemoths is to consider the stock repurchases in light of the Medi-Cal settlement amounts that each has agreed to pay. In the case of Quest Diagnostics, its settlement agreement called for it to pay $241 million. This is the largest settlement in the history of California, the nation’s largest state. Yet that amount is just 29% of the $834 million that Quest used to purchase back its stock during the first half of 2011.
For LabCorp, its $49.5 million settlement amount with California represents 14.8% of the $335 million it has spent to repurchase its stock since January 1. These two examples show how much cash is being generated by each company. It is a reminder that they both have ample capital which they can use to improve their market share.
Other Public Labs Report Q-2 Earnings
ONLY A HANDFUL OF PUBLIC LAB COMPANIES provide routine testing to office-based physicians. But their second quarter earnings reports help provide understanding about trends in the lab testing marketplace.
Bio-Reference Laboratories, Inc. (BRLI), of Elmwood Park, New Jersey, uses a fiscal year ending on October 31. For its second quarter ending April 30, 2011, it said that net revenue increased by 24.5%, from $110 million the previous year to $137 million in this year.
Growth was equally strong in BRLI’s number of requisitions. That increase was 23%. It served 1.7 million patients in its Q2-11 versus 1.4 million in Q2-10.
At Enzo Biochem, Inc., of New York, New York, growth in clinical laboratory testing revenue was equally robust. For its second quarter, Enzo said clinical laboratory rev- enues grew 28%, from $10.8 million for Q2-10 to $13.8 million in Q2-11.
In St. Paul, Minnesota, MedTox Scientific, Inc., released its earnings report on July 14. It said that clinical laboratory revenue was up by 20.5%. For Q2-11, clinical lab revenue totaled $9.1 million versus $7.6 million in Q2-10.
In percentage terms, each of these three public laboratory companies reported significant increases in their net revenue for clinical laboratory testing operations during the second quarter of 2011. Individually, each public company is demonstrating its ability to compete effectively in the physicians’ office market against the national lab firms.