Specimen Volume Declines Reported By Quest Diagnostics and LabCorp

For second quarter, outside data indicates there were 5% fewer patient visits to doctors

IN REPORTING SECOND QUARTER EARNINGS, there was enough difference in the numbers announced by Quest Diagnostics Incorporated and Laboratory Corporation of America to catch the attention of financial analysts.

Revenue at LabCorp was up for the quarter while revenue at Quest Diagnostics was down for the quarter. But the devil is in the details. Financial analysts know that the financial performance of one quarter does not necessarily represent a trend.

On the other hand, for more than a decade, the quarterly financial reports of the two blood brothers have typically moved in a close relationship. With such large market shares of the physicians’ office testing market, basic business trends typically have similar influences upon the finances of both companies.

So the fact that LabCorp’s revenue during the quarter was up and Quests’ revenue for the quarter was down caused financial analysts to explore possible reasons for this discrepancy in market performance.

LabCorp reported a 4.2% growth in revenue for Q2-2010 compared to the same quarter last year. By contrast, Quest Diagnostics reported a decrease in its Q2- 2010 revenue of 1.4%, compared to the same quarter last year. However, LabCorp’s 4.2% growth in revenue masked a 2% decline in the number of specimens. This was offset by a 4.2% increase in price.

At Quest Diagnostics, specimen volume declined by 1.3% for the quarter. It did not disclose a figure for its price increase or decrease for the quarter. But Quest Diagnostics did announce that revenue per requisition declined by 0.3%. LabCorp’s revenue per requisition increased by 6.3% for second quarter.

In providing guidance to investors for the balance of 2010, Robert A. Hagemann, CFO at Quest Diagnostics, told analysts on the July 21 conference call that: “Based on our results through the first half, we’ve become more cautious in our outlook for the remainder of the year and now expect full year revenues to be approximately 1% below the prior year, due principally to our changing outlook for volume. Keep in mind our guidance excludes any acquisitions which may be completed in the second half [of 2010].”

LabCorp Raises Guidance

During LabCorp’s second quarter conference call on the following day, its CFO, William Hayes, also updated his company’s guidance for the financial community. “This morning, we updated our 2010 financial guidance. We expect revenue growth of 4.5% to 5.5% compared to previous guidance of 2.5% to 4.5%,” stated Hayes.

This divergence in basic rates of growth between the nation’s two laboratory testing behemoths has not been seen in recent years. Since both companies have multi-year track records as reliable cash-generating machines for shareholders, financial analysts want to understand the reasons for these differences in financial performance between Quest Diagnostics and LabCorp.

One fact was discussed by both companies during their quarterly conference calls. Data collected by IMS Health of Norwalk, Connecticut, indicates that patient visits to physicians’ offices declined by approximately 5% in the second quarter 2010, compared to the same quarter in 2009. Both Quest Diagnostics and LabCorp noted that their respective declines in specimen volume were less than the drop in patient visits to physicians’ offices.

If there was an elephant in the room during both conference calls, it was the potential for either laboratory to acquire the assets of Genzyme Corporation’s testing businesses in genetics and diagnostics. Genzyme announced in May that it intended to explore the sale, spin-off, or management buyout of its genetics and diagnostics divisions. These business lines together generated $538 million in revenue during 2009.

Financial analysts expect aggressive bidding for the Genzyme lab testing assets. Both Quest Diagnostics and LabCorp are expected to vigorously pursue this acquisition opportunity.

Business Strategy At Quest

On its conference call, Quest Diagnostics discussed a four-point business strategy with financial analysts, Surya N. Mohapatra, Chairman and CEO, characterized these as programs launched last quarter “to improve our self-effectiveness and get closer to our customers.”

First is a program to upgrade the skills in its sales force. “We have targeted high potential sales reps from other healthcare fields, such as cancer diagnostics and cardiovascular disease, many with specific expertise in key areas such as cancer diag- nostics and cardiovascular disease,” explained Mohapatra. “To make them effective sooner, we have enhanced our training programs and we are giving them advanced tools to better target sales leads.”

Target Markets For Growth

Quest Diagnostics’ second program is to target “specific geographies with the greatest opportunity for growth, including areas where [laboratory] competitors are challenged.” The third program is, in selected markets, to beef up service by adding personnel, such as phlebotomists and service reps where appropriate and by opening more patient service centers (PSCs).

Quest Diagnostics’ fourth program is to ramp up sales and marketing efforts on selected tests believed to have the greatest growth potential. Mentioned on the conference call were cancer diagnostics, cardiovascular testing, allergy testing, and tests for women’s health.

At LabCorp, current business priorities center around four areas: lab acquisitions, expanding managed care contract access, introducing a new electronic gateway for physician clients, and improving internal operations—including new lab automation solutions.

LabCorp’s Lab Acquisitions

In the area of lab acquisitions, LabCorp executives discussed the purchase of DCL Medical Laboratories of Indianapolis, Indiana, in June. The other acquisitions discussed was of Westcliff Medical Laboratories of Newport Beach, California. The FTC is reviewing this acquisition. (See TDR, June 10, 2010.)

LabCorp’s second business initiative involves managed care contracts. It is now a provider for Empire Blue Cross Blue Shield of New York. This health plan serves 2.8 million beneficiaries and Quest Diagnostics had held an exclusive contract with Empire for most of the past decade.

The third business project is deployment of what the company calls LabCorp Beacon. LabCorp Chairman and CEO David King described this as “our new online gateway for client lab connectivity… accessible anywhere and at any time. LabCorp Beacon is an end-to-end solution that allows physicians to view, share, manage, and analyze lab results.”

Internal operations is the fourth business initiative at LabCorp. King detailed its key elements, stating on the conference call that “Our Protedyne subsidiary continues to provide innovative solutions for automating and streamlining our operations.

“We are rolling out next-generation [phlebotomy] appointment scheduling,” he continued, “and we continue to optimize the workflow at our patient service centers to improve the customer experience, as well as the overall efficiency of our business.”

Sysmex Agreement

King called attention to a major agreement with Sysmex America, Inc., explaining “we have fully automated hematology operations in our regional core laboratories throughout the United States. The Sysmex partnership allows us to increase throughput with less labor and to improve turnaround time for our customers. It is one of the largest laboratory automation projects ever undertaken.”

Another point of particular interest to pathologists is that during both conference calls, analysts asked about specimen declines associated with anatomic pathology TC/PC arrangements by office-based physicians. Both of the national laboratory companies acknowledge that business retention is problematic in this sector of their business.

Assessing the range of topics discussed during this series of conference calls, financial analysts are closely monitoring two key areas. One is the quarterly increases or decreases in specimen volume. The second is the trend in managed care contract pricing. Each is a sign that growth opportunities are narrowing for the two blood brothers.

Slow Economy and Dominant Market Share IAre Likely Factors in Quest, LabCorp Earnings

IT IS NOT OFTEN THAT THE QUARTERLY EARNINGS TRENDS DIVERGE BY MUCH between Quest Diagnostics Incorporated and Laboratory Corporation of America. Both laboratory companies reported declines in specimen volumes for the second quarter compared to same quarter 2009. But LabCorp showed a 4.2% increase in revenue during this period while Quest Diagnostics reported a decline in revenue of 1%.

By contrast, Sonic Healthcare issued an advisory following the two quarterly earnings calls of Quest Diagnostics and LabCorp. Sonic disclosed that, for the first six months of 2010 (January 1 through June 30), its lab operations in the United States posted organic revenue growth (excluding acquisitions) of 3.6.%. It said its organic growth in specimen volume was up 1.4% during this same six-month period.

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