PUBLICLY TRADED LABORATORY COMPANIES OFFERED INSIGHTS into how acquisitions of hospital lab operations and outreach businesses add to their bottom lines, according to recent reports on full-year 2022 and fourth quarter earnings.
Last year was a busy one for the billion-dollar lab corporations in terms of acquisitions. These huge laboratory companies are on the prowl to win contracts to operate inpatient hospital labs. They often transition local lab employees to the national company as part of those deals.
Running Hospital Labs
For example, Labcorp in Burlington, North Carolina, signed a deal in February 2022 to manage nearly 100 hospital labs for Ascension Health based in St. Louis and to acquire the laboratory outreach business at a number of Ascension locations. (See TDR, “Labcorp to Buy Outreach, Manage Ascension Labs,” Feb. 22, 2022.)
Labcorp reported recently that the Ascension deal alone resulted in a 7% increase in non-COVID-19 base business in Q4 2022.
“We are seeing an increased number of people [hospital administrators] that are interested in looking at us running and acquiring parts of the hospital business,” said Labcorp CEO Adam Schechter during a Feb. 16 earnings call. “If you look at 2023, Ascension revenue is going to be about 5% of the base business growth. So, if you do the math, it’s approximately $550 million to $600 million in 2023.”
In August, Labcorp also acquired the lab outreach business of RWJBarnabas Health in West Orange, New Jersey.
Also last year, health system Summa Health in Akron, Ohio, sold select assets of its laboratory outreach business to Quest Diagnostics in Secaucus, New Jersey. Quest also announced in late 2022 plans to acquire outreach services and run operations for nine hospital labs at Northern Light Health in Brewer, Maine.
“Our [merger and acquisitions] pipeline is strong, including potential deals with health systems, small regional labs, and other capability-building assets,” commented Jim Davis, CEO at Quest, during a Feb. 2 earnings call. “In particular, the funnel of opportunities with health systems that are facing major margin pressures due to labor challenges and mix shift from inpatient to outpatient care is very active.”
LABCORP: Revenue Down 7.7% for Full Year 2022
Labcorp’s revenue was down in 2022 compared to 2021, although it appears a large part of the drop was related to decreases in the number of COVID-19 tests it performed. The company announced the following results:
- 2022 revenue decreased 7.7% to $14.9 billion compared to 2021.
- Q4 revenue dropped 9.4% to $3.7 billion compared to Q4 2021.
- Q4 diagnostics revenue fell 12.8% to $2.3 billion.
- Q4 COVID-19 testing revenue fell 20.7%.
- Q4 base business (i.e., non-COVID-19) growth of 10.6%.
Schechter updated analysts and investors on Labcorp’s plans:
- The spinoff of the company’s clinical development business, now named Fortrea, will be effective in mid-2023.
- Oncology expansion continues to be a priority, as in Q4 Labcorp launched a liquid biopsy test called Plasma Focus intended “to match cancer patients with FDA-approved therapies using the patient’s circulating tumor DNA taken from a blood draw,” Schechter explained.
- Labcorp sees opportunities to grow with tests related to neurodegenerative, autoimmune, and liver diseases, as well as cell and gene therapy, he said.
Labcorp’s diagnostic test volume for Q4 2022, based on number of requisitions, decreased by 11.8% compared to Q4 2021. Less demand for COVID-19 testing played a role in the drop.
The price per test dropped 1% in Q4 2022 compared to the prior year. However, taking COVID-19 tests out of the equation, the base business price per test increased by 7.6%. That included the addition of Ascension’s labs.
The company did not release full-year figures for volume and price.
QUEST DIAGNOSTICS: COVID-19 Revenue Plummets
Similarly, Quest Diagnostics reported lower earnings compared to 2021, but it said non-COVID-19 business was a bright spot during the past year. Results included the following:
- 2022 revenue was $9.9 billion, down 8.5% from 2021.
- 2022 base business revenue (non- COVID-19) climbed 5.1% to $8.4 billion.
- 2022 COVID-19 testing revenue dropped 47.5% to $1.4 billion.
- Q4 revenue was down 15% to $2.3 billion compared to Q4 2021.
- Q4 base business revenue grew 6.3% to $2.1 billion.
- Q4 COVID-19 testing revenue plunged 74.6% to $184 million.
Davis shared these business observations and growth plans:
- Quest Diagnostics’ fastest growing opportunities are genomic sequencing services, prenatal and hereditary genetic testing, and pharmaceutical services.
- To grow prenatal genetics, Quest added reps to its women’s health sales team.
In response to an analyst’s question on growth in 2023, Davis said at-home testing is an area on which to focus.
“Consumer-initiated testing will continue to grow on the base side of our testing in 2023,” he noted.
Tied into that objective, Quest will invest in genomic sequencing. “[Another] big area of investments has been in oncology and what we call genomic sequencing services and building out what we call our integrated genomics platform,” Davis noted.
He added that Quest will increase participation in the development of companion diagnostics. A companion diagnostic is a lab test used in tandem with a drug therapy developed by a pharmaceutical company.
The companion diagnostic test verifies beforehand that a patient is a good candidate for the drug, based on expected benefits and side effects. This type of genetic testing is the foundation for precision medicine models of patient care.
Companion diagnostics associated with pharmaceutical work grew 15% year over year in 2022, Davis said.
Requisition volume for Quest was down 4.5% for the year and 11.2% for Q4. Revenue per requisition was down 4.5% in 2022 and 5.1% for the quarter compared to 2021.
BIOREFERENCE LABORATORIES: Focus on Cutting Costs in 2023
OPKO Health, the parent company of BioReference Laboratories in Elmwood Park, New Jersey, is in cost-cutting mode after a disappointing Q4 and full year. OPKO reported the following:
- OPKO’s Q4 diagnostics revenue through BioReference was $139.4 million, a drop of 61.6% from the same quarter in 2021.
- OPKO’s overall Q4 revenue, which includes other business lines, was $185.4 million, down 53.8% from $401.3 million.
- OPKO’s total revenue was $1 billion for 2022, down 43% from 2021. Full-year diagnostics revenue comparisons were not reported.
During an earnings call, OPKO President Elias Zerhouni, MD, shared ways the company is cutting costs and seeking to be profitable:
- BioReference eliminated $140 million of expenses over the past year.
- Still, a $30 million cost reduction is planned for 2023 (or 5% of the company’s annual spend).
- In Q4, the company added eight new oncology sales territories and five new molecular oncology sales positions to focus on offering BioReference’s cancer genomics to cancer centers, health systems, and oncology practices.
- In addition to oncology, the company plans to grow testing segments focused on women’s health, urology, as well as large health system partnerships, Zerhouni said.
“Our continued priority is to return this business back to profitability post- COVID-19,” Zerhouni told analysts.
Part of BioReference’s cost cutting has been in employee ranks. Zerhouni said at the end of 2021, BioReference had 8,000 employees. As of February 2023, it has 3,330—the same at it had in 2019 before the COVID-19 pandemic.
OPKO’s pharmaceutical business has one commercial stage pharm product and several pharmaceutical compounds and technologies in various stages of research and development. For lab testing services, it operates laboratory divisions, such as BioReference, GenPath (Oncology), and GenPath (Women’s Health).
How National Lab Companies Use AI
During recent earnings calls, Quest Diagnostics and Labcorp provided updates on how they use artificial intelligence (AI) in their operations. For example:
- Progress continues on Labcorp’s use of digital technology and AI in various ways, including result reports that provide deeper clinical insights to guide patient care.
- Quest stepped up use of automation and AI with an automation conversion project at its lab in Lenexa, Kansas, which should lead to quicker turnaround times and the ability to add capacity rapidly if needed. Quest is also working on an AI-powered microbiology platform to aid in sample analysis.
Labcorp has used artificial intelligence for years, applying the technology to drug development and diagnostics, including clinical laboratory workflow and operations. (See TDR, “Labcorp Now Using AI for Operations, Patient Care,” July 6, 2021.)
The Dark Report noted previously that successful AI projects at clinical laboratories analyze large amounts of data to automate processes, improve test result accuracy, and reduce human labor needed for routine tasks. (See TDR, “Artificial Intelligence Is Ready to Deliver for Labs,” July 26, 2021.)