IN RECENT WEEKS, the nation’s two largest lab companies reported fourth quarter and full-year earnings for 2015. The earnings reports reveal how the paths of the two companies are diverging.
The companies are diverging because of a major acquisition made in February 2015, by Laboratory Corporation of America. LabCorp bought Covance Inc. in a deal valued at a minimum of $5.6 billion. Covance is a major player in the clinical trials business and offered synergies that LabCorp considered to be attractive.
Covance had revenue of $2.5 billion in 2014. When the Covance revenue was added to LabCorp’s 2014 revenue of $6.0 billion, the combined company represented $8.1 billion in revenue. That is larger than the 2014 revenue of Quest Diagnostics Incorporated, which was $7.4 billion.
Thus, LabCorp has taken a major step to begin diversifying from its core clinical laboratory business. Currently, about 70% of LabCorp’s revenue comes from clinical lab testing and the other 30% comes from the clinical trials business of Covance.
In reporting fourth quarter 2015 financial performance, LabCorp stated that its LabCorp Diagnostics (clinical lab) business had revenue of $1.55 billion, compared with $1.49 billion in Q4-2014. This was growth of 4.4%. Requisitions for the quarter increased by 1.8% (of which 0.2% came from tuck-in lab acquisitions). Revenue per requisition increased 2.2% for Q4-2015, benefiting from increased prices and tuck-in acquisitions.
For the full year 2015, LabCorp’s diagnostics business generated revenue of $6.2 billion, compared with $5.9 billion in 2014. This was an increase of 4.9%. LabCorp did not disclose the full year 2015 increase in requisitions.
Quest Diagnostics Incorporated reported its earnings on January 28. Revenue was $1.85 billion for the quarter, an increase of 0.6% when compared with Q4-2014. The number of requisitions grew by 0.3% over the same quarter in the prior year and revenue-per-requisition increased by 0.1% during that same period.
For the full year, Quest had revenue of $7.5 billion, an increase of 2% over rev- enue of $7.4 billion in 2014.
paMa and FDa Issues
During their respective conference calls to discuss the earnings reports, analysts asked the executives at both lab companies about two subjects of keen interest to most pathologists and clinical lab executives. One subject involves lab test price reporting to CMS, as required under the PAMA law. The other subject was about the FDA’s proposed LDT guidelines.
LabCorp’s CEO, David P. King, fielded the question about PAMA during his company’s conference call. “…there were some very positive developments from our perspective in terms of strong letters going from the House, from the Senate and from the Chair and Ranking Member of the Finance Committee encouraging both the inclusion of at least a selection of key hospital labs as well as a delay in the implementation of PAMA.
“We continue to believe that the inclusion of key hospital labs is absolutely vital to accomplish the Congressional purpose, which was a market-based price for Medicare,” continued King. “Realistically, we’re at the end of February and the rule has not been finalized. It’s hard for me to imagine how this could be implemented in January of 2017 in a way that would be fair to our industry. So that’s the [LabCorp] view on PAMA.”
Lab Test price reporting
Stephen H. Rusckowski, CEO at Quest Diagnostics, responded to a similar question during his company’s conference call. “As you have heard me say before, PAMA needs to be built on a representative view of the market. The current proposal limits the definition of an applicable lab to exclude a large portion of the market,” he commented. “We also believe that a 2017 effective date will be a significant challenge for all parties.
“We believe they [CMS] did not get it right as far as the applicable labs; it needs to include hospitals,” continued Rusckowski. “We’ve got a lot of support now from the American Medical Association, American Hospital Association, and Congress to help us with that.”
FDa’s LDT regulation
In response to questions about the FDA guidelines for regulation of laboratory-developed tests, Rusckowski stated, “As far as the FDA, as I just mentioned, we continue to work with Congress on a legislative action. We believe that’s the best approach for this issue. We believe it is a good start.
“And again, as a trade association, we believe… the FDA does not have the statutory authority to regulate laboratories,” he emphasized. “…We’re hopeful that we can come up with something with Congress, and we’ll see where that leads us. But this is going to be done step-by-step… and we’ll see where this evolves over the next several months.”
LabCorp CEO King doubled down on these same points. Regarding the FDA LDT guidance, “We continue to work closely with Congress and [are] attempting to work with the FDA, as well, on a solution that would be a legislative solution, that would bring clarity to whatever regulation there is going to be of laboratory-developed tests,” he stated. “And it would not depend on sub-regulatory guidance as a proposed long-term solution. We feel, again, we’ve been very clear about this; we feel very strongly that guidance is the wrong way to go about this and that we will continue to oppose that path.”
Both lab companies told analysts and investors that they continue to be optimistic about lab acquisition activities as a way to grow clinical lab testing revenue.
To this point, Quest’s Rusckowski noted that, “We’ve shared our view that hospitals will look to partner with us to develop and execute their lab strategy. In November, we announced the acquisition of Hartford HealthCare’s outreach business. In December, we announced a professional lab services relationship with Barnabas Health, New Jersey’s number one health system. Under this relationship, we will manage inpatient laboratory test services for seven of their locations throughout New Jersey.”
During the LabCorp conference call, King declared, “…we feel great about the M&A pipeline and we certainly have plans to… acquire about 1% of revenue; that we’re going to do tuck-in acquisitions that will account for about 1% revenue growth… and I think there is ample opportunity to execute on that.”
Another common element during the conference calls of both lab companies was an emphasis on improving operations and cutting costs. This is a response to the ongoing decline in lab test prices by payers.