Growth Conundrum Confronts Quest and LabCorp

AFTER MORE THAN TWO DECADES of buying up almost every attractive laboratory asset that came up for sale—and with few lab acquisition candidates left to buy—Laboratory Corporation of America and Quest Diagnostics Incorporated find themselves in an interesting conundrum. As public companies, any increase in the value of their shares is directly linked to growth rates in specimen volume, revenue, and net profit.

On the other hand, simply because of their huge size relative to the laboratory services marketplace, the ability of the two blood brothers to achieve sustained rates of growth of 10% and 15% per year is a major challenge. Let me explain why the numbers work against them.

By year’s end, Quest Diagnostics will post revenue of around $7.7 billion. Revenue at LabCorp will be in the range of $4.5 billion. Thus, for each lab company to grow revenue by 10% during 2009, Quest will require $770 million in new business and LabCorp will require $450 million. That’s the need for $1.2 billion in new business between them, and in just one year!

Thus, as you will read on pages 10-16 in this issue, each of the national lab companies have multiple strategies to generate new specimens, more revenue, and greater net profits. The days of rapid growth in revenue and net profits because of acquisitions and conversion of conventional Pap smear business to thin-layer Pap tests are long past. Both national labs must successfully execute a series of business growth initiatives to generate additional revenues and increased net profit in today’s competitive lab marketplace.

This is why the laboratory services marketplace has seemed rather quiet over the past year. The two national laboratories are adjusting to a market where growth-by-acquisition is no longer the primary strategy to achieve increased revenue and net profit. Now each company must craft a long-term business plan to deliver sustained growth that satisfies investors.

That is why the conversation is shifting at both LabCorp and Quest Diagnostics to new opportunities in genetic and molecular testing. It is why there are plans to serve the developing wellness and prevention emphasis in healthcare. That brings employers onto the radar screen as potential customers. And, I predict that Quest Diagnostics and LabCorp will steadily increase their presence and activity in other countries. LabCorp’s new agreement in Abu Dhabi is one example of this. (See Page 18.)


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