"Dark Index"

Good News for Regional Labs Competing Against Nationals

Each of the two blood brothers has growing, successful, “gadfly labs” in its own backyard

CAN REGIONAL LABORATORIES compete effectively against the two blood brothers? This question lies at the heart of the business strategy for most hospital laboratory outreach programs in the United States.

After all, in their community, the toughest competitors they face are likely to be Quest Diagnostics Incorporated and Laboratory Corporation of America. These lab behemoths hold most of the important managed care contracts, possess substantial economies of scale which can allow lower pricing, and have an extensive sales force to call on office-based physicians.

National Labs Lose Share

Yet, despite these impressive resources and other competitive advantages, the two blood brothers are losing market share in their own backyards—to two regional laboratories which are competing vigorously and successfully. These two thriving regional labs demonstrate that hospital lab outreach programs can compete effectively and produce worthwhile profits for their parent hospitals and health systems.

Not only does each of the two blood brothers have its own particular regional lab “thorn,” but these smaller competitors have gained market share in their local areas for six or more years. For Laboratory Corporation of America, with headquarters in Burlington, North Carolina, it is Spectrum Laboratory Network which steadily grabs market share. Spectrum is located in Greenville, North Carolina, just 30 miles west of LabCorp’s biggest laboratory facility.

Clients and regular readers of THE DARK REPORT are familiar with the Spectrum story. With an outreach revenue base of $25 million in 1999, this regional laboratory increased its revenue to $125 million by the end of 2005. Over the past five years, it has expanded its service network and now competes against LabCorp and Quest in the states of North Carolina, South Carolina, Virginia, Tennessee, and Georgia.

There are two linchpins to Spectrum’s business strategy. One is to sup- port a professional and aggressive sales force in the field. The second is to utilize sophisticated information technology to streamline lab operations, increase service levels, and offer enhanced electronic capabilities to physician-clients. (See TDRs, October 7, 2002; March 7, 2005; and November 14, 2005.)

In the case of Quest Diagnostics Incorporated, the regional laboratory competitor which continually eats away at its market share in the New York metropolitan area is Bio-Reference Lab- oratories, Inc. (BRLI). Quest Diagnostics has its headquarters and its largest laboratory facility in Teterboro, New Jersey. Just five miles away, in Elmwood Park, is BRLI’s laboratory.

For its fiscal year ending October 31, 1999, BRLI posted revenues of $53.8 million. For fiscal 2005, its revenues totalled $163.8 million. Most of this growth has come from increasing its physician office clients in the New York metro area—a region where Quest Diagnostics is dominant and has a market share in the range of 70%.

Quarterly Earnings Report

In a quarterly earnings statement released just last Thursday, BRLI con- firmed that this strong growth in specimen volume, revenue, and market share is continuing. Because its financial year ends October 31, Bio-Reference Laboratories, Inc. is always the first public laboratory company to report earnings from the latest quarter.

For its second quarter ending April 30, revenues increased by 18%, from $40.1 million Q2-05 to $47.2 million in Q2-06. Income before taxes was $4.1 million, an increase of 86.4% from Q2- 05. This substantial growth is primarily from an increased number of physician office clients from the highly-competitive New York City metro area. Another component of growth is BRLI’s niche testing business lines, some of which serve a national market. (See sidebar at right.)

Revenues Grew By $100 Mil

Both Spectrum Laboratory Network and Bio-Reference Laboratories have increased their revenue by $100 million during the past six years. That rate of growth is notable, particularly since both companies are profitable. What makes the accomplishment even more impressive is the each of these two labs are grabbing this market share from the home turf of the two blood brothers.

The business lesson from this success is instructive to lab administrators and pathologists involved in hospital lab outreach programs. It is possible to compete effectively—and profitably—against the national laboratories. But to achieve this success, it is necessary to invest capital and to apply the professional management talents necessary to build the lab and its sales program.

This is true of the most successful regional laboratory networks. Joint Venture Hospital Laboratories (JVHL) in Detroit and PACLAB Network Laboratories in Washington State demonstrate that properly-funded and well- managed outreach programs can be successful and profitable.

Bio-Reference Builds Niche Test Markets

EVEN AS IT DEFINES ITSELF as a regional lab, Bio-Reference Laboratories, Inc. (BRLI) has a business strategy of developing testing niches at the regional level, then selling those lab testing services in the national market.

“Within our local marketplace, we are constantly looking for testing niches where we can add value, generate additional margin,and be viewed by physicians as having specialized clinical expertise,” observed Marc Grodman, M.D., Chairman, President, and CEO of BRLI. “As we validate the delivery model and profitability of these testing niches, where appropriate, we will market them nationally.”

One example is testing for jails and prisons. In past years, BRLI won contracts for prison testing in New York City and New York State. As it established enriched services specifically to serve the needs of healthcare practitioners in the corrections market, it has won lab testing contracts for prison systems in other states.

Another testing niche is molecular pathology. To serve clients in its core market around New York City, BRLI established specialized labs for FISH and similar tests. It now offers these services to clients throughout the United States.

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