Public Laboratories Struggling To Maintain Competitive Ability

WITH regional laboratory systems as the theme of this issue, it is appropriate to look at the three national laboratories. What does 1997 and 1998 hold in store for them?

For the last three years, news was uniformly bad for virtually every public laboratory. Problems at Corning Clinical Laboratories (now Quest) and Laboratory Corp. of America got big headlines during 1996.

Because the three national labs still struggle, opportunities exist for independent regional laboratories and hospital labs with outreach sales programs to gain market share at the expense of the three national laboratories. Quest, LabCorp and SmithKline Beecham Clinical Laboratories (SBCL) continue to concentrate on internal problems. This makes them less effective with their sales and marketing.

Further, as they cut costs by closing satellite labs, draw stations and reducing medical technologist staffing levels, it only becomes more difficult for them to provide exceptional service for their clients. This opens a door of opportunity for nimble local competitors who operate professional sales programs.

I have several predictions for 1997-98 involving the three national laboratories. For LabCorp, a major reorganization, possibly even a chapter 11 filing, may be in the cards. They must service almost $1 billion in debt, deal with unhappy lenders and they need to write down a significant portion of their $891 million of intangibles. Only a huge infusion of capital could eliminate the need to restructure. It remains to be seen as to whether LabCorp’s parent, Roche, will continue to regularly bail them out by providing additional working capital.

At SmithKline, the laboratory division under-performs other corporate divisions. Although SBCL is modestly profitable, its growth prospects are poor compared to its corporate brothers. Prediction: no major change, but meager corporate support as resources go to the fast-growing pharmaceutical and consumer products divisions.

Probably the best performance of the three national laboratories will come from Quest during 1997-98. This laboratory had the opportunity to clean up its balance sheet and finances when Corning Inc. spun it off January 1, 1997. CEO Ken Freeman is also pursuing management strategies common outside healthcare, but ignored by laboratory industry executives.

I predict that Quest will enjoy mod- est earnings during the next 24 months. However, revenue and profit growth of 10% to 15% per year will prove unattainable. This is the Wall Street benchmark which Quest must meet for its share price to increase.

What does this mean for laboratory competitors? Expect the three national labs to continue to squeeze costs, thus diminishing services. They will also begin raising prices. This provides the opportunity for competitors to enlarge market share, particularly if they will selectively target quality physician accounts.


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