Three National Laboratories Begin 1997 With Challenges

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CEO SUMMARY: Expect a number of surprises during 1997. The three national laboratories face unique challenges and must operate with unequal resources. By year’s end, the marketplace for commercial laboratory services will be quite different. However, picking the winners will not be easy.

FOURTH QUARTER EARNINGS will not be announced for some time. However, Wall Street and the financial community are closely watching the performance of all public laboratory companies.

Corning Clinical Laboratories gets to start 1997 with a clean slate. Effective January 1, 1997, the company was spun-off from Corning Incorporated. Renamed Quest Diagnostics Incorporated, it now trades on the New York Stock Exchange. Its ticker symbol is DGX.

“Quest is benefiting from the opportunity to ‘clean house,’” stated one bond analyst. “Quest used the spin-off to aggressively clean up its balance sheet and position itself to maximum advantage. Their $150 million bond offering was strongly subscribed. Their stock opened trading at $15 per share. Both facts indicate that Wall Street is comfort- able with Quest’s business prospects.”

In contrast to the optimism at Quest, Laboratory Corp. of America still struggles to solve its financial dilemma. “Investors were hoping that Lab Corp.’s parent, Roche, would invest equity into Lab Corp.” said this same analyst. “When Roche only lent money to Lab Corp., this was widely interpreted to mean that Roche will not readily provide capital to help Lab Corp. through its cash crunch.”

“Virtually all of Lab Corp.’s debt is held by banks,” stated another financial analyst. “If the company’s management fails to develop an effective plan to raise capital and refinance this debt, I would speculate that the banks will become more assertive in seeking a solution.”

“Laboratory Corporation of America would love to raise capital and pay down some of their debt. However, as a three dollar stock, they would have to issue a lot of shares to raise significant capital.”
—Wall Street Stock Analyst

In contrast to the major events underway at Quest and Lab Corp., things are relatively quiet at SmithKline Beecham Clinical Laboratories. The long-awaited $300 million settlement with the federal government on Medicare billing claims has not been announced yet, surprising many observers. Observers say that much internal reorganization is taking place, but that management is maintaining a low profile concerning these changes.

“Financial prospects for the laboratory industry in 1997 are mixed,” stated the bond trader. “From what I under- stand about the companies I track, any positive prospects continue to be mitigated by reimbursement declines resulting from managed care plans. These revenue declines will only partially be offset by revenue growth.”

Focus on Corporate Issues

“I would love to see consolidation take place among the major laboratories,” he continued. “This would allow these companies to solidify their market share in regions where they are dominant, and reduce costs in regions where they have less presence.”

As reported throughout 1996 in THE DARK REPORT, marketplace fundamentals continue to move against the financial health of clinical laboratories. The most striking effects of these trends can be seen in California. In that state, bankruptcies and lab downsizing dominated the news last year.

For laboratory executives who compete against the national laboratories, 1997 will provide opportunities to expand market share. Lab Corp., Quest and SmithKline will all be preoccupied with internal issues. Within California, Unilab is still concentrating on downsizing and consolidation. Physicians Clinical Laboratories is struggling to maintain positive cash flow.

There is anecdotal evidence that strong regional laboratory competitors are benefiting from the distractions of the national labs. As the major laboratories concentrate on internal management priorities, their more nimble regional competitors are quietly acquiring new business. 1997 may be the year that regional laboratories regain dominance in many markets.

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