Year-end Financials Released For Quest, LabCorp & LabOne

It’s a stable marketplace, as major public labs report modest growth in revenues and earnings

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In RECENT WEEKS, public laboratory companies have released earnings reports for the year-ending December 31, 2004.

It was generally a good year for the three largest lab companies that have a major emphasis on providing lab testing services to office-based physicians. In this year’s review, THE DARK REPORT looks at Quest Diagnostics Incorporated, Laboratory Corporation of America, and LabOne, Inc.

At Quest Diagnostics, full-year revenues climbed by 8.2%, to $5.1 billion in 2004 compared to $4.7 billion in 2003. Unilab, acquired by Quest Diagnostics on February 28, 2003, generated 1.5% of this growth.

Net income for 2004 was $507.1 million compared to $436.7 million in 2003. This was growth of 16.2%. During 2004, Quest Diagnostics spent $735 million to repurchase 8.3 million common shares.

Fourth Quarter Growth

During fourth quarter 2004, Quest Diagnostics reported revenue growth of 6.6% over fourth quarter 2003. It attributed specimen volume growth to be 4.1% of this total and growth in revenue per accession to be 1.9%. The balance of revenue growth came from non-clinical testing business.

LabCorp reported full-year 2004 revenues of $3.1 billion. This was a 4.9% increase over 2003’s revenues of $2.9 billion. Net earnings at LabCorp for 2004 were $363 million, representing growth of 13.1% over the $321 mil- lion the company earned during 2003.

LabCorp stated that the 4.9% growth in revenue was comprised of 3.6% increase in specimen volume and 1.3% from an increase in the average price per accession.

Similar to Quest Diagnostics, LabCorp repurchased shares during the year. It spent $378 million to repurchase 8.8 million shares during 2004.

Stable Lab Marketplace

The financial performance reported by both Quest Diagnostics and LabCorp is evidence that the laboratory testing marketplace has been fairly stable during the past 24 months. Up through 2002, both lab companies grew rapidly, primarily because they regularly acquired laboratories.

However, by the end of 2002, the two blood brothers had acquired most of the publicly-traded laboratory companies which were the easiest acquisition opportunities. During 2003 and 2004, both companies have had no “easy” options to boost specimen volume and revenue. It has required them to focus on improvement to operations (internal) and better execution of their national sales and marketing programs (external).

Fast-growing LabOne has a different story relative to its larger peers. LabOne’s revenue comes from testing activities in “risk assessment services” (life insurance testing), healthcare (clinical testing provided to office-based physicians), and substance abuse testing.

35% Growth In Revenues

For full-year 2004, LabOne reported revenues of $468.2 million, a growth of 35% from its 2003 revenues of $346.0 million. LabOne notes that $69.5 mil- lion of this growth during 2004 came from its acquisitions of Alliance Laboratory Services, Inc. in Cincinnati, Ohio and Northwest Toxicology, located in Salt Lake City, Utah. (See TDR, February 23, 2004.)

In each of its testing segments, LabOne reported the following growth rates during 2004: risk assessment services–$261.1 million (13%); healthcare–$166.7 million (88%); and, substance abuse–$40.4 million (51%).

As a point of comparison, revenues from testing provided to office-based physicians at LabOne was $166.7 million. At Bio-Reference Laboratories, Inc. (BRLI), based in Elmwood Park, New Jersey, revenues for its fiscal year ending October 31, 2004 were $136.2 million.

Second And Third Largest

LabOne and BRLI are the second-largest and third-largest public laboratory companies in the United States, as measured by revenues generated from testing provided to office-based physicians. LabOne reports larger revenue totals than BRLI because of its involvement in providing testing to the life insurance industry and its drugs-of-abuse business.

However, BRLI has posted steady and substantial rates of growth over the last four years. It may overtake LabOne’s clinical testing business sometime in the next 18 to 24 months.

For lab administrators and pathologists competing against these public laboratory companies, one conclusion stands out: overall, these companies are in good financial health and are generating adequate margins on their testing business.

This should encourage hospital laboratory outreach programs seeking to expand. The market environment is favorable and professionally-managed and marketed outreach programs should enjoy success.

AmeriPath Reports 2004 Financials

In the first full year following its acquisition by Welsh Carson Anderson & Stowe, AmeriPath, Inc. is showing modest growth in revenues and specimen volumes.

Now with headquarters in Palm Beach Gardens, Florida, AmeriPath posted total net revenues of $507.3 million for full year 2004. This contrasts with 2003 revenues of $485.0 and is an increase of 4.6%. Its EBIT- DA (earnings before interest, taxes, depreciation and amortization) for 2004 was $67.8 million, representing little change from its 2003 EBITDA of $66.5 million.

AmeriPath attributes its increased costs as “primarily due to increases in physician compensation both from adjustments to existing contracts and from additional physicians added in select specialties, and from increased courier and distribution costs associated with the increased revenues from physicians’ offices.”

Across the pathology profession, it has been consistently speculated that AmeriPath’s original “employment model,” used to acquire its constituent pathology group practices, would trigger the need to pay increased salaries in downstream years. That would be particularly true as the older pathologists in a group which sold itself to Ameripath retire. Replacing these experienced hands would require more aggressive compensation to attract new pathologists.

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