Market Trends: Quest-Walmart, LabCorp- Walgreens Add Momentum to Mass Retailing of Lab Services

Mass commercialization of health care in general and laboratory services in particular is heating up with a pair of co-branding deals between leading lab chains with national retail giants. What makes the deals so eye-popping isn't so much the model but the fact that the participants are all household names.

The Quest-Walmart Deal
At the end of June, Quest Diagnostics announced plans to open co-branded lab service centers at 15 Walmart stores in Florida and Texas by year's end. The centers will initially furnish testing services with plans to encompass other basic health care services going forward. "By providing lab testing and healthcare services where people also shop, we will make it easier for Walmart customers to get the quality diagnostic insights they need in convenient locations," noted Quest CEO Steve Rusckowski.

Quest is no stranger to mass retail collaboration. But its previous deals have been mostly with grocery stores, including over 100 company-branded patient service centers (PSCs) at Albertsons companies' stores (Safeway, Vons, Randalls and Tom Thumb) across California, Colorado, Maryland, Oregon, Texas, Virginia and Washington.

The LabCorp-Walgreens Deal
The second blockbuster will see LabCorp operate co-branded PSCs at 7 Walgreens locations in Denver, North Carolina and Deerfield, Illinois (site of Walgreens HQ). The PSCs, which are expected to open by the end of the year, will provide specimen collection services.

LabCorp has been a pioneer of the PSC model and was, according to company press statements, the first national lab chain to make its services available through retail outlets. The Walgreens deals adds to LabCorp's portfolio of roughly 1,750 PSCs offering over 4,800 women's health, genomics, oncology and companion diagnostics test across the country.

The Brick and Mortar Model
Both of the new deals follow the typical model for labmass retail collaboration in which co-branded PSCs are established at store locations. By leveraging their retail partners' real estate and marketing assets labs generate incremental volumes and greater exposure. Stores benefit from the extra foot traffic and added customer convenience. Thus Walmart hailed the Quest deal as enabling it to extend its current health care offerings (which include vaccines and free blood pressure readings) and make its stores ia "one-stop shop" for customers' everyday health and wellness needs.

Expansion of labs services into the retail environment is a natural extension of pharmacy diversification, says Morgan Stanley analyst Ricky Goldwasser. For example, CVS's 1,081 MinuteClinics and Walgreen's 374 in-store clinics offer labs a "premier" retail footprint, while sharing overhead expenses could yield incremental savings, if labs relocate PSCs from other sites, like medical office buildings. Goldwasser says that in addition to the potential overhead savings, relocation to more consumer-friendly sites can also drive increases in testing volume. She highlighted in a recent research note that an estimated 10 percent to 20 percent of lab requisitions go unfilled. If retail PSCs can capture 10 percent of the unfilled requisitions, it would yield a 150 bps pickup in test volumes, or an incremental increase in earnings per share growth of one percent to two percent, according to Goldwasser.

The Cloud Model
Of course, the mass retail strategy is not confined to brick and mortar settings. Not surprisingly, Amazon has been among the most active in adapting the model for online retail. So far, most lab tests on Amazon have been sold through third parties. But last November, Good Start Genetics became the first genetic testing firm to establish a direct partnership with Amazon to provide physician-ordered tests online, namely Good Start's VeriYou next generation sequencing test for couples planning to have kids. The dynamic: Customers must register online, furnish family history and provide consent. A licensed physician then reviews the data and decides whether to order the test. The customer can then buy the test on Amazon for $149.

DTC Applications
Both models have also been adapted for direct-to-consumer (DTC) applications allowing customers to order tests without a physician's order in states where such arrangements are permitted by law. The ill-fated Walgreens-Theranos partnership was a notable example of the former to a brick and mortar setting. Online examples include Quest's newly launched QuestDirect empowering consumers in Colorado and Missouri to order designated tests online without a physician's order.

Takeaway: Collaboration between labs and mass retail will continue and likely expand into the retail pharmacy segment. Look for brick and mortar PSC and online arrangements to proliferate, both DTC and physician-ordered.