DX Earnings Report: Markets Soften, Payors Harden but Growth Continues

Lab business is getting tougher. While PAMA cuts are hurting Medicare revenues, pressure from private payors may be even more intense both at the pricing front end and claims denial back end. Economic growth in Europe and Asia has slowed. And the consumer genomics market continues to lag.

But, so far at least, labs are hanging tough. Many lab companies did a good job of preparing for PAMA by acquiring new companies and revenue sources. And even as the PAMA firewalls prove their value, organic growth remains steady, albeit somewhat slower than last year at this time. That’s the big picture takeaway from recent earnings reports from the second quarter of 2019. Here’s a more detailed analysis.

Gainers

The first key point is that sales are up across the board. All but five of the 40 companies in our sample reported at least some revenue growth during the period, as compared to Q2 2018. The bad news is that the rate of growth is down, especially for the blue bloods who last year at this time were first digesting significant new acquisitions:

Earnings v. Expectations

Thirteen of the 37 companies that had clear consensus Wall Street estimates missed their target during the quarter, as compared to only 5 in 2018. The top-line misses included many of the industry’s most significant companies such as Abbott, Bio-Techne, Illumina, LabCorp, Meridian Bioscience, Myriad Genetics, PerkinElmer and Qiagen. The silver lining is that, with the exception of Myriad and Bio-Techne, all of these companies met or exceeded earnings per share (EPS) targets.

The flip side is that seven of the 22 companies that met revenues targets fell short on the bottom line. Of course, most of these companies are in the genomics space, including cancer screening company Personalis that just went public. Overall, companies that met or exceeded Wall Street EPS targets outnumbered companies that fell short 28 to 8.

Also boding well is that 14 companies raised their full-year revenue guidance on the basis of their Q2 results, including firms that had disappointing quarters like:

• Abbott, which fell just $2 million short of meeting its $8.0 billion revenue target;
• LabCorp, which also missed top line earnings estimates by $2 million; and
• Bio-Rad Laboratories, which had -1% growth for the period.

Decliners

Four firms revised their revenue and/or estimates downward, including Illumina, OraSure Technologies, PerkinElmer and Waters.

But no company had a tougher quarter than Myriad Genetics which despite 11% growth, came in well short of its top ($215.4 million vs. $221.0 million) and bottom line ($0.41 EPS vs. $0.47) targets. Myriad CEO Mark Capone cited the “unprecedented” impact of laboratory benefit management programs which he said reduced test revenues by about $50 million and adjusted EPS by approximately $.51. Although Capone said he expects the pricing situation to stabilize in Q1 FY2020, revenue and EPS projections left investors disappointed and triggered a sell-off of Myriad stock.

Diagnostics Earning Reports for Q2
(period ended June 30, 2019)
(At least $10 million in sales)

* Bold face: Companies that met or exceeded average Q2 Wall Street revenue estimates
* Companies that raised their revenue guidance as a result of Q2 performance
** Companies the lowered their revenue guidance as a result of Q2 performance