It’s a tale of two national labs, but their numbers suggest similar rather than unique challenges.Both Quest Diagnostics and LabCorp—the nation’s number one and two laboratories in terms of revenue respectively—reported flat revenue for calendar 2012, decent earnings growth, and modest forecasts for 2013.
LabCorp announced its fourth-quarter and 2012 earnings on Feb. 8. Full-year net income was $584.8 million on revenues of $5.7 billion. That compares to net income of $533.1 million in 2011, a 9.9 percent increase. However, revenue was up only 2.3 percent, to $5.7 billion from $5.5 billion.
And LabCorp did not end the year on a high note: Fourth-quarter net income was $120.6 million, down 10 percent from the prior year’s fourth-quarter net of $138.1 million. Revenues were virtually identical at $1.4 billion.
Quest’s net income numbers were similar to LabCorp’s: $555.7 million for calendar 2012, but on significantly larger revenue of $7.38 billion. In 2011, it netted $470.6 million on revenues of $7.39 billion, although legal settlements made up much of the difference in earnings for the two years.
The 2013 guidance for both companies was in the same range: Revenue growth of 2 percent to 3 percent for LabCorp, and virtually flat for Quest, which Kevin Ellich and Bradley D. Maiers, analysts with Piper Jaffray, called “disappointing.” Earnings in 2013 are also expected to be relatively flat.
This is a far cry from the estimated 6 percent to 7 percent growth rate experienced by the two national labs in the mid-2000s.
|
2010 Revenues |
2010 Net Income |
2011 Revenues |
2011 Net Income |
2012 Revenues |
2012 Net Income |
| Quest Diagnostics |
$7.37 billion |
$757.0 million |
$7.39 billion |
$505.7 million |
$7.38 billion |
$592.1 million |
| LabCorp |
$5 billion |
$571.6 million |
$5.54 billion |
$533.1 million |
$5.67 billion |
$584.8 million |
Is the Future Any Brighter?
The companies seem to be making the best of what is an environment slammed by recent deep Medicare cuts and anticipated financial strictures expected with the expansion of the Patient Protection and Affordable Care Act in 2014. Quest paid off more than $600 million in debt, while LabCorp nearly tripled cash on hand. Quest generated $1.2 billion in cash flow last year, a record. LabCorp generated just over $841 million—an impressive number, but the lowest in five years.Quest is in the middle of an ambitious restructuring announced last fall that if successful will unify its sales team and generate $500 million a year in savings. LabCorp, with its significantly fatter net margins, is not going on any sort of new management diet, but instead will impart value to shareholders by announcing a new buyback of $1 billion of its stock.
It is also continuing to deploy its new Internet portal for providers, as well as Propel, a robotic platform expected to replace manual splitting and sorting in all of its major laboratory facilities.
“We see 2013 as a building year,” Quest Chief Executive Officer Steve Rusckowski said as he announced earnings. He added that the company anticipated a 3 percent cut in Medicare reimbursements but that the company would see significant growth in 2013. LabCorp anticipates the Medicare cuts would lead to about a 3 percent to 4 percent hit on earnings.
LabCorp CEO David King said the company will spend $200 million to $220 million in capital expenditures, primarily for facility consolidations and what King said during the earnings call was a “replacement of a major testing platform.”
Analysts See Challenges
Analysts were not impressed, but neither are they forecasting apocalyptic doom.
“The labs face a number of challenges, in our view, including weak utilization driven by the macro environment, purchase of physician practices by hospitals, and insourcing of lab testing by physician practices,” said William Blair & Co. analysts Amanda Murphy and Sylvia Chao.
“In addition, Medicare pricing pressures are well known . . . and private payer pricing pressure appears to be escalating.” They projected 2013 revenue for LabCorp of $5.8 billion.
Quest also faces similar hurdles, note analysts. “While new management’s organizational changes and strategies are starting to come together and should yield substantial cost savings over the next 24 months, reimbursement headwinds from Medicare and [managed care] payers will be very strong in [2013],” reported Darren Lehrich, a managing director with Deutsche Bank. He added that the near-term outlook for Quest “remains challenging.”
It therefore could be a couple of years before growth for the two giants perks back up. And while they are both in the same boat, experiencing the same doldrums, most industry analysts believe they are financially strong enough to wait for the tailwinds to arrive.
