Inside the Lab Industry: Quest, LabCorp Post Improved Volumes, Revenue for Third Quarter

Could the third quarter be the charm for the big national labs? Both Quest Diagnostics and LabCorp reported solid earnings for the quarter ending Sept. 30, indicating they were back on track toward actual volume growth. Although overall profits were down, the numbers come after a long procession of quarterly reports where revenue and test volumes had been all but stagnant. The New Jersey-based Quest reported a 6.5 percent uptick in revenues, which reached $1.9 billion for the quarter. That compares to $1.8 billion for the third quarter of 2013. Officials say a rise in the number of insured patients played a significant role. “Regarding the Affordable Care Act, while it’s still early, we continued to see modest shifts from uninsured patient volumes in the third quarter to government and other payers,” said Quest Chief Executive Officer Steve Rusckowski in a conference call with analysts to discuss the earnings numbers. “Regarding the market dynamics, we saw additional signs of improvement in health care utilization during the quarter. . . . We delivered a second solid quarter of top-line growth as we continue to build momentum.” In addition to the improved quarterly numbers, Quest also bumped up its year-end forecast. It now projects that revenue will grow 3.5 percent for the year, up from the previous estimate of 2.5 percent to 3.5 percent for the year. According to Chief Financial Officer Mark Guinan, Quest’s test volume was up 7.8 percent compared to the year-ago quarter, with recent acquisitions adding about 8 percent to the total. “Last quarter, I shared that we had made prudent decisions regarding pricing and in some cases decided to walk away from existing business,” Guinan told analysts. “Excluding the impact on revenue from these decisions, our underlying volumes were favorable to the prior year by approximately 1.5 percent.” Guinan later added that prescription drug monitoring “continues to be an area of strength. Hepatitis C continues to be an area of strength. Obviously, we have launched our BRCA offering, which is growing.” Quest also introduced earlier this week an enhanced BRCA offering known as BRCAvantge Plus to evaluate breast cancer risk in patients. The assay screens for mutations in the BRCA1 and BRCA2 genes and five additional genes: TP53, PTEN, CDH1, STK11, and PALB2. Quest officials said those additional genes account for between 3 percent and 4.5 percent of genetically inherited breast cancers. Net income for the quarter did take a hit. It was $139 million for the quarter, down 67 percent from the year-ago period. However, the company had reported a $300 million gain last year from the sale of the royalty rights for Ibrutinib. It also took a $24 million write-off associated with restructuring and integration costs and another $25 million write-off associated with the sale of the Enterix cancer screening test kit division. For the first nine months of 2014, Quest reported net income of $392 million on revenues of $5.6 billion. That compares to $732 million on revenues of $5.4 billion for the first three quarters of 2013.

Earnings Data for Quest Diagnostics and LabCorp
Company	2014 3Q Net Income	2013 3Q Net Income	2014 3Q Revenue	2013 3Q Revenue	Nine Months 2014 Revenue	Nine Months 2014 Net Income	Nine Months 2013 Net Income	2014 3Q Test Volume Growth
Quest Diagnostics	$129.0 M	$405.0 M	$1.9 B	$1.8 B	$5.6 B	$392.0 M	$732.0 M	7.80%
LabCorp	$137.2 M	$148.7 M	$1.6 B	$1.5 B	$4.5 B	$392.7 M	$447.5 M	6.90%
Source: Company Reports

  Meanwhile, North Carolina-based LabCorp reported a similar surge of growth. Revenues for the quarter reached $1.6 billion, up 6.1 percent from the $1.46 billion reported in the third quarter of 2013. Net income was down about 8 percent, to $137.2 million from $143.8 million, although operating income stood at $253 million, about 2 percent higher than in the third quarter of last year. Glenn A. Eisenberg, LabCorp’s chief financial officer, said that test volumes were up 6.9 percent from the year-ago quarter, with most of the growth being organic. “We are pleased that strong volume growth generated an increase in the company’s sales, which in turn generated improved adjusted operating income during the quarter,” said LabCorp Chief Executive Officer Dave King. King and Rusckowski’s assessments tend to echo those of the investor community. Amanda Murphy and J.P. McKim of William Blair & Co. in Chicago observed in a recent report that “dynamics in the lab industry look more promising in 2015 than they have in a few years, particularly given the likelihood of more muted reimbursement pressure. While we do not expect multiple expansion from these levels, we see upside to earnings estimates relative to consensus.” LabCorp did report that revenue per requisition was down 0.7 percent, although a large chunk of that was due to foreign currency fluctuations. For the first nine months of the year, revenue stood at $4.5 billion, up 2.9 percent from the first nine months of 2013. Total test volume has been up 5 percent, with most of that growth being organic. Revenue per test requisition is down 2 percent, although the drop is only 1.6 percent when currency fluctuations are factored out. Those numbers suggest that the third quarter was particularly strong for LabCorp, despite the dip in net income. The company projected that revenue growth for the entire year would stand at 3 percent compared to 2013. It said it would provide its 2015 guidance in February. Murphy and McKim noted that “both labs’ commentary was more optimistic for the future, in our view, as reimbursement appears to have stabilized with no major contracts up for renewal in 2015. Volume growth has been stronger than anticipated and accelerated throughout the year; while it is difficult to know for sure, this outperformance has been attributed to the Affordable Care Act. . . . [F]rom a fundamental perspective, the ability to drive [pretax earnings] expansion in 2015 seems more attainable than it has been in the past.” The pair also praised the two labs for their focus on offering more complex—and therefore higher-priced—tests focusing on exome sequencing, somatic tumor panels, and women’s health. King noted that LabCorp’s recently launched Enlighten Health division would focus largely on self-paying patients, meaning its tests menu would not likely come under any serious reimbursement pressure. The investor service Seeking Alpha also noted that LabCorp’s $85 million purchase of LipoScience received regulatory approval on Oct. 22 and that it expects “LipoScience’s flagship test LipoProfile to be accretive to LabCorp’s revenues by several hundred million dollars per year since LabCorp’s nationwide footprint should facilitate acceptance of the test by major insurers.” Murphy and McKim had mixed thoughts on which of the labs would fare better moving forward. They noted that Quest’s aggressive cost-cutting—some $700 million since it was instituted in 2011 and $200 million more than originally planned—may take a toll on the company’s ability to enter into an aggressive growth mode. “We continue to have concerns around the longer term effects of large cost cutting initiatives on organic volume growth at Quest and thus prefer LabCorp, which has continued to outperform on volume growth,” they wrote. Takeaway: After many quarters of stagnant growth to shrinkage, the larger laboratories may have begun the journey back toward sustained growth.