Inside the Lab Industry: Second Quarter Is Decent Showing for National Labs, Big Gain for Smaller Players

As the laboratory sector moves into the second half of 2014, is the flat growth that has defined the two large national players in recent years being left behind? New Jersey-based Quest Diagnostics, which had reported shrinking revenue for seven consecutive quarters, finally ended that dubious streak with its second-quarter earnings report. And North Carolina-based LabCorp, which has reported modest growth in recent years, also reported an uptick, although overall profitability at both were lower. Meanwhile, several smaller labs reported strong earnings. For the second quarter, ending June 30, Quest reported revenue of $1.9 billion, up 4.8 percent. In a conference call with analysts, Quest Chief Executive Officer Steve Rusckowski observed that “our top priority is restoring growth and we made solid progress in the quarter. . . . [W]e are seeing continued improvement in sequential trends and revenues, organic volume, and organic price. We are seeing continued improvement in sales productivity. We saw a strong revenue growth in several product categories driven by clinical franchises, including prescription drug monitoring, health and wellness, and infectious disease.” Rusckowski said the Sustainable Growth Rate “doc fix” legislation passed by Congress earlier this year added some stability to the company, along with a likely favorable 2015 Physician Fee Schedule from the Centers for Medicare and Medicaid Services, and mildly favorable numbers as a result of the implementation of the Affordable Care Act, which added about 10 million Americans to the insurance rolls since last autumn. Rusckowski was also enthusiastic about Quest’s recent affiliation with Sloan-Kettering Cancer Center to use molecular testing in next-generation sequencing to improve treatment of patients with solid tumor cancers, and with Sequenom to distribute its MaterniT21 PLUS noninvasive prenatal test. “The clinical franchises are positioning us for future growth,” he said. Not all was rosy with Quest: Net income for the quarter was $133 million, down 19 percent from the $165 million reported for the second quarter of 2013. The company took a $24 million hit associated with restructuring and costs associated with integrating recent acquisitions. And while the company upwardly revised its forecast for revenue for the remainder of the year, it was a mild bump at best: 2.5 percent to 3.5 percent, compared to the prior 2 percent to 4 percent. “Despite the added level of reimbursement clarity highlighted by the company this morning, lingering questions on the visibility of organic volume reacceleration remain an overhang,” said Michael Cherny, an analyst with the ISI Group. Although Cherny increased Quest’s stock price target from $62 to $62.50 a share, his organization did not budge on its neutral rating. Modest Growth for LabCorp Meanwhile, LabCorp reported that second-quarter revenue grew 3.3 percent from a year ago to $1.52 billion. Although it was a modest increase, it beat Wall Street’s expectation of $1.5 billion.

First-Half Earnings Numbers for National, Esoteric Labs
Company	First Half 2014 Revenue	First Half 2013 Revenue	First Half 2014 Net Income	First Half 2013 Net Income
Quest Diagnostics	$3.65 billion	$3.6 billion	$253.0 million	$318.0 million
LabCorp	$2.95 billion	$2.9 billion	$255.2 million	$300.0 million
Sequenom	$76.80 million	$53.6 billion	$-11.2 million	-$60.3 million
Illumina	$868.30 million	$677.0 million	$106.6 million	$13.3 million
Source: Company Reports

  LabCorp attributed the growth to an increase in test volume, along with recent acquisitions. Total test volume increased 5.3 percent, but revenue per requisition dipped by 2 percent. “We are pleased with the strong volume growth in the quarter and the sequential stability of revenue per requisition, which has been under pressure due to mix,” said LabCorp Chief Executive Officer Dave King. Net income for the quarter was $141.7 million, down 7 percent from the $152.3 million that was reported for the second quarter of 2013. LabCorp attributed the dip to cost increases in performing tests, bad-debt expense, and the mix of tests themselves. David Clair and William Quirk, analysts with Piper Jaffray, said the recent decision by TRICARE, which provides health care services to military dependents, to cover 40 molecular tests could be an upside for LabCorp moving forward. However, they also noted that “CMS’ molecular pathology changes continue to negatively impact LabCorp’s business with state Medicaid reimbursement delays remaining a headwind.” LabCorp did not change its guidance of a 2 percent increase in revenue for the calendar year. Piper Jaffray maintained a neutral rating on its stock. Quest’s stock price rose slightly after Quest released its earnings but has since dropped back to about $61 a share. LabCorp’s stock is up about 5 percent since LabCorp released its earnings numbers and is trading at around $106 per share. Smaller Labs Saw Bigger Growth Smaller publicly traded players in the lab sector reported significantly stronger revenue growth for the quarter. Massachusetts-based Thermo Fisher Scientific reported a 33 percent growth in revenue for the second quarter, ending June 28, reaching $4.32 billion, up from $3.24 billion a year ago, while net income rose 6.4 percent to $278.5 million. Thermo Fisher’s laboratory and specialty diagnostics divisions grew, but not at the same pace as the rest of the company: 7 percent and 8 percent, respectively, representing $2.6 billion of the firm’s overall revenue. Both divisions reported adjusted operating income increases in the high single digits. The company revised its low-end calendar-year revenue forecast up slightly, to $16.86 billion from $16.84 billion. San Diego-based Sequenom reported revenue of $39.8 million for the quarter, up 62 percent from the $24.5 million reported during the first quarter of 2013. Accessions of its MaterniT21 increased by 7 percent, including a robust uptake of testing by state Medicaid programs. The company also entered into the black, reporting net income of $4.5 million, compared to a loss of $31 million a year ago, although all of that was attributed to the sale of its biosciences division. Its operating loss was $13.2 million, significantly lower than the year-ago quarter’s $29.2 million. Illumina, also based in San Diego, reported a 29 percent increase in revenue for the fiscal second quarter, ended on June 29, reaching $447.6 million, compared to $346.1 million for the fiscal 2013 second quarter. Its service revenue—which includes sequencing tests—rose 75 percent, to $57 million. “The progress we’ve made in the clinical market validates our strategy and the utility of sequencing in health care,” Illumina CEO Jay Flatley said in a conference call with analysts. “We’re confident in our technology leadership and believe we will continue to deliver significant growth as we unlock the power of the genome.” Takeaway: Revenue growth for the large national labs appears to have resumed, though it remains sluggish, while smaller labs are growing at a more dramatic pace.