March 2009
LabCorp’s (Burlington, N.C.) esoteric testing business continues to fuel double-digit growth for the lab leader. Full-year 2008 revenues climbed 10.7 percent to $4.5 billion, while testing volumes increased 9.8 percent. This full-year growth rate surpasses the U.S.’s top testing provider, Quest Diagnostics (Madison, N.J.), whose revenue grew 8.1 percent to $7.1 billion for 2008.
For the fourth quarter of 2008, LabCorp’s revenues grew 11.3 percent to $1.1 billion, primarily due to the 13.5 percent volume growth in the company’s higher value esoteric testing operations (compared to 9 percent esoteric volume growth in the third quarter). Given that the core testing volume growth was essentially flat, several analysts noted that this esoteric growth is especially positive because this testing is more immune to economic cycles. In addition, esoteric testing is a higher revenue and higher margin testing segment (see figure).
Overall volume growth for the quarter was 3 percent, excluding the impact of consolidation of the company’s Ontario, Canada, joint venture. In comparison, Quest’s fourth-quarter volume growth was 1 percent. Organic revenue growth for the quarter for LabCorp—also excluding the impact of this joint venture—was 6 percent.
Recession-Related Impacts
Despite this growth, the current economic environment continues to impact LabCorp’s drugs-of-abuse employee testing business, which has taken a hit as unemployment rates increase in the United States. For the fourth quarter 2008, volumes associated with this testing were down almost 16 percent, with a significant deterioration in the months of November and December, explained company CEO David King in the recent earnings call. “This decline reduced total U.S. volume growth by 140 basis points,” he added.
But LabCorp is improving in two other benchmarks that are vulnerable in this recession: days sales outstanding (DSO) and bad debt expense rate. King announced that at the end of December, the company’s DSO was 51, an improvement of two days over the previous quarter, and the bad debt rate remained stable at 5.3 percent. Officials attribute these improvements to better collection efforts at patient service centers.
Looking ahead to 2009, the company is holding firm on its revised outlook for 2 percent to 4 percent revenue growth.
“We expect that 2009 could be a challenging year for volume growth, given the economic environment,” said King. “On the other hand, our pricing outlook is positive. We are pleased to have price increases from both Medicare and several large managed care payers in 2009.” During this recent earnings call, company officials also announced the renewal of the contract with WellPoint through the middle of 2013. While LabCorp is considered one of WellPoint’s “strategic partners,” the testing provider does have to negotiate each individual affiliated health plan contract. However, there are some states where LabCorp is the sole national provider for WellPoint patients, and this contract will extend that relationship.
For the most part, Wall Street analysts share this confidence in terms of the current pricing environment, although analyst Amanda Murphy with William Blair & Company (Chicago) noted that increasing unemployment rates will be a factor to monitor throughout 2009. “The key variable in the upcoming year, in our view, is how unemployment will affect the national labs’ ability to grow volumes (an issue we will watch closely over the coming months),” Murphy wrote in a research note on LabCorp’s recent results. “Our analysis suggests the United States would have to experience a fairly significant uptick in unemployment rates for the labs to have no earnings growth next year (i.e., in the 12 percent range).”
|
U.S. Lab |
Revenue |
|
Volume |
|
|
Leaders |
Growth |
Revenue |
Growth |
DSO |
|
LabCorp |
10.7% |
$4.5 Billion |
9.8% |
51 days |
|
Quest |
8.1% |
$7.2 Billion |
n/a |
44 days |
|
March 2009 - Table of Contents
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