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LabCorp’s Genomic, Esoteric Testing Arms Will Be Prime Margin Drivers Over 3-5 Years

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Laboratory Corporation of America’s esoteric and genomic testing franchises will likely comprise a greater percentage of the company’s revenues in the next five years, company officials said last week.
 
“Esoteric and genomic type testing — that’s where a lot of our energies are focused in terms of margin growth,” LabCorp Chief Financial Officer Brad Hayes said at the UBS Global Life Sciences Conference in New York.
 
Based on figures presented by Hayes, in the second quarter, genomic testing and esoteric testing together comprised 27 percent of the company’s revenues. Over the years, these two sectors have grown at a faster pace than the company’s core testing franchise.
 
“What we’ve seen in the last five years is that while our top line has grown at about 8.5 percent, the genomic and esoteric category has grown at almost 12 percent over that time compared to the routine or core [testing category] at 7 percent,” Hayes said.
 
LabCorp breaks down its services into four parts: core, histology/cancer, genomic, and esoteric. In the second quarter, core and histology testing made up 66 percent and 8 percent of the revenue, respectively. Meanwhile, genomic testing and esoteric testing accounted for 15 percent and 12 percent of the second-quarter revenues, respectively.
 
Esoteric laboratory tests require specialized personnel and reagents and are ordered by physicians when patients are suspected of having a particular disease or a condition. Routine tests, comprising LabCorp’s core testing franchise, are those that measure a person’s overall metabolic function and are performed regularly as part of annual physical examinations.
 
For the three months ended June 30, LabCorp revenues rose 10 percent to $1.15 billion from the second quarter of 2007. In the second quarter, testing volume increased 9 percent and prices increased 1 percent, the company reported. However, net earnings decreased to $104.2 million in the second quarter from $128.7 million in the year-ago period on one-time restructuring and special charges [see PGx Reporter 07-30-2008].
 

“But we don’t seek to expand outside the medical services business because that’s what we know how to do well.”

During that period, LabCorp generated the most revenues from its medical testing customers, including managed care fee-for-service customers (40 percent), Medicare and Medicaid (19 percent), and patients’ out-of-pocket payments (9 percent). The company also collects a significant portion of its revenues from an undifferentiated category called “clients” (28 percent).
 
Pointing out that the company’s customer base is heavily concentrated in the medical testing arena, LabCorp CEO Dave King noted at the conference that the company is planning to stick with what it knows best.
 
“We think of ourselves as a medical testing-services business. So, we have our clinical pathology, which is our routine testing; our esoteric genetic testing, which is our DNA and cell-based testing; and anatomic pathology, which is tissue based,” King said.
 
Although LabCorp identifies itself as a medical-testing facility, earlier this year the firm took over genotyping services for DTC personal genomics firm 23andMe. 
 
Most likely, 23andMe is one of the customers that falls under LabCorp’s undefined “clients” category. When previously asked about LabCorp’s affiliation with 23andMe, Eric Lindblom, LabCorp’s senior vice president for investor and media relations, said that “we are not DTC, as we are the lab for 23andMe and they are the DTC. This is a ‘client’ just like other client arrangements we have, [including] hospitals, pharma companies for clinical trials, and employers for drug testing.”
 
However, King’s latest statements at UBS suggest that LabCorp may not be forging any deeper into the DTC genetic testing arena.
 
“We seek to grow … bigger by expanding our test menu, by bringing new tests to market. But we don’t seek to expand outside the medical services business because that’s what we know how to do well,” King said at the conference. 
 
Going forward, LabCorp plans to introduce new lab-based tests and services through partnerships with managed care organizations, research groups, and other diagnostic firms, and cut into the hospital-based testing market.
 
“We have the opportunity to redirect work from hospitals. Hospitals charge three to four times what we charge for the exact same tests,” King said. According to company figures, hospital testing presents between a $15 billion and $18 billion market opportunity for LabCorp.
 
Furthermore, the company’s recent test launches suggest it is investing heavily in the personalized medicine and pharmacogenomics field.
 
“In the industry, there is an increased focus on outcomes and cost-containment … increased [drug] effectiveness from the regulatory side, on drug efficacy, proper dosage, and avoidance of side effects, continuing advances in science, genomics, and in understanding the genetics of disease,” King noted.
 
Just this year, LabCorp launched a new breast cancer gene expression assay, a test for prostate cancer risk, ColoSure for colorectal cancer risk, and OvaSure for ovarian cancer risk. Additionally, the company markets two companion diagnostic tests: a K-RAS test that gauges response to anti-EGFR colorectal cancer drugs and a HLA-B*5701 test that detects patients at risk for hypersensitivity reactions to GlaxoSmithKline’s HIV drug abacavir.
 
King noted that usage of its KRAS and HLA-B*5701 tests have increased since recently published studies have established their clinical utility.
 
Clinical data presented at the American Society of Clinical Oncology meeting this summer urged physicians to routinely screen for K-RAS mutations in colorectal cancer patients [see PGx Reporter 07-02-2008]. 
 
In July, the US Food and Drug Administration asked makers of abacavir to update the drug’s label to include information about the increased risk of fatal hypersensitivity reaction in HIV patients who have the HLA-B*5701 allele. The agency also advised healthcare professionals to genetically screen all HIV patients for the HLA-B*5701 allele before initiating treatment with the drug abacavir [see PGx Reporter 07-30-2008]. 
  
LabCorp is currently also invested in several collaborations to develop diagnostic tests, which are in various stages of development.
 
The company has penned agreements to develop companion diagnostics for ARCA Biopharma in cardiovascular disease; OncoMethylome Sciences in oncology; Siemens Health Solutions in oncology and CVD; Third Wave Technologies in CVD, and Vanda Pharmaceuticals in oncology.
 
In addition, LabCorp is working with Duke University to develop a lung cancer test and working with Medco to research gene-based warfarin dosing.
 
However, in focusing more heavily on the genetic testing and companion diagnostics market, the company will likely have more regulatory concerns.
 
In an Aug. 7 warning letter, the FDA said it is reviewing LabCorp's multi-protein biomarker panel ovarian cancer test, OvaSure, to determine if it is an in vitro diagnostic multivariate index assay that requires FDA clearance [see PGx Reporter 09-03-2008].

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