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LabCorp’s Q2 Revenues Grow, But Limp US Economy Tempers 2008 Profit Goals

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Laboratory Corporation of America officials last week slashed the firm’s revenue expectations for the year by around three percentage points after noting that the volatile US economy has trickled down to patients and curbed their ability to pay for tests.
 
In discussing its second-quarter earnings with investors, the company said it now expects 2008 revenue to grow to between $4.5 billion and $4.6 billion, or to between 10.3 percent and 11.3 percent more than the $4.07 billion recorded in 2007.
 
But three months earlier, the company said it expected to earn between $4.6 billion and $4.65 billion this year, or between 13 percent and 14.3 percent more than in 2007.
 
“We believe that in the second quarter … our collections have been lower than expected in patient,” Brad Hayes, LabCorp chief financial officer, told investors. “And our write-offs have been higher, which has been a direct result of what we think are the economic conditions and their impact on the consumer.”
 
Despite its troubles recouping patient payment, LabCorp in the last quarter introduced several new genomic tests in the area of personalized medicine and identified genomic testing and companion diagnostics as a major long-term growth driver.
 
“We are leveraging our capabilities in assay development, data and informatics, physician and patient access, and distribution to become the partner of choice for development of companion diagnostics,” CEO David King said during the earnings call.
 
Furthermore, LabCorp plans to use a portion of its balance sheet this year on M&A deals. However, company officials didn’t name any specific companies they are eyeing for acquisition.
 
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.
 
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. 
 
Economic Woes
 
According to Hayes, between 75 percent and 80 percent of LabCorp’s bad debt is from the patient billing category, and, as a result, the company is setting aside $45 million for these accounts.
 
“We generally see the worst experience in the uninsured category and better experience in the co-pay deductible category,” Hayes said. “But with the growth in the co-pay and deductible category, that experience would be worse than our average bad debt rate; it puts pressure on the bad debt expense.”
 
Approximately 17 percent of LabCorp’s revenue is collected directly from patients, half of which comes from uninsured patients and half from co-pays and deductibles. 
 
According to Hayes, more than two-thirds of the company’s write-offs related to doubtful accounts come from uninsured patients who are unable to pay for testing or from non-payment of co-pay deductibles. Approximately one-third of the write-offs are due to incomplete payment information at the time of testing.
 
“It's very hard to know if a patient was covered or not covered on that date of service,” Hayes said.
 

“Although asking prices are still on the high side, we see lots of opportunities for consolidation. To that end, we remain committed to our discipline of making strategic acquisitions at appropriate valuations.”

King attributed the increase in bad debt to current economic conditions, which have placed more financial pressure on patients when managing their healthcare bills.
 
According to King, approximately 37 percent of the population in 2007 was in high-deductible plans with an annual deductible of greater than $500. “Now, in 2008, we expect that number to have increased significantly,” he said. “That means there's more patient responsibility in a time when there's [other kinds of economic] pressure on patients.” 
 
In an effort to recoup its bad debt, the company is implementing several strategies that are focused on collecting payment from patients at the time of testing.
 
LabCorp plans to set up cash register modules with company representatives at its service centers and in some physician offices to collect payment from uninsured patients at the time of service or before service. These company representatives, responsible for managing uninsured patients, will receive incentives for collecting payment.
 
“We have had for several days a cash register module embedded into our system that sits in front of our employees [at] patient service centers, and in some cases, physician offices,” Hayes said. “So, [we are] getting better at building into their work process and work flow collecting from an uninsured transaction at that time of service or before the time of service.
 
Furthermore, LabCorp will bolster efforts to capture patients’ credit card information at the time of service.
 
“Because we don't have a real-time claims adjudication system … it's not impossible for us to know at the time of service what the patient is going to owe after the third-party adjudication,” Hayes said. “So, if we can get a credit card swipe upfront, we can go back to that with the patient's authorization and collect after a third-party adjudication. We've had very good success there.”
 
Additionally, the company advises physicians to send uninsured patients to LabCorp’s service centers, which is another measure designed to recoup payment at the time of service.
 
“We also look at our third-party denial process, [and] look at sources of our bad debt by where it comes from in terms of physician accounts, to address that portion of our bad debt that we don't see in our patient service centers or in-office phlebotomists,” Hayes added.
 
Growth Plans
 
Although economic conditions appear to be squeezing the company’s profits, increasing M&A activity in the laboratory sector might work in LabCorp’s favor and allow it to expand.
 
“The M&A market is probably the most active it's been in recent years. We believe that a combination of factors has caused many lab owners to explore their options,” Brad Smith, LabCorp executive VP of corporate affairs, told investors during the conference call. “Although asking prices are still on the high side, we see lots of opportunities for consolidation. To that end, we remain committed to our discipline of making strategic acquisitions at appropriate valuations.”
 
Over the past few weeks there has been particularly heavy M&A activity in the diagnostics and laboratory sectors. Some notable alliances in the last week include Hologic’s acquisition of Third Wave, and Affymetrix’s purchase of San Francisco-based microparticle-technology firm True Materials.
 
Last month, Invitrogen announced a $6.7 billion deal combining its portfolio of life science consumables and reagents with Applied Biosystems’ instruments. In February, Roche acquired Ventana Medical Systems, a tissue diagnostics company.
 
And as reported by Pharmacogenomics Reporter last week, even Exact Sciences has made no secret of the fact that in light of financial troubles it is searching for an M&A partner. 
 
Smith said LabCorp plans to use a portion of its balance sheet primarily on acquiring new companies and licensing new technologies.
 
“We're going to use our cash to look for strategic acquisitions and licensing agreements first. And then, [we will] look at our pre-cash and pursue share repurchase, second,” Smith said. “[T]here are a lot of opportunities out there. And the timing and how we use our cash is affected by what we see as it relates to acquisition and licensing opportunities.”
 
Company officials would not name any potential M&A partners they were eyeing. However, King mentioned that earlier this month LabCorp signed an agreement with Stanford University to acquire its outreach business. King did not elaborate on what kinds of products or services this so-called outreach business comprised. The deal is expected to close on Aug. 1.
 
LabCorp’s testing volume has also grown year-over-year with several insurers, including United, WellPoint, Cigna, and Humana. During the quarter, LabCorp also signed an agreement with Aetna to retain “a significant part” of the national insurer’s business.
 
“We continue to discuss with [insurers about] how lab testing can help them improve patient outcomes and reduce healthcare costs,” Smith said.
 
King noted that LabCorp had initiated several strategies for increasing testing volume. For instance, since February, the company has been marketing its tests to specific physician offices and specialty practices.
 
The doctors being targeted by sales reps, “we believe, are less subject to the economy, [such as] physicians who were taking care of patients with more acute issues,” Kind noted. “I think that's what really is going to drive the … top-line volume growth.”
 
Focus on Personalized Rx
 
Despite its difficulties collecting payment directly from patients in the second quarter, LabCorp during that period continued to expand its genomic test offerings in the area of personalized medicine.
 
In the second quarter, LabCorp launched OvaSure, a test that identifies women at high risk for developing ovarian cancer; and a gene-methylation test designed to calculate prostate cancer risk.

The OvaSure test is based on technology licensed from Yale University. "We have seen significant interest in the test from physicians, patients, and payers, and already see adoption," King noted during the call, adding he expects adoption to increase after Yale publishes data from a Phase III trial.

LabCorp also launched an assay for gauging the risk of prostate cancer in men who have elevated PSA but negative biopsies. The test, based on technology developed by Veridex, detects the presence of key tissue markers in prostate cancer, including the methylated version of the GST-Pi gene. LabCorp has said the test is "the first commercially available methylation assay for prostate cancer."

OvaSure and the prostate cancer test are the newest additions to LabCorp's test catalog, which has been growing rapidly this year.

Earlier this month, LabCorp launched ColoSure, a stool-based colon cancer test that uses PCR to detect the methylation of the Vimentin DNA marker. ColoSure is based on technology LabCorp licensed from Exact Sciences earlier this month [see PGx Reporter 07-23-2008]. The test, which can potentially increase survival by detecting colon cancer in an early or localized state, was recently included in the American Cancer Society's treatment guidelines for colon cancer screening.

 
The company also made several strategic moves in the second quarter to advance the development of targeted medicines and companion diagnostics.
 
In the second quarter LabCorp reached an agreement with Siemens to develop companion diagnostics for metabolic syndrome, oncology, and diabetes treatments. LabCorp also penned an exclusive partnership with Vanda Pharmaceuticals to develop a series of diagnostic tests for the atypical antipsychotic drug Fanapta, which is currently being reviewed by the US Food and Drug Administration.  
 
Additionally, several advances in personalized medicine research this past quarter may boost sales of existing tests in LabCorp’s catalogue.
 
For instance, King noted that LabCorp markets a K-RAS mutation test, in light of clinical data presented at the American Society of Clinical Oncology meeting this summer that urged physicians to routinely screen for K-RAS mutations in colorectal cancer patients [see PGx Reporter 07-02-2008].
 
Another test is one for HLA-B*5701, which the company has marketed since 2005. The test is now particularly significant because the FDA recommended last week that patients should be screened for this allele before being treated with the HIV drug abacavir (see related story, in this issue).
 
To further its presence in the genomic-testing and companion-diagnostics market, LabCorp “will soon be breaking ground on a state-of-the-art biorepository in Kannapolis, North Carolina,” King noted. The biorepository will be developed in partnership with Duke University and several pharmaceutical manufacturers. 
 
“This biorepository, [and] our newly acquired Tandem Labs’ ability to do rapid biomarker identification, are two critical components of our plan to create the most comprehensive companion diagnostic platform in the industry,” King said. 
 
He added that this comprehensive platform under development could potentially help to support drug rescue programs that LabCorp has been exploring in its collaborations with Arca Biosciences.
 
“We have recently seen exciting new data from Arca about [the beta blocker] bucindolol, indicating that genetic testing allows us to accurately identify patients who will benefit from the drug,” King said [see PGx Reporter 02-21-2007]. 
 
King said he expects esoteric and genomic testing to comprise 40 percent of LabCorp’s revenues in the next three to five years.

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