Quest Diagnostics will focus on growing its portfolio of point-of-care diagnostic tests this year, and has long-term plans to expand its clinical trials and testing services to India, according to CEO Surya Mohapatra.
He said that Quest will be launching a diagnostics lab in India before the end of March and said the effort will “incur significant start-up cost.”
However, company officials are betting that the emerging Indian market will offer Qiagen opportunities for long term revenue growth. “The middle class in India is as large as the entire US population, and therefore … represents an important element of [Quest’s] growth strategy,” Mohapatra said during the call.
“We are entering the decade of diagnostics,” he added. “The healthcare world is moving from a focus on curative care to a reliance on early detection, prevention, and extended use of personalized and targeted medicine.”
Mohapatra made his remarks during Quest’s fourth-quarter earnings conference call. For the three months ended Dec. 31, 2007, Quest reported that revenue increased 14.3 percent to $1.8 billion from the year-ago period. Profit from continuing operations during the fourth quarter inched up to $154 million from $151 million in the fourth quarter of 2006.
For full-year 2007, revenues rose 7 percent to $6.7 billion.
In the year, the company increased its reserve cash anticipating the settlement of a government investigation into a diagnostic test kit manufacturing subsidiary Quest closed in 2006. Additionally, the company instated a plan to reduce costs by $500 million after losing a UnitedHealth contract to a rival.
Indian Market Potential
Earlier this month, the company announced that its diagnostics division in India penned a long-term agreement to be the exclusive provider of full-service medical screening, diagnostic laboratory testing for life insurance customers, and other health assessment services for Birla Sun Life.
During the call, Mohapatra said that the Indian market will be a central focus for Quest’s international efforts since the Indian middle class numbers around 350 million.
However, Quest is not the only company that has set its sights on emerging Asian economies. Qiagen recently opened an Asia-Pacific service center as the last piece of its global service network. Industry leader Roche Diagnostics also has branches throughout the region (see related story, in this issue).
If India’s literacy rate and economy grow at current rates, as much as half the population is expected to rise to middle class status between 2020 and 2040. If these trends continue, experts are estimating that India’s per capita purchasing power can climb from just above $2,000 in 1999 to more than $16,000 by 2040.
Along with India’s purchasing power, the population appears more willing to invest in insurance for health and unforeseeable events, which in turn has given rise to private and state-owned insurance schemes. Earlier this month, state-owned insurer Life Insurance Corp of India introduced its first long-term health insurance policy targeting at least one million policy buyers across the country during the first phase of the launch.
Collaborating with Birla gives Quest entry into a life-insurance market that is expected to be worth $100 billion by 2012. Birla, a joint venture between the Aditya Birla Group and Sun Life Financial, covers more than a million lives and has customers across more than 1,000 towns and cities in India.
Growing Point-of-Care Testing
Fourth-quarter results included contributions from AmeriPath, an anatomic-pathology and molecular-diagnostics company Quest acquired last May. The acquisition increased Quest’s revenues for the quarter by 13 percent, while clinical testing revenues increased by 13.1 percent.
During the call, Quest officials said that in the long term, they expect the AmeriPath acquisition to bolster its presence as a provider of point-of-care testing, particularly in the cancer diagnostics market.
“We continue to be encouraged by physicians’ decisions to select Quest Diagnostics, when given a choice.”
In line with this strategy, Quest became the first commercial laboratory in the US to obtain a non-exclusive license for the Septin 9 biomarker from Epigenomics for the development of a homebrew colorectal cancer test (see related story, in this issue).
Additionally, Quest announced during the fourth quarter that its HemoCue and Focus Diagnostics subsidiaries had received 510(k) clearance from the US Food and Drug Administration for two new point-of-care tests: HemoCue’s White Blood Cell Analyzer assists physicians diagnose infection, inflammation, bone marrow failure, autoimmune diseases, drug toxicity, and leukemic neoplasia, among other medical conditions commonly tested for at reference laboratories. Focus’ HerpeSelect Express HSV-2 tests for the herpes simplex type-2 virus, the primary cause of genital herpes.
While 510(k) clearance allows Quest to market the products to hospitals and laboratories, the company is still awaiting CLIA waivers, which would allow it to market directly to physician’s offices, a much larger segment. Quest officials noted that point-of-care testing is a $6 billion market that is growing at an annual rate of between 8 percent and 10 percent.
The company also increased its cash reserve to $241 million from $190 million in the third quarter, in case a settlement is reached in the ongoing government investigation of the Nichols Institute Diagnostics, a test-kit manufacturing subsidiary Quest shuttered in 2006.
“The company estimates that the amount reserved represents the minimum expected probable loss with respect to this matter,” Quest said in a statement. However, Quest told investors that if a settlement cannot be reached in the case, the company is prepared to go to court.
“While this is a substantial increase to the reserve, we believe we are closer to either settling this matter or determining that an acceptable settlement cannot
be reached,” Quest Chief Financial Officer Bob Hagemann said during the earnings call.
The case began in 2004 when the US Attorney’s office for the Eastern District of New York subpoenaed NID and Quest for documents regarding the company’s FDA-cleared tests for parathyroid hormone levels. At the time, Quest said that NID’s PTH test kits contributed less than 1 percent to Quest’s consolidated revenues. NID discontinued operations in 2006 due to quality issues.
“Obviously, we want to put this matter behind us quickly; however, it remains unclear as to how long it may take to bring it to closure,” Hagemann said. “If we are unable to reach an acceptable settlement, we are fully prepared to litigate this matter.”
Although the company’s revenues grew in the fourth quarter, Quest experienced some setbacks in 2007. Mainly, in January 2007, UnitedHealth Group — Quest’s “largest private payor” — dropped its contract with Quest and instead penned a deal with rival Laboratory Corporation of America.
Following this event, Quest “renewed or expanded relationships with most major health plans” and began a program to reduce its cost structure by $500 million.
According to Quest, losing the UnitedHealth contract shaved 5 percent from fourth-quarter revenue and reduced clinical-testing volume during the period by about 8 percent. However, Quest maintained approximately 20 percent of its customer base despite the change in status with UnitedHealth.
Going forward, some of the 20 percent of physicians who still use Quest may choose not to use Quest’s services, however, “we continue to be encouraged by physicians’ decisions to select Quest Diagnostics, when given a choice,” Hagemann said.
In losing the UnitedHealth contract, Quest initiated at the start of 2007 a program to cut costs by $500 million. Hagemann said the plan “is in full swing” and the company had eliminated approximately $100 million in costs by the end of 2007. He said the firm expects to reach its goal by the end of 2009.
In 2008, the company expects to grow revenues by 9 percent. Cash from operations is expected to be around $900 million and expenditures are projected to range between $280 million and $300 million.
In the longer term, the company hopes to expand its operating income to 20 percent of revenues, and in five years garner 10 percent consolidated revenues from its international business, in which India will play a large role.