Bio-Reference Labs: Just What the Doctor Ordered

Bio-Reference Laboratories (NASDAQ:BRLI) is a relatively small player in the huge business of diagnostic testing services. With annual revenue of $204 million and a market capitalization of $356 million, it is a tiny fraction of the size of competitors like Quest Diagnostics (NYSE:DGX) or Lab Corp. of America (NYSE:LH). Yet its size is part of the appeal.

There is great potential for growth, particularly in the area of esoteric testing which accounts for more than 40% of its revenues. Bio-Reference Labs is an intriguing small cap stock that is well positioned to benefit from the theme of an aging population and the trend toward genetic testing and other advanced demands on clinical labs.

Bio-Reference serves healthcare providers in the greater New York metro area, providing lab tests that range from the routine such as blood and urine analysis to the sophisticated needs of genomics and oncology testing. The company also offers clinical knowledge management services and a Web-based portal that connects labs and physicians.

The diagnostic testing business is large and fairly steady, so even though Bio-Reference is a small, regional company, investors can have some confidence that the market for its services isn't subject to fickle consumer trends. Indeed, the graying of the baby-boomers is sure to support an upward trajectory for demand in this industry. Moreover, advances in genomics are finally starting to move from the headlines to the local doctor's office, or at least the lab behind it. Medicine has long understood the significant role of individual patient differences traced to everyone's unique genetic profile, and science is finally catching up to support that in ways from prevention to treatments.

Bio-Reference reported a 25% increase in revenues for the first quarter of 2007. Worth noting is that patient count grew 15%, which says that both market share and revenue per patient are growing. Net income for the quarter increased 71% and earnings per share jumped to 14 cents from 9. Esoteric testing increased to 43% of total revenue from 36% a year ago.

The company noted that its business has benefited from turmoil in the industry lately. This is a reference to the huge managed care provider, UnitedHealth Group (NYSE:UNH), and its Q1 announcement that it is switching business from Quest to Lab Corp. Here again, this highlights the differences between the nationwide industry giants and a small regional player like Bio-Reference.

Another difference is the impressive margins these big players sport -- operating margins approaching 20% and net margins in the 9%-10% area. Bio-Reference simply lacks the scale to even aspire to such fat profits--the company currently has margin rates of about half that of the big players. But with the evolution in the market toward the higher-margin business of esoteric and genomic testing, where Bio-Reference is strong and evidently growing, investors can see the potential for margin expansion.

The common trade-off with small vs. large companies in the same industry is higher growth rates but less certainty. But the latest turmoil caused by United Health's switch from Quest to Lab Corp. shows that dependence on the big managed care providers has it's risks, too. As for growth, Bio-Reference is expected to deliver earnings of 96 cents per share, up from 85 cents last year. That works out to a modest 13% increase, but the 5-year growth rate is expected to be 19% according to the average analyst forecast.

Small cap stocks carry plenty of risk, but Bio-Reference Labs is in a business that is reasonably steady and definitely growing. Trends in demographics and medicine support both the industry and the niche it has carved out.

BRLI 1-yr chart


Disclosure: none