Profiting From Diagnostic Laboratories

Nov. 07, 2011 2:42 PM ETDGX, LH, BRLI-OLD, GHDX, MTOX, PMD1 Comment
Ron Sommer profile picture
Ron Sommer

There are approximately 8,000 medical and diagnostic laboratories generating $55 billion in annual revenues. The industry is highly fragmented and competitive with thousands of independent labs, physician office labs, and hospital based labs. The industry’s two largest companies are Quest Diagnostics (DGX) and Laboratory Corp. of America (LH). Other publicly traded, but significantly smaller, competitors include Bio-Reference Laboratories (BRLI), Genomic Heath (GHDX), MEDTOX Scientific (MTOX), and Psychmedics (PMD). Through significant consolidation over the past decade, the majority of publicly traded labs have been acquired, primarily by Lab Corp and Quest.

Demand is linked to the number of people receiving medical treatment. The profitability of individual companies depends on efficient operations and good marketing. There are large economies of scale in the operation of medical labs, which can receive samples from a wide geographical area. Small medical labs can compete effectively by providing specialized analyses, or by serving geographical regions with few medical facilities.

Across the United States, medical laboratory accreditation and Clinical Laboratory Improvement Act (CLIA) compliance is getting tougher. This is a trend which affects every clinical laboratory and anatomic pathology medical group that must comply with CLIA and meet the accreditation requirements of the Medicare program.

The long term trends are very favorable for the diagnostic laboratories. All laboratories will benefit from volume increases due to both population growth and the baby boomer budge in the aging population; an increase in the number of tests per requisition; and an increase in esoteric/genomic tests which we see as a result of technological developments and the nascent trend to customize treatments. Taken together, these trends will accelerate revenue growth beyond single digits. We think that the expansion of health insurance coverage to millions of currently uninsured consumers will out way reduced reimbursement rates. The main beneficiaries of the trends will be the most cost efficient service providers. We

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Ron Sommer profile picture
Ron Sommer was a chief financial officer at an institution of higher education in New York City. He has 40 years of financial management experience in the public, private and not-for-profit sectors. Sommer has also been a private investor for more than 30 years. He uses a ruled-based quantitative model.

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