LabCorp on Wednesday reported an 8% increase in third quarter revenue to $2.83 billion from Q3 2017 but lowered full year guidance for 2018. Main rival Quest Diagnostics disclosed the same trends in their earnings on Tuesday.
The Burlington, North Carolina-based company attributed its revenue growth first to acquisitions and secondly to organic growth in the quarter. Earnings per share and revenue growth were both negatively impacted by what CFO Glenn Eisenberg called "business disruptions" on a morning investor call: a ransomware attack in July and the effects of Hurricane Florence in September.
Though LabCorp's diagnostics branch suffered in the quarter, yielding revenue of $1.75 billion (a 0.2% decrease from Q3 last year), its Covance drug development business shined with revenue of $1.06 billion, up roughly 25% from same quarter last year.
Archrivals LabCorp and Quest both faced fierce external headwinds in the most recent quarter.
LabCorp's drug development arm, Covance, was a bright spot. The company expects to deliver $150 million of net savings from the LaunchPad business process improvement initiative by the end of 2020, along with $30 million from the integration of Chiltern by the end of next year.
But the diagnostics branch was "particularly disappointing," said chairman and CEO Dave King.
Though LabCorp divested its Food Solutions business and its U.K.-based forensic laboratory testing business in the quarter for approximately $15 million in revenue, the influx of cash could not make up for external forces slamming into once-stable bottom lines.
An unexpected ransomware attack over the summer caused LabCorp to incur $24 million in costs to find and attempt to rectify the breach before further damage. The company, which says it processes tests for more than 2.5 million patient specimens per week, reported it found no evidence data was transferred or misused.
And Hurricane Florence last month whacked a majority of the U.S. medical device and pharmaceutical industry, along with forcing hospital closures and patient transfers. LabCorp, headquartered in hard-hit North Carolina, was not immune.
And regulatory agencies and the courts are not helping. Last month, a district judge dismissed an American Clinical Lab Association lawsuit seeking to stop HHS from implementing a key section of the Protecting Access to Medicare Act, or PAMA, which lowers Medicare payment rates for clinical lab testing.
Though the group filed a notice of appeal last Friday, it's likely the legislation will stand, further cutting into lab companies' bottoms lines. The headwinds facing LabCorp "will be at their stiffest next year," affirmed King on the earnings call.
Bad debt, a problem for competitor Quest in the quarter, does not bother LabCorp. Its bad debt year over year has been essentially flat as a percentage of revenue, King said. Debt in the quarter was $6.5 billion.
And the company is particularly bullish about its partnership with Walgreens announced earlier this month.
"Covance delivered growth in net orders, a strong book to bill and significant margin expansion, while Diagnostics continued its consistent organic revenue and volume growth," said King. "In addition, we made progress on our three strategic objectives, and initiated LaunchPad Phase II in Diagnostics to continue streamlining the business and reducing the fixed cost base."
LabCorp reported an operating income of $343.4 million and net earnings of $318.8 million, both up from Q3 2017’s figures of $326.7 and $171.6 million, respectively. At the close of the quarter, LabCorp’s cash balance was $892.6 million.
Outlook for 2018 was revenue growth of 10.5% to 11% over 2017 revenue of $10.3 billion, a small narrowing from prior guidance. LabCorp also narrowed their guidance, or lowered it in the cases of adjusted earnings per share and free cash flow (due to an upcoming tax payment of approximately $125 million related to the disposition of the Food Solutions business).