LabCorp cuts its profit outlook, citing volume shortfall
- Lab testing giant LabCorp on Friday reduced its earnings outlook for full-year 2018, pointing to several reasons that volume and demand have fallen short of expectations in its diagnostics business.
- The company blamed slower growth in referred direct-to-consumer genetic testing, lower referral volume from hospitals and health systems, volume declines from certain managed care plans that will no longer be exclusive to LabCorp in 2019 and adverse weather.
- The announcement follows a profit warning just two days earlier from rival Quest Diagnostics. Quest lowered its revenue and earnings forecasts for 2018 on "volume softness" it said was driven in part by Hurricane Michael, California wildfires and the recent East Coast snowstorm.
Jefferies analyst Brian Tanquilut said reimbursement cuts under a new CMS payment system resulting from the 2014 Protecting Access to Medicare Act (PAMA) most likely drove the guidance revisions by both LabCorp and Quest.
The companies' lowered forecasts have "created a cloud over the lab space's fundamentals" underscored by softness in their hospital reference testing businesses, the analyst said.
"Our theory is that PAMA cuts have forced hospitals to get more aggressive in pulling volumes in, specifically with physicians they employ. We also believe regional independent labs have also started pricing more aggressively to capture greater share as a way to offset the impact of PAMA," Tanquilut wrote in a note to clients Friday.
LabCorp and Quest also have set ambitious growth agendas to capture more share of the fragmented U.S. market for laboratory services. Quest recently announced plans to open a new 250,000-square-foot laboratory in Clifton, New Jersey, that will become the largest of its more than 20 major U.S. facilities. LabCorp is currently focused on opening nine patient service centers in Walgreens stores in California as it expands a collaboration with the pharmacy chain that aims to have 600 co-branded sites up and running over the next four years.
LabCorp lowered its 2018 adjusted earnings per share estimate to a range of $10.95 to $11.05 from its prior guidance of $11.25 to $11.45. It reduced its forecast for total revenue growth to 9.9% to 10.3% from the prior range of 10.5% to 11%. The company said cost reduction initiatives outlined on its third-quarter conference call would not be enough to offset the unanticipated volume shortfall. LabCorp stock declined nearly 10% following the announcement.
Quest said it now expects 2018 adjusted EPS to be greater than $6.30 per share, below its previous forecast for a range of $6.53 to $6.60. It anticipates revenue of about $7.57 billion, below the $7.62 billion it forecast earlier.