LabCorp tests positive for growth
While presidential candidates debate over how to rein in health-care costs for consumers, Laboratory Corp. of America’s ($73; NYSE: LH) partial solution could help both consumers and health insurers — and also boost its own revenue.
LabCorp conducts routine and specialized medical testing, a $50 billion industry dominated by hospitals, which perform about 54% of clinical tests. Since hospitals often charge two to three times as much as independent national labs, LabCorp sees an opportunity to grow its business. As managed-care companies seek to reduce costs, LabCorp is marketing its cost advantage in an effort to expand its market share beyond the current 8%.
Most of LabCorp’s business is not economically sensitive, and consensus estimates project double-digit growth in sales and per-share profits this year. While the managed-care industry faces problems with enrollment growth because of increased competition and weakness in the labor market, the laboratory-testing industry should continue to grow strongly over the long term as the U.S. population ages and insurers focus more on preventative medicine. LabCorp is a Focus List Buy and a Long-Term Buy.
LabCorp’s services range from clinical trials for drug companies to routine employee drug testing to high-tech genetic testing. Managed-care providers accounted for 46% of 2007 revenues, while commercial clients provided 27%. LabCorp also serves Medicare and Medicaid (18%) and individual patients (9%).
UnitedHealth Group ($38; NYSE: UNH) provided $366 million of LabCorp’s sales in 2007, the first year of a 10-year contract. LabCorp expects to receive even more work from UnitedHealth this year in the wake of the managed-care giant’s acquisition of Sierra Health.
Roughly two-thirds of LabCorp’s 2007 revenue came from routine testing services. LabCorp’s genomic (15% of revenue) and other specialty (11%) testing services generate the highest profit margins and enjoy the best growth potential. Histology, or analysis of tissue samples, accounted for the remaining 8% of 2007 revenue.
As the health-care industry shifts toward medicine targeted to individuals, LabCorp is positioning itself to take advantage of the trend. To provide personalized pharmaceuticals, drug companies must use tests that identify individual characteristics, or biomarkers, that indicate which drugs to use and how to administer them. Pharmaceutical spending to discover biomarkers has increased tenfold over the last five years, while the percentage of cancer drugs in clinical trials that use biomarkers increased to 40% from 10%. Should these trends continue, LabCorp’s clinical-trial presence represents a competitive advantage. Tests using biomarkers are far more profitable than routine testing, in many cases generating twice the profit margins.
At 15 times projected 2008 earnings of $4.83 per share, LabCorp sells below its three-year average forward P/E ratio of more than 16 and well below the laboratory industry’s average valuation of 19. An annual report is available from 358 S. Main St., Burlington, NC; 27215; (336) 229-1127; www.labcorp.com.