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LabCorp’s Growth Drivers in 1Q16: Organic Growth, Acquisitions

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LabCorp Diagnostics

In 1Q16, LabCorp’s (LH) national clinical laboratory business, LabCorp Diagnostics, accounted for 69.3% of the company’s total revenues. Despite facing the impact of about -0.6% in revenues on a year-over-year (or YoY) basis from foreign exchange fluctuations, LabCorp Diagnostics managed to report strong revenue numbers in 1Q16.

In 1Q16, LabCorp Diagnostics earned approximately $1.6 billion in revenues, which was a rise of 8% on a YoY basis. The business witnessed positive organic growth, which was reflected in the number of requisitions from physicians and the commercial success of BeaconLBS.

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BeaconLBS

BeaconLBS was responsible for about 1% of LabCorp Diagnostics’ YoY revenue growth. According to LabCorp, “BeaconLBS is a laboratory benefit solutions company that enables health plans, physicians and network labs to connect and deliver high-quality, cost-effective care to patients.

“BeaconLBS is distinctive in its approach, offering a fully integrated, solutions-based technology that automates real-time clinical and financial decision-making at the point of care and point of ordering.”

Revenue and volume growth

In 1Q16, LabCorp Diagnostics also benefited from an optimal price mix and strategically focused acquisitions targeted at adding esoteric testing capabilities. The revenue growth rate of esoteric testing surpassed that of core testing in 1Q16. These trends were reflected by the revenue per acquisition metric reported by the business, which grew by about 2.7% on a YoY basis.

In 1Q16, LabCorp Diagnostics witnessed total volume growth of about 4% in 1Q16. Of that, 3.4% was attributed to organic growth while the remaining 0.6% was due to acquisitions. Volume growth also received a boost from weather conditions, as well as an additional day in 1Q16 as compared to 1Q15.

Among its peers, Quest Diagnostics (DGX), Opko Health (OPK), and Davita Healthcare Partners (DVA) are also expected to benefit from the additional day in February in 1Q16.

Operating income

LabCorp Diagnostics’ operating income rose from $290 million in 1Q15 to $310 million in 1Q16 due to favorable volume and price mix, as well as increased business productivity. However, the segment’s operating income did not rise in line with its revenues. Its income was constrained by increasing labor costs, bad debt expenses rising by ~0.25%, and the customer mix of BeaconLBS.

LabCorp expects that its business process re-engineering efforts could enable the company to control its bad debt expenses in future quarters. If these projections prove to be correct, this could will help boost the company’s operating income. It may also have a positive impact on the share prices of the company as well as those of the Health Care Select Sector SPDR ETF (XLV). LabCorp makes up about 0.47% of XLV’s total portfolio holdings.

In the next article, we will explore the performance of the Covance Drug Development segment in 1Q16.

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