Quest Diagnostics, Inc. (DGX)

NetscribeHealthC (68.61) Submitted: 1/30/07 7:20 AM : Start Price: $52.08 DGX Score: 30.78

Quest is the largest provider of diagnostic testing and information services, with nearly 25% market share, which include esoteric testing, gene-based testing, anatomic pathology services and testing for clinical trials. The company has a network of 35 primary testing facilities and more than 2,000 service sites in 46 states. It is estimated that per year it performs personal health testing on more than 100 million patients and processes more than 250 million diagnostic laboratory tests. Routine testing generates 80% of net sales, esoteric testing 17%, while clinical trials 3%.

Diagnostics accounts for almost 2%-3% of health care costs but impacts approximately 60-70% of medical decisions. Coupled with a favorable aging demographic trend, the laboratory services industry is poised for a steady growth of 7-8% per annum till 2010. The $40 billion clinical laboratory market comprises of hospital-based labs accounting for about 56% of the market, independent commercial labs making up for 36%, while the balance being physician-office labs.

United Healthcare, until it transferred the contract to LabCorp, represented approximately 5% of Quest's business and given LabCorp's recent victory, it is expected that this loss can prove to be a disadvantage to the company. However, the earlier acquisition of LabOne in December 2005 and Focus Diagnostics in July 2006 has given Quest a large reference lab located in Southern California and GenomEx, an independent genetic laboratory testing service. These acquisitions are expected to boost the future sales starting 2007 and fill up the vacuum created by United Healthcare’s loss.

Sales have grown at a compound annual growth rate of 10.2% over the past 4 years driven by organic growth and acquisitions. Revenues from continuing operations increased 14.9% for the year ended 2006. The acquisition of LabOne contributed revenue growth of approximately 8%, while share of Focus Diagnostics was 1.5% since July 2006. As the management anticipates a 12-14% revenue growth in the coming two years, Quest seems to be a good investment proposition.

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