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Quest Diagnostics' net income hit by hospital competition


By Bob Herman
Posted: July 24, 2014 - 12:00 pm ET
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Increasing competition from hospitals and one-time charges spelled a drop in second-quarter net income for Quest Diagnostics, but the Madison, N.J.-based diagnostic laboratory company recorded steady revenue growth thanks to acquisitions and higher clinical volumes.

Quest in March completed its $572 million all-cash acquisition of Solstas Lab Partners Group, a commercial lab company based in Greensboro, N.C. The Solstas deal and other acquisitions represented about 7% of Quest's revenue for the quarter, the company said.

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UBS analyst A.J. Rice said Quest's second-quarter results were mostly in line with projections. Quest and other diagnostic testing companies have faced headwinds stemming from low volumes and competition from hospitals that are directly employing physicians. Quest is in the middle of a $700 million cost-cutting campaign for 2014 as it attempts to offset those challenges, but reducing the expense side alone is not likely to create long-term stability, Rice said.

“We are looking for a re-acceleration of top-line growth in order to potentially become more enthusiastic about the stock,” Rice said in his research note.

Quest's second-quarter net income dropped 19%, from $165 million to $133 million, while revenue increased almost 5%, from $1.8 billion to $1.9 billion. The company said the profit declined because of restructuring and integration costs associated with acquisitions and its expense-reduction plan.

For the first six months of the year, Quest's net income was down 21% to $237 million. Revenue rose 3%, totaling almost $3.2 billion.

“We continued to make good progress executing our strategy, and as underlying trends improved for pricing and volume," Quest CEO Steve Rusckowski, who made $8.2 million last year, said in a statement. "We saw strong testing growth in infectious disease, prescription drug monitoring, and general health and wellness.”

UBS estimates the U.S. diagnostic testing market is worth $72 billion, with physician services representing 61% of that total and hospitals representing 39%.

Follow Bob Herman on Twitter: @MHbherman


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