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Quest, Labcorp Report Strong Acquisition Pipelines, Positive Signs on Pricing at JP Morgan


SAN FRANCISCO – Quest Diagnostics and Laboratory Corporation of America both said during their presentations at the 42nd JP Morgan Healthcare Conference on Tuesday that the environment for hospital lab acquisitions continues to be extremely strong and that they see such deals as significant growth opportunities.

The companies noted that higher capital costs and competing priorities are leading more and more hospital systems to offload their laboratory businesses, even in cases where those businesses are profitable.

"If they have to make a choice of [where to put capital], they are going to put it into surgery instead of lab," said Labcorp Chairman, President, and CEO Adam Schechter.

Quest President and CEO Jim Davis made much the same point, highlighting his firm's acquisition last year of portions of NewYork-Presbyterian's lab services business for $275 million.

"When you see an institution like [NewYork-Presbyterian] decide to get out of the outreach business, I think it makes a statement to the rest of the business," he said. "Certainly [NewYork-Presbyterian] did not exit the business because they were losing money on their outreach business."

However, when "faced with investment priorities from neurosurgery, from cancer, from women's healthcare, from cardiovascular work, in an era when the cost of capital is significantly higher than it was five years ago," the hospital chose to devote money toward things that could drive market share to it and away from competing institutions, Davis said.

Quest this week announced its most recent hospital acquisition, a deal to purchase assets of Dallas-based Steward Health Care System's outreach lab business in Pennsylvania and Ohio.

Beyond acquisitions, both firms highlighted esoteric testing as key growth drivers going forward, with oncology, and minimal residual disease testing, in particular, as prime areas of opportunity.

Discussing Quest's MRD business, which it entered last year with the acquisition of Haystack Oncology, Davis said Quest is currently in the process of moving Haystack's MRD test to its oncology center of excellence in Lewisville, Texas, and "industrializing what was an R&D-based test." He added that the company plans to begin offering the assay this year.

Quest also announced this week a collaboration with Ultima Genomics to develop new sequencing-based clinical tests including assays based on Haystack's MRD technology.

Schechter likewise said that Labcorp sees MRD as "the next area for growth in oncology for diagnostic testing," though he noted that more data supporting the utility of such testing is needed for it to take off.

Schechter also singled out women's health as a near-term growth driver for the company, while longer term neurology and autoimmune disease represented significant opportunities.

Both firms also reported an uptick in pricing, with Davis noting that while from 2012 to 2019 the business generally saw price declines of 100 to 150 basis points a year, pricing was flat to slightly positive in 2023, a trend he expects to be repeated in 2024.

Schechter, discussing pricing of Labcorp's managed care contracts, said its recent deals have been "flat to slightly accretive based on price, which is the first time you can say that in a long time."

Davis said that in part the improvements in pricing reflected inflationary pressures. He said it also stemmed from hospital acquisition deals in which improvements in pricing are shared by Quest as such deals bring pricing down from the higher reimbursement typically paid to those labs.

On a more pessimistic note, Davis said he thought that reform of the Protecting Access to Medicare Act (PAMA) via passage of the Saving Access to Laboratory Services Act (SALSA) is unlikely to occur in 2024.

"We didn't quite get there in 2023," he said. "Congress was a bit difficult to work with last year. We actually don't anticipate them being easier to work with in 2024 since it's an election year."

He noted that Congress also has a budgetary incentive to continue delaying cuts as opposed to passing a permanent fix to PAMA. The Congressional Budget Office (CBO) has projected that a permanent fix would cost $6 billion over 10 years while a one-year delay would save $730 million over 10 years.

"We will continue to work with the two committees in the House and the one in the Senate to try to get bipartisan support [for SALSA], but I think that is going to be difficult," he said.

Schechter was slightly more optimistic, saying he didn't think 2024 being an election year necessarily made SALSA more difficult to pass.

"It's been hard even in a non-election year. I can't imagine it being harder in an election year," he said. "What we'd like to do is get it passed before we actually get to the election."

Schechter also addressed the US Food and Drug Administration's proposed rule on laboratory-developed tests (LDTs), noting that while the company supports the Verifying Accurate Leading-edge IVCT Development (VALID) Act, through which Congress would have given the FDA explicit oversight of LDTs under a new regulatory framework covering both LDTs and in vitro diagnostics, it does not support the FDA rule.

The FDA is "trying to take legislation that was specific to the device industry and apply it to an entirely different focus, and therefore we don't think that is the right answer," he said. "We are supportive of oversight through VALID. We are not supportive of the current way in which [FDA] is suggesting moving forward."