巴克莱美股医疗保健行业美国生命科学与诊断实验室产业更新201951732页

EquityResearch17May2019COREBarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE25.Restricted-InternalU.S.LifeScienceTools&DiagnosticsLabIndustryUpdate:ConsolidationCatalystsStartingtoComeTogetherAswedigest1Q19earnings,webelievetherewereinterestingsignalsfromthelabindustrywhichhighlightthepotentialopportunityforindustryconsolidationforthenationallabs–LabCorpandQuest(bothOW).Labindustryconsolidationhasbeenathesisforalongtimegivenindustryfragmentationandscaleadvantagesinherentinthestrategy.CoupledwithPAMAreimbursementpressure,ourviewhasbeenthatbroaderaccesstonationalpayorsin2019helpsremoveahistoricalbarriertoconsolidation.Webelievenetsharegainswithnationalpayorsarebackinfocusasthenationallabsappeartobeleveragingtheirscaleadvantagesamidstindustrypressure.Notably,webelievethat1Q19resultsalreadysupporttheviewthatLabCorpandQuestshouldbeabletocollectivelygainshareagainsttherestoftheindustryfollowingtheopeningofnationalpayornetworksinJanuary.In1Q19,Questsizedthenettailwindofpayorshiftsataround1.5%revenuegrowth,oraround$27mm.QuestnotedthatitinitiallygainedsharewithUnitedHealthinJanuary,whichcontinuedtobuildthroughoutthequarter.LabCorpsizedthenetheadwindwithmanagedcarepayorshiftsasa0.7%headwindtolabrevenues–oraround$12mm.LabCorpnotedthatitinitiallylostsharewithUnitedHealthwhichthenstabilized,whileAetnavolumesbuiltthroughoutthequarter.Thisimpliesthatthenationallabshavecollectivelygained$15mmofsharetostart2019.Weestimatethisrepresents~20bpofthe“outsidethehospital”labopportunityonanannualizedbasis.Inadditiontothequantifiablesharegains,webelieveanecdotalcommentaryaroundbuildingsharewithpayorswhereeachlabwaspreviouslyout-of-networkshowsthatthereareincrementalsharegainscomingfromregionalandhospitallabs(it’snotjustLabCorpvsQuest).Outsideofthenationallabs,thepublicregionallabshavefacedpressuretooperationsfromPAMAandrelatedcommercialpricingreductions.AtBio-ReferenceLabs(partofOpkoHealth,notcovered),revenueshavedeclinedsteadilyforthelastthreeyears.IncreasedlossesoverthepasttwoquartershavebeenattributedtoPAMAreimbursementpressureaswellascommercialpayordenials.AtEnzo(ENZ,notcovered),theclinicallab’sprofitabilityhasturnednegativeeachofthelasttwoquarters.Webelievetherelativelyweakerregionallabresultshighlightthescaleadvantagesinherentinthenationallabbusinessmodelwhichcanbeleveragedovertime.Lookingforward,webelievetheimplementationofUnitedHealth’spreferredlabnetwork(PLN)representsanadditionalstrategicpositiveforLabCorpandQuest.Thenationallabshavecommentedtherewillbeeconomicincentivesforphysiciansandpatientstochoosepreferredlabs,whichweviewasapotential2020event.DearClient:WeappreciateyourconsiderationintheInstitutionalInvestorAll-America&All-CanadaResearchTeam2019Survey.Toviewouranalysts,pleaseclickhere.INDUSTRYUPDATEU.S.LifeScienceTools&DiagnosticsNEUTRALUnchangedU.S.LifeScienceTools&DiagnosticsJackMeehan,[e-mail],USMitchellPetersen,[e-mail],[e-mail],USBarclays|U.S.LifeScienceTools&Diagnostics17May20192TABLEOFCONTENTSAConfluenceofFactorsIsPromotingStructuralShiftsintheLabIndustry.................................3LaboratoryMarketPresentsaLargeConsolidationOpportunity.....................................................4BackgroundontheNationalLab&PayorRelationships.....................................................................62007CaseStudyShowsHowRegionalLabs“Arbitraged”theExclusiveLabContracts...........7Turningto2019,EarlySignsShowaNormallyFunctioningDuopolyHasGainedShare.......14Conversely,RegionalLabResultsHaveBeenMixed..........................................................................17LookingForward,PreferredLabNetworksRepresentAdditionalShareGainPotential..........20Valuation:RoomforExpansionIfConsolidationContinues............................................................22Barclays|U.S.LifeScienceTools&Diagnostics17May20193AConfluenceofFactorsIsPromotingStructuralShiftsintheLabIndustryWhilethisreportfocusesonpayornetworkchangesasamechanismforshareshifts,webelievethereareseveralotherdynamicsthatshouldpromotesharegainsforthenationallabs.Inourview,reimbursementpressure(Medicare,Medicaid,andcommercial)willhaveanoutsizedimpactonsmallerindependentlaboratorieswithcostcurvedisadvantagestothenationallabs.Additionally,mechanismsdesignedtolowerhealthcarecostsshouldfavorthelow-costoperators.Weoutlinetheseotherdriversbelow:PAMA–MedicarePricingPressure:ThroughtheProtectingAccesstoMedicareAct(PAMA),CMSissettingMedicarereimbursementtoparitywithcommercialrates.Themajorityofroutinelaboratorycodesarebeingcutsignificantlythroughthisprocess,andtheclinicallabfeeschedule(CLFS)inaggregateisexpectedtobecu