The Diagnostics Industry: Why Healthcare Reform Should Help These Companies
by Marc Lichtenfeld, Healthcare Expert
Thursday, April 1, 2010: Issue #1229
America seems to be divided into two camps…
- Not blue states versus red states.
- Not Yankees fans versus Red Sox fans (although why you’d be the latter I’ll never understand).
- Not even people who support the new healthcare reform bill versus those who are opposed to it.
Rather, I’m talking about the difference between people who run to the doctor for every little ache and pain, compared with those who wouldn’t go within 50 yards of a doctor’s office even if their internal organs suddenly became external…
The Diagnostics Industry: More Healthcare Coverage Means More Business
My family and I try to stay out of doctor’s offices. This has been the case, ever since a routine visit to get my six-year-old son some orthopedics in his shoes turned into scheduled spinal chord surgery. Luckily, before my boy was carved up, a second opinion confirmed our thesis that the first doctor was either a quack or wanted a new boat and expected my insurance company to pay for it – at my son’s expense.
But there are also people who avoid the doctor’s office, not because they’re afraid of needles, but because they can’t afford it.
However, times are changing. The new healthcare bill will enable millions more people to get their various conditions checked out.
A friend of mine is one of them. He’s a cancer survivor – cancer-free for five years now – and has an excellent prognosis. But because he was unable to obtain health insurance, he only goes to the doctor when there’s something wrong, rather than forking out thousands for lab tests and physicals.
It will now be easier for him to get coverage, though. And get those costly lab tests.
That scenario will likely be true for millions of other Americans, too.
The Booming Diagnostics Industry: A $1 Billion Market and 25% Annual Earnings Growth
As a result, the diagnostics industry should boom…
Let’s take the two dominant players in the diagnostics field – Quest Diagnostics (NYSE: DGX) and Laboratory Corp. of America (NYSE: LH).
Combined, they generate over $12 billion in revenue and offer services ranging from routine bloodwork to molecular genetics and cancer detection.
In fact, molecular diagnostics is expected grow 19% per year to become a $7 billion a year industry by 2011. Oncology and genetic testing is expected to fuel the growth.
If you’re willing to take on a little more risk in exchange for greater growth opportunities, consider Genoptix (Nasdaq: GXDX). This is a stock that Louis Basenese, told subscribers about back in January.
And after hearing Genoptix’s presentation at the J.P. Morgan Healthcare Conference a few months ago, I did a little digging of my own.
Genoptix provides diagnostic services, which focus on cancers of the blood. But doctors aren’t simply provided with a printout of data. Genoptix has hematologists (those who specialize in the study of the blood) on staff who work with the patients’ oncologists to ensure proper diagnosis and treatment. This is a $1 billion market.
And with Genoptix’s earnings growth projected to exceed over 25% annually over the next five years, I agree with Lou’s positive prognosis for the firm.
When it Comes to Diagnostics Industry Stocks… Go Small
Two other companies specializing in diagnostics to look at are…
- Genomic Health (Nasdaq: GHDX): This is a cancer diagnostics company, which tests for breast cancer and colon cancer. Its Oncotype DX test shows breast cancer patients how likely they are to benefit from chemotherapy.
- Bio-Reference Laboratories (Nasdaq: BRLI): Operating in the New York tri-state area, the firm is similar to Quest and Lab Corp, but smaller. However, earnings growth is expected to total more than 18% per year through 2014, versus 12% for both Quest and Lab Corp.
While most diagnostics companies should enjoy success over the coming years, it’s the small caps that are likely to provide the stronger growth prospects.
And with new technologies constantly being created, I’m focusing my efforts on the smaller names.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
Any investment contains risk. Please see our disclaimer.
6 Responses to “The Diagnostics Industry: Why Healthcare Reform Should Help These Companies”
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Marc is a senior analyst at Investment U. His investment career started out at the trading desk of Carlin Equities in San Francisco, CA, where he executed dozens of trades each day for his clients.
“As a result, the diagnostics industry should boom…”
you neglect the realities of the bill. which is that government will regulate cash flow to medical providers in a manner that serves the needs of high volume and limited resources. while more tests will be done, the medical industry will suffer as they struggle to recoup their expenses.
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Marc,
I’m curious why your article didn’t reference Myriad Genetics (MYGN). Are they not similar to Genoptix and Genomic Health?
Regards,
Troy
PS. Would also value your opinion on the recent court judgement that the genes these companies use for their tests can not be patented. Do you see this (if not overturned) significantly impacting their operating margins going forward?
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What are you thoguhts on the new loss ratios required by the bill? To my understanding individual will be at 80% and group wil be at 85%. Gov’t will now be regulating profits on health Ins companies.This can’t be good.
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your stock recommendations may (or may not) be right on for healthcare stocks, but your conclusions about actual health care (by doctors) don’t match your experiences. Your friend is lucky that he is a five year survivor of cancer (he may, or may not be cancer free – but expensive lab tests won’t prove it – only time will tell – and a simple blood test) Doctors of the 50s & 60s diagnosed diseases just as well with blood & urine tests & actually physically “hands on” exams as the “expensive tests” of today (I had a 43 year old mother who lived to be 93 to prove it) The key to successful treatment is the quality of the DOCTOR (his diagnostic & treatment skills) not the expensive equipment he may or may not use. Your experience with your son should show you that doctors “practice” medicine – it is not an exact science like you have been lead to believe – just as picking stocks are not a “sure thing”. Picking the “right” doctor at the “right” time is comparable to doing the same thing with a stock – an element of “luck” is surely involved.
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I just think (and I really may have got cancer and I sure have had some horrendous toxin exposures, but I have used and adapted some very purist natural health methods and sometimes just my mind) these obligatory medical examinations are an offence against human rights and dignity and I will be even prepared to go in for them because I am going to try to join the Israeli army (I am already 32, I looked after my blind father Herbert Otto Altar for many years and got only home education with him not even courses) and I used to dream in my youth of becoming a military general, that is difficult, but I cannot wait for this to change, of which there is no indication at the moment. Number two doctors abuse and control patients from all kinds of points of view when they are sick and love to force conventional medicine on them, when with all the indecent prophylaxis fad cancer is just around as ever. Illnesses always come and mutate, correct and healthy living is the best defence.
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clearly, prevention is the key to a successful healthcare policy..
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