The Diagnostics Industry: Why Healthcare Reform Should Help These Companies

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist

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

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