Bio-Reference Laboratories reported second quarter 2014 earnings that exceeded expectations, driven primarily by strength in the company’s esoteric business (e.g., GeneDx) as well as better gross margin than we projected (gross margin was 44%, versus our estimate of 42%, but down 175 basis points year-over-year, driven by reimbursement pressure). The company reiterated EPS guidance of 10% growth excluding weather of $0.10, which implies 2014 EPS of roughly $1.72 and a meaningful fourth-quarter ramp-up; fourth-quarter EPS would need to be roughly $0.71 assuming a flat third quarter.
Patients served of 2.364 million were up 14%, which continues to be exceedingly better than the industry average of closer to 1% to 2%; excluding the impact of bad weather, volume would have been up 17%. The company’s routine business on a revenue basis was down just over 1%; after adjusting for the impact of a 5% reduction in ASP on that side of the business, we calculate volume was up just less than 4% (assuming an ASP for the routine business of roughly $38.00).
Some of the revenue growth was driven by acquisitions (low single digits).Thus, most of the strength in the quarter came from esoteric testing (presumably at least in part driven by GeneDx); esoteric revenue was up 23% ($25 million). Depending on assumptions of ASP for the routine business (we assume roughly $38 in the quarter), volume growth implied in esoteric results was impressive (up 50%), although esoteric ASP (we calculate roughly $200) appears to be down roughly 20% year-over-year.
Part of the strength in the company’s volumes has been driven by GeneDx (which focused on exome sequencing, specialized prenatal testing, and inherited cancer testing). The reimbursement structure is not in place for many of these tests (particularly esoteric testing), so this could explain an implied decline in recognized esoteric ASP as well as inflated days’ sales outstanding (DSO).