Ahead of the Bell: Clinical laboratory operators

Revenue for clinical laboratory operators should keep growing, according to an Oppenheimer & Co. analyst, and smaller companies like Bio-Reference Laboratories Inc. have a chance to gain market share.

Analyst Balaji Gandhi on Wednesday put an "Outperform" rating on the sector, saying revenue will increase due to greater use of more expensive molecular diagnostic tests. Prices for routine tests have come under pressure, because the government and health insurers are looking to pay less.

As a result, larger labs like Laboratory Corp. of America Holdings Inc. and Quest Diagnostics Inc., are relying on rare test to maintain their profit margins. Laboratory Corp. has a large contract with UnitedHealth Group Inc., and Quest has one with Aetna Inc., but Gandhi said both companies are being paid less than benchmark Medicare rates.

Hospitals could choose smaller labs because of their customer service and good relationships with physicians, along with instruments that are tailored to meet the requirements of specific tests.

Total revenue for the industry should keep growing at about 5 to 7 percent per year, he said. He estimates the current market at $52 billion.

Gandhi rates Bio-Reference Labs "Outperform," saying it should trade at a premium to rivals because of its greater profit and cash flow growth. He rates Lab Corp., Quest, Genoptix Inc. and Medtox Scientific Inc. "Perform."

The analyst also started coverage of Beckman Coulter Inc. at "Outperform" and Gen-Probe Inc. and Celera Group at "Perform."