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The MainStreet Investor

William J. DeRosa, Jr., CFA

II. Highlighted Security: LabOne, Inc. (ticker - LABS)
Price/Sales (ttm): 1.4x
Price/Cash Flow:(ttm) 24.4x
P/E (ttm): 24.6x
Market cap: $360 million
Insider ownership: 18.2%

Description: Industry: Healthcare Facilities

LabOne, Inc. provides risk assessment services for the insurance industry, laboratory testing services for the healthcare industry and substance abuse testing for employers and third party administrators. LabOne??s risk assessment services comprise underwriting and claims support services including teleunderwriting, specimen collection and paramedical examinations, laboratory testing, telephone inspections, motor vehicle reports, claim investigations services, and medical information retrieval to the insurance industry. The laboratory tests performed and data gathered are specifically designed to assist the insurance industry in objectively evaluating the mortality and morbidity risks posed by policy applicants.

LabOne??s clinical services include laboratory testing services for the healthcare industry as an aid in the diagnosis and treatment of patients. LabOne operates a highly automated and centralized laboratory, which the company believes is a competitive advantage relative to competitors. LabOne markets its clinical testing services to managed care companies, insurance companies, self-insured groups and physicians.

Finally, clinical services also include substance abuse testing (SAT) services provided to employers who adhere to drug screening guidelines. The company is certified by the Substance Abuse and Mental Health Services Administration to perform substance abuse testing services for federally regulated employers and currently markets these services throughout the country.

LabOne, Inc. is based in Lenexa, Kansas.

Business Model:

The revenue mix is broken down between risk assessment services (70% of revenue) and clinical services (30% of revenue). The risk assessment category is further subdivided into insurance laboratory and other insurance services. Clinical services are segmented into healthcare and substance abuse testing. LABS data tracking and information gathering services within risk assessment has seen accelerated growth and thus a greater share of the overall revenue mix.

The company??s client base consists of insurance companies, managed care organizations, physician practices, hospitals, and employers in North America. LabOne has several exclusive arrangements with managed care organizations, Blue Cross BlueShield of Tennessee, BlueCross Blue Shield of Kansas City and Universal Care of Tennessee. LABS provides utilization and disease management reporting to the managed care organizations. In addition, substance abuse testing is marketed to large employers, third-party administrators, and occupational health providers.

LabOne employs a sales force for all three divisions and markets directly to potential customers. The sales representatives are experienced within the industry with attention to high-level customer service, which offers significant competitive advantage. The risk assessment services market in the U.S. and Canada is estimated to be a $1 billion industry where LABS holds 20% of the market. Laboratory testing is a much larger market at $35 billion, but is highly fragmented and very competitive. SAT is the smallest market at $400 million.

The company??s operations are designed to facilitate the testing of a large number of specimens and to report the results to clients, generally within 24 hours. The company has internally developed, custom-designed processing systems, which has resulted in a large statistical database of tests.

Growth Drivers:

?? LabOne serves well defined markets with above average growth potential.

?? Unique and value-added business model providing a strategic competitive advantage.

?? Centralized statistical database developed over the years provides significant barrier to entry.

?? Solid execution of strategic business and integration of recent acquisition.

?? Highly educated and experienced sales force with premium client service.

?? Strong financial position and performance. High cash flow and recurring revenue model provides earnings consistency. Margins and ROIC steadily improving.


?? Client concentration; State Farm Insurance represented approximately 12% of revenue.

?? Competitive environment, specifically in laboratory testing segment. Industry is very fragmented and is dominated by larger competitors.

?? Pricing risk within the industry.

?? Balance sheet: LABS has paid down long-term debt since recent acquisitions, but debt levels remain relatively high.

?? Regulatory risks.

Hooper Holmes, Inc.
Examination Management Services, Inc.
Laboratory Corp. of America
Quest Diagnostics

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