Download REAL CLIENT MANAGED PORTFOLIO MEMORANDUM

REAL CLIENT MANAGED PORTFOLIO MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
RCMP Spring 2012 Class
Qi He, Nan Liang, Su Chen
4/5/2012
Bio-Reference Laboratories Inc. (BRLI)
Industry Overview
Bio-Reference Laboratories sits in the Health Care Service sector of the GICS Map with section code 35102015, which includes
providers of patient health care services including dialysis centers, lab testing services. The laboratories industry has long been an
essential ingredient in healthcare. The aging population and the ongoing move toward preventative care have further boosted revenue in
recent years. Growth has started to accelerate after it slowed in 2008 due to the economic recession, and revenue is expected to rise 2.7%
in 2012, with 4.5% annual growth from 2012 to 2017.
There are five external business drivers for this industry, which are Federal funding for Medicare and Medicaid , Number of people with
private health insurance, Total health expenditure, Number of adults aged 50 and older and Technological changes. The industry is
highly regulated and technology concentrated which has a medium level of entry barrier and is on its growth stage of life cycle. However,
with current market competition, it is projected that the industry is moving towards consolidation, which can be either an opportunity for
BRLI to grow stronger or a threat for BRLI to be a target of other companies for acquisition. And the high degree regulation leaves
uncertainty to this industry due to unpredictable change of government regulations regarding healthcare system reforms.
Two major issues of this industry are complicated billing system and fragmented payment sources. The first problem is due to reasons
such as different private insurance coverage, different reimbursement between Medicare and Medicaid, different fee schedules, and
sometimes incorrect billing information, which leads to bad debts that need to be written off. Regarding the second issue, private
insurance has been the biggest source for payment, followed by Medicare and Medicaid. However, over 8 sources of payments again
impose potential risk for receivable collections.
Company Overview
Bio-Reference Laboratories Inc. (BRLI) is a clinical testing laboratory offering testing, information and related services to physician
offices, clinics, hospitals, employers and governmental units. It’s the fourth largest full- service laboratory in the United States and the
largest independent regional laboratory in the Northeastern market. From 2006 to 2011, there are 3 acquisitions. In 2006, BRLI acquired
GeneDX, a diagnostic genetic testing laboratory providing services to national and international customers. In 2008, BRLI were the first
commercial laboratory in the world to offer NextGen (high speed computerized sequencing) to analyze multi-gene conditions. There
innovations have significantly grown GeneDX’s business. On March2, 2010, BRLI completed the acquisition of Lenetix Medical
Screening Laboratory Inc., a clinical testing laboratory located in Mineola, New York, The laboratory performs both clinical laboratory
diagnostic testing and genetic testing. On August 5, 2011, BRLI acquired the Genetics Center Inc, a New York corporation engaged in
the clinical laboratory business with its principal place of business in Smithtown, New York.
The company’s business can be separated into 2 parts: routine test and esoteric test. The routine test measures various health parameters,
such as the functions of the heart, kidney, liver, thyroid and other organs. For example, Blood Cell Counts, Cholesterol Levels, HIVrelated tests, pregnancy, substance abuse, urinalysis, etc. Routine test accounts for 40% of revenue of BRLI. Esoteric test requires
sophisticated equipment and materials, highly skilled personnel and professional attention. These tests ordered less frequently and priced
higher. For example, endocrinology, genetics, immunology, microbiology, and toxicology, etc. 60% of BRLI’s revenue from this part of
business. According to different target market, the company’s business can also be separated to 5 parts: clinical lab, correctional
healthcare, genetics, oncology, and women’s health. The first two parts belong to routine tests, and the last three are esoteric tests, which
fueled company’s recent 10 years’ growth.
Financial Projection
Given the consideration BRLI had a compounding annual growth rate of 20% for the past 17 years and its past five- year average annual
growth was about 23.5%, we forecasted the average growth for the next five years to be around 20.79%. The cost services and CAPEX
were expected to grow as indicated by management discussion, and the depreciation would grow as well due to direct depreciation. For
DCF model, we used a 4% risk free rate and 6% market premium. The cost of equity was 17.35% as a result of 30% of ROE and 70% of
CAPM, and the WACC was 10.57%. We added 1% risk premium to compensate unexpected economics and business risks, so our final
discount rate is 11.57%. With a 3% terminal growth rate, our price per share calculated by DCF was $23.87. We felt our valuation come
out to be very reasonable as our ratio analysis showed consistency.
Recommendation
DCF model gives the price per share of $23.87. As for multiple valuations, we got a final comparable price of $19.8 using 8.41x. The
closing stock price on April 4 was $23.9, which was slightly higher than our valuation. Therefore, we recommend putting BRLI into
watch list.