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Stock Strategist Industry Reports

Finding Moats in the Diagnostic Lab Industry

Diagnostic reference labs: Narrow moat firms have strong prospects.

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The $55 billion U.S. diagnostic testing market is broken down into three segments: hospital-based labs, independent commercial labs, and physician office-based labs. We estimate that hospital labs account for about 55% of the market, independent labs another 34%, and doctor offices about 11%. We estimate that the market has grown at a compound clip of 4% during the last decade.

These diagnostic services range from routine testing of bodily fluids (such as blood urine for blood chemistry, pregnancy, and thyroid function), to far more complex testing of specific tissue and genetic signatures for cystic fibrosis, oncology, and Down Syndrome. Though there are two major competitors,  Quest Diagnostics (DGX) and  LabCorp (LH), that dominate the independent lab segment, there are still an estimated 5,200 commercial labs scattered across the country. As of 2009, Quest and LabCorp accounted for roughly 22% of the total diagnostic lab market, and considering the firms' historical acquisition patterns, we expect these two rivals to continue to make strategic purchases of other labs, which will only reinforce their leadership positions.

Debbie Wang does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.