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Stock Strategist

Taking the Investment Pulse of Diagnostic Laboratories

This low-key health care niche could offer therapy for some portfolios.

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Although processing blood tests isn't as splashy as the latest biotech therapeutic therapies, diagnostic reference labs remain one of our favorite health care businesses. The domestic clinical lab business racks up approximately $55 billion in revenue a year, and is split between hospital-based labs (more than half the market), physician office labs (at minority at 7% share), and independent laboratories (accounting for an estimated one-third of the total market). The independent lab segment has historically been a fragmented market, with only a handful of clinical labs that were able to build out national geographic coverage.

Thanks to consolidation in the independent lab space over the last 15 years, a duopoly consisting of  Quest Diagnostics (DGX) and  LabCorp (LH) has emerged to dominate the independent lab space. The two behemoths account for combined market share close to 22% of the entire diagnostic testing market. The expansive networks these competitors enjoy make them attractive vendors to managed care plans that like to offer convenient lab services to its insureds. The scale of Quest and LabCorp's businesses also translate into lower costs, as they can push more tests through their regional laboratories. It would be difficult for a third competitor to replicate the number of locations, convenience, and cost advantages that Quest and LabCorp offer.

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