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A Temporary Blip or A Long-Term Slowdown for Lab Giants?

Quest and Laboratory Corp. of America, two Wall Street favorites for several years, seem to be bumping up against a wall when it comes to growth. Their growth is heavily dependent on acquisitions--but there aren't many big labs left to buy. Lab Corp.'s just announced offer for Dianon not withstanding. Quest's bid to buy California-based Unilab, is under FTC scrutiny--although Wall Street is betting the deal will fly. Lab Corp. faces intense regional competition, which it claims it is addressing. Still, the bigger these companies get, the tougher it is to maintain growth.

Quest Diagnostics Inc. and Laboratory Corp. of America , the nation's two largest commercial laboratories, and Wall Street favorites for the past three years, both appear to have bumped up against a wall in terms of growth. Their stocks are down—33% in Quest's case, more in LCA's—a situation partly reflecting the bear market, but also industry-specific events. As bellwether stocks for the industry, analysts wonder whether the setbacks are temporary quarterly declines or long-term signals that the laboratory industry's robust growth is slowing. The answer will depend on a number of factors: notably, the availability of consolidation opportunities, reimbursement, and physician demand for new kinds of tests, genomic and otherwise.

The setbacks are all the more noteworthy in light of the stocks' heretofore extraordinary rise. Only six years ago, LCA...

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