LabCorp Q2 Results Strong, Sequenom Buyout Raises Hope

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On Aug 18, 2016, we issued an updated research report on Laboratory Corporation of America Holdings LH or LabCorp, a leading independent clinical laboratory company. LabCorp is currently working on portfolio expansion. The company is more focused on the high-margin esoteric testing business to drive its top line.

LabCorp’s second-quarter earnings and revenues both managed to surpass the Zacks Consensus Estimate. This has been a strong quarter with respect to organic volume growth in LabCorp Diagnostics, accelerated revenue growth in Covance Drug Development and operating leverage.

With the acquisition of Covance, which is now operational as Covance Drug Development, LabCorp expects to expand the company’s range of diagnostic offerings and create a new industry leader in both the laboratory testing and CRO spaces. This will act as a leading provider of medical testing apart from operating as a premier full-service drug development organization.

In the second quarter, revenues from Covance Drug Development were up 12.2% year over year. The full year 2016 anticipated growth target of this segment currently remains at 7% to 9% from 2015, an increase from the prior guidance of 6% to 9%, driven by strong organic growth.

Apart from massive takeovers like Covance, LabCorp continues to add complementary capabilities through targeted tuck-in acquisitions. The latest in this list is the impending acquisition of Sequenom, a prominent player in the field of non-invasive prenatal testing (NIPT) for reproductive health. According to LabCorp, this acquisition will be a strategic fit for the company’s business as Sequenom’s NIPT and genetic testing capabilities will further advance LabCorp’s extensive women’s health test menu.

We expect LabCorp to benefit from organic growth as well introduction of new tests for existing and new customers in the near term. In this regard, the recent launch of a set of new tests including Roche cobas EGFR Mutation Test v2 and a complementary PDL1 diagnostic test for bladder cancer are noteworthy additions to the company’s world-class test menu.

However, the current economic uncertainty remains a restraint for LabCorp. The strengthening of the dollar continues to weigh on its year-over-year revenue performance. Moreover, changes in governmental regulations have had a considerable impact on LabCorp’s operations. We are highly disappointed with the recent CMS proposal related to Protecting Access to Medicare Act (PAMA).

LabCorp currently carries a Zacks Rank #3 (Hold).

Key Picks in the Sector

Medical instruments stocks that are worth considering include Align Technology Inc. ALGN, Antares Pharma Inc. ATRS and Derma Sciences Inc. DSCI. All these stocks carry a Zacks Rank #2 (Buy).

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