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Laboratory Corporation of America Holdings (LH - Analyst Report) strengthened its portfolio with the launch of a companion diagnostic test for melanoma patients. Last month, Roche (RHHBY - Analyst Report) had received approval from the US Food and Drug Administration (FDA) for the drug Zelboraf and a companion diagnostic test (cobas 4800 BRAF V600) for patients with inoperable or metastatic melanoma with the BRAFV600E gene mutation.

This companion diagnostic test will now be available though LabCorp. The test, by identifying patients eligible for treatment with Zelboraf, will help physicians decide on the treatment option. It is estimated that around 9,000 will develop advanced melanoma in US in 2011 with 50% having the BRAFV600E gene mutation.

LabCorp has been aiming at increasing its revenues from esoteric testing over the next few years. To achieve this target, the company has made some acquisitions, the most significant being Monogram Bioscience (August 2009) and Genzyme Genetics (December 2010). These acquisitions should help strengthen the company’s esoteric testing capabilities and its personalized medicine program.

At present, the company derives approximately 40% of revenues from genomic, esoteric and anatomic pathology categories, which is expected to increase to 45% over the next 3-5 years. Identification of certain mutations is important for the long-term drug treatment strategy. As a result, the latest companion diagnostic test should boost revenues from esoteric testing in the forthcoming period.

During the second quarter of 2011, LabCorp recorded a 13.3% year-over-year growth in revenues to $1,403.3 million, of which 7.6% came from the acquisition of Genzyme Genetics. Both testing volume (measured by requisitions) and revenue per requisition increased 4.8% and 8.1%, respectively. The growth in revenue per requisition is attributable to acquisitions, rate increases, test mix shift and increase in test per requisition.

Genzyme Genetics accounted for approximately 0.9% of the company’s volume growth and 6.4% of the growth in revenue per requisition. Despite economic headwinds, organic volume grew 2% during the quarter while volume from esoteric testing increased 10%. However, the company operates in a highly competitive environment with the presence of players such as Quest Diagnostics (DGX - Analyst Report).

We are currently Neutral on LabCorp, which also corresponds to a Zacks #3 Rank (Hold) in the short term.

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