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Quest Diagnostics Sheds OralDNA

DGX LH

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Over the past several years, Quest Diagnostics (DGX - Analyst Report), a prominent player in the field of diagnostic testing, has been making efforts to align assets with its core strategies. The latest among these is the divestment of considerably all the assets of OralDNA Labs salivary-diagnostics business to Access Genetics, a clinical laboratory with advanced molecular diagnostics test development capabilities. Financial terms of the deal were not disclosed.

Since 2008, Access Genetics has provided support and expertise for OralDNA-based testing services for dental professionals. Following the recent transaction, OralDNA's testing services will be consolidated under Access Genetic's CLIA- and CAP-certified laboratory in Minnesota.

At present, Quest Diagnostics is focusing on areas with high-growth potential and is striving to increase its operational efficiency. Consistent with this, earlier in October 2012, the company announced a major organizational restructuring that will replace the company’s existing business structure with two new business groups – Diagnostic Information Services and Diagnostic Solutions (effective January 1, 2013). According to the company, these structural changes will eliminate three management layers representing 400–600 management positions by the end of 2013, thereby making an annualized savings of $65 million.

According to Quest Diagnostics, the divestiture of OralDNA will benefit the company by allowing it to refocus its resources to core diagnostic information services; drive operational excellence and restore growth. We hold a favorable view about this divestment along with the organizational structure developed by the company’s new CEO, Steve Rusckowski. We also expect this to run successfully adding synergies to the company’s ongoing $500 million restructuring initiative associated with its Invigorate program.

However, challenges remain in the form of pressure on testing volume. Moreover, reimbursement pressure from government and other payers continue. Concerns linger regarding the anticipated reimbursement cut effective January 1, 2013. The competitive landscape is also tough with the presence of Laboratory Corporation of America Holdings (LH - Analyst Report). We currently have a Neutral recommendation on Quest Diagnostics over the long term. The stock retains a short-term Zacks #3 Rank (Hold).

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