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DGX Acquires UMass Outreach Labs

DGX LH

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Leading diagnostic testing company Quest Diagnostics (DGX - Analyst Report) is keeping at par with its Mergers and Acquisition (M&A) strategy, which the company expects to remain as its key driver of growth. Recently, as a part of this strategy, the company teamed up with Central New England’s largest health care system, UMass Memorial Health Care, and purchased the clinical and anatomic pathology outreach laboratory businesses of UMass Memorial Medical Center. However, financial terms of this definitive purchase agreement were not disclosed.

Quest Diagnostics expects this acquisition to establish a long-term relationship between the two organizations. The company believes that the acquisition is in sync with its goal to create the  planned 'lab of the future', which will help increase long-term growth opportunities as well as shareholders' value.

The diagnostic testing stalwart expects the incorporation of the clinical and anatomic pathology outreach laboratory to add 1% to the company’s consolidated revenues in 2013 with no bottom-line impact. However, the company expects this transaction to be accretive to its earnings per share (EPS) in fiscal 2014.

Quest Diagnostics also finalized a lease agreement to construct a 200,000 square feet clinical laboratory with advanced facilities in Marlborough, Massachusetts. According to the plan, Quest Diagnostics' full-service laboratory in Cambridge and its Athena Diagnostics specialty neurology testing subsidiary in Worcester will be moved to this centrally located new facility in Massachusetts. The company expects this facility to be fully operational in next 18–24 months.

As per the plan, once the facility becomes fully operational, UMass Memorial has the option to invest in a minority stake in the new facility that would develop and operate a leading laboratory in Massachusetts in the future. Both the organizations expect this advanced laboratory service to include a number of benefits like higher quality service, expanded information connectivity options, and reduced laboratory testing costs.

Our View

We believe that the M&A decisions perfectly match the company’s current growth strategy. We expect the capital deployment to continue into the faster-growth esoteric markets. In this regard, we should also mention the company’s recent divestment of all assets of the OralDNA Labs salivary-diagnostics business to Access Genetics. This, according to the company, will benefit by allowing it to refocus resources to core diagnostic information services; drive operational excellence and restore growth. We assume that all these recent endeavors could very well turn around the company’s fortunes going ahead.

However, concerns linger about the soft industry trends due to a decline in physician office visits, the ongoing margin trends and the company’s lower-than-expected fiscal 2012 guidance. However, we hold a favorable view regarding 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, the current price is not a good entry point for the short-term investors as the ongoing issues like weak volume growth, flat pricing, low organic revenue and challenging underlying market conditions may compel the company to lose some market capitalization in the near term. Moreover, the competitive landscape remains tough with the presence of peers like Laboratory Corporation of America Holdings (LH - Analyst Report). We currently have a ‘Neutral’ recommendation on Quest Diagnostics. The stock retains a short-term Zacks #3 Rank (Hold).

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