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LabCorp: Strong Fundamentals, Sequenom Buyout Raise Hope

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On Sep 20, 2016, we issued an updated research report on Laboratory Corporation of America Holdings (LH - Free Report) or LabCorp, a leading independent clinical laboratory company. It is currently working on portfolio expansion. The company is more focused on the high-margin esoteric testing business to drive its top line.

With the acquisition of Covance, which is now operational as Covance Drug Development, LabCorp expects to expand its 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 last reported second-quarter 2016, revenues from Covance Drug Development were up 12.2% year over year. The expected growth target of this segment for full-year 2016 currently remains at 7%−9% from the 2015 level. This also marks an increase from the prior estimate of 6%−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 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 help further advance its extensive women's health test menu.

We expect LabCorp to benefit from organic growth as well as the 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 considerably impacted 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 - Free Report) , Merit Medical Systems, Inc. (MMSI - Free Report) and Derma Sciences Inc. .

Align Technology has gained 48.9% year to date, much better than the S&P 500’s gain of 6.52% over the same period. The estimate revision trend for the current year remains impressive with 9 estimates moving higher over the past two months, compared to no downward movement. The stock currently holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Merit Medical Systems, with a Zanks Rank #2, has an impressive long-term earnings growth rate of 12.5%. The stock recorded a gain of 30.6% year to date as compared to the S&P 500’s gain of 6.52% over the same time frame.

Derma Sciences also carries a Zacks Rank #2. The stock’s current-year earnings growth rate remains at 94.5%, much higher than the Industry’s growth rate of 7.6%.

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