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Quest Diagnostics: Product Launches, Alliances to Add Value

HCA DGX GWPH QDEL

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On Oct 13, 2016, we issued an updated research report on Quest Diagnostics, Inc. (DGX - Free Report) , a major commercial laboratory services provider.

Quest Diagnostics has successfully complied with its five-point strategy that focuses on areas with high potential such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. Revenues declined 1% on a reported basis during second-quarter 2016 mainly due to the company's efforts to refocus on the core business.

Consequently, revenues grew 2.4% on an equivalent basis and once again the company is optimistic about its performance for the rest of 2016 (second-quarter 2016 Diagnostic Information Service revenues grew by 2.2% on a year-over-year basis).

Over the last few months, Quest Diagnostics has made a number of strategic product launches and forged new partnerships. This includes three new cancer test services that will provide clinically actionable insight into an individual's risk of developing hereditary forms of cancer. These tests will remain part of the company's newly branded Quest Vantage cancer test menu.

Additionally, last month, the company announced the launch of Zika Antibody Test Service based on the Centers for Disease Control and Prevention’s (CDC) Zika MAC-ELISA. Notably, Quest Diagnostics was the first commercial laboratory to receive FDA emergency use authorization for a Zika test for the qualitative detection of RNA from Zika virus in human serum specimens.

We are also looking forward to the company's recently formed alliance with HealthONE System of HCA Healthcare (HCA - Free Report) to improve the quality and value of diagnostic services. Per the agreement, Quest Diagnostics will manage in-patient laboratory operations for six Denver-area hospitals in the HealthONE system.

We are also optimistic about the current favorable demographic trends along with Quest Diagnostics' mergers and acquisitions activity which is on track with its strategy. The company's recent acquisitions of the Outreach Laboratory Services business of Clinical Laboratory Partners (CLP) as well as the Professional Lab Services Agreements from Barnabas Health, are aiding  continued implementation of an accelerated growth plan.

However, through the past several quarters, the overall soft industry trends, responsible for low volume growth, have been a major concern for the company. Furthermore, Quest Diagnostics is highly disappointed with the recent CMS proposal related to the Protecting Access to Medicare Act (PAMA). While CMS has once again decided to further delay the execution of the new payment system until Jan 1, 2018, Quest Diagnostics is apprehensive about the effect of the final rule, taking into consideration the clinical lab fee schedule representing approximately 12% of its revenues.

Moreover, lower healthcare utilization continues to be a major drag. Although the company has witnessed signs of modest increase in utilization, sustainability is still a concern.

The stock currently carries a Zacks Rank #3 (Hold).

Key Picks in the Sector

Two favorably placed stocks in the medical sector include GW Pharmaceuticals plc (GWPH - Free Report) and Quidel Corp. (QDEL - Free Report) . Both the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals’ share price has surged 85.1% year to date, compared to the S&P 500’s 4.34% gain over the same period. The company’s four-quarter average earnings surprise is 41.6%.

Quidel has gained 15% in the past one year, higher than the S&P 500’s 5.3% gain. Over the next five years, the stock is estimated to record an earnings growth rate of 20%, higher than the industry average of 14.8%.

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