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Will LabCorp's (LH) Food Solution Divestment Upset Sales?

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On Sep 25, we issued an updated research report on LabCorp (LH - Free Report) . The stock carries a Zacks Rank #4 (Sell).

In the past three months, shares of LabCorp have underperformed its industry.  The stock has lost 7.5% against the industry’s 4.4% increase. The company’s narrowed 2018 guidance has also been discouraging. Per the company, the latest expectations include the previously-announced divestiture of the Food Solutions business. The current economic uncertainty resulting in a challenging reimbursement scenario for testing labs as well as utilization weaknesses loom large on LabCorp.

This Burlington, NC-based healthcare diagnostics company, providing comprehensive clinical laboratory services and an end-to-end drug development support, has been grappling with multiple issues of late. Economic uncertainties including a challenging volume environment for testing laboratories and softness in utilization pose as headwinds for LabCorp.

Changes in governmental regulations left a significant impact on LabCorp’s operations. Particularly, in the past couple of years, the company faced several reimbursement woes hurting its revenues. The company is concerned about the CMS' (Centers for Medicare & Medicaid Services) latest Medicare reimbursement reduction following the implementation of Protecting Access to Medicare Act (PAMA). Notably, first-quarter 2018 opened operating under the clinical IP schedule.

The above development has come as a huge blow to the testing laboratories. Per LabCorp’s earlier statement, the new PAMA rates published by CMS do not reflect the intent of Congress when it directed CMS to enforce market-based Medicare rates for lab testing. We are quite apprehensive about this entire scenario. With latest clinical lab fee schedule getting implemented without any amendment in favor of the testing laboratories, the continuation of LaunchPad, the projected growth at Covance, the benefits from Chiltern, PAML and Mount Sinai acquisitions plus the Covance LaunchPad process will all be offset by PAMA reductions.

On a positive note, LabCorp's Diagnostics business remains strong on the back of improving price, mix, acquisition and a favorable foreign exchange.

Under Covance Drug Development business, LabCorp gears up to expand the company’s range of diagnostic offerings and create a new industry leader in both laboratory testing and CRO spaces, which will act as a foremost provider of medical testing besides operating as a premier full-service drug development organization.

At the end of the second quarter, the company stays on track to deliver cost synergies worth $30 million from the integration of Chiltern within three years of its acquisition.

This apart, the company’s latest investment in building a central delivery center in Bangalore, India, has been considered an important milestone toward extending its global service delivery model. In addition, the company has progressed with the Covance LaunchPad initiative in the same period.

Key Picks

Some better-ranked stocks in the broader medical space are Intuitive Surgical (ISRG - Free Report) , Amedisys, Inc. (AMED - Free Report) and Masimo Corporation (MASI - Free Report) .

Intuitive Surgical’s expected long-term earnings growth rate is 14.7%. The stock currently carries a Zacks Rank #2 (Buy).

Amedisys’ expected long-term growth rate is 19.4%. The stock sports a Zacks Rank #1 (Strong Buy) at the moment. You can see the complete list of today’s Zacks #1 Rank stocks here.

Masimo’s expected long-term earnings growth rate is 14.8%. The stock has a Zacks Rank of 2 at present.

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