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LabCorp (LH) to Report Q3 Earnings: What's in Store?

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Laboratory Corporation of America Holdings (LH - Free Report) also known as LabCorp, is slated to report third-quarter 2018 results on Oct 24 before the market opens. Last reported quarter, the company delivered a positive earnings surprise of 2.05% with its average trailing four-quarter beat being 3.42%.

Let's see how things are shaping up for this announcement.

Factors at Play

LabCorp is likely to repeat its success trend, which it maintained over the past few quarters, during the third quarter of 2018. The company is expected to gain from a strong LabCorp Diagnostics segment in the period to be reported, banking on a favorable price, mix, tuck-in acquisitions and organic volume. Particularly, we are looking forward to the company’s collaboration with European provider of clinical laboratory testing Unilabs. This collaboration has started to broaden the network of laboratories used by biopharmaceutical companies to support companion diagnostic development and commercialization. Per LabCorp, companion diagnostics is a global opportunity and the partnership with Unilabs is the first step in extending its companion Dx offering worldwide.

Among the company’s other recent alliances, worth mentioning are its two major health systems partnerships, namely the original Mount Sinai Health System alliance and Pathology Associates Medical Laboratories (PAML), a market-leading reference and outreach laboratory based in the Pacific Northwest. According to LabCorp, these anchor health systems will also gradually become research hubs, improving their access to trials as well as Covance's site activation and investigator plus patient recruitment capabilities.

The tie-ups will benefit from a full-year ownership, generating approximately $500 million as incremental profitable revenues in 2018. We expect this likely upside to be reflected in third-quarter results itself.

Within Covance Drug Development, we note that after suffering a drag for several quarters, the segment started to gross higher revenues exactly a year ago on the back of Chiltern acquisition as well as a strong organic growth profile plus a favorable foreign currency translation.

The Chiltern buyout proved accretive to LabCorp’s portfolio, adding highly complementary capabilities to the company’s offerings including scale expansion in the Asia Pacific region, a broader reach in the rapidly-growing emerging and mid-tier biopharma customer segments and its expertise in the oncology drug development.

Apart from Chiltren, LabCorp continues to add Covance's offerings to its portfolio through targeted tuck-in acquisitions. The latest on this list is the consolidation of Sciformix Corporation, a scientific process outsourcing company. The transaction is expected to strengthen LabCorp’s position in the later phases of drug and device development, particularly for post-marketing pharmacovigilance and market access solutions.

All these factors should together constantly benefit the top line at LabCorp’s Covance Drug Development in the yet-to-be reported quarter.

Significantly, the company is putting more emphasis on creating new growth opportunities in women's health, medical drug monitoring, genetics and oncology testing apart from critical collaborations such as Walgreens and 23andMe. Within Covance Drug Development, LabCorp expects these efforts to help fortifying its book-to-bill and net orders, driving its 2018 revenue conversion in the process.

The company is also optimistic about the development regarding its multi-year project LaunchPad. Its last-year savings already achieved a $20-million impetus from this platform and further projects additional net savings of $130 million through the three-year period ending 2020. This in turn, augurs well for substantially boosting the Drug Development margins. Notably, this had contributed 80 basis points to Covance’s margin improvement in the earlier reported quarter. We expect this to continuously progress at a rapid pace, contributing to the company’s top-line figure in the to-be-reported quarter.

However, downsides might surface from the ongoing reimbursement issue. As stated by the company, the new PAMA (Protecting Access to Medicare Act) rates published by CMS (Centers for Medicare & Medicaid Services) do not replicate the intent of Congress when it directed CMS to implement the market-based Medicare rates for lab testing. The statement reads that “The process CMS followed to determine these rates was fatally flawed and failed to account for significant segments of the lab market by excluding 99 percent of all U.S. labs from reporting data and limiting data collection to 1 percent of laboratories, dominated by independent labs”.

We are quite apprehensive about this entire scenario. With implementation of the latest clinical lab fee schedule without amendment in favor of the testing laboratories, the continuation of LaunchPad, the projected growth at Covance, benefits from Chiltern, gains from PAML and Mount Sinai plus the Covance LaunchPad process will all be offset by PAMA reductions.

Per LabCorp’s guidance for 2018, revenue growth is expected to remain in the 10.5-11.5% band from the range recorded in 2017 including a likely increase of 50 bps from a positive foreign currency movement. Adjusted EPS expectation for the current year remains within the range of $11.35-$11.65.

What the Quantitative Model Suggests

Per the proven Zacks model, a company with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP.

LabCorp has a Zacks Rank #4 (Sell), which lowers the predictive power of ESP. Its Earnings ESP of -1.08% also makes surprise prediction unlikely as the company needs to have a positive ESP to be confident about a possible earnings surprise.

The Zacks Consensus Estimate for earnings of $2.87 per share reflects 16.67% growth year over year. Revenue expectation is pegged at $2.84 billion, a 7% improvement year over year. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

Here are a few medical stocks worth considering with the right combination of elements to beat estimates this time around:

Henry Schein, Inc. (HSIC - Free Report) has an Earnings ESP of +0.33% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.

DaVita Inc. (DVA - Free Report) has an Earnings ESP of +2.41% and is a Zacks #2 Ranked player.

Masimo Corporation (MASI - Free Report) has an Earnings ESP of +0.98% and a Zacks Rank of 2.

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