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LabCorp Rides on Covance Business Amid Reimbursement Woes

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On Jan 4, we issued an updated research report on LabCorp (LH - Free Report) . The stock carries a Zacks Rank #3 (Hold).

This Burlington, NC-based healthcare diagnostics company, providing comprehensive clinical laboratory services and 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 are headwinds for LabCorp.

In the past three months, LabCorp has underperformed its industry. The stock has dropped 24.8% in comparison to the industry’s 19% decline. While increasing acquisitions and organic volume expansion positively contributed to LabCorp Diagnostics business in the third quarter 2018, the disposition of certain businesses and the implementation of the Protecting Access to Medicare Act (PAMA) dented growth.

The lowered 2018 guidance (announced on Nov 30) also fails to inspire us about any positive rebound in the near term. This apart, adverse currency movement affected the top line. Also, the current economic ambiguity including a tough reimbursement scenario for testing labs and utilization weaknesses are weighing on LabCorp.

On a positive note, within Covance Drug Development business, LabCorp is focused on driving profitable growth through expanded solutions and enhanced operational capabilities. The acquisition of Chiltern completed in September 2017, has started to significantly strengthen the company’s strategic position in clinical development and is accelerating revenue and profit growth within Covance. In this regard, the company is keeping a good pace with its objective to streamline the drug development process. Moreover, it is winning new awards via its integrated Covance and Chiltern offering. Also, the company has progressed with the Covance LaunchPad initiative in the last reported quarter.

At the end of the third quarter, LabCorp remains on track to deliver $150 million of net savings from Covance LaunchPad by the end of 2020 and another $30 million of cost synergies from the integration of Chiltern by 2019-end.

Apart from heavyweight buyouts like Covance, LabCorp consistently adds complementary capabilities through targeted tuck-in acquisitions. The latest on the list is the transaction of Sciformix Corporation, a scientific process outsourcing company. The same is expected to leverage LabCorp’s position in the later phases of drug and device development, particularly for post-marketing pharmacovigilance and market access solutions.

Key Picks

Some better-ranked stocks in the broader medical space are Veeva Systems (VEEV - Free Report) , Surmodics, Inc. (SRDX - Free Report) and athenahealth, Inc.  (ATHN - Free Report) .

Veeva Systems’ long-term earnings growth rate is estimated at 19.5%. The stock flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Surmodics’ long-term earnings growth rate is predicted at 10%. The stock carries a Zacks Rank #2 (Buy).

athenahealth’s long-term earnings growth rate is projected at 17.7%. The stock has a Zacks Rank of 2.

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