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LabCorp Grows on Strong Diagnostics Arm Amid Contract Losses

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On May 17, 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.

Over the past three months, shares of LabCorp have climbed 9.8% against the industry’s 0.9% decline.

In first-quarter 2019, the company reported a strong underlying performance and organic revenue growth across both Diagnostics and Drug Development businesses, banking on a solid execution of three fundamental strategies, which are delivering advanced diagnostics, bringing new medicines to patients faster and using technology to improve patient care.

During the quarter, Diagnostics business grew organically in terms of both revenues and volumes despite additional price reductions due to PAMA and the loss of exclusivity in two of the company’s largest managed care contracts. Revenues from all aspects of companion diagnostics surged more than 30% across the enterprise in the first quarter.

Covance Drug Development also rose organically despite an adverse impact of the foreign currency translation. During the quarter under review, the company enhanced Covance's offerings through strategic acquisitions like MI Bioresearch that bring about specialized preclinical capabilities in cell and gene therapy plus oncology testing.

In April, the company announced an innovative business swap transaction with Envigo. The strategic move provides Covance with enhanced global non-clinical research capabilities while maintaining access to bigger research models and services through a multi-year renewable supply agreement. This apart, the Covance LaunchPad initiative is well on track to deliver $150 million of net savings by the end of 2020.

On the flip side, the current economic volatility including a challenging volume environment for the testing laboratories and utilization weaknesses are looming downsides for the company. This apart, the disposition of certain businesses and the implementation of the Protecting Access to Medicare Act (PAMA) dented growth. Moreover, an unfavorable currency movement persists as a major woe. The company also expects 2019 to continue witnessing similar hurdles.

Key Picks

A few better-ranked stocks in the broader medical space are Masimo Corporation (MASI - Free Report) , CONMED (CNMD - Free Report) and DENTSPLY SIRONA (XRAY - Free Report) , each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Masimo’s long-term earnings growth rate is projected at 16.1%

CONMED’s long-term earnings growth rate is expected at 13.3%.

DENTSPLY SIRONA’s long-term earnings growth rate is predicted at 11.5%.

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