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LabCorp (LH) Rides on Solid Diagnostics Despite PAMA Issues

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On Feb 10, we issued an updated research report on LabCorp LH. The company 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.

However, the recent quarters saw this company, which is a provider of comprehensive clinical laboratory services and end-to-end drug development support, successfully registering a strong underlying performance and organic revenue growth across both Diagnostics and Drug Development businesses. This upside is aided by the solid execution of three fundamental strategies, which are delivering advanced diagnostics, bringing new medicines to patients faster and using technology to improve patient care.

In the last reported quarter, Diagnostics business grew organically in terms of both revenues and volumes despite additional price reductions due to the Protecting Access to Medicare Act (PAMA) and the loss of exclusivity in two of the company’s largest managed care contracts. Within Diagnostics, the company recorded a sturdy  revenue per requisition and a robust implementation of its LaunchPad 2 initiatives.

Covance Drug Development also advanced organically despite an adverse foreign currency translation. Of late, the company enhanced Covance's offerings through strategic acquisitions like MI Bioresearch that adds specialized preclinical capabilities to cell and gene therapy as well as oncology testing.

The company is also hopeful about its recently-completed business swap transaction with Envigo. This tactical move provides Covance with better global non-clinical research skills while maintaining access to bigger research models and services via a multi-year renewable supply agreement.

Right now, LabCorp is on track to deliver $10 million of net costs synergies from the integration and Envigo by 2021 end. This apart, the Covance LaunchPad plan is well on course to generate net savings worth $150 million by the end of 2020.

Over the past three months, shares of this Burlington, NC-based healthcare diagnostics player have inched up 10.5% outperforming the industry’s 7.2% rise.

On the flip side, apart from a challenging volume environment for the testing laboratories, disposition of certain businesses and the implementation of the Protecting Access to Medicare Act (PAMA) dented growth. Moreover, an unfavorable currency movement is a lingering downside. The stock carries a Zacks Rank #4 (Sell).

Key Picks

A few better-ranked stocks from the broader medical space are LeMaitre Vascular, Inc. LMAT, Hill-Rom Holdings, Inc. (HRC - Free Report) and ResMed Inc. RMD.

LeMaitre has a Zacks Rank #2 and a projected long-term earnings growth rate of 10%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hill-Rom’s long-term earnings growth rate is estimated at 11.1%. The company presently carries a Zacks Rank of 2.

ResMed’s long-term earnings growth rate is expected at 12%. It currently sports a Zacks Rank #1.

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