On Nov 17, 2014, we issued an updated research report on Laboratory Corporation of America Holdings (LH), a leading independent clinical laboratory company. LabCorp posted a better-than-expected third quarter with both top and bottom-line beats. In addition, the company grabbed the headlines with its decision to take over drug development company Covance Inc. (CVD) for an equity value of $6.1 billion.
The company’s decision to acquire Covance is expected to create a new industry leader in both the laboratory testing and contract research organization (CRO) spaces that will serve as a leading provider of medical testing besides operating as a premier full-service drug development organization.
Covance's risk-based patient monitoring tools are expected to amplify LabCorp's existing capabilities in predictive analytics, benefitting at-risk patients, risk-bearing physicians, as well as payors. LabCorp expects this transaction to be accretive to adjusted earnings per share in 2015 before synergies. Moreover, LabCorp expects to achieve annual cost synergies in excess of $100 million to be fully realized within three years of closing.
Shortly before the announcement of this acquisition, LabCorp reported third-quarter adjusted earnings per share of $1.80, unchanged year over year but ahead of the Zacks Consensus Estimate of $1.75. Revenues increased 3.3% to $1,516.4 million, beating the Zacks Consensus Estimate of $1,504 million. Significant increase in test volume acted as the main impetus behind the company’s top-line improvement.
Apart from growth through inorganic means, LabCorp is working on portfolio expansion to drive its top line. The company is currently focusing more on the high-margin esoteric testing business, which is expected to contribute 45% of total sales in the next 3–5 years. Moroever, the company’s new alliance with Bristol-Myers Squibb Co. (BMY) and United Healthcare (UNH) are other material upsides.
On the flip side, however, the current economic uncertainty continues to adversely affect LabCorp. The challenging volume environment for testing laboratories and utilization weaknesses pose looming headwinds. We are also concerned about the Medicare payment reductions (effective Jan 2013), molecular pathology codes and the implementation of sequestration. Further, margins continue to remain under pressure.
LabCorp currently carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some of the top-ranked stocks that warrant a look in the sector are AmerisourceBergen Corp. (ABC), CR Bard Inc. (BCR) and Cardinal Health, Inc. (CAH). All the three stocks carry a Zacks Rank #2 (Buy).
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