On Jul 3, 2015, we issued an updated research report on Laboratory Corporation of America Holdings LH, a leading independent clinical laboratory company.
As the first operational quarter post the acquisition of Covance, LabCorp delivered impressive results in the first quarter of 2015 beating the Zacks Consensus Estimate on both lines. According to the company, the quarter highlighted solid organic revenue growth and operating leverage, which it expects will continue through the rest of the fiscal.
We believe that with the integration of Covance, LabCorp is perfectly positioned to drive long-term profitability through a combination of advanced diagnostics, drug development expertise and knowledge services.
According to the company, Covance's drug development is on track to deliver cost synergies worth approximately $35 million in 2015. The new combined company is expected to derive approximately 20% of revenues from outside the U.S.
Apart from strategic acquisitions, LabCorp continues to increase its scale and competencies in clinical laboratory medicine through collaborations. In Jun 2015, the company entered into a partnership with Japan-based clinical laboratory services provider Sysmex Corporation. Per the deal, Sysmex Inostics, a subsidiary of Sysmex Corporation, will offer reagents and associate services that will enable Covance’s central laboratories to effectively perform molecular genetic analyses to facilitate clinical trials in oncology.
In May, the company signed a strategic agreement with biotechnology company – ORIG3N, Inc. to elevate its position in the global billion-dollar genetic testing market. Alongside, it formed an alliance with United Healthcare to start a new healthcare program that will help in selection of the right test at the right time and facilitate payers’ address concerns about both unit cost and trend.
Such acquisitions and partnerships are in sync with one of the key elements of LabCorp’s five-pillar strategy, that is, to deploy capital in investments that will enhance its business and drive shareholder returns.
In addition, Project LaunchPad is expected to garner net savings in excess of $150 million over the next three years ($50 million in 2015) for the company.
However, the current economic uncertainty, including a challenging volume environment for testing laboratories and utilization weaknesses, is a looming headwind. In the last reported quarter, LabCorp witnessed a 5.2% increase in organic testing volume (measured by requisitions and fold-in acquisitions) which was partially offset by unfavorable price and mix. On the other hand, the company reported poor revenue per requisition (down 0.6% year over year) that reflects Medicare payment reductions and an unfavorable test mix.
Currently, LabCorp carries a Zacks Rank #3 (Hold).
Key Picks in the Sector
Some better-ranked med-dental/supply stocks are Align Technology Inc. ALGN, Cardinal Health, Inc. CAH and Luxottica Group SpA LUX. All the three stocks hold a Zacks Rank #2 (Buy).
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