LabCorp (LH) Grows On Solid Diagnostics Arm Despite PAMA Headwinds

On Jan 3, we issued an updated research report on LabCorp (NYSE:LH) . 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 inched up 0.2% compared the industry’s 8.7% rise.

In third-quarter 2019, the company reported strong underlying performance and organic revenue growth across both Diagnostics and Drug Development businesses, banking on 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 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 registered strong revenue per requisition and a solid execution 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 through a multi-year renewable supply agreement.

Right now, LabCorp is on track to deliver $10 million of net costs in synergies from the integration and Envigo by 2021 end. This apart, the Covance LaunchPad initiative is well on course to deliver net savings worth $150 million 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 loom large on the company. Also, the 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.

Key Picks

A few better-ranked stocks from the broader medical space are Haemonetics Corp. (NYSE:HAE) , West Pharmaceutical Services (NYSE:WST) and Omnicell (NASDAQ:OMCL) . While Haemonetics sports a Zacks Rank #1 (Strong Buy), the other two carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Haemonetics has a projected long-term earnings growth rate of 13.5%.

West Pharmaceutical Services has an expected long-term earnings growth rate of 14%.

Omnicell has a long-term earnings growth rate of 12.5%.

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