Quest Diagnostics: Strategic Initiatives & Tie-ups To Add Value

On Aug 23, 2016, we issued an updated research report on Quest Diagnostics, Inc. (NYSE:DGX) – a major commercial laboratory services provider.

Quest Diagnostics has successfully complied with its five-point strategy that strongly focuses on areas with high potential such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. Although during the second quarter, revenues declined 1% on a reported basis, this was primarily due to the company’s efforts to refocus on its core business.

Once again the company is optimistic about remaining in a strong position for the rest of 2016 (second quarter 2016 Diagnostic Information Service revenues grew by 2.2% on a year-over-year basis).

In the last couple of months, the company has made a number of strategic product launches and forged new partnerships.

This includes three new cancer test services that will provide clinically actionable insight into an individual's risk of developing hereditary forms of cancer. These tests will be part of the company's newly branded Quest Vantage cancer test menu.

We are also looking forward to the company’s recently formed alliance with HealthONE System of HCA Healthcare (HCA) to improve the quality and value of diagnostic services. Per the agreement, Quest Diagnostics will manage in-patient laboratory operations for six Denver-area hospitals under the HealthONE system.

We are also encouraged about the current favorable demographic trends along with Quest Diagnostics’ mergers and acquisitions activity which is in line with its strategy. The company’s recent acquisition of the Outreach Laboratory Services business of Clinical Laboratory Partners (CLP) as well as the Professional Lab Services Agreements from Barnabas Health, are aiding in delivering a continuous implementation of an accelerated growth plan.

However, through the past several quarters, the overall soft industry trends, responsible for low volume growth, have been a major concern for the company. Furthermore, Quest Diagnostics is highly disappointed with the recent CMS proposal related to the Protecting Access to Medicare Act (PAMA). While CMS' has once again decided to further delay the execution of the new payment system until Jan 1, 2018, Quest Diagnostics is apprehensive about the effect of the final rule, taking into consideration the clinical lab fee schedule representing approximately 12% of its revenues.

Moreover, lower healthcare utilization continues to be a headwind. Although the company has observed signs of modest increase in utilization, sustainability is still a concern.

The stock currently carries a Zacks Rank #3 (Hold).

Key Picks in the Sector

Some better-ranked stocks in the broader medical sector worth considering are Almost Family Inc. (NASDAQ:AFAM) , RadNet, Inc. (NASDAQ:RDNT) and US Physical Therapy Inc. (NYSE:USPH) , all carrying a Zacks Rank #2 (Buy).