LabCorp Gains on Covance Synergy, Diagnostics Strength
On Mar 26, 2016, we issued an updated research report on Laboratory Corporation of America Holdings LH, or LabCorp, a leading independent clinical laboratory company. LabCorp is currently working on portfolio expansion and is focusing more on the high-margin esoteric testing business to drive its top line.
With the acquisition of Covance, which is now operational as Covance Drug Development, LabCorp expects to expand the company’s range of diagnostic offerings and create a new industry leader in both laboratory testing and CRO spaces, which will act as a leading provider of medical testing apart from operating as a premier full-service drug development organization.
Earlier, LabCorp had set a goal of $150 million in incremental revenues by the end of 2018 ($100 million for companion diagnostics and $50 million for real world evidence). In the fourth quarter, the acquisition of Covance contributed $670 million to the company's revenues, driving 44% year-over-year growth. The company is currently on track to achieve the incremental revenue synergy.
Moreover, LabCorp expects to achieve annual cost synergies in excess of $100 million, to be fully realized within three years of closing. Of this, till the end of the last reported fourth-quarter 2015, the company has achieved $45 million and looks well on track to achieve its targeted synergy, going ahead.
LabCorp has also strengthened its foothold in the diagnostics space through both organic and inorganic means, and plans to collaborate with leading companies and academic institutions to provide a wider portfolio of tests. In Dec 2015, the company agreed to acquire the full-service independent women's health laboratory, Pathology, Inc., including the patient service centers used to conduct the latter’s medical testing and services business. Prior to that, in October, it acquired Safe Foods International Holdings, a food safety laboratory, the inclusion of which expanded LabCorp’s size and reach in the fast-growing global food safety market.
Among strategic partnerships, recently, the company formed an alliance with Interpace Diagnostics, a developer of molecular diagnostics tests, to begin offering the latter’s new ThyraMir microRNA classifier test. Other collaborations include the alliance with Japan-based Sysmex Corporation – a leading clinical laboratory services provider. The company has also signed a strategic agreement with biotechnology company ORIG3N, a leading provider of induced pluripotent stem cell (iPSC) repository, called LifeCapsule.
Also, as part of its five-pillar strategy, LabCorp is currently working on new innovations with academic institutions to capture the growing lab testing market with its advanced assays and tools.
However, the current economic uncertainty remains a deterrent for LabCorp. The strengthening dollar continues to weigh on its year-over-year revenue performance. Moreover, we are concerned about the Medicare payment reductions, the recent introduced molecular pathology codes and the implementation of sequestration.
LabCorp currently carries a Zacks Rank #3 (Hold).
Key Picks in the Sector
Medical stocks that are worth a look include The Cooper Companies Inc. COO, Henry Schein, Inc. HSIC and Cardiovascular Systems Inc. CSII. All these stocks carry a Zacks Rank #2 (Buy).
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