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DGX to Sell HemoCue

Zacks Equity Research

Following the divestment of its OralDNA Labs salivary-diagnostics business to Access Genetics in Dec 2012, leading diagnostic testing company, Quest Diagnostics (DGX), came up with the plan to sell its HemoCue diagnostic products business. This business develops point-of-care testing systems. The company believes that these divestitures will allow it to refocus its resources toward core diagnostic information services, drive operational excellence and restore growth.

Accordingly, revenues from the HemoCue and OralDNA products businesses will now be reported as discontinued operations in its fourth-quarter and fiscal 2012 results, scheduled to be released on Wednesday, Jan 23, before the market opens. The company expects these divestments to reduce its 2012 revenues by $117 million, operating income by $11 million and net income from continuing operations by $15 million. Consequently, earnings per share (EPS) are expected to decrease by 9 cents in 2012. The company expects to incur an asset impairment charge of $89.5 million related to the divestment of HemoCue and OralDNA.

Meanwhile, Quest Diagnostics disclosed the impact of Hurricane Sandy on its business. According to the company, this catastrophe was a big blow to its fourth-quarter 2012 performance, reducing revenues by an estimated $21 million, operating income by $16 million and EPS by 6 cents.

Although we remain concerned with Quest Diagnostics’ overall sales disruption due to Hurricane Sandy, we are optimistic regarding the company’s strategy to refocus on Diagnostic Information Services along with the organizational structure developed by the company’s new CEO, Steve Rusckowski. We also expect this to run successfully adding synergies to its ongoing $500 million restructuring initiative, associated with its Invigorate program.

However, pressure on testing volume remains a challenge. Moreover, reimbursement pressure from the government and other payers continue. Concerns linger regarding the anticipated reimbursement cut effective Jan 1, 2013. The competitive landscape is also tough with the presence of Laboratory Corporation of America Holdings (LH). We currently have a Neutral recommendation on Quest Diagnostics over the long term. The stock retains a Zacks Rank #3 (Hold).

Some of the Zacks Rank #1 (Strong Buy) stocks are Haemonetics Corporation (HAE) and Spherix Inc. (SPEX).

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