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Quest Diagnostics Grows on Innovation Amid Reimbursement Woe

Zacks Equity Research

On Feb 20, we issued an updated research report on Quest Diagnostics, Inc. DGX. The stock carries a Zacks Rank #3 (Hold).

Quest Diagnostics exited the fourth quarter on a sluggish note. A decline in Diagnostic information services revenues was also disappointing. Moreover, we are concerned about factors like unfavorable changes in prescription drug monitoring, vitamin D and hepatitis C testing marketplace that can dent growth going forward.

Additionally, a rise in patient concession along with certain reserve adjustments affected the top line, inducing lower revenue per requisition.

On a brighter note, Quest Diagnostics is refocusing on diagnostic information services wing and a disciplined capital deployment. The company’s acquisitions and collaborations with hospitals and integrated delivery networks consistently act as major growth drivers.

We are upbeat about the company’s strategic partnership with UnitedHealthcare, a business of UnitedHealth Group, to operate as a preferred national laboratory for all the company’s members starting Jan 1, 2019.

Quest Diagnostics Incorporated Price

Quest Diagnostics Incorporated Price | Quest Diagnostics Incorporated Quote

This expanded agreement will provide in-network access to Quest Diagnostics’ complete portfolio of laboratory services to more than 48 million eligible members. Under the expanded tie-up, the companies are going to join forces on a variety of value-based programs.

Of late, major new developments included the company’s progress in prescription drug monitoring, QuantiFERON and non-invasive prenatal screening. In advanced diagnostics, Quest Diagnostics witnessed a strong uptick with its new center of excellence in precision medicine oncology in Texas. This apart, with the buyout of Med Fusion, the company has seen accelerated growth of its tumor panels.

However, on fourth-quarter earnings call, Quest Diagnostics announced that its guidance for 2019 reflects a massive reimbursement pressure, which may be partially offset by the company’s steady execution of Invigorate program. More specifically, in 2019, the company expects about a 10% reduction in Medicare reimbursement rates. The impact of these cutbacks will be more significant on smaller independent hospital outreach laboratories, which the company believes, could eliminate the majority of profit and provide a catalyst for market consolidation.

Shares of Quest Diagnostics have outperformed its industry in the past six months. The stock has declined 20.7%, narrower than the 26.2% fall of the industry.

Stocks to Consider

Some better-ranked stocks in the broader medical space are Penumbra, Inc. PEN, Amedisys, Inc. AMED and Abbott Laboratories ABT.

Penumbra’s long-term earnings growth rate is expected at 20%. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Amedisys’ long-term earnings growth rate is projected at 18.8%. The stock sports a Zacks Rank #1.

Abbott’s long-term earnings growth rate is estimated at 11.7%. The stock has a Zacks Rank of 2.

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