Quest Diagnostics (DGX), recently announced that Radiometer Medical ApS has agreed to purchase the HemoCue diagnostic products business for $300 million plus customary adjustments for cash balances. This leading diagnostic testing company had earlier disclosed its plans to sell off the particular business.
HemoCue develops point-of-care testing systems like hemoglobin, glucose and others worldwide. The company believes that, in addition to its earlier divestment of OralDNA Labs salivary-diagnostics business to Access Genetics, the latest divesture of HemoCue will allow it to refocus resources toward core diagnostic information services, drive operational excellence and restore growth.
Quest Diagnostics has been focusing on areas with high potential such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. The company experienced increasing demand for gene-based and esoteric tests compared with routine tests, on the back of increased esoteric mix contributed by Athena and Celera.
Earlier in Dec 2012, as a part of this strategy, the company shed OralDNA Labs salivary-diagnostics business in order to refocus its resources to core diagnostic information services. Recently, Quest developed a number of gene-based and esoteric tests, made strategic acquisitions and entered into partnerships to further strengthen its foothold in this segment.
Although we remain concerned with Quest Diagnostics’ overall sales disruption in the recent past, 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.
We remain concerned about Quest Diagnostics as it is continuously witnessing challenges with testing volume. Concerns also remain about a conservative 2013 revenue outlook, indicating that the industry trend will not improve in the near future. Moreover, reimbursement pressure from government and other payers continue. Concerns linger regarding the reimbursement cut, which has been in effect from Jan 1, 2013. The competitive landscape is also tough with the presence of Laboratory Corporation of America Holdings (LH).
Other Stocks to Consider
Quest Diagnostics retains a Zacks Rank #5 (Strong Sell). While we strongly recommend a ‘Sell’ rating for the stock, other medical device stocks worth a look are Medical Action Industries Inc. (MDCI), and Given Imaging Ltd. (GIVN). Both the stocks carry a Zacks Rank #1 (Strong Buy).
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