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LabCorp (LH) Posts Strong Q1; Covance Synergy Continues

On May 16, 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. The company is more focused on the high-margin esoteric testing business to drive its top line.

LabCorp kick-started the year 2016 on an optimistic note with its first-quarter earnings and revenues surpassing the respective Zacks Consensus Estimate. This has been a strong quarter with respect to organic volume growth in LabCorp Diagnostics, accelerated revenue growth in Covance Drug Development and operating leverage.

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 the laboratory testing and CRO spaces. This 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 first quarter, the acquisition of Covance contributed $687.3 million to the company's revenues, driving 23.7% year-over-year growth. The company is currently on track to achieve the incremental revenue synergy target.

Moreover, LabCorp expects to achieve annual cost synergies in excess of $100 million, to be fully realized within three years of closure of the acquisition. Of this, the company has already achieved $50 million and looks well positioned 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 Mar 2016, the company acquired 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.

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 recent collaborations include the alliance with Japan-based Sysmex Corporation – a leading clinical laboratory services provider. The company 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 hard on new innovations with academic institutions in order 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 of the dollar continues to weigh on its year-over-year revenue performance. Moreover, changes in governmental regulations had a significant impact on LabCorp’s operations. We are highly disappointed with the recent CMS proposal related to Protecting Access to Medicare Act (PAMA).

LabCorp currently carries a Zacks Rank #2 (Buy).

Key Picks in the Sector

Medical instruments stocks that are worth a look include CR Bard Inc. BCR, Henry Schein, Inc. HSIC and The Cooper Companies Inc. COO. All these stocks carry a Zacks Rank #2.

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