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LabCorp: Covance Drug Prospects Bright, Competition Rife

Zacks Equity Research
Updated

On Dec 28, we issued an updated research report on Burlington, NC-based Laboratory Corporation of America Holdings LH or LabCorp. The company is a major player in the healthcare diagnostics space, providing comprehensive clinical laboratory services and end-to-end drug development support.

Over the past six months, LabCorp’s shares have been consistently trading above the Zacks classified Medical - Dental Supplies industry mark based on fundamental strength. The company lost 1.4% over this period, much narrower than the 4.7% decline of the industry. The company has recorded a 5-year revenue CAGR of 11.9%, reflecting its strong fundamentals.

In the recently concluded third-quarter report, LabCorp observed revenue growth in Covance Drug Development. It reported a 4.8% rise in net revenues to $701.1 million. According to management, the company has been able to compete in a growing addressable market worth approximately $200 billion. It is expected that the combined revenue growth from a broader platform, increased scale and synergies along with strategic deployment of cash flow will create significant long-term shareholders’ value.

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Meanwhile, LabCorp continues to add complementary capabilities through meaningful acquisitions. Management believes that the recently completed buyout of Sequenom will boost the company’s women's health test menu. The inclusion is also expected to expand the company’s geographic reach both domestically and internationally.

As part of its three strategic plans to drive growth, LabCorp is working on innovation in order to gain traction in the potential lab testing market with its advanced assays and tools. The company is focusing on extending its core testing capabilities such as Bode Cellmark Forensics, its leading DNA testing solutions business. Simultaneously, the company is collaborating with leading companies and academic institutions to come up with a wider portfolio of tests. Recent instances are  the strategic partnerships with Interpace Diagnostics, a developer of molecular diagnostics tests, alliance with Japan-based Sysmex Corporation – a leading clinical laboratory services provider – and Roche, the world's leading biotech company.

On the flip side, LabCorp operates in an intensely competitive space. Management also anticipates the reimbursement cut to impact LabCorp’s operations in the near term.

Unfavorable foreign exchange continues to be a major dampener for the company. LabCorp’s third quarter has been weak with respect to organic volume growth at LabCorp Diagnostics. Also, economic uncertainty marked with a challenging volume environment for testing laboratories and weak utilization are looming concerns.

Zacks Rank & Key Picks

LabCorp carries a Zacks Rank #3 (Hold). Better-ranked medical stocks are NxStage Medical Inc. NXTM, Align Technology, Inc. ALGN and Haemonetics Corporation HAE. NxStage Medical and Align Technology sport a Zacks Rank #1 (Strong Buy) while Haemonetics carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NxStage Medical gained 14.4% over the last one year compared with the S&P 500’s 9%. The company has a four-quarter average positive earnings surprise of 46.3%.

Align Technology rallied 47% year to date, way better than the S&P 500’s 10.1%. It has a trailing four-quarter average positive earnings surprise of 23%.

Haemonetics recorded a 23.7% gain year to date, better than the S&P 500. It has a trailing four-quarter average positive earnings surprise of 0.82%.

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HAEMONETICS CP (HAE): Free Stock Analysis Report
 
NXSTAGE MEDICAL (NXTM): Free Stock Analysis Report
 
ALIGN TECH INC (ALGN): Free Stock Analysis Report
 
LABORATORY CP (LH): Free Stock Analysis Report
 
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