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LabCorp Diagnostics Strong on Novant Health Deal Extension


Laboratory Corporation of America Holdings LH, also referred to as LabCorp, has decided to extend its Technical Services Agreement with Novant Health which was originated in 2012. However, the financial terms of this multi-year agreement extension have been kept under wraps.

The Technical Services Agreement makes the company’s diagnostics business – LabCorp Diagnostics – the laboratory management services provider for all Novant Health acute care facilities. Thus, we expect this agreement to expand LabCorp’s reach.

LabCorp’s highly sophisticated and exclusive services like IT and data analytics and high-end testing platforms provide a holistic and enriching range of laboratory and diagnostics solutions. In addition to these services, LabCorp acts as the primary reference laboratory for Novant Health and Novant Health Medical Group.

Interestingly, LabCorp’s Diagnostics arm is its prime revenue generating business which accounted for around 71% of the company’s total revenues in the first quarter of fiscal 2017. The latest development is expected to help the company to strengthen its position in this space.

Notably, the company has been riding high on this segment, courtesy of its continuous efforts to stimulate growth organically as well as through acquisitions and partnerships. In this regard, LabCorp recently teamed up with Walgreens Boots Alliance, Inc. WBA to set up specimen collection service stations at various Walgreens stores across the U.S.

The company also expanded its reach by closing the acquisition of Mount Sinai Health System Clinical Outreach Laboratories in May 2017. Post-acquisition, LabCorp’s highly differentiated portfolio will be used by Mount Sinai’s existing customers.

Per a report from MarketsandMarkets, the Vitro Diagnostics market is expected to witness a CAGR of 5.5% in the 2016-2021 period, while the Diagnostics Imaging Market is projected to see a CAGR of 6.6% over the same time frame. Thus, LabCorp’s continuous efforts to grow in this niche market seem to be perfectly aligned and justified.

Management showed confidence in the Diagnostics segment by revising the Guidance for fiscal 2017 favorably. The projected revenue growth at this segment was increased by 50 basis points to 5.0–7.0% over 2016 net revenue of $6.59 billion. Moreover, in May 2017, company expanded its VistaSeq Hereditary Cancer portfolio through the addition of ten new test panels with focus on the risk of specific hereditary cancer syndromes.

Over the last three months, LabCorp has been lagging the broader Medical Instruments market, gaining 6.6% as compared to the industry’s 11.6%. However, the company’s strong fundamentals make us believe that this phase is only momentary. Also, we expect the latest development to provide some momentum to the stock.

Zacks Rank & Key Picks

LabCorp currently carries a Zacks Rank #4 (Sell). A few better-ranked medical stocks are Edwards Lifesciences Corporation EW and Abbott Laboratories ABT. Notably, Edwards Lifesciences sports a Zacks Rank #1 (Strong Buy), while Abbott Laboratories carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Edwards Lifesciences has an expected long-term adjusted earnings growth of 15.22%. The stock has added roughly 24.7% over the last three months.

Abbott Laboratories has an expected long-term adjusted earnings growth of 10.84%. The stock has added around 12.8% over the last three months.

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