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Can LaunchPad Aid LabCorp’s (LH) Covance Arm in Q1 Earnings?

Zacks

Laboratory Corporation of America Holdings LH also known as LabCorp, is slated to report first-quarter 2018 results on Apr 25, before the market opens. Last quarter, the company delivered a positive earnings surprise of 3.38%. It has an average trailing four-quarter beat of 2.87%.

Let's see, how things are shaping up for this announcement.

Factors at Play

LabCorp is likely to repeat its success trend from the last quarter. The company is expected to gain from a strong LabCorp Diagnostics segment in the period to be reported, banking on a favorable price, mix, tuck-in acquisitions and organic volume. Particularly, we are looking forward to the company’s partnership with Mount Sinai and the former owners of Pathology Associates Medical Laboratories (PAML), Providence and Catholic Health. Earlier, the company anticipated these three partnerships to benefit from a full-year ownership and growth to generate approximately $500 million as incremental profitable revenues in 2018. We expect this likely upside to get reflected in first-quarter results itself.


Within Covance Drug Development, we note that after a dull show for several quarters, the segment has started to report revenue growth from third-quarter 2017 onward on the back of the Chiltern acquisition, strong organic growth and a favorable foreign currency translation. With its buyout, Chiltern proved accretive to LabCorp’s portfolio, adding highly complementary capabilities to the company’s offerings including scale expansion in the Asia Pacific belt, a broader reach in the fast-growing emerging and mid-tier biopharma customer segments as well as expertise in the oncology drug development. All these factors should together continue to benefit the top line at LabCorp’s Covance Drug Development in the yet-to-be reported quarter as well.

Significantly, the company is putting more emphasis on creating new growth opportunities in women's health, medical drug monitoring, genetics and oncology testing apart from critical collaborations such as Walgreens and 23andMe. Within Covance Drug Development, LabCorp expects these efforts to help fortifying its book-to-bill and net orders, driving its 2018 revenue conversion in the process.

Also, the multi-year project LaunchPad, a business process improvement initiativeof LabCorp looks promising. The company’s last-year savings already achieved $20 million from the platform and further projects an additional net savings of $130 million through the three-year period ending in 2020, thereby substantially expanding the Drug Development margins.

However, downsides might surface from the ongoing reimbursement issue. As stated by the company, the new PAMA (Protecting Access to Medicare Act) rates published by CMS (Centers for Medicare & Medicaid Services) do not reflect the intent of Congress when it directed CMS to implement the market-based Medicare rates for lab testing. The statement reads that “The process CMS followed to determine these rates was fatally flawed and failed to account for significant segments of the lab market by excluding 99 percent of all U.S. labs from reporting data and limiting data collection to 1 percent of laboratories, dominated by independent labs”.

We are therefore quite apprehensive about the entire scenario amid this current uproar. If the latest clinical lab fee schedule draft by CMS finally gets enforced sans amendment in favor of the testing laboratories, the continuation of LaunchPad, the projected growth at Covance, benefits from the Chiltern purchase and that from PAML and Mount Sinai plus the Covance LaunchPad process will all be offset by reduced PAMA rates.

Per LabCorp’s previously provided guidance for 2018, revenue growth is expected to remain in the band of 9.5-11.5% from 2017 including a likely improvement of 60 bps from a positive foreign currency movement. The Zacks Consensus Estimate for current-year revenues is pegged at $11.48 billion. Adjusted EPS outlook for 2018 has been projected in the $11.30-$11.70 range. The consensus mark of $11.55 for the metric falls within the company’s forecast.

What the Quantitative Model Suggests

Per the proven Zacks model, a company with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP.

LabCorp has an Earnings ESP of +2.08% and a Zacks Rank #2, a combination that suggests the company to likely beat on earnings this quarter.

Conversely, the Sell-rated stocks (#4 or 5) should never be considered going into the earnings announcement, especially when the company is seeing negative estimate revisions.You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Other Stocks to Consider

Here are a few other medical stocks worth considering with the right combination of elements to beat estimates this time around:

Myriad Genetics, Inc. MYGN has an Earnings ESP of +0.61% and a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Henry Schein, Inc. HSIC has an Earnings ESP of +3.34% and a Zacks Rank #3.

Quest Diagnostics Incorporated DGX has an Earnings ESP of +3.19% and is a Zacks #3 Ranked player.

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