LabCorp (LH) Banks on Covance Amid Testing Volume Pressure

On Jul 31, we issued an updated research report on LabCorp LH. The ongoing positive synergy from the Covance consolidation is a major plus. However, a challenging volume environment for testing laboratories and softness in utilization are headwinds for LabCorp.

Over the past three months, shares of LabCorp have risen 19.5% compared with the industry’s 5.7% increase.

Despite the challenges associated with COVID-19, the company exited the second quarter of 2020 with better-than-expected results. Although diagnostic testing revenues declined on a year-over-year basis, there was a steady recovery in the Base Business during the quarter for both diagnostic and drug development. This could be attributed to the fact that people are gradually returning to their doctors for testing and clinical trials activity has resumed. COVID-19 related research too is progressing well. More encouragingly, in the month of June, volumes were up year over year and COVID-19-related testing more than offset the decline in the Base Business.

Laboratory Corporation of America Holdings Price

Laboratory Corporation of America Holdings price | Laboratory Corporation of America Holdings Quote

Within the Covance Drug Development business, the company reported a solid trailing 12-month book-to-bill of 1.32. More encouragingly, backlog grew to $11.8 billion compared with $11.3 billion in the first quarter. In terms of COVID-19 testing updates, the company was the first commercial lab to launch the PCR tests in March. Since then, LabCorp has rapidly expanded both capacity and accessibility for testing.

However, LabCorp’s Diagnostics and Drug Development arms are experiencing the impact of coronavirus with clients postponing programs and lower demand for diagnostic testing. The increased testing performed by the company for COVID-19 did not nearly offset the decline in other testing.

Diagnostics revenues declined 3.9% year over year due to sluggish Base Business revenues on the impact of COVID-19 and continued price pressure from PAMA. This reduction in demand impacted testing volume broadly, but the impact was more severe on routine procedures. It also impacted esoteric tests, but to a lesser degree due to the critical and time sensitive nature of these tests. In the Drug Development business, revenues declined 2.9% affected by a 5.2% decline in organic revenues, 

Due to the unpredictability regarding the duration and the impact of the COVID-19 pandemic, the company did not provide its 2020 guidance.

On the flip side, apart from a challenging volume environment for the testing laboratories, disposition of certain businesses and the implementation of the Protecting Access to Medicare Act (PAMA) dented growth. Moreover, an unfavorable currency movement is a lingering downside. The stock currently carries a Zacks Rank #3 (Hold).

Key Picks

Some better-ranked stocks in the broader medical space are West Pharmaceutical Services, Inc. WST, Thermo Fisher Scientific Inc. TMO and PerkinElmer, Inc. PKI. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

West Pharmaceutical reported second-quarter 2020 adjusted EPS of $1.25, beating the Zacks Consensus Estimate by 37.4%. Net revenues of $527.2 million outpaced the consensus estimate by 6.9%.

Thermo Fisher reported second-quarter 2020 adjusted EPS of $3.89, beating the Zacks Consensus Estimate by 45.7%. Revenues of $6.92 billion outpaced the consensus mark by 0.1%.

PerkinElmer reported second-quarter 2020 adjusted EPS of $1.57, surpassing the Zacks Consensus Estimate by 68.8%. Revenues of $811.7 million outpaced the consensus mark by 1.3%.

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