Morningstar | LabCorp Faces Increased Price Pressure; No Change to Our FVE
LabCorp reported solid third-quarter results, and our slight adjustments to assumptions were immaterial to our $185 fair value estimate. Now that we’re beginning to see the full impact of the PAMA-led cuts to the Medicare clinical lab fee schedule on the diagnostic labs, shares have come under pressure. We had already assumed greater pricing pressure in 2018 and 2019, with a slight easing in 2020 to reflect the timing of the CLFS phase-in. We see no reason to change our thinking here, now that a judge has dismissed the industry-led lawsuit challenging the method by which the Centers for Medicare and Medicaid Services determined which labs would be included to calculate market prices. The diagnostic industry is heading into the next 12 to 24 months facing the full brunt of Medicare cuts, which may not be immediately offset by industry consolidation, which is likely to lag. Over the long haul, we still think narrow-moat LabCorp will be one of the biggest beneficiaries of this industry culling thanks to its highly competitive cost structure and scale, and we expect LabCorp to opportunistically acquire more outreach programs and smaller independents through the midterm.Aside from the changing dynamics in the diagnostics segment, we’ve been impressed with overall progress in the drug development segment since the beginning of 2017, as net orders have grown and the backlog has nearly doubled since the end of 2016. At this point, IQvia and LabCorp are the two competitors that increasingly dominate the contract research organization field, from our perspective. We think LabCorp’s ability to leverage its patient database has provided a differentiated benefit to potential clinical trial clients, especially those seeking patient populations with certain biomarkers. Management has indicated the firm currently integrates its data assets in roughly two thirds of its proposals and we anticipate this level will increase.
Laboratory Corporation of America Holdings is a life sciences company that is focused on guiding patient care. The company reports its business in the following segments: LabCorp Diagnostics (LCD) and Covance Drug Development (CDD). LCD is an independent clinical laboratory business. LCD provides a menu of requested and specialty testing through a network of primary and specialty laboratories across the United States. CDD provides drug development, medical device and diagnostic development solutions from early-stage research to clinical development and commercial market access. CDD engages in early development and clinical trials in each therapeutic category.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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