EUR 850.00 For Business Accounts Only

Morningstar | LabCorp's 2Q Results Were Solid; No Change to Our FVE

LabCorp released solid second-quarter results that were very close to our expectations, and we're leaving our fair value unchanged. Consistent with historical patterns, the diagnostic lab segment again outpaced that of rival Quest, with LabCorp's organic volume up 2.8% year over year compared with 0.5% at Quest. However, the Medicare reimbursement reductions seem to have hit LabCorp harder than Quest, to the tune of at least 20 basis points more than Quest. In the bigger picture, we're not overly concerned about this increased price pressure from the Medicare Clinical Lab Fee Schedule and fully expect it will continue over the next two years. We have long held that LabCorp and Quest, as the two lowest-cost producers, are well-positioned to navigate these cuts, and over the longer term, should actually benefit from more volume as hospital-based labs are forced to outsource more tests to the largest independent labs. We think this dynamic will only underscore LabCorp's narrow economic moat.

The clinical trials segment was more of a mixed bag, with net book/bill falling from roughly 1.34 in the second half of 2017 to 1.22 in second quarter. While we recognize a single quarter does not add up to a trend, we're watching this measure with interest, especially as new collaborations with biotech and pharma clients should show up in the book/bill ratio over the next few quarters. Management has quantified LabCorp's advantage in clinical trials, demonstrating through case studies that the firm completes oncology trials three to five months faster than competition. This should bode well for new client collaborations. Nonetheless, if book/bill softness is prolonged, we could slightly ratchet down our projections for this segment in 2019-20.