Can Strategic Alliances Aid LabCorp's (LH) Q2 Earnings?

Laboratory Corporation of America HoldingsLH also known as LabCorp, is slated to report second-quarter 2018 results on Jul 25 before the market opens. Last reported quarter, the company delivered a positive earnings surprise of 5.30% with its average trailing four-quarter beat being 3.85%.

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

Factors at Play

LabCorp is likely to repeat its success trend from the first quarter of 2018. 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 collaboration with European provider of clinical laboratory testing Unilabs. This collaboration has started to broaden the network of laboratories used by biopharmaceutical companies to support companion diagnostic development and commercialization.

Laboratory Corporation of America Holdings Price and EPS Surprise

Laboratory Corporation of America Holdings Price and EPS Surprise | Laboratory Corporation of America Holdings Quote

Among the company's other recent alliances, worth mentioning is its comprehensive laboratory collaboration with Appalachian Regional Healthcare. This apart, the company has expanded its relationship with Mount Sinai to consolidate all of the latter's reference work as well as streamline its inpatient labs.

Also, in February, LabCorp's Covance business entered into a strategic technology agreement with GlaxoSmithKline. Under the terms of the agreement, GSK will use Covance's Xcellerate Monitoring, Xcellerate Insights and Xcellerate Clinical Data Hub solutions in a software-as-a-service model.

Earlier, LabCorp noted that its three partnerships, viz. Mount Sinai, Pathology Associates Medical Laboratories (PAML) and Catholic Health will be rewarding to its portfolio. The tie-ups will benefit from a full-year ownership, generating approximately $500 million as incremental profitable revenues in 2018. We expect this likely upside to be reflected in second-quarter results itself.

Within Covance Drug Development, we note that after suffering a drag for several quarters, the segment has started to gross higher revenues from third-quarter 2017 onward on the back of Chiltern acquisition, a strong organic growth profile and a favorable foreign currency translation.

The Chiltern buyout 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 LaunchPad project, a business process improvement initiative of LabCorp, looks promising. The company's last-year savings already achieved a $20 million impetus from this platform and further projects additional net savings of $130 million through the three-year period ending 2020. This in turn, also bodes well for substantially boosting the Drug Development margins.In this regard, the company recently opened Covance central delivery center in Bangalore, India, creating an important milestone toward broadening its global service delivery model.

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 replicate 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 quite apprehensive about the entire scenario. With the latest clinical lab fee schedule getting implemented without amendment in favor of the testing laboratories, the continuation of LaunchPad, the projected growth at Covance, the benefit from Chiltern, the gain from PAML and Mount Sinai plus the Covance LaunchPad process will all be offset by PAMA reductions.

Per LabCorp's guidance for 2018, revenue growth is expected to remain in the 10-12% band from the range recorded in 2017 including a likely increase of 90 bps from a positive foreign currency movement. Adjusted EPS expectation for the current year remains within $11.30-$11.70. However, this view now includes the anticipated negative impact of 20-30 cents for the full year from ASC 606, offset by strong first-quarter results and an improved outlook for the remainder of the year.

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 a Zacks Rank #3, which increases the predictive power of ESP. However, its Earnings ESP of -0.23% leaves surprise prediction inconclusive. The Zacks Consensus Estimate for earnings of $2.92 per share reflects 18.22% growth year over year. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Stocks to Consider

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

Align Technology, Inc. ALGN has an Earnings ESP of +5.2% and a Zacks Rank of 1. You can see the complete list of today's Zacks #1 Rank stocks here .

Baxter International Inc. BAX has an Earnings ESP of +0.42% and a Zacks Rank #2.

Boston Scientific Corporation BSX has an Earnings ESP of +0.49% and a Zacks Rank of 2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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