LabCorp (LH) Banks on Structural Review Plan for Solid Returns

Laboratory Corporation of America Holdings or LabCorp LH, based on its ongoing robust growth momentum across Diagnostic and Drug Development wings, has decided to undertake a review of its structure and capital allocation strategy. This decision was based on the company’s deduction that its current valuation is not appropriately justified in the company’s current stock price. This review while ensuring better shareholder return should boost the stock price.

Following the news, shares of the company jumped nearly 5% on Mar 24 to close at $250.42.

A Few More Details on the Review

During the pandemic, LabCorp played a critical role in terms of delivering COVID-19-related products. In other key therapeutic areas such as oncology, liver and kidney disease, Alzheimer’s and autoimmune disorder too, the company is continuously progressing in terms of development of next-generation solutions.

Amid this accelerating growth trajectory over the past several months across all platforms, management, realizing that the stock is not accurately valued, called for a structural review. The company has appointed Goldman Sachs & Co. LLC as its financial advisor to support the process.

Per the press release, LabCorp does not intend to comment further about this review until the board reaches a conclusion.

LabCorp’s Recent Progress Across Segments

Within Covance Drug Development, the company’s ongoing strategic investments in precision medicine, therapeutic expertise, FSP solutions and biologic drug development capabilities continue to increase its win rate with existing partners and new customers. The acquisition of Chiltern is significantly strengthening LabCorp’s strategic position in clinical development and accelerating revenue and profit growth within Covance. This apart, the company’s recent strategic technology contract with QIAGEN is expected to witness a positive outcome down the line.

Of late, LabCorp is enhancing it drug development offerings through strategic acquisitions. The acquisition of MI Bioresearch is expected to create an opportunity for Covance to move from preclinical to clinical development. We are also optimistic about the company’s plans to acquire Regulatory and Clinical Research Institute (RCRI), a device focused CRO with strong regulatory consulting expertise.

In addition, the company has made progress with the Covance LaunchPad initiative. By the end of 2020, it achieved its goal of delivering $150 million of net savings from Covance LaunchPad. At the end of fourth-quarter 2020, the company registered both organic-based business demand and LaunchPad savings. The company expects that in 2021 the base business will grow 9.5% to 12% over 2020 revenues despite the continuing negative impact from the pandemic.

Within Diagnostics arm, the company successfully continues to provide the foundation for new collaborations with health systems, large physician groups and managed care partners. LabCorp has also created growth opportunities in women's health, medical drug monitoring, genetics and oncology testing, as well as in critical collaborations with players like Thermo Fisher, Walgreens and 23andMe. Also, its partnerships with UnitedHealthcare and Aetna have helped LabCorp to become a contracted laboratory provider for all major national plans. In the second quarter, as a major development, the company launched liquid biopsy test for patients with non-small cell lung cancer.

LabCorp introduced the LaunchPad program in Diagnostics arm as well. This Phase II of LaunchPad initiative in Diagnostics is expected to deliver $200 million of savings by the end of 2021. Phase II of LaunchPad is expected to streamline its business, unlock new avenues for growth and contribute to improvement in long-term margins. Per the company’s fourth-quarter 2020 update, despite the COVID-19 downsides, it is currently on track to deliver diagnostics Launchpad target.

Price Performance

Shares of the company have gained 103.9% in a year’s time compared with the industry’s growth of 56.1%.

Zacks Rank and Key Picks

Currently, LabCorp carries a Zacks Rank #3 (Hold).

A few better-ranked stocks from the broader medical space include Arlo Technologies, Inc. ARLO, Calix, Inc CALX and Covetrus, Inc. CVET. All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Arlo Technologies has a projected long-term earnings growth rate of 48%.

Calix has a projected long-term earnings growth rate of 39%.

Covetrus has an estimated long-term earnings growth rate of 21%.

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