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Barclays Downgrades Quest Diagnostics to Equal Weight

NEW YORK – Barclays on Tuesday downgraded its rating on Quest Diagnostics' stock to Equal Weight from a previous Overweight, citing reimbursement pricing pressure resulting from the Protecting Access to Medicare Act.

In a research note, Barclays analyst Jack Meehan also lowered his price target on Quest's shares to $106 from a previous target of $114. He noted the recent passage of the Laboratory Access for Beneficiaries (LAB) Act as a factor for the downgrade, saying the law will put "incremental PAMA Medicare rate pressure in 2021" on reimbursements to Quest.

The LAB Act will delay by one year the reporting of lab payment data required by PAMA. While the clinical lab industry believes the delay will allow the Centers for Medicare and Medicaid Services to improve its reimbursement data collection process to include more labs, notably hospital labs, resulting eventually in higher rates, in the near term the new law could have a negative effect on larger labs.

PiperJaffray analyst William Quirk said in a note last week that 2021 lab reimbursement rates will be based on data collected during the 2017 reporting period, rather than the 2020 period, which would have been the case if the LAB Act had not been enacted. That, he wrote "will be an incremental negative for [Laboratory Corporation of America] and Quest and will likely lead to an [approximately] 4.4 percent reduction in 2021 for the broader" clinical lab fee schedule.

According to Meehan, while Secaucus, New Jersey-based Quest is well positioned to gain market share as rate pressures accelerate and national insurers look to large national labs "as low-cost providers," in the nearer term Quest has not captured enough share gain to offset risks.

The LAB Act, he said, is a "negative for the national labs," and in 2021 it "solidifies" a further 14 percent Medicare rate cut to labs, which will make it a challenge for Quest to maintain adjusted EBIT margins.

"In addition, PAMA has been a persistent headwind to margin expansion since 2018, which we now expect to step up in 2021 with enactment of the LAB Act," he said.

Additionally, while PAMA had been expected to amplify acquisition activity by the largest national labs, including Quest, to date, M&A in the space has been muted. Meehan said that Quest has had plenty of conversation with hospitals around their lab business, but the recent slowdown in deals has been surprising in light of operating pressures faced by hospital labs.

He still believes that reimbursement pressures will drive consolidation in the lab industry as smaller labs lack the scale to effect operational efficiencies. "From an M&A perspective, Quest will have to assess the underlying value of transactions to determine whether it is worthwhile to acquire a lab or pick up share organically if that lab goes out of business," Meehan said.

In afternoon trading on the New York Stock Exchange, Quest's shares were down about 1 percent to $104.40.