NEW YORK (360Dx) – Investment Bank Evercore ISI on Thursday initiated coverage of Laboratory Corporation of America with an Outperform rating and a target price of $176 per share, and Quest Diagnostics with an In Line rating and a target price of $103 per share.
In notes to investors, analyst Ross Muken wrote that a key factor facing both companies is how much of a headwind the Centers for Medicare & Medicaid Services' new lower lab prices under the Protecting Access to Medicare Act will prove to be. Muken expects that price cuts for 2018 will probably be realized, but "it is possible that the agency might revisit PAMA and provide some relief in future years."
Meanwhile, he noted that the PAMA prices are more painful to smaller labs than LabCorp and Quest, and without a PAMA reprieve it is likely that smaller competitors will be put up for sale.
PAMA aside, LabCorp and Quest are both expected to see some upside from tax reform, Muken wrote.
For LabCorp, Muken sees the acquisition of Chiltern boosting the company's contract research organization business geographically, as well as in the key oncology vertical. The company has worked to improve initial "performance bumpiness" related to its Covance business, and Muken expects LabCorp's CRO business to trend positively. Muken believes investors will reward LabCorp for its more diverse strategy.
At Quest, the effects of PAMA may be cushioned by the company's "notable uptick in outreach M&A activity," Muken wrote. The company had also shown strong cost management, he added. Muken forecasts that the pace of transaction activity will remain elevated.
Muken expects that Quest will most likely only see a notable upside in shares in the event of a PAMA reprieve for 2019. As a result, he sees the Quest's current risks versus rewards as balanced.
In Friday morning trading on the New York Stock Exchange, LabCorp's shares were trading up around 1 percent at $164.22. and Quest's shares were flat at $99.58.