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Coverage of Quest Diagnostics, LabCorp Started by UBS

NEW YORK (360Dx) – UBS initiated coverage of Quest Diagnostics and Laboratory Corporation of America on Thursday with a Neutral and Buy rating, respectively.

In a report, analyst Kevin Caliendo put a a 12-month price target in Quest's shares of $90 and wrote that while he believes Quest could take market share from LabCorp and other competing reference labs, his analysis of Quest's long-term strategic partnership with UnitedHealthcare, announced in May, "suggests less switching to Quest than is expected."

The day after the Quest-UnitedHealthcare partnership was announced, LabCorp announced it would become a national preferred lab for Aetna, ending Quest's exclusive national preferred status with that insurer.

Caliendo added that though a survey conducted by UBS suggests that the Protecting Access to Medicare Act could drive hospital strategic activity, such as M&A or partnerships, "it also suggests nearly as much enhanced hospital competition as hospital outsourcing opportunities."

Further, he said while he expects a "steady stream of M&A and partnerships with the national players as a result [of PAMA], we think an acceleration in the M&A pipeline will take more time to sort out as independent labs assess market opportunity and profitability in a post-PAMA world."

Near-term expectations around Quest's revenue and earnings growth "are too high," Caliendo said, though consistent low- to mid-single digit topline growth and high-single digit EPS growth could return in 2020.

Quest is scheduled to announced its fourth quarter 2018 and full-year 2018 financial results on Feb. 14.

Caliendo also began coverage of LabCorp with a Buy rating and a price target on its shares of $169. In a separate note, he said the firm's diagnostics business should stabilize in the second half of 2019, which "should provide support to a rerating of LabCorp's multiple." Additionally, he noted that the company's stock price has retreated 27 percent since the start of Q3 2018, which should create "a positive risk-reward setup into the 2019 guidance call."

Of the effect of PAMA on LabCorp, Caliendo said he anticipates the firm will be less active on the hospital M&A front, compared to Quest, as funds may be directed to LabCorp's Covance business, instead.

"Though PAMA pressure will offer strategic opportunities to LabCorp in the hospital market, factoring in lost referral volumes due to insourcing likely will offset those gains," he said.

LabCorp is scheduled to announced its Q4 2018 and full-year 2018 earnings results on Feb. 7.