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Evercore Upgrades Quest to Outperform As Tax Windfall, United Contract Reduce PAMA Impact

NEW YORK (360Dx) – Evercore ISI today upgraded its ratings for shares of Quest Diagnostics to Outperform from In Line, and raised the target price to $121 from $108, as tax changes and new insurance contracts are expected to lessen the impact of lower Medicare prices for lab tests under the Protecting Access to Medicare Act.

In a research note, Evercore Senior Managing Director and Partner Ross Muken wrote that despite the hit to lab pricing from PAMA, "a sizeable windfall from tax reform allowed management to smooth the impact to EPS growth, while not sacrificing investment in the business."

The report noted that commercial and government pricing are likely to remain stable over the medium term.

In addition, the decisions in May by both UnitedHealthcare and Aetna to end their exclusive national laboratory provider relationships makes Quest a "net beneficiary from incremental volume," Muken wrote.

The new UnitedHealthcare contract gives Quest significantly greater access to the more than 48 million members enrolled in UnitedHealthcare plans. Meanwhile, the lab company's relationship with Aetna remains "strong and unchanged" a company spokesman said at the time of the announcements.

Evercore ISI expects Quest and its primary competitor Laboratory Corporation of America could both see market share growth from "outright share gains from non-preferred vendors in key [managed care organization] contracts." The investment bank also expects the labs to see an increase in outreach merger and acquisition activity as smaller providers struggle with PAMA pricing. These incremental volume increases could boost margin and operating income growth, and contribute to earnings per share growth in the high-single digits or potentially the low-double digits, according to the research note.

In the first quarter, Quest reported 3 percent year-over-year revenue growth despite the impact of PAMA pricing.

Quest's stock was up 2 percent to $112.85 in midday Tuesday trading on the New York Stock Exchange.