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LabCorp Downgraded by Canaccord Genuity

NEW YORK (360Dx) – Following Wednesday's release of Laboratory Corporation of America's third-quarter financial results, which missed the consensus Wall Street estimates on the top and bottom lines, Canaccord Genuity today downgraded the company's shares to a Hold rating from a previous Buy.

The investment bank also lowered its price target on LabCorp's shares to $162 from $195.

In a research note, analyst Mark Massaro said that while the company remains "a best-in-class lab leader with a strong management team and ample [free cash flow], well equipped to consolidate a large fragmented lab industry," he noted several reasons to take a more bearish outlook on LabCorp's stock.

He noted the effect of the Protecting Access to Medicare Act, which lowered reimbursement rates for many non-molecular tests performed by labs, as well as the loss of LabCorp's status as the exclusive national provider of lab services to UnitedHealthcare. In the spring, the insurer announced a long-term partnership with Quest Diagnostics, though it will also renew its relationship with LabCorp in 2019.

Massaro also noted "contractual changes in managed care," which could affect LabCorp's financials moving forward, as well as the recent dismissal of a lawsuit filed by the American Clinical Laboratory Association against the US Department of Health and Human Services related to PAMA rates. ACLA last week filed its notice of appeal to the dismissal.

Together, the concerns "move us to the sidelines as we approach what looks like at least one bridge year," he wrote.

For 2019, LabCorp said it anticipates "'modest'" growth in adjusted EPS, which Massaro said suggests "flattish operational profit." While the firm expects growth in the Covance business, it declined to provide a forecast for its diagnostics business, which accounts for more than 60 percent of its revenues, he added.

Lastly, while LabCorp recently announced it would add at least 600 LabCorp patient service centers in Walgreens stores over the next four years, Massaro said that it is unclear how quickly LabCorp would be able to do that or announce larger deals.

In morning trading on the New York Stock Exchange LabCorp's shares were up almost 2 percent to $158.11.