BofA Securities downgraded Quest Diagnostics (NYSE:DGX) to Neutral from Buy and cut its price target to $148.00 from $166.00, noting that margin expansion looks more difficult after the Haystack Oncology deal.
Last week, the companies announced that Quest Diagnostics will acquire Haystack Oncology in an all-cash equity transaction. While the purchase price ($300 million cash + $150M in milestones) doesn’t seem high vs. other transactions and the current comps in the liquid biopsy space, BofA’s main concern is that it will be dilutive to earnings.
Management expects Haystack to become accretive by 2026, but BofA noted that its experience with genomics-based diagnostics suggests longer development times and higher costs.
Last week, the company reported its Q1 earnings, with both EPS and revenues coming in better than the consensus estimates.
With tailwinds from C19 testing volumes and reimbursement falling, lingering regulatory uncertainty, and its updated view on out-year margin targets, BofA believes a lower multiple is more appropriate now and thus moves to the sidelines.