LabCorp has thrown its hat into the pharmaceutical testing arena in a huge way: It is acquiring biopharma contract testing giant Covance in the biggest transaction ever in the laboratory sector. LabCorp came to terms earlier this week to purchase the Princeton, N.J.-based Covance for $5.6 billion, not including assumption of debt. Covance shareholders will receive $75.76 and slightly more than one-quarter of a LabCorp share for each share of their stock and will ultimately own about 15.5 percent of the merged company. At the equivalent of $105.12 per share, the terms are at a 32 percent premium above Covance’s stock price before the deal was announced. LabCorp is financing the transaction with a combination of cash on hand and financing from BofA Merrill Lynch and Wells Fargo Bank. The deal, which is expected to close in the first quarter of next year, comes as more laboratories are devoting their resources to providing genomic profiling and other test services to the pharmaceutical sector in their quest to develop more sophisticated drugs. As a result, LabCorp will have a huge stake in pharmaceutical development testing moving forward. That niche will account for 29 percent of the company’s revenues, up from virtually […]
LabCorp has thrown its hat into the pharmaceutical testing arena in a huge way: It is acquiring biopharma contract testing giant Covance in the biggest transaction ever in the laboratory sector.
LabCorp came to terms earlier this week to purchase the Princeton, N.J.-based Covance for $5.6 billion, not including assumption of debt. Covance shareholders will receive $75.76 and slightly more than one-quarter of a LabCorp share for each share of their stock and will ultimately own about 15.5 percent of the merged company. At the equivalent of $105.12 per share, the terms are at a 32 percent premium above Covance’s stock price before the deal was announced. LabCorp is financing the transaction with a combination of cash on hand and financing from BofA Merrill Lynch and Wells Fargo Bank.
The deal, which is expected to close in the first quarter of next year, comes as more laboratories are devoting their resources to providing genomic profiling and other test services to the pharmaceutical sector in their quest to develop more sophisticated drugs.
As a result, LabCorp will have a huge stake in pharmaceutical development testing moving forward. That niche will account for 29 percent of the company’s revenues, up from virtually negligible numbers prior to the transaction being consummated. It will be the second-largest source of revenue within the company behind managed care contracts, which will comprise about 32 percent of revenues. LabCorp also expects the deal to add to the bottom line almost immediately and realize $100 million in savings over the next three years.
The deal will also make LabCorp the largest diagnostic company within the United States, with pro forma revenue of $8.4 billion, based on the two firms’ performance between Sept. 30,
2013, and this year.
“This transaction provides LabCorp with immediate scale and a comprehensive market-leading platform in the $141 billion biopharmaceutical research and development market, while at the same time achieving the new sources of revenue, broader payer mix, and greater international presence we have long pursued,” said Dave King, LabCorp’s chief executive officer.
“Clearly LabCorp was going for a big splash by acquiring one of the clear contract research organization market leaders,” said Michael Cherny, a managing director with Evercore CSI in New York. He labeled the deal as an “all-in strategic transaction” for LabCorp.
The merged company will be led by King, who will continue to serve as both CEO and chairman of the board. Covance CEO and Chairman Joe Herring will lead the Covance division inside LabCorp and report to King. LabCorp will continue to be headquartered in Wilmington, N.C., while the Covance division will keep its current New Jersey headquarters. Covance will also continue to operate as a brand separate from the LabCorp label.
“We are thrilled to join forces with another industry leader through a transaction that delivers to our shareholders substantial immediate cash value along with a meaningful stake in a combined company with exciting growth opportunities,” Herring said. “Covance generates more safety and efficacy data for the approval of innovative medicines than any other company in the world, and LabCorp has longitudinal diagnostic data from more than 75 million patients.”
While Cherny upped pro forma 2015 earnings by about 1.7 percent, Evercore kept its hold rating on LabCorp stock, noting that Covance has had volatility issues with its late-stage testing business and that the cost opportunity to engineer the deal may have been too high. LabCorp shares dropped nearly 9 percent after the transaction was announced.
Takeaway: With a single mammoth deal, LabCorp not only has dived head-first into the pharmaceutical development realm but has leapfrogged Quest Diagnostics to become the nation’s largest laboratory firm.
