LabCorp Acquires Covance for $6.1 Billion

Medical diagnostics company Laboratory Corporation of America (LabCorp) is entering the drug research and development business by agreeing to purchase contract research organization (CRO) Covance Inc. for $6.1 billion in cash and stock.

LabCorp provides medical testing through a national network of laboratories, while Covance, as a CRO, helps pharmaceutical companies research and develop new drugs, with a focus on nutritional analysis. The merger of the two key market leaders creates the world’s largest healthcare diagnostics company.

“This transaction provides LabCorp with immediate scale and a comprehensive market-leading platform in the $141 billion biopharmaceutical research & development market, while at the same time achieving the new sources of revenue, broader payor mix, and greater international presence we have long pursued,” LabCorp chairman and CEO David P. King, said in a company statement.
The two companies claimed in the statement their merger will pave the way for “more cost-effective healthcare by improving the safety and efficacy of drug therapies, enabling accurate patient diagnostics, and advancing evidence-based medicines.”

“As a combined company, we will be well positioned to respond to and benefit from the fundamental forces of change in our business, including payment for outcomes, pharmaceutical outsourcing, global trial support, trends in pharmaceutical R&D spending, personalized medicine, and big data and informatics,” added King, who will retain his chief executive position at the combined company.

The deal allows LabCorp to leverage its extensive health database of 75 million patients to help enroll patients in clinical trials quickly, in accordance with privacy safeguards, according to a Wall Street Journal report. The combined company will tap the database to run more efficient clinical trials, advise doctors on patient recruitment, and send information directly to study participants. King said during a conference call that the database can also be used to develop companion diagnostic tests to analyze genetic data and determine whether a particular drug treatment could benefit patients with certain profiles, according to the WSJ.

LabCorp hopes to use Covance’s presence in overseas markets to expand its own international footprint. More than 90% of LabCorp’s sales come from the United States. In comparison, more than half of Covance’s revenue comes from overseas. The combined company’s tax rate should be about 35 percent, compared with LabCorp’s current tax rate of about 38 percent, LabCorp Chief Financial Officer Glenn Eisenberg told the WSJ.

In the past year ending Sept. 30, 2014, the combined business posted a revenue of $8.4 billion, an adjusted EBITDA of $1.6 billion, and free cash flow of more than $700 million, with 20 percent of revenue coming from overseas, according to the LabCorp statement. The two companies said they estimate savings of at least $100 million within three years of closing the deal, which is expected by the first quarter of 2015, pending approval by Covance shareholders and by regulators. The combined company will make its headquarters in Burlington, N.C., where LabCorp currently is based.