LabCorp to Buy Covance

On November 3rd, Laboratory Corporation of America Holdings (“LabCorp”), one of the largest U.S. medical testing companies, agreed to buy Covance for about $6.1 billion. By acquiring one of the biggest providers of contract medical research, LabCorp is creating a business that performs both routine medical testing and research for drug companies, an unusual combination.

Though both companies are involved in the healthcare industry, they have little in common. LabCorp’s core business involves processing patient samples for doctors and hospitals, whereas Covance helps drug makers with clinical trials for their products. This deal signals LabCorp’s entry into the drug-development business.

David P. King, LabCorp’s chairman and chief executive, asserted that “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.” King’s counterpart, chairman and CEO of Covance Joe Herring, shares King’s optimism and assured investors that “the strategic opportunities between these two companies are absolutely stunning.”

Indeed, 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 U.S. whereas more than half of Covance’s revenue comes from overseas. In addition, according to its annual report, Covance had employees in over 60 countries last year. Through the acquisition, LabCorp will also gain control of Covance’s food and chemistry business, which tests the nutrition content and safety of food.

Moreover, LabCorp has a large database containing information on 75 million patients, which includes demographic and diagnosis information that LabCorp can employ in recruiting for Covance-run clinical trials. Patient data can also be used to develop companion diagnostic tests, which are used to analyze genetic and other biological traits to predict whether patients will benefit from certain drug treatments.

Asked on a conference call about the legality of using patient data, Mr. King said the company is permitted to “interrogate the database” to advise physicians on patient recruitment and to send any clinical trial information directly to patients. The company would comply with all privacy regulations, Mr. King said.

Under the terms of the deal, LabCorp will pay $105.12 a share, a nearly 32 percent premium over the Covance share price as of the Friday before the agreement. Covance shareholders will receive $75.76 in cash and 0.2686 of a LabCorp share for each of their Covance shares. Collectively, the soon-to-be former Covance shareholders will own about 15.5 percent of the new combined company. LabCorp’s top executives, including Mr. King, will remain in their current positions in the combined company, while Covance’s chairman and chief executive, Joe Herring, will continue to lead Covance’s businesses.

Investors are questioning both the price and the reasoning behind the deal, said Michael Cherny, an analyst with Evercore ISI. “It’s strategic questions, plus the price paid,” he said in a telephone interview. “This is not a deal where investors are going to give them the benefit of the doubt.” He called LabCorp’s purchase a “major move with regards to diversifying its business into a broader testing model.” Indeed, LabCorp said it expects to save more than $100 million annually in reduced costs within three years after the acquisition. The deal should close by the end of March, 2015.

LabCorp to Buy Covance (PDF)