With clinical laboratory acquisition candidates dwindling in number, Laboratory Corporation of America Holdings (LabCorp) (NYSE: LH) looked outside the medical laboratory industry and agreed to acquire Covance, Inc. (NYSE: CVD), a major player in clinical trials testing, for approximately $6.1 billion in cash and stock.
By taking this action, LabCorp will have bragging rights as the world’s largest laboratory testing company. Upon completion of this transaction, financial analysts point out that the two companies have combined annual revenue of $8.4 billion as of the period ending September 30, 2014. By comparison, annual revenue at Quest Diagnostics Incorporated (NYSE: DGX) was $7.1 billion for year ending 2013.
Covance Involved in Clinical Trials
Covance is a contract research company in Princeton, New Jersey, with annual revenues of $2.5 billion and 12,500 employees in more than 60 countries. In February of this year, Covance sold its Covance Genomics lab in Seattle, Washington, to LabCorp, per the company’s press release. Terms of this transaction were not announced.
The purchase of Covance gives LabCorp a bigger presence in drug development research and animal testing, noted The New York Times in its story about the agreement. Before the acquisition, LabCorp, based in Burlington, North Carolina, was the second largest clinical laboratory company in the United States. The deal is expected to close within the first three months of next year.
LabCorp Positioned for Greater Role in Pharmaceutical Research
By acquiring Covance, LabCorp is making a significant move into the lucrative business of drug testing, the Charlotte News & Observer reported in its story about the purchase. Laboratory industry observers have speculated for years that LabCorp would buy a company that designs and analyzes drug trials. The acquisition will allow LabCorp to combine its database of 75 million patients with Covance’s drug testing business, giving pharmaceutical companies access to potential clinical trial volunteers, the Charlotte News & Observer noted.
The Charlotte newspaper quoted Bret Jones, an analyst with Oppenheimer & Co., Inc., who said the strategic rationale for the deal was unclear. “The most obvious revenue lift could come from faster and more efficient patient recruitment for clinical trials,” Jones wrote in a research report. Other benefits, such as designing customized cancer treatments, are more speculative, he added.
Once this deal closes, David P. King will retain his titles as LabCorp Chairman and CEO. Joe Herring, Covance’s Chairman and CEO, will lead the Covance business in Princeton, New Jersey.
LabCorp is Acquiring a Company that Was Once Part of Corning, Inc.
There is some irony about LabCorp’s purchase of Covance. Pathologists and clinical laboratory managers with long memories will remember that, back in the 1990s, Corning, Inc., owned the predecessor companies that we now know as Quest Diagnostics (then called MetPath/Corning Clinical Laboratories) and Covance (called Corning Pharmaceutical Services, then Corning Life Sciences).
When the Corning board decided to spin off Corning Clinical Laboratories as an independent company, it also took action to spin off the other assets of Corning Life Sciences. Thus, on January 1, 1996, Quest Diagnostics Incorporated and Covance began operations as publicly traded corporations.
Now, 18 years later, LabCorp has purchased a former sister company of Quest Diagnostics and will become the world’s largest lab testing company when the deal closes during the first quarter of 2015.
—by Joseph Burns