LabCorp sets $6.1B price tag on Covance

BURLINGTON, N.C.—2014 has already seen a number of multibillion-dollar acquisitions take place, and as the year draws to a close, there’s another to add to the list: under a definitive agreement, Laboratory Corporation of America Holdings (LabCorp) will acquire Covance Inc., a Princeton, N.J.-based contract research organization (CRO) that provides drug development and animal testing services, for $6.1 billion.

According to the deal terms, LabCorp will purchase Covance for cash and LabCorp shares currently valued at $105.12 per Covance share, which comes to an equity value of roughly $6.1 billion and an enterprise value of roughly $5.6 billion. Covance shareholders will receive $75.76 in cash and 0.2686 LabCorp shares for each share of Covance stock that they hold. As a result, Covance shareholders will own roughly 15.5 percent of the combined company.

The transaction price represents a 32-percent premium to Covance’s closing price of $79.90 on Oct. 21. With the exclusion of one-time costs, LabCorp expects the deal to be accretive to its 2015 adjusted earnings per share (EPS) before synergies, and the company expects to see annual cost synergies of more than $100 million realized within three years of closing the deal. Pending shareholder approval, regulatory approvals and other customary closing conditions, that closing is expected to take place in the first quarter of next year.

David P. King, chairman and CEO of LabCorp, and Glenn A. Eisenberg, chief financial officer of LabCorp, will hold those same positions in the new combined company. Joe Herring, chairman and CEO at Covance, will lead LabCorp’s Covance division. LabCorp’s Burlington, N.C., headquarters will serve as the corporate headquarters for the combined company, while Covance’s Princeton headquarters will serve as the operating headquarters for the Covance division.

“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 payor mix and greater international presence we have long pursued. Covance also has market access and nutritional businesses that we view as great growth opportunities,” said King. “By joining our highly compatible and complementary capabilities, the combined company will be an industry leader in both the laboratory and CRO spaces, characterized by global scale, enhanced offerings, new efficiencies, broader and deeper customer relationships and a differentiated business model. Combining with Covance is fully aligned with our five-pillar strategy and broadens our portfolio consistent with our vision of being a trusted partner to healthcare stakeholders, providing knowledge to optimize decision-making, improve health outcomes and reduce treatment costs.”

This deal combines LabCorp’s leading-edge medical laboratory testing and services with Covance’s comprehensive drug development expertise to form what both organizations say will be the world’s leading healthcare diagnostics company. LabCorp saw revenues of $5.8 billion last year, while Covance netted $2.5 billion in revenue in 2013, making it the second-largest CRO behind Quintiles. Over the past fiscal year, ended Sep. 30, 2014, the combined business saw pro-forma revenues of $8.4 billion, with adjusted earnings before interest, taxes, depreciation and amortization of $1.6 billion.

Covance brings with it more than 12,500 employees in more than 60 countries, as well as an international footprint: the company is a top-five provider of Phase 1 to 4 clinical management services, with trial activity in more than 100 countries and, according to a LabCorp presentation on the acquisition, business relationships with the top 20 pharmaceutical companies. Additionally, that presentation cites that Covance “contributed to the development of over 90 percent of the 50 best-selling medicines on the market today.” LabCorp called the company “the only CRO offering full-spectrum drug development services,” adding that this acquisition meets LabCorp’s financial criteria, in that it’s expected to be accretive to adjusted EPS before synergies in year one and should earn the cost of capital by year four.

“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,” said Covance’s Herring. “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. This combination leads the way to more cost-effective healthcare by improving the safety and efficacy of drug therapies, enabling accurate patient diagnostics and advancing evidence-based medicines which will enable our clients to substantiate the value of their products and services to patients and payors.”

This isn’t the first M&A transaction between the two companies. In February of this year, LabCorp acquired the Seattle-based Covance Genomics Laboratory and its associated genomics business for an undisclosed amount. The lab offers genomic analysis services that include gene expression studies, translational biomarker projects and next-generation sequencing applications to support drug development. In conjunction with the deal, LabCorp and Covance established a five-year services agreement to collaborate and continue offering specialty genomic services to Covance clients.

LabCorp has noted there is only about 3-percent overlap between itself and Covance, so this acquisition certainly expands the company’s competency areas. Despite the benefits of it diversifying LabCorp’s revenue options, however, analysts are reserved in their approval of the deal. Bloomberg commentary by Tara Lachapelle opined that “at first blush, the $5.6-billion takeover makes little sense,” noting that the best-case scenario is that “The acquisition will position LabCorp for the future of healthcare, where treatments are more personalized.”

“There isn’t a clear runway as to where revenue synergies are going to come from,” said Bret Jones, an analyst at Oppenheimer. “Companion diagnostics is definitely an area of interest for the labs and an area of potential growth, but that’s going to take time to develop.”

Some of LabCorp shareholders were apparently just as leery about the deal, because on Nov. 3, the day the companies announced the deal, the company’s stock price dropped 7.4 percent. Debbie Wang, a Morningstar analyst, called the selloff overdone since the deal can create value for LabCorp’s investors.