Last man standing

LabCorp acquires MEDTOX Scientific, one of two remaining major independent clinical labs

Lloyd Dunlap
BURLINGTON, N.C.—Laboratory Corporation of America Holdingsand MEDTOX Scientific Inc., a provider of specialized laboratory testingservices and on-site/point-of-collection testing (POCT) devices, have enteredinto a definitive merger agreement under which LabCorp will acquire MEDTOX fora purchase price of $27 per share in cash, representing a total enterprisevalue of approximately $241 million. The board of directors of MEDTOX hasunanimously approved the agreement and recommended approval of the transactionby MEDTOX's shareholders.
 
"We are extremely pleased that MEDTOX is joining ourfamily," says David P. King, chairman and CEO of LabCorp. "MEDTOX is anindustry leader in specialized toxicology testing. This acquisition provides astrong foundation for growth in this business, as we build and expand LabCorp'sToxicology Center of Excellence and add to the unrivaled assets of the LabCorpSpecialty Testing Group."
 
 
"This transaction highlights the fundamental value of theMEDTOX brand, the talent and expertise of our team and the quality of ourproducts and testing services," says Dick Braun, chairman and CEO of MEDTOX."As part of LabCorp with its substantial resources and infrastructure, weexpect to accelerate MEDTOX's profitable growth and provide a stable andsustainable environment for our employees and clients."
 
 
According to industry observer Paul Nouri, a contributor towww.seekingalpha.com, "For a number of reasons, investors were likely betteroff staying away from the big two labs, namely, Quest Diagnostics and LabCorp."Instead, he recommended that investors take a look at two of the remainingpublicly traded clinical labs at the time, Medtox and Enzo. His reasoning wasthat while Quest and LabCorp were struggling to see organic volume growth, Enzoand Medtox had seen double-digit growth over the past few years. When LabCorpannounced the purchase of Medtox, Nouri pointed out that on a trailing 12-monthbasis, the purchase price equates to 2.2 times sales, 47 times earnings pershare and 27 times free cash flow.
 
 
"At first blush, this looks like a pretty expensiveacquisition," Nouri noted, "however, when looked at more critically, investorscan see why LabCorp was willing to pay up for this asset. Historically, the biglabs have liked making tuck-in acquisitions. The reasoning usually is thatQuest and LabCorp already have substantial lab space, IT departments, billing,etc. When merged, the goal is to bring the margins of the acquired lab up tothe level of the purchaser. As of the latest quarter, Medtox was running at an8.5-percent operating margin, while LabCorp was running at about 20 percent. Itdoesn't happen overnight, but if LabCorp is eventually able to bring up themargin to their level, the acquisition looks much more reasonable atapproximately 13-times free cash flow."
 
 
In recent communications with market analysts, Quest hasmade it apparent that it is not currently interested in any major acquisitions.The company is heavily in debt after spending more than $2 billion to buy back36.5 million shares over the past three years and making over $1 billion inacquisitions. LabCorp has been less outspoken, saying that there are attractiveopportunities, but that it will be diligent about price and fit.
 
"After the rush of acquisitions over the past 10 years,there are only a few labs left that would make a dent in either LabCorp orQuest's results, and the valuations are likely to be high. There are, however,a host of smaller labs that could be bought for relatively reasonablevaluations," Nouri states.
 
 
LabCorp's release announcing the acquisition states that,"The transaction is subject to customary closing conditions including theexpiration or early termination of the waiting period under theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approvalby MEDTOX's stockholders. The transaction is expected to close in the thirdquarter of 2012."
 
 

 
LabCorp, XDx to develop lupus flare predictor test
 
 
BRISBANE, Calif.—LabCorp also announced last month that ithas entered into a collaboration and license agreement with XDx Inc. to developand commercialize a diagnostic test to predict flares of systemic lupuserythematosus (SLE).
 
The agreement combines LabCorp's diagnostic development andcommercialization resources with XDx's autoimmune diagnostics research anddiscovery experience and SLE blood sample database. Financial terms of theagreement were not disclosed.
 
SLE, also known as lupus, is a chronic autoimmune diseaseaffecting more than 1.5 million people in the United States, according to theLupus Foundation of America. Lupus disease flares are periods of increaseddisease activity. The major challenge for physicians managing patients withlupus is to treat this active phase without allowing the treatment itself tocause long-term damage. Treatment for active lupus differs, depending on theorgan systems involved and disease severity. Current treatment often includes acombination of drugs.
 
 
"Building upon our success in the immune-mediated diagnosticmarket with our first approved product, AlloMap Molecular Expression Testing,XDx is dedicated to expanding its pipeline of high-value diagnostic tests toother diseases that involve the activity of the immune system," said PierreCassigneul, XDx's president and CEO. "In lupus, we have developed an extensive,proprietary database of lupus blood samples that we will use in collaborationwith LabCorp to initiate its development of a biomarker for the flare test. Welook forward to a fruitful relationship with this world-class partner."
 
 
"Lupus remains a critical area of unmet medical need, andnew tests are needed to help clinicians anticipate when patients may needadditional therapeutic interventions for the treatment of flares," statedLabCorp Chief Medical Officer Dr. Mark Brecher. "This agreement with XDxadvances our strategy of developing and introducing tests to providepersonalized information that can be used to help physicians and theirpatients."

Lloyd Dunlap

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