Burlington-based Laboratory Corp. of America, or LabCorp, is wagering in a big way on the lucrative business of drug testing through a $6 billion acquisition of New Jersey-based Covance.
Monday’s announcement follows years of speculation that LabCorp would buy a company that designs and analyzes drug trials, and only 11 months after LabCorp’s acquisition of Covance’s genetics lab in Seattle. Drug trial companies work with pharmaceutical and biotechnology companies to test experimental drugs on human volunteers and analyze the results.
LabCorp said the acquisition will combine its global database of 75 million patients with Covance’s drug testing business, giving pharmaceutical companies access to potential volunteers and support services on a grand scale.
That will help in recruiting patients for clinical trials, which is a major problem for the drug industry, LabCorp CEO David King told analysts in a conference call.
“It’ll be very attractive to patients to be able to know what trials might be available to them,” King said.
The deal will put LabCorp in competition with the Triangle’s large cluster of drug-testing companies, called contract research organizations. The Triangle has more CROs than any other region in the world – more than 100 of them operate here and employ about 12,500 employees, according to the N.C. Biotechnology Center.
Three of the world’s biggest CROs – Quintiles, which is by far the largest, INC Research and PRA Health Sciences – call the Triangle home. A fourth, PPD, is based in Wilmington and has 1,600 Triangle workers.
LabCorp employs 34,000 people worldwide, including 6,800 in North Carolina, and will be adding 12,500 employees through the Covance acquisition.
The combined annual revenue for the two companies was $8.4 billion for the period ending Sept. 30. Covance, which does not have operations in North Carolina, will keep its division headquarters in Princeton, N.J.
Some investors reacted coolly to the news, especially considering the substantial acquisition price. Standard & Poor’s, noting that LabCorp is financing the the deal with $3.9 billion of debt, expects to lower LabCorp’s credit rating when the acquisition is finalized.
The acquisition values Covance at 32 percent above its Oct. 31 stock price of $79.90. The cash-and-stock deal, which requires regulatory and shareholder approval, is expected to close in the first quarter of 2015.
LabCorp’s shares fell 7 percent, or $8.06, to close Monday at $101.23.
“This is not a deal where investors are going to give them the benefit of the doubt,” Michael Cherny, an analyst with Evercore ISI, told Bloomberg News.
Oppenheimer analyst Bret Jones noted the deal creates a “higher risk profile” and the merger’s strategic rationale “lacks a clear path.”
“The most obvious revenue lift could come from faster and more efficient patient recruitment for clinical trials,” Jones wrote in a research report, noting that the other touted benefits, such as designing individually customized cancer treatments, are more speculative.
Credit Suisse analyst Glen Santangelo praised the deal but wrote: “Admittedly, this is a significant bet outside of management’s previous core competencies, and such a transaction will carry meaningful integration risk with the potential for disruption” in both LabCorp’s and Covance’s existing businesses.
LabCorp, based about 60 miles west of Raleigh, is also in the process of completing a previously announced $85.3 million acquisition of LipoScience, a Raleigh company whose diagnostics tool measures heart disease risk. LabCorp has been LipoSciences’s largest customer, accounting for about a third of the tests LipoScience sells.
The CRO industry has been raising its profile locally. Quintiles became a publicly traded company last year and recently both INC Research and PRA have filed plans to raise hundreds of millions of dollars by going public.
Jeff Williams, CEO of Clinipace Worldwide, a fast-growing CRO in Morrisville with 700 employees, said the deal could boost Covance’s competitiveness among the large CROs that compete for the largest contracts.
“This should be attracting the attention of Quintiles and PPD and ICON – the other big CROs,” he said. ICON is based Ireland.
Covance is the leading provider of clinical lab services among CROs, which makes it an especially smart acquisition by LabCorp given that lab services are its core competency, Williams said. Combining their lab services, he added, could produce significant cost savings and efficiencies.
Clinipace, for example, does not have its own labs and therefore works with third-party clinical lab operators.
The largest CROs provide core lab services, such as blood work and urinalysis, for patients who participate in clinical trials in conjunction with the many other services they provide, such as patient recruitment and data analysis. LabCorp also provides lab work to pharmaceutical and biotech companies conducting clinical trials.
“When Labcorp is out there selling that (service), that’s all they have,” Williams said. “Now they can go in and sell the full clinical trial solution.”
Maxim Group analyst Bryan Brokmeier wrote that LabCorp has four central labs and 44 regional labs, while Covance has five central labs.