Labcorp to splice off clinical development arm into standalone business

After more than two years of pandemic-driven growth, Labcorp is shipping off its clinical development arm as a standalone, public company.

The spinoff—for now, dubbed the “clinical development business”—would solely focus on contract research work, helping companies run clinical studies through confirmatory phase 4 trials. The news was first reported by The Wall Street Journal early Thursday before being announced by the company. 

The decision is a reversal from the end of last year, when, following a strategic review, Labcorp decided that restructuring wasn’t necessary. Instead, Labcorp prioritized dividend payouts and a share buyback program, among other initiatives. But as Labcorp sought to maximize shareholder value while the going was good, it evidently reconsidered. 

“We were very clear to say at that time because we knew that post-review the board was going to evaluate avenues to enhance value—including potential transactions—they were going to talk to more external people,” said CEO Adam Schechter. 

He added that, at the time the post-review recommendations were made, the company was also dealing with a surge in omicron cases and didn’t want to rock the corporate boat while dealing with increased testing volumes. 

Labcorp says it will share “health and clinical data” between the diagnostics business and the new CRO company. Schechter estimated that 15% to 20% of Labcorp’s central lab business came from the CRO wing. But splitting off, he projected that the central lab wing would have more flexibility to work with more clients. 

Overall, Labcorp’s top brass is bullish that a standalone CRO company will be self-sufficient. In the year ending June 30, 2022, the clinical research arm notched $3 billion in revenue and is expected to produce high single-digit revenue growth going forward. 

Company execs say there’s been year-over-year profit margin improvement “for multiple years now” and that it should continue to expand. Furthermore, Schechter predicted that the clinical development business “has the greatest potential for additional margin expansion.” The deal is expected to close in the second half of 2023.