LabCorp is buying Covance for $5.6B to cut in on the CRO boom

LabCorp CEO Dave King

Diagnostics giant LabCorp ($LH) is buying its way into the upper ranks of the CRO business, signing a deal to pay $5.6 billion for Covance ($CVD) and create an end-to-end testing conglomerate.

The agreement gives each Covance stockholder $105.12 per share, a 32% premium to the company's Friday closing price, and the CRO's shareholders will own about 15.5% of the new company. LabCorp expects to complete the merger in the first quarter of next year, creating an entity with $8.4 billion in combined revenue over the past 12 months.

LabCorp's vision is this: By marrying its expansive capabilities in diagnostics with Covance's share of the drug development market, it will create an industry-leading entity that can support a candidate therapy from its preclinical inception to well past its market debut. Through decades of running safety and efficacy trials and diagnostic tests, the two companies have amassed longitudinal data on millions of patients, and the pair says their merger will help clients of all stripes make more informed decisions and pave the way for more cost-effective healthcare.

Once the deal wraps up, LabCorp CEO Dave King will preside over the whole company while Joe Herring will remain in charge of the Covance subsidiary, which will retain its branding.

"As a combined company, we will be well positioned to respond to and benefit from the fundamental forces of change in our business, including payment for outcomes, pharmaceutical outsourcing, global trial support, trends in pharmaceutical R&D spending, personalized medicine, and Big Data and informatics," King said in a statement.

The deal follows a continuing wave of consolidation in the CRO space, which is dominated by an increasingly smaller number of big players. Over the past year, industry giants including Quintiles ($Q), PRA and Charles River Laboratories ($CRL) have all bought out rivals in hopes of broadening their platforms and securing a larger slice of the growing market for outsourced drug development.

And it's a good time to be among the world's largest CROs: Big Pharma is finally getting back to spending big on R&D after some lean years post-downturn, and biotech is enjoying a protracted bit of bullishness that has lined pockets around the industry.

That's an attractive proposition for LabCorp, which has watched declining reimbursement and mounting competition cut into its testing revenues over the past year. The company took up a sweeping reorganization in 2012, promising to diversify its revenue streams and cut extraneous spending. LabCorp has been on an M&A kick ever since, buying its way into prenatal testing, genomic sequencing and, now, contract drug development.

- read the announcement

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