|Covance CEO Joe Herring, who will remain at the helm when Covance becomes a LabCorp subsidiary|
Under pressure from cuts in reimbursements and a general malaise for doctor-ordered diagnostics tests, LabCorp's ($LH) $6 billion cash and stock deal for contract drug development player Covance ($CVD) might be the right diversification prescription to ease a financial headache.
In a tumultuous 2013 that saw the diagnostics giant suffer through layoffs, restructuring, and lower demand for its tests based on insurance reimbursement challenges, the Burlington, NC-based company ended the year booking $5.81 billion in net sales, versus $5.67 billion in 2012. Still, net earnings for 2013 slipped to $575.4 million, down from $584.8 million in 2012. At the time, LabCorp gave guidance that growth for 2014 would be around 2%.
In September, the company announced it was buying personalized diagnostic test maker LipoScience ($LPDX) for $85 million in a deal seen as a gimme as the two are based in North Carolina and LipoScience gives LabCorp a much-needed boost in modernizing its diagnostic products offering.
Now comes the blockbuster Covance deal announced earlier this week, which positions LabCorp in the quickly growing CRO (contract research organization) sector as well as expand its central labs business and play off of Covance's reputation outside of the U.S.
"For LabCorp, the last few years have been challenging with regards to volume and price perspective," Michael Cherny, an analyst with Evercore ISI, told Reuters. "And so to diversify away to a more pharma-related customer base will help mitigate some of those risks in the long term."
Still, Bret Jones of Oppenheimer told the news service that cost savings which support the reasoning behind the deal seem to be longer term and lack a clear path.
As part of the deal, Covance gets to keep its CEO--Joe Herring--and its brand, albeit as a subsidiary. LabCorp Chairman and CEO David King will oversee the combined company.
- see Reuters' take