The Strategy Behind LabCorp's Acquisition of Covance

A couple of analyst reports on LabCorp’s purchase of Covance and how it affects investors crossed our email since the announcement early yesterday. What was provided by the analysts—more than the financial investing aspects—was an interesting look at the direction of clinical trials, labs, and the future of drug development. Here is a summary of what these analysts are saying about the purchase.

Growth to larger biopharma market. The Maxim Group says the transaction diversifies LabCorp’s revenue beyond the $62B clinical testing industry into the $141B biopharma R&D market. Deutsche Bank says the entry into relatively higher-growth end-market, with CRO outsourcing growing 7% to 8% and Covance is recognized for its strong capabilities across key service offerings, as the number one central lab, number one pre-clinical, and among the top five CROs offering Phase I-IV services.

Creates a unique clinical trial offering. The Maxim Group also suggests that the combined entity will benefit from the emerging personalized medicine and companion diagnostic revolution. It positions the company to introduce a unique clinical trial offering on the front end to biopharma customers that no other CRO can offer and a personalized medicine offering on the backend to patients and MCOs that no other clinical lab can provide.

Blended labs and logistics. As the fifth largest shipping company in the world, LabCorp’s logistical expertise can be introduced within Covance’s business. Maxim Group maintains that both companies operate central labs—LabCorp has four central labs and 44 regional labs; Covance has five central labs. Given that much of LabCorp’s business is processed at night, its labs are largely underutilized during the day. The greater scale and shift away from time sensitive volume, should allow the company with the opportunity to consolidate facilities without having to close any central labs. In addition, analysts William Blair say the combined LabCorp and Covance clinical trials central lab business could have about 50% market share post-deal.