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LabCorp to Acquire Covance for $6.1B

NEW YORK (GenomeWeb) – Laboratory Corporation of America and Covance today announced a definitive agreement under which LabCorp will acquire Covance for about $6.1 billion in cash and stock.

LabCorp will pay approximately $105.12 per Covance share, a 32 percent premium to Covance's closing stock price of $79.90 on Oct. 31. On an enterprise value basis, the deal is valued at $5.6 billion.

The acquisition leverages LabCorp's leadership in medical testing and Covance's leadership in contract research, they said, and the combined firm's technologies will improve patient recruitment for clinical trials, improve efficiency in clinical trials, and deliver data more quickly to drug sponsors, physicians, and patients. Covance's patient monitoring tools are expected to enhance LabCorp's existing capabilities in predictive analytics, and the new firm's range of offerings will advance personalized medicine and the development of new drugs. The increased scale of its central lab operations and collective data resources are expected to drive greater R&D productivity for its clients, they said.

The deal will also create new revenue sources and expand the customer base. Managed care revenues will comprise about 32 percent of the combined firm's total revenues, while pharmaceutical and biotechnology business will comprise about 29 percent of revenues. About 22 percent of revenues will derive from commercial customers, 12 percent from Medicare and Medicaid, and 5 percent from private patients. The new firm will have established relationships with all of the top 20 drug firms and an "attractive payor mix," LabCorp and Covance said.

"This transaction provides LabCorp with immediate scale and a comprehensive market-leading platform in the $141 billion biopharmaceutical research and development market, while at the same time achieving the new sources of revenue, broader payor mix, and greater international presence we have long pursued," LabCorp Chairman and CEO David King said in a statement. "By joining our highly compatible and complementary capabilities, the combined company will be an industry leader in both the laboratory and CRO spaces, characterized by global scale, enhanced offerings, new efficiencies, broader and deeper customer relationships, and a differentiated business model," he added.

The deal follows LabCorp's acquisition of Covance's high-complexity genomic lab in February for an undisclosed amount.

King will serve as chairman and CEO of the new firm, while LabCorp Chief Financial Officer Glenn Eisenberg will continue in that role with the combined firm. Covance Chairman and CEO Joe Herring will head LabCorp's Covance division. The Burlington, NC headquarters of LabCorp will remain the new firm's headquarters, while Covance's Princeton, NJ base will be the operating headquarters for the Covance division.

The deal is expected to close in the first quarter of 2015. Under the terms of the agreement, Covance's shareholders will receive $75.76 in cash and .2686 shares of LabCorp for every share of Covance stock they own. Covance's shareholders will own about 15.5 percent of the new company. LabCorp intends to finance the cash portion of the deal through a combination of cash on hand — including Covance overseas cash — and debt financing from Bank of America Merrill Lynch and Wells Fargo Bank.

Excluding one-time costs, the acquisition is anticipated to be accretive to adjusted earnings per share in 2015 before synergies. LabCorp said that it expects synergies of $100 million to be fully realized within three years of closing.

Last week, LabCorp reported $1.55 billion in total revenues and a profit of $137.2 million, or $1.59 per share, for its third quarter. Covance today said that it had $671 million in total revenues for the third quarter ended Sept. 30, and a profit of $66.0 million, or $1.16 per share.

On a pro forma basis, the combined company had $8.4 billion in revenues through 12 months ending Sept. 30, 2014, as well as adjusted EBITDA of $1.6 million and free cash flow of more than $700 million, they said.

"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, global trial support, trends in pharmaceutical R&D spending, personalized medicine, and big data and informatics," King said.

In Monday morning trading, shares of LabCorp were down almost 8 percent on the New York Stock Exchange at $100.69. Covance's shares on the New York Stock Exchange were up 25 percent to $100.

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