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LabCorp Reports 46 Percent Q2 Revenue Surge from Covance Acquisition

NEW YORK (GenomeWeb) – Laboratory Corporation of America today reported second quarter revenues of $2.22 billion, an increase of 46 percent year over year from $1.52 billion, largely attributable to its acquisition of Covance.

The firm's revenues were in line with the average Wall Street estimate.

LabCorp acquired contract research firm Covance in Q4 2014 for about $6.1 billion in cash and stock. The firm today announced that Deborah Keller, who was most recently executive VP at Covance, will be the new CEO. She will succeed Joseph Herring, who will retire on July 31 after serving as CEO of Covance for more than a decade.

In the second quarter, the Covance acquisition contributed $620.8 million to LabCorp's revenues, driving 41 percent growth year over year. The remaining $81.5 million, or 5 percent growth, was due to volume increases from LabCorp's clinical laboratory business and tuck-in acquisitions, partially offset by negative currency effects.

Revenues from LabCorp's diagnostics business in the second quarter were $1.58 billion, a 5 percent increase from $1.49 billion in Q2 2014. During a conference call recapping the firm's earnings, LabCorp Diagnostics CEO James Boyle noted that growth in genomic and esoteric testing was strong during the quarter. The Covance drug development segment brought in $643.7 million in revenues in the second quarter, a 3 percent decrease from $661.3 million in the year-ago period.

In the second quarter "we began to see the power of the combined businesses, which extends far beyond merely combining central lab capabilities," LabCorp CEO David King said during the call.

King noted that Covance and LabCorp are working on integrating the efforts of researchers and sales leadership teams. "We have dedicated teams focused on driving more than $300 million in incremental annual revenue by 2018 through accelerated clinical trial enrollment, end-to-end capabilities in companion diagnostics, and broad use of real-world evidence in support of clinical trials," he said.

One of LabCorp's advantages in the clinical trials business is its database of 17 million patients. King highlighted that the database is particularly useful in recruiting patients for studies on rare conditions. Moreover, the Covance/LabCorp joint analytics team has received multiple client requests to use de-identified data for assessing the size of a market, conducting comparative effectiveness research, identifying safety signals and ways to improve patient adherence to therapy, and administering a personalized medicine approach.

"We … continue to speak with drug sponsors that express interest in consolidating R&D outsourcing from multiple vendors across multiple areas of development to a preferred partner, to improve efficiency and reduce the cost of bringing a drug to market," King said.

LabCorp reported Q2 net income of $168.4 million, or $1.64 per diluted share, compared to $141.3 million, or $1.64 per share, in the second quarter of 2014. On an adjusted basis, EPS was $2.09 in the second quarter, beating analysts' consensus estimate of $2.03.

The firm's SG&A costs were $392.4 million in the second quarter of 2015, compared to $297.9 million during the same period in 2014. The company also reported $46.6 million in charges for amortization of intangibles and other assets, and $14.3 million in restructuring and other charges.

The firm finished the quarter with $619 million in cash and cash equivalents.

LabCorp updated its 2015 guidance. At the end of the Q1 2015, the company had projected that FY2015 revenues would increase between 39 percent and 42 percent, and its diagnostics business would grow between 3 percent and 5 percent.

The company now estimates year-end revenue growth of between 40 percent and 42 percent, and growth in diagnostics revenues of between 3.5 percent and 5.5 percent. LabCorp also expects its Covance drug development business to log between a 1.5 percent drop and and a 0.5 percent increase in revenues, reflecting a negative foreign currency impact. The firm had previously projected up to a 2 percent increase for this segment.

One area that LabCorp is watching closely is the Centers for Medicare & Medicaid Services' implementation of market-based payment rates under the Protecting Access to Medicare Act of 2014. Some industry observers have expressed concern that a market-based reimbursement system, slated to take effect in 2017, may favor large reference labs such as LabCorp and Quest, which have economies of scale and can perform testing more cheaply than smaller labs can.

Currently, the timing of this rule is uncertain, but so far, King said LabCorp supports CMS' efforts.