The lab testing and diagnostics giant announced plans on Thursday, seven months after LabCorp’s strategic review resulted in no changes to the company spin off As an independent company, its nearly $6 billion annual drug development business.
The new, unnamed company will be publicly traded. Separating LabCorp’s laboratory testing efforts from its clinical trial services business, much of which came from acquisitions, will allow each company to focus on its strengths and grow independently, CEO Adam Schechter said on the conference call.
“It makes sense to pivot and do so now, and it will really give strength and strategic flexibility and operational focus so that we can pursue specific market opportunities and customer needs in each area,” Schechter said. . “Lab Services Market Different from the clinical trial market.”
LabCorp currently divides its business into two segments: diagnostics and drug development.The diagnostics segment is the larger of the two, accounting for $10.3 billion of LabCorp’s $16.1 billion in revenue, according to LabCorp’s 2021 figures annual report.Diagnostics is also more in line with the company’s historical identity, which dates back to 1969 as a laboratory business in the basement of a hospital in Burlington, North Carolina. The business was later acquired by Roche. In 1995, Roche Biomedical Laboratories merged with National Health Laboratories to form LabCorp, which has been headquartered in Burlington ever since.
The growth of LabCorp makes it now one of the largest laboratory testing companies in the industry. If you’ve ever had a drug test or blood test for your new job, chances are these samples were tested at a LabCorp site. Acquisitions have continued to shape the company over the years, bringing new diagnostic testing capabilities. LabCorp has also expanded its capabilities to include central laboratory services for pharmaceutical and biotechnology companies that need to test samples for clinical trials. In 2015, the laboratory testing company further forayed into drug development services, Acquires Covance for $6.2 billionat the time one of the largest contract research organizations (CROs) in the industry.
Last March, LabCorp announced a strategic review, saying the board and management did not believe the company’s value was properly reflected in its share price. The review ended in December, and Shecht said Thursday that the decision at the time was appropriate. LabCorp did a lot of Covid-19-related diagnostic testing and drug development late last year and early this year, and now is not the right time to interrupt that work, he said.
However, the evaluation of potential corporate initiatives has not stopped. The laboratory business has a different capital structure and equipment needs than the clinical development business, Schechter said. As both divisions have growth potential, the Board believes that now is the right time to separate them, allowing each division to deploy capital to meet its needs.
“Having a focused capital structure is important because there are a lot of business development opportunities out there, and I think the way you prioritize those opportunities can be very different between the two businesses,” Schechter said.
In its second-quarter 2022 financial results released Thursday, LabCorp reported revenue from its diagnostics division of $2.2 billion, down 4.5% from a year earlier. Drug development revenue for the quarter was $1.4 billion, down 2.9% from the second quarter of last year. The company attributed the drop in revenue to a drop in Covid-19 testing. LabCorp’s net income for the quarter was $358.6 million, a decrease of 23.2% compared to the second quarter of 2021.
LabCorp reported that its backlog in clinical trials business CRO industry terms was $15.2 billion at the end of the quarter, up 6.5% from the same period last year. Backlog is a key financial metric for CROs, as growth in backlog indicates growth in potential business. LabCorp said Thursday that it expects to turn a $4.8 billion backlog into revenue in the coming year.
In addition to revenue, LabCorp’s financial statements do not list costs, profitability or other measures of the company’s two business segments. Chief Financial Officer Glenn Eisenberg said that’s because it’s been a long time since the Covance acquisition and the business is now well integrated with LabCorp’s operations. When the clinical development business is classified as a separate entity, profits and other metrics will be provided in audited financial statements three years ago, he said.
Consolidation has been a theme in the CRO industry in recent years. In early 2021, ICON reaches $12 billion deal to acquire PRA Health Sciences. A few months later, the lab equipment giant Thermo Fisher Scientific Enters Clinical Trial Services Business with $20.9 Billion Acquisition of PPD. But large companies in other areas of the life sciences have found that business separation is the way to go. In April, Becton Dickinson completes spin-off of its diabetes business, now named Embecta. Last week, GlaxoSmithKline participated in separate Its consumer health business, Haleon.
LabCorp expects to complete the drug development spin-off in the second half of 2023. A financial analyst asked whether executives would still consider selling the business to a larger player. Schechter, who will remain LabCorp’s CEO after the spinoff is complete, responded that the company evaluated several options and concluded that the spinoff was the right move. He added that the management team is open to hearing any inquiries, “but based on everything we know sitting here today, we believe that rotation is the best way to really capture customer and shareholder value.”
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