LabCorp Clears Anti-Trust Review - Analyst Blog

Laboratory Corporation of America Holdings (LH) moves a step closer in the process of acquiring Genzyme Genetics, a unit of Genzyme Corporation (GENZ). Recently, LabCorp received clearance from the Federal Trade Commission for the acquisition.

Earlier, in September, LabCorp had announced its intention to acquire Genzyme Genetics for $925 million. Genzyme Genetics, which provides complex reproductive and oncology testing services, performs more than 1.5 million tests annually and recorded $371 million of revenue in 2009.

Subsequent to this transaction, LabCorp will be able to strengthen its esoteric testing business. The transaction is expected to close around December 2010.

In order to finance this transaction, earlier this week, LabCorp raised $925 million of senior notes in two tranches – 3.125% notes amounting to $325 million due 2016 and 4.625% notes amounting to $600 million due 2020. The company has been using its cash balance to make strategic acquisitions as well as rewarding its shareholders through share repurchase programs.

Esoteric testing accounted for 36% of LabCorp's revenues in 2009, which the company plans to increase to 40% in the next 3-5 years. The successful acquisition of Genzyme Genetics will enable LabCorp to achieve this target. Subsequently, the company will provide updated goals for its esoteric testing business. During the third quarter, esoteric volume increased 6.9%, higher than 4.9% in second quarter.

Following this acquisition, LabCorp will be better placed to compete with its prime competitor, Quest Diagnostics (DGX). The US laboratory testing market has been valued at approximately $55 billion in which LabCorp has about a 9% market share, with Quest leading with an approximately 14% share.

Recommendations

LabCorp continues to focus on strategic initiatives to drive growth and profitability. It includes the introduction of innovative tests in the genomic/esoteric arena, specifically in the area of cancer, greater focus on managed care organizations in addition to aggressive penetration into the hospital market. However, the economic uncertainty is of primary concern which is affecting testing volume and pricing.

We are currently Neutral on the stock.

 
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