LabCorp Raises Funds - Analyst Blog

Laboratory Corporation of America Holdings (LH) raised $925 million of senior notes in two installments – 3.125% notes amounting to $325 million due 2016 and 4.625% notes amounting to $600 million due 2020. The company will use the proceeds of this offer to partly fund the acquisition of Genzyme Genetics, a unit of Genzyme Corporation (GENZ) and other corporate functions.

With the decision to acquire Genzyme Genetics for $925 million during the third quarter of fiscal 2010, LabCorp expects to strengthen its esoteric testing and personalized medicines business. The acquisition, to be completed by the year-end, would expand the company's capabilities in reproductive, genetic, hematology, oncology and clinical trial, central laboratory testing.

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

LabCorp exited the third quarter of 2010 with cash and short-term investments of $96.9 million, down 34.7% from $148.5 million at the end of December 2009. With $920.6 million of long term debt, the company's debt as a percentage to total capital was 29%, representing a comfortable position.

The company has been using its cash balance to make strategic acquisitions as well as rewarding its shareholders through share repurchase programs. Cash flow trends of the company remain robust with free cash flows for the trailing 12 months at $718.2 million, marginally down from $739.6 million in 2009.

Recommendation

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.

The company is increasing its focus on the high margin esoteric testing business, which accounted for 36% of its revenues in 2009. In this field the acquisition of Genzyme Genetics is considered to be a smart strategic move by the company. However, the tough competitive landscape is of primary concern, especially in the current economic scenario.

We are currently Neutral on the stock.

 
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