In order to strengthen its foothold in the toxicology testing
business,
Laboratory Corporation of America Holdings
(
LH
) has decided to acquire
Medtox Scientific
(
MTOX
) for $27 per share or a total enterprise value of $241 million.
The offer price represents a 37% premium over the share price of
Medtox as on June 1.
The board of directors of Medtox, a provider of high quality
specialized laboratory testing services and
on-site/point-of-collection testing devices, have unanimously
approved the agreement. The transaction is expected to close in the
third quarter of 2012.
Equipped with a strong cash balance along with its credit
facility in place, LabCorp has been looking at suitable
acquisitions to expand its portfolio. The company exited the
first quarter of fiscal 2012 with cash and short-term investment of
$129.9 million ($159.3 million at the end of 2011) and $460 million
of borrowings outstanding under the $1 billion revolving credit
facility. Cash flow trends of the company remain robust with free
cash flow for the trailing twelve months coming in at $686.9
million. For fiscal 2012, the operating cash flow guidance remains
at $950 million.
We are encouraged by the company's steady focus on pipeline
expansion. In order to achieve this objective, it is also targeting
suitable acquisitions in certain cases. The company is garnering
approximately 41% of total revenues from the specialized testing
business (including genomic, esoteric and anatomic pathology
categories), which is expected to gradually scale up to 45% over
the next 3−5 years.
The decision to acquire Medtox is not new for LabCorp as the
company has been following this strategy over the recent past. In
March 2012, the company signed an exclusive agreement with OPKO
Health for intellectual property associated with a potential
Alzheimer's disease diagnostic product. The company, to its
advantage has other significant collaborations or agreements with
leading companies and academic institutions such as
Abbott
(
ABT
) for lung cancer (Xalkori), Duke University (joint venture in
biomarker development and lung cancer), John Hopkins (melanoma),
and
Roche
(
RHHBY
) for melanoma (Zelboraf). Given the continuous focus on portfolio
expansion, we are confident about the company garnering higher
revenues from specialized testing, going forward.
We believe LabCorp's focus on acquisitions or agreements to
expand specialized testing portfolio is necessary as its peer
Quest Diagnostics
(
DGX
) is also working towards the same goal. We currently have a
Neutral recommendation on LabCorp over the long term. The stock
retains a short-term Zacks #3 Rank (Hold).
ABBOTT LABS (ABT): Free Stock Analysis Report
QUEST DIAGNOSTC (DGX): Free Stock Analysis
Report
LABORATORY CP (LH): Free Stock Analysis Report
MEDTOX SCIENTIF (MTOX): Free Stock Analysis
Report
(RHHBY): ETF Research Reports
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