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LabCorp-Orchid Deal Evinces FTC Nod - Analyst Blog

Posted: 12/9/2011 1:00:00 PM
Referenced Stocks: DGX;FTC;LH;ORCH

Laboratory Corporation of America Holdings ( LH ) received the much awaited nod from the US Federal Trade Commission ( FTC ) for the proposed acquisition of Orchid Cellmark ( ORCH ). The FTC nod comes with the rider that LabCorp will have to hive off certain assets of Orchid's US government paternity business following completion of the transaction. This would reduce the "anti-competitive impact" of the proposed merger, according to the federal agency. LabCorp has agreed to sell those assets to DNA Diagnostics Center, an Ohio based privately held provider of DNA paternity testing.

The pending issue with FTC dates back to May 2011. The company's tender offer for Orchid is scheduled to expire today, unless extended further.

LabCorp had decided in April 2011 to acquire Orchid for $2.80 per share, coming to a total consideration of $85.4 million, all in cash. After taking into account Orchid Cellmark's cash balance, LabCorp's net payable comes to $65.6 million. Orchid Cellmark provides DNA testing services targeted towards forensic and family relationship applications on a global basis.

This deal would enable LabCorp to command a leading position in identity testing in the US and also establish its presence in this field in the UK. LabCorp derives 60% of its revenues from core routine tests. It also provides specialty testing services in the areas of allergy, clinical trials, diagnostic genetics, identity, forensics, infectious disease, oncology and occupational testing, which accounts for the remaining 40%.

LabCorp, in a drive to diversify from the more mature core testing, has of late put more and more emphasis on specialized testing. Acquisitions have played an integral role in this respect, significant among which are Monogram Bioscience (August 2009) and Genzyme Genetics (December 2010). The company has set a target of garnering 45% of its revenues from the specialty business in the next 3-5 years.

During the most recent quarter, total revenue increased 10% year over year to reach $1,404.5 million, of which approximately 7% came from the acquisition of Genzyme Genetics. However, economic uncertainty has resulted in lackluster physician office visits, as reflected in the year-to-date declining trend in organic volume growth at LabCorp (3% in the first, 2% in the second and 1.2% in the third). Moreover, with no significant job growth in the economy or an increase in commercially insured covered lives, the company's overall volume growth will continue to languish until the economy rebounds.

In this scenario, LabCorp's competitor, Quest Diagnostics ( DGX ), is also striving for a greater share of the high-margined, specialized testing business. In such a quest, the company has acquired neurological diagnostic test specialist Athena Diagnostics and Celera Corp.

We are currently Neutral on LabCorp, which also corresponds with the Zacks #3 Rank (Hold) in the short term. For Quest Diagnostics, we have a Neutral recommendation.

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