LabCorp Divests Orchid DNA Paternity - Analyst Blog

Following the recent completion of the much-awaited acquisition of Orchid Cellmark by Laboratory Corporation of America Holdings ( LH ), DNA Diagnostics Center ("DDC"), a privately held provider of DNA paternity testing, announced that it has acquired the government paternity business of Orchid Cellmark. However, financial terms of the deal have not been disclosed.

Orchid Cellmark provides DNA testing services targeted toward forensic and family relationship applications on a global basis. DDC expects the addition of the government paternity business to expand the scope and size of its portfolio in a considerable manner and help it to solidify its position is a fiercely competitive global DNA testing market.

Earlier this month, LabCorp received the nod from the U.S. Federal Trade Commission ("FTC") related to the acquisition of Orchid Cellmark. The FTC approval came with the rider that LabCorp would hive off certain assets of Orchid's U.S. 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, consequently, agreed to sell those assets to DDC.

LabCorp believes that the Orchid Cellmark acquisition would enable it to command a leading position in identity testing in the U.S. 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 has of late put more and more emphasis on specialized testing. Toward this end, the company undertook a number of acquisitions, notable among which are Monogram Bioscience (August 2009) and Genzyme Genetics (December 2010). LabCorp has set a target of garnering 45% of its revenues from the specialty business in the next 3-5 years.

However, economic uncertainty has resulted in deferred physician office visits, as reflected in the year-to-date declining trend in organic volume growth at LabCorp (3% in the first quarter of 2011, 2% in the second and 1.2% in the third). The tough competitive landscape remains another concern, and the leading diagnostic players are striving hard to grab a greater share of the high-margined, specialized testing business. In such a move, Quest Diagnostics ( DGX ) has acquired neurological diagnostic test specialist Athena Diagnostics and Celera Corp.

We are currently 'Neutral' on LabCorp, which corresponds with a short-term Zacks #3 Rank (Hold). For Quest Diagnostics, we have a Neutral recommendation with a Zacks #2 Rank (short-term 'Buy').

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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