LabCorp Snaps Up Orchid Cellmark - Analyst Blog

After several months of negotiations with the Federal Trade Commission ( FTC ), Laboratory Corporation of America Holdings ( LH ) has completed the acquisition of Orchid Cellmark for $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.

Earlier this month, LabCorp received the much awaited nod from the FTC related to the acquisition of Orchid Cellmark. The imbroglio with the federal body dated back to May 2011. The FTC approval came with the rider that LabCorp would 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.

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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LABORATORY CP ( LH ): Free Stock Analysis Report

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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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