Testing LabCorp's Deal Plans

The medical-diagnostics company's reported target INC Research is pricey and strategically questionable.

About a year after completing its biggest takeover to date, medical-testing company LabCorp appears ready for another large deal. The question is whether it's the right deal.

The $12 billion company has held preliminary talks with INC Research about a possible combination, Bloomberg News reported Monday. 1  LabCorp's shareholders sent the stock down about 0.6 percent on the news and the shares were relatively flat in early trading on Tuesday -- in other words, no uproar, but not exactly a ringing endorsement of the strategy either. That makes sense, because there are both financial and strategic reasons to be hesitant about this particular choice of target.

Buy High

INC Research is trading near a record.

Source: Bloomberg

For one, LabCorp would be buying at the top. INC Research has been hovering near a record and analysts as of last week saw few gains left in it over the next year. A standard 30 percent takeover premium would imply a valuation of about $3.9 billion for INC Research including net debt, or roughly 19 times the company's Ebitda in the last year. That's pretty pricey for the medical-testing industry and a higher multiple than LabCorp paid for Covance in its $5.6 billion takeover of the company last year. LabCorp also still has a decent amount of debt left over from that deal and an INC Research takeover would push its holdings even higher, making the timing questionable.

Companies can get away with big multiples and extra leverage when the strategic logic is compelling. It's just not clear that's the case here. LabCorp runs routine medical checks for things like allergies or diabetes. Through the Covance takeover, it expanded into more complicated lab work and research for pharmaceutical companies conducting clinical trials. A deal for INC Research -- which operates like a consulting service in that it actually takes on the work of managing the drug-testing process including organizing patients and pulling together necessary documentation -- would be a way to build on the Covance takeover, at least in theory.

Deal Diagnosis

An INC Research takeover would be one of the bigger health-care deals of the year.

Source: Bloomberg

The idea is to bundle testing services with lab analytics and offer the whole package to pharmaceutical clients. One-stop shopping can be a good thing for some drugmakers, particularly more nascent ones on a tight budget. But LabCorp can already offer this through the Covance takeover and there may be a limit to the benefits of further consolidation.

Think about it: If AstraZeneca is using one company to do trials on a cancer drug and Bristol-Myers is using another to test a similar treatment, neither of them is likely to be happy about their research partners merging. Faced with the risk of data potentially getting in front of enemy eyes, they might decide to take their business elsewhere. A survey of bio-pharmaceutical clients conducted by Robert W. Baird analysts last month drew mixed responses on the idea of consolidation among major contract-research companies, with about 40 percent saying it wouldn't add value to R&D efforts.

There probably aren't enough synergies to justify further expansion into testing services, says Greg Bolan of Avondale Partners. He likes Icon Plc as an alternative target for LabCorp because it also has a central lab business used to analyze the data collected in clinical trials. Combinations on the lab side of things don't ring as many alarm bells because the work isn't as sensitive, Bolan said.

Either way, LabCorp needs to make sure it's getting its money's worth on its next big purchase.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. There's been no agreement and the companies may choose not to proceed with a transaction, people with knowledge of the matter told Bloomberg.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net

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