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LabCorp spins off clinical development business

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Deal overview

On July 28, 2022, Labcorp (NYSE: LH, $257.94, market capitalization: $23.3 billion), one of the world’s leading life sciences companies, has its board of directors approve plans to spin off its clinical development business into an independent, publicly traded company announced that it did. Company. After the spin, Labcorp (a stub entity) will maintain a lab business consisting of routine and esoteric labs, central labs and early development laboratories. The clinical development business (NewCo.) will operate as a Contract Research Organization (CRO).
CROs
) provides Phase I-IV clinical trial management, market access and technology solutions to pharmaceutical and biotechnology companies.

LH intends to execute this transaction by distributing a dividend on the shares of its clinical development business to LH shareholders. The transaction is intended to be structured as tax-exempt for U.S. federal income tax purposes. After the spin-off, LH will continue to be listed on the New York Stock Exchange, but NewCo. will also be a newly listed public entity. The transaction is expected to close by the second half of 2023.

Following the separation, Adam Schechter will continue as chairman and chief executive officer of LH and will retain the name and management team of NewCo. Will be announced later. LH will continue to be headquartered in Burlington, North Carolina.

Jones Day and Hogan Lovells acted as legal counsel, and Barclays, Evercore
EVR
and Goldman Sachs & Co. LLC are acting as financial advisors in this transaction.

In 2021, LH will conduct a strategic review of its business after activist investment firm Jana Partners pressured company management to conduct a strategic review of its policies because the company was deemed undervalued. It was started. The company completed the review in December 2021, but the results of the business restructuring have not been announced. However, the company’s board of directors approved the distribution of dividends to shareholders and approved a $2.5 billion buyback program.

Basis of transaction

LabCorp’s lab business has different capital structure requirements and equipment requirements compared to its predominantly human-centric clinical development business. Both segments also serve different markets. In 2021, the Diagnostics business contributed approximately 64% of revenues primarily for the North American market, while the Clinical Development segment contributed approximately 36% of revenues, split evenly between the US and Rest of World. After the spin-off, both companies will continue to independently develop new markets using customized capital structures, with a focus on targeted growth and enhanced shareholder value. In addition, the new clinical development entity will retain access to LabCorp’s vast health and clinical data insights and will seek to monetize by providing support to customers operating in the pharmaceutical and biotechnology businesses. has great advantages.

Following the separation, Labcorp’s stub entity will continue to focus on core diagnostic services and strive to expand its network of routine and esoteric labs, central labs and early development research labs outside the United States. The diagnostics business, in particular, is poised for mid-single-digit or higher revenue growth over the next few years, with the division’s global addressable market growing from +$150 billion to ~$250 billion in 2022. poised to grow at a CAGR of ~10%. 2026E. On the other hand, the clinical development sector offers an attractive growth opportunity as the US capable market ($25 billion) is poised to grow at his CAGR of ~6% from 2022 to 2030. increase. Therefore, the segment is expected to achieve high single-digit revenue growth going forward. The clinical development business is profitable and growing rapidly. During the pandemic, it was put on hold, but demand has revived as drug companies and governments have started investing in new treatments. and shows great potential for future business growth.

Management believes the split will provide compelling and differentiated investment opportunities based on each company’s specific business model. Post-separation, the two companies are expected to be better valued by the investor community based on a suitable set of peers.

overall result

2Q22 results

Fourth quarter revenues were $3.7 billion, down 3.7% year-over-year (-1.6% vs consensus). This was primarily due to declines in organic revenues (-3.4%) and FX translation (-1.1%), partially offset by net gains from acquisitions. sales (+0.8%). Organic earnings were impacted by a decline in COVID-19 PCR and antibody testing (COVID-19 Testing). Additionally, segment-adjusted sales declined 4.7% and 2.9% in Diagnostics and Drug Development, respectively.

Gross profit fell 11.2% year-on-year to $1.1 billion, but the corresponding margin narrowed 256 bps to 30.4%, 78 bps above consensus. Adjusted operating profit fell 21.9% year-on-year to $656.1 million, 8.0% above consensus, but the corresponding margin fell 406bps to 17.7%. GAA
GAA
P Pre-tax income declined 26.8% year-over-year to $476.4 million (-21.6% vs. consensus), with corresponding margins narrowing 406 bps to 12.9%. Adjusted net income decreased 23.7% year-over-year to $459.4 million (+5.8% vs. consensus), with a corresponding margin of 12.4% (2Q21: 15.6%). Adjusted EPS was $4.96 (2Q21: $6.13), well above consensus of $4.70.

Outlook

For FY22E, management has lowered its outlook and expects earnings to decline between 2.0% and 6.0%. Diagnostics revenues by segment are expected to decline in the range of 9.0% to 13.0%, while Drug Development revenues are expected to grow between 1.5% and 3.5%. Adjusted EPS guidance was raised from $19.00 to $21.25.
Flow 2
Guidance remains unchanged at $1.7 billion to $1.9 billion.

Company Profile

LabCorp (Parent)

Labcorp is a global life sciences company based in the United States. The company was formed through the merger of National Health Laboratories (NHL) and Roche Biomedical Laboratories (RBL). Its business is divided into he two segments, Labcorp Diagnostics (Dx) and Labcorp Drug Development (DD), providing diagnostics, drug development and technology-enabled solutions for patients. We currently operate in over 100 countries and employ over 75,500 people.

NewCo. (Shake off)

NewCo. will become a global clinical research organization (CRO), offering a wide range of services including Phase I-IV clinical trial management, market access, and full-service delivery of technology solutions to pharmaceutical and biotech organizations.

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