Leading diagnostic company Laboratory Corporation of America Holdings (LH) has decided to acquire Genzyme Genetics, a unit of Genzyme Corporation (GENZ) for $925 million. This asset was put up for sale in May 2010 to increase shareholder value. Genzyme’s plan to divest the other two units – Diagnostic Products and Pharmaceutical Intermediates – is still on track.
Genzyme Genetics, which provides complex reproductive and oncology testing services, performs more than 1.5 million tests annually and recorded $371 million of revenue in 2009. Subsequent to this transaction, LabCorp will be able to strengthen its esoteric testing business. The transaction, subject to approvals, is expected to close by the year-end.
During the second quarter conference call, LabCorp provided an update regarding the acquisition market. The company found the acquisition market to be attractive (as valuations have declined) with a number of opportunities existing in the esoteric testing franchise.
Esoteric testing accounted for 36% of LabCorp’s revenues in 2009, which the company plans to increase to 40% in the next 3-5 years. During the second quarter, esoteric volume increased 4.9% although revenue per requisition was up marginally (0.2%). The company has launched several new tests in the field of esoteric testing which includes BRAF gene mutation detection, EGFR mutation analysis for non-small cell lung cancer, HERmark for breast cancer among others. We believe, with meaningful acquisitions, LabCorp is on its way to achieving a higher volume in the esoteric testing market.
Following this acquisition, LabCorp will be better placed to compete with its prime competitor, Quest Diagnostics (DGX). The US laboratory testing market has been valued at approximately $55 billion in which LabCorp has about a 9% market share, with Quest being the leader with an approximately 14% share.
LabCorp has benefited from an increasing demand for preventive medicine, a trend expected to continue due to an increasingly ageing population, increased recognition of the value of more specialized and sophisticated tests in genomics and the low-cost benefits of testing for health improvement. However, the tough competitive landscape is of primary concern, especially in the current economic scenario.
We have a Neutral rating on the stock, which also corresponds to a Zacks #3 Rank (short-term hold recommendation).