Based in Burlington, North Carolina, and specializing in health care diagnostics, LabCorp offers a wide range of diagnostic tools doctors can use to identify the diseases their patients are suffering from. INC Research is a pharmaceutical research organization based in Raleigh, North Carolina.
Valued at $2.7 billion, INC Research has roughly 6,400 employees worldwide. LabCorp is valued at $12 billion, with 48,000 employees in 60 countries. With a long history of acquisition, LabCorp acquired CRO Covance at the beginning of 2015 for $6.2 billion, aligning all its companies focused on clinical trials (LabCorp Clinical Trials and
Tandem Laboratories) under the Covance brand.
With the M&A and IPO market in the CRO space off to a steady start in 2016, deals of this size are not unexpected. INC Research went public in November of 2014, earning good returns for owners. With market conditions currently favorable, the CRO is one of several rumored open to new opportunities.
Wells Fargo Securities analyst Gary Lieberman noted that the potential deal between LabCorp and INC “makes strategic sense, as INC brings certain capabilities that LabCorp’s Covance is lacking.” The addition of INC would allow LabCorp to strengthen its expertise in areas where it is currently less proficient, such as in testing drugs for diseases that affect the central nervous system. Geographic expansion to LabCorp’s global reach also is a top priority.
“This combination is strategically compelling,” said David K. Blume, co-founder and managing director of Edgemont Capital Partners. “LabCorp/Covance is a leading CRO, but its late phase business has ranked only seventh or eighth in terms of revenues among the largest CROs. INC would add the scale Covance has been seeking for a while and vault it solidly into the top 5 based on late phase revenue. It would also put INC into the ranks of the largest CROs overall.”
Wells Fargo Securities thinks the combination would build a business to rival Icon in size. Global CRO Icon is estimated to sit at fourth, in comparison to LabCorp and INC Research ranking seventh and eighth.
Some believe this is not the first time an INC Research and Covance deal has been considered. In 2014, there were indications Covance was considering purchase of INC Research. Neither company released official comments in 2014, and now in 2016, both refer to official policy prohibiting commentary on industry rumors.
Lieberman feels that risks to the deal are limited by the fact that both players are mid-size, and that INC’s largely Japanese pharmaceutical focus will be unlikely to have much overlap with Covance. Lieberman also said, “INC has one of the most robust processes for maintaining control over the clinical trial process, which we believe could be valuable when integrating a CRO with opportunities for operational efficiency.”
Industry impact is expected to be slow but significant. “Large CRO consolidation is not straightforward, given potential client overlap and conflicts,” said Blume. “However, like almost any other maturing industry, it will consolidate to the point where the top three-to-four players control a large majority of the revenues, although perhaps a bit more slowly given these considerations.”
Blume continued, “We are already witnessing the resulting dynamic for the rest of the industry players. This high-level consolidation opens greater opportunity for small to mid-sized and emerging players to fill the void left by the large companies as they continue to move upstream. These players will offer specialized services around novel service models and therapeutic expertise that differentiates their offerings and adds great value to their client base.”
Future forecasting points to more of this trend. “We will continue to see a proliferation of specialty players,” said Blume, “and we expect strong M&A activity and ROI for investors in the lower middle and middle market for pharmaceutical outsourcing companies.”
This article was reprinted from Volume 20, Issue 16, of CWWeekly, a leading clinical research industry newsletter providing expanded analysis on breaking news, study leads, trial results and more. Subscribe »