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LabCorp's $6.1-billion bid for leading CRO has implications for pharma's future
Press and analyst commentary on the purchase, in a cash-and-stock deal representing a 32% premium over Covance’s closing price prior to the announcement, focused on one of the leading medical testing companies (second only to Quest Diagnostics in the US) expanding into contract research for the pharma industry. Princeton, NJ-based Covance, in turn, is one of leading contract research organizations (CROs), and the CRO space is generally regarded as higher-margin and faster-growing than medical/clinical testing.
But a closer look shows some interesting dynamics to the combination—and implications for future interactions with pharma. “Deal has Investors Rethinking the Sectors,” was the headline of a WSJ blog, noting that the stocks of other leading CROs—Quintiles, Charles River Laboratories and Parexel—had all jumped subsequent to the announcement.
In fact, Covance (like other CROs) has been moving more into medical testing and healthcare outcomes; conversely, LabCorp (which, historically, arose from spinouts and mergers of testing laboratories originally founded by pharma companies) has been doing more clinical research work. The LabCorp announcement noted that the combined entity will derive 29% of its revenue from pharma and biotech and 66% from managed care, payers and commercial customers (the remaining 5% is from private patients). "As a combined company, we will be well positioned to respond to and benefit from the fundamental forces of change in our business, including payment for outcomes, pharmaceutical outsourcing, global trial support, trends in pharmaceutical R&D spending, personalized medicine, and big data and informatics," said David King, chairman of Burlington, NC-based LabCorp.
Another element of the deal is the access that LabCorp will provide for clinical research based on longitudinal data; LabCorp is said to have access to 75 million patient records. This, in part, is expected to make clinical trial recruitment run more efficiently, and no doubt, it will.
Overall, given the constant pressure the pharma industry is under to deliver better patient outcomes, one can envision a future where pharma research directors, rather than hiring CROs willy-nilly, will be coming hat in hand to organizations like LabCorp, pleading for access to valued patient and outcomes data. At the same time, growth in genetic testing (which is something that pharma companies themselves engage in through their medical diagnostics businesses) will become a contested area of business between the lab firms and the drug firms. Specialty pharmaceuticals, the growth area today for biopharma, and one that often requires complex testing and monitoring, could become more of a shared business opportunity between manufacturers, labs and healthcare providers—something that is beginning to take shape today. Meanwhile, at the end of the day, as Big Pharma becomes bigger, and payers and providers consolidate, the testing business is looking to keep its place at the table.