LabCorp, Orchid Test DNA - Analyst Blog

Laboratory Corporation of America Holdings (LH) has decided to acquire Orchid Cellmark (ORCH) for $2.80 per share in cash or a total $85.4 million. The offer price represents a 37.31% premium on the closing price of the share as on April 5, 2011.

After taking into account Orchid Cellmark's cash balance LabCorp's net payable comes to $65.6 million. The transaction is expected to complete by the second quarter of 2011. Orchid Cellmark provides DNA testing services targeted towards forensic and family relationship applications on a global basis.

Based on this deal, LabCorp will be able to develop a command over identity testing in the US and also establish its presence in this field in the UK. The company derives 64% of its revenues from core routine tests. The company also provides specialty testing services in the areas of allergy, clinical trials, diagnostic genetics, identity, forensics, infectious disease, oncology and occupational testing, which accounted for the remaining 36%.

For the past few quarters, LabCorp has been trying to increase the contribution of this specialized testing. The company has undertaken some acquisitions to achieve this objective such as Monogram Bioscience (August 2009) and Genzyme Genetics (December 2010). LabCorp has set a target of recording 45% of its revenues from this specialty business in the next 3-5 years.

On the liquidity front, LabCorp is quite well capitalized. The company exited fiscal 2010 with cash and short-term investment of $230.7 million ($148.5 million at the end of 2009) and $460 million under revolving line of credit.

The company has been using its cash balance to make strategic acquisitions as well as reward its shareholders through share repurchase programs. Cash flow trends of the company remain robust with free cash flow for 2010 at $757.5 million compared to $747.7 million in 2009. LabCorp is confident that free cash flow will help record a healthy increase in 2012-2013 as Genzyme Genetics starts contributing to the bottom line.

LabCorp continues to focus on strategic initiatives to drive growth and profitability. However, the tough competitive landscape is of primary concern, and the leading diagnostic players are all striving for a greater share in the high margin, specialized testing business.

In this regard, Quest Diagnostics (DGX) recently acquired Athena Diagnostics, which is focused on diagnostic tests for neurological conditions and is also in the process of acquiring Celera Corp (CRA).

We are currently Neutral on LabCorp, which also corresponds to the Zacks #3 Rank (Hold) in the short term.