LabCorp Extends Orchid Tender Offer - Analyst Blog

Laboratory Corporation of America Holdings (LH) has extended the tender offer for all outstanding shares of Orchid Cellmark (ORCH) till June 15, 2011. Last month, the company had received a request from the Federal Trade Commission (FTC) for some additional information regarding the transaction. Subsequently, LabCorp extended the tender offer from May 17, 2011 to June 1, 2011. Shares tendered till date represent almost 82.3% of the outstanding shares of Orchid.

Earlier, in April, LabCorp had decided to acquire Orchid Cellmark for $2.80 per share in cash or a total $85.4 million. 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 recorded 60% of its revenues from core routine tests during the first quarter of fiscal 2011. It 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 40%.

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

LabCorp continues to focus on strategic initiatives to drive growth and profitability. Earlier this week, the company decided to strengthen its clinical trials business with the acquisition of Clearstone Central Laboratories. 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 (focused on diagnostic tests for neurological conditions), and Celera Corporation.

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