Laboratory Corporation of America Holdings said it will spend $5.6 billion to acquire Covance, a Princeton, N.J.-based contract research organization and provider of laboratory and diagnostic services.
The deal will make the combined company larger than Quest Diagnostics, currently the nation's largest provider of laboratory services.
On a pro forma basis, the combined company would have generated $8.4 billion in revenue in fiscal 2014, which ended Sept. 30. Quest has estimated that it will report a 3.5% increase in revenue to roughly $7.4 billion at the end of its fiscal year, compared to the $7.1 billion it reported for fiscal 2013.
The total cost of the deal is $6.1 billion. It will be financed by equity, cash and roughly $3.9 billion in new debt.
LabCorp, based in Burlington, N.C., sells medical laboratory testing and services, including genomic testing, while Princeton, N.J.-based Covance markets drug development and animal testing services for clinical trials to drug and biotechnology firms and also offers risk-based patient monitoring tools.
Acquiring a company with a customer base primarily made up of manufacturers rather than healthcare providers can help LabCorp mitigate reimbursement trends, an analyst for ratings agency Standard & Poor's said in a statement.
The acquisition also highlights the pricing and utilization pressure negatively affecting all lab services companies. Many of the companies that sell medical products and services to healthcare providers are consolidating as they seek to lessen the cost of their operations to offset declining reimbursement rates and broader efforts to reduce utilization of some costly and unnecessary services and tests.
LabCorp, which last week reported its third-quarter results, said then that it anticipates revenue will grow 3% in 2014.
“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,” David King, LabCorp chairman and CEO, said in a statement.
The deal is expected to close in the first three months of 2015.
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