LabCorp plans to slim down its Covance contract research business

LabCorp is beginning a cost-cutting initiative in its contract research business after revenue and earnings slipped in the first quarter at its Covance Drug Development unit, according to its Tuesday earnings report.

The performance at Covance, which was acquired for about $6.1 billion in early 2015, dampened what ultimately turned out to be a positive quarter for LabCorp.

The diagnostics giant posted net income of $192.2 million on revenue of $2.45 billion in the quarter compared with net income of $164.1 million on revenue of $2.37 billion in the year-ago quarter.

Covance, though, is about to undergo a reduction plan. The business, whose revenue dipped 2% in the quarter to $690.3 million, faces possible headcount reductions and some facility closures as management accelerates its integration into LabCorp, the company disclosed Tuesday.

LabCorp is expecting $30 million in severance and facility-closure costs in 2017 as it realigns the business under a systematic process that LabCorp has used previously known as LaunchPad, the company said.

Covance is dealing with the cancellation of two large clinical studies in late 2016 by their sponsors. Covanceprovided central laboratory services for those studies, the company said.

The study cancellations, rising personnel costs, and some booked project revenue delays caused Covance operating income to fall to $83.5 million for the quarter compared with operating income of $103.2 million in the year-earlier quarter.

Despite the first-quarter wobble, LabCorp. expects to deliver $100 million in synergies from the Covance acquisition in the three years ending in 2017, the company said.

Covance represents about 29% of LabCorp's total revenue.

The bigger piece, the diagnostics division, posted earnings and revenue gains in the quarter.

Operating income for diagnostics rose 11% in the quarter to $341 million compared with $308 million the year earlier.

Burlington, N.C.-based LabCorp used acquisition last quarter to add to organic growth. The company agreed to buy the clinical laboratories of Mount Sinai Health, a deal that adds seven locations to the 120 labs that LabCorp operates in metropolitan New York City.

The company also inked a deal to acquire Pathology Associates Medical Laboratories, or PAML, a Spokane, Wash.-based laboratory firm jointly owned by Providence Health & Services and Catholic Health Initiatives.