Labcorp unveils plan to spin out clinical development business

Laboratory Corp of America (Labcorp) has announced that it plans to separate its clinical development business into an independent, publicly-traded contract research organisation (CRO).

The move will return Labcorp to its core lab testing business and central laboratory network and will allow each company to "benefit from its own capital structure, enhanced investor alignment through a more targeted investment opportunity and a differentiated value proposition," said chief executive Adam Schechter on a conference call.

The new, as-yet unnamed CRO will provide phase 1 to 4 clinical trials, market access and technology services to biopharma companies, both large and small, said Labcorp in its announcement of the plan.

The business – which emerged largely from Labcorp's $6.1 billion acquisition of Covance in 2014 – generated $3 billion in revenues in the 12 months to 30 June, up 8%, while the lab business contributed $12.7 billion, or $10.5 billion excluding COVID-19 testing revenue. The CRO is expected to continue to deliver mid-single-digit annual revenue growth.

"This transaction allows Labcorp to move forward as a strong, global, innovative laboratory services business with significant growth potential," said Schechter, while the new CRO will still be able to tap into Labcorp's "vast health and clinical data set."

The spinout comes after Labcorp launched a strategic review in March 2021, amid pressure from activist investor Jana Partners which pushed for changes including a separation of the clinical research unit.

That ended without any changes last December, with management concluding its current structure was in the best interest of stakeholders at that time.

Schechter said the decision to press the button on the demerger came from the understanding that the clinical development business is a fast-growing business in a very large market – estimated at around $25 billion per year – and one which is growing very quickly.

"At this point, we see strong growth in each of the businesses," he told investors. "So we feel really good about the business profiles. We've determined that a separation by spin will enhance value, but it's also going to give both companies the ability to get sustainable growth."

The transaction – enacted via a dividend of the shares of the clinical development business to Labcorp's shareholders – is expected to be tax-free and close before the end of the year.