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Labcorp clinical trial business spin-off plan fits with wider services sector trends

Posted by on 15 August 2022
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Labcorp’s surprise decision to spin-off its clinical development services business in keeping with trends in the services space say analysts.

Labcorp announced the move in July, explaining the separated business will morph into a CRO that provides Phase I to IV trial management services and market access support and technology to the pharma and biotech industries.

Labcorp is targeting completion of the spin-off in the second half of 2023.

Speaking on an analyst call at the time CEO Adam Schechter said, "spinning off the clinical development business will benefit customers and shareholders by creating two standalone businesses that are poised to accelerate growth and focus resources on distinct strategic priorities, customer needs and value creation.”

“Our shareholders will be able to participate in the upside potential of two market-leading businesses in the global healthcare sector, each of which will be well-capitalized and positioned to generate sustainable growth with strong free cash flows and attractive returns.”

On the call Schechter said only between 15 and 20% of the firm’s central labs business comes from clinical development services unit.

The spin off decision is in marked contrast with the results of a strategic review Labcorp conducted last year. In December it wrote “The Board unanimously concluded that the Company’s existing structure is in the best interest of all stakeholders at this time and represents compelling opportunities to grow and create significant shareholder value.”

The numbers

Clinical trials have always been the smaller part of Labcorp’s business.

Over the last four quarters ending June 30, 2022, the business brought in revenue of $3.0 billion. This business grew 8.0% on a CAGR basis from second quarter 2019 to second quarter 2022.

In contrast, lab services, central lab and early development research lab businesses delivered total revenue of $12.7 billion, or $10.5 billion excluding COVID-19 Testing revenues. The division is growing 5.5% a year according to Labcorp.

Analysts at McKenzie Ryan said Labcorp’s decision is in keeping with the trend that has seen others in the services space refocus in recent years.

They wrote, “the move adds to the trend of medtech companies spinning off units into independent businesses — GE, Johnson & Johnson, Zimmer Biomet, Becton Dickinson and 3M have all announced spinoffs.”

Image: Stock Photo Secrets

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