Laboratory Corp. of America (LabCorp) plans to acquire the CRO giant Covance for $6.1 billion cash and stock, the companies said today, in a deal that broadens the acquirer into a key player in outsourced drug development.

LabCorp and Covance said the combined company would be the world's leading healthcare diagnostics company, capitalizing on LabCorp's strengths in medical testing and Covance's presence in contract research. The deal is expected to close in the first quarter of 2015, subject to Covance shareholder approval, regulatory approvals and customary closing conditions.

LabCorp provides medical laboratory testing and services through a national network of primary clinical laboratories and specialty testing laboratories.  Covance is a leader in contract drug development and nutritional analysis. The combination, the companies said, will allow it to better partner with customers across a broad range of services from biopharma research, through drug and diagnostic development, to commercialization.

“The combined company will be an industry leader in both the laboratory and CRO spaces, characterized by global scale, enhanced offerings, new efficiencies, broader and deeper customer relationships, and a differentiated business model,” LabCorp Chairman and CEO David P. King said in a statement.

King and LabCorp CFO Glenn A. Eisenberg will hold the same positions with the combined company, while Covance chairman and CEO Joe Herring will lead LabCorp's Covance division and report directly to King.

“Covance generates more safety and efficacy data for the approval of innovative medicines than any other company in the world, and LabCorp has longitudinal diagnostic data from more than 75 million patients,” Herring stated. “This combination leads the way to more cost-effective healthcare by improving the safety and efficacy of drug therapies, enabling accurate patient diagnostics, and advancing evidence-based medicines which will enable our clients to substantiate the value of their products and services to patients and payors.”

LabCorp's headquarters in Burlington, NC, will be the corporate headquarters of the combined company, while Covance's headquarters in Princeton, NJ, will be transformed into the operating headquarters for the Covance division, which will continue to do business under the Covance brand.

LabCorp will fund part of its acquisition with its shares priced at $105.12 per Covance share—a 32% premium above Covance’s closing share price of $79.90 on October 31, and about 13.3 times earnings before interest, taxes, depreciation, and amortization (EBITDA) over the 12 months ending September 30. Over the 12 months through September 30, the combined business had pro forma revenue of $8.4 billion, adjusted EBITDA of $1.6 billion and free cash flow of over $700 million.

Excluding one-time costs, LabCorp expects the Covance acquisition to add to its adjusted earnings per share for 2015 before cost-cutting or “synergies.” LabCorp said it also expects to achieve annual cost synergies of more than $100 million, to be fully realized within three years of closing.

LabCorp and Covance said the largest portion of their combined revenues (32%) would be derived from managed care, followed by pharmaceutical and biotech companies (29%), commercial customers (22%), Medicare/Medicaid (12%), and private patients (5%).  The combined company will derive about 20% of its revenue from outside the U.S.—and have relationships with all of the top 20 pharmaceutical companies.

One of them is Novartis, whose Novartis Institute for Biomedical Research joined Covance last month to launch a next-generation clinical data warehouse designed to designed to support data integration and meta-analysis for preclinical and clinical research by combining Covance and NIBR’s technical and clinical data management expertise.

LabCorp and Covance said the combined company will be strong enough to grow organically and through acquisitions, citing what it said were “strong and stable cash flow, additional payors and revenue sources, as well as superior financial resources.”

Covance shareholders would receive $75.76 in cash and 0.2686 LabCorp shares for each Covance share they own— giving Covance shareholders an approximately 15.5% share of the combined company.

LabCorp said it intends to finance the cash portion of the acquisition through a combination of cash on hand and debt financing from BofA Merrill Lynch and Wells Fargo Bank.

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