By Chris Laudani – Jun 02, 2016 | 11:00 AM EDT — Laboratory Corp. of America (LH) bought contract-research firm Covance for $5.7 billion last year, and 2016 could be the year where the deal really begins to pay off.
Clinical labs like Laboratory Corp. and Quest Diagnostics (DGX) have traditionally been slow-growth companies. These firms fight for reimbursements from insurance companies, hospitals and Medicare officials who are all hell-bent on keeping testing costs down.
As a result, Quest’s 2015 revenues rose just 2%. And while Laboratory Corp. processes some 500,000 patient specimens a day, its sales only grew by 4%. LH hopes to really accelerate top-line growth through its purchase of Covance, a leading contract-research organization (CRO).
Pharmaceutical firms hire CROs to do the nitty-gritty work of lab testing and clinical-trial management during drug development. Contract-research organizations generate the safety and efficacy data that pharmaceutical firms provide to the U.S. Food and Drug Administration and the scientific community.
Covance was involved in developing all of the top 50 drugs on the market today. In fact, the company collaborated on 87% of the 45 drugs the FDA OK’d in 2015, including 100% of all approved oncology drugs.
Because of its critical importance to the industry, Covance has faster revenue growth (7% to 8%) than Laboratory Corp. as a whole does. But by merging the two companies, LH hopes to leverage its 100 million “patient encounters” to find new revenue sources for the CRO.
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