ORCH Orchid Cellmark (MM)

Laboratory Corporation of America Holdings (LH) has once again extended the tender offer for Orchid Cellmark (ORCH) until December 9, 2011. The company had earlier extended the tender offer to November 30.

In May 2011, the company received a request from the Federal Trade Commission (FTC) for some additional information related to the transaction. LabCorp is cooperating with the FTC on this issue. To date, about 88.2% of the outstanding shares of Orchid have been tendered.

LabCorp had decided in April 2011 to acquire Orchid Cellmark for $2.80 per share, coming to a total consideration of $85.4 million, all in cash. After taking into account Orchid Cellmark’s cash balance, LabCorp’s net payable comes to $65.6 million. Orchid Cellmark provides DNA testing services targeted towards forensic and family relationship applications on a global basis.

This deal would enable LabCorp to command a leading position in identity testing in the US and also establish its presence in this field in the UK. LabCorp derives 60% of its revenues from core routine tests. It also provides specialty testing services in the areas of allergy, clinical trials, diagnostic genetics, identity, forensics, infectious disease, oncology and occupational testing, which accounts for the remaining 40%.

LabCorp, in a drive to diversify from the more mature core testing, has of late put more and more emphasis on specialized testing. Acquisitions have played an integral role in this respect, significant among which are Monogram Bioscience (August 2009) and Genzyme Genetics (December 2010). The company has set a target of garnering 45% of its revenues from the specialty business in the next 3-5 years.

During the most recent quarter, total revenue increased 10% year over year to reach $1,404.5 million, of which approximately 7% came from the acquisition of Genzyme Genetics. However, economic uncertainty has resulted in lackluster physician office visits, as reflected in the year-to-date declining trend in organic volume growth at LabCorp (3% in the first, 2% in the second and 1.2% in the third). Moreover, with no significant job growth in the economy or an increase in commercially insured covered lives, the company’s overall volume growth will continue to languish until the economy rebounds.

In this scenario, LabCorp’s competitor, Quest Diagnostics (DGX), is also striving for a greater share of the high-margined, specialized testing business. In such a quest, the company has acquired neurological diagnostic test specialist Athena Diagnostics and Celera Corp.

We are currently Neutral on LabCorp, which also corresponds with the Zacks #3 Rank (Hold) in the short term. For Quest Diagnostics, we have a Neutral recommendation.

 
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