NEW YORK – Laboratory Corporation of America said Thursday that it plans to spin off its Labcorp Drug Development clinical development business.
The spinoff will result in two separate publicly traded companies — Labcorp, which will house the current firm's lab testing business and laboratory network; and a to-be-named contract research organization offering clinical trial management and other services to pharma and biotech clients.
Labcorp announced the news with the release of its Q2 2022 financial results, in which the company posted revenue of $3.70 billion, down 4 percent from $3.84 billion in Q2 2021 and below the consensus Wall Street estimate of $3.75 billion.
During a call to discuss the company's financial results, Labcorp Chairman and CEO Adam Schechter said that the decision to spin off the clinical development business emerged from a strategic review the company undertook last year seeking to explore ways to improve its stock price.
Under the plan, "each company will benefit from its own capital structure, enhanced investor alignment through a more targeted investment opportunity and a differentiated value proposition," he said. "We expect this transaction to drive significant value for shareholders as it will provide investors with the opportunity to participate in the significant upside potential of two leading global businesses in the healthcare sector."
Labcorp aims to complete the spinoff in the second half of 2023 and will enact it through a dividend of the shares of the Clinical Development business to Labcorp's shareholders. Following the spinoff, Labcorp will continue to be headquartered in Burlington, North Carolina and led by Schecter as chairman and CEO.
For Q2 2022, the company's organic revenue was down 3 percent, with foreign currency translation adding 1 percent to the decline and acquisitions boosting revenue by slightly less than 1 percent.
The decline was driven by a drop in COVID-19 testing revenues, which fell 42 percent year over year.
Labcorp Diagnostics' revenues fell 5 percent to $2.26 billion from $2.37 billion a year ago. Acquisitions added around 1 percent to revenues. The decline in COVID-19 testing contributed an 8 percent drop in diagnostic revenues, while 4 percent year-over-year growth in the company's base testing business contributed a 2 percent rise.
Test volumes were down 3 percent, with acquisitions contributing less than 1 percent. COVID-19 testing volumes were down 45 percent, contributing to a 6 percent decline in overall volume, while a 3 percent increase in base testing volumes provided a 3 percent boost.
With the ongoing drop in COVID-19 test demand, Labcorp is shifting the bulk of its attention back to its base testing business, Schecter said.
"We're really focused on our base business," he said. "We're really focused on the hospital and local laboratory acquisitions that are before us, and to me that is the long term growth that we see. We will continue to do what we can in [COVID-19] PCR testing, but long term we are really focused on getting that base business to perform well."
That said, COVID-19 volumes remain higher than the company had expected, noted CFO Glenn Eisenberg, adding that it continues to maintain excess capacity to handle potential surges in COVID-19 testing demand. Labcorp averaged roughly 31,000 COVID-19 tests per day during the quarter.
Labcorp Drug Development saw revenues fall 3 percent to $1.45 billion from $1.50 billion in Q2 2021.
Net earnings attributable to the company for Q2 2022 were $358.6 million, or $3.87 per share, compared to $467.4 million, or $4.76 per share, a year ago. Adjusted EPS of $4.96 beat the consensus Wall Street estimate of $4.70.
Labcorp's SG&A expenses rose 6 percent year over year to $486.0 million from $458.7 million.
The firm ended the quarter with $1.07 billion in cash and cash equivalents.
Labcorp updated its full year 2022 guidance and said revenues are expected to decline by between 2 percent and 6 percent year over year compared to a previous range of 1.5 percent to 5.5 percent. It revised its guidance for adjusted EPS to a new range of $19.00 to $21.25 from a previous range of $18.25 to $21.00.
The company projected a 50 percent to 60 percent decline in COVID-19 testing in 2022, revised from its previous guidance of a 60 percent to 70 percent decline, and growth in its base business of 5 percent to 7.5 percent, down from a previous guidance of growth of 8 percent to 10 percent. It maintained its previous projection of growth in its base testing business of between 4 percent and 6 percent.
In Thursday morning trading on the New York Stock Exchange, Labcorp shares were down 3 percent to $242.66.