ORCH Orchid Cellmark (MM)

Laboratory Corporation of America Holdings (LH) has once again extended the tender offer for Orchid Cellmark (ORCH) until November 30, 2011. The company had earlier extended the tender offer to November 14.

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 86.8% 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. The company derives 64% 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 accounted for the remaining 40%.

LabCorp has of late put more and more emphasis on specialized testing. Towards this end, the company undertook a number of acquisitions notable among which are Monogram Bioscience (August 2009) and Genzyme Genetics (December 2010). LabCorp 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, esoteric volume increased 7% over the prior year. The company has also expanded its portfolio of tests in the field of women’s health and personalized medicine.

LabCorp continues to focus on strategic initiatives to drive growth and profitability. However, the tough competitive landscape is of primary concern, and the leading diagnostic players are striving hard for a greater share of the high-margined, specialized testing business. In such a quest, Quest Diagnostics (DGX) 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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