Dropping Revenue: Expect More Cuts and Closures as LabCorp Aligns Covance Biz
April 26, 2017
By Mark Terry, BioSpace.com Breaking News Staff
Laboratory Corporation of America released its first quarter 2017 financial results yesterday. Although it showed overall strength, there were some issues with its contract research organization (CRO) subsidiary Covance Drug Development, that complicated matters.
LabCorp, known primarily as a clinical diagnostics company, reported net revenues of $2.4 billion for the quarter, up from $2.3 billion in the first quarter of 2016. Total revenues for 2017’s first quarter were $2.447 billion, up from $2.368 billion from the first quarter of 2016.
The biggest area of strength was its diagnostics division, which reported $1.72 billion, an increase of 8 percent over $1.59 billion from the first quarter of 2016. The company indicated the increase was driven by acquisitions, price, mix and organic volume. Total volume grew by 4.3 percent, with 1.8 percent organic volume and acquisition volume 2.5 percent. Revenue per requisition grew by 3.8 percent.
Covance , on the other hand, had a drop of 1.8 percent for net revenue, from $703.1 in the first quarter of 2016 to $690.3 million in this quarter. Once you exclude the impact of foreign currency translation, the decline was only 0.3 percent year over year. The decrease in net revenue for Covance was mostly the results of slower revenue conversion from the backlog, and two large clinical trials were canceled by their sponsors in late 2016.
Adjusted operating income for Covance for the first quarter was $83.5 million, about 12.1 percent of net revenue. That compares to the first quarter of 2016, where operating income was $103.2 million or 14.7 percent of net revenue. This decline was associated with increased personnel costs and targeted strategic investments. They are partially offset by cost synergies.
LabCorp acquired Covance in 2015 for about $6.1 billion, and estimates synergies through the end of 2017 to be about $100 million.
In order to align Covance more closely with the rest of the company, some job cuts are taking place. A Covance facility in Evansville, IN is being closed, with more than 100 staffers expected to be laid off. The site is a clinical research site and conducts research on healthy people, as well as patients with high cholesterol, diabetes, and obesity. The layoffs are expected to start on or after July 24, and are expected to be permanent.
Part of LabCorp’s plans is to expand its LaunchPad business process improvement initiative to include Covance. It will have two phases spread out over three years. The first phase will better align Covance with its near-term outlook, which includes the job cuts. It expects to save approximately $20 million pretax in 2017 and about $45 million each year after as the result of job cuts and facility closures. It expects charges of $30 million related to severance costs and closing the sites will occur this year.
The second phase will address long-term structural changes to create a more efficient business model. Details are pending.
“We made strong progress on our enterprise-wide initiatives and turned in an outstanding performance in the Diagnostics business during the quarter,” said David King, LabCorp’s chairman and chief executive officer, in a statement. “Customers continued to embrace our integrated solutions, as evidenced by two major health system partnerships, a record number of study wins based on combined data, and strong growth in companion diagnostics. We also delivered strong growth in enterprise revenue, adjusted EPS, and free cash flow, and we returned $150 million to shareholders through share repurchases. In the LabCorp Diagnostics business, we had excellent revenue growth, with significant increases in both total and organic volume and revenue per requisition, leading to expansion of our industry-leading margins. Despite mixed results in our Covance Drug Development business, we saw strong orders, an improved book to bill ratio and solid progress in the clinical business.”