Labcorp, currently in the midst of a corporate shakeup aimed at turning its focus to the offerings that make it one of the largest providers of laboratory and diagnostics services in the life sciences sector, is building up its testing capabilities by acquiring the clinical laboratory division of Enzo Biochem for $146 million cash.
Enzo’s clinical lab operations provides testing services to physicians, medical centers, other clinical labs, and pharmaceutical companies. The acquisition agreement announced after the market close Thursday is the culmination of a strategic review that Farmingdale, New York-based Enzo began last summer.
Enzo had historically divided its operations into three operating segments: clinical lab, life sciences, and therapeutics. The clinical lab unit is the largest of the three, accounting for $74.4 million of Enzo’s $107 million revenue for the fiscal year ending July 31, 2022, according to Enzo’s annual report. But compared to 2021, clinical lab revenue was down 14.4%. The clinical lab business grew in 2021 with Covid-19’s spread and then fell as testing demand declined, a trajectory that tracks with other companies in the space, including Labcorp.
At the start of Enzo’s fiscal year in August, the company changed how it reported its operating segments. The therapeutics unit, which had historically focused on researching new treatments for disease, would no longer be a separate segment, according to the company’s annual report. Enzo turned its focus to the life sciences and clinical lab segments. The work in the therapeutics unit would be included in a segment classified as “other.”
The corporate rethink came after Enzo signed on earlier in the summer with investment bank Jefferies, which was charged with advising the company on strategic alternatives to maximize shareholder value. Jefferies advised Enzo on the sale of the clinical labs division to Labcorp, which will leave Enzo with only one reportable business segment: life sciences. This business will continue to supply products and services used in drug discovery and development, bioscience research, and clinical trials.
Diagnostics and laboratory services have been the mainstay of Burlington, North Carolina-based Labcorp throughout its history. The company became a major player in clinical trial services through the $2.6 billion acquisition of Covance in 2015. This acquired business makes up much of what is now Labcorp’s drug development business segment. But even though Covance was one of the largest contract research organizations in that sector, this unit was always much smaller compared to Labcorp’s diagnostics business.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
In 2021, Labcorp’s quest to maximize shareholder value led to its own strategic review. The review concluded with no major changes for the company. But last July, Labcorp announced it would spin off the clinical trials business, leaving the remaining company to return to its diagnostics focus. Those plans are taking shape. In January, Labcorp announced the hiring of Tom Pike, former CEO of CRO Quintiles, to serve as president and CEO of the drug development business unit. Pike will become the CEO of the newly independent company when it spins off from Labcorp. In February, Labcorp announced this new company would be named “Fortrea.” Labcorp added that it expects the spinoff to be complete in mid-2023.
The sale of Enzo’s clinical lab business still needs shareholder approval. According to an Enzo securities filing, the purchase agreement includes a provision that bars Enzo from seeking other offers. But if an unsolicited offer emerges that could top Labcorp’s price, the Enzo board of directors may explore that bid. If Enzo accepts a higher bid, the original purchase agreement calls for the company to pay Labcorp a $5 million termination fee or reimburse Labcorp’s expenses up to that sum.
“Completion of the sale will position Enzo to assess and execute on further actions to increase shareholder value and advance our global leadership within the life sciences sector,” Enzo CEO Hamid Erfanian said in a prepared statement. “We are very grateful to all our colleagues who have made Enzo Clinical Labs a trusted source for patient care. With proven expertise in clinical laboratory services and products, Labcorp is perfectly positioned to bring these operations to new levels of momentum and success.”
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