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Covance Drug Development Drives LabCorp’s 1Q16 Revenue Growth

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Covance Drug Development segment

In 1Q16, LabCorp’s (LH) contract research organization (or CRO) business, Covance Drug Development, accounted for 30.7% of the company’s total revenues. Covance Drug Development accounted for about 24% of the year-over-year (or YoY) revenue growth reported by the company in 1Q16.

In 1Q16, Covance Drug Development earned ~$703.0 million in revenues, which was a rise of 12.6% on a year-over-year basis. The growth was well-balanced across the Clinical, Central Lab, and Early Development Businesses of the segment.

Because Covance Drug Development provides all types of drug development services, LabCorp has proved to be tough competition for peers such as Quest Diagnostics (DGX), Opko Health (OPK), and Idexx Laboratories (IDXX).

However, unfavorable foreign exchange movements had an impact of about -1.6% on the segment’s revenues. Additionally, the business also experienced a loss of revenues in 1Q16, due to the expiration of its site support contract with Sanofi in October 2015.

Covance Drug Development could have achieved YoY revenue growth of about 17.9% in 1Q16 if we exclude the impact of these one-time events from the segment’s revenue performance.

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Operating income

Covance Drug Development earned adjusted operating income of about $103 million in 1Q16, which is a YoY rise of 39.2%. The solid growth in operating income is partly attributed to improved productivity and demand.

Additionally, LabCorp (LH) achieved a portion of the $100 million in cost synergies that were projected for the Covance acquisition in February 2015. LabCorp expects to realize the entire cost synergies of the acquisition by 2017.

If LabCorp is successful in realizing these acquisition-related synergies, it may boost the company’s share price, as well as those of the iShares Core S&P 500 ETF (IVV). LabCorp makes up about 0.07% of IVV’s total portfolio holdings.

In the next article, we will explore key growth drivers for the Covance Drug Development business in 1Q16.

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