Labcorp to Spin Off Clinical-Development Business

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Laboratory Corp. of America Holdings LH 1.03%

plans to spin off its unit focused on clinical drug trials, according to people familiar with the matter, a move that will create a new stand-alone company in the fast-growing contract-research sector.

Burlington, NC-based Labcorp is expected to unveil the plan to separate its clinical-development business Thursday when it reports its second-quarter results, the people said. Labcorp will continue its focus on its core diagnostic-testing business and will also retain two related pieces of its drug-development unit, the people said.

The businesses being spun off generated revenue of roughly $3 billion in the 12 months ended in June, a figure that is expected to grow at a high-single-digit rate, the people familiar with the matter said. It represents over 20% of Labcorp’s roughly $13.5 billion of annual sales excluding Covid-19 testing.

Investor interest in so-called contract research organizations that do outsourced drug trials and the like increased in the past several years as pharmaceutical companies poured money into developing new cancer and other treatments. Rapid development of coronavirus vaccines also provided a boost, for a time. There was a flurry of deals in the sector last year as major players snapped up rivals, with Icon ICLR 3.64%

PLC buying PRA Health Sciences Inc. and Thermo Fisher Scientific Inc.

TMO 1.51%

acquiring PPD Inc.

In March of last year, Labcorp launched a strategic review after pressure from activist investor Jana Partners LLC but ended it without a deal in December. At the time, it initiated a quarterly cash dividend and authorized $2.5 billion of share buybacks. It said it had examined a range of options including acquisitions, divestitures and spinoffs, concluding its existing structure was best.

Spinning off the clinical-development business now could facilitate deal making, by giving it a currency to transact with. Its focus will be providing Phase I to IV clinical-trial management and other services to pharmaceutical and biotechnology companies.

Labcorp plans to retain the parts of the drug-development business that focus on early-stage development and central laboratory work, given that they require similar resources to its diagnostics operation, the people said.

Labcorp expanded into the clinical-development business when it agreed in 2014 to pay roughly $6.1 billion for Covance.

Write to Cara Lombardo at cara.lombardo@wsj.com

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