LabCorp announced the expanded deal - which will see it conduct the lion's share of B-MS' central lab and biomaker testing work - this week, prompting speculation the agreement will mean less business for the US drugmaker's other contractors.
“The five-year agreement appears to be an expansion of an existing relationship between [LabCorp] and [BMS] in central lab services,” Tim Evans, senior analyst at Wells Fargo, said.
“We view the addition of [LabCorp] as a preferred provider as a potential negative for [Icon], since the desire to expand the [LabCorp] relationship could mean the [Icon] relationship will shrink.”
But BMS’ decision to expand its relationship with LabCorp should not have “any negative implications for the core Phase II-IV services Icon provides, given that its central lab is underscaled compared to its clinical business,” Evans said.
Icon on Monday told Evans that the LabCorp deal will not change Icon’s 2013 central lab services outlook or revenue projections. But Evans maintained that Icon should be removed from his list of “priority companies,” noting that Icon either knew about this extension with LabCorp when it released its projections in December 2012, or the impact of the LabCorp extension will not be realized until after 2013.
The impact of the deal on Icon will “begin to be felt in 2014 as [BMS] trials begin to roll off at [Icon],” Evans added, noting that it will probably not have a significant impact on Covance, which may only have limited central lab service contracts with BMS. Evans projected BMS’ current lab budget to be between $50m and $75m annually, though that amount may be spread over two or more CROs.
Competitiveness in Central Labs
The LabCorp deal with BMS also may be “illustrative of the dynamics at play when deals renew. If a pharma sponsor feels its current partners have not been adequate, we see some risk that it expands its other relationships or chooses additional partners,” Evans said.
But Wells Fargo noted that there is not a significant risk for a sponsor to completely eliminate an existing relationship “unless the partnership has been extremely problematic.” In addition, changes to a CRO’s central lab business “is significantly easier than moving project management business,” he said.
In addition to the negative impact on Icon, the contract extension may be a welcome boost for LabCorp, which just last week saw its rating outlook by Moody’s Investors Services downgraded from positive to stable.
"The change in LabCorp's rating outlook reflects our expectation that leverage will increase given the change in the company's stated tolerance for using incremental debt to fund share repurchases and other investment in the business," Dean Diaz, a Moody's senior credit officer, said.