[email protected]] (lh) october 21, 2015tippie.biz.uiowa.edu/henry/reports15/lh_fa15.pdf ·...

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Royce Walton [[email protected]]

Laboratory Corporation of America Holdings (LH) October 21, 2015

Healthcare – Diagnostic Testing Stock Rating BUY

Investment Thesis Target Price $124-137 We recommend a BUY for Laboratory Corporation of America Holdings (LH). Recent market turmoil and cuts to federal reimbursements beat down the stock, but LH made a timely upgrade to their moat by acquiring Covance in 2015. The new company can increase their market share and generate powerful revenue synergies during this difficult time. Additional investments in new tests and automated processes will also drive deeper customer relationships. These moves are undervalued in the market, and LH has the potential for significant outperformance. Drivers of Thesis

Synergies from Covance acquisition: Analysts were initially skeptical of the Covance acquisition, but we expect both companies to benefit from revenue and operational synergies.

Project LaunchPad and Testing Automation: LH leads the industry in automated testing processes. Their business efficiency platform, Project LaunchPad, also gives LH the tools they need to combat industry-wide margin compression.

Increased funding for drug development: Funding for early stage drug development is at all-time highs and late stage funding is nearing the end of its cycle. We believe that Covance increases LH’s exposure to both cycles, eliminating the risk of any indivdual cycle.

Risks to Thesis

Integration risks: Covance cost over $6 billion, and LH took on considerable debt to complete the acquisition. LH also entered an unfamiliar industry, but we believe the company’s previous acquisition/integration efforts will help them bridge the gap quickly.

Currency exchange: While Covance’s international exposure decreases LH’s tax base, it also introduces currency exchange risks. We believe that a strong dollar will continue to restrict Covance’s growth through 2017.

Pricing pressure: Medicare reimbursement pressure drive industry-wide margin compression, but Covance decreases LH’s revenue exposure to public payers, which was already below their largest competitor.

Henry Fund DCF $131.03 Henry Fund DDM $130.28 Relative Multiple $138.64 Price Data Current Price $112.60 52wk Range $95.61 – 131.19 Consensus 1yr Target $141.41 Key Statistics Market Cap (B) $11.38 Shares Outstanding (M) 101.10 Beta 0.86 Dividend Yield N/A Est. 5yr Growth 4.7% Price/Earnings (TTM) 19.1 Price/Earnings (FY1) 17.4 Price/Sales (TTM) 1.6 Price/Book (mrq) 2.4 Profitability Operating Margin 15.1% Return on Assets (TTM) 6.41% Return on Equity (TTM) 11.5% Data Source: FactSet

Earnings Estimates 2012 2013 2014 2015E 2016E 2017E

EPS $6.09 $6.36 $6.03 $7.05 $7.53 $7.74

growth 17.2% 4.4% -5.2% 17.0% 6.8% -3.0%

Data Source: FactSet 12 Month Performance Company Description

Data Source: FactSet

Laboratory Corporation of America Holdings (LH) is a leader in outsourced diagnostic testing. They also added drug development services to their portfolio with their recent acquisition of Covance. LH earns revenue by conducting tests for hospitals, managed care organizations, employers, and pharmaceutical companies. They also provide early and late-stage drug development services to pharmaceutical and biotech companies worldwide.

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Mkt Cap P/E ROE Op Margin

LH DGX

-10%

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20%

30%

S O N D J F M A M J J A S

LH S&P 500

EXECUTIVE SUMMARY

The diagnostic testing industry is facing public reimbursement cuts for their services, but LH is best positioned to combat this. The company’s focus on cost reduction, ability to generate new revenue streams, and disciplined acquisition strategy will enable them to outperform their closest peer, Quest Diagnostics.

LH stands alone in their focus on automation within the testing process. As they continue to invest in efficiency programs and automation, LH will win market share by delivering faster and more accurate results.

LH’s acquisition focus is on adding unique testing capabilities. This strategy drives top line growth in areas that face less reimbursement pressure, and it diversifies their revenues away from routine testing. Covance also significantly diversifies the company’s revenue streams. Not only did they gain access to the contract research industry, they also created an opportunity for companion diagnostic tests. Management’s ability to identify new revenue streams gives LH a durable competitive advantage in the industry.

We believe the diagnostic testing industry is ripe for consolidation because small labs are impacted more by public reimbursement decreases. LH is more targeted than Quest in their acquisition strategy, and this discipline will pay dividends as consolidation increases.

COMPANY DESCRIPTION

LH lists their founding year as 1971, but they were not fully formed until 1995, when Roche Biomedical and National Health Laboratories merged. They named the united company Laboratory Corporation of America Holdings.1 LH operates 1,750 patient service centers where they collect samples directly from patients at the recommendation of a patient’s primary provider. The company also receives samples directly from primary care providers, employers, and pharmaceutical companies. After collection, LH sends samples to a branch, or distribution center. Branches serve as a collection point, processing center, and a home base for the local sales team. After processing at the branch, the company’s internal currier service transports samples to one of LH’s 37 primary testing laboratories.2

In addition to testing patient samples, the company also provides services to pharmaceutical and biotechnology companies as a contract research organization, or CRO.

LH has this capability thanks to their acquisition of Covance, which we discuss in more detail below. Drug companies outsource their pre-market research and testing to CROs. This type of outsourcing helps drug companies lower costs and reduce their time-to-market.

Segments

Data Source: LH 2014 10-K

LH divides their sales into the three categories (listed below), and we added Covance as a fourth for forecasting purposes:

Core testing: includes routine tests that are analyzed overnight and returned to customers by the next day

Genomic and esoteric testing: includes testing of genetic markers and rare molecules

Other: includes diagnostic testing operations in Ontario, Canada

Covance: sales from the newly acquired business

Core Testing

Core testing includes the following types of tests:

blood chemistry analyses

urinalyses

blood cell counts

thyroid tests

Pap tests

Hemoglobin A1C

PSA

STD tests (Ct, Ng, Tv, HIV)

HCV tests

microbiology cultures and procedures

alcohol and other substance-abuse tests

Data Source: LH 2014 10-K

These overnight tests made up 69% of LH’s total test volumes in 2014, but they carry a lower revenue per test, or requisition, than genomic or esoteric tests ($39 versus $62.)2 Unfortunately, the company does not release margin data for their tests, but we believe core testing gross margins are lower than genomic and esoteric. The chart below highlights how total gross margins decreased as core testing became a larger portion of total revenues. We believe the reason for core testing’s low margins is due to the low differentiation among competitors in this segment and consolidation among healthcare providers and managed care organizations. These factors pressure revenues while the costs in core testing remained constant, resulting in lower margins.

Data Source: LH Financial statements

It is difficult to identify a “typical” consumer for core testing because of the diverse demand drivers. Consumers range from physicians to employers. It is important to differentiate between consumers and customers in this segment. Consumer refers to the end user, while customer refers to the party paying for LH’s services. In this case, the most common customers are managed care organizations, commercial clients, and

federal reimbursement programs (Medicare and Medicaid.)

The two charts below highlight the shifts in payers and the revenue per requisition by payer. Managed care organizations increased slightly from 39% in 2010 to 42% in 2014, but their revenue per test remained flat. This leads us to an important concept in the industry. Many diagnostic labs negotiate contracts with managed care organizations to pay a certain amount per member per month, regardless of the number or cost of tests performed (excluding esoteric tests, which are more expensive.) While many contracts in the industry are not exclusive or guaranteed, LH established an exclusive contract with UnitedHealthcare in 2006, which they recently extended to 2018. We view this as a positive because of UnitedHealthcare’s size. By building a strong relationship with the leading MCO, LH secured a safe and long-term revenue stream.

Data Source: LH financial statements

Data Source: LH financial statements

Commercial clients make up the next largest customer group with 40% of total requisitions, which is relatively flat over the past five years. Commercial client revenues per requisition rose slightly over the same period. Commercial clients typically include hospitals, physicians, and employers. We do not expect this customer base to

exercise significant pricing pressure in the future because of its fragmented nature.

Medicare and Medicaid make up nearly 16% of LH’s revenues, and this is also where the most significant price reductions occurred. The federal government hopes to reduce total healthcare expenditures in the United States, and their first target is diagnostic testing. In 2014, congress passed the Protecting Access to Medicare Act (PAMA), which details maximum cuts to diagnostic tests. From 2017 to 2019, the government can cut a test’s reimbursement by a maximum of 10% compared to the previous year. From 2020 to 2022, the government can cut a test’s reimbursement by a maximum of 15% compared to the previous year. Below is an example of the process created by the Center for Medicare and Medicaid Services (CMS):

If a test under the Clinical Laboratory Fee Schedule (CLFS) for 2016 has a payment rate of $20.00, but the private payor rate calculated during 2016 produces a payment rate of $15.00, then the 2017 CLFS payment rate becomes $18.00 ($20.00-$2.00), the maximum 10 percent reduction from the current prices.

The following year, a 10 percent reduction would equal $1.80, lowering the total payment to $16.20.

The maximum reduction percentage under the statute is applied to the prior year’s payment until the reduction becomes less than the applicable percentage (10 percent or 15 percent) and the fee schedule payment goes to the weighted median of the private payor rates for the test.3

In addition, CMS recently announced that they will not include hospitals’ internal laboratories when calculating the private payer rate for each year. This is important because hospitals typically charge a much higher price than outsourced labs. Not including hospital lab fees lowers the target price for Medicare and Medicaid, resulting in lower revenues for outsourced labs. However, public payer revenues make up a smaller portion of LH’s total revenues than their competitors. In light of this, we believe the impact of reimbursement reductions will have a muted effect on LH when compared to their competition.

The final customer group is private patients. These include those who pay for lab tests without healthcare coverage or wealthy patients who pay out of pocket.

These patients typically make up less than 2% of total requisitions, but they pay over $190 per requisition.2

Because their revenue per requisition is over twice that of other customers, we excluded them from the chart above. With increased access to healthcare coverage and penalties for failing to adopt an insurance plan, this segment will continue to play a minimal role on the industry and LH’s revenues.

The key drivers for the core testing segment include:

Consolidation of managed care organizations, which could lead to a consolidation of power in LH’s customer base

Reduced reimbursements from public payors, which is negative for the industry but less negative for LH

Given the presence of negative drivers for a large portion of customers in this segment, we expect slow growth throughout the forecast period. Expect 5% growth for 2015 slowing to 1% growth long-term.

Genomic and Esoteric Testing

LH Genomic and Esoteric Testing Brands

Source: LH 2014 10-K

The genomic and esoteric testing segment makes up 23% of LH’s overall revenues, but we believe that the higher revenue per requisition in this segment ($62 versus $39 in core testing) make it a larger contributor to margins. This segment derives revenues from tests of rare molecules or genetic markers. Hospitals are more likely to outsource these tests, unlike many core tests, because of their expense and the low demand. A few examples of

the types of tests a hospital might request include tumor tissue analysis, cholesterol tests, and prenatal genetic screening. Revenues also come from biotech and pharmaceutical companies who are required to test their drugs before and after market release. During development, drug companies may use labs like LH to determine how fast their drugs are metabolized, the best dosage levels, and study the results of their use. After a drug is approved for use, drug companies are required to monitor their drug’s performance for a specified period. During this time, they may use a partner like LH to help them monitor their drug’s effectiveness and side-effects on a larger scale.

The main drivers in this segment include:

Expansion of test capabilities through acquisition or internal development

Partnership with drug producers to develop tests for specific drugs in development

Increased demand for genetic tests to identify predispositions to deadly diseases

First, the increasing the scope of tests offered is one of the few ways to increase revenues in this segment. This is because for each test offered, there is a low customer demand based on the nature of these tests. Offering a wide variety of tests helps a lab become a go-to partner for their customers. On this front, LH is particularly active, adding over 170 new tests in 2014.2 The new tests added in 2014 include tests centered around cardiovascular disease risk assessment, infectious disease treatment, breast cancer tests, coagulation, prenatal screening, and early detection of childhood genetic diseases. While LH developed most of their new tests internally, their new cardiovascular risk test came from their LipoScience acquisition in September 2014.

Another key driver includes working with drug companies during development stages to create companion diagnostics. These are tests that specifically target the drug or the disease the drug targets. Drug companies use these tests throughout the drug development process to produce results for the Food and Drug Administration (FDA). There is also an opportunity to continue working with a drug company after their drug hits the market because the FDA requires them to monitor the drug’s performance. Establishing a relationship with a drug company in the development stage increases a lab’s chances to win their business post-release. This was one of the driving factors in LH’s acquisition of Covance, which we discuss in more detail below.

Finally, the demand for genetic tests is increasing due to the linkage of many diseases and disorders to genetic causes. Diseases and disorders linked to genetic causes include cancer, cardiovascular disease, obesity, down syndrome, cystic fibrosis, sickle cell disease, and many more. Since the human genome was decoded in 2001, it became more economical to conduct genomic tests that target specific areas of the genome. Parents can now test to see what diseases a future child may be susceptible to, and doctors can target specific parts of the genome to treat diseases. We expect demand to continue to rise in this area, driving requisition growth for LH.

While we like the trends in genomic and esoteric testing, it is still very difficult to gain economies of scale, because of the low demand per test. We expect this segment to grow by 4% in 2015 and 2016, slowing to 2% growth in 2017 and beyond. There is potential for significant growth in this area when you consider the possible synergies from Covance. However, these synergies are difficult to project and it is too early in the integration process to determine if management’s goals are playing out.

Other

The final segment of LH’s core business is comprised of non-US based diagnostic lab operations in Ontario, Canada. The Canadian subsidiary was added in 2002 though the acquisition of Dynacare, and it makes up 5% of the company’s revenues. This segment provides clinical lab testing services to the Ontario Ministry of Health, and we expect it to grow at 1% throughout the forecast period.4 We based our expectations on the low bargaining power of LH in Ontario, especially when compared to their business partners, who are backed by the government. We also believe that the historically flat testing volumes will continue throughout the forecast period.

Covance

Before LH acquired Covance in February 2015, Covance was the second biggest contract research organization (CRO) for pre-clinical work and a top 10 competitor for late-stage trials. The company is also the only worldwide CRO capable of working through the entire drug development process.4

Pre-clinical services include in vivo (or in body) testing of drug effects, toxicology measurement, pharmachemistry (metabolic profiling and

bioavailability of drugs), nutritional chemistry and food safety services (food labeling, pesticide screening), and production of specialized research products (test animals)

Clinical pharmacology services include first-in-human drug trials and patient proof-of-concept studies

Central lab services include the processing of trial results and data generation for published results

Clinical development services include the management of clinical trials throughout the development process2

Covance’s primary customers are pharmaceutical and biotechnology companies, universities, and government entities. These companies outsource the processes listed above to CRO’s in order to reduce their cost of drug development and testing. Covance and their competitors offer their clients cost savings through their large network of trial participants and knowledge of the trial process. This enables biotech companies to focus on identifying new target molecules and pharmaceutical companies to focus on marketing and selling their drugs in the marketplace.

While cost savings are the primary reason for outsourcing, numerous factors drive which CRO a client chooses. CROs differentiate themselves by focusing on either a specific illnesses or a wide range of diseases. Likewise, some CROs have strengths in a particular stage of the development process, while others offer comprehensive services. Covance elected to use the broad approach, which enables them to work with both biotech and pharmaceutical clients. As we discuss in the industry trends section, the funding flow for these two types of customers are cyclical. Working with both provides Covance with revenue stability. The company’s global scale also sets them apart, because many CROs are not able to tackle the unique drug development regulations in different countries

LH expects to derive revenue synergies by 2018 from three key factors, and we believe two additional factors will affect the combined company’s profitability going forward.

1. Faster clinical enrollment (>$150 million) – LH has a large network of patients and healthcare providers, and they maintain a detailed database of patient information. Prior to merging, Covance reached out to individual hospitals directly to source possible candidates. The combination

enables Covance to leverage LH’s network and information to source potential participants.

2. Companion diagnostics (>$100 million) – As Covance works through the drug development process with a client, they gain key knowledge about the drug and the illness. The combined company will use these insights to develop diagnostic tests, which drug companies can use to test the effectiveness of their products after they hit the market.

3. Post-market surveillance (>$50 million) – This is the one aspect of the drug development process where Covance was weakest, and it is also an area where LH had existing services. Combining these with Covance gives the company a truly all-encompassing platform of services.5

In addition to these drivers, we believe the combined company will derive tax benefits because of Covance’s geographic diversity. LH operates primarily in the United States with a marginal tax rate of nearly 35% in 2014.2 The chart below indicates that Covance derives a majority of their revenues outside the United States, where tax rates are generally lower. In Covance’s most recent stand-alone filing (Q3 2014) they posted a 23% tax rate.6 Going forward, we expect the combined company to operate at just over a 32% tax rate.

Data Source: KeyBanc

We also expect the combined company to experience increased exchange rate sensitivities in the future. Covance’s international exposure negatively affected their performance as the U.S. dollar strengthened. As the Fed decides what to do with interest rates, dollar strengthening will become a bigger concern for LH. We

expect strengthening and weakening cycles to neutralize each other in the long term.

We project Covance’s revenues to decline 1.5% in 2015 as they integrate with their larger partner. The chart below highlights how our projections impact the combined company’s revenue distribution for 2015. By 2017, the segment will benefit from the cyclical recovery in early stage funding (discussed in the industry trends section), resulting in 4% growth.

Data Source: Henry Fund Estimates

Company Analysis

LH continues to set themselves apart by focusing on the development of genomic and esoteric tests, while their competitors focus on growing their core testing base. We believe this strategy will continue to benefit LH because hospitals cannot conduct their own esoteric tests. This focus also enabled LH to capture higher profitability in the past, which the company used to fund acquisitions and repurchase shares.

While the company uses acquisitions and internal test development to drive top line growth, we believe LH’s focus on cost reduction make them a particularly good investment compared to their peers. First, LH’s initiatives in automation will continue to drive margins above their peers. These efforts date back to 2007, when LH acquired a lab testing robotics company named Protedyne. LH used Protedyne’s Radius system to automate the unscrewing of caps from pap smear tests. LH also uses automation in blood testing. Their system enables them to process 20,000 samples per night with 19 employees in their Burlington, NC headquarters. The same process used to take 42 employees and yielded only 8,000 results. In 2014, the company began installing the Propel robotic system in several of their major laboratories. This 4,000

square foot system conducts pre-testing processes ranging from removing caps to applying barcodes.7 As a result of LH’s automation focus, they reduced human errors in testing and improved per-employee throughput by 50% since 2008.2 These efficiencies also benefit the top line because they produce results more quickly and accurately, which creates repeat customers.

LH also announced Project LaunchPad in 2015. This program is a company-wide efficiency initiative that will examine the company’s systems of procurement, customer billing, and patient servicing. Management expects Project LaunchPad to result in $100 million of savings over the next three years.2

Another important aspect of LH’s potential is the debt they took on to acquire Covance. The company’s historical target leverage ratio (Total Debt / EBITDA) was 2.5x. However, after issuing bonds and taking out loans to pay for Covance, their leverage ratio rose to over 4.5x. Management believes they can get back to their target ratio by late 2016 or 2017, after which they would begin to consider buybacks or acquisitions again. The chart below highlights the manageable debt maturity schedule for LH. We trust management’s ability to pay down this debt early based on the company’s strong operating margins and cash generation.

LH Debt Maturity Schedule

Source: Thomson One

Overall, we expect LH to see limited revenue growth (just over 4% in 2016, slowing to 1.5% long-term) due to reimbursement pressure. However, LH should rise above Quest Diagnostics because their exposure to public payers is lower. Recent announcements regarding reimbursements should affect Quest more negatively. From a cost cutting perspective, LH has a distinct advantage thanks to the focus of their management team. We believe that LH will continue to create value through the revenue and tax synergies from the Covance acquisition. We also expect LH to win market share

providing a wider variety of tests and faster and more accurate results. They will accomplish this through continued investments in their test offerings, automated processes, and Project LaunchPad.

RECENT DEVELOPMENTS

Q2 2015 Results

LH completed their second quarter in June 2015 and reported their performance on July 28, 2015. The company’s reported $2.09 earnings per share outperformed consensus estimates of $2.03, and overall earnings per share guidance were also increased.8

Q2 2015 Results vs. Consensus (in 000’s except EPS)

Reported Consensus Revenue $2,269 $2,190

EPS $2.09 $2.03

Data Source: WF Q2 Analysis

The market responded positively to the news, nearly driving the stock price above its all-time high of $128 by the end of July. However, world-wide economic events took their toll on LH’s stock, which has underperformed the S&P 500 since August.

Despite the good news, Covance’s revenue growth was downgraded to -1.5-0.5% from 0.0-2.0% based on continued currency exchange challenges. We expect Covance to exit this year with revenue growth of -1.5%, at the low end of management’s guidance. Once fully integrated, we expect Covance to achieve a higher growth rate of 4% in 2016. This projection is also driven by the neutralization effect of exchange rates in the long term.

PAMA Announcement

In September 2015, CMS made a much-anticipated announcement regarding PAMA. They announced that when calculating reimbursement rates, they would not include hospital labs. This is important because the costs and rates are higher in hospitals than they are at a diagnostic testing center operated by LH or Quest.9

The industry is likely to argue for hospital inclusion during the public comment period, which lasts until late November.9 However, we believe they are unlikely to be successful, because CMS has made it very clear that they are targeting diagnostic testing companies. Changing

their decisions would be contrary to all of their actions leading up to this point.

The news removed a significant overhang from both LH’s and Quest Diagnostic’s stock prices. Analysts knew an announcement was coming from CMS this fall, but the exact date and details were unknown. As a result, LH’s stock traded in a tight range over much of the summer. Since the September 28 announcement, LH narrowly outperformed the overall market gaining just over 8% by October 16 (Quest Diagnostic matched the overall market’s performance during this period.

We view the CMS release as a non-material event. The news was not positive, but more importantly, it was not more negative than expected. We still expect reimbursement challenges beginning in 2017, and revenue growth in each subsequent year for LH (3.0% in 2017, 2.0% in 2018, and 1.5% in 2019.)

INDUSTRY TRENDS

Drug Development Funding

Historical Biotech Funding

Source: Jeffries10 While the major driver in the diagnostic testing industry is decreasing reimbursement rates, the driver for CRO’s is increased spending on drug development. Currently at all-time high levels, funding for biotech drug development is tracked through initial public offerings and start-up funding. Biotech companies typically identify a target molecule or disease that they wish to treat. Then, they begin testing different methods of treatment, either internally or through a CRO.

William Blair conducts regular surveys of biotech and pharmaceutical companies to gain insights on their future research and development spending. The most recent survey, published on October 15, highlighted strong future growth expectations. Biotech companies lead the way with over 8% R&D growth expected each year through 2018. Larger pharmaceutical companies, on the other hand, have more moderate growth expectations.

R&D Budget Growth Expectations (by company size)

Source: William Blair11

Nearly 50% of biotech companies surveyed were likely to cut R&D spending if capital markets become significantly weaker. While this insight is not particularly specific, it does indicate how volatile markets can influence R&D spending at small firms.11

Overall, funding tends to be very cyclical, with the cycles in early and late stage funding typically occurring independently. Below is a chart depicting the most recent funding cycles and our expectations for the current funding cycles. Based on the historical length of early and late stage cycles, we expect the current late stage cycle to end at the conclusion of this year. We suspect early stage funding reached its midpoint peak in 2014 or mid-2015, and there are at least two years left in the cycle.

Early and Late Stage Funding Cycles

Data Source: Jeffries10 and Henry Fund Estimates

This suggests that companies like LH/Covance, who have a strong reputation with both early and late stage development, will benefit. On the other hand, companies

who focus on a particular stage will see more cyclical results. Our analysis of company stock performances during these cycles shows that Charles River and ICON are most correlated to trends in early stage funding, while Covance, Quintiles, and Parexel have a more balanced historical performance. Because both trends will end by 2017, we expect slower growth for Covance after 2017, with 2% growth in 2018 and 2019.

Outsourcing by Pharmaceutical Companies

While increased R&D spending is a good thing, the only way it affects CRO’s is through outsourcing. Pharmaceutical companies are increasingly outsourcing parts of the drug development process because of the increasing complexity and globalized nature of trials. The William Blair survey suggests that there is room for growth in outsourcing, but they also suggest that outsourcing is approaching its maximum penetration.

The survey also examines drug companies’ preference for a specific CRO, and the data reflects positively on the LH/Covance team. When asked which CRO was best positioned to increase clinical trial efficiency, 37% of large pharma and 26% of biotech companies chose LH. The next highest selection was Quintiles with 25% of large pharma and 17% of biotech companies.12 This adds credence to the synergies LH suggested as key drivers of their acquisition.

Finally, the survey also highlights which CRO’s are favored for a particular stage of the drug development process. Listed below are the leaders by each phase of the development process:

Discovery: LH and Charles River shared the top-spot with 24% each

Pre-clinical: LH lead this segment with 28% and Charles River had 24%

Phase I: Quintiles and LH both registered 22%, but LH was up from 21% in the previous survey while Quintiles was flat

Late Stage: Quintiles lead with 21% (down from 23% last survey), while Covance came in second with 19% (up from 17% in the previous survey)

The William Blair survey highlights the business LH can win through their acquisition of Covance. We believe they are well positioned to take advantage of increased funding in any stage of the development process. Strength within the drug development process also increases the opportunity for companion diagnostics,

which was another key aspect of the Covance acquisition. While we do not project any funding cycles beyond 2017 (just as we do not typically project acquisitions), and we expect Covance to show strong growth in 2016 and 2017. However, these expectations must be tempered by the fact that Covance will continue to suffer from currency headwinds until the world economic system fully recovers. This results in 4% growth for both 2016 and 2017.

MARKETS AND COMPETITION

The market for diagnostic testing is very fragmented with many small players working with a specific hospital in their geographic area. However, the top two competitors, LH and Quest Diagnostics, have a combined 31% of the market share. Beyond LH and Quest, it is difficult to find a competitor with a market share greater than 1%. Our analysis will focus on the competition between LH and Quest, as well as the other options available for diagnostic testing.

Data Source: Barclays13

Companies in the diagnostic testing market differentiate themselves in several ways. The first differentiator is size. The top two companies, LH and Quest, opted to grow by buying individual labs and using the efficiencies of scale to improve their profitability. Second, a company may select to work with a specific type of payer. For example, LH has a stronger focus on managed care patients, while Quest Diagnostic leans slightly more on public payers. Another key point of differentiation emerged recently when LH opted to acquire a CRO. Quest followed suit in 2015, but they decided to form a joint venture with a CRO, Quintiles.

Test companies win business by providing inexpensive, but trustworthy, testing results. The ability to provide quality tests quickly is also a differentiator. The final

aspect of differentiation is the scope of testing capabilities offered. While a hospital’s internal testing lab may be able to handle certain core tests, many tests are outsourced because it is expensive to tests for rare diseases that have a low occurrence. Small regional labs offer a wider testing capability, but LH and Quest provide a significantly larger array of tests. Given the choice to work with multiple test laboratories based on each lab’s capabilities or one comprehensive lab seems like an easy choice. However, industry fragmentation leads us to believe that hospitals are not focusing on this decision yet, opting to meet government requirements for IT system implementation and trying to improve their revenue cycle management processes. We are confident, that over time, hospitals will realize the cost savings and efficiencies of working with a comprehensive lab. This will increase the market share of both LH and Quest, leaving many regional labs with the option of going out of business or joining one of the two leaders.

The CRO market is more dynamic with a longer list of competitors and competitive strategies. However, when Covance joined LH, we believe it changed the competitive landscape. Covance was already a top CRO, and now they will have even more selling points. These include faster trials, better data analysis, and the opportunity to work with one CRO throughout the entire development process. CROs typically specialize in a particular area of the development process or work with drug companies of a particular size. Covance now has the opportunity to hit all markets, and they are also one of the few to operate internationally. We believe this will help them build even stronger relationships with large pharma companies who have the ability to develop drugs for a wide range of countries or geographic regions. Again, this creates the opportunity for clients to work with several CRO’s or one comprehensive company.

Operating Efficiency and Debt Comparison

Ticker Op.

Margin ROE ROA Total Debt-to-

Equity Diagnostic Test Companies

DGX 15.3% 12.6 7.4 86.3

LH* 15.7% 11.5 6.4 141.8

Contract Research Organizations

Q 8.3% - 12.4 -

PRXL 10.5% 23.8 7.2 53.3

ICLR 16.4% 10.1 20.8 5.9

CVD* 11.1% 11.4 7.0 16.0

*Pre-acquisition statistics Data Source: FactSet and Company Financial Statements

Quest, 16%

LabCorp, 15%

Others, 69%

Market Share

Peer Comparisons

Our peer comparison will focus on LH’s only other large peer and a new entrant with the potential to disrupt the industry.

Quest Diagnostics (DGX)

DGX represents the best pure comparison to LH’s business, and the two companies have pursued a similar strategy historically. As a result, the two company’s stock prices are strongly correlated, with a correlation coefficient of 0.93 over the past five years. However, there has been a slight divergence in the past year as the correlation coefficient shifted to 0.89.

Data Source: FactSet

While both companies actively pursue growth through acquisition, it appears that LH is more targeted. Below is a list of each company’s acquisition activity since 2011. For many deals, companies do not disclose the price paid.

Acquisitions Since 2011

Data Source: Mergent

When we examine the revenue growth of each company over the same time period, we find that although DGX made more acquisitions, they have not overcome any pricing or volume issues the company is fighting. LH on the other hand, has been able to translate their shorter deal list into revenue growth for each year since 2011.

Data Source: Company financial statements

The other aspect that may produce future outperformance for LH is the fact that they acquired a CRO, while DGX created a joint venture. We believe that both strategies provide good revenue opportunities. However, fully incorporating Covance significantly diversifies LH’s payer mix and decreases its tax base due to Covance’s international exposure. Because of LH’s targeted acquisition strategy, revenue diversity, and lower exposure to public payers, we believe LH will outperform DGX over our forecast period.

Theranos

Theranos Sample Size Compared to Typical Sample

Source: Company website14

-5.0%

0.0%

5.0%

10.0%

15.0%

2011 2012 2013 2014

Revenue Growth

DGX LH

Theranos is a relatively young diagnostic test device maker, and many think their device, Edison, has the opportunity to disrupt much of the diagnostic testing industry. The device enables Theranos to charge prices 50-80% below Medicare reimbursement rates, with over 150 tests priced below $10. The company claims that their tests are conducted in under 15 minutes, and they require a significantly smaller sample.14

The company does not sell their devices, but they use them in their testing centers in Arizona (42 centers), California (2 centers), and Pennsylvania (1 Center.) Because the company does not sell their devices, they are not required to gain FDA approval for the validity of their tests. However, the company began submitting their tests to the FDA voluntarily, gaining their first FDA approval in 2015.15

Because this technology could displace much of the diagnostic testing conducted by LH and DGX, investors have jumped in, driving the company’s valuation over $9 billion. However, a recent front-page article in the Wall Street Journal brought several issues to light. The article calims that a vast majority of the company’s tests are not conducted by Edison, but with standard testing machines. To bring their small samples up to the required size for a regular testing machine, they are often diluted. Sources in the article state that diluting samples leads to less reliable results, which the article also discusses in detail.16

While Theranos does highlight the opportunity for disruption in the industry, we believe that a company must pursue the typical validation processes before their technology is accepted by the public and medical industry. The scientific and medical communities act as a barrier to entry for start-ups, and we believe this protects companies like LH and DGX from disruption.

ECONOMIC OUTLOOK

GDP Growth

We forecast real GDP to grow 2.98% over the next two years with 1.59% growth in inflation. Our expectations are primarily driven by lower world-wide demand for U.S. products and neutral consumer confidence. However, we believe these impacts will have a relatively small impact on LH and the diagnostic testing industry, because testing is driven by medical necessity and access to healthcare. Covance would be more significantly impacted by a global slowdown, however, because of its international exposure. As international drug companies tighten their

belts, it is up to Covance to show how their services reduce development costs for their clients. If a drug company does not see past the initial investment or Covance cannot compete through price, their growth could be significantly lower than our forecasts.

Healthcare Spending

Healthcare spending in the United States is expected to increase at a 5.8% CAGR through 2020, and we believe this is a positive driver for LH.17 When combined with the increased access to healthcare, we expect testing requisitions to continue their increase. However, labs are one of the first targets that the federal government is examining to help reduce the U.S.’s healthcare spending. Reduced reimbursements from Medicare will make the growth in requisitions less profitable than analysts previously expected.

LH has a slightly lower exposure to Medicare and Medicaid patients compared to DGX, but we still expect reimbursement cuts to counteract increased healthcare spending. Expect diagnostic testing revenue growth to slow to 3% in 2017, with further slowdowns in 2018 and 2019.

Interest Rates

The Federal Reserve decided not to raise rates in September, but we still expect rates to increase at the end of 2015 or beginning of 2016. LH is highly levered as a result of their recent acquisition, but they have the cash flows to reduce their debt quickly. We do not expect the company to take on more debt in the near future, but they may require funding to continue their acquisition strategy in after 2017. The fragmented diagnostic test industry is ripe for consolidation, and we expect both LH and DGX to continue making acquisitions going forward.

Currency Exchange Rates

The introduction of Covance’s international exposure to LH’s income statement increases their exposure to currency exchange rates, which the company does not hedge. As the U.S. dollar strengthens, Covance’s top line growth is restricted. We expect the strong dollar environment to continue through 2017 as the Fed increases interest rates, China tries to right their ship, and Europe continues to struggle with Greece’s debt crisis. Our two-year forecast for the USD/EUR exchange rate is 1.13, just above the current 1.12.

CATALYSTS FOR GROWTH

Covance Synergies

We agree with LH’s management regarding the revenue synergies from their Covance acquisition. While many analysts were skeptical initially, the company has done a good job of convincing them that the deal will be a growth driver. DGX’s move to partner with Quintiles, adds credence to LH’s Diagnostic/CRO strategy. While Covance is a lower margin business, we believe LH will benefit from sales growth that was not possible as a standalone company. Additionally, Covance will likely see margin expansion as a result of the deal, because LH’s patient network becomes a significant selling point for their services. Finally, we believe that the diversification of LH’s revenues (in terms of payer and geography) significantly decreases their risk as a company.

Project LaunchPad and Testing Automation

LH’s leads the industry in their efforts to automate testing processes. We believe that continued investments will help them combat industry-wide margin declines. We also expect Project LaunchPad to drive margins in the future, because of its potential to eliminate redundancies. In an industry where margins are likely to decline, we believe LH has the best possible strategy to respond.

INVESTMENT POSITIVES

•LH’s management team has a history of making timely investment decisions that drive top line and operational synergies (Covance acquisition, investments in automation.) • They also return half of the company’s free cash flow to investors, a process that should resume after paying down debt. •Investing in LH provides exposure to biotech and pharma without the risks. Because the company works with both companies on drug development projects in multiple stages, they are diversified enough to avoid any firm specific risks.

INVESTMENT NEGATIVES

•After two quarters as a combined company, Covance is still not firing on all cylinders. We expect things to come

together in 2016, but there is still a risk that the two unique businesses are too different to synchronize. •It is a foregone conclusion that pricing pressure will occur among public payment systems. We like LH’s low exposure versus Quest, but pricing pressure is never a good thing. •As managed care organizations consolidate, their bargaining power increases. Winning contracts with MCOs is important because of the sheer volume of requisitions, but we would re-examine our investment if price competition becomes the new norm.

VALUATION

Sales Growth

We projected LH’s revenues using their pre-Covance segments and the addition of Covance as a unique business segment. The core testing and genomic and esoteric testing segments will be most impacted by public payer reimbursement cuts. These cuts, which are likely to occur each year beyond 2017, will slow revenue growth in LH’s core business units. The other segment, which serves the Ontario Ministry of Health is expected to grow at 1% each year throughout the forecast period because of the lack of growth drivers and LH’s low bargaining power in Canada. Finally, we expect Covance to decline 1.5% in 2015 due to currency exchange issues and the prevalence of longer-term projects. However, we expect Covance will recover in 2016 and 2017, driven by strong funding for early stage drug development.

Sales Growth Estimates

2015 2016 2017 2018 2029 Diagnostic testing

5.0% 5.0% 3.0% 2.0% 1.0%

Genomic and esoteric testing

4.0% 4.0% 2.0% 2.0% 2.0%

Other 1.0% 1.0% 1.0% 1.0% 1.0%

Covance -1.5% 4.0% 4.0% 2.0% 2.0%

Total sales 43.8% 4.3% 3.0% 2.0% 1.5%

Source: Henry Fund Estimates

Gross Margins and COGS

Gross margins declined from nearly 42% in 2010 to 37% in 2014 due to flattening revenues per requisition. We

expect that LH’s gross margins will stabilize between 35% and 34% throughout the forecast period. In 2017, we expect COGS to grow 1% to 65% of sales because of the operational synergies from the addition of Covance. As the two companies integrate, the drivers listed in our description of the acquisition will fuel market share gains and stronger broader relationships.

Sensitivity Analysis of Continuing Value Year’s Cost of Sales


Capital Expenditures

We projected LH’s capital expenditures based on the five-year historical average ratio of net plant, property, and equipment to sales. The chart below highlights the spike in 2015, which is due to the incorporation of Covance’s assets. We expect future annual expenditures to be nearly half of 2015.


WACC Calculation

We used a weighted average cost of capital of 6.12% in our models. We calculated this by making several assumptions. First, we used a risk-free rate of 2.87%. This was the 30-year Treasury bond yield at the time of our report. While this rate may increase in the future, we feel that it is the best long-term rate available. We also selected a market risk premium of 4.85%. This premium is the Henry Fund consensus estimate based on historical

and implied forward-looking data. Next, we used a cost of debt based an existing LH bond with a maturity of February 2045. The table above in our discussion of gross profits also displays the sensitivity of our discounted cash flow model to our WACC assumptions.

Beta Calculation

Sensitivity Analysis of Beta Calculation

Source: Henry Fund Estimates We calculated LH’s beta to be 0.86 by taking an average of their one and two-year weekly betas. We chose this time period because changes in the healthcare industry make any longer period less meaningful. While this beta is generally in line with betas of other diagnostic testing companies and CRO’s, we do not believe it is a perfect description of the company’s risk. This is because it does not include assumptions about the risk of integrating Covance. If the integration goes poorly, we believe LH could pay the consequences for years to come. However, we believe that artificially inflating our beta would not provide a more accurate estimate, and we feel that 0.86 is the best number available.

Valuation Model Results

Our DCF/EP model results in a target price of $137, which we feel is our most accurate projection. This is primarily because of the difficulties applying the other models described below. Our DCF price is below the current consensus price of $141 for a variety of reasons including differences in long-term growth rates, margin expectations, cost of debt, beta, and WACC. Our dividend discount model produces a target price of $128, which is below our DCF forecast but above the current stock price. We feel this is less reliable because LH does not currently pay a dividend, and we do not expect them to. The company primarily generates shareholder returns through stock repurchases Lastly, our relative valuation model generates a price of $127. We believe this number is more reliable than our

DDM target price, but it is flawed for several reasons. First, our peer group contains companies who operate in different industries. We included DGX, but we also included four CRO’s because they compare with the Covance segment. LH trades at a premium to DGX, and we believe this is justified based on our comparison of the two companies, which was discussed above. For the reasons listed above, we used our DCF model results to generate our target price range. Through our sensitivity analysis of key variables, we arrived at the target price range of $129 to $143.

KEYS TO MONITOR

Margins are the most important factor to watch for LH going forward. We anticipate revenues to stabilize over time, but we would grow concerned if operating margins fell below 10%. It is helpful to compare magins to DGX since the companies are so similar. Currently, they both have operating margins near 15%, and we expect DGX ‘s margins to approach 11% while LH’s stabilize near 13%.

It is also important to monitor LH’s debt levels going forward. Management promised to hold off on all share repurchases until they can achieve a leverage ratio of 2.5x. If the company makes any large acquisitions or fails to decrease their outstanding debt, we would begin to question management’s commitment to their goal.

Lastly, reimbursement news has the potential to negatively impact the company’s stock without much upside. In general, the market understands that cuts are coming, and we anticipate Medicare reimbursement cuts will be maxed out at 10% each year. If there are any updates that make this number more clear, we would include them in the model. We do not expect any further discussion of reimbursement rates until late 2016, when the final numbers will be released for 2017’s cuts.

REFERENCES

1. Company website: www.labcorp.com 2. LH 2014 10-K 3. Center for Medicare and Medicaid Services website:

https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2015-Fact-sheets-items/2015-09-25-2.html

4. Hooker, Donald. “LH: Initiating Coverage at Overweight” KeyBanc Capital Markets. 15 June 2015

5. 2015 UBS Global Healthcare Conference Presentation

6. Covance Q3 2014 10-Q 7. McGowan, Molly. “Test Site” Times News. 23

November 2013. 8. Lieberman, Gary. “LH: Lowered Covance Revenue

Guidance Overall Solid Quarter but Slower Growth in Clinical Business” Wells Fargo. 28 July 2015

9. Gill, Lisa. “PAMA Proposal Excludes Hosptial Rates but Could Still Remove Overhang; Introducing 2017 Estimates” J.P. Morgan. 28 September 2015

10. Windley, David. “R&D Higher, Biotechs Richer, CROs Happier; Upgrading Q to Buy” Jeffries. 254 April 2015.

11. Kreger, John. “Results from Fall 2015 Survey of Biopharmaceutical Sponsors” William Blair. 15 October 2015.

12. Murphy, Amanda. “CRO Survey Hilights Robust Trends for CRO Space and Positive Views of LabCorp/Covance’s Positioning” William Blair. 15 October 2015.

13. Meehan, Jack. “Prolonged Turnaround Showing Signs of Improvement: Initiate Equal Weight” Barclays. 2 March 2015.

14. Theranos company website: www.theranos.com 15. Theranos company press release:

https://www.theranos.com/news/posts/statement-from-theranos

16. Carreyrou, John. “Hot Startup Theranos Has Struggled With Its Blood-Test Technology” The Wall Street Journal. 16 October 2015.

17. IBISWorld: Total Health Expenditure

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

Laboratory Corporation of America HoldingsRevenue Decomposition

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Clinical diagnostics laboratoryCore testing 3,246,600 3,445,100 3,656,600 3,839,430 4,031,402 4,152,344 4,235,390 4,277,744 YoY Growth 3.27% 6.11% 6.14% 5.00% 5.00% 3.00% 2.00% 1.00%Genomic and esoteric testing 2,089,800 2,020,100 2,025,600 2,106,624 2,190,889 2,234,707 2,279,401 2,324,989 YoY Growth 0.04% -3.34% 0.27% 4.00% 4.00% 2.00% 2.00% 2.00%Other 335,000 343,100 329,400 332,694 336,021 339,381 342,775 346,203 YoY Growth 8.27% 2.42% -3.99% 1.00% 1.00% 1.00% 1.00% 1.00%

Covance 2,366,278 2,460,929 2,559,367 2,610,554 2,662,765 YoY Growth -1.50% 4.00% 4.00% 2.00% 2.00%

Total 5,671,400 5,808,300 6,011,600 8,645,026 9,019,241 9,285,798 9,468,120 9,611,701 YoY Growth 2.33% 2.41% 3.50% 43.81% 4.33% 2.96% 1.96% 1.52%

Covance 2,095,938 2,180,621 2,402,313 2,366,278 2,460,929 2,559,367 2,610,554 2,662,765 YoY Growth 8.84% 4.04% 10.17% -1.50% 4.00% 4.00% 2.00% 2.00%

Laboratory Corporation of America Holdings

Income Statement


Net sales 5,671,400 5,808,300 6,011,600 8,645,026 9,019,241 9,285,798 9,468,120 9,611,701

Cost of sales 3,421,700 3,585,100 3,808,500 5,532,817 5,772,314 6,035,769 6,154,278 6,247,606

Gross profit 2,249,700 2,223,200 2,203,100 3,112,209 3,246,927 3,250,029 3,313,842 3,364,095

Selling, general & administrative expenses 1,114,600 1,128,800 1,198,200 1,729,005 1,803,848 1,857,160 1,893,624 1,922,340

Amortization of intangibles & other assets 86,300 81,700 76,700 73,790 73,790 73,790 73,790 73,790

Restructuring & other special charges 25,300 21,800 17,800 48,706 50,815 52,316 53,344 54,153

Operating income (loss) 1,023,500 990,900 910,400 1,260,708 1,318,474 1,266,763 1,293,084 1,313,813

Other income (expenses)

Interest expense 94,500 96,500 109,500 216,126 202,933 185,716 189,362 192,234

Equity method income, net 21,400 16,900 14,300 22,294 23,259 23,946 24,417 24,787

Investment income (loss) 1,000 2,200 1,100 2,062 2,151 2,215 2,258 2,292

Other income (expenses), net (7,200) 2,100 10,400 (2,019) (2,106) (2,168) (2,211) (2,245)

Earnings before income taxes 944,200 915,600 826,700 1,066,919 1,138,845 1,105,040 1,128,186 1,146,413

Provision for income taxes 359,400 340,200 314,100 348,814 372,329 361,277 368,844 374,803

Net earnings (loss) 584,800 575,400 512,600 718,105 766,516 743,763 759,342 771,610

Less: Net income attributable to noncontrolling interest(1,700) (1,600) (1,400) (10,208) (10,650) (10,964) (11,180) (11,349) Net income attributable to Laboratory Corporation of America Holdings583,100 573,800 511,200 707,898 755,866 732,799 748,162 760,261

Shares outstanding-basic 95,700 90,200 84,800 100,351 100,351 100,274 100,202 100,135

Net earnings (loss) per common share-basic $6.09 $6.36 $6.03 $7.05 $7.53 $7.31 $7.47 $7.59

Laboratory Corporation of America HoldingsBalance Sheet


AssetsCurrent assets

Cash & cash equivalents 466,800 404,000 580,000 496,347 537,982 435,658 607,780 1,420,101 Accounts receivable, net 718,500 784,700 815,700 1,132,081 1,181,085 1,215,992 1,239,867 1,258,669

Supplies inventories 121,000 136,500 139,500 187,949 196,072 201,867 205,831 208,952

Prepaid expenses & other current assets 74,600 106,900 157,500 329,799 344,075 354,244 361,199 366,677

Deferred income taxes 10,900 - - 32,800 - - - -

Total current assets 1,391,800 1,432,100 1,692,700 2,178,976 2,259,215 2,207,760 2,414,677 3,254,399

Property, plant & equipment, gross 1,575,700 1,731,900 1,813,000 3,763,299 5,007,577 6,094,903 7,203,578 8,329,065

Less accumulated depreciation & amortization 944,900 1,024,500 1,026,500 1,931,499 3,951,464 5,007,577 6,094,903 7,203,578

Property, plant & equipment, net 630,800 707,400 786,500 901,498 1,056,113 1,087,326 1,108,675 1,125,488

Goodwill 2,901,700 3,022,800 3,099,400 6,136,600 6,136,600 6,136,600 6,136,600 6,136,600

Intangibles assets, net 1,667,700 1,572,000 1,475,800 3,644,800 3,571,010 3,497,220 3,423,430 3,349,640

Joint venture partnerships & equity method investments 78,100 88,500 92,600 68,600 69,286 69,979 70,679 71,385

Other assets, net 124,900 143,100 154,800 197,400 217,695 224,129 228,529 231,995

Total assets 6,795,000 6,965,900 7,301,800 13,127,874 13,309,919 13,223,013 13,382,589 14,169,507

Liabilities and shareholders' equity

Current liabilities

Accounts payable 236,900 304,500 282,300 438,800 431,462 444,214 452,936 459,805

Accrued expenses & other current liabilities 311,600 310,000 341,400 567,700 356,200 372,457 379,770 385,529

Deferred income taxes - 9,900 5,500 - - - - -

Unearned revenue - - - 142,500 - - - -

Total short-term borrowings & current portion of long-term debt 480,000 111,300 347,100 674,100 523,269 456,035 420,252 426,989

Total current liabilities 1,028,500 735,700 976,300 1,823,100 1,310,931 1,272,706 1,252,958 1,272,323

Long-term debt, less current portion 2,175,000 2,889,100 2,682,700 5,029,888 4,091,390 3,344,255 2,812,459 2,857,542

Deferred income taxes & other tax liabilities 546,000 563,900 530,400 1,372,600 1,336,276 1,300,913 1,266,486 1,232,970

Other liabilities 307,400 266,500 274,200 375,133 391,371 402,938 410,849 417,080

Total liabilities 4,056,900 4,455,200 4,463,600 8,600,721 7,129,967 6,320,811 5,742,752 5,779,914

Noncontrolling interest 20,700 19,400 17,700 17,058 16,439 15,843 15,268 14,714

Common stock 11,300 10,500 10,400 1,889,600 1,889,648 1,889,696 1,889,744 1,889,792

Retained earnings (accumulated deficit) 3,588,500 3,373,500 3,786,100 4,493,998 5,249,864 5,982,663 6,730,825 7,491,086

Treasury stock, at cost (951,800) (958,900) (965,500) (965,500) (965,500) (975,500) (985,500) (995,500)

Accumulated other comprehensive earnings (loss) 69,400 66,200 (10,500) (10,500) (99,800) (10,500) (99,800) (10,500)

Total shareholders' equity 2,738,100 2,510,700 2,838,200 5,424,656 6,090,651 6,902,202 7,550,538 8,389,593

Laboratory Corporation of America HoldingsCash Flow Statement

Fiscal Years Ending Dec. 31 2012 2013 2014

Cash flows from operating activitiesNet earnings (loss) 584,800 575,400 512,600

Adjustments to reconcile net earnings to net cash provided by operating activities

Depreciation & amortization 229,800 230,100 245,500

Stock compensation 40,700 37,300 45,700

Loss (gain) on sale of assets 5,500 (3,900) (12,500)

Accreted interest on zero coupon subordinated notes 2,700 2,300 2,000

Cumulative earnings less than (in excess of) distributions from equity method investments (400) (4,200) (5,800)

Deferred income taxes 53,300 56,200 27,700

Change in assets and liabilities

Accounts receivable, net 600 (67,500) (31,100)

Inventories (6,300) (15,300) (300)

Prepaid expenses & other assets 7,100 (32,300) (12,900)

Accounts payable (30,000) 60,800 (21,200)

Accrued expenses & other liabilities (46,400) (20,200) (10,700)

Net cash flows from operating activities 841,400 818,700 739,000

Cash flows from investing activities

Capital expenditures (173,800) (202,200) (203,500)

Proceeds from sale of assets 3,200 1,100 1,400

Proceeds from sale of investments - 7,500 31,600

Deferred payments on acquisitions (2,900) - -

Acquistion of licensing technology (2,500) - -

Investment in equity affiliates (26,000) (6,500) (20,200)

Acquisition of business, net of cash acquired (332,200) (159,500) (159,400)

Net cash flows from investing activities (534,200) (359,600) (350,100)

Cash flows from financing activities

Proceeds from senior notes offerings 1,000,000 700,000 -

Proceeds from credit facilities 305,000 412,000 -

Payments on credit facilities (865,000) (412,000) -

Payments on term loan - - -

Payments on zero-coupon subordinated notes (8,200) (21,500) (18,900)

Payments on vendor financed equipment - - -

Payments on long term debt - (350,000) -

Payment of debt issuance costs (8,900) (9,300) (24,100)

Payments on long term lease obligations - (400) (1,400)

Proceeds from sale of interest in a consolidated subsidiary - - -

Cash paid to acquire an interest in a consolidated subsidiary - - -

Minority interest distributions (1,200) (900) (1,200)

Deferred payments on acquisitions - (5,600) (6,700)

Excess tax benefits from stock based compensation 8,200 11,000 5,900

Net proceeds from issuance of stock to employees 85,800 174,000 114,800

Purchase of common stock (516,500) (1,015,600) (269,000)

Net cash flows from financing activities (800) (518,300) (200,600)

Effect of exchange rate changes on cash & cash equivalents 1,100 (3,600) (12,300)

Net increase (decrease) in cash & cash equivalents 307,500 (62,800) 176,000

Cash & cash equivalents at beginning of year 159,300 466,800 404,000

Cash & cash equivalents at end of year 466,800 404,000 580,000


Restated Cash Flow Statement

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

Operating activitiesNet income (loss) 707,898 755,866 732,799 748,162 760,261

Depreciation & amortization 904,999 2,019,965 1,056,113 1,087,326 1,108,675

Change in accounts receivable (316,381) (49,004) (34,906) (23,875) (18,802)

Change in inventories (48,449) (8,124) (5,795) (3,964) (3,121)

Change in prepaid expenses (172,299) (14,276) (10,169) (6,955) (5,477)

Change in deferred income taxes 836,700 (36,324) (35,363) (34,427) (33,516)

Change in accounts payable 156,500 (7,338) 12,752 8,722 6,869

Accrued expenses and other current liabilities 226,300 (211,500) 16,257 7,313 5,759

Change in unearned revenues 142,500 (142,500) - - -

Change in other assets (42,600) (20,295) (6,434) (4,401) (3,466)

Change in other liabilities 100,933 16,238 11,567 7,911 6,230

Net cash from operating activities 2,496,100 2,302,709 1,736,821 1,785,812 1,823,411

Investing activities

Capital expenditures (1,950,299) (1,244,278) (1,087,326) (1,108,675) (1,125,488)

Change in intangible assets (2,169,000) 73,790 73,790 73,790 73,790

Payment in excess of business acquisitions (3,037,200) - - - -

Joint venture partnerships & equity method investments 24,000 (686) (693) (700) (707)

Net cash from investing activities (7,132,499) (1,171,174) (1,014,229) (1,035,585) (1,052,404)

Financing activities

Proceeds from issuance of long term debt 2,347,188 (938,498) (747,135) (531,797) 45,084

Proceeds from issuance of short term debt 327,000 (150,831) (67,234) (35,782) 6,737

Proceeds from issuance of common stock 1,879,200 48 48 48 48

Repurchase of common stock - - (10,000) (10,000) (10,000)

Change in noncontrolling interests (642) (619) (596) (575) (554)

Net cash from financing activities 4,552,746 (1,089,900) (824,917) (578,105) 41,315

Change in cash (83,653) 41,635 (102,325) 172,122 812,322

Plus beginning cash 580,000 496,347 537,982 435,658 607,780

Cash at end of year 496,347 537,982 435,658 607,780 1,420,101


Common Size Income Statement


Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of sales 60.33% 61.72% 63.35% 64.00% 64.00% 65.00% 65.00% 65.00%

Gross profit 39.67% 38.28% 36.65% 36.00% 36.00% 35.00% 35.00% 35.00%

Selling, general & administrative expenses 19.65% 19.43% 19.93% 20.00% 20.00% 20.00% 20.00% 20.00%

Amortization of intangibles & other assets 1.52% 1.41% 1.28% 0.85% 0.82% 0.79% 0.78% 0.77%

Restructuring & other special charges 0.45% 0.38% 0.30% 0.56% 0.56% 0.56% 0.56% 0.56%Operating income (loss) 18.05% 17.06% 15.14% 14.58% 14.62% 13.64% 13.66% 13.67%Other income (expenses)

Interest expense 1.67% 1.66% 1.82% 2.50% 2.25% 2.00% 2.00% 2.00%Equity method income, net 0.38% 0.29% 0.24% 0.26% 0.26% 0.26% 0.26% 0.26%

Investment income (loss) 0.02% 0.04% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02%

Other income (expenses), net -0.13% 0.04% 0.17% -0.02% -0.02% -0.02% -0.02% -0.02%

Earnings before income taxes 16.65% 15.76% 13.75% 12.34% 12.63% 11.90% 11.92% 11.93%

Provision for income taxes 6.34% 5.86% 5.22% 4.03% 4.13% 3.89% 3.90% 3.90%Net earnings (loss) 10.31% 9.91% 8.53% 8.31% 8.50% 8.01% 8.02% 8.03%

Less: Net income attributable to noncontrolling interest-0.03% -0.03% -0.02% -0.12% -0.12% -0.12% -0.12% -0.12%

Net income attributable to Laboratory Corporation of America Holdings10.28% 9.88% 8.50% 8.19% 8.38% 7.89% 7.90% 7.91%

Laboratory Corporation of America HoldingsCommon Size Balance Sheet


Assets Current assets

Cash & cash equivalents 8.23% 6.96% 9.65% 5.74% 5.96% 4.69% 6.42% 14.77%

Accounts receivable, net 12.67% 13.51% 13.57% 13.10% 13.10% 13.10% 13.10% 13.10%

Supplies inventories 2.13% 2.35% 2.32% 2.17% 2.17% 2.17% 2.17% 2.17%

Prepaid expenses & other current assets 1.32% 1.84% 2.62% 3.81% 3.81% 3.81% 3.81% 3.81%

Deferred income taxes 0.19% 0.00% 0.00% 0.38% 0.00% 0.00% 0.00% 0.00%

Total current assets 24.54% 24.66% 28.16% 25.20% 25.05% 23.78% 25.50% 33.86%

Property, plant & equipment, gross 27.78% 29.82% 30.16% 43.53% 55.52% 65.64% 76.08% 86.66%

Less accumulated depreciation & amortization of capital lease assets16.66% 17.64% 17.08% 22.34% 43.81% 53.93% 64.37% 74.95%

Property, plant & equipment, net 11.12% 12.18% 13.08% 10.43% 11.71% 11.71% 11.71% 11.71%

Goodwill 51.16% 52.04% 51.56% 70.98% 68.04% 66.09% 64.81% 63.85%

Intangibles assets, net 29.41% 27.06% 24.55% 42.16% 39.59% 37.66% 36.16% 34.85%

Joint venture partnerships & equity method investments1.38% 1.52% 1.54% 0.79% 0.77% 0.75% 0.75% 0.74%

Other assets, net 2.20% 2.46% 2.58% 2.28% 2.41% 2.41% 2.41% 2.41%

Total assets 119.81% 119.93% 121.46% 151.85% 147.57% 142.40% 141.34% 147.42%

Liabilities and shareholders' equity

Current liabilities

Accounts payable 4.18% 5.24% 4.70% 5.08% 4.78% 4.78% 4.78% 4.78%

Accrued expenses & other current liabilities5.49% 5.34% 5.68% 6.57% 3.95% 4.01% 4.01% 4.01%

Deferred income taxes 0.00% 0.17% 0.09% 0.00% 0.00% 0.00% 0.00% 0.00%

Total short-term borrowings & current portion of long-term debt8.46% 1.92% 5.77% 7.80% 5.80% 4.91% 4.44% 4.44%

Total current liabilities 18.13% 12.67% 16.24% 21.09% 14.53% 13.71% 13.23% 13.24%

Long-term debt, less current portion 38.35% 49.74% 44.63% 58.18% 45.36% 36.01% 29.70% 29.73%

Deferred income taxes & other tax liabilities9.63% 9.71% 8.82% 15.88% 14.82% 14.01% 13.38% 12.83%

Other liabilities 5.42% 4.59% 4.56% 4.34% 4.34% 4.34% 4.34% 4.34%

Total liabilities 71.53% 76.70% 74.25% 99.49% 79.05% 68.07% 60.65% 60.13%

Noncontrolling interest 0.36% 0.33% 0.29% 0.20% 0.18% 0.17% 0.16% 0.15%

Common stock 0.20% 0.18% 0.17% 21.86% 20.95% 20.35% 19.96% 19.66%

Additional paid-in capital 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Retained earnings (accumulated deficit) 63.27% 58.08% 62.98% 51.98% 58.21% 64.43% 71.09% 77.94%

Treasury stock, at cost -16.78% -16.51% -16.06% -11.17% -10.70% -10.51% -10.41% -10.36%

Accumulated other comprehensive earnings (loss)1.22% 1.14% -0.17% -0.12% -1.11% -0.11% -1.05% -0.11%

Total shareholders' equity 48.28% 43.23% 47.21% 62.75% 67.53% 74.33% 79.75% 87.29%


Weighted Average Cost of Capital (WACC) Estimation

Tax rate 32.69%

Cost of equity 7.04%

Risk free rate 2.87% 30-Year Treasury Bond

+

Beta 0.86 Calculated based on data from Bloomberg (see inputs)

*Market risk premium 4.85% Henry Fund consensus estimate


WACC


*Equity/firm 74.18% Market value of equity: $9,548,480

+

Cost of debt 5.17% LH bond with maturity of 02/01/2045

*(1-tax rate) 67.31%

*Debt/firm 25.82% Book value of debt: $3,029,800 PV of Operating Leases: $294,117

WACC 6.12%

Laboratory Corporation of America HoldingsValue Driver Estimation


NOPLAT

EBITARevenue 5,671,400 5,808,300 6,011,600 8,645,026 9,019,241 9,285,798 9,468,120 9,611,701Cost of goods sold 3,421,700 3,585,100 3,808,500 5,532,817 5,772,314 6,035,769 6,154,278 6,247,606General and administrative expense 1,114,600 1,128,800 1,198,200 1,729,005 1,803,848 1,857,160 1,893,624 1,922,340

Amortization of non-goodwill intangibles 86,300 81,700 76,700 73,790 73,790 73,790 73,790 73,790Implied interest on operating leases 26,821 23,184 16,947 15,215 13,659 12,263 11,009 9,883EBITA 1,161,921 1,117,584 1,021,847 1,398,419 1,456,738 1,405,132 1,431,227 1,451,638

Adjusted taxesTaxes (federal, state, and foreign) 306,100 284,000 286,400Marginal tax rate 32.42% 31.02% 34.64% 32.69% 32.69% 32.69% 32.69% 32.69%Total income tax provision 359,400 340,200 314,100 348,814 372,329 361,277 368,844 374,803Tax shield on restructuring expense 8,202 6,762 6,167 15,924 16,613 17,104 17,440 17,704Tax shield on interest expense 30,636 29,932 37,935 70,659 66,346 60,717 61,909 62,848Tax on interest income (6,938) (5,242) (4,954) (7,289) (7,604) (7,829) (7,983) (8,104)Tax on non-operating income (324) (682) (381) (674) (703) (724) (738) (749)Tax shield on other non-operating income 2,334 (651) (3,603) 660 689 709 723 734

Tax shield on implied operating lease interest 8,695 7,191 5,871 4,974 4,466 4,009 3,599 3,231Total adjusted taxes 402,005 377,510 355,135 433,068 452,135 435,263 443,794 450,468

Change in deferred taxes 43,300 27,800 (37,900) 836,700 (36,324) (35,363) (34,427) (33,516)

EBITA 1,161,921 1,117,584 1,021,847 1,398,419 1,456,738 1,405,132 1,431,227 1,451,638Less adjusted taxes 402,005 377,510 355,135 433,068 452,135 435,263 443,794 450,468Plus change in deferred taxes 43,300 27,800 (37,900) 836,700 (36,324) (35,363) (34,427) (33,516)NOPLAT 803,215 767,874 628,813 1,802,051 968,279 934,506 953,006 967,655

Invested Capital

Net operating working capital

Operating current assetsNormal cash 366,588 375,437 388,578 496,347 537,982 435,658 607,780 621,281Receivables 718,500 784,700 815,700 1,132,081 1,181,085 1,215,992 1,239,867 1,258,669Inventory 121,000 136,500 139,500 187,949 196,072 201,867 205,831 208,952Pre-paid expenses and other current assets 74,600 106,900 157,500 329,799 344,075 354,244 361,199 366,677Operating current assets 1,280,688 1,403,537 1,501,278 2,146,176 2,259,215 2,207,760 2,414,677 2,455,579

Non interest-bearing current liabilitiesAccounts payable 236,900 304,500 282,300 438,800 431,462 444,214 452,936 459,805Accrued expenses & other current liabilities 311,600 310,000 341,400 567,700 356,200 372,457 379,770 385,529Non interest-bearing current liabilities 548,500 614,500 623,700 1,006,500 787,662 816,671 832,706 845,334

Net property, plant, and equipment 630,800 707,400 786,500 901,498 1,056,113 1,087,326 1,108,675 1,125,488

Net other operating assetsNet intangible assets 1,667,700 1,572,000 1,475,800 3,644,800 3,571,010 3,497,220 3,423,430 3,349,640Other assets 124,900 143,100 154,800 197,400 217,695 224,129 228,529 231,995PV of operating leases 518,474 448,175 327,612 294,117 264,047 237,051 212,814 191,056Net other operating assets 2,311,074 2,163,275 1,958,212 4,136,317 4,052,752 3,958,399 3,864,774 3,772,691

Net other operating liabilitiesOther liabilities 307,400 266,500 274,200 375,133 391,371 402,938 410,849 417,080 Net other operating liabilities 307,400 266,500 274,200 375,133 391,371 402,938 410,849 417,080

Invested capitalNet operating working capital 732,188 789,037 877,578 1,139,676 1,471,553 1,391,089 1,581,971 1,610,246

Plus net property, plant, and equipment 630,800 707,400 786,500 901,498 1,056,113 1,087,326 1,108,675 1,125,488Plus net other operating assets 2,311,074 2,163,275 1,958,212 4,136,317 4,052,752 3,958,399 3,864,774 3,772,691Less net other operating liabilities 307,400 266,500 274,200 375,133 391,371 402,938 410,849 417,080Invested capital 3,366,662 3,393,212 3,348,090 5,802,359 6,189,047 6,033,877 6,144,570 6,091,345

Return on invested capitalNOPLAT 803,215 767,874 628,813 1,802,051 968,279 934,506 953,006 967,655/Beginning invested capital 2,875,844 3,366,662 3,393,212 3,348,090 5,802,359 6,189,047 6,033,877 6,144,570Return on invested capital 27.93% 22.81% 18.53% 53.82% 16.69% 15.10% 15.79% 15.75%

Free cash flowsNOPLAT 803,215 767,874 628,813 1,802,051 968,279 934,506 953,006 967,655Less ending invested capital 3,366,662 3,393,212 3,348,090 5,802,359 6,189,047 6,033,877 6,144,570 6,091,345

Plus beginning invested capital 2,875,844 3,366,662 3,393,212 3,348,090 5,802,359 6,189,047 6,033,877 6,144,570Free cash flows 312,397 741,325 673,935 (652,218) 581,591 1,089,676 842,312 1,020,880

Economic profit

Beginning invested capital 2,875,844 3,366,662 3,393,212 3,348,090 5,802,359 6,189,047 6,033,877 6,144,570ROIC 27.93% 22.81% 18.53% 53.82% 16.69% 15.10% 15.79% 15.75%WACC 6.12% 6.12% 6.12% 6.12% 6.12% 6.12% 6.12% 6.12%Economic profit 627,158 561,770 421,083 1,597,083 613,062 555,617 583,616 591,488

Laboratory Corporation of America HoldingsDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 1.52% CV ROIC 15.75% WACC 6.12% Cost of Equity 7.04%


DCF ModelPeriod 1 2 3 4 4

Free cash flow (652,218) 581,591 1,089,676 842,312

CV 18,987,753

PV of free cash flows (614,593) 516,425 911,763 664,129

PV of CV 14,971,075

Operations value 16,448,799

Non-operating assets:Excess cash 0Joint venture partnerships & equity method investments 68,600Value of non-operating assets 68,600

Non-operating liabilities:PV of operating leases 294,117PV of employee stock options 153Short-term debt 674,100Long-term debt 5,029,888Value of non-operating liabilities 5,998,258

Equity value 10,519,141Shares outstanding 84,800 Price at YE FY2014 124.05$

Price today 131.03$

EP ModelPeriod 1 2 3 4 4Economic profit 1,597,083 613,062 555,617 583,616Continuing value 12,843,183PV of economic profit 1,504,951 544,370 464,901 460,157PV of continuing value 10,126,330Initial invested capital 3,348,090

Operations value 16,448,799

Non-operating assets:Excess cash 0Joint venture partnerships & equity method investments 68,600Value of non-operating assets 68,600

Non-operating liabilities:PV of operating leases 294,117PV of employee stock options 153Short-term debt 674,100Long-term debt 5,029,888Value of non-operating liabilities 5,998,258

Equity value 10,519,141Shares outstanding 84,800 Price at YE FY2014 124.05$

Price today $ 131.03


Dividend Discount Model (DDM) or Fundamental P/E Valuation Model


Period 1 2 3 4 4

EPS $7.05 $7.53 $7.31 $7.47 $7.59

Key Assumptions

CV growth 1.52%

CV ROE 9.06%

Cost of Equity 7.04%

Payout ratio 0.00%

Future Cash Flows

Growth 43.81% 4.33% 2.96% 1.96% 1.52%

ROE 13.05% 12.41% 10.62% 9.91% 9.06%

Dividends Per Share -$16.63 $4.90 $5.27 $5.99 $9.12

Discounted Cash Flows -$15.53 $4.28 $4.30 $4.56 $125.72

Intrinsic Value $123.33

Price today $130.28

Laboratory Corporation of America HoldingsRelative Valuation Models

EPS EPSTicker Company Price 2015E 2016E P/E 15 P/E 16

PRXL PAREXEL International Corporation $61.39 $2.97 $3.85 20.7 15.9

Q Quintiles Transnational Holdings, Inc. $70.03 $2.96 $3.65 23.7 19.2

ICLR ICON Plc $70.80 $3.94 $4.68 18.0 15.1

CRL Charles River Laboratories International, Inc. $65.82 $3.34 $3.68 19.7 17.9 DGX Quest Diagnostics Incorporated $63.25 $3.89 $4.84 16.3 13.1

Average 19.7 16.2

LH Laboratory Corporation of America Holdings $112.60 $7.05 $7.53 16.0 14.9

Implied Value:

Relative P/E (EPS15) $ 138.64

Relative P/E (EPS16) 122.34$

Laboratory Corporation of America HoldingsKey Management Ratios

Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Liquidity RatiosCurrent (Current Assets/Current Liabilities) 1.18 1.36 1.35 1.95 1.73 1.20 1.72 1.73 1.93 2.56

Quick (Current Assets-Inv)/Current Liabilities 1.07 1.22 1.24 1.76 1.59 1.09 1.57 1.58 1.76 2.39Operating Cash Flow (Operating Cash Flow/Current Liabilities) 0.91 1.07 0.82 1.11 0.76 1.37 1.76 1.36 1.43 1.43

Activity or Asset-Management RatiosReceivables turnover (sales/average receivables) 7.63 8.18 8.00 7.73 7.51 8.24 7.80 7.75 7.71 7.69Inventory turnover ratio (COGS/average inventory) 28.11 30.51 29.52 27.85 27.60 32.58 30.06 30.34 30.19 30.12Asset turnover ratio (sales/total assets) 0.81 0.90 0.83 0.83 0.82 0.66 0.68 0.70 0.71 0.68

Financial Leverage RatiosDebt to equity ratio (total liabilities/shareholder equity) 1.43 1.43 1.48 1.77 1.57 1.59 1.17 0.92 0.76 0.69Equity ratio (shareholder equity/total assets) 0.40 0.41 0.40 0.36 0.39 0.41 0.46 0.52 0.56 0.59Leverage (assets/equity) 2.49 2.43 2.48 2.77 2.57 2.42 2.19 1.92 1.77 1.69

Profitability RatiosReturn on assets (net income/total assets) 9.02% 8.47% 8.58% 8.24% 7.00% 5.39% 5.68% 5.54% 5.59% 5.37%Return on equity (net income/shareholders equity) 22.45% 20.59% 21.30% 22.85% 18.01% 13.05% 12.41% 10.62% 9.91% 9.06%Operating margin (operating income/sales) 19.56% 17.11% 18.05% 17.06% 15.14% 14.58% 14.62% 13.64% 13.66% 13.67%

Gross profit margin (gross profit/revenue) 41.92% 41.04% 39.67% 38.28% 36.65% 36.00% 36.00% 35.00% 35.00% 35.00%


Current price: $112.60

WACC

$131.03 5.72% 5.92% 6.12% 6.32% 6.52%

63.00% 182.96 170.30 158.63 148.14 138.40

64.00% 167.61 155.76 144.83 135.01 125.89

65.00% 152.27 141.22 131.03 121.88 113.38

66.00% 136.92 126.68 117.24 108.75 100.87

67.00% 121.57 112.14 103.44 95.62 88.36

Beta

$131.03 0.46 0.66 0.86 1.06 1.26

18.00% 270.40 204.26 158.63 125.19 99.58

19.00% 249.52 187.58 144.83 113.49 89.48

20.00% 228.63 170.90 131.03 101.79 79.37

21.00% 207.75 154.22 117.24 90.09 69.26

22.00% 186.87 137.54 103.44 78.39 59.16

CV ROIC

$131.03 11.75% 13.75% 15.75% 17.75% 19.75%

1.17% 161.43 166.10 169.59 172.29 174.45

3.17% 141.26 145.51 148.67 151.12 153.07

5.17% 124.27 128.15 131.03 133.28 135.06

6.17% 116.78 120.49 123.26 125.40 127.12

7.17% 109.80 113.37 116.02 118.08 119.72

CV Growth

$131.03 -0.52% 0.52% 1.52% 2.52% 3.52%

-3.50% 92.09 108.24 130.56 165.51 227.16

-2.50% 92.23 108.42 130.80 165.84 227.66

-1.50% 92.36 108.60 131.03 166.18 228.17

-0.50% 92.57 108.86 131.38 166.65 228.86

0.50% 92.81 109.17 131.78 167.19 229.64

Cost of debt

$131.03 4.17% 4.67% 5.17% 5.67% 6.17%

1.00% 138.16 133.94 129.86 125.98 122.23

3.00% 138.81 134.56 130.45 126.54 122.76

5.00% 139.46 135.17 131.03 127.10 123.29

7.00% 140.53 136.21 132.04 128.07 124.23

9.00% 141.83 137.48 133.28 129.28 125.41

Cost of sales % of

sales (2019)

SG&A % of sales

(2019)

Cost of Debt

Covance sales

growth (2015)

Core testing sales

growth (2015)

[email protected]] (lh) october 21, 2015tippie.biz.uiowa.edu/henry/reports15/lh_fa15.pdf ·...

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