LabCorp/Covance: clinical trial by fire Healthcare is supposed to become more intelligent. What is unclear is whether healthcare companies are up to the task. On Monday, The Laboratory Corporation of America (LabCorp), best known as a provider of blood and other medical testing, announced plans to buy Covance for $6bn, mostly in cash and the rest in shares. Covance works in another part of the lab - it is a so-called contract research organisation. A CRO provides outsourced clinical trials to drug developers. A month of market instability was not enough to put LabCorp off the deal - the company is confident enough to borrow $4bn and pay a 30 per cent premium for Covance. Some of its investors appear less sanguine however - its shares dropped 7 per cent on Monday. Every company in the sector has to respond to more restrained healthcare spending. Private insurers and government programmes such as Medicare are demanding better results for less money. LabCorp and Covance are in different businesses but the combination is supposed to create an end-to-end lab that can share and use the huge amount of data it has to improve results for patients and offer better value to those who pay the bills. That claim may be dreamy but it cannot be properly evaluated for years. In 2007, drug chain CVS bought drug benefit manager Caremark in an unorthodox deal that was judged disastrous. Today, it is widely admired. What we do know about LabCorp/Covance is that for a pricey deal there will be little in the way of immediate cost savings. The enlarged company will start with a debt-to-cash-flow ratio of more than 4 times. Only $100m of synergies are expected (Covance has annual revenue of $2.5bn). But with banks still eager to lend, some minimal cost savings and Covance's growth expected to exceed LabCorp's measly low single-digit pace, the financial engineering may be as compelling as waiting around for what materialises in the test tube.