Labcorp Cuts Contract Research Growth Outlook as Biotech Funding Crunch Persists
Key Insights
Labcorp reduced its contract research unit growth forecast to 5.7%-7.1% for 2024, down from the previous 6.1%-7.5% range, citing prolonged biotech funding challenges.
The company expects early-stage drug development revenue to grow only in low-single digits for 2025, compared to previously estimated mid-single digit growth.
Despite beating Q3 earnings expectations with $4.18 per share, Labcorp shares fell 5.8% as investors reacted to the continued pressure on biotech client spending.
Laboratory services provider Labcorp has lowered its annual revenue growth forecast for its contract research unit, signaling that the biotech funding crunch affecting early-stage drug development continues to impact the pharmaceutical services sector. The company now expects its contract research division to grow by 5.7% to 7.1% this year, down from its previous projection of 6.1% to 7.5%.
Prolonged Funding Challenges Impact Study Timelines
The revision reflects ongoing difficulties in the biotech sector, where reduced funding has led to delayed study starts and decreased spending on early-stage drug development. CEO Adam Schechter explained during an analyst call that "the issue that we're seeing is with timing of study starts ... We expected that to start to come back to more normalcy."
Contract research organizations have experienced reduced spending from biotech clients over the past two years. The funding crunch, which industry observers had anticipated would improve in 2024, may be further prolonged due to policy uncertainty from the incoming Trump administration.
Financial Performance and Market Response
Despite the lowered growth outlook, Labcorp reported better-than-expected third-quarter results, with adjusted earnings of $4.18 per share beating the analyst consensus estimate of $4.13. However, investor concerns about the contract research unit's performance overshadowed the positive earnings, leading to a 5.8% decline in share price on Tuesday.
Leerink Partners (search) analyst Michael Cherny noted that while the weakness in early-stage development is concerning, the market reaction may be disproportionate given that the segment contributes less than 6% of the company's total revenue, as stated by CEO Schechter last month.
Strategic Response and Future Outlook
To address the challenging market conditions, Labcorp is implementing restructuring measures including divesting or consolidating approximately $50 million in annual revenue through site consolidation. Finance Chief Julia Wang indicated that early-stage revenue for 2025 is expected to grow in the low-single digits, a reduction from the previously estimated mid-single digit growth.
The company has also adjusted its overall revenue growth forecast for the full year to 7.4% to 8%, down from the prior estimate of 7.5% to 8.6%. This revision accounts for the impact of a stronger dollar and the timing of certain acquisitions.
Despite the revenue challenges, Labcorp raised its 2025 adjusted profit forecast to $16.15 to $16.50 per share, up from the previous range of $16.05 to $16.50 per share, suggesting the company's cost management and operational efficiency initiatives are helping maintain profitability amid market headwinds.