Labcorp Holdings Inc. (LH) Earnings Call Transcript & Summary

Good afternoon, thank you for joining us. My name is Lisa Gill, and I am the health care technology and distribution analyst with JPMorgan. It is with great pleasure this afternoon that we have a fireside chat with LabCorp. To my left is incoming CEO Adam Schechter who became CEO November 1. Welcome to your very first JPMorgan Healthcare Conference as CEO.

Thank you. Glad to be here.

And to his left is Glenn Eisenberg, CFO. So with that, let's kind of kick this off from the perspective of your new role.

What are the things that you're most excited about coming into this role at LabCorp?

Sure. So there's a lot to talk about there. Before I start, and I promise I'll get back to the question, I just have to remind people that we'll be making forward-looking statements, and they're based upon the current conditions as we see them. You can refer to our website or the press release regarding this presentation, if you'd like more information. So what am I most excited about? It's only 2 weeks into the new year, and over the holidays is always a good time to reflect and to think about things. As I was reflecting over the holidays, it was really apparent to me the importance of the work that LabCorp does. I mean to think about 500 million tests per year, the amount of data and information that we have is just remarkable. The question is how do we use that data and information to stratify patients to learn about the disease, to develop companion diagnostics, assays so that we can help our clients in pharma and also in biotech find patients faster, do studies quicker, get to market faster than ever before. And as I look at that, we have a unique set of capabilities and skills to do that. So to me, that's exciting, and it really came back energized as we start this year. So as we start this year, there's been 5 priorities that we've set forth for the organization. The first one is to win in oncology. Oncology is where we'll be able to show the full continuum of the work that we can do from assay development, to biomarkers and to companion diagnostics straight through to clinical development into the marketplace where we can monitor who is being treated. Is it working? Are they having unintended side effects? And we're going to really have a significant focus in that area. The second area we're going to focus on are data analytics, artificial intelligence and ensuring that we digitalize everything that we can possibly digitalize. That will enable us to have better data, better information, make better decisions, help our customers enroll trials faster, but it's also going to improve the customer experience if we can digitalize everything. The third thing is to ensure that we get all the synergies out of the combined organization. I think that the team has done a nice job getting synergies across the drug development and diagnostic area, but there's still more we can do, and I'm very excited about the types of things. I think we'll be able to show that in oncology first. And once you see it there, we'll be able to move to specialty areas and move into other areas like gene therapies and cell therapies. The next one is to ensure that we are focused on our customers. I want our customers to have great experience, no matter if they are customers going into our PSCs or they're customers in pharma, in biotech or if they are payers. I want them to know we are high quality. We are low cost, but we really are there to meet the needs for our customers. And the last one is to ensure that we put our capital behind the fastest-growing opportunities that we have, and I believe there are multiple opportunities that we have for continued growth. So I hope you can tell I'm energized. I'm excited, and we're ready to kick off this year.

Yes. And I think it's exciting, just given your background coming from Merck, the first thing you highlighted is oncology. And I think so many people here at the conference have talked about new product development, talking about specialty drugs and other things, so I think it's a very interesting perspective. The market seems to finally be appreciating the strategic value of putting together LabCorp and Covance, which is now 5 years, right? It's been 5 years since that deal came together. And you talked about the synergies and continuing to drive the synergies there. Where do you see some of the enhanced opportunities in these combined assets?

Yes, absolutely. And one of the things that you'll probably notice is I don't refer to LabCorp and to Covance. I refer to it as diagnostic and drug development. Now externally, our customers like the name Covance. We'll still use it. Also, when we report our earnings, we'll still use the segments. But internally, it's an important thing that people know we are one organization with a set of capabilities that starts with a large database of what we get from our diagnostics, and it ends with our diagnostic capabilities in the marketplace. And we do everything in between in terms of drug development and clinical trials. What we've seen is some of our customers are really interested. So some of the hospital health care systems, they talk to us about diagnostics and labs. But then when they find out that we can also help them with their thoughts on clinical trials, I mean, if there's additional studies they can do, they become even more excited. So I think having both parts of the organization go across certain areas. Like I've mentioned in oncology, it's going to enable our customers to be able to see from the beginning all the way through into the marketplace, how we can work with them and actually give them a better experience.

And how do you think about your management team? I mean there was a recent announcement around a change. John Ratliff had decided to leave the company. So how are you thinking about your management team today?

Yes. So I feel great about the management team, and the good news is I was on the Board for 6 years before I joined LabCorp as the CEO. And I know the strategy. I know the company. I know the management team. I was a known entity to most people in the company. When I moved John over to Diagnostics, the reason why was what a better way to get the synergies I talked about than taking a person leading one part of the organization and putting them in charge of the other part. Now at the same time, I promoted Paul Kirchgraber, which -- who was the obvious choice to run our clinical business, well-known to organization. I did not expect John to leave exactly when he left. It was on my first full day in the role. That was a surprise. But I was smart enough to realize that there was a potential he would leave in a relatively short period of time. He's a talented individual. He wanted to be a CEO, and there are other people, I thought, would be recruiting him. So I'd already discussed with the Board what other options I had if he had left. That's why I was able to make the announcement on the other leadership so quickly. When you think about the new leadership in the diagnostic area, I took the person that knows our customers better than anybody. In fact, he was a customer. Brian Caveney, and he was responsible for our medical area. So he knows the science really well. And I put him in charge of all customer-facing and medical issues for the diagnostics area. Known entity, he's been with the company for a while, and he knows our customers as well, if not better, than anybody. Then I took Mark Schroeder who is extraordinary at understanding how to run laboratories. He was a head of our supply chain for a long time. He's done the LaunchPad initiatives where he knows how to get out cost, and he will focus on quality of our laboratory as well as ensuring that we have the efficiencies in place that we need to actually continue to take cost out while at the same time being as effective with highest quality, lowest cost. So all of the players are known to the organization. I didn't go outside and bring a bunch of people that aren't known. But it's given a level of energy, a level of enthusiasm, and people are looking to try new things and have new ideas. It's not we've tried that already, that doesn't work or -- it's really what can we do together as a management team to really enhance what we bring to our shareholders and to our customers. So I'm thrilled with the team that we put in place.

When we think about...

And Glenn might have a perspective on that as well because Glenn has been on the team for a while. So if you want to say anything there, you can, Glenn.

I think the only thing I'd add, Adam, is that when you go through a CEO succession change and you bring somebody that's not internal, the initial issue from a management team is what's the strategy, how is it going to change. With Adam being on the Board for 6 years and being an integral part of the strategy of the company, who is really, from a management standpoint, someone that were going to achieve what we had set out to do but now somebody that also has unique perspectives and really has instilled kind of his 5 key areas of focus that's going to help execute the strategy. So from a transition standpoint, it makes the transition very well. And with the changes down at the segment levels, you really have as well that fresh perspective, even though the strategies are there about executing and delivering on the performance. So we're very excited about the team and the year ahead of us.

As we think about the future of health care and we think about the role that Lab plays, and you talked a little bit about this in your earlier comments, but how do you think about value-based contracting? And as you think about value-based contracting, taking more risks, what do we see ultimately from a Lab perspective as we think about value?

Yes. So I'll start a little bit higher level, and then I'll come down directly to the question. I mean every country in the world is struggling with health care costs as a percent of the GDP. It's either too high or it's growing too fast. They have to move to more value-based systems. It's the best way to reduce cost. I think we are uniquely qualified to help with that, particularly in the United States. We have high quality. We're a low-cost diagnostic capabilities. We can help with prevention because by doing diagnostic tests, you can tell who's most apt to develop disease, who's got pre diabetes, pre cholesterol. And we can actually help identify that through prevention, which is the most cost-effective way to actually reduce cost. We can also help figure out who's most likely to respond to which medicines when. And then once people are on medicines in the marketplace, we can help understand are they working and are there unintended consequences or side effects, for example, LFTs or ALT elevations. So I think that we can be part of a value-based system. And with the quality that we bring with the low-cost that we have, I think that we are welcoming anything that would be new and innovative for value-based care. But I think it's a larger health care issue, and I think everybody in health care should be thinking about how do we bring more value-based care to the markets around the world.

I think that it's tough when you come from a fee-for-service environment, and that's what you're used to, is to make these changes moving towards value based. I think that your earlier comment around having data and analytics and having that information to make decisions around value-based type of care arrangements I think will be some of the key drivers. Are you starting to see this, though, with health plans? And maybe you can talk what -- this maybe dovetails a little bit into your relationship with UnitedHealthcare as we think about the preferred Lab relationships and as we think about other big health plans and providers in the marketplace.

Yes. So as I look at the diagnostic business, I think there's significant opportunities. I think if you put aside PAMA, the underlying growth has been pretty strong, a couple of percent every single year consistently over time. But there are additional opportunities. The first opportunity are as PAMA has impacted hospital labs and also local labs, I think they're more apt to consider joining or having LabCorp acquire them. I think that's another way that we can have significant growth. We also see that a plan like United is really focused on how can they impact their lab costs. We can give high quality, low cost. We're a great partner to be on the PLN. Now they're launching that PLN to their customers, and we'll see who signs up for it and exactly which plans are signing up for 0 copays and so forth. But I'm optimistic that over time, as consumers play a larger role in their own health care, they will care about how much money they're spending. And if they understand that they can have 0 copays or if they use -- prefer labs that they could actually reduce their costs, I think it could really work. So stay tuned. We have to see how it rolls out. If it works here, I imagine other payers will also adapt similar types of programs. I'm not building any upside into the plan for this year because I want to see how it rolls out, but I'm optimistic that, over time, it could be meaningful.

Last year, sitting here in 2019, the opening of the networks for United, Horizon, Aetna were a big topic. As we sit here today and we look at 2020, is that fully anniversaried? Do you think that there are still some movement that we'll see in 2020?

So the vast majority of the change that we saw from the opening of those contracts was last year. There may be a very small impact in the first quarter of this year but nothing that I would consider meaningful. I think there's only one additional plan that is still not fully open, and that's a plan in Florida. Other than that, I don't see anything that would cause noncontinuous growth or noncontinuous performance. And I think we've overlapped the vast majority of any impact that we've seen.

Beyond this discussion around contracts and whatnot, how would you characterize the overall competitive environment today? And I think you touched on this a little bit, saying, "Hey, look, the hospitals are struggling. These smaller labs are struggling under PAMA." You've got one other large national competitor. But as you think about the total landscape, how are you viewing it today?

So the first thing I would say is I think we're uniquely positioned across the full spectrum of not just diagnostic and drug development. So I look at us as uniquely positioned in the marketplace versus looking at any one competitor. I don't think any competitor has what we have from the beginning all the way through to the end. If you try to look at the individual components, I think there's opportunities in both areas, both in the drug development area and also in the diagnostic area. In Diagnostics, I think it will come mostly from market share and from the acquisitions of labs, as well local and hospital labs that you mentioned. But if you look at the drug development area, I think when we show the value of having a diagnostic database and understanding companion diagnostics all the way through drug development, my plan would be that we start to see -- we win more registration trials, more Phase III trials. We have done really well in early-stage trials, but we haven't seen those early-stage trials turn into registration trials often enough. I think we are at a unique period in time. I think with oncology and gene and cell therapy, customers want to know who's going to respond to which medicines. Customers are saying, "I want to make sure that I'm using these medicines and people that I know are going to get benefit." So you now have people looking across the pharma organizations and biotech, saying, "When I launch, I want to launch with some type of biomarker or some type of companion diagnostic." Those people are now talking to the early-stage development people because they realize that has to start early on in development. So I think, because you're seeing much more interaction across the various areas within pharma and biotech, you're going to see our unique capabilities start to land us, not just the early stage in the companion diagnostic work, but all the way through the late-stage development.

You've commented a couple of times that you continue to see acquisition opportunity just because of the PAMA impact on many other labs outside of yourself, but we haven't seen the pull-through that we would have anticipated in 2019. And I don't know if this is a question for you or for Glenn. But is it that the price isn't quite right that these hospitals haven't felt the pain yet? Maybe it's so far down on their income statement that they're just finally noticing that their rates are substantially less than they used to be?

Yes. So I'll answer, and then Glenn can feel free to jump in. I'd say that we have a long list of potential opportunities for these type of acquisitions. It's surprising to me on how long it takes. There's a lot of discussions, hospital by hospital, with department by department, and trying to get people to move fast has been harder than I would have anticipated. I do believe we're starting to see people consider it. And I also believe that as hospitals consider -- continue to consolidate, the CFOs will play a much more important role in the decision-making. And when they see the numbers, they might move faster. But I don't know, Glenn, if you had any additional context.

No. I agree. 2019 was actually a good year from an acquisitive standpoint but spending around $900 million of our capital but weighted towards the drug development side. We still did do some tuck-in acquisitions within Diagnostics. But as Adam said, the pipeline for the Diagnostics side is good, and those tend to be very high return on invested capital because we're basically integrating them into our systems, if you will. The hospital systems, as Adam says, do take time. But we also knew that there would probably be a slowing down within the Diagnostics side initially when PAMA came out because of the uncertainty. We thought maybe that would go away within a year. There were still the second wave of uncertainty as the litigation is continuing. I think the sense is that we have another year of PAMA clearly ahead of us. That's probably more certainty to it. And as a result, it's kind of known valuation. So people that are affected, and like you said, it's not being affected by 1 year, it's now multiple years of being affected, that now those that feel that it's the right opportunity for them to transact are doing it. And we're pretty encouraged that next year, we'll see a good pipeline of deals coming through.

Yes. Outside of the PAMA cuts, are there other things that you're focused on from a D.C. perspective?

Yes. So I'm always watching what's happening. Particularly in an election year, you never know exactly what is going to happen, what you hear. In general, PAMA is the main thing that we're watching this year. We've built in a downside for our plan this year similar to last year. We're assuming next year is the same. But if you look recently, there was a court case that was one where at least it delays the data that we have to submit, and there's a request that they have to go back and look at the way in which we get the data. There's another court case where we learn more in the next couple of weeks to months, and that's challenging whether or not the methodology for how the data are calculated is correct. I think if that turns out in favor of ACLA, then I think there might be some significant change to the positive. But it's too early to know the results of those things, and even if we win, where it may end up.

And that would be around -- just so everybody understands. That's around the actual collection of the data, right, where the data collection is coming from?

The first one was data collection. The second one is the methodology in which they calculate it.

In which they calculate it. Right. So we're not talking about PAMA going away. We're just talking about a potentially better outcome versus where we are today.

We'll see.

Okay. Kind of shifting gears a little bit as we think about the consumer as being part of health care. I look to your relationship with Walgreens. Can you update us as to how many locations you are today. I believe that the goal is to get to 600. And any other kind of metrics you can share with us as far as the Walgreens relationship?

Yes. So the relationship is going very well. We currently have 125 stores that are either up and running or are in the process of up and running. We're monitoring certain things. We're looking at how many people are going into the store, so we're measuring the volume of the sessions and the number of tests per session. We're also looking at NPS scores to see if the customer satisfaction, when they go into the Walgreens site, is better than if it's a typical PSC. We're seeing positive momentum in both of those areas. Getting to 600, whether it will be a little bit more, a little less, what we're doing is we're trying to find out where is the best overlap where we have a large number of people that would go into a standalone PSC versus where Walgreens are. And that's how we come up with that number. I think the key is, if we're already in a physician's office or if we're in a group practice office, we're going to stay there. It's not like we can tell physicians and group practices, "You don't take [ both of ] your patients in your office. You go to Walgreens." But we have standalone PSCs that are close to the Walgreens. Those are the ones, over time, we're going to monitor and see if it makes sense to do some consolidation and so forth.

Going back again to your earlier comment around data analytics, really monitoring that patient and looking at longitudinally the patient journey, it seems to me like there's probably a number of opportunities to work more closely with Walgreens. So you talk about whether it's a diabetic or a person with a high cholesterol, and you're testing for that, did they pick up the prescription. Do you see that opportunity to share data to be able to share in -- when I think about value based, these are other value-based ways, right, to really manage that patient.

Yes. So we're having multiple conversations with Walgreens on areas such as data and data sharing. Of course, there's all kinds of issues that you have to deal with when you're talking about data and privacy and so forth, but I do think there are possibilities where we could potentially work together in the future. But I just believe in the health care system, nobody owns enough data to have everything that you need. So there's going to have to be multiple partnerships. We're going to have to work together across various industries and various ways in order for us to have the data that we need to make the best health care decisions.

So as we think about both sides of your business, and we think about the growth algorithm on each side. You've had LaunchPad for each of the businesses and taking out costs. There has been talk about improving the margins on the drug development side of the business. And talk about continued margin pressure to somewhat on the diagnostics side of the business. That's kind of the view that was most recently given. But if we think about this business longer term -- so again, not looking for 2020 guidance, but thinking about this on a longer-term basis, where do you think some of the bigger opportunities are for margin improvement? You talked about the fact that you still see synergy opportunities, et cetera. But when we think about this business in totality, and I like the fact that you're looking at it from that perspective, how can we think about where you can really drive the margins of the overall company?

Yes. I'll give some high-level comments, and I think Glenn can give some additional context. But overall, LaunchPad has been successful. We continue to look -- to take cost out. I don't believe that that's something that ends once LaunchPad ends. I mean continuous productivity has to occur in every organization to believe that health care costs in every aspect of health care are not going to be under pressure I think would be a mistake. So we're going to continue to find ways to reduce cost. We'll invest in high-growth opportunities. But overall, costs have to come down. I believe that through the digitalization, data analytics and increasingly using AI over time, we'll find ways to bring the cost down even further. And if you look, it's a tale of 2 different types of margins in the diagnostic area versus in the drug development area. We do well in certain parts like early development, not as well on our margins in later development. So I think we still have opportunities to do better with the margins, and we're just going to keep having a relentless focus on finding every opportunity that there is.

Yes. The only thing I'd add is when you look at the businesses so on the Diagnostics side, historically, we have seen good margin appreciation in the business up until the time where PAMA comes in, which was a pretty meaningful headwind for us given it was all price. And even with the opening up of the managed care contracts, which is more volume related, still obviously having an impact. And so as the managed care now levels off, annualizes, we still have another headwind, which is why we talked about flat to slightly down kind of margins in Diagnostics. As you think longer term, with that headwind ultimately going away or mitigating, we would expect to see our margins start to improve again on Diagnostics because, as Adam said, the LaunchPad initiative really is just another way of saying continuous business process improvements. And on the Drug Development side, we've really felt that there were some good opportunities as we benchmark the peers. We've seen good margin appreciation, really across all 3 parts of our business. Especially on the early development, we've seen good demand, good pricing, capacity utilization. We have a very outstanding central labs business that's always performed well, and we're seeing through LaunchPad, especially in looking at our cost structure improvement as well on the late-stage side. So we're pretty bullish, still have a headwind. But the margins for the company over time, we would expect to continue to grow.

We have a little less than a minute left. Capital priorities. So as we think about -- anything changed under your leadership as CEO? And then secondly, I think a lot of people have always asked about a dividend, right? Dave has been pretty adamant about not paying a dividend. What's your thoughts around paying a dividend?

Yes. So first with regard to capital allocation, the first thing I would say is we have a high bar. And when I think about the things that are like things that we like to do, first of all, looking for these small hospital laboratories, there's local. Hospital acquisitions make a lot of sense. I would do as many of those as I could where we can be accretive in the first year. We can return our cost of capital within 2 years typically. We can synergize them, bring them in and put it in our big machine. I think those all make sense, and we want to continue to do those. But that's a financial bar. We also have a strategic bar. And when you look at some of the strategic pillars that I said, we will continue to evaluate the different things and options that are available to us. But as I sit here today, I don't see any huge significant need that we have in the marketplace to be successful. Doesn't mean that we won't look at potential larger acquisitions, but I think that the bar is going to be extraordinarily high. We've done a nice job with share buybacks, and we continue -- and we'll continue to look at share buybacks. We have discussions with the Board of Directors every year regarding a dividend. At this time, we don't think it's the right place, but we will continue to look because, as our cash builds over time, it may make more sense in the future. But as I sit here today, I don't think it's the best place to put capital. So thank you.

Thank you very much. We're going to just continue the discussion across the hall in the Georgian Room. Thank you.

Thanks for being here. Thanks for having us.

Absolutely. Good afternoon, everyone. My name is Lisa Gill, and I'm the health care technology and distribution analyst with JPMorgan. With us this afternoon, we have LabCorp's breakout session. To my right is Adam Schechter, the new CEO; and to his right is Glenn Eisenberg, the CFO of LabCorp. So thanks so much for joining me. For those of you that were in the other room, we just did a really great fireside chat. We've covered tons of information. So if anybody would like to ask a question, by all means, just raise your hand. We just ask that since it's webcast to just come up to the microphone. One of the things that we didn't really talk about in the last session were lab-developed tests, right, and where we are on lab-developed tests? And how you're thinking about that, where you see opportunities and where you see it from a regulatory perspective?

Yes. So I'm going to start off a little bit different, but I'll get to the question, I promise. People ask me one of the biggest surprises that I've seen since I've become CEO. And I have to say, when I started last year, one of the first things I did was go to a meeting with our scientists in Raleigh. There were -- all of our top scientists were together having a meeting. And listening to the scientific discussion, I could have been anywhere in the world at the highest level scientific discourse, and I heard it in that room. And the work and the capabilities of our scientists are just truly remarkable. And if I talk to the scientists and say, "Oh, yes, we developed EGFR. Oh, yes, we worked on genotyping HCV virus. Oh, yes, by the way, we were part of the PD-L1 work that was done." And I said, "Do you realize how hard that is?" But they say, "Well, we were asked to do it, so we do it in service to our customers." And one of the things I'm trying to make sure people know is that the scientists that we have, the skills that we have in assay development, in companion diagnostic, in developing new tests and evaluating new tests is as good as anywhere in the world. So when it comes to new tests, I feel like we have our finger on the pulse of everything that's out there. If there's something important, I know about it. If I don't know about it, the team knows about it. Every time I've sent one of our scientists a test that I've heard about, they say, "Oh, yes, we've talked to them. We've looked at this. We know all about it." So I think we're going to continue to bring new tests into the work that we do. We have 4,500 already, and that's just part of doing the diagnostic business. But I'm putting an additional emphasis on patents and making sure when we have these great ideas and we're ahead of the game, how do we make sure we get the right patent protection on those things. And I'm making sure that our scientists publish more often, so people realize the great work that we do. So you can continue to expect us to be at the forefront of new lab testing and new laboratory developments. And if there's something that makes sense, you can count that we'll be involved.

Can that be an incremental driver to earnings over the next couple of years?

I look at it more as the ability have the continuum of everything that we need to be successful in the marketplace. But when I think about the lab business, there are tests that become very popular very fast. And over time, they fade a little bit. They reach a certain level. Managed care starts to look at it, and then they put some bars in place that's hard to get to. I think the best way to think about it is we have to be at the forefront of all laboratory testing. And if we do that, we'll have a continuum of services that we offer that will allow us to grow over time. So I feel good about our potential growth aspects, but I wouldn't look at any one single test to say, "Boy, that's going to move the needle significantly." Those tests are far and few between. They will happen, but that's not what I want to count on for our long-term growth.

Somewhat related. As we think about the broader consumer engagement platform with Pixel, can you maybe just talk about the opportunities you've seen thus far and where you see the future opportunities? And what are the margins on those kind of products look like?

Yes. So first, has anybody been to a LabCorp PSC recently to get their blood taken? Gosh, we got to work on that. I would have expected more hands to go up. So let me talk to you about the LabCorp PSCs. If you look at the PSCs, we've done a tremendous job improving the customer experience. So if you want to go to a LabCorp to get your blood test, you can go online on your phone, on your computer. You can sign up for an appointment. When you get into the PSC, you can tell them you're there while you're sitting down on your chair with your iPhone. When you tell them you're there, you'll be called in very quickly, then you'll get your results back on your iPhone. And when you look at that, you'll be able to understand it. So we're doing everything we can because we realize consumers have to play a more important role in their own health care moving forward. I think Pixel is another opportunity for that. So Pixel allows people to get certain tests that they want to get by themselves. Now we've also not only had the test available where they can take their own blood and send it to us, they can now go to the PSC and have the experience I just described and have them do the test for them. I don't think we're all the way where we need to be in terms of technology for people to feel comfortable doing the blood test and taking the blood themselves. I think there's still work on the technology that needs to be done. But we are learning a lot, and we are understanding consumers in a very fundamentally different way. Pixel, to me, is not going to be a large growth driver in the short term. The margins are decent, but it's not about that. It's what are we learning about consumer behavior. What are we learning about consumer interaction and how we're using that in the future? At some point, I believe the time will be right. And I want to make sure we're at the forefront and that we disrupt ourselves versus having somebody else come and disrupt us. So that's how we have to be at the forefront of all these new technologies and things like Pixel.

You made that comment about disruption, and I think a lot of us in this room remember a little company just in the Bay Area called Theranos. And Glenn remembers many dinners where we had long, deep discussions that Dave would just shake his head, right? But when you think about potential disruption, do you see companies that are emerging that potentially could be disruptive in some way?

; Yes. I think you always have to be paranoid about disruption to any industry, and I see lots of interesting startups that we have to watch very closely. I don't see anything in the real near term that would be a significant disruption. But when you think about some of our unique capabilities of building -- we do massive distribution and move goods around the world. I think those types of things, over time, are going to be disruptive. I think point of care will become more important in the future than it is today. So we are looking for trends. I want to find the disruptions. I want to bring the disruptions in. We have a venture capital arm where we want to invest in the disruptions because I think the worst thing companies do is ignore what could possibly disrupt their core business. I think companies need to disrupt their own core business in order to get ahead of it. So it's easy to say, hard to do, but we're going to work hard at it.

And I understand that. We talked a little bit about acquisitions in the other room, and we talked about it more on the diagnostic side of the business that you see real opportunities that it's taken some time for these hospitals to figure out that, hey, we're not making the same amount of money now under PAMA. But as we think about the business more holistically and we think about the other side of the business, right, the Covance side of the business, made an acquisition last year, as Glenn talked about, what other areas do you need to make acquisitions then on that side of the business?

Yes. So first thing I'd say is I feel pretty good about the position we're in right now, and I think we can compete in the marketplace throughout the entire chain of diagnostics, all the way through to the drug development in each aspect: central laboratories, clinical trials, Phase I through Phase IV and in the marketplace. Now there are things that we've had to increase our presence. So we increased our presence significantly in Japan. I don't think we had our CRO business big enough. Now we do. We increased our presence in China. And I think, in the future, China could be a real growth opportunity for us with the number of biotechnology companies coming to fruition in China that really want to work with a national or a global CRO to help them bring products out of China into other markets. But with that said, we know that there are assets that might be actionable over time. We will look at those. The multiples are really high. I don't see any reason that we need to do something like that as I sit here today. But of course, we continue to look at things. And then, I think, Glenn, why don't you give a perspective of Chiltern and how that helped us and how the recent acquisitions have helped?

Yes. As a matter of fact -- so when we think about the diagnostics side, just to briefly to talk about that, we already have, obviously, a very strong market position. And there's still consolidation going on at which PAMA, while it's a headwind, obviously, from a pricing standpoint, really feel that we're seeing a good pipeline of transactions that could be [ bought outside ] that we get a very high return on invested capital. When we think about the drug development side, when we diversified into that space 5 years ago, we built a very -- acquired a very strong business that really had end-to-end capabilities that we really felt that while we didn't necessarily have significant synergies to begin with, other than the overlap in our central lab business, which was one of the reasons why Covance was very attractive, we felt there would be good opportunities to continue to grow in that space as well. So as Adam said, this past year, Envigo was a great acquisition for our early development position, which really solidified us as a very strong #2 player overall in early development. We have an outstanding central lab business where we're globally #1 in what we do there already. And then on the late-stage side, we felt there's more opportunities to grow. There were a couple of bigger players out there. And so as Adam said, Chiltern was really a great acquisition for us because it was sizable enough to fill in really the voids that we had on our late stage from geographic presence to the FSP part of the business that they had, a focus on oncology, which was an area that we were really trying to develop before, let alone a heightened focus right now that we feel that we've now filled in all the pieces that we need. So similar to diagnostics, we're now dealing from a situation where we are looking at all the other players that are in this space from very large to very small, identifying which would be good add-ons to what we have. And then as Adam said, there would be some nice acquisitions we would tell you today would be nice to have. But not only do they have to meet the strategic criteria, they have to meet the financial criteria. And under today's environment, we're very disciplined, and they're just not making sense. Maybe down the road, they'll be there. But we also see smaller opportunities that we feel continue to expand on both sides of the business. We're very diligent and patient. And as you've seen, when we don't do acquisitions, we return the capital back to the shareholders.

Just have a couple of questions. One, the changes on the data collection for PAMA, do you view this as some sort of inflection point in terms of how CMS is looking at this issue? The second question is has the genetic testing business at some level stabilized? Or are you still seeing declines in that business? And the third question is, is your testing business at all correlated to flu volumes?

So let me repeat the questions for those of you that are joining us by webcast. The first one is regarding PAMA and the lawsuits that have occurred and what's happened. So the first lawsuit, which was recently announced, it said that we didn't have to submit the data until a year from now. And it also asked that the methodology for collection of the data be evaluated. I don't think that has a significant impact, other than getting that data in the way in which they wanted it was really hard, took a lot of effort and was a bit of a distraction. The second case, which we're still waiting for, would be the one where ACLA is challenging Azar. And they're questioning whether or not the methodology for the way in which you calculate the cost is accurate. If that were to come back and the methodology was proven wrong, then I think there could be some potential upside. Now whether if we -- if ACLA won that the government would reimburse you for years' past, I'm not going to count on that. Whether there might be a negotiation or discussion for the future, we'll wait and see. But I think we have to wait to get the second piece of it to know for sure. The second question was -- well, I'm going to answer the third question, do we see lab testing correlated to flu volumes. There may be some slight increases, but it goes both ways. Sometimes people with flu go and get more diagnostic tests. Sometimes people with flu were told not to go into public places or into offices like a PSC. So in general, I don't believe that there's any significant impact from the flu. And the third one was generics -- genetics testing, it continues to be important, but I don't think it's a major driver of our growth nor do I think it's going to be a major change from what we're doing today or any major upside or downside as I sit here today.

So it stabilizes?

It stabilizes at a low level. You're talking about the 23andMe. I would say it's low level, stabilized but at a low level.

Yes. I mean it's one of those where, as a percentage of the company, it's a relatively small piece of what the business was. So when it went from 0 to ramping up to what they were doing, obviously we saw the growth. And to your point, it's now come down. It's stabilizing. It potentially has a little bit of a headwind to it, but it's not a meaningful impact to the company. Okay?

As we think about the success in identifying patients and recruiting them via your lab data to clinical trials, can you just update us on the success? And then secondly, as we think about companies like Verily that are competitors out in the marketplace in this recruitment sector, how do you think about how your business sets up competitively versus players like that?

Yes. So I think we have a unique competitive advantage. And I mentioned in the other room, I mean, when I first heard the number of over 500 million tests per year that LabCorp does, that is just massive. I mean we have data on almost half of Americans over time. And when you think about how to best utilize that data, I mean, you have real-time data on disease. And I think that, that -- if we have the ability to use it in a way we want to be able to for clinical trials would be real meaningful. The difficulty is you have to have people opt in. You have to be thoughtful about the way in which you utilize the data because of privacy, and it's not easy to get those 2 things to be part. But we are making progress. We've had some success with several of our biotech and our pharma colleagues, talking to them about the things that we can do to help them enroll trials. And as we get more opt-ins, I believe that's going to continue to get better and better and better over time. With regard to other companies, everybody has their story on their data and why their data is great for enrollment. And we have our stories, and I really believe ours is the right story. Because if you look at the richness and the timeliness of the data, it is pretty unique. At the same time, I don't think any one company is going to have all the data that they need to make the impact that we want to make on value-based care and value-based medicine. And I think it's going to take us to do partnerships with other companies in potentially nontraditional ways to be able to make the impact that I want to have. So first thing I want to do is I want to have the best data analytic, digital capabilities and artificial intelligent capabilities that we can possibly have for our industry. Then I want to find the right partners once we have the data in a way that we can use it with them, so we can bring data sets together to help make even better decisions than those that can be made today. So it's a journey. It's going to take time. I truly believe we have a competitive advantage, but I know we still have to prove that, and we're planning to show that, first, through oncology and then through other therapeutic areas as we move forward.

Other questions?

If you have questions, you don't have to come to the microphone. I -- we will be glad to repeat them, if you want to yell them out.

Go ahead.

Can you speak to the international strategy?

So the question was can you speak to the international strategy. I believe that with the acquisitions that we've made, we've actually increased our presence outside the U.S. pretty significantly. And our ability to do drug development, I think we have what we need to be successful. We've increased, as I said, our presence in Japan and China. We have a significant increase in Europe, in Belgium and the U.K., and we have strong capabilities for central laboratories and to do clinical trials. But at the same time, I think that there are tremendous opportunities in countries like China, in South Korea, in Japan. We have many local companies that know how to get local approvals, but they haven't necessarily learned how to get global approvals. And with our capabilities across the continuum I've talked about time and time again, we would be a perfect partner for some of these companies that have good early-stage assets for us to work with them from the beginning all the way through to launch in countries around the world, and we have significant presence to be able to do that.

What do you see as far as opportunities through drug development with biosimilars, right, so companion diagnostic testing. Do you see actual trials? I mean because, obviously, a biosimilar is not the same as a generic in that it's not a chemical compound.

Yes. So it's pretty remarkable. Our scientists have done a lot of the work on biosimilars and have worked with most biosimilar companies and try to show the biosimilars and how they compare to the bio-originals and also how bio-originals have actually changed over time since the time that they've launched. So our analytic capabilities in the biosimilar area are very significant, and I expect we'll continue to play a strong role in that. Because as you say, they're biosimilars. They're not the same. And therefore, you have to really be thoughtful as you bring those into the marketplace.

Go ahead.

With the [ CVS, Aetna ] deal and the United and other [ customer's ] deal, we're seeing the industry converge. What are your thoughts on that? And what's the role that LabCorp can play in a [ acquisition ]?

The question is with some of the mergers, the CVS, Aetna and some of the kind of nontraditional coming together of companies, we're seeing convergence. And what role do we think LabCorp can play? I think LabCorp can play a significant role, particularly as a lot of these coming together are to really increase value-based care and trying to get the care from the beginning all the way through the patient's journey. If you look at what we offer, we offer high-quality, low-cost diagnostic testing. And by doing that, I believe that we can help these companies try to achieve what they're trying to achieve, which is a lower overall cost. First, through prevention of disease, then through treatment of disease and identifying those who need to be treated and those who will benefit from treatment. So I believe that we will have more partnerships in the future than we have today with nontraditional partners, but I also believe that our ability to bring value-based care through our high-quality, low-cost environment is going to be helpful to all of them.

Other questions? Yes. The last couple of years have been big years of innovation from pharma, biotech. The funding seems to be never-ending for new products to come to the market. Can you just talk about the -- on the drug development side your positioning with some of the newer entrants versus the more seasoned pharmaceutical and biotech companies?

Yes. So I'll give some context and Glenn, hope you'll jump in. Overall, I think we do a very good job in biotechnology, and we have a lot of relationships with biotechnology customers, and we do a good job with large pharma as well. But where we do very well is in the earlier stage, in the Phase I stage. What I would like to see is that turn into the registration trials more often than they do today. And I think we're at a...

What will drive that?

Well, I think we're at the perfect period of time. If you would have gone back 15 years ago and said if I can tell you the 30 people that would respond to a statin out of 100, would you want to know? Most people at the time would say, no, I'd rather treat all 100. Today, payers are saying, "You better tell us the 30 that this drug is going to work in. We want you to." In addition to that, 15 years ago, the average time from first in man to launching a drug could be 10 years, 12 years. Today, with personalized medicine, in oncology, in cell-based therapies, you can do it potentially in 4 or 5 years. Those 2 things coming together says the person bringing the product to market better be talking with the person in early-stage development, developing the biomarker of the assay and the companion diagnostic. Because if you come to market without that, you're not going to be successful in the marketplace. So now is the perfect time where we can show -- we can help here, all the way through here, and there's no longer these silos that used to exist. If you're doing preclinical, you're over here. If you're doing clinical, you're over there. It's all coming together because of the speed and the technology. So I think we're at a unique moment in time where LabCorp can really show our value across the continuum and get more of those later-stage registration trials. Because after that, we'll go into the marketplace with the companion diagnostics and help with the launch of those things. So hopefully, you can tell, Lisa, I'm excited about the future.

You sound very excited.

I think the team is energized, and we're looking forward to going through the rest of this year.

Any other questions in the audience? Go ahead.

Can you talk about volume differences by age cohorts? For somebody who's, say, in their 20s versus middle age versus seniors, how big of a difference in the annual testing volumes?

So the question was can you talk about volume testing based upon age cohort? To be honest with you, I have to look at that. We'd have to get back to you. I don't know the exact numbers, and I don't want to guess. I've not looked at it exactly that way, frankly. But what I can tell you is if I go back 30 years and you look every year, there's about 2% to 3% underlying volume growth that we've seen in the marketplace. So even with the aging population, even -- we continue to see that underlying growth. I haven't seen a discontinuous growth. But in terms of has the mix changed from younger to older, I don't know offhand, to be honest. I don't know if you know, Glenn.

I don't know if the mix has changed. But just the -- again, the demographics that Adam spoke to, obviously, the older you are, the more testing that's going to be prolonged. And now as we have a more aging population, we would expect that mix to change. But as far as a pattern of change, no.

So -- oh, sorry, go ahead.

Can you just talk about regulatory scrutiny in the diagnostic business? Has that stayed pretty consistent over time? Has it increased, decreased? And how does that kind of affect your competitiveness, especially against maybe smaller or subscale assets?

Yes. So regulatory scrutiny. It hasn't changed significantly, although we do see some changes that are occurring. I think it's an advantage for us. The higher the bar, the tougher the science, the better we're going to do because, as I said earlier, we have the best scientists, and we will beat that bar where the other companies won't be able to get to the bar. So I actually encourage the regulatory to be tough in a good way and make sure that the quality is right, and I think that plays to a competitive advantage for us.

So Adam, in closing this out, I've asked all of my CEOs the same question. We are sitting here in 2021 together, what do you believe investors will better appreciate about LabCorp that they don't today?

Yes. So what I believe you'll see is that the integration across the entire spectrum of what we're able to do is actually making a difference and enabling us, first, in cancer and so oncology and then starting to move down into other specialty areas. So I think what you'll see is the true benefit of bringing the 2 organizations together and the ability for us to make an impact on human health, starting in oncology and then going down further and further.

Great. Thanks, everyone.

Thank you. Thanks for your time.