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

Good morning, everyone. This is Derik De Bruin. I'm the Bank of America life sciences and diagnostics tools analyst. Thank you for joining us on the second day of our virtual Vegas health care conference. We appreciate everybody dialing in and sort of adapting to this brave new world that we're sort of all facing right now as we figure out new ways to bring you conferences and one-on-one meetings and corporate access. Up next at our conference is LabCorp. We're very happy to have with us today Adam Schechter, President and CEO; Glenn Eisenberg, Executive Vice President and CFO. And particularly excited to talk to the company since they have a few things to say about the current world situation that we're living in and can help us to sort of slide on all the craziness that's going on today with the COVID-19 situation. Also, with us is Clarissa Willett. My apologies, Clarissa, I didn't mean to leave you out, from IR on LabCorp. Anyhow, welcome everybody. Thanks for being here. And let's just jump into it. Sort of give us a sense on what you saw in Q1 and all the craziness that sort of ramped up since then. I mean can we just -- sort of a synopsis on sort of where we sit in the LabCorp view of the world in terms of the diagnostic markets and particularly the COVID market.

Terrific. Thank you, Derik, and thanks, everybody, for joining us today. Really, it's a pleasure to be here with you. I wish we were in Las Vegas. I looked outside, and it's raining and chilly here. But at the same time, I thought it was important that we continue to have this discussion, and I'm glad to share whatever information you're interested in. So there's no doubt that these are unprecedented times, and they're extraordinarily busy times. But I'm very proud of LabCorp and our employees around the world. Whether it be our employees who are doing diagnostic testing, including the COVID-19 testing. We have our laboratories running 7 days a week, 3 shifts a day. Whether it's the scientific innovation that we brought to market in COVID-19 testing, but also in understanding the virus, things like Ciox, where we're doing a large registry; PacBio, separately adaptive, where we're trying to understand the virus and how it changes over time and the characteristics of the virus. And then what we've really been able to see is the power of the combined of our diagnostic business with our drug development business. And if you look at the number of trials that are underway for COVID-19, whether it be antivirals, other treatments or vaccines, we're winning a disproportionate number of those trials. And I think a big part of that is because of our diagnostic capabilities. So where are we today? Today, we're able to do 75,000 PCR tests a day. And when you think about that, we've gone from several thousands of data, 75,000 in about 2.5 months. Our expectation and our target is by this time next month, we'll be able to do 150,000 PCR tests a day. In addition to that, we've launched various ways to get the PCR test. So you can go to your physician. You can go to drive-throughs. We're working with Walgreens, and we've increased their capacity threefold so that they'll take samples at drive-throughs for the PCR testing. And yesterday, we announced the expansion of our Pixel by LabCorp at-home testing kit. And with that, we now have 200,000 sample kits that we can send out directly to consumers, and we expect to be able to make 100,000 of those each and every week moving forward. Originally, we launched those kits to individual that were either health care workers or first responders with symptoms. But because we've been able to increase our supply to a significant level, yesterday, we announced that we're going to have those available to all patients in accordance with the CDC guidelines. So no doubt, we've made a huge amount of progress on the PCR testing. I'm glad to answer, Derik, any questions you might have on PCR testing, and then I can give you an update on serology, if you'd like.

Yes. That's exactly how I wanted to sort of take the conversation. And also, just a reminder to the investors that are online, if you're using the Veracast platform, you can chat me questions during the presentation here. So like that. So I guess let's start with the molecular testing, massive ramp-up on there. And I guess the first question is, and I know you were making some comments earlier this morning. I guess what's the right level of testing that we sort of need to get back to work? And that -- I've seen everything from we need 500,000 tests a day to we need somebody throughout 20 million tests. I mean I've seen numbers all over the place. It's like what's the right level of molecular testing that you think is going to be necessary to get things going? And more importantly, it's like how do you see the sustainability of molecular testing?

Yes. So let me just focus on molecular testing because I think part of the answer is how much you need for molecular testing and how much you need for serology testing. With regard to molecular testing, I don't think anybody could give you an exact number of what you need. But what I can tell you is if you get to somewhere between 8 million and 12 million tests per month, that's going to be a pretty significant number, and I think it allows you certainly to go into Phase I of opening. What you want to be able to do is test everybody that has symptoms, be able to track and trace people that are around those that have symptoms or test positive and test all of them. I think we have that capacity today. But I certainly believe when we go from 75,000 to 150,000 in the next 30 days, I'm assuming that others are ramping up the testing. We'll have a lot more capacity even 30 days from now. But one of the things that's important, Derik, is I don't think necessarily it's the number of tests that can be run today that is a rate limiting step. Part of the issue has been the front end, which is where do you go to get a sample taken. As doctors' offices are opening up and they become much more able to take tests, samples and send them to the labs again, I think, you'll see an increase. So when I said we are able to do 75,000 tests per day, we are not running 75,000 tests today. We're running somewhere between 35,000 and, say, 50,000 tests per day. And the reason why is we're not getting all the samples that we can possibly run tests on. That's going to change with 2 things: one, physicians' offices opening up; and two, with our Pixel at-home kit, people can now get the test sent directly to their home and send it to us. So I think those 2 things will increase the volume of samples being sent to us over the next weeks.

Great. And how do you get from 75,000 to 150,000? I mean you're obviously doing some LDTs, you're using some of the automated platforms. Can you give us just sort of a flavor of what your molecular capacity looks like?

Yes. So from the beginning, we've launched on multiple platforms. We have 4 to 5 platforms. And frankly, our LDT, which is our own lab developed test, has run the most tests across all the tests that we've run so far, and we've done well over 1.5 million tests so far. But we also are on, for example, the Roche platform, the Thermo Fisher platform and several others. Our strategy was to ensure that we have multiple platforms. So if there was ever an issue with supply for reagents or test kits that we would still be able to be up and running. And it's really served us well because there were some shortages in different areas of reagents and test kits and so forth, but we were able to keep going because we were on those different platforms.

Got it. And I guess how are you getting reimbursed for molecular testing? I mean obviously, there's different price points between some of the higher throughput platforms and the LDTs. And I guess the -- has people actually started sending you money yet? Are you actually getting paid for things yet? And then how do you think about -- obviously, there's CMS side and then there's the commercial side. Can you sort of clarify some of the reimbursement and payer dynamics for molecular?

Absolutely. And we've been very consistent from the beginning. And at the beginning for our PCR test, we said we would charge everybody the Medicare-approved price. I wanted to make sure when you're in unprecedented times that you have a guide rail to say, "Here's why we chose the price we did, and here's how we administrated the price." And we did it across the entire country exactly the same. The issue is that the original Medicare price was about $51.30 some odd. They had since raised their price to $100. Most of the large payers are paying $100, but there are still some that we're trying to work with to go from the $51 to $100. And we're still working with hospitals to try to get them to go from the $51 to $100. So in general, we're going to keep working to say, "Medicare price is our price. It's $100." And we're working with everybody to try to get there. Whether we'll be 100% successful or not, I'm not certain at the moment, but many have moved.

Yes. So a question from a client coming in since it fits in right now. I guess why is the 150,000 molecular tests today the right number for you? I mean -- yes, just sort of how you sort of arrived at that.

No. That's the right question. And the real answer is I don't know if it is right for us. What I'm doing is I'm building as much capacity as fast as I possibly can to ensure that we can do as many tests as we can with the fastest turnaround we possibly can. I can get to 150,000. I have a path forward at the moment to get there. I don't have a path forward at the moment to go well above that. It's not that I'm not willing to spend the capital. We're spending significant capital. But at the same time, there are limitations on the number of machines that you can buy, especially for these multiplexes and these very high throughput machines. So if you ask me, do I think we'll use all of the 150,000 capacity? I don't know if we will or won't, but I'm just going to build as much as I can, as fast as I can.

Great. Before I move on to serology testing, just I think one of the debates going on is sort of like what is the flavor of testing look like going forward? I guess this sort of is a question between the need for rapid, more point-of-care testing at -- immediately at hospitals and maybe like points of entry, and then sort of like the surveillance and screening of populations. I guess sort of how do you see the balance between point of care, centralized testing? And this -- is this a bigger picture in terms of how you think about the whole decentralized, centralized lab model of testing, sort of like does COVID really change anything? Sorry, long answer -- long question on that.

No, no. I think it's a good question, and I think there's a role for multiple types of tests. The fast tests are certainly going to be helpful in certain settings. If you're in a hospital and somebody comes in and needs emergency surgery, you're going to want to be able to test them before you do the surgery. You're not going to have time to wait a day or 2 days to get the results back. There's certainly real important ways to use the fast-acting testing. The issue is that if you can do 4 per hour, if you assume most are negative, and it's 15 minutes per negative. And so therefore, per machine at 12 hour a day is 36 per day. You just can't get the kind of throughput to be able to do 150,000 that we can do. So I think there's going to be a role for both. We encourage people to get as many of those rapid machines and tests that can be available quickly, particularly for hospital settings. But at the same time, I don't think there's any way that they're going to meet the full capacity as needed, so that's why we're going to continue to work to build our capacity.

Great. Going to serology, unlike the molecular space, serology has still been a little bit of the Wild West. It's nice to see the FDA has finally sort of clamp down on some of the craft that was dumped on the market earlier. Just some general thought on your serology capacity, whose machines you're using, and then we're going to sort of like evolve into a conversation on what do you think about the various vendors you're looking at and then ultimately to demand.

Sure. So currently, we're able to do about 100,000 serology tests a day, between 70,000 and 100,000, and we're increasing that capacity very significantly. By the middle of next month, we should be able to do 200,000 to 300,000 per day. So those are blood tests. They're easier for us to do. We can do some of it on our existing equipment, very different in terms of level of complexity versus an RNA extraction test, which is the molecular testing. So that's why we're able to build capacity even faster. With regard to serology tests, we're choosing serology tests that have extraordinarily high specificity. And many of the ones that you talked about that were in the market without EUAs didn't have that level of specificity. All of the ones that we're using have specificity above 99%. In fact, we're using the Roche one, that is 99.8%. We're also using Abbott. We're using EUROIMMUN, and we're looking at several others. Our strategy is going to be the same as it was for PCR testing, which is to be on multiple platforms, to use multiple different companies so that we can have as much capacity as possible, but also be covered if there's any issues in terms of testing kits or anything like that in the future.

And I guess how do you think serology test is going to be deployed by various people? I mean I think it's pretty clear that you're going to get some sort of immunity based upon an infection. I mean that's what the data would suggest in the other coronavirus, although it's not clear. But I mean how do you think about how it's going to be used? And thoughts about how employers are going to sort of engage with this and just sort of thoughts on how do you sort of see the serology market evolving.

Yes. So the first thing I'd say is there's certainly more science that needs to be done for serology testing. I don't think anybody doubts that it's good for surveillance, and it will help at a national level to understand at a regional level how things are moving forward and progressing. The question becomes when you have an individual person level, what does it mean exactly? I can tell you, we launched our serology testing on labcorp.com, and we are seeing a huge amount of people applying and registering to go to our PSCs and get tested. I think there's a lot of people that just felt sick in the January through March time frame, and they're wondering, did I have the virus or not? And the question is when they get the test, if they find out they're positive, what can they do with that information? I don't think it's -- I think it's important that they don't become reckless if they're positive and think that they're fine and they don't have to worry about anything any longer, but I think it will certainly give them some comfort and confidence as they go back to work. And I think that there's the science and then there's the psychology. The science wants to understand more how many -- what level of antibodies do you need to be able to successfully fight the disease again? Will you be immune to the disease in the future? How long could you be immune to the disease in the future? Many of those questions are yet to be answered because the virus hasn't been around long enough to know all those answers. At the same time, psychologically, people want to know, okay, did I have it? If so, my body beat it, and I was able to beat the virus before. Even if I could get it again, I think I'll be able to beat it again. So I think from a psychologic standpoint, many employers are looking at it as a way to get people to feel more comfortable as they go back to work.

Got it. And just thinking about the reimbursement for this. I mean less clarity on that. I think certainly, serology tester costs less than $5 for the most part. And I think serology tests for things like Zika and the flu are sort of like in the $17 to $18 range. Is that the right crosswalk to sort of think about this? And then justification from some sort of multiplier on top of that? How do you think about sort of like serology reimbursement?

Yes. So the first thing I'd say is we don't have CMS pricing yet from Medicare. And we provided information, but they can get information from many different sources. And therefore, we have not priced the serology test at the moment. We're running them, but we're waiting to bill them. It's similar to what we did with the PCR testing when it first launched. We started to run the test, but we waited to bill until we understood where CMS came out with because I want to make sure I have kind of a guidepost to understand the thoughts there. My sense is that you can -- I'm expecting a price that's higher than the ones that you mentioned because I do think that these tests are more complicated than the ones that you mentioned, they’re the simpler tests. But at this moment, I don't want to try to get out ahead of where CMS may be, but I think that they will build appropriate crosswalk. I think it will be a multiple of some of the things that you talked about, and we're hoping that we have a price in the very near future.

Great. We -- do you have any sense from some of the data that you've run so far on what the level of seroprevalence is just in general across the U.S. from the sort of the surveys that you've run so far, the serology tests you've run so far?

Yes. What I would say is it wouldn't surprise you that, depending on if you were in a hotspot or if you were in other parts of the country, we're seeing significantly differences. And if you look at the PCR testing and the percent positive, we're not seeing something that's too different in terms of the serology testing. So the serology testing that we're doing is matching pretty well to the PCR testing based upon geography. So for example, in New York, we see a much higher rate of PCR positivity. We're seeing a much higher rate of serology positivity than a state like North Dakota.

Great. One final question on this, and then I want to move on to the other aspects of your business because then we can talk about how COVID is impacting clinical trials. But I think I've got a version of this question from 3 investors. And it's basically what type of testing could be deployed at airports to screen customers. I think people are trying to understand that based on some initiatives. I guess what can companies do for their companies or employees to test rapidly? Just sort of your thoughts on that, just because I said I've got 3 questions from investors along those line.

Yes. So I'll answer that question, but I want to start off by saying that things like social distancing, wearing masks, good hygiene, they're here until we get a vaccine. And I'm hoping we get a vaccine sooner than later, but it's 12 months, 18 months, under all circumstances, even whether you're tested at an airport or someplace else or not, I think it's going to be important to practice those types of things. And here's the reason why. If somebody got the virus yesterday, but it takes 3 days to start shedding. If they're tested today, you might not see it. Where if you tested them tomorrow, you might see it. So the testing is only good at the point of time in which you test and you catch the virus. So therefore, I think the other thing is going to be just as important under all circumstances until there's a vaccine. There's a couple of things that I've seen hospitals doing, and I think it could apply to airports. Some of them are trying to get the rapid machines. The problem is, I don't think you'll ever get enough of those to be able to test enough. For hospitals, some of them are asking their patients to quarantine 2 days before surgery. And they're sending us a test so that we can test that patient for their PCR, and then they have the results at the time that they go into the hospital. I think you can start to think about those types of things as we move further into opening up the country. One of the things that we are going to announce tomorrow, and I mentioned it this morning, is LabCorp employer services. And we're going to be working with employers in all aspects of business to try to help them with multiple things. One is to think about how do you have people come back to work? Do you have temperature checks outside? Do you ask people questions to see if they have COVID-19 symptoms or not? The second thing will be to help them test, particularly if they have to do track and tracing. So somebody is in the workplace, they're positive or they have symptoms, where you going to want to test the people that they've been in very close contact with over the last several days. And then the third thing is, as we start to think about the flu season in the fall, I think you would want to really reinforce the importance of flu vaccinations. And we're going to work to have on-site flu vaccinations. So we're going to work with employers across all areas of business to try to help them think that through. And we have a wellness business that we're moving to be called LabCorp employer services, and they're going to be focused on COVID-19 as we go into the summer and through the fall.

Great. So let's talk about the rest of business, and I mean, obviously, your routine trends have been -- your routine testing volumes have been down dramatically as a result of this. Can you talk about latest volume trends? Are you starting to see some pickup coming back? Just an update on sort of what -- about the broader business.

Sure. And it's nice to talk about the broader business, too, because one of the things I worry about is a lot of people are not getting their routine testing for like diabetes or cholesterol and heart disease. And I worry that there'll be unintended consequences as people start to come back and get tested and whether people's diabetes are out of control and those types of things. So it's important that we maintain our service centers to be open through this so that people could get tested, if needed. We also had the first hour at each of our service centers dedicated to those most vulnerable. So if people were worried about coming in because they were older or had comorbid diseases, they were able to come in with less volume and less people for that first hour. We announced at our first quarter earnings that the last 2 weeks of March, we had the most significant decline. It was greater than 50%, but we're seeing improvements every day. And I look at it every day. And we're starting to see, as the country opens up, as doctors' offices open up, people are going back to routine testing. I don't want to give an exact percent because I'm looking at early indicators and early data. But I can tell you, it's moving faster than I anticipated or expected.

And what categories of test are coming back first? Can you sort of give us some clarity on that, more esoteric testing? Yes.

Yes. We're seeing it across all testing. I mean the esoteric testing was not impacted as greatly as the more routine tests from the beginning. So when I give you the greater than 50% in the last couple of weeks of March, esoteric business was not down nearly as much. But as I look at it now, as it's beginning to come back, it's across testing, including things like diabetes and cholesterol.

Got it. And how should we sort of think about -- I mean given the pluses and minuses with the core business and then the COVID and those expenses associated, how should we think about lab margins for 2020? And sort of like what is the legacy impact in '21?

Yes. So if you look at the last quarter, we showed you that there was an improvement in our diagnostic margins versus what I think people have anticipated. The reason for that was what I just mentioned, the balance and the percent of esoteric testing going down less than the other testing actually enabled our margins to look better. I think as we get through the rest of this year and the testing kind of levels out a bit, we should get back to what we said before, which are margins in the diagnostic group should be flat to down slightly, and we expect improvement in our drug development business. And that's why I expect it will happen when it washes out. One of the good things as you start to think about 2021 is the impact of PAMA has been pushed out a year. So in 2021, we won't have the impact from PAMA, which we were originally anticipating, which should help us in 2021. I think it's important that, I as well as other leaders in the laboratory business, as well as ACLA, which is the industry group, really engage with the Congress and the various law makers because, I think, over time, we should actually remove PAMA from being implemented even in 2022. I think people have seen the importance of diagnostic testing. I think they have a new appreciation for what we do, how important it is. And I think we need to continue to push to say, not only should it be out of 2021, but we don't think it should happen in 2022. But I have no reason to believe that's going to happen at the moment, but I can tell you I'm going to be pretty vocal about it.

Great. Let's move on to the drug discovery business and talk about Covance. I guess how is the pandemic impacting your 3 segments? You've got the central lab, the early-stage and the late-stage business. And just some general thoughts on there and clinical trial site closures. And when do you think -- trial delays, getting back, just a general update on the Covance business.

Yes. No. We're glad to do that. And our drug development business continues to be important. And I've always said that I don't think that the drug development business has a significant impact on our diagnostic business. But I always believe that our diagnostic business can have a very significant positive impact on our drug development business. And we're certainly seeing that with COVID-19. There are hundreds of trials. Now most of them are very early stage. They're not very big dollar amounts at the moment, but we are involved in RFPs in almost all of them that I can tell. And we're winning a disproportionate number of those, and a big part of that is because our diagnostic capabilities, the registry that we build in with Ciox, our understanding of the disease and so forth. So I believe that COVID-19 is going to be a way for us to show the power of the combined in a very expedited way. Outside of that, we have seen a significant impact in the first quarter of that business, and there will be an impact on the second quarter of that business. Many of the clinical sites globally were impacted to some degree, some greater than others. But about 52% to 60% of the sites have been impacted and are currently impacted at the moment. As we see parts of the world open up, we see the sites opening up. And I think it's going to really depend on how quickly the United States and Europe open. But also, we have to watch carefully if there's going to be a second wave in the fall because that will be important. But I'll tell you why I think we have a way to work with that in just a moment. If you look at our 3 businesses, our central laboratories were impacted. But for example, our central lab in China is back up and running, almost at full capacity. So we're seeing the central lab business come back quicker because it's not dependent necessarily on as many countries as something like the clinical trial business. Our early-stage business is doing well. And it's doing well, in particular because of the COVID-19 trials, which are a significant number, and we're winning a lot of those. It's the later-stage development where we've seen the most significant delay. And it's in the clinical trials that we've seen delay, including our Phase I trial sites. The Phase I trial sites will begin opening up again, I believe, in the not-too-distant future. And then it's really going to be how fast can we work with biotech and pharma to start to open up their larger clinical trials when they feel confident in other parts of the world. The reason I mentioned before how we're going to think about that moving forward in the second wave is I believe that hybrid and virtual trials will become increasingly important as we move forward. And we've been investing significant amount of time and effort in developing an offering for pharma and biotech to help with hybrid and virtual trials. I think there's a different use for hybrid and virtual trials, but I think both will be important, particularly until we have treatments and vaccines to help with COVID-19.

Great. And we're coming to the bottom of the hour, and I just want to -- bottom of the hour, sorry. We're coming end of our time. And I just want to finish with one question I'm asking all the companies is -- and you sort of alluded to this in your last answer, but I just want to ask it more directly. I think what do you think will be the long-term implications from COVID? How are you -- how do you think it changes your business? How do you think it changes your customer business? And I guess the question is like what changes do you think will persist well beyond sort of like the initial wave of the crisis?

Yes. So first thing I'd say is what LabCorp did before COVID-19 was important and meaningful. What we will do after COVID-19, I believe, will be even more important and more meaningful as people realize the benefit of diagnostic testing and drug development in a different way than they appreciated beforehand. I think things like virtual trials and hybrid trials will become more important. I think the ability to work from home and use technology is here to stay. There are parts of our business that we are working from home, where if I would have asked the team to do it 3 months ago, they would have said it won't work. It's working great. So I think it's going to change the way in which we do business from a technology standpoint. If you would have asked me 3 months ago, if I can do a town hall virtually, I would have said that's not going to go so well. It worked great. And the technology has really held up and done terrific. So I think that's important. I think telemedicine has had a significant impact on through that, and I think it's here to stay. And I think some of the laws and regulations that have been difficult to change over time in that industry have changed, and I think that's here to stay. So I think that you will see a lot of differences. But to me, it's going to be the human impact. It's going to be what happens when you social distance for 12 months to 18 months? How do you interact after that? And how do you get back to what was considered normal in terms of human interaction and human impact? I'll leave with the last statement. Last Sunday was Mother's Day, and I was fortunate enough that my mother could drive and visit us. But we sat outside. We sat set 6 feet apart. There was no giving your mama a hug on Mother's Day. It was a very weird feeling to realize that this could be around for a period of time. I think it's going to be something we're going to have to get used to, and it will change society as we move forward.

Great. Thanks. I'm going to -- I've got a couple of questions coming in, just as you were saying that, but we're out of time. But I'll follow up with Clarissa on e-mail. I get questions being about how do you define virtual trials and hybrid trials and things like that, so more very in the weed CRO questions, but I'll follow it up. Anybody -- anyhow, thank you for doing this. Thank you for all the work you're doing. Thank you for participating in our conference, and thank you to all the clients listening online. Be safe out there. Be careful out there. Thanks, everyone. Have a great day.

Thanks, Derik. Have a great day. Bye-bye.