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

I think it's a great question. And the interesting thing is we had to buy a lot of machines and build capacity because the type of tests that you do for PCR testing is not the vast majority of the testing that we do. It's not a blood test. It's a molecular diagnostic test. So before COVID, the number of those tests we did per year was a very small part of our total HCV, HIV, maybe some other areas. So no matter how you look at it, there's going to be overcapacity in terms of these machines. And there's no way to use these machines for doing typical blood tests. They're not meant for that. So even for ourselves, the question is with the machines that you bought, once you don't do as many PCR test, will you have a need for them? We will need for many of them because we'll update all of that HIV, HCV testing that we do, but we won't have a need for all of them. And I think a lot of these companies that have come into the market are going to struggle to figure out, "okay, now that we have all this molecular machinery, what do we really do with it because the market frankly is not there." The bread and butter diagnostic testing that we do is either blood testing or urine testing.

Thanks a lot, thank you for that. The last one on this, and I want to spend ample time on Covance as well on your drug development business. Could you remind us what percent of the market naturally is point-of-care testing. If you look broadly at the U.S., I think, again, it's in that same vein of the last question with all of these investments being made by the Abbotts of the world and others to come out with unit cards or rapid point-of-care testing, does that stimulate a wave of manufacturers actually trying to enter new lab market areas that they weren't in previously. I'll open it up with that.

Yes. So it's a very small percentage of most diseases, like diabetes, [indiscernible] flu, it's a higher percentage of something like flu. And the reason why is you're always trying to do 3 things. One is quality, the other is speed and the other is -- and by speed, I mean, the turnaround time for the test and the other is cost. So typically the point-of-care test are higher cost, higher speed, but lower quality. We're typically higher quality, lower cost and moderate speed because you have to send it to a central laboratory, that's how you get the cost lower. I think when things get in a normal environment outside of a pandemic, managed care and other places would prefer to lose a little bit on speed, to get the lower cost and the higher quality. And that's why I think that the position that we're in is very strong. Now with that, it has opened up new opportunities. So for example, Pixel, at-home test, I don't think people even realize that we did at-home test until COVID-19. We have a lot of other tests that we can do through Pixel. Will there be more opportunity out of pocket for at-home testing and those types of things, I think that's yet to be determined, but an area we're going to certainly investigate.

Makes a lot of sense. Let's shift to drug development, one of my favorite areas. So bookings -- Covance bookings in 2Q, absolutely stellar. The whole industry had a fantastic quarter. But frankly, I was a bit surprised with how strong Covance has -- was up in the first half, up 8% year-over-year in bookings, especially when you consider having the biggest central lab and the direct knock-on impact to patients not being able to participate in clinical research at the end of the first quarter, all of the second. And then also early development, which historically has not had big book-to-bills because of the shorter burn nature of the work. So I'm just hoping you could shed some additional light on the strength of bookings at Covance in first half in total, second quarter, in particular, and then maybe give us to the best of your ability, any sense on how that pipeline and demand has continued into the third quarter?

Yes. So Covance continues to do well. And we're continuing to disproportionately win COVID trials above and beyond what you would expect based upon our market share. And that's in each stage of development. And I think it's really shown the power of having diagnostic capabilities combined with drug development capabilities. Now with that said, I'm not pleased because I won't be pleased until I show we can do it in oncology and in other therapeutic areas, and that's our intent, which is to say, take the learnings and what we've demonstrated with COVID and then show how that makes the difference in areas like oncology and other areas. So we should expect that we will continue to focus on oncology. And I'm hopeful that by showing pharma biotech what we can do with COVID, they understand that that's transferable to oncology and other areas. And I believe that we'll be able to make that case and show it strongly. Our book-to-bill was strong for sure. But what I keep saying over and over again is, I don't look at any one quarter, and I would not judge any one quarter because book-to-bill has ebbs and flows, and it depends on the last quarter of last year when you're looking at trailing 12 months, and you also sometimes get a bunch of studies at the end of the quarter and so forth. So we look at it over time. And over time, we continue to see it grow and increase. And I would expect, as we go through the end of this year, we're going to continue to see momentum over time. As I look at our win rate and so forth, we're doing very well in early stage. We're doing really well in the central laboratory business, where we continue to make progress, and we have to show progress is in the later-stage clinical trial business. And we have a significant focus there. And that to me is an area that I'm watching really closely because I think when it comes to the book-to-bill, those are the largest trials, those have the biggest dollar amounts, those will make the greatest difference. So we have to continue to do well to win the Phase III trials. We already do well earlier.

I can fully appreciate that this is a long game, not a short game in terms of bookings, and we need to look over the trend over time. Having said a lot of your peers that have clinical relationships with big pharmas that are involved in operation for speed vaccines had the enormous 100 million, 200 million plus vaccine trials that were awarded. I didn't get the sense that you participated in one of those very, very large 30,000, 60,000 patient studies, I could be wrong, but your overall COVID bookings were relatively low compared to the rest of the group. I looked at that as more of a positive that the core business was exceptionally strong and weren't reliant on COVID studies and when you had COVID studies, they were more of the smaller work in early-stage in other areas. So I view that as actually a big positive. But when you mentioned getting clients' attention in clinical and having the same win rates and successes in oncology and other therapeutic categories, what is the strategy for doing that? I mean, last quarter, you mentioned talking about high science CRO. I'm really wanting to dig into that what you mean by becoming the high science CRO of choice.

Yes. No, that's great. I'll answer that question directly, just [indiscernible]. If you look at our COVID-19 work, we're involved in many trials, both treatments and vaccines and whether it be in FSP or in central laboratory work, we will be part of some of those very large trials. So I just want to be clear. What I said last quarter was the revenue that we were generating from those trials was still relatively small part of the revenue because they were still very early stage at the time. But you should expect that we will be part of some of these very important large trials in one shape, way or form. With regard to being the high science CRO, what I mean by that is we have significant capabilities in compelling diagnostics and early stage development. And when you look back, we were part of EGFR, PD-L1, hepatitis C genotyping. And when I look at our early-stage work that we're doing for things like Alzheimer's and other important therapeutic areas, it's really remarkable. The problem is that scientific work that we did didn't necessarily lead to us winning the Phase III trials. And it was pressing to me to find out that we did a lot of this early work. But then by the time we got to Phase III, somebody else did the Phase III clinical trial. Unfortunately, the science is great at the beginning, but the dollars is more important towards the end. So to me, we need to find a way to show that our scientific capabilities will add to your ability to do the clinical trials faster. And that's what I mean by using our science to be able to get the Phase III trials. I think it matters more today than it has in the past, and have chosen oncology as our key therapeutic area to prove it for the following reason. Historically, it took 7 to 10 years to develop a drug. And the people in preclinical and Phase I fairly talk to the marketing teams or the people doing the Phase III trials. Today, if you're in a marketing team, you're starting to think about companion diagnostic back in preclinical or Phase I. If you are in clinical development, you're trying to say, how do I get that companion diagnostic for personalized medicine to know how to enroll my trial faster, enrich my trial and get it done quicker. So it's come together. In the area like oncology, you can launch a drug in 4 to 5 years. So to me, the time is right to bring the science together with the clinical trials. And if you do it in the specialty areas first, I think you'll get the greatest benefit, the fastest. And if you can do it in the specialty areas, then I believe the pharma companies will believe it can be used in all the other areas. So that's what I'm talking about when I talked about the science behind it all.

So I'll -- Dave and myself when I speak about Covance and having covered that company since the mid-1990s. But historically, what you had was a very good central lab, a very good early development business, a large, but maybe not always reputationally the best clinical business. The labs were what drove Covance. But they all operated, frankly, as a bit of silos. They didn't really ever integrate the way that I think the original vision was set out. With what you're talking about, especially with targeting oncology is a focus, are you speaking about a new organizational structure, a new go-to-market structure, how you sell to clients. Maybe you can hit on that for just a second?

So the answer is yes, yes and yes. But again, if you look at COVID, what we did is as soon as we realized that this was going to be something that we had to focus on, we put across division, a cross-functional team that included top members from diagnostics, from preclinical, from central laboratory, clinical development and they meet every single day to review every single trial. And I meet with them once a week, and I get an update on every trial, and there's hundreds of them out there. And then when they go to the client, now they're going together as a team to talk about what we can do from diagnostics, from drug development, from preclinical, from central laboratory. And it's a very different discussion, which I think is why we've been able to disproportionately win. I'm doing the same thing with oncology. And oncology, we're putting together an organization that will be run by an individual that will focus on oncology. I'm not going to pull out all the pieces from the areas that they sit because I think that it's important that oncology is part of your overall clinical development, but I'm going to matrix and organization together where everybody sits down at the table to discuss each trial that we have, each client that we're working with and puts that together one cohesive strategy for that client. And what I found is when you put that level of focus on things is when you can make a difference. And I am hopeful, and I expect to see us win more oncology trials based upon that. Once we do, we have to figure out how do we move into other specialty areas and ultimately into all areas.

That's great. Glenn, I want to squeeze you in here. You don't have formal 2020 guidance at this point. But on the second quarter call, you did project improvement in your base business. I think we're getting some signals of that today as well. I just would hope for a little more detail on your thoughts of progression as you look at 3Q and 4Q, maybe phasing comments, if you can? Or any other framing thoughts here that could possibly help the Street get a bit more comfortable with how to consider the third and fourth quarter of this year? And I'll just leave an open-ended question for you on that, Glenn.

Sure. And I think, Adam, kind of alluded to it in part of the discussions but our base business has been improving. We obviously commented on what we have seen in June and it continues. And one of the reasons we withheld guidance just for the year was just due to the lack of visibility, all the different outcome possibilities let alone. Obviously, what we've seen now with the antigen testing picking up and a softening in the PCR. So obviously, we're looking for a good performance throughout the rest of the year just given the current dynamics. But I think what we're most pleased with is the improvement that we've seen in the base businesses both of our businesses going forward. Still don't know how to read into the flu season and how that will affect again, will the base businesses which we would expect to see a nice improvement in the third will tick down again in the fourth, but that could have an impact, obviously, on the PCR side of the business as well, which would be offsetting. But right now, we feel good about the cost structure. We feel good about the labor that we have to address the current needs of the company. We continue to generate very strong cash flow, and we continue to manage in the current environment.

That's great. And I wanted to just kind of wrap up here. You mentioned cost structure. We've seen CROs obviously take some immediate cost actions. Some have had to already start unwinding those back to [ 401 ] back to hiring, et cetera. Have you found any permanent cost options, whether it be less travel and entertainment within the office space? Is there anything that has a lasting favorable impact post COVID?

Yes. So I think it's going to be a while before travel comes back anywhere near what it was. I also believe that it's accelerated the use of hybrid and virtual trials, which ultimately should have some type of cost implications for not just travel, but in terms of site visits and our MRAs traveling around. I do believe that there are certain roles that we've realized we can do remotely that we never thought before. So there should be some benefit over time to our footprint. And then we've learned that in many parts of the world. So we're going to continue to push there really hard. The other thing [indiscernible] as you know, Eric, with our LaunchPad initiative even in the COVID world continues. Obviously, that being modified, if you will, but we continue to see business process improvement initiatives, which will ultimately make us more efficient and lower our overall cost structure as well, and that will continue going forward.

That's great. Well, guys, we are just under a minute over, and we need to stay on time unfortunately. I could keep going. I hope you have a wonderful day. I want to thank all of you for joining us, Clarissa, Adam, Glenn. Thanks again, and good luck with the rest of your day.