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

Okay. So welcome, everybody, and welcome to the 2020 Healthcare Conference at Crédit Suisse. Obviously, this is in a virtual format this year. [Operator Instructions] And then with that, I think we'll get started with our first presentation of the day with LabCorp. We're happy to have the 2 leaders of the group here with us today. So we have the President and CEO, Adam Schechter; as well as CFO, Glenn Eisenberg. And we also have Clarissa as well from the IR team to help out, too. So happy to have the team here. Thanks so much for joining us in this virtual format. And happy to kind of get started and fire away with questions.

To start off, if we could, talk a little bit about what you're seeing in sort of the base lab business. In terms of that core base business, core volume growth, you noticed that -- or you commented that you were seeing some recovery in the most recent quarter. What are you seeing currently? What are some of the quarter-to-date trends to get us comfortable with what you're seeing in terms of underlying demand.

Absolutely. Erin, thanks for having us here today. So first of all, if you look at our base business -- I'm going to focus on the Diagnostics business first, and then I'll talk a little bit about our Drug Development business. If you recall, back in March, our Base Business was down about 55% versus the prior year. When we announced our results for the second quarter, we announced that June was about 17% below prior year June. And then in our last quarter, we said that we're about 9% for third quarter this year versus last year below. But also every month it's been getting a little bit better. And if you look at October, October was better than September which was better than August and so on. So we're seeing our base business come back very strongly. At the same time, we're able to do over 210,000 PCR tests a day. In the third quarter, I mentioned we were averaging about 120,000 tests per day. Unfortunately, the number has gone up. And with what we're seeing across the United States with significantly more cases of COVID, we are seeing more tests being requested for COVID. So as we look at October, we're seeing an average above 120,000 per day. If you look at our Drug Development business, that too has come back significantly from back in March. Our preclinical business is strong. It's almost back to where it was versus prior year. Our clinical development business in stage 3, we have about 70% of the sites opened. So that's better than where it was in March, which is about 55%. But we still have a ways to go for the clinical development arm.

Okay. Great. And what are you seeing in some of the areas that have had -- that have had kind of flare-ups in the pandemic? Are you seeing a different response than maybe you initially saw with -- back in March? Should we anticipate a different level -- level of potential volatility associated with that if things get a little bit more onerous from a pandemic perspective?

I think that's an important question and that's one of the variables that makes it so difficult to forecast what the rest of the year looks like. In general, where we've seen spikes in cases, we have not seen our Base Business go down like we did back in March. And even in areas of the country where they've gone back to only outdoor eating or no more gyms open or theaters open, in those areas, the physicians' offices have continued to be open. So we don't see anything near what we saw back in March. And I think there's a couple of reasons. One is we can manage COVID better now than we could back then. We have more PPE now than we did back then. And also, I think that we have a lot more telemedicine. So people are able to see their doctors, get prescriptions, but also get lab requests done through telemedicine. With all that said, as we go through the rest of the winter and flu season and we see continued increased spikes of cases, there could be a time when there's an impact on our Base Business for the rest of this year. I don't think there's a scenario that it gets as bad as it was back in March, but there are some scenarios that say if you have a very big flu season while COVID cases continue to increase, you could see some impact on the core business.

Okay. Okay. And then can you talk about your capacity, any sort of capacity constraints that you're seeing across the business from a COVID testing perspective? And how we should think about utilization of that sort of capacity and when we do start to see things normalize?

Yes. So what I'd say is back in March of this year, we were doing 2,000 to 3,000 tests a week. We're now doing 200,000 -- more than 210,000 tests per day. We can do about 300,000 antibody tests today, so the first test, the PCR test, that meaning the 210,000 capacity. We're continuing to build capacity. That capacity does not include the pooling that we're able to do. Our biggest rate limiting step, frankly, in building more and more capacity is just the number of machines that we need, especially the larger machines that run the actual PCR tests. At this moment in time, we still have not hit our maximum capacity in any given day. But I can tell you, there are some days during the week that are bigger than other days. So for example, Wednesday, you got a lot more samples than you do on a Sunday. And when I say we averaged 120,000 for the month of September, so that average means some days were a lot higher, some days were a lot lower. So there are days that we are getting as many samples as we got back in July, if not even a little bit more. So we are continuing to do everything we can to make sure we have increased capacity. But also, Erin, importantly, our turnaround time is still about a day. So that's still a really good turnaround time.

So it seems like you're well within that window. I know CMS recently extended that policy kind of through late January. Do you anticipate there -- I mean you'll be able to complete their -- or suffice for their 2-day turnaround time? And what are you expecting for reimbursement thereon for COVID testing?

Yes. So Erin, when we first launched, we had 3 principles: The first one was use science and innovation to build as much capacity as we can as best as we can. The second one was nobody to be advantaged or disadvantaged based on ability to pay. And that's why, as you mentioned, we've always used Medicare price. It was $100 per person for our test in the past. It's still $100 per person based upon the new CMS rules, but only if you turn around the tests within 2 days and also if the month prior your average turnaround time was within 2 days. We're in pretty good shape for that. As I said, our turnout time has been about a day for almost 3 or 4 months now. And as we continue to go through this year, we expect that we'll continue to have a turnaround time within the CMS results. So we're expecting to get the full $100 price. As long as there's the emergency declaration, I think that price will stand. That's currently through January, I think, 20th of next year. And the question will be whether that's extended or not. My inclination is that it will be extended. It's hard to believe that in the middle of the winter and the flu season, with either the current or new administration, that they would really change the emergency situation at that time. So I would assume that the price would be good for a couple more months after that. But once the emergency is no longer declared, I think you'll see significant price erosion. It will be very fast.

Okay, great. And you mentioned flu a couple of times now. I am curious about your multiplex panel, if that's something that you'll see meaningful traction with and what sort of reimbursement rates do you anticipate for that sort of flu-COVID multiplex panel.

Yes. So right now, we have a test available that their physician can offer for flu, RSV and COVID. The CMS [indiscernible] price is $143, and we're going to charge everybody that price, just like we did with COVID since the beginning. It's one of our principles. And then we have also filed an EUA for the Pixel at-home kit collection, where you can do the collection at home and then send it in for measurement of all 3, COVID, RSV and flu. And we're waiting to hear back from the FDA on that ultimately.

Okay. And how are you thinking about the quarterly progression then of PCR testing into the fourth quarter here? Then should we anticipate a step-down or a step-up based on what you're seeing? Like is it -- I know most -- what exactly kind of are you anticipating here coming into the fourth quarter?

So as I said, if you look at last quarter, we're averaging about 120,000 PCR tests a day. We're averaging a bit more than that if you look at the month of October. It's impossible to predict November and December. So my sense is it's going to be at least the same of last quarter, probably a bit higher.

Okay. And serology testing, my sense is that, that hasn't necessarily picked up as meaningfully as maybe anticipated or maybe just a little bit slower traction. What are you expecting on that front in terms of traction? Will that be meaningful? Or is it meaningful today?

It's not a meaningful part of our numbers today. And in fact, if you would have asked me back in March when I thought it would be much more meaningful now than it is, I would have said yes, and that's why we built capacity to do 300,000 of those tests per day. We haven't needed nearly that many. In fact, I think it's like 10,000 to 20,000 per day. But the reason why is the science isn't yet there. And if you have an antibody test and you actually saw you have antibodies, we know for a minimum it means that you had the virus in the past and your body beat it. That's a good thing to know. But what level antibodies you need? How long the antibodies last? Whether you have the ability to fight off the disease just by having antibodies, yes or no answer, we don't have any answers to any of that right now. So we still have to learn a lot more. I think the guys who go through the vaccine trials can learn a lot. But also, we are studying not just [ COVID ] antibodies, but we're also looking at neutralizing antibodies, quantitative antibody analysis. We're also looking at T cells. So we're developing a whole bunch of different tests. Depending on what the vaccines show and what we might need in the future, I think these tests might play a much more important role in the future. But frankly, it's just too early to tell from the science.

Okay. And I know there's a lot of variables you're considering here, but when would you feel comfortable? And what do you need to see in the marketplace to actually give us some more explicit guidance? Or do you feel more comfortable on the visibility of the business?

What I would say is I would break apart the 2 pieces, look at our base business and look at the COVID testing. And it's how I look at it as I go into next year. Our Base Business I think we have a fairly good sense of what that will look like, what the recovery looks like. And over time, I think we'll have a better sense of that. COVID testing has so many variables in it as far as -- you mentioned already price, how long the price will last, when will there be a vaccine. There was some good news today with one of the vaccines this morning. If there is a vaccine, how many people will want it? How many times you have to take it. So there's still a lot more that we have to learn on the COVID testing. That's a pretty big number for us right now. But to me, the COVID testing is the harder platform to really get your arms around... [Technical Difficulty]

I think we're getting a little bit of feedback. In terms of -- hopefully, you can hear me okay. And then in terms of PAMA, is -- do you anticipate any sort of further PAMA relief other than what we've heard from the CARES Act? And do you think you've earned some goodwill from the government in terms of the response to COVID?

Yes. So the PAMA impact from next year was pushed into the following year. So that's good. We appreciate that. I think it's helpful as you go through and plot the ambiguity. My personal opinion is it should be removed forever. I think that the world and the United States had a new sense of importance of diagnostic testing. I think this has shown us the importance of what we do. And if you ask me the reason we were in such trouble in March, partially it was because this industry has been hit so many times by things like PAMA. And if you really want to make sure you are ready for anything that could happen in the future, you want to have some additional excess capacity. You'd want to have dual supply chains. You would want to have the ability to scale up quickly and you'd want to have your labs with the latest and greatest equipment. And many of those things didn't happen. For example, if you look at the state labs, they had older equipment. Some of them were using Windows 93, I think. But they needed to really gear up quickly to get ready. So I'm hoping that we'll have a strong argument to say, don't start what is only 3% of your health care spend. Diagnosis is only 3% of health care spend and it's involved in 97% of health care decisions. And if you really want to get ready for anti -- COVID resistance or all these other things that we may face in health care in the future, I think you have to feed your diagnostic business a bit versus starving it with things like PAMA. So you can tell I'm passionate about it. I'm going to make my pleas to whoever will listen. Our industry group, ACLA, will also talk to everybody who will listen. But I do believe the world has a new understanding of the importance of diagnostics and also drug development, which is the other half of our business.

Okay. And that kind of leads into a broader question that I have and that we've been getting from investors is sort of what structurally changes with your business in a post-COVID world? Is this something that we simply lap at some point? Is there longer-term implications for this? Is it better consumer-driven initiatives around diagnostics? Or is it -- and how do you kind of play a role in that? And we're just trying to think of this in a post-COVID world, how do things meaningfully change for LabCorp?

Yes. So number one, technology has changed for the good forever. So things like telemedicine, I think, are here to stay and making sure that we're able to be -- the electronic medical records for telemedicine physicians and those types of things are important. Making sure our distribution channels and our courier services work with telemedicine is going to be important. Making sure that we have enough access points for people to get their blood tested will be important. At the same time, we've seen things like the Pixel at-home tests, where we're doing at-home collections for COVID. And Pixel had been around for years, and very few people use it. I think now people understand and Pixel's become almost a houseful name. And I think that there may be opportunities for us to do other at-home collections in the future. As technology for ways that you can take your own blood and those things increase over time, I think there might be a better business for us in that way over time. But 2 things that we're not sure of yet. I get asked all the time, do you think point-of-care testing is here to stay and will expand? And I'd say in the typical dynamics of our industry, there's 3 things people look at: quality, speed of results and cost. In a COVID pandemic, people are willing to give up a little quality and are willing to pay a lot more if they can get speed. Typically, people want the best quality at the lowest cost. For something like diabetes test, they're not that worried about getting the results back in a day versus in 15, 20 minutes. So I don't think that the point-of-care testing, which is typically faster and more expensive, but not the same quality, is going to impact our business in a significant way. I think there'll be certain parts of the market that we may want to participate in for point-of-care testing. But in general, I think that the work that we do, which is high volume, high quality, good speed is going to continue to be the direction after COVID.

Okay. Great. And then thinking about the M&A environment across the lab space, do you think that we'll see some sort of a tipping point in terms of consolidation? I know we've been talking about that for years. But will we see any sort of expedited consolidation across the market?