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

Okay. I think we're going to go ahead and get started. Thanks, everybody, for joining day 2 of the Citi Virtual Healthcare Services Conference. I'm Ralph Giacobbe. I cover managed care and health care facilities and providers here at Citi. We're happy to have Labcorp here today. Joining from the company is CEO, Adam Schechter; CFO, Glenn Eisenberg; and from IR, Chas Cook. Guys, appreciate your time here today. I'm going to turn it over to Adam for some introductory remarks, and then we'll just sort of jump into Q&A right after that. Adam?

Yes. Thank you, Ralph. Good afternoon, everybody. It sure is a pleasure being with you all today. I wish it were in person, but I'm optimistic. I'm really optimistic that by this time next year, we'll be able to be in a very different place for the United States and for the world than we are today. And I'm hopeful that we'll be able to see each other before this time next year, but I really believe that we're making a lot of progress, and we'll be in a very different place as we move forward through this year. I've been asked a lot about how my first year as the CEO of Labcorp has been, whether it was what I expected it or not. And I can tell you, frankly, it was a remarkable year. I mean, to be able to see the Labcorp employees come together to fight the pandemic and really use science and innovation, speed, resilience. And we were involved in almost every single aspect in the fight against the pandemic. It was truly amazing. But it's not over. We're still in that fight. And every day, our scientists, our laboratory technicians, our laboratories are still doing everything they can to help the country and the world through the pandemic. In fact, if you look in 2020, our scientists developed 6 FDA EUA COVID tests, 6 of them. Most recently, we announced a high-sensitivity antigen test. In 2020 -- think about it, at this point in time, we had not run our first PCR test yet. But in 2020, we did more than 35 million PCR tests. And if you look at where we are today, it's more than 41 million. Our capacity today, we can now do 275,000 tests a day, and that doesn't even include our ability to do pooling. We also can do 300,000 tests per day for serology. It's pretty remarkable when you think about where we were at this time last year, and we were trying to ramp up to do several thousand tests a week. Our average time to result is about a day. Even in the worst of the pandemic, back in the holidays of Christmas last year and Thanksgiving, we still had a turnaround time of about 1 to 2 days. We've won more than 400 vaccine achievement studies, and we're involved in so many trials. It's remarkable. We've also partnered with a lot of great companies. We partnered with PacBio, for example. There, we're sequencing the genetic sequences of the virus, so we can understand the mutations and then that can potentially even help as we think about booster shots for vaccines, knowing where the mutations are and when they occur. All of that innovation and science, it led to great financial results in 2020. Our revenue grew in our base business, the base business of both Drug Development and Diagnostics in the fourth quarter, and that's despite the record infections that we saw in the fourth quarter. But if you look at the full year, our revenue of $14 billion grew 21%, our EPS of $23.94 grew 112% and our free cash flow was $1.8 billion from $1 billion in 2019. Our drug development trailing 12-month book-to-bill reached 1.43 and our year-over-year backlog growth was 22% as of the year-end 2020. So as we enter this year, we have momentum. We have momentum, and we're going to continue with our strong focus. We're executing against our 5-pillar strategy. We're being innovative in the way we deliver care and enhance shareholder value. We formed an oncology team. We announced several new leaders, and we're making significant progress. And importantly, before I go back to Ralph to answer questions, I just want to acknowledge our 75,000 Labcorp employees around the world for their tireless efforts last year and for their tireless efforts this year. It's truly appreciated. So with that, Ralph, I'm glad to answer whatever questions you may have.

Great. Very helpful. Thanks for that commentary. I guess, I clearly want to jump into operations. But just given some of the recent headlines, I feel like we should try to address some things upfront. So Jana recently has gotten involved in your stock and there were headlines of them nominating directors to the board. Can you give us a sense, have you engaged with Jana? And if you have, what can you tell us about those conversations?

Yes, Ralph, we regularly engage with many shareholders. I engage with you all the time, but I also engage with many of the people that are on video right now. I enjoy those conversations. I appreciate hearing other people's thoughts and ideas, and we're going to continue to do that as we move forward. Of course, I'm not going to give specific information about any discussions with individual shareholders, but what I can tell you is that we are very active in discussions with our shareholders and have been.

Okay. Fair enough. Understood. So I guess, the next natural question is, maybe how do you look at the structure of the company and sort of the merits of keeping the 2 businesses together, given very different valuation multiples, particularly when comparing against other publicly traded CROs?

Yes. So we're focused on successfully executing our strategy. And I think you've seen significant progress. When I first started, people asked, how are we going to continue to show the benefits of having Drug Development and Diagnostics together? My focus was on oncology in the beginning, but then COVID hit. And there's no doubt in my mind, with COVID, people have seen the benefit of those 2 platforms together. In fact, our Diagnostics group is doing testing for vaccines. When our Drug Development group is getting the samples in, we can use our diagnostic capabilities to try to turn those around faster than you could otherwise. Our Diagnostic group developed a neutralizing antibody test, which is very important for vaccine development. In the United Kingdom, they needed to have some testing done for PCR. We were able to have our Diagnostics team help our Drug Development team pull up testing in the U.K. So our pharma colleagues, our biotech colleagues, government officials have really begun to see the progress that we've made by having these 2 parts of our platform together and working well together. And we have momentum, and you see that momentum. What we're going to do now is show it even more in oncology. And if you look at oncology, I mentioned that we brought in 2 new leaders, but we also won a very large pharma's oncology late-stage clinical trials last year. That will begin this year. That is significant progress for us. So I believe that you're going to continue to see us move and gain momentum and continue to grow over time.

Yes. Okay. Fair enough. I guess, when I think about the business, right, you combined -- you've had the combined lab and CRO asset now for 5 years now. And that sum-of-the-parts value has kind of never really taken hold. So going forward, how do you think you'll be able to sort of extract or show that value to the market that seemingly hasn't been willing to pay for it up until this point and sort of show that synergistic benefit, I guess, of sort of the 1 plus 1 equaling at least 2, if not more, right? Because right now, I think the argument is the 1 plus 1 is not showing 2 as it relates to sort of what you're getting credit for in the public markets.

Yes. So Ralph, let's start off by saying we've showed a lot of progress, and I think COVID enables us to show progress even faster than what we would have seen with oncology. Now we're going to see it with oncology. But what I'd also say is I believe we're undervalued. And that's the opportunity. That's the growth opportunity that you have in Labcorp. That's why if we continue to deliver, if we show that we can do the same thing for oncology we did with COVID, we're then going to show it in Alzheimer's and in rheumatoid arthritis and all these other disease areas where you can see by having diagnostic testing combined with drug development, you can help with that data and information, get drugs to market faster. You can do clinical trials potentially better. And then once the drugs are launched in the marketplace, if it's personalized care, you can actually do diagnostic testing in the marketplace as well.

Okay. All right. Fair enough. Another sort of headline topic that came up just yesterday, a pretty sizable deal in the CRO space with ICON and PRA. Maybe let's just start with, any high level thoughts, I guess, on either that combination and/or how that may or may not change the competitive landscape within the space?

I've been asked before, do I think there'll be consolidation in the industry, and I've always thought there'd be some consolidation. There's no doubt that you have to have a certain size in order to compete and be successful. You have to have a global scale. You have to have a presence in China. You have to have a presence in Japan. You have to have a presence across Europe and obviously in the United States. But once you have the scale, then it's all about delivering. When you say you're going to do a trial, you better deliver the trial with the highest quality and the time line that you commit to. And then it's about differentiation. What else can you offer above and beyond doing the clinical trials? That's where I think diagnostic capabilities, developing companion diagnostics can come into play. So I believe that we have the scale we need. We had to do some organic growth in terms of growing our presence in China, and we've done that. We've grown our presence in Japan. We're going to continue to grow a bit more in Japan. But we have a very strong presence across Europe and the United States. I believe we have the scale we need. We've been delivering. I mean, I think the pharma and biotech companies have seen us deliver like big time when it came to COVID and all the trials we've been involved in. And now we have to make sure we continue to show how we differentiate ourselves.

Okay. All right. Fair enough. Maybe let's just jump into operations at this point. And maybe let's start, if you're willing to share what you've seen maybe over the first couple of months of the year for both sort of COVID trends and maybe core trends at this point.

Sure. So I'll start with the core trends. As you may recall, at the end of last year, we reported that our base business, particularly for the Diagnostics, was still down about the same, in the high single digits. As we came into January, it's still down, frankly, in the high single digits. February, it's still down a bit. But to be honest with you, there's been a lot of weather impact, and there's been some issues as everybody knows in Texas. So it's a little bit hard to know exactly. But our expectations is for the first several months, maybe even for the first 6 months of the year, the base business will be slightly behind where it was prior year when it was normalized. But then as we go to the second half of the year, that's where we expect we're going to see that base business get back to more normal levels. As you look at our Drug Development business, the base business, you saw a very strong growth at the end of last year. You saw our book-to-bill grow. You saw us do very well. That's even with still about 20% to 30% of the sites that have not fully opened up. We are seeing more and more sites open up. We're seeing more and more studies that are beginning to start or are about to start. But at the same time, it's not fully back to where it was prior to last year. And if you look at COVID, we've seen a significant decrease in the number of PCR tests that we're running right now versus when we were in the peak, which was around Christmas time and New Years' time. We're still seeing somewhere in 100,000, 120,000 per day range of PCR tests. But our expectations is that we'll continue to have a significant amount of PCR testing for the first half of the year. But then as we get into the second half of the year, it will probably decline. And if you look at our guidance, we said we believe that PCR testing will decline between 35% and 50% this year versus prior year. And I think that's somewhere about right. It's a pretty wide range, and there's a lot of different ways you could get there. But based upon everything we know today, I think that's still a realistic range, albeit wide.

Okay. All right. That's helpful. And I want to stay on that point, right, the down 35% to 50%, right? Because I think, when I look at 2020, over the pandemic period, you averaged about 100,000 tests a day, I believe. Again, that's an aggregate. So the down 35% to 50% essentially suggests 57,000 tests a day on average for the full year. And again, as you mentioned in the first quarter, it seems like you're averaging well over the 100,000, certainly from the start of the year. So again, guidance would suggest a pretty steep drop off as the year moves on, almost to a point of it being negligible by year-end. Is that sort of the fair way to look at it in terms of what you've embedded in?

Yes. So again, we gave a wide range. I mean, 35% to 50% is a pretty wide range, but that covers a whole bunch of different scenarios. One scenario is that we continue to see a continued decline month over month over month. And by the end of this year, we're still doing some testing, but nowhere near where we were at the beginning of the year. A second scenario is that we see a decline for the first half of this year, but then when flu season hits, if this is another -- if this is a big flu season, in 2020, it was the smallest flu season, I think, in 25 years. If this flu season in 2021 is big, if you got the vaccine but you still have significant symptoms of the flu, I think you're still going to get tested with a PCR test because you're going to want to know, did the vaccine work on me, am I one of the 10% of people that it didn't work in, or if 30% of people don't get vaccinated, you're going to want to know. So there is the chance that the second half of the year could be strong depending on the flu season. So the 35% to 50% has many different scenarios built in, none of which we can predict with certainty, but I think it's wide enough to say there's multiple ways to get there.

Okay. All right. Certainly makes sense. And then just quickly to follow-up and finish off this topic, on the other side, you imply what appears to be kind of a generally healthy bounce back of core trends for the Diagnostics side. I think guidance suggests up 11% to 14% off of the suppressed 2020 or up about 4% off of kind of the 2019 baseline. There's certainly a lot of debate around utilization trends for this year. I guess just what gives you sort of the confidence in that base growth to grow above that 2019 level?

We're seeing strength across our businesses. And even with the worst part of the pandemic in the fourth quarter, we still saw some revenue growth in our Diagnostic base business. So that gives me a sense that as it continues to come back, because the base business has been flat, down high single digits probably for about 4 or 5 months now, that I believe that's going to continue to get better. And as that gets better, it's going to give us more and more momentum. The other thing that we've seen is an increase in the number of tests per accession. And it's been interesting because that's been a real upside for us. It's not something that we necessarily anticipated, but we're certainly seeing it. I think that as people have not gone to their doctor or they might have missed doctor's appointments or the physicians are worried about when they might come back next, they're just prescribing more tests for each accession. Whether that remains after the base business gets back, I don't believe it will, but it may, and we're going to have to continue to watch that very closely.

Okay. Fair enough. I want to move to COVID reimbursement. It sounds like payers are largely adopting the CMS rate and with PHE, that should stay in the kind of $100 range as long as turnaround times are within that sort of 2-day mark. Is that your expectation sort of for the year? And I know Quest recently talked a little bit about it may be trending a little bit lower. One of the things they cited was direct client bill. So just maybe interested in your general thoughts on average COVID PCR reimbursement.

Yes. So well, first, let me define the way it's measured, and then I'll answer the question directly. But if you look at what CMS released at the end of last year, it was that you get reimbursed $75. But for the month before, your average turnaround was better than 2 days. Then for the current month, you look at each test and if it's under 2 days, you get an additional $25. As I've said, our turnaround time has been about a day. So the vast, vast majority of our tests are being done within that CMS guideline, so I feel great about that and I feel confident that they should be around our average price that we saw all through last year, which was around the $90 level on average. As I go through the rest of the year, there'll be continued pressure on price, there always is, but we're going to be in a declaration -- emergency declaration for the entire year. And I think that gives us the ability to hold on to price better than you would typically. So I'm planning that as we go through the year, the average price will stay about the same.

Got it. So -- and what about the direct client bill piece to it? Is there -- I mean, is -- that's probably part of the reason why the average is $90 to begin with. So your suggestion is, it sounds like, that you're not seeing any sort of incremental pressure above and beyond on that direct client bill. Is that the fair interpretation?

Yes. What I would say is we always have pressure. But what we're doing is human's work, and it's important to the country. And I feel like we have a strong ground to continue to really have a strong argument for the price.

Okay. All right. Fair enough. And then jumping to sort of the rollout of the vaccine. Maybe help us with discussions with employers and schools in terms of accelerating this notion that we have a greater line of sight seemingly back to getting people into buildings. Has that continued? Has it maybe died down on the premise that the vaccine won't require the same level of testing or maybe more point of care? Just give us a little bit of a sense of some of those conversations and what the opportunity may be.

Yes. So first of all, Ralph, when you and I talked at this time last year, I think you had asked me -- or I've been asked by many, when do I think there'll be a vaccine available. And my answer was at the earliest would be the middle of 2021. I just want to say how remarkable it is that here we are and 2 vaccines are already approved with 94% efficacy. And there could be a third one approved shortly. I just want to give a lot of credit to our pharma and biotech colleagues. We've been a large part of many of the vaccine trials, and I'm thankful to the Labcorp employees. But I think science and innovation has really shown how strong it can be when we put our minds to it. So that's remarkable. I encourage everybody to get vaccinated as soon as they can. When people ask me which vaccine should they get, my answer is the fastest one you can get. As far as what the impact is on testing, I believe that there will be less testing as more and more people are vaccinated. However, what we don't know is how long will people be protected for, will people have to get booster shots, will there be 30% of people that refuse to get a vaccine, and if 30% of people don't get a vaccine and it doesn't work at 10%, that means 40% of America won't be protected the way they should be. So I still think there's going to be a need for testing. And I think there's going to continue to be mask wearing for some time. And I believe that we're going to have to continue to reinforce the importance of COVID is going to be here for a long time. It's not like it's going to go away by the end of this year. We're going to have to learn to live better with COVID, and I think we can do that. With regard to back-to-school and back-to-work, it's been interesting. Many places that we're working with to try to get them back to work have decided to continue to allow people flexibility and to work from home, even when some of them are vaccinated. I think we're going to see a gradual build back to work. Point-of-care testing, I think, is going to be helpful for people to get back to work. But at the same time, I don't think you're going to get into a situation where every employee is tested every day. I still think there's a more rational way to think about testing to get people back to work. And frankly, when people go back to schools, we've seen that even with the testing available today, you can do that pretty successfully. So I think we're going to see more and more schools get back up and running. We'll offer testing to help schools if they want to, as they go up and running. There are discussions about whether they should use pooling, point-of-care test, antigen tests. The good news is we can help them with any of those testing. And I think you're going to see different schools and different employers act in different ways, all of which we're prepared to help and be part of.

Yes. Makes sense. Okay. And then sort of rounding out the discussions on sort of the guidance piece. I mean, obviously, you gave us 2021. And I know it's difficult enough to try to figure that out, let alone go to 2022, but I'm going to go there anyway. Any general or directional thoughts on sort of COVID testing specifically for 2022? Like -- and I just mean that in the sense of do you think it's going to be a cliff and ultimately be more of a marginal amount in perpetuity? Or do you think it could represent a couple few percent of total sessions for you guys on a go-forward basis?

Yes. So I think PCR testing will continue to be around, particularly as you grow through flu seasons. People have said to me, well, flu has moved to point-of-care. The difference between flu and COVID is COVID is more contagious, and more people are severely impacted, potentially for long periods of time. So when you think of point-of-care testing, it is more convenient, it's more expensive, but it's not necessarily as accurate. I think when people are ill and a doctor wants to know what they have, and they think it might be COVID, that they're going to still want to do a PCR test. So I think that there will be some PCR testing. But to me, when you said COVID testing, that's an important caveat. I think that we're going to have a different use potentially for serology and/or for quantitative antibody, looking for titers, for example. We're not sure exactly how that's going to play out. But you see that we have a semiquantitative antibody test now. We also announced that we're going to be working with Adaptive on a potential T-cell test. We're trying to make sure that we're prepared for any which way it could go for people to understand if they continue to be protected from COVID. And we don't know what that could mean in the future, but if it needs to be scaled and if it's going to be significant, we're going to be ready.

Okay. Got it. Makes sense. I wanted to circle back on the revenue per session sort of commentary they made earlier, just more tests per session that's actually helping sort of drive up that pricing stat. But I do think there's some discrepancies in how you define some of the metrics and how Quest does mainly around the hospital lab management agreements that would tend to, I guess, depress your volume stats and inflate theirs, but by the same token, it sort of inflates your pricing stats relative to theirs. So I guess what I'm trying to get at is I think in the fourth quarter, you put up 8.2% core pricing from 4Q -- from sort of a year ago, seems a little bit out of whack. But I guess is there any way to exclude that lab management agreement? And second, maybe just give us a sense of how much test per session is up the last couple of quarters versus what it normally has been up.

I'll give you a little bit. I'll ask Glenn to jump in and provide a little bit more specifics here. But we did report 8.2% that was driven in the price, 4.9% of it was from tests per accession. So the vast majority of it, almost 5 out of 8, was from the test per accession. Glenn, anything you want to add there?