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

Hey, good afternoon, everyone. My name is Donald Hooker. I am the analyst here at KeyBanc, who covers Labcorp as well as the broader health care IT and biopharma software and services space. Today is my great privilege to host a discussion with representatives from Labcorp. From Labcorp, we have CEO, Adam Schechter; CFO, Glenn Eisenberg; and the Head of IR, the new Head of IR, Chas Cook. For the investor audience out there, the hope is that this will be an interactive discussion. So if you have any questions, you can anonymously submit them through the KeyBanc conference portal, and I can relay them on your behalf to the Labcorp team as time permits. So with that, Adam, Glenn, Chas, thank you for attending our conference. We super appreciate your time. I'm looking forward to having a nice conversation. Adam, I believe you wanted to make some prepared comments for the investor community. And with that, I will give the virtual mic to you, and we'll follow-up thereafter with some Q&A.

All right. Thank you, Don. Good afternoon. I'm supposed to be here with you and all of your colleagues today. And I really wish it were in person, but with COVID and the situation, obviously, we couldn't do that. But I'm optimistic. I'm optimistic by this time next year at the latest, we'll be in a very different place for the country and also for the world. And I look forward to seeing you all again in person in the not-too-distant future. So I've been asked a lot about how my first year as the CEO of Labcorp went and whether it was as I expected it to go. I got to tell you, frankly, it was a remarkable year. To be able to see the Labcorp employees together fight the pandemic with science and innovation, with the speed and resilience that they brought to the table and to be part of almost every single aspect in the fight against the pandemic, whether it be testing or drug development or vaccine development, it was truly an amazing year. And we have to consider that we're still in the fight against the pandemic every day, and we're still working to do everything we can to help the country and the world through the pandemic. But if you go back to this time last year, I mean, our base business was down about 55%. We were hoping to be able to perform 10,000 tests a week, and our stock price was around $122. What a difference a year makes. Our scientists developed 6 FDA EUA COVID tests. We recently announced a high-sensitivity antigen test to screen for active COVID. And we also announced that we're working with Adaptive on their T-cell tests. In 2020, believe it or not, we did more than 35 million COVID tests. And if you look at where we are year-to-date, more than 42 million. Our capacity now from 10,000 a week at this time last year, we can do more than 300,000 tests per day for PCR and about the same for serology tests. And if you look at our time to results, it's about a day. We've won about 400 vaccine and treatment trials. We've partnered with a company called PacBio to genetically sequence COVID samples, allows us to track variants. And it will potentially help develop vaccines and booster shots, if recquired. And then if you look at our 2020 financial results, they are very strong. Our revenue grew in our Base Business for the first time in the fourth quarter despite record inflections that we saw. And in 2020, our revenue was $14 billion. It grew 100 -- it grew 21% versus the prior year. Our adjusted EPS was $23.94. It grew 112% year-over-year. And our free cash flow grew to $1.8 billion, an $800 million increase. And then lastly, if you look at our drug development trailing 12-month book-to-bill, it was 1.43, which was our all-time high. And our year-over-year backlog growth grew 22% as of the year-end. Now we entered 2021. 2020 is behind us, and we're moving in there with momentum and focus. We're continuing to execute on our 5-pillar strategy. We're looking to ways to be innovative in the way we deliver care to the patients that we serve, and we continue to look for ways to enhance shareholder value. And also, as you look at 2021, we've already formed an oncology team made up of very strong and talented leaders that are going to help continue for us to see progress in our quest to help in the oncology area. So lastly, Don, before I turn it back to you for questions, I just want to say thank you to my 75,000 Labcorp colleagues, who have been relentlessly focused on doing everything they can to not only keep our core business growing, but to make sure we do everything we can to help the country and the world through the pandemic.

Great. Yes. It sounds like you guys have accomplished a lot. Thanks for kind of reviewing that. I guess the topic du jour sort of has to be that last night, Labcorp, you all did make a media statement that you're undergoing a formal strategic review. I guess this follows a month ago, there was news that an activist invested in Labcorp as well. And I think as a management team, you've expressed some frustration at Labcorp's valuation as well as you commented last night in your media release. So let's address the elephant in the room head on here, kind of maybe a 3-parter, you may or may not be able to comment on, but just sort of the elephant in the room to address here. What kind of commentary are you willing to provide kind of on the strategic review process? Any sort of time lines when you and the Board might complete the analysis? And you referenced a potential update to the capital allocation strategy at Labcorp. You guys have a great balance sheet. A lot of options there. This could include, I guess, I'm supposing acquisition, share repurchases and/or potentially a dividend. Can you maybe walk through last night's media release and against those questions?

I would have been disappointed, Don, if it wasn't the first question. So of course, first of all, many publicly traded companies do these types of reviews. And our Board and the management team, including myself, are committed to regularly reviewing our strategy, our structure, our capital allocation, and you need to do that. And what we're trying to do is to ensure that Labcorp can best serve the patients who rely on us, but importantly, to enhance shareholder value. As we mentioned, since I became CEO, I've said many times before that I do not think our stock price reflects the full value of our 2 businesses. So we announced that we're going to look at our structure and we're going to look at our capital allocation strategy, and we're going to be open minded. Our goal is to continue to find ways to increase shareholder value, while we also continue to meet the needs of our customers in the marketplace. Many of you know, I regularly engage with shareholders. I actually enjoy it very much. I'd like to hear your points of view. I appreciate your points of view. I'm not going to comment on any specific discussions with any specific shareholders. But what I'll say is I've heard many different things that people have asked us to consider in the past, including structural changes but also capital allocation changes. And nothing is off the table. We're going to be systematic. We're going to go through the analysis very carefully and very closely. And then we'll report out the results of that analysis as soon as we can. So I'm not going to give a specific time line right now because I want to make sure that we do everything we can, move as fast as we can, but to make sure that the analysis is extraordinarily thorough as well.

Okay. And I guess, maybe diving into sort of the Labcorp as a holistic company. I know you guys have had some interesting successes and case studies where you've been able to sort of combine the lab testing business and the CRO Phase II, Phase III CRO businesses together synergistically. Can you kind of highlight some sort of case studies where you've had success? And are there sort of future successes that you can give us visibility to in the coming year?

Absolutely. And frankly, one of the reasons I believe that we've been undervalued is because all of you have been asking to give specific examples where you see the benefits of having diagnostic capabilities alongside of drug development capabilities. What I can say is I think COVID has accelerated our ability to do so. I'll give you several examples. One, if you look at the number of tests that we can do, 300,000 diagnostic tests per day, that's the largest of any commercial lab in the U.S. I probably would bet and say it's the largest in the world. We do that testing not just in our diagnostic laboratories, where we're using our drug development laboratory to do some testing as well. In addition to in the U.S., we're actually using our diagnostic laboratory in the United Kingdom to try to help with testing where they need it. The second thing is, as we did clinical trials for vaccines and as do the things like the central laboratory work, we were using our diagnostic laboratories to help ensure we can move faster than anybody thought we can move before. Because if you would just use your central laboratory, you wouldn't have been able to do the number of PCR tests, the number of antibody tests. And in fact, some of those tests were invented and developed in our Diagnostics business to perform in our Drug Development trials. Another great example is if you look at our ability to show speed of enrollment, I mean, we were able to identify where the uprates of COVID were -- was prevalent, where the most people with positive cases were. And we're able to use that to try to help with designing protocol but also where to place trials. So to me, COVID has really shown the benefit of having Drug Development and Diagnostics together. Now the question is, is it just COVID? Or do you see it on therapeutic areas? And the reason we focus on oncology so much is because I think oncology is another area that we can show some quick wins, where we can develop companion diagnostics together with doing clinical development trials, you'll be able to identify patients faster. And ultimately, you'll be able to have more targeted therapies at the end. So we have a significant focus on oncology. Once we show it in oncology, I believe we'll be able to show it in other specialty areas. And then over time, we'll see it across the business. So I think we have some pretty clear examples with COVID. Now the question that we have to show is that, that is transferable to other therapeutic areas, which I believe it is. And then over time, you'll see it across therapeutic areas.

Okay, great. And then as we think about -- let's dive into the businesses that you operate. Another sort of elephant in the room is another sort of topic du jour is sort of the announcement that last month that ICON is looking to acquire PRA Health Sciences. And I think ICON has a long-term strategy for its shareholders. But in the near term, as an operator of a CRO yourself, I mean how do you kind of think about the impact of a big merger of 2 clinical CROs across the marketplace and how it might impact Labcorp in the coming years? You've made some acquisitions in the CRO space yourself, of course. Do you see more consolidation among the CROs? And I guess, dovetailing on that, what -- do you have any updated view on the sizing and scope of your own clinical CRO operations?

No, I think it's an important question. And I've always said that I believe there was going to be some consolidation in the CRO space, particularly in the later-stage development where you saw this. The first question you have to ask yourself is, do you have what you need to be successful? And are you global enough to be able to grow and to meet your clients' needs? I believe that what we have with the Covance Drug Development organization is big enough and is scalable, where we don't need to do a very significant acquisition. In fact, if you look, we've built internally and organically a bigger presence in Asia, for example, where we did not have a big enough presence in China several years ago. We've increased substantially our presence in China and other parts of Asia. We've been able to shore up some of our virtual clinical trial needs with the acquisition of GlobalCare and with SnapIOT. So there are some smaller strategic tuck-ins that we continue to look at, particularly for things like hybrid and virtual trials. But I don't think you need more scale than what we have because in the clinical business, you can scale very easily once you have the customer base, but also have the global reach and the global base. And we have that. So even though I believe that there'll be more consolidation, I believe that the size that we have for our clinical development business is appropriate.

Yes. You referenced -- I guess, you jumped to my next question. It seems like the clinical CRO space is potentially being disrupted by sort of digital technology. You mentioned 2 acquisitions you made in the space, SnapIOT and GlobalCare. But I guess maybe as an operator yourself, is -- are these -- is this move to decentralize virtual clinical trials, digital clinical trials, whatever you want to call them, how financially impactful is this for your businesses? Is it more talk than walk? I mean how do we think about that as we stand today?

Yes, I think it's a very important discussion. And before COVID, we were making some progress, but it was very slow. And the agencies weren't moving fast enough. Therefore, the pharmaceutical and biotechnology companies weren't necessarily moving as fast. What you saw during COVID when all the sites were closed down or many of them are closing down, you needed a way to keep clinical trials going. You've got to be able to think about how do you have continuity in the clinical trial? You can't afford to miss doses. You cannot afford to miss people being monitored and so forth. So it kind of forced the industry a bit to move faster and the regulatory agencies to be a bit more acceptable and the pharmaceutical and biotechnology companies to think a bit differently. So the first thing I would say is, I believe it's here to stay. Now virtual and hybrid trials are 2 different types of trials. A hybrid trial, I believe, is going to be really meaningful, particularly in specialty areas. So hybrid trial is you still have a physician that you see or a specialist that you see. You just don't have to see them that often, and some of the visits you can do at home. A virtual trial, you don't even have to see your physician necessarily on a routine basis. I think hybrid trials will do well in specialty areas, where you still need to see your oncologists, you still need to see and get scans done and so forth. But thinking like large-scale primary care trials or Phase IV, Phase V post-marketing trials, I think you'll see more virtual trials as we move forward into the future. So my first comment is, I think these things have been accelerated, and I think they're here to stay. The second question is, does it change the fundamental economics of the business? I believe that will help us with our margins and improve our margins over time. If you can do more virtually and do more through technology, typically, that's going to help you with efficiency, effectiveness and cost, obviously. So I do believe that we're going to have to continue to watch our margins very carefully. And over time, I believe we'll be able to continue to improve our margins in the late-stage clinical trial business.

Great. And I'm just looking here at some questions, some inbound questions from investors. Obviously, a lot of interest here. I guess COVID-19, as you might expect, is coming up here. So with regards to the CRO operations, COVID-19 has been a sort of a tailwind for Labcorp. You've been among the leaders helping to develop vaccines and therapeutics, preclinical and clinical, I guess. I guess there is some concern out there among investors that there could be sort of a COVID cliff kind of a sugar high that wears off, and we could see some revenue headwinds as the virus is addressed and it loses -- perhaps hopefully loses relevance. How do you see sort of the flow of RFPs, bookings and revenues and COVID work over the course of this calendar year and into next?

Yes. So first thing is, we have done really well with COVID trials with more than 400 opportunities that we've won. I think it's actually even over 450 now. But at the same time, it's not a significant portion of our book-to-bill, and we gave that number in the third quarter. If you look at our backlog, it grew to nearly $13.8 billion. I mean that's a large backlog, and that gives you a sense of the future potential that we have. Some of that is COVID. And I think there's going to be vaccine trials, and there's going to be therapeutic trials for some time to come. And with booster shots and everything else, there might be additional trial work in the future. But importantly, we won the late-stage trials for large pharmaceuticals oncology portfolio. And that was a nice win for us. Second, we won another large pharmas outside of oncology business, which was another good win for us. What I've said before is if you look at our Drug Development business, there's 3 parts to it. There's the early-stage clinical development. There's the early-stage development. There's the middle kind of central laboratory work, and then there's the clinical work. We do really well in the central laboratory work and in the early-stage work, and we're market leaders in those areas. Where we needed to improve is in the later-stage clinical trial work. So the fact that we've been able to get our backlog to grow and the fact that it's coming in therapeutic areas outside of COVID to a very large degree, I think, gives us great confidence as we move forward into the future. And the last part of your question is RFPs. We're not seeing any decrease in RFPs. In fact, we're hearing that biotech and pharma is continuing to look for ways to accelerate their pipelines. And we've seen actually at least the same number of RFPs in general, maybe even a little bit more, frankly.

Got you. Maybe on the lab testing side of your operations, you have a lot going on at Labcorp. So can you provide any update on volume trends? We're sitting here in late March. Obviously, the economy is hopefully recovering here and people are getting back to normality. Hopefully, that translates to patient volumes for the industry. Can you give us an update there?

Yes, absolutely. Go ahead, Don. I'm sorry.

Yes. Just give us an update on volumes.

Sure. So I mean at this time last year, our Base Business was down almost 55%. By the end of the year, it was down in the high single digits. So we had a very strong recovery of the Base Business in terms of volume. If you look at January, it stayed about flat to the fourth quarter of last year. The good news is we saw an improvement in February, and for the first 2 weeks of March, we've seen a further improvement. So it certainly looks like the Base Business is coming back, and it's coming back well. It's not entirely where it was if you go back to 2019 and project where it should be today, but it's getting much closer. And it's continued to come back further than what we saw in the fourth quarter of last year and in the month of January. In terms of PCR testing, that has actually slowed down a bit faster than I would have anticipated. We're seeing maybe about 100,000 tests per day on average. But the question is, as we're now starting to see some additional breakouts, as we start to think about mutations, as we start to think about November and what could happen there, when we start to think about the need for antibody tests, it's hard to predict what the full year is going to look like. So that's why for our Base Business, we gave a relatively narrow range when we gave our guidance this year. I feel really confident about that. And if you look at the PCR business, we gave a much wider range, being down anywhere from minus 35% to minus 50%. And I would say it's a little bit faster decline right now, but I have a sense there might be some more upside as we go into the middle end of the year. So net-net, we're still confident in the range, but I gave a wide range because it has a whole bunch of potential scenarios within that. If you look at our Drug Development business, we still see about 70% to 80% of the sites open. So it's not at 100%, but it continues to be the vast majority of sites. And we're seeing our central laboratory business extraordinarily busy as well as our early stage as well.

Yes. And there are some questions here on sort of also consolidation, and I want to -- definitely, this is on my hit list to ask you as well. I mean I think that sort of in the lab testing area, the need for consolidation, I think, in U.S. lab testing to the 2 independent national labs, that would be, of course, yourself and Quest, has been a [ theme ] for some time because you have a lot of subscale labs out there. I'm wondering maybe if this -- we've been waiting for this for many, many years, but I'm wondering if this sort of consolidation thesis might be starting to happen now, can you update on us? We have the COVID-19 environment sort of pressuring smaller labs. We have sort of efforts to narrow -- towards narrow networks, UnitedHealth and others, Medicare cuts, et cetera, et cetera. Can you talk to us about conversations you're having with maybe some hospital outreach labs and other labs that are looking for a home?

Yes. So we're certainly having a lot of those discussions. And for the reasons that you mentioned, we're having more discussions today than we've been having in the past. And it doesn't surprise me because a lot of these labs have been under intense pressure. Many hospitals realized that they hadn't upgraded their equipment, they didn't have all of the latest and greatest things that they needed for COVID testing. So all of a sudden, they want to do COVID testing and didn't have the latest machinery and the ability to do that. So they realize they had to invest capital in the laboratories. And if you're a hospital and you think, boy, I'm going to have to invest more capital in the future. I don't want to put it into a laboratory or to another surgical suite, I think you're going to look at other ways to actually use your capital that are better served and have a company like us come in and run your laboratories or acquire and run your laboratories for you. So we are having a lot of those discussions. In fairness, these take longer than what I expected. So when I first started about a year ago, I thought we would be able to get these. So it makes so much economic sense, there's so many reasons why you should do it. But what I'd say is a lot of discussions. I am optimistic that we'll be able to do some of these acquisitions as we move forward. They just take a little bit longer than what I would typically think. But overall, I'm optimistic that there will be further consolidation, and we can be a player in that for sure.

Sure. I'm just looking here. Again, a reminder, sort of feel free to submit questions to the investor audience. Maybe one question I have. One area that sort of piqued my interest is, obviously, there's been a lot of buzz around telehealth, needless to say. You guys have had some success with an at-home lab testing product like you call Pixel for the audience. Walgreens is now selling Pixel actually over-the-counter, I believe, for the COVID test. I think in the past, you commented that Pixel was 7% of your COVID-19 testing volumes, which -- that's -- if I'm remembering correct, that's an amazing number. Is there a broader opportunity as you look forward here in other areas, obviously, as COVID winds down for the at-home Pixel technology?

Absolutely. No doubt in my mind. What's happened with COVID is consumers will play a much more active role in health care. People have decided they'd rather stay home than go to the doctor if they don't have to. And if there's ways for them to get the test either through telemedicine or going directly to one of our service centers, they would prefer to do that than they go into an office if there's sick people that could potentially have COVID. So do I think it will stay at this rate? Probably not, but I don't think it will go back to where it was before COVID. I think telemedicine is going to be much more prevalent in the future than it was in the past. And I think people being open to at-home collections and not having to go somewhere for the collections will be much more open in the future than in the past. And if you look at Pixel, we actually had that launched for quite some time before COVID, and we had it for a whole host of different diseases. And you can actually buy a kit directly from us online. You could go to one of our service centers, and we would take the blood for you and send it in. But we didn't get significant utilization of that. I think now that we've had so much utilization of Pixel. And I can tell you, if anybody's used it, I've not yet been in a group of people, a Zoom meeting or something like that, right, ask a question, where at least 1 or 2 people don't raise their hands and say they've used Pixel. The customer experience is terrific. And when you look at our NPS scores, which is a way of looking at customer satisfaction for Pixel, it's extraordinarily high. So now we're going to use that momentum to reinforce that there are other things that people can do with at-home collections and/or by going to a service center directly without having to necessarily go to a physician. And those would be for more common ailments. Of course, if it's a serious ailment, we'd rather them go to the physician. We're not encouraging people not to do that. But for common ailments that they can safely do at home, we think that, that's going to be a market for us to move into more significantly in the future.

Got you. And sort of another question from the audience on the issue of weather, obviously, and we all know we've had up here in the Northeast some significant snow. How does that -- I mean, I guess, can you maybe give us any kind of visibility to the impact of that in terms of, as you mentioned, the Base Business seems to be doing better. Obviously, that would be, I guess, ignoring the impact of weather perhaps because, I guess, weather would be potentially a big driver just giving people a heads up as we think about the 1Q results. Is that fair? Can you give any clarity around the weather?

Yes. There are certainly some issues with weather, whether it be storms in Northeast. There were some issues, as you know, in Texas that had significant implications. So there'll be certainly some impact to the Base Business for Diagnostics due to weather for the quarter. But at the same time, as I said, the Base Business is performing better than what I had anticipated and coming back a bit quicker. So I'm not going to give a new forecast for the quarter. But what I would say is that I feel good about the Base Business and where it is. And we tend and will show what the impact of weather is so people can understand that. That's what we've historically done and I would expect us to continue to do in the future. So as the quarter ends, and we report out in the quarter, we'll give specific information so you can understand what impact from weather there was.

Got you. We have a -- I guess, more of a technical question from the audience here, more specifics about the business. I mean the sort of the focus on big data and real-world evidence. I guess this would be for the clinical CRO area, a lot of emphasis on real-world data in clinical trials. I guess I haven't heard you talk as much about that, but that might just be because there's other things going on. So just maybe -- have you had exposure here? Is this an area where you're looking to invest?

Yes. So we have a pretty strong capability for real-world evidence. And we actually have some strong capabilities for post-marketing surveillance and also for safety assessment and those types of things. So we're prepared to take advantage, frankly, and work with pharma and biotech for those types of studies as we move forward. And we have significant capacity to do those. Even though they're becoming more prevalent, even though they're becoming more significant, they're typically not as complicated. And they're not as significant in terms of size or complexity. So when you look at it as a percent of revenue, it would be hard for those to become a very large part of a percent of revenue there.

Got you. And looking sort of here at the queue of questions, where we have a few minutes left here. I'm just trying to make sure we hit the audience on their topics of interest. In terms of the COVID-19 pricing, that sort of seems to be an interest here. I know you got the special sort of public health emergency price. Is that sort of -- that's for Medicare. And I guess that would trickle into the commercial space as well. And I know you charge one price for everyone, I think you've said in the past. So how is that price holding up in the sort of private sector?

Yes. So right now, you get reimbursed $75. But if you return the result back within 2 days and you average at the month before, you get another $25, so $100. As I said earlier, our average return times about a day. So the vast majority of ours meet the criteria and will be reimbursed at that rate. As we sit here today, we continue to have very good ability to have the price that we've had in the past. I think the fact that there's significantly less testing being done has helped with some degree. I would expect, as we go into the future, as we look more at schools and so forth, this is going to continue to be pressure on the price. But as of now, we've continued to be able to maintain it very well.

Got you. And maybe one last question in terms of margins. I know you took some sort of -- there's been some sort of volatility in the margins, I guess, particularly in the CRO area. You made some temporary sort of cuts and sort of pausing in spending. As we look over the next year or 2, is there a logical sort of terminal margin for that Drug Development segment for Covance? What are you aiming for over time? That's been going up.

So you'll see our margins continue to improve over time. Last year was a bit of an anomaly because the -- we didn't let go of people because they're so hard to find and so difficult to recruit, and it costs a lot to train them. So we had more people at certain points when a lot of the sites were closed down. So it played a bit of havoc on the margins. If you thought that was going to be long-lasting, you would have made some different decisions. But because we believed and we were correct that it was temporary, we held on to the people, even though we didn't necessarily have the business at points in time. What I would do is go back to 2019 margins, and we're going to continue to make progress in those as we move forward. I would say our margins in the early stage are good. Our margins in the middle kind of laboratory, since laboratory work are very good. Where we need to continue to improve is in the later-stage clinical. And I think as we win more of the big pharma clients, that should help. But also as we continue to work on the remote and hybrid clinical trials, that should help as well.

Great. So we are running up against time here. I wanted to sort of thank you for your time this afternoon. And I guess I'll sort of turn it back to you and ask you if you have any closing comments, and I always like to ask kind of exiting our discussion here if there -- in your discussions with investors, and what do you -- where are areas that maybe people don't fully appreciate Labcorp, areas that maybe I didn't ask or are there areas that are -- that you'd like to emphasize?

Yes. Thank you, Don, and thanks for having me here today. And for everybody on the line, thanks for joining us. Hopefully, you walk away with the sense that I'm optimistic, optimistic about what we've been able to achieve through COVID as an organization. I'm optimistic about the pandemic and where we are in terms of beating the pandemic in the United States and around the world. And I'm optimistic about our growth potential as we move into the future. We're going to continue to look for ways to unlock shareholder value. As I said before, I don't believe we're fully valued in our stock price, and we're going to continue to do everything we can to make sure that we meet the needs of our customers, the patients that we serve, but also we think about our shareholders as well. So thanks so much for your time today. I ask all of you to stay safe, get vaccinated as soon as you can and you're eligible. And hopefully, we'll be together in person soon.

All right. Well, thank you very much, everyone. Thank you to the Labcorp team. Bye-bye.

Bye.