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

Hi, everyone, I'm Kevin Caliendo, Healthcare Services Analyst at UBS. This afternoon, I am very proud to have with us Adam Schechter, CEO; and Glenn Eisenberg, CFO of LabCorp. Gentlemen, thank you so much for joining us today.

Yes, it's a pleasure to see you, and we're glad to be here.

It's really good to see you, guys, and nice to see everybody in the same room with no masks on. And hopefully, everyone down there is healthy and well. I wanted to start off maybe a little bit different than normal. I've heard you speak a couple of times recently and you talked about how you think your stock is undervalued. And quite frankly, I think your stock is undervalued as well. But to prove that your stock are -- to show that your stock is undervalued, there's typically, if you're an investor, there's 3 ways that, that manifests itself. One, you execute and earnings go up, confidence in the stock and the company goes up and your multiple expands. Or 2, you come up with a strategic means to create shareholder value, whether it's through asset sales or spins or capital deployment or M&A. Or 3, somebody else, a third-party comes in and looks at you and says, "Oh, this is a very inexpensive asset", and makes a bid for you guys.

So I want to sort of talk about those 3 options for you guys. I know the strategic review is on the top of everyone's mind right now. So maybe we should start there. Maybe give us a little bit of a background. Where are we in the strategic review process? How far along are you? How long is it going to take? Why don't we start there?

Yes. Thank you, Kevin. And if you look at our performance, I think we've been executing very well. And we've been executing well across both businesses. You can see for the last several years, both the diagnostic and the drug development business has performed well and versus competition in -- where they compete, we've performed well. So the first thing I would say is that we are going to continue to execute well in the marketplace as we go through the analysis. The second thing is in March, we said that even though we're doing well, and our stock has performed well, we still believe we're significantly undervalued. And based upon that, we announced in March that we're going to conduct a review of the structure of the company, but also our capital allocation strategy. As so -- the Board working closely with the management team and we're going to do a very thorough review to make sure that we're well positioned to unlock shareholder value. And we do all the things that you just mentioned. We're going to look at everything. We're going to look at all possibilities including the ones that you mentioned and even more than the ones that you mentioned. Because I think there's other strategic alternatives that we can look at from both a structure and capital allocation perspective. The thing is it's going to take some time. And the Board, along with the management team, is committed to doing a very thorough review of all the options. And once we reach conclusions, as a Board and management team, we'll give a further update on where we are, what we found and what we think the appropriate path forward is. But the thing I want to ensure everybody is while we go through this review, we're committed to executing on our strategy in the marketplace and continuing to perform well.

Well, I appreciate that. And I didn't mean to exclude the execution part from my question, given -- I was almost data complete, you guys have done such a good job over the last 2 years. I was sort of taking that for granted. Let's talk about the strategic view. Everyone has been focused on the CRO, right? And what's going to happen with CRO? There's been a handful of transactions in the marketplace. And we can talk about the impact of all the other transactions later. But when you think about your CRO, you've given us a lot of reasons why it makes sense for that business to remain and that their synergies with the Diagnostics business. Have you contemplated any what the benefits of the CRO might be and the Diagnostic segment might be separated? Meaning, is there a benefit to them being a part as well as being together?

Yes. So as we look at the review, we're going to look at everything. And we're going to really make sure we're thorough in every option. I've always said that I believe that there is benefit from having Diagnostics and Drug Development together. And if there are synergies. The question is, are those synergies enough to offset the valuation gap that we see. And that's we have to look and take a really hard look at that and make sure that we understand it. In terms of the business is performing better separately than together, we'll take a look at that, as we're looking at everything else. Because when you do a review like this, you have to be open minded. You have to make sure it's very thorough. Because when you reach conclusions, people going to want to understand how you reached those conclusions. So that's where we're really spending the time to do the work and to do the thorough analysis. But we're going to look at all the options, including the 1 you need just recommended looking at from both sides of the coin.

With regards to the CRO, there have been a lot of deals. There's only a handful of CROs now that are, what I would call independent. We've even seen acquisitions from non-CROs into the CROs section with TMO recently. Has that in any way impacted how you view the CRO either from a valuation perspective or from the either opportunity set from partnership -- from companies merging together or the fact that there are fewer partners out there available to you to potentially partner up with your CEO -- CRO, if you were with Covance, if you're thinking about doing that?

Yes. And what I'd say is obviously, we're aware of all the different things that are happening in the marketplace, and we watch it very closely, as you can imagine. And we take into account all of that as we think about the options that we have before us. What I've always said is, in this business, scale matters to a point. You have to have a global presence in the CRO business. You have to have a presence not just in North America, but in Europe and in Asia. Once you have that presence, I think you have enough scale that you can grow by yourself internally. If you don't have that scale, then I think you have to look at these types of additional acquisitions, because it's hard to develop from scratch, for example, our presence in China, or our presence in Japan. If you look at our drug development business, we have scale across all 3 parts of the business, preclinical, central laboratory and in clinical research. So I think that we have scale. It's not a matter of is do you need more scale or not scale, there may be reasons that scale could be potentially helpful but I don't think it's hurtful if you don't have more scale than we have as long as you believe you can build additional capabilities internally. But the most important thing I can tell you is we're listening all of it, and we really are doing a very thorough review of every one of our strategic options. And keeping in mind, obviously, what our alternatives are, what's happening in the marketplace, what's happening with the different deals that you just mentioned. So of course, that's part of our analysis.

You say you have preclinical, you have clinical, you have the central lab. And geographically speaking, you have enough scale. Is there synergy between preclinical and clinical? That's always been a debate in the industry to a certain extent. Not every company has it. Some companies do better with one. The other, I think CRL was 1 who decided they just wanted to be preclinical. Can you talk about that? And your view around the synergies between those two? And even if you wanted to bring the central lab in as well.

Yes. I think historically, it's been hard to show synergy between preclinical, central laboratory and big clinical development. But I think as you think about the future, I think it could be very different in the future, and I'll tell you why. Historically, when you did preclinical work in Europharma, it was a long time for preclinical to actually launching a product. So typically, it could take 15 years. I mean, when you had to do cardiovascular outcomes trials for diabetes drugs, for example, it would take a long time for your preclinical work to launching in the marketplace. And therefore, you didn't have a lot of discussion between preclinical, clinical and frankly, marketing. Today, when you look at specialty products, for example, oncology drugs, you can get to marketplace in 3 or 4 years. If you look at a COVID vaccine, that was done in a remarkable time. I'm not saying those drugs will be as fast, but it just shows you that things are moving faster today than they have before. So therefore, I think the discussions between preclinical and clinical are happening much more often today, than they happened in the past. The second thing that's happened is payers are being much more discrete than what we're going to pay for. So in the past, if you had a new chemical entity in a new class, you would imagine that, that could do well in the marketplace for something like diabetes or hypertension or even oncology. Today, you have to show benefit over the existing standard of care in order for payers to pay for what you bring to market. Therefore, you have to think about the population that's most apt to respond to your product very early in development. So marketing in clinical are spending a lot more time with preclinical thinking about companion diagnostics, thinking about how to determine what the right patient population is and to make sure you develop the data that you're ultimately going to need in order to have success in the marketplace. And therefore, I think all those discussions happening earlier have brought together preclinical, clinical and post-marketing much more closely now than where they were in the past.

That's interesting. And it obviously speaks to sort of your asset base now and the capabilities that your company has. But if we think that, that is truly the future, and it sounds like you believe that it is, is there any of those areas, companion diagnostics, preclinical, clinical that you would want to enhance? Or do you feel -- you said you had scale, but if we are truly moving into that model, what do you feel as a business, ideally -- what would you like to additionally have to maybe fill that need of the manufacturer or the payor in that situation?

Yes. And the first thing I'd say is I'm not necessarily saying you have to own everything. You could potentially partner certain things and find relationships and. So as I think to the future, I think that things like liquid biopsy, or cell and gene therapy, very much more important in the future than they are today. So you've got to enhance your capabilities as you think about cell gene therapy, liquid biopsies and where the market is going in the future. So whether or not you have to do-it-yourself or you can partner, whether you have to own all pieces of it or you can partner pieces of it. That's all work that we're doing to ensure that we're really looking at everything from an open-minded perspective. But there are certainly additional capabilities that would be important to the future versus everything that is there today.

Okay. That's helpful. And I think you just sent a bunch of companies valuations up a little bit in the last couple of minutes there. One thing that people haven't really touched on, everyone has been so focused on Covance and your clinical business as part of the strategic review, because of the valuation spin. But what about the Diagnostics business as part of the strategic review, right? We just made an argument that, that segment of your business was also undervalued given the sort of dynamics and fundamentals being potentially a lot better now than they have been for a while. What's happening in context of the strategic review with the Diagnostics business? What are the potential outcomes there? I don't think that's an area a lot of people have contemplated or thought about, but clearly, you must be. So take us through what can be done there or the options there?

Yes. So once again, Kevin, there's only so many things I can say right now, because we don't have all the answers. We still putting a review. But the best thing I can tell you is everything is on the table. We're looking at everything. And frankly, that's what you would expect a management team and the Board to do on an ongoing basis. I just believe it's the role of the Board with management to review their strategy often enough to make sure that if you have to pivot or make moves, you have the time to do that. So everything is being looked at, and everything is being thoroughly reviewed. When it comes to diagnostics, we performed very well. And in fact, if you look at the underlying business, the underlying business has bounced faster, frankly, than what even I expected. If you look at the first quarter, we announced that the base business is only in the low single digits, different than where it was prior to COVID. It's been about the same as that since we've gotten into May. And frankly, it's leveled off in the low single digits, but we expect it's going to come back even further as we go through this year. So the base business of Diagnostics is strong. I also think that there's continued opportunity for business development in diagnostics. I keep talking about the importance of hospital laboratories or local and regional apertures and the deals that we can do. I can tell you, we're having more discussions now about those deals than we've had in the past. And I think that represents a very important opportunity for growth as we go into the future. I have to mention things like liquid biopsies and cell gene therapy. I think that is an area where we want to continue to think about and figure out how we play. Saying so we did a deal to actually bring to market a liquid biopsy test for non-small lung cancer. And I want to look for more of those opportunities as we look forward. So at the end of the day, if you look at both segments, Diagnostics and Drug Development, we're seeing good performance, and we're seeing the base business come back strong. And that's why when we broke out our guidance, we tried to give you kind of the COVID guidance and give you the base business guidance, because seeing the strength that we have and the momentum that we have in the base business should give you a better sense of how bright the future is.

Fair enough. I promise this will be my last strategic review question, probably maybe excluding capital allocation. Would -- I mean you came here in 2019 to run the company, and I'm sure you had your plans to run the business for the next 10 years. But if the strategic review comes back and says, here is an opportunity to spin-off your CRO and sell your Diagnostics business, and you have a $400 stock. Is that something that is interesting to you? I mean is that part of a potential strategic review? Or are you simply trying to say, "Oh, listen, we have a business run, we're going to run it and this is the best way to run it". When you say everything is on the table, I'm just wondering if that -- to that extent is also on the table.

Yes. So I mean, the review is agnostic to the CEO, of what the CEO is, kind of future is. In my opinion, the thorough analysis should be what's in the best interest of our shareholders, both in the short and long term. So we have to look at what the best thing to do for our shareholder is over time. I can tell you that myself and what happens there is not at the top of the mind of me at all. In fact, it's the last thing I'm thinking about.

So I promise I won't spend any more time on it. We can think about...

That's fine. I wish I could tell you more, Kevin, but if you walked away -- enlist and walk away with anything, I think the most important thing is that we're doing a thorough analysis. We're looking at all the options. We want to find a way to at least shareholder value the best that we can, realizing that even though our performance is strong, there's still opportunity, we believe, due to our under valuation. So we're going to look at everything. I can't give the answers, because we don't have the answers. We're continuing to do the work.

I said I wouldn't ask anymore, but I have -- I'd be remiss if I didn't follow-up. You're still doing the work. You started in March. Is it safe to say that on your third quarter earnings call, we might have some kind of answer, that would be about 6 months, right or so? Is that a fair amount of time?

Yes. I mean, not going to give an exact timing. I'm just going to tell you that we're going to do the work, we're going to be thorough about it. And as soon as we reach conclusions with the Board, we're going to announce it. And to me, the most important thing is getting to the right place versus rushing or just trying to get to an answer. So that's why -- I wish I could give you a more direct answer. But the honest answer is that we got to do the work and depending on where you lean and the work that you do, it could take more or less time. So we've got to figure out where we are, before we figure out what the next steps are. So it really is a thorough analysis that we're doing.

Fair enough. Fair enough. Glenn, you're not off the hook on this either. But in a little bit different direction. Talking about partnerships and enhancing liquid biopsy and some of the other sort of high-tech things that we've discussed here. Those are expensive. How do you think about return on capital for capital allocation as part of the strategic review? Not talking about big spins in asset sales. But in terms of deploying capital, you saw your peer just announced a pretty meaningful ASR. You guys are generating tons of cash. Your balance sheet is pristine as it's ever been. Yet you do have this massive opportunity in some of these very fast-growing, but probably low ROIC -- near-term low ROIC things. How do you think about those kind of investments?

First and foremost is to say that we continue to execute on our capital allocation as we're going through the strategic review. So we're very focused, as I said, on executing on our business, including our capital deployment to get the best returns we can. In the guidance that we've given, we've commented that this year's strong free cash flow, around $1.80 to $2 billion was our guidance, will be used for share repurchases and for M&A. And the good news is we see a very strong pipeline of M&A that we feel could be very attractive. But obviously, you'd have to reach agreement and ultimately get it done, but the pipeline is good across our businesses that we feel potentially could create a lot of value. In addition, we have our share repurchase program, that we've said we were going to accelerate more than what we had done in the first quarter, frankly, from both an M&A and a share repurchase standpoint, but you'll see that accelerate. So this year, we feel there will be really good uses of our capital to redeploy. And then just going back to the broader issue of the strategic review of structure and capital allocation and on what Adam said, we're looking at everything. How we've allocated capital before, where the best opportunity to unlock value and looking at our criteria, our financial criteria, looking at our balance sheet. The one thing, we continue to expect to be committed to being investment grade, that's just part of our ability to continue to allocate capital, have excess to the capital in the marketplaces, but beyond that, looking for what's the optimum way to redeploy our capital.

Fair enough. That's helpful.

The way I think about it with Glenn is first and foremost, these local regional hospital deals make a lot of sense. And we may return our cost of capital in a couple of years, accretive in the first year, and we know how to do them. So we would do as many of those as we can, and the pipeline is strong. Secondarily look to the strategic opportunities. We bought a couple of companies last year, like SnapIOT and GlobalCare, because we want to enhance our ability in virtual and hybrid trials. So there's things that are aligned with our 5 pillar strategy that are strategic, we're going to look to do those because even though they might not have the best return in the short term, we think that they make a lot of sense and provide a lot of value in the future and over time. And then the third thing is we'll deploy the share buyback program to return cash to shareholders. So that's kind of the order and the priority that we look at. And I think that as we go through this year, the more we can do in that first and second priority the better off we will be.

What's -- the hospital deals always were taking a long time, and I always felt like for years. It ended up being a little bit of a disappointment in that we hear about this pipeline and the deals never happen, and they always take too long, but now they seem to be coming. What's changed? Is it the reimbursement, payors and PAMA and everything else that's maybe hospitals more willing? Is it a different value proposition that you were providing? Sort of what's the dynamic there that's changed that's hopefully led to -- because it's clear, it's -- they're coming faster than they ever have been. And your language around them is similar to your competitors. So it all sounds great. I'm just wondering what's prompted the uptick?

Yes. I think 2 things. One is with COVID, a lot of the hospitals realize that their equipment wasn't as up-to-date as it needed to be, and they realize that this is a capital-intensive business. And if they have to make a choice between putting more capital in the future into their laboratories, versus into a new surgical suite, it's a pretty easy decision in terms of their return on invested capital. I think the second thing is they realized that we were able to scale fast and we were able to help them in very significant ways. So just like we look at things to say, if there's something that can do this better than us in terms of cost and capabilities to build fast, then it's not a strategic or competitive advantage to do yourself, then why wouldn't you consider somebody else to do for you. And I think they've now looked at our capabilities and said, this is what these people do all day every day, and they're really good at it. So why would we have them come in here to be part of the hospital system itself. So I think COVID kind of got people to accelerate a little bit, especially as they had to put more capital, and they realize how hard it is the work that the labs do every day. I think even in the hospital labs are taken for granted for a while and those labs do a lot of hard work, but they haven't gotten the capital they needed.

So the deals that you're doing with the hospitals, you're not going in and necessarily buying the lab out. You're doing most of the nonroutine testing. Is that the right way to think about it? Or are you doing testing?

Yes. We would like to buy the labs out where we can. I think you'll see a host of different things, but buying the lab, is our first preference, but then there are times that we'll go in and run the lab. And then there are times that we'll go in and do the esoteric testing and so forth. So all 3 of those are happening. But the thing that's most, I think, advantageous for the hospital and for us is the acquisition.

Okay. Fair enough. That's helpful. I want to get back to the CRO a little bit and then ask this competitive question, because it's definitely popped up a lot. Historically, whenever we saw CRO deal, CRO for CRO deals or whatever, there was always disruption. Now some of them were -- not all of them, historically. But there's always been opportunity for others. It seems like what is the opportunity set for Covance right now given -- is there -- do you see increased opportunity, given that there's been, what, 4 deals done in the last several months. Sort of take us through the positioning competitively now post the announced transactions?

Yes. So there's no doubt. And any time you go through a massive acquisition, merger or you're acquired by another company, that there's disruption and there's distraction. And in any business I haven't been part of when I see the competition go through that type of disruption and distraction, I'd say there has to be opportunity. There has to be. So I'd say the same thing to our team here. And I think that our drug development team is looking for any opportunity to capitalize and others being distracted or disrupted or disrupted as they go through their mergers or acquisitions and so forth. So stay tuned. I know it has to exist. And the question is, how do we get to it fast.

The one question we keep getting around Covance is the fact is your margins are below your peers, right? I mean, anybody can set up a comp sheet and notice that. And that's raised the question of, is it the mix of the business? Is the company just aggressive in the way it spends? Is the fact that it's global? Or is there a reason? Or is it that other people will say, well, as a standalone CRO, your margins could be higher. How did you guys think about that? I mean the margin discrepancy is in the hundreds of basis points, right? It's not -- we're not talking about every year, 50 basis points one way or the other. I know you've got cost-cutting plans in place and other things. But when you think about the margin of that business, and you go to your Board and then the Board says, "Well, wait a minute, why is IQVIA or Icon's margins so much higher", what do you say? And what's the goal?

I'll give you some context, and I'll ask Glenn to jump in as well. So you got to look at the margins by the type of business that you compete in. So the margins are clinical or different than the margins are preclinical or different than the margins in essential laboratory. And historically, we've done pretty well taking out costs, and we're going to continue to take out costs. And we're going to continue to improve our margins as we move forward. And I think the team has done a good job improving margins, but we have to continue to get even better. But if you look at the 3 businesses, the area of the greatest opportunity for us is in the late stage clinical. And I think a part of that is because we do a lot of work with the smaller biotechs, one-offs, and I think that there is some synergy when you have deals with the larger pharmaceutical companies where you have a multitude of studies across therapeutic areas. The good news is we've won a couple of those recently. So we're now the leading laboratory to do drug development for a large oncology business and across oncology portfolio. And we also have on the non-oncology business of a different pharmaceutical company to be 1 or 2 and available there. So I think the more that we do bigger companies that have multiple trials that we can be part of across therapeutic areas, we have the opportunity to improve the margins. And that's the area where I see us having the greatest improvement as we move forward in clinical space. I think we did pretty well in preclinical, we did pretty well in the central laboratory, not to say we're not going to improve in those areas, but the real opportunity is in clinical. And Glenn, if there's anything you'd add?

No. Just to your point, Kevin, I mean, we benchmarked to where we are with the peers by the business units that we have and what we can say, and you've seen our margins pick up each year within the business, and so we're making progress on it. And as we do our normal strategic plans level on the strategic review, if you will, we look at always getting back to parity with where our peers are over the number of years. And sometimes you invest dollars today that can strain your margin for the benefit of achieving those higher margins over time. And frankly, we've done a lot of that. So we still want to show that our margins are increasing, which they have while we've been investing a lot in order to make sure we have all the technology systems, processes, global footprint, that will then get us to the higher margins over time.

Just a quick follow-up to that, when you did that strategic review or analysis, how much room do you think you have on that side of the business on the clinical or late-stage business? I mean, is it meaningful? Or are we talking about incremental that we might see over time?

It's meaningful. And it's over time, obviously, but it's meaningful over time.

Okay. That's helpful. I want to talk about margins on the Diagnostics business next. I know I'm kind of jumping around a little bit, but staying with margins. We noticed that your margins through COVID were meaningfully better than your competitors. You're able to also do more PCR COVID testing during that period of time, which obviously helped. But you also were taking a little bit more share. It seemed like you were growing faster during that period of time as well. I'd love to hear your reasoning behind that? And how sustainable it is, maybe when hopefully things become normal? We ourselves are trying to do the analysis around it and thought maybe there were some geography benefits or the like. But I'd love to hear from you sort of why did you grow a little bit faster than Quest? And why were your margins a little bit better through that period than Quest? And do you expect that to continue?

Yes. The first thing I would say is that our scientists did an outstanding job moving quickly and building capacity fast. And we have more capacity than anybody else in the marketplace. The second thing is a lot of our capacity went through our own laboratory developed tests. So if you can imagine that margins on your own laboratory developed tests could be better than if you're using other tests. So we use 8 different platforms, but a lot of it was able to go through our own LDT. The other thing I would say is that our scientists were always trying to innovate and find ways to do things better. So historically, we had to use reagents for one of the steps. And there's 3 steps to the COVID testing. One is take the swab, get the sample; 2 is extract the DNA from a sample; 3 is run the DNA. In the second step, you needed reagent, and it took 4 to 6 hours. Our scientists were able to determine a methodology where you only needed heat, then you can do in 30 minutes. And that's just an example of how we use innovation that help do more tests faster, but also reduce cost on tests by not having to necessarily buy reagent and so forth for that step. And we were trying to figure that out each part of the process for COVID testing. So I think the team did an extraordinary job there. The second thing is, if you remember back to our 5 pillar strategy, 1 of the pillars was data analytics, digitalization and artificial intelligence in everything that we do. I think starting to focus on that before COVID gave us a tremendous advantage. And the reason why is when people weren't able to get to doctor's offices, when it was difficult to actually have people selling in the field, we were able to do a lot through digital and a lot of marketing and sales and improving the customer experience through our digitalization capabilities. And I'll give you an example of that. As people were working from home -- New York City is a great example. We had a lot of our service centers in New York City. Well, when people were out in New York City as much and they're working from home, those service centers were not as busy as they were before COVID. But we saw in some of the rural areas, those service centers were packed. Also, as doctors were seeing patients through electronic means and doing digital conversations telemedicine, people weren't going to the offices, they weren't going to get their blood taken the offices, they were going to our service centers. We were monitoring that in real time, and we're using data analytics and artificial intelligence to increase people in certain service centers, increase hours in certain service centers and make sure we were adjusting to the shift in population that we saw. At the same time, for the customer experience, people were able to check-in online. They were able to wait in their car until they got a text to come in. And after they came in, they got all the results through a digital way. So that's just an example of how our data analytics, artificial intelligence allowed us to put the right people at the right places with the right appointments. And then our digital capabilities improved the customer experience. And we actually saw our NPS, which is a kind of surrogate for customer satisfaction scores, go up across our service centers.

That's really helpful. Okay. I'm going to shift gears again a little bit and talk about sort of testing at home. It's a topic that's popped up a lot lately. Amazon has popped up a lot lately. They made some noise and headlines. And I think investors have largely been able to dismiss Amazon to a certain extent, but it's never smart too. And I would love to sort of understand your strategy around moving into the home and taking advantage of what is likely to be an increasingly large at-home testing market. How you would participate in that? Why don't we start there? Take us through how big that market opportunity can be for you versus -- today versus 5 years from now, perhaps? And how you think about competition there?

Yes. So first of all, I'd say Amazon has been talking about this for a while. And we don't ever take any competitor lightly. And of course, we don't take Amazon talking about this lightly either. But a lot of what they've talked about and what we've talked about in the past are things other than blood test, because we still have software is people feeling comfortable to take their own blood in their own house. That's a whole different scenario. They're doing a nasal swab, saliva test or something like that. The vast majority of what our central laboratories do are either blood tests or samples like biopsies or urine tests for example for people going to work. I don't think if you're going to work you're going to let a person take a urine test without supervision, out of their own house. So I think the core of our business remains safe and strong from that perspective. At the same time, we're looking to disrupt ourselves. Is there a way to get blood samples from home? Is there a way to get some of these other samples from home? At the moment, I don't think there is. But to think that there'll never be, I think will be a mistake. So we continue to look at technologies and try to figure out is there a way to disrupt some part of that core business. When you think about at home testing, I think Pixel was a great example. Pixel, which was our at-home collection for COVID, did tremendously well. And the customer experience that people had from that pixel test, I don't know if anybody on the line has used it. But anybody I talked to said that the experience was terrific. So we're now going to expand that experience to other types of tests. And when Amazon talks, they talk about potentially creating a marketplace. Who knows, maybe we can even be part of that marketplace in the future. So there might be some synergy to working together in some of these areas that they've discussed. When it comes to testing or testing in general, there's 3 areas that I look at. One is speed to get the result. Second is accuracy of the test; and third is the cost of the test. During COVID, people were willing to give up a little accuracy. They were willing to pay a bit more, especially if it was subsidized in order to get the result fast. That's not the typical market dynamic. The typical market dynamic is I don't need the results within 10 minutes. I really want to get the most accurate result I can get, and I want it to be at the lowest cost I can get. And that's what we excel, frankly, is in that area, because we have highly accurate results in a very timely manner at a very good cost. The issue we're going to have to wait when you do the at-home test, they're probably not going to be the lowest cost. They might not be the most accurate, particularly if people are taking their own samples. And what you're going to get is speed. So I think you have to look at all 3 of those levers and figuring out which tests make the most sense in order to do those at home, there will be certain tests that we're going to focus on, I think, that make a lot of sense, and there are other types that don't think are going to make so much of sense.

Well, if we think about some of the tests that make sense and make don't make sense. I think Amazon just said that they're looking to get into STDs and clinical genomics. Do those make sense to you? Would those be the kind of areas that would work?

I think those two make sense. And we're going to be in those areas as well. We're in those areas as well.

Got it. No, that's helpful and trying to understand because I don't know how big a percentage of your business home is right now. I just don't... I don't know if you guys got...

It's not worth even getting in a long discussion about. It's very small. But I can tell you, we expect it to get bigger. And as I said, we're going to bring it into the discussion.

Fair enough. So I don't feel bad about not knowing exactly how big it's...

No.

One of the positive thesis I had on your space has been the fact that both you and your -- and Quest have been taking market share, you a little bit faster than them. Part of that thesis was that the payors are finally pushing into the low-cost providers, you guys being a low-cost provider. That seemed to slow down a little bit last year, because of COVID. And I think the preferred lab network and some of the other things. Do you see it reaccelerating in 2021 or in 2022? Are other payors jumping on board? This has always been sort of a background thesis that once United and did this, some of the other ones would follow. We've seen some of the blues plans do it, sort of take us where we are with this sort of patient migration amongst the payors into the low-cost providers?

Yes. So when United launched their earnings, we were very excited about that. We were working with them to try to figure out how to best capitalize the opportunity. I mean it really is a very significant win for them. It's a significant win for employers. It's actually a good thing for the patient, particularly if you have service centers that are easily available, and it's a good win for us. So it's one of those scenarios, you say, "Boy, it's a good thing to do, how fast can you do it?" Unfortunately, when COVID hit everything slowed down in terms of the different plans working on it. So -- and everything was focused on COVID and testing and treatment in the hospitals had so much work that they had to do. My sense is that we will get back to it as we get to the other side of COVID. And as things start to come back more and more to normal, I'd say, through this year, and employers start to develop their plans for next year, which should happen sometime over this summer, you're going to see more and more people trying to say how can we tackle this issue. Because when you really think about it, it just makes sense all around. So to me, when there's so many market dynamics, pushing in the same direction, there has to be a way to make it happen faster and better. But in fairness, I thought -- when I first started, I couldn't believe how much business was done at higher prices for the same results. So it has been happening for a very long time. So once things are entrenched, it's always harder to change in the marketplace, but I do think it's going to happen. And I do think you're going to see more and more payors try to tackle it. I think you would -- a fewer payors would not.

So we've tried to model it out and try to figure out exactly how many lives are out there and available that are probably going into higher cost labs that maybe could move, right, geographically and the like. But when you guys think about it, what is the TAM for this? Is it -- are we talking about millions and millions and millions of lives or tens of millions of incremental tests or hundreds of -- like how do you think about it? How should we think about it as the opportunity set?

Yes. I mean I would think about it that it's done to take time. It's not going to be like, all of a sudden, everything switches over. But over time, it should certainly be tens of millions.

That's helpful. We've got a couple of minutes left, and I've got some questions from investors I wanted to go through. The -- there was a follow-up on the Amazon question which is, can you ask the impact of STD competition from Amazon and what Amazon means by clinical genomics. I guess the question being, how much of your business is STD, how much do you think is really at risk? And what do you think Amazon really means by the term clinical genomics, because it is somewhat of a fraud.

So for the second question, you have to ask Amazon because I'm not exactly sure. If I were to just take a shot in the dark, I'd say it's kind of looking at the things like looking at genetic history, people where they came from, what their backgrounds are and those types of things. I don't think it's going to be the very complicated genetic testing. I don't think that's something anybody would want to do at home without being under the care of a physician. So for us, it's a very -- I mean I don't think it's much at all, frankly. And if you look at STDs, it's not a major part of our business in any way, shape or form. So it's one of the things that we have a lot of competition in that area already. There's going to continue to be competition. But whenever Amazon comes into a space, you got to watch it very carefully. But the vast majority of our 530 million tests that we do a year are done in physician offices. Their blood tests, much of it, and they're not the nasal swabs or saliva tests.

That's helpful. This is one I was going to ask anyways, but we had Secretary Azar, who's our keynote speaker, and he highlighted that one thing that you didn't think many people understood was that coming in 2023, it was going to be a lot of increased price transparency. Payors, a lot of it on the drug side, potentially PBM rebates and the like. But pretty much across the board, payors, providers, we're going to have to provide full transparency on pricing. If you guys are a low-cost provider, is this potentially a big benefit to you? Or is there a risk of this kind of sea change coming in January of '23?

Yes. So I don't know what's exactly going to happen in January 2023. So we are interested to see where it ends up. I always believe that there's a level of price transparency that's helpful and that especially as consumers begin to pay more out-of-pocket and they pay more of their own costs. But in terms of ours and our industry, particularly in people that have large central laboratories and so forth, where we're high-quality, lower cost. I don't think it hurts us. I think it could work in our favor. But the only thing I would say is whenever it comes to health care, cost is a complicated discussion. And what transparency means, I don't know exactly what they mean by that. So you got to make sure that it's accurate as well as transparent. I always say that in this industry, the dynamics are interesting. They're very different than the other. You have 1 person pictured going to restaurant. 1 person orders a meal, 1 person eats the meal, and a different person pays for the meal. That's the dynamics that you have this in health care, right? You have something that is ordering it, the physician, the lab is intermediary. You have somebody that's getting, which is the consumer. And you have somebody that's paying for, which is the payor and their employer. It's not a typical market dynamic. So understanding pricing in this industry is not simple. And as you look at other parts of health care, it even gets more complicated. So I think it's a harder question to ask other parts of the health care system, frankly. We'll deal with whatever comes our way.

We are just about out of time, but I wanted to sneak 1 more in, if I could, with that sometimes. It's really on PAMA. Yes, we're expecting the cuts in 2022. What are you expecting beyond 2022? And what are the signposts that we should be looking for in terms of what might happen? There's been a lot of conjecture, a lot of talk. We've spoken to lobbyists, there's optimism that maybe the 2022 will be the end. And then we talk to people in D.C., who will say, well, if anything, costs us money, it's unlikely that we're going to do anything, because we're out of money at this point. How are you thinking about it? And what should we be looking for as potential signals on what might happen beyond 2022?

Yes. So for 2022, we've built into our plan, the same number that we had prior to this year, it's about $100 million. The intent of PAMA, to some degree, was to try to get the Medicare prices close to other ex-Medicare prices. Now we can argue about how to measure the x prices and we are and so forth. But that was the goal. Once you get the prices to be about the same, then I think the PAMA doesn't have as much impact. So I've been more concerned about companies that continue to have a price difference that's significant between our Medicare business and their other business that they have, particularly in commercial. But most of us having gone through this for 3 years plus are going to be at the same level already. So that's why we say there's probably less of an impact going to the future. It's not that how it necessarily goes away. It's just like you kind of reach that parity point to some degree, and there's less risk unless you do something that sets off the balance again.

Fair enough. Well, gentlemen, thanks for giving me a couple of extra minutes and all of the audience, I'm sure we're very appreciative of it. This has been incredibly helpful and frank. And we appreciate always the time he's been with us. Thanks so much.

Thank you, Kevin. We look forward to seeing you soon. And hopefully, in person.

Yes, that would be great. Bye guys, thanks so much.