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

All right. Thank you, A.J. Good afternoon, everybody. It's really a pleasure to be here with you today. It's pretty remarkable. I recently marked my 2-year anniversary as CEO of LabCorp. And in just a month or 2, I will be approaching 2 years since the start of COVID-19 pandemic. We started to hear about it and react to it. when we heard about in January of 2020, where we had significant issues in Asia, and we began to realize that the rest of the world was going to face similar issues. Needless to say, no one could have imagined how much the world would change over those 2 years. What I can tell you is LabCorp continues to fight against the pandemic in every way possible by our Diagnostic capabilities, together with our Drug Development capabilities. We've done over 60 million COVID tests to date, and we continue to innovate. So we recently announced that we now have an at-home collection kit for both flu and COVID that can be used for people, children ages 2 and older. And once again, no upfront out-of-pocket costs for those. In Drug Development, we've been involved in many of the vaccines' medical therapeutics. We announced recently that we supported the AstraZeneca trials for their antibody combination, but also the Merck trials for Phase I through Phase III for their oral antiviral medicine. So we continue to do everything we can to help the world through the worst pandemic in 100 years. At the same time, we made a lot of progress outside of COVID in areas such as oncology, where we've launched several new tests to help in Diagnostic and Drug Development. We also announced that we acquired a company called Ovia Health, which is a leading digital platform that's used for family planning and pregnancy and parenting support. It actually helps us extend our position in women's health. At the same time, we're using data and analytics and digital technology wherever we can. So we announced that we're deploying our LabCorp diagnostic assistant, and that's going to help health care systems do point of care, care, and it will help them better treat the patients that they serve. So at the same time, we continue to focus on our Base Business, and our Base Business performed well in the third quarter. We saw growth both in Diagnostic and Drug Development, 10%, 22%, respectively, and that was versus 2020. A better comparison, frankly, is versus 2019, and we saw growth versus 2019 pre pandemic as well. At the same time, when we continue to deliver strong performance, we still believe that there is intrinsic value in LabCorp that's yet to be realized. And to that end, we're working closely with our outside advisers, with our Board of Directors and we continue to evaluate our structured capital allocation. We're making significant progress to identify the best path forward to unlock the shareholder value. But at the same time, we continue to support our patients and the customers around the world. We're performing a very thorough and a very thoughtful analysis, and frankly, it just takes time to fully assess all of the alternatives. We expect to share our conclusions later in this quarter. At the same time, we're going to continue to deliver on our mission to improve health and improve lives. And I can tell you, I'm very optimistic about our future. So A.J., at this point, I'm glad to ask -- answer any questions that you may have.

No, that's great, and I appreciate that quick overview. One thing I will tell our audience is if they want to ask a question, they can e-mail me and then I can ask it on their behalf and you e-mail me at [email protected]. I guess at this time of the year, we all start to think about 2022, the year ahead and the outlook there. I assume that one of the big unknowns is the COVID testing environment. And I would assume that the company and others trying to predict COVID to end next year, we'll probably take a conservative view on that. But beyond COVID, what are your biggest swing factors that you would point to as you think about next year, the open questions in your mind with respect to the year ahead?

Sure. And I'll start by giving some context on COVID, A.J., and then I'll answer your question directly on the rest of the business. So you're absolutely right, the biggest swing factor, as I look at next year, is COVID testing, both from a value -- volume perspective but also pricing perspective. How long will the emergency declaration be held? Will it be for a part of next year? All of next year? That impacts price to some degree. And then how long do the vaccines work? Will there be another variant? Will it be a hard flu season next year? That will impact volume of the testing. So as we prepare to provide guidance for 2022, we're going to break out COVID testing separately than the Base Business, similar to what we did this year, so that you could see the range that we see for COVID testing as well as the Base Business. So we're going to continue to do that to help you understand the 2 components very well. In terms of our Base Business, the good news is the rebound has been strong. And in fact, we're seeing volume increases versus 2019, and it's basically about the same as the same time in '19, but we're starting to now see a little bit actually better than 2019. So the volume continues to improve. Now there has been a relationship between the amount of COVID testing and the volume of our base business. So if there was a very significant increase in COVID testing, you might see some minor impact in the Base Business. But in general, I feel confident that the Base Business is strong and will be strong as we go into next year. We're still continuing to expect PAMA to impact us next year at a similar number as to what we've done years before the pandemic, about $100 million. But we're still trying to see if there's a way to either change PAMA or kind of have PAMA not impact us next year. In our base case, we assume an impact for PAMA. But obviously, that's a big swing for us in one direction versus the other. At the same time, we continue to look strongly at M&A. And I've said before that our pipeline for M&A is stronger than what I've seen in the past. And frankly, I expect that as we go through this quarter and into the beginning of next year, we're going to continue to have some important deals. And I think that those will be impacts in terms of swings for next year. The more of those deals we can do, they're going to impact as we look at next year. And then the third thing is we're going to continue to go after cost and have cost reduction because we do see, and I'm sure it's one of your questions that you're going to ask, that there are material costs, inflation costs, there are cost of people that are going up. So we're going to try to offset as much of that as we can by continuing to reduce costs wherever we possibly can. The question is what's the timing of the cost increases while we have the cost decreases that we take out. So those would be a few of the swing factors for the Base Business as I look at next year: PAMA, business development, costs coming in versus cost we'll be taking out.

Okay. That's great.

Yes, I don't know, Glenn, is there anything you'd add to that or?

No, I think that's a pretty comprehensive list. And as you know, A.J., we'll be coming out more specifically with the guidance with our fourth quarter results and our outlook for next year.

Right. And to segue over, I was going to ask you, specifically, a lot of chatter this quarter, not just in your space, but across the entire health care space on the issues around labor and supply chain. You've got a lot of different pockets of labor there. Are there any particular that are pressure points as you think about next year versus this year and prior years? Is there going to be a step-up, do you think, in SWB generally? And are there any supply chain issues that you're dealing with in the business?

Yes. So I'll start with the supply chain, and then I'll go with the labor. So our procurement team is working around the clock to ensure that we have the supplies that we need. We've run into issues, frankly, in many different places, but we've been able to overcome those with really strong procurement planning that we've done. So we are holding a bit more inventory than we typically would, particularly for key supplies that we know we need, but that's the right thing to do as we go through some of these supply issues. We're also looking to ensure that we have duplicative supply chains so that if we run into an issue trying to get something from one side of our supply, we have another way to get that supply that we need. But we've had to worry about everything from test tubes to dry ice to fine pet tips to nasal swabs. I mean, almost everything, we've had to find ways to innovate and to find ways to kind of offset those supply issues. The good news is we've been able to overcome the supply issues that we've faced in a very good way. And as we go into next year, I expect that we'll be able to do the same. So a lot of work, a lot of effort, but we're doing really well in terms of getting the supplies we need. Now with that said, there's no doubt that material costs are going up and we have to deal with that. And there's no doubt that the cost for people are going up. And you ask if there are specific areas that we worry about, a lot of is it -- there's entry-level positions that we need to fill, that there's a lot of competition that didn't exist before. And then secondarily, even in some of the specialty areas that we have, there's a lot of competition across companies in terms of the jobs that we need to fill. So we're seeing competition and wage increases across the business. We have to be effective to get the people that we need and to retain those people. At the same time, we've got to find other ways to reduce costs significantly to offset those additional costs. So we're going to continue to focus on how to improve our effectiveness, reduce our cost, while we know we're going to have to pay some more from material costs and wages as we go through next year.

And I mean, I guess, the rate of increase on SWB has probably been in the low single digits. That seems to be pretty standard across the industry in the last few years. Are we entering a period, do you think, where it's going to be mid-single digits? Or is that not -- there's enough offsets there that that's not really going to be an issue?

Yes. So we'll provide more when we give the guidance, A.J., but I would think that we're going to be under more pressure next year than we have been in the past. And the question is how fast can we catch up, how fast can we take out the cost for some of the immediate issues that we're seeing. So over time, I think we'll be in a very good position. We just have to manage through as we go through next year. But we'll give you a specific guidance as we get into February time frame.

Okay. I think it may have been you, Adam, who said on the conference call, but somehow the company said that it was committed in this strategic review process to ensuring that, as best as possible, it would unlock the value for shareholders that it saw the company is trading at a valuation that appears to be a discount to its closest clinical lineup here and is further trading at a substantial discount to other CROs. This would all seem to argue, in light of those comments, that you do something at the end of this strategic review process. And I'm making too much of a leap to try to -- if there's going to be something done to try to eliminate and minimize the valuation gap that we see in the market right now?

Yes. So a couple of thoughts on that, A.J. So first of all, we see strong momentum across our operations. I think you see that, everybody sees that. And at the same time, we've seen our share price rise over time. But we also believe, as you say, that we're undervalued, given the strength of our business and given the opportunities that we see before us. So that's why we're doing such a thorough review. That's why we've engaged external advisers. That's why we're spending so much time with our Board on this analysis. I can tell you we're looking at everything. We're looking at everything when it comes to both our structure and our capital allocation. And we're going to share that information as soon as we reach our conclusions. We'll share it very broadly, and we still expect that in this quarter of this year.

Okay. And I'll press it with one more and then go on to business-related questions, one more related to the strategic review. So it did strike me, and you've probably been doing this all along, it seemed like on the last conference call, there was more of a distinction between looking at capital allocation as part of the strategic review and looking at business structure as part of this review. Is it possible to do one without the other? At the end of this, we could see a capital allocation decision that's different and the business stay the same or vice versa? Or are you probably going to do something on both of those?

So A.J., the first thing I'd say is that since the beginning, when we announced the strategic review, been very clear that we're looking at both our structure and our capital allocation. So no change in third quarter versus when I originally announced that. We're doing both of those things, very thorough, and we're going very deep in both of those areas. So we're going to look at everything. We do want to find a way to unlock the shareholder value that we see, and then we'll announce that when we reach the conclusions. But I wouldn't read into anything that you -- in third quarter differently than in first quarter, second quarter because it's been the same thing. We're looking at both structure and capital allocation. We're being very thorough. We've got outside advisers. We have a Board fully engaged. And then when we reach the conclusions, we'll show those broadly. So no change in tone or anything like that.

Okay. And you mentioned again today and on the third quarter call that the M&A pipeline is as robust, I think, as ever, I think, is the way it was described. Do you feel this is being driven by COVID? Is it driven -- what's driving the uptick in transactions and discussions? And is there any challenges in pricing? I could envision, if you're talking about lab deals, perhaps people are looking at the COVID volumes they've been doing and wanted to get some of that priced into their transaction. How much of an impediment is that to bring you to a conclusion on the deal?

Yes. No, I'd say it's as strong as I've ever seen it. And when I talk to the team, it's as strongest they've ever seen it when you look at the pipeline. And I'd start off with a couple of things, right? One, we're always looking for hospital acquisitions of labs, local labs, regional labs, and we continue to look at those. And the reason why is because they are accretive typically in the first year, they return their cost of capital in a couple of years, and we know how to integrate those and to do them really well. So I see more of those now than when I started 2 years ago. I see more of those possibly now than I even saw a year ago. And I think part of it is because COVID has enabled hospitals to realize that they need to invest in those labs if they're going to continue to run them. They need to have the right capital equipment. They don't necessarily have the scale that a company like LabCorp has. And why invest in that and we can do it for them and then they can invest in other things like another surgical suite or something else. So I think COVID has made people pay more attention to the labs that they have and realize that it might be a good thing for them to have us run them versus run it themselves. The issue on COVID testing has not really been an issue in the hospital and the hospital labs. There, it's more when we talk to the local labs or the regional labs that have done significant COVID testing, but it's pretty simple to be able to pull out that COVID testing. I mean you can see that clear as day. We know how to identify it. They know how to identify it. So you can have very clear discussions about, okay, what's the non-COVID testing. Let's agree on that. And then what's the range of what we think is possible for the COVID testing. So I haven't seen that as an impediment. I would say it would have been worse if you couldn't really pull out the different tests. Here, it's very simple for us to do that.

And then so in a general sense, are you saying that pricing is pretty consistent throughout the last few years? Or is there anything that's driving pricing, either up or down?

Now when you talk about pricing, you're talking about the cost of doing these deals?

Right, right.

Yes, I'd say it's relatively consistent. I feel like we'll be able to do these deals in a good, smart way. Accretive in the first year, return cost of capital in 2 to 3 years. And those things still hold today, just like they did a year or 2 years ago. And then I see us in that space doing well. But I also see some other strategic things that we continue to look at. So I talked about Ovia. I talked about in the past, GlobalCare and SnapIOT, which helped us with virtual clinical trials. I believe that there's more of those strategic deals that we'll be able to do, and we continue to look for ways to kind of bring our future in terms of our growth opportunities.

Okay. Okay. Another important part of the story over the years has been the LaunchPad initiatives around cost reduction. Is there still plenty of runway on that to go if you look out over the next 2 or 3 years? Where are some of the key areas where you might see some incremental savings that you can go after?

Yes. So I think the team has done a really good job with LaunchPad over the last several years, and they've hit or exceeded the majority of the LaunchPad commitments that have been made. But this is no time to stop, and we have to continue to find ways to take out cost. Whenever you go down this path, there's kind of low-hanging fruit to go after that first, and then it gets harder. It's about changing business processes. It's about automating different things that you've done before. So when I look at the future, there's a couple of things that I look at. Number one, I think there are more that we can do to automate some of our testing. Two, I think that there are opportunities in virtual and hybrid clinical trials. Three, I think we can continue, we've done a good job with labor arbitrage, but I think there's continued work that we can do with labor arbitrage. Four, we're a logistics machine. I think there's more that we can do to reduce cost as we think about moving samples across United States and around the world. And then fifth, we're going to continue to go hard after procurement and find ways that we can kind of reduce costs wherever we possibly can. So there are still opportunities, and we're going to continue to look for every single one of them.

Right. Maybe just to flesh out that, one of those early ones you mentioned, virtual and hybrid clinical trials, where is that today in terms of use of that? And where might that go over time? And what would that be financially for the company if you can get there?

Yes. So the utilization of virtual clinical trials has increased substantially since COVID. And if you look at our total book of business, it's less than 10% that includes some aspect of a virtual hybrid trial. But if you look at our most recent bookings in the last quarter, it actually was more than 30% of the bookings that we had. So all of a sudden, you see that the new trials that we're getting business for, they're looking for components, if not the entire trial, to be virtual hybrid capable. So there's no doubt that it's moving in that direction, and we're going to have to do more and more of that. The good news is I feel like we got ahead of it with our acquisition of GlobalCare and with SnapIOT. I think it will expand our ability to do trials globally. I think it may enable enrollment to occur faster because you're not necessarily limited by number of sites. You can actually expand pretty significantly, particularly in certain disease areas. And then I think it will enable us to find ways to reduce cost, either by reducing the number of patient visits or finding other ways to monitor patients in between visits and some other areas. So I do think it's an avenue for better clinical trials to get results faster by more patients being available sooner. And then at the same time, there should be some type of cost component as we go through the kind of transition over to more hybrid trials.

Okay. That's interesting. Just a couple of quick questions on the clinical diagnostics side. I think in Q3, you said that the rebound in Base Business, and others said this, too, was a bit off due to the surge relative to Q2. Obviously, you had it made up by the COVID testing surge. You had said that you thought that was coming down as you exited the quarter and -- the COVID was coming down and hopefully the Base Business will rebound. Is that what you've seen in October and early November? Has that trend played out as you sort of expected?

Yes. So if you go back historically, right? Last quarter, we averaged 85,000 tests per day. The quarter before that, we averaged 54,000 tests per day in the second quarter. But then if you look at the month of September, we averaged 114,000. So you just saw a very significant increase in the month of September. As we've gone through October, we actually saw week-over-week declines almost every single week. It's kind of leveled off a little bit right now, to be honest. And if you look, frankly, across the country, you're seeing for the first time a slight increase in the number of COVID cases that are being reported. So it's not a surprise that it's leveled off a bit, but I would expect a continued decline, unless we see a significant flu season, which we've not yet seen. What happens is when there's an increase in COVID testing, like there was in September, it went up to 114,000 versus the quarter that averaged 85,000, you did see a slight impact on the Base Business, but it was a slight impact. It was not like back in March of the year before when we saw huge increase in COVID and we saw the Base Business get significantly impacted. And the reason why is because when COVID impacts us today, doctors' offices don't shut down, patients aren't as concerned to go to their doctor visits. So we see that even when COVID has a surge, that the impact to the business is much less than it's been in the past. If you look at the most recent weeks, as we go into the end of October, November, the base business has continued to rebound. And I said in the third quarter call that was basically about flat versus where it was in 2019 in terms of volume. It's actually growing just slightly.

Okay. Okay. One of the big question marks has been all this chatter about people avoiding their care for their traditional illnesses, primary care, preventative diagnostics, et cetera, in the COVID environment. I wonder whether your testing data that you generate, can you see any of that for -- in any way you slice and dice the data? And does that have any implications if it is true for testing volumes or even test for requisition looking forward from here?

Yes. I'll give you my thoughts, and maybe Glenn can jump in as well. When you look at the beginning of COVID, in the beginning, we actually saw a very significant decrease, for example, in a number of patients being tested for cancer. Now you know there weren't less people that had cancer, it's just that people weren't either going to a doctor, couldn't get into the doctor. So the long-term implications of that are, by the time people are diagnosed, they might be further along in their disease, which were being very unfortunate, but I think in reality, we're going to have to face as a society. At the same time, we began to see a number of tests per patient increase significantly. It's come down a bit since the peak, but it's still higher than historical. And I think it's because when people finally do go to the doctor, their doctor's checking them for a lot more things because it's been longer since they last saw the patient. But I don't know, Glenn, if you have anything you'd add?

I think as Adam said, I mean we've tracked interestingly enough, our revenue pretty steady throughout this time. And the interesting part is that the volumes, as you know, originally were down, and now they're kind of back to pre-pandemic levels and we continue to benefit from favorable price mix, mostly of which is just more tests per session. A little bit, as Adam said, recently with esoteric maybe growing a little bit more helping the mix. But the expectation, as we continue to go forward, is that the volumes will start to pick up, hopefully, back to more normal levels and that the test per rec or the price mix, if you will, will normalize as well.

Okay. Okay. Can you tell us a little -- talk a little bit more about relationship with managed care organizations? We're hearing different things about value-based arrangements and how far they've penetrated the business. We're also hearing about managed care companies potentially being willing to work with you more on acquisitions, especially hospital outreach businesses. Are you seeing that? Any other ways you'd characterize recent developments with managed care?

Yes. So A.J., I mean health care costs as a percent of GDP in the United States are too high and they're growing too fast. And I think there are significant unintended consequences of COVID that could cause increases, whether it be drug dependency, alcoholism, domestic violence, incidence of depression and other elements. And I think that, that's going to cause further strain as we go into next year and into the future on a health care system. So you've got to be part of how to reduce overall health care costs. Now the good thing about diagnostics is we're involved in 95% of decisions for health care. We're only 3% of the cost. And I think we can be part of the solution. If you use our diagnostic testing the right way, we can give you very high quality and very affordable cost. I do think that value-based care is a way to help reduce cost over time. Unfortunately, I think with COVID, we haven't seen as many contracts where that progressed as fast as I would have hoped or I think others would have liked. We're getting back to that. We're having more discussions about it. But I wouldn't say we're significantly further ahead right now than where we were just before the pandemic. I think we've lost real time there, and now we've got to find ways to accelerate that. In terms of the future opportunities with managed care, I mean, we work closely with managed care, and we work together side by side. We have very strong relationships. And we'll work together to figure out how can we best reduce overall health care cost, and there might be things that we can do through value-based care through identifying patients, we'll just have to respond, companion diagnostics. We have so many other opportunities that we can work with them on. So I think that there are opportunities, but it will be a difficult environment in health care as we go through the next couple of years. I think everybody is going to be looking to reduce cost where they can. I mean I just think that's a fact of what we all have to do in the U.S. health care system.

Yes. Maybe another opportunity that's often discussed is a direct-to-consumer opportunity. Where is that in your mind? And what -- how big an opportunity might that be over the next few years?

Yes. So that's something we're looking at very closely. And I think it is an important opportunity. What we learned was Pixel, which was our at-home collection kit, we launched that for COVID, and it was probably the most utilized at-home collection kit of any kit that I'm aware of anyway. And the patient experience was very good. And if you look at the Net Promoter Scores, it was higher than any other test that I've ever seen. So I think we found that people are willing to do home collection for information that they want. And I think people don't want to have to go to the doctor if they don't need to go to the doctor. They don't want to be in an office. They don't want to necessarily be around other patients that are feeling ill, unless they need to. So we're looking to expand the number of tests that we offer for at home. I think if it's a nasal swab, it's easier than if it's a blood collection. But we're also looking at where patients want to order their own test where they can do a blood collection at one of our service centers. So we are looking for ways to engage with consumers as appropriate, not to take away the interaction they have with their physician, but to augment that and to help them when there are times that they would rather stay at home or get results in a different way.

Okay. Okay. On the drug development side, I think you've noted previously that about 2/3 of trials leverage the combined data capabilities across Covance and LabCorp. Can you speak to consumer feedback -- or customer, rather, feedback on these offerings and provide any metrics to help us think about how those support the drug development process for clients?

Yes, I don't recall that specific metric. Is that a metric you recall, Glenn?

No.

So I don't recall that specific metric, A.J., but at the same time, there's no doubt that having drug development and diagnostic together helps. And people saw it clear as day with COVID. We were using our central laboratories to help do COVID testing. We were using our diagnostic laboratories to help with the vaccine trials where we're doing central laboratory work. We were helping enroll the vaccine trials faster by showing where the most positive patients were in terms of COVID. So you saw clear as day how those interactions can be very beneficial to identifying patients, enrolling trial, running the studies and doing the central laboratory work. We're now showing that with oncology. And I believe oncology will be the next area that we can clearly demonstrate the power of having drug development and diagnostics together. But at the same time, we're looking at other therapeutic areas for the future, like Alzheimer's disease, rheumatoid arthritis and so forth. So I do think that the customers see it and they feel it. So the next logical question is, well, as you look at your strategic review, has that come into play? So when we think about the strategic review, it's not whether or not there's value in diagnostics and drug development, it's how do you unlock that value, and do you need to own both in order to have that value. So we're looking at everything still on the table. And I'm not questioning whether it makes sense to have the capabilities to help with clinical trials. What we're making sure we answer is, does this -- do you need to own both of those capabilities to actually make it as effective as you can.

Yes, yes. And maybe just a final question here. You've been in the role 2 years. You came from -- I mean, obviously, you're on the Board longer than that, but came out from Merck historically. You sort of have a unique viewpoint into what pharmaceutical customers want to see in a CRO, I guess. Can you give us a little bit about your assessment now of where you stand with respect to Covance? Is there areas that need further investment, where -- to be an even more attractive partner with pharma? And give us a little bit of an assessment of that if possible.

Yes. Sure. So I'll start by saying, when I was in pharma, the most important thing was delivering on the commitments that you agreed to. So if you say you're going to start a trial at a certain time, start it at that time. If you say you're going to roll a certain number of patients by a given time, make sure you enroll those number of patients. When you say you're going to lock the database at a certain time, ensure you lock the database at the right time. When it comes to quality, there's no shortcuts. The quality has to be at the utmost perfection. So the first thing is you got to deliver, and I think we do a really good job delivering. As you start to then think about the future, I think hybrid and virtual trials, as I said, are going to be increasingly important, and we're continuing to build our skills there. The second thing is you have to have a global presence. And we've increased our footprint in China and Japan. Those were 2 necessary components because that's the second and third largest markets for pharma in the world now. So you have to have the critical mass, and we've built that over the last couple of years. And then I'd say the third thing is you have to have a broad set of offerings. So it can't just be one therapeutic area. You have to be able to be across therapeutic areas. We've done really well in certain areas. We've increased in oncology very significantly over the last 2 years. And there's 1 or 2 other therapeutic areas that I want to make sure we increase our presence in as we go through the next 12 months.

Okay. Okay. That's great. Well, I really appreciate you guys participating in the conference this year. Laboratory Corporation of America, it's great to have you. I appreciate Adam and Glenn and Chas being part of it. And hopefully, next year, we'll be doing this in person as opposed to virtual. But again, thanks for being with us today.

Thank you, A.J. I can't wait to be in person again, and I want to thank everybody for their time today. It's a pleasure to be here. And I hope everybody has a happy, healthy Thanksgiving holiday and into the future. Just continue to be vigilant and careful. We'll see you all soon.

Thank you.

Thank you.