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

Okay. Good afternoon, everyone. My name is Eric Coldwell. I cover pharma services and health care distribution related industries for Baird. It's great to see everyone here in the room today. It's really a pleasure to have LabCorp with us. We are -- for those of you who follow our work, we're getting more and more positive about the space and are pretty upbeat about what we see going into 2025. And been upbeat on LabCorp this year. I also had the honor of doing a field trip with you guys at your central lab back in June, which was a great reminder of a facility that I'd seen in the past. Adam Schechter, CEO, Chairman. We have Glenn Eisenberg, CFO. We're going to go straight into Q&A, but breaking from starting with the high-level macro, I do like when companies have relatively new news to let you just jump in on that outside of a press release.

Yes.

So maybe we would start with your most recent deal with Ballard Health.

Yes, absolutely. First of all, it's great to see you. It's always a pleasure. We've said for a while now that a big core part of our growth strategy is the ability to do hospital deals as well as deals with local and regional laboratories. We announced last night, another hospital deal. With hospital deals, there's 3 parts. There's the ability to run their hospital laboratory, there's their ability to acquire their outreach business and then there's the ability to be their reference lab. We will do all 3 of those. But the first 1 running the laboratories is actually a very good business because you don't have to lay out any capital, so the return on cost of capital is good, but it is dilutive to margins a bit. The second part of the business is right in our core in terms of acquiring our outreach business, hospital laboratory, capital is good, but it is dilutive to margins a bit. The second part of the business is right in our core in terms of acquiring our outreach business. And that's what we did with that. We acquired select parts of the outreach business. Doing that, we're able to run those tests in our central laboratories. We can do it faster, at a better cost. And that gives about our average margin in 1 year or so. And then the third part reference lab, we've been that with them for a while. So it's another part of our hospital strategy. It was a nice deal that we announced yesterday and we look forward to announcing more of those deals as we go forward. The pipeline for hospital deals remain strong as does the pipeline for the local regional laboratory deals.

Okay. I know not to go too far into this. When you didn't size it, you typically don't own some of these smaller deals, but part of the overall mosaic and obviously, whenever closes, it's not going to have a big impact on calendar '24 anyway. What is the overall, just big picture overall pipeline are deals becoming, they feel like, things feel like they're materializing faster now than they have in several years.

Yes. There's no doubt. There's no doubt. Yes. I mean the good news is the pipeline remains strong for these types of deals. And if you look at the longer-term guidance that we gave, we said that inorganic growth will be between 1.5% to 2.5%. Historically, we would have said 1% to 2%. So we're getting an extra 0.5% growth because we see the accelerated ability to do these hospital deals, also the local regional laboratory deal. So we announced that we're going to be doing a deal with BioReference. That will be happening in the near future. We announced that we were doing a deal with Westpac out in the West. So we continue to find opportunities to do these local regional laboratory deals in addition to the deals that we do with the hospitals.

That's great. During the last call, which was a good call, it was a nice update and stock responded well to it out of the gates. You were put on the spot, which I guess was the job of the sell side. You were put on the spot in the Q&A to foreshadow at some level 2025. And I always look at that with a grain of salt because it wasn't part of your prepared commentary. That being said, you only highlighted 2 potential -- 2 big unexpected items or unknown items, I should say, that could lead on expected performance, and it was, one, does PAMA come back or not; and two, just the overall biopharma environment for your central lab and early development business where you now have exposure. In hindsight, you've had some time to think about it. I gave you a nudge last week if you want to think about this more. Is there anything else you would throw into the mix because that's a pretty short list of things to, I wouldn't even say worry about, but to say you're uncertain about.

Yes. So if you look at -- I'll start with the diagnostic business, it's a pretty resilient business. A lot of people will say, does it matter who the President is or what happens with Congress. And in general, the diagnostic business does well in recessions. It does well in a good economy. It does well under Republican leadership, Democrat leadership. So it's a very stable type of business, and it's been that way for many years. COVID obviously made it a bit less stable. But it typically is a very stable business. So the largest thing that we're facing next year is the potential of PAMA happening or not happening. If you look at other things I watch, I watch the number of tests per accession. So when you take a blood test, if on average, a doctor takes 4 tests with that blood, Well, if they make a fifth test with that same sample, that's a great margin business for us because we've already paid for the phlebotomist, for the needle for the courier, everything up into the lab. So I always watch what's happening with the test per accession. That went up pretty significantly at the time of COVID. People asked me if I thought that would go back to pre-COVID levels, I thought it would. I think you even asked me out a while ago, it hasn't and therefore, I don't think it will. And I think that we'll continue to see test per accession continue to grow. If that would go back to pre-COVID levels, that would be something I'd watch very carefully, but I have no sign of that happening. So I feel really good about the stability of the diagnostic business. If I look at the central laboratory business, that's also a pretty stable business. It's typically with large pharma, and it's their Phase II and Phase III pipeline. So even when large pharma is facing an issue, they'll typically cut the preclinical work way before they think about cutting Phase II trials or Phase III trials. So we're in a relatively good space when you think about the central laboratory work. It's really in the early development work that we've seen that if pharma, if interest rates go 1 direction, if it gets difficult to find funding, that gets impacted. Now that has been impacted, frankly, for the last 12 to 18 months. We've actually seen some stabilization of that business. We feel like we're going to grow that business in the fourth quarter of this year, and I have confidence in that. But that's the 1 I watch very closely in terms of the economic conditions, particularly what happens with pharma. And I think that does vary sometimes based upon which administration is in place and which ones are not in place.

Okay. I want to spend next to no time on PAMA. We got a big room and maybe a few people who would just love a level set. What is in your guidance? What are the 2 alternative outcomes. And very specifically, I know some of the sell side have assumed that PAMA comes back such that there's no additional risk in models, others perhaps have not. Do you have a sense on where the Street is balanced for 2025.

Yes. When we look at the models, I'd say about 1/3 of them predict that there will not be an impact from PAMA. 2/3 of them predict that there will be an impact from PAMA. If PAMA occurs, it's about an $80 million impact, and that almost all goes to the bottom line. There's 2 things that could happen with PAMA. The first 1 SALSA could get passed. I've never seen a bill have such strong bipartisan support as SALSA does. If anybody in this room has met a congressman or a woman or a senator that doesn't think it's a good idea, send them my way because I can't find them. The issue is that it's still a cost add. And for the last 4 years, it's been very difficult to get any bills passed that had any cost. But when they look at PAMA, they've delayed it every year for those years because they realize that it's not the right thing to do to implement it the way it is today. So they end up if they can't pass also looking delay it, delaying PAMA has been a cost savings to the government based on CBO scores. So I believe there's still a chance, SALSA may get past this year, but it's a smaller and smaller chance every day because I don't know what's going to happen. I think there's a good likelihood that it will be delayed again if SALSA does not get passed. But I don't want to count on that because for it to be delayed, it has to be attached to a bill. And depending on what happens in November, we'll see if any bills get through before the end of the year. So in our long-term guidance, we've put in another impact from PAMA, assuming it will happen in 2025 and when it doesn't happen, there'll be about $80 million, most of which could come to the bottom line of upside. And I want to build a plan that assumes that it's coming, that looks good. And then when it doesn't come, it'll look even better. Anything you would add? No?

Well said. I agree. LCD, yes. Really good margin last quarter, especially considering the setup. I mean in addition to your growth investments and onboarding a number of new deals, which don't always kick off right out of the gates with the highest of margins, you had the cyber attack at your 1 of your -- if not your biggest partner on the LCD side. I mean there was a lot going on in 2Q and you still pulled out a 17.5% margin. Talk about the puts and takes in the quarter. What were the -- maybe give it 2 or 3 things that you fully achieved what you were hoping for and/or were better, 2 or 3 things that were incremental other than Ascension if there were any. Just talk to us about margin, and then I'm going to have a follow-up that is actually something I know it's a question from the audience.

Okay. I'll answer that and I'll ask Glenn to jump in and add his thoughts as well. When I look at the margin, obviously, we think about it every day. And we do several things proactively, such as our LaunchPad initiative. Our LaunchPad initiative is a reduction of expense between $100 million to $125 million each year as we go through the longer-term guidance. And we have line of sight to that. We know what we have to do to get that done. We typically try to accelerate everything we possibly can there because that gives us a little bit of room. We're on track for LaunchPad. I feel really good about where we are. I mentioned tests per accession help us a lot for margins. And you've seen the test per accession continue to be strong for us. Again, that's a good margin business because every additional test from the same blood sample that's taken is a good margin for us.

Can I interrupt and you just -- I know you highlighted this a minute ago, but could you more specifically say where it is now versus the past?

Yes. So we don't give the exact number because it varies and it's very different patient by patient. But what we've seen is when we do 650 million tests per year, a very small slight change in the number of tests per accession could be a very meaningful impact. So even though I can't say you see test per accession go from 4 to 5. I mean, you think about a 25% increase that would be a massive impact on 650 million tests that we do. It's very gradual, very small, but we can track it and see it very clearly. So what would you add to the margin discussion?

Let's just say that overall for diagnostics. So for the incremental revenue, we normally look to leverage at, call it, 25% to 30%. And to your point, on good top line growth, we saw our margins relatively flat. Most of the time, when we see that, it will be a mix issue when we don't in this quarter, in particular, between obviously lower coded revenues, which mix us down a bit, and that's obviously becoming less of an issue as we go forward. But with all the hospital systems, as Adam said, it's a really attractive business for us. We bring them on, but they have a different profile from a return on revenues. They mix us down from a return on invested capital, they mix us up. So more of a mix issue as we look, especially less quarter-to-quarter, but over the full year, whether we back out the mix impact, the TSAs, weather, we strive to be in that 25% to 30% kind of incremental.

Okay. I got a question that came in before -- right before we started on, it's actually come in a couple of times now, but you were -- you sounded good on the last quarterly update, and really weren't highlighting big topics for next year beyond those. We've already talked about your core guidance is moving up a little bit. We'll talk about Invitae and some of the apples-to-oranges numbers. But you did not proactively highlight third quarter events like CrowdStrike like Hurricane Barrel. You did acknowledge a handful of pennies of headwind in the third quarter when asked, but you didn't highlight. But this is a quarter that has fewer revenue days and more payroll days.

Yes.

So you didn't highlight that. I think your slide deck I didn't talk about as the Street in the right place. I mean, are we too optimistic because we're not looking at that slide deck and you didn't call it out.

I think that's a great question, and it's a very fair question. And I think you should look at your models because you're absolutely correct. That is going to occur in this quarter. I've tried to get away from calling out like weather days and number of days in the quarter. And I think at 1 point, when I first started, you called and said, Adam, how many exes do you possibly have, it's like ex this and ex that, you have too many exes.

Were we not friends then?

What's that?

Were weren't friends then.

Friends. And I actually appreciate it and I took it to heart. So I tried to pull out the things that are kind of I can't explain easily. But in the third quarter, when we come out with the numbers, we'll explain pretty easily, well, here's where we are. And part of the reason we're there is because we had an extra day of expense without revenue, and we'll call those things out, in particular, in Glenn's discussion. So I do think that it's important to note that because it will be something that impacts the quarter. But -- to me, that's just mechanics of the quarter, but I'd like to talk about the fundamental underlying business that we have, and those things remain strong. Like I can explain if there's an extra day of expense and no revenue, the fundamentals is what I try to focus on and are the fundamentals of the business strong and in diagnostics, they are strong.

And regardless, you knew numbers when you gave guidance originally and when you updated it last quarter.

Yes, we do. But I think you're right. You should check the models and folks out there should think about it. But you're always on top of those. Thanks. I appreciate that.

So let's hit on Invitae here. Street was initially concerned about the deal was not probably the response you were expecting hoping for right out of the gates. When you gave your update and put some more numbers around it framing around the onboarding, which came earlier and how you were getting through some of that initial dilution, pulling it forward, getting through it faster, getting to accretion next year, the stock responded very well with the second quarter report. We're 5 weeks in now on that deal. So maybe it's too soon to say much more but...

I feel great about that deal. And I feel great about the progress that we have.

Give us just 1 or 2 line around just, again, for people who aren't that familiar.

Yes, I will do that. So Invitae is a company that does inherited genetic testing. A lot of that testing is in oncology. Some of it's in rare diseases. There's a bit in women's health like BRCA testing. So it really is an important set of tests to help people with preventive care or to understand hereditary -- the hereditary cancers or other things that they may have. I've watched them for years now. We love their science. We like their patient experience. They were doing a really good job with those things but they couldn't find a way to be profitable. And I saw them when they were $10 billion, we did all the homework and all the things I just couldn't justify the cost. When they went to $5 billion or half price, we looked at them again, I'm like, well, I love their science. I like what they do. It's important work, but we still couldn't get to the financials making sense for us. So we were able to buy them for $239 million, which was less than 1x revenue. And we had a clear path to profitability, and I'll explain how. I thought that people are going to respond very positively. So frankly, I was pretty surprised when people -- I can tell you, bankers, venture caps, all those folks were calling me saying, how did you pull off that deal for that price? And then I was watching what the rest of the world was saying, I'm like, what's missing here? So I think what was missing was some more specific understanding of what we were going to do and how we were going to do it. So what we said will be dilutive to margins this year by about 60 basis points, but it will be accretive to our business next year. And the way we get from here to there is, first of all, we look at G&A, and we have G&A. We don't need their G&A. We can reduce that very significantly. The second thing we do is we look at where we have overlapping laboratories and programs. So if we're doing science for certain types of tests, they're doing science, let's take the 1 that's furthest ahead that has the best scientific studies behind it, and let's not do the other one. And we'll just take the best of the science wherever it is, whether it's in Invitae or in LabCorp. And we'll look at the best labs. They have a great lab in California. And we'll say, okay, where is the right way to do this, patient experience. Their patient experience is really good. We'll take more of our test, put it through their patient experience and not necessarily have to use ours. Cost, when you look at us having fixed courier costs where they had to pay for courier services, there are so many opportunities for us to use our scale and capabilities to reduce cost that we feel very confident in the fact that we said it will be accretive next year. I meet with the integration team as does Glenn every other week. We've put a really strong team. They're making great progress. They're right on track with where I expected them to be. I think that 1 day, we'll look back at this deal and say that's 1 of the best returns on capital that you've had.

All right. So here's the hard question. One of -- I think 1 of the challenges, the Street has had in the past is that we haven't always gotten the report card on how an initially dilutive deal has done financially. We might get the update on the new PDGx or OmniSeq, you good feel about it. We don't always get the update hey, we laid out these targets back in the day when we bought that business, and we get an A-grade, a, D, a, C, a, D and F. That's we don't -- so we don't have that ability to say, trust them because the track record is 9 out of 10x, this works.

Yes, I think that's a fair comment, Eric, and I thought a lot about that. And typically -- so we obviously have a very thorough financial analysis that we do before we do any acquisition. And these acquisitions get approved by our Board. So we go in a lot of detail. Then we do a 1-year review to say, are what we expect it to be typically, after a year, they're integrated into our overall business. So it gets much more difficult to try to break out the individual pieces because they're using our courier services. They're using -- and they become part of our test menu. One thing that people have asked me is, Adam, if you look at something like PGDx, how do you think it's doing? Well, we've launched tests with PGDx. We've launched a test with OmniSeq. The thing is when you launch a test in oncology, it's not just about that test, if I gave you the number of liquid biopsy tests that we would do in a year when we do 650 million total test, that number would not be impressive. But when you think about it this way, if an oncologist can come to LabCorp and get the liquid biopsy at the same time, order every other test that you need for that cancer patient, their liver test or kidney test, their WBCs, or their RBCs, so many tests that a cancer patient needs. They will come to us, and we will get all the tests for that patient. If you were a physician and you had to go to 1 company for a liquid biopsy test, another company for these other tests, you got 2 different reports, 2 different order systems versus if you can go to 1 company and order everything you need for that oncology patient you're going to choose the 1 company with everything you need that gives it all to you in 1 report in totality. So we want to be the lab that they come to for the entire cancer patient versus 1 test. So there's a lot more to it than just looking at the individual test. It's about how do you actually win in very important patient populations. And those patient populations that we're focused on, oncology, women's health, neurology and autoimmune disease, we expect to grow 2x to 3x faster than the overall market itself. So it's actually a lot more goes into the thought than just that 1 specific thing. If you would ask me to grade how we've done with PDGx and OmniSeq, I would say, in total, the deals have been terrific. Have they met the exact expectations in any given year for just the number of tests for that company, I would say, OmniSeq more so than PGDx. But PGDx, we have several tests that we've launched in the marketplace that are doing really well, and it's actually expanded. If you actually somebody did a survey that asked oncologists, what companies do you think of? And the first time, LabCorp was top of mind for oncologists. That's what we're shooting for. Because when we do that, we get all the tests for that patient.

That makes sense. Let's use our remaining time for -- a proportionate amount of time for your smaller but still very visible segment, BLS, Biopharma Lab Services. Central Lab I can't think of many, I can think of 1 company that would be visible to the Street at least that grew at the pace your central lab, which is in a clinical CRO per se, but obviously, is very closely entwined with that business. I can think of 1 company that had a better growth rate over the last year. Now that being said, you do have some tougher comps moving forward. So I guess I want to attack this from a couple of angles. First off, one or 2 liner on why your central lab is the dominant central lab, why it's doing so well? What drove that double-digit trailing 12-month growth. And then number two, which might have some follow-up, the segue into where you're headed and then just the overall market environment. On the clinical side, but this is again lab on the clinical side.

Yes. So I'll focus on the lab, central laboratory, which does primarily Phase II and Phase III studies for pharmaceutical companies and/or sometimes for CROs, the pharmaceutical companies work with. And importantly, even sometimes CROs that have their own central lab will use our central lab because pharma will say, "We would like LabCorp to be our central laboratory. They're doing work with us in other areas". We are the leader in central laboratory. We have a global footprint. We have labs in China, in Singapore across Europe, in the United States. And when pharma's running Phase II and Phase III trials, Phase III in particular, they want a global laboratory that uses the same reagents, the same machineries, the same consistency for their study in every part of the world. And I think that's what we're able to offer them. Separate and distinct from that, if you walk into a central laboratory, it looks exactly like our diagnostic laboratories, you've seen both. And the differences are the customers. So in central labs, it's more pharma in our regular diagnostic labs it's patients from physicians. And the second thing is the regulatory requirements that come along with doing pharmaceutical studies. So the FDA comes in inspects you and the Japanese regulatory agency, but the labs themselves, there's a lot of synergy we actually get cost synergies and reagents and machinery that we buy. We actually can develop companion diagnostic tests in our diagnostic areas that we can bring into clinical trials and roll out into other parts of the world. So a good example of that is PGDx. We developed a liquid biopsy test for lung cancer. That liquid biopsy test is now available in Asia, in our lab in China, and it's available in Europe and our lab there. So any company that wants to use liquid biopsy as part of their global clinical trial, they can come to us where other labs in that space can't say that.

What long-term growth for that business, you have a you have a long-term target for BLS but also specifically to central lab, a normal future expected growth rate?

So when we gave our guidance, if you will, call it, around 6% organic growth at the midpoint of the guidance range over the next 3 years for both of the businesses. So we don't break them out separately. To your point, the first half of 2024 in central lab, which we break out each quarter that we go was higher than that normal. And in part, that was due to a softer comp a year ago when the investigator sites were constrained with some labor shortages. But -- so as we think about the second half of this year for that business, more normal mid-single-digit organic growth consistent with the longer term. The flip side, if you will, on early development, still within that kind of guide that we gave, 6% at the midpoint, arguably, a little bit on the higher end of that, but coming off of a weaker comp right now as well. So we expect the growth rate within ED to grow as we go through the rest of this year, start to see favorable comps year-over-year in the fourth quarter and then hit that higher growth rate longer term.

And on the early development, I think people are going to struggle with the early development framework because the biggest competitor in the market had a pretty sharp shift in their outlook here just a few weeks ago. You do have an incredibly different comp this year versus the competitor. I think you have a bit of a different mix profile both in terms of the type of work and also the customer base. But give us the reminder on what you're seeing real time in terms of bookings, cancellations, client conversations?

Yes. I mean, I'll tell you what I look at when I look at their business. The first thing I look at is RFPs, the number of people that come to us request for trials. I look at those in numbers and I look at those in dollars. The number of RFPs coming to us is similar to what it was prior to COVID. So the number of requests that we're getting to do trials in both numbers and dollars looks very good. The second thing I'd do is I look at our win rate. And I look at that as a percent. I look at it in numbers and in trials. The numbers are very consistent. The dollars bounce around a bit because a big trial in early development could be like $7 million. Sometimes you win it and your percent goes up, sometimes you lose it, your percent comes down. But if you look over time, our win rate looks very consistent with where we've been. So our market share is very consistent. The next thing I look at is how many of those trials start actually come to fruition. You got them, you want them and you do them. Well, where we've had issues up until the second quarter of this year was the start. There were a lot of cancellations. And I could go through why, but we know exactly why there was those cancellations. In the second quarter, we actually saw the cancellation rate go back to not quite pre when there was a primate shortage level, but almost there. And that gives me the confidence as we look at the third quarter, the third quarter will still be negative but better than second quarter and that by the fourth quarter this year, we'll be able to see some positive growth going into next year. So the RFPs, the win rate and the start rate look good. And when you see those 3 things coming together, those are studies that are ongoing. So it gives you a pretty good insight as to what you're going to see as you go through the year. So based upon everything that I see, as I said as we look at those data, that business will come back to growth by the end of this year.

And to be fair, it doesn't really matter what your backlog is. It's about bookings in the quarter because that's right and done.

That's exactly right.

And you did say bookings in the quarter were strong, but you never specifically quantified. In the past, you've said strong and early development might be somewhere in the 1051 1 ZIP code perhaps. I don't know if you were being that specific that you would have gotten back to that level, but.

Yes. So I never said a fully development. I said that for BLS, that would be good.

About 11 somewhere in that ZIP code.

Yes. I think anything above 1 in early development, I mean, even like if you look at our competitors, they're usually the 0.7 level or 0.75 level because they burn fast. So you can get more trials in that year that get you to meet your year because you start them and you can end them in the same year. What I would say is when I looked at our bookings for the third quarter, they were strong, and they were as strong as what I've seen in the past prior to having these shortages, and we don't break it out exactly, but directionally, I would say it was above a 1.

And I don't want to put you on the spot or getting uncomfortable territory, but that hasn't changed that.

I feel good about the early development business and the fact that we should see some growth as we are in the fourth quarter. But again, declines on the third quarter growth in the fourth quarter.

Okay. We have 33 seconds. I'm going to let -- I'm just -- I'm going to drop my last 2, but I just want you to maybe if you want to take the last few seconds here and leave us with your parting thoughts.

Yes. So first of all, Eric, it's great to be here. Thank you. I always appreciate your questions. And as I look at LabCorp's business, our diagnostics business is performing very well. Our central laboratory business is performing very well. That represents 94% of our revenue and even more than that in operating income, and it gives us great momentum as we move forward. And the other 6% early development, we see the path to return to growth by the end of this year. So we're excited about the opportunities before us. We're excited about the growth potential before us, and we look forward to seeing you real soon.

Thank you very much for that. I'm going to quickly introduce the next 4 companies, and we'll -- I'll be staying here with ICON in 5 minutes. We have Applied Therapeutics, Grail and Amylyx Pharmaceuticals, all coming up in the other session. So with that, Adam, Glenn. Thanks very much.

Really appreciate it. Thank you.