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

Good day, and thank you for standing by. Welcome to the Q2 2026 Labcorp Holdings Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Dewey Steadman, Senior Vice President, Investor Relations. Please go ahead.

Good morning, and welcome to Labcorp's Second Quarter 2026 Financial Results Webcast. With me today are Adam Schechter, our Chairman and Chief Executive Officer; and Julia Wang, our Executive Vice President and Chief Financial Officer. This morning, in the Events section of the Labcorp Investor Relations website at ir.labcorp.com, we posted both our press release and a supplemental financial presentation with additional information on our business and operations. We will also host a replay of this webcast on the IR website for 1 year. On today's webcast, we will focus on our adjusted or non-GAAP results for the second quarter of 2026, our capital allocation strategy our updated financial guidance for the full year 2026. Our GAAP results and a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures are available in today's earnings release and the supplemental financial presentation. Please see the use of adjusted measures section in the supplemental presentation for more information regarding our use of non-GAAP financial measures. In today's remarks, the term organic growth excludes the impact from acquisitions, divestitures and currency as well as other strategic actions taken in early development business. Our remarks will also include forward-looking statements, including, but not limited to, statements about our updated 2026 financial guidance and the assumptions underlying that guidance, the expected impact of various factors on our business operating and financial results, cash flows and financial condition, global economic and market conditions, our future business strategies, the expected savings, benefits and synergies from acquisitions strategic actions and partnerships and our potential opportunities for future growth. Each of these forward-looking statements is subject to change based on various factors, many of which are beyond our control. More information is included in our more recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I'll turn the call over to Labcorp's Chairman and CEO, Adam Schechter. Adam?

Thank you, Dewey, and good morning, everyone. We appreciate you joining us today to review our second quarter 2026 results. Labcorp delivered another very strong quarter, driven by solid revenue growth, margin expansion and progress across our strategic priorities. Our diagnostics and biopharma laboratory services businesses both performed well. Advancing strategic initiatives and expanding technological capabilities that continue to drive growth. Key accomplishments include broadening our specialty test portfolio, expanding partnerships with leading health systems, biopharmaceutical clients and regional local laboratories, continuing to grow our consumer business and increasing the use of advanced technologies across the company. Turning to our enterprise financials for the second quarter. Revenue grew 6% to $3.7 billion. Margins improved 70 basis points to 15.8%. Adjusted earnings per share grew 15% to $4.99. And free cash flow was $314 million. Moving to our segments. Diagnostics revenue increased 5.5% to $2.9 billion, Biopharma Laboratory Services revenue increased 6.5% to $836 million, driven by strength in central laboratories and our BLS book-to-bill was 1.14 in the quarter and 1.03 in the trailing 12 months. Julia will review our updated increased guidance in just a moment. Our results reflect the progress we've made across each of our strategic priorities, beginning with strengthening our leadership in specialty testing across oncology, neurology, autoimmune disease and women's health. Collectively, in the first half of the year, these specialty areas delivered double-digit revenue growth and helped us to win new health systems and provider customers. Laboratory testing plays a critical role in both drug development and patient care, supporting earlier detection, diagnosis, therapy selection and ongoing disease monitoring, all of which support better health outcomes while enabling more informed clinical decision-making. In our Labcorp oncology business, we expanded our portfolio across lung, colorectal and prostate cancer, adding innovative screening, diagnostic and companion diagnostic testing solutions. We launched ColoSense nationwide, the first FDA-approved RNA-based colorectal cancer screening test with an at-home collection. With Medicare expanding commercial payer coverage, this test increases patient access to screening and enables earlier detection. And we entered into a clinical trial collaboration with Fox Chase Cancer Center to evaluate Labcorp's Plasma Detect Genome MRD in patients at risk of early-stage non-small cell lung cancer recurrence. We expanded nationwide access to Roche's FDA-approved companion diagnostic for people living with prostate cancer who will now be eligible for combination treatment with AstraZeneca's targeted therapy. And we added an advanced DPYD genotyping test to our portfolio that helps identify patients at risk for severe treatment-related toxicity from certain chemotherapies. Beyond our priority specialty areas, we continue to advance testing solutions across a broad range of important health conditions. We signed an agreement to broaden nationwide access to myOLARIS-KTdx a first-of-its-kind noninvasive test that supports surveillance of graft injury, including rejection following a kidney transplant. For patients at risk of liver disease, Labcorp's blood-based test, NASHnxt secured Medicare coverage beginning in mid-August, expanding access for more patients and enabling earlier detection of MASH. Additionally, new peer-reviewed research demonstrated the potential of Labcorp's advanced noninvasive blood-based diagnostic tools, including MVX and NIS2+ to improve risk assessment and to provide early identification of patients at risk for liver disease progression. Moving now to the strategic priority of being a partner of choice for health systems and regional and local laboratories. These partnerships play an important role in providing health systems and providers, greater access to our high-quality, cost-effective laboratory services to our scientific expertise and to our broad testing portfolio, including specialty diagnostics. In the quarter, we completed the acquisition of select Outreach Laboratory Services from Parkview Health in Indiana and Ohio and the acquisition of Tribal Diagnostics, a clinical laboratory serving communities in Oklahoma and Texas. And once again, we were recently awarded a Department of Defense contract to provide laboratory testing for service members and their families across military hospitals worldwide. We continue to have a very robust pipeline of deals and to support our long-term growth strategy, and we look forward to sharing more of those moving forward. Turning to the consumer health space. Our consumer business continued to deliver strong double-digit growth, driven by increasing demand for consumer-initiated testing, innovative offerings and compelling digital experiences. And with the recent announcement of our Marker by Labcorp Genetic Health Panel through Labcorp OnDemand, consumers will be able to get biomarker and genetic testing and insights from a single trusted source. We also launched Canada's first at-home self-collection test to measure women's fertility-related hormones, immense cystosterone levels. Additionally, our recently launched AI-powered app, MyLabcorp has already begun to be downloaded by millions of consumers. The app allows patients to schedule appointments, to view their test results and to get deeper insights into their health using AI. These differentiated innovations, combined with our leading science are creating personalized experiences that consumers can trust. We continue to make strong progress on the strategic priority of shaping our future through technology and innovation to improve the customer experience, to enhance productivity and to transform our business. In the quarter, we broadened our cooperation with Epic, which will make Labcorp's 6,500-plus diagnostic tests available on Epic's Aura platform. This collaboration will make it easier for health care providers using Epic Aura to access Labcorp's tasks, including genetics, oncology and other advanced diagnostics. We also enhanced the experience at Labcorp's patient service centers through expanded appointment availability, streamlined scheduling and proactive rescheduling reminders and assistance. These are just a few examples of how we're advancing our strategic priorities in serving our customers. Our results this quarter and our progress against our strategy were made possible by our teams who carry out our mission each and every day. Their impact was recognized by TIME, where we were honored to be named again as one of the world's most impactful companies. We were also included on the Wall Street Journal's Best Companies for the Future list, recognizing our commitment to innovation with long-term value creation and positive impact. With that, I'll turn the call over to Julia to discuss our financial results in more detail.

Thank you, Adam. Our second quarter results reflect strong momentum and continued execution of our strategy. Enterprise revenue grew 5.8% versus the prior year. Enterprise adjusted operating margin expanded basis 70 basis points to 15.8%, primarily driven by organic revenue growth. Adjusted earnings per share grew 14.9% and we generated $314 million in free cash flow. We also remain active on capital deployment. We invested $226 million in acquisitions, repurchased $354 million of shares and paid $59 million in dividends following the retirement of $500 million in senior notes in the second quarter with $142 million in cash and $5.9 billion in total debt at the end of the quarter. In July, our Board of Directors approved an increase of $1 billion in the company's share repurchase authorization, bringing the total authorization outstanding to $1.4 billion. Moving to more details on the quarter. Enterprise revenue was $3.7 billion, up 5.8% from the second quarter of 2025. Organic revenue growth was 4.2%. Net acquisitions contributed 1.2% growth. Foreign currency translation contributed 0.4%. Adjusted operating income was $589 million, or 15.8% revenue compared to $532 million or 15.1% of revenue last year. The adjusted tax rate was 23%, in line with last year. We continue to expect our full year adjusted tax rate to be approximately 23%. Adjusted EPS was $4.99, up 14.9% from last year. Free cash flow was $314 million compared to $543 million last year. The difference was primarily due to working capital timing and planned increases in capital expenditures. We continue to expect free cash flow in the range of $1.24 billion to $1.36 billion for full year 2026. Turning to our segment. Diagnostics segment delivered another strong quarter. Revenue was $2.9 billion, up 5.5% compared to the prior year. Volume growth contributed 3%, and the price/mix contributed 2.5%. We delivered organic revenue growth of 3.6%, consisting of 1.8% volume growth and 1.8% favorable price mix, which was largely driven by higher test per accession. Revenue from acquisitions contributed 1.9%, consisting of 1.3% volume growth and 0.6% favorable price mix. Diagnostics segment adjusted operating income was $523 million or 18% of segment revenue compared to $483 million or 17.6% range last year. Adjusted operating margin expanded 50 basis points due to organic growth and operating efficiencies. BLS segment revenue was $836 million, up 6.5% compared to last year. Organic constant currency revenue growth was 6.2% as a 1.8% benefit from foreign currency translation was partially offset by a 1.4% impact from our early development strategic actions. Within the BLS segment on an organic constant currency basis. Central Labs Services delivered strong revenue growth of 7.6% and early development grew 2.7%. BLS segment adjusted operating income was $142 million or 17% year-on-year. compared to $123 million or 15.7% of revenue last year. Adjusted operating margin expanded 130 basis points driven by organic growth and operating efficiencies from the strategic actions we have taken in early development. All strategic actions have been announced and are largely complete. Our BLS segment ended the quarter with a backlog of $8.7 million. We expect approximately $2.7 billion to convert into revenue over the next 12 months. Quarterly book-to-bill was strong at 1.14, bringing trailing 12-month book-to-bill to 1.03. Turning to our full year 2026 guidance. We are raising the midpoint of our enterprise revenue and our adjusted EPS range by $42 million and $0.13, respectively. Enterprise revenue is expected to grow 5.4% to 6.3%, which represents a 30 basis point increase at the midpoint. The guidance continues to include a 40 basis point benefit from foreign currency translation. Diagnostics segment revenue is expected to grow 5.3% to 6%. This is a 20 basis point increase at the midpoint. We continue to expect the majority of growth to be driven by organic performance. segment revenue is expected to grow 5.5% to 6.5%. We have raised the midpoint of our BLS revenue guidance by 140 basis points, driven by continued strength in Central Labs and a more favorable outlook for early development. The guidance continues to include a 150 basis point tailwind from foreign currency translation. For the full year, on an organic constant currency basis, we continue to expect Central Labs revenue to grow in the mid-single digits. We now expect early development revenue to grow in the low single digits. We continue to expect enterprise margin expansion with margins improving in both Diagnostics and BLS in 2026 versus 2025. Consistent with our prior expectations, BLS margin is expected to expand more than Diagnostics. This reflects continued strong topline growth in Central Labs and the benefits from the strategic actions in early development. At the enterprise level, we continue to benefit from our launch pad initiative, which remains on track. Our adjusted EPS guidance range is $18.10 to $18.55, with an implied growth rate at the midpoint of more than 11%. Compared to prior guidance, we have narrowed the range and raised the midpoint by 3. Our free cash flow guidance range remains $1.24 billion to $1.36 billion. We continue to expect capital expenditures to be approximately 4% revenue. Our full year guidance assumes foreign exchange rates as of June 30, 2026. The guidance also reflects our current capital allocation assumptions, including the use of free cash flow for acquisitions, share repurchases and dividend. We remain focused on delivering profitable growth and strong free cash flow to generate long-term shareholder value. Now I will turn the call back to Adam for closing remarks.

Thank you, Julia. Let me close with a few takeaways. First, we delivered another strong quarter of financial performance, including solid revenue growth, significant margin expansion and double-digit adjusted EPS growth. Second, we strengthened our leadership in specialty testing and announced several important partnerships with health systems. And third, we are leveraging technology and AI to create differentiated customer experiences to enhance productivity and to transform our business. All of this has led to us increasing our full year revenue and EPS guidance. Looking ahead, we remain confident in our long-term growth trajectory. We are executing with discipline, investing in areas of significant opportunity and remain well positioned to deliver sustainable growth and long-term value to both customers and shareholders. Operator, we'll now take questions.

[Operator Instructions] And our first question comes from Lisa Gill of JPMorgan.

Good morning, Adam and Julia. Adam, I just really wanted to understand a couple of things when we look at the strong organic growth. You talked about specialty testing being double-digit growth. You talked about advancing strategic partnerships in the marketplace. Can you just talk about underlying what you're seeing from a utilization perspective, one? And then just on the back of that, I think previously, you had talked about a potential impact from changes of around ACA and Medicaid, do you still have something in your guidance or anticipation that we could see some type of headwind because of changes to the exchanges and Medicaid?

Yes. Lisa. I'll take the first part, I'll ask Julia to comment on ACA and what's built into the guidance. So diagnostics had a very strong quarter. That's for sure. We had $2.9 billion in revenue, which increased 5.5% versus last year. And as you mentioned, it was strong organic growth. The organic growth was 3.6% and then just under 2% was due to acquisitions. If you take a further look, the volume growth was also good at 3%, with the majority of that volume growth coming from organic growth. We're certainly seeing our specialty business grow faster than the routine business, and we expect to continue to see that. Importantly, when we have the specialty business and you look at an area like oncology, it's not just the oncology test, but it's the oncology patients. And if you look at an oncology patient, they tend to get many, many, many more tests than a typical patient over time. So that's why we also believe we're seeing tests per accession continue to increase as well.

Lisa, in terms of the ACA impact, previously, we provided an estimate of 30 basis points to the Diagnostics segment volume for full year 2026. At this point in time, we continue to believe that this assumption is appropriate. And we have incorporated into the updated guidance that we just provided this morning. As you might recall, we shared on our last earnings call that the impact from ACA during Q1 was immaterial. Subsequently, in the second quarter, it was a slight headwind of about 20 to 30 basis points of the diagnostic volume. Now it is important to note that this particular peer cohort accounts for a very small percentage of our total diagnostic volume which is less than 4% to 5%. Therefore, our expectation for the full year impact remains unchanged. But of course, we will continue to monitor closely and manage appropriately.

And our next question comes from Kevin Caliendo of UBS.

I want to dive a little bit into the organic volume number. And how to think about that relative to the markets, how are you faring in the retail segment, how are you faring hospital versus doc offices? And sort of what's embedded in that in terms of how you calculate volumes versus number of tests that you're doing? Is it -- is it sort of an apples-to-apples because we're hearing that there are more tests per session. And I'm just trying to understand how to think about is organic -- you're positioning in organic volumes versus the market versus your peers and how it's reported?

Yes. Thanks, Kevin. So let me start, and I'll ask Julia to provide additional context. So first of all, the volume growth was 3%. So it remains strong, and the majority of that 1.8% was organic volume growth. That does not include the test per accession increases. So if you would increase that, you would actually see tests actually going up even more. We're doing very well. The market typically grows at 1% to 2%. So we're growing substantially more than the overall market. And I think a big part of that is some of the hospital deals that we're doing, the local and regional laboratory deals that we're doing to continue over time to give us additional growth opportunities. If I look in the overall market, we're doing very well in primary care. We're doing well in the hospital segment. And if you look at hospital reference testing, for example, we're actually even growing faster there than the overall segment. I think we have some real strength if you look at reference testing as well. So overall, I'd say a good organic growth, and that's why we were comfortable to raise the midpoint of the diagnostic revenue guidance by about 20 basis points. And we remain excited about the rest of the year.

Yes. Kevin, in terms of your question about the way that we account for volume for diagnostics, it is beneficial to bring some clarity to that. As you know, we typically report that out in the measurement of a session. And then we would account for the number of tests, including the session in the price/mix calculation. However, if you step back and think about volume in the unit of test, you could potentially argue that the combination of the volume growth in accession, combined with volume growth in number of tests is a more intrinsic representation of the volume growth. So with that being said, maybe I can give you a little bit more color. For example, in the second quarter, we just shared that the price mix growth for the diagnostics business was about 2.5%. And out of that, the organic aspects of our business contributed 1.8%, once again in the terms of a session. But if you think about the test per accession growth, it's also another kind of majority of the contributor to the price/mix improvement. So all in all, I would say if you take the session growth of 1.8% and 1.8% price/mix contribution is almost 3.6% in the terminology of number of test growth. Now immediately post-COVID, we have seen significant growth in test per accession versus prior to COVID. But over time, we continue to see consistent and slight growth in test per accession quarter in and quarter out. Now longer term, we continue to believe that the mix growth will be supported by structural factors as well as our own strategic focus, as you've heard from Adam earlier, which, of course, include the considerations around the aging population, the health and the wellness trend the advancement in diagnostic testing as well as the breadth of our testing menu and our focus on specialty testing.

And our next question comes from Elizabeth Anderson of Evercore ISI.

Maybe one on BLS. Obviously, nice to see this morning. If we think about early development, can you talk about from maybe a revenue perspective like how much of the revenue improvement was sort of the end of the restructuring versus the end market improving there. Central Labs obviously continues to be strong. And then can you help us sort of decompose the bookings? Just looking for a little bit more color there.

Sure. So if you look at BLS revenue, it increased 6.5% versus last year. So it was very strong. And it was driven by Central Lab that's really performing well. It represents about 70% of the BLS segment. And the Central Labs grew 10% or an organic constant currency, it was about 8%. If you look at early development, it was down 1% reported, but it was up 3% and on an organic constant currency basis. So we're certainly seeing that business do a bit better than it has in the prior year or -- if you look at ED, we continue to look at RFPs, which are strong. We look at our win rate, which remains consistent. We're also seeing study starts to be a bit more on time. So we were able to raise the guidance, frankly, to single-digit growth for that business for this year versus prior it was relatively flat. And that's based upon the strong book-to-bill. For early development, you might recall that within a year, you can have a study start and finish. So you typically have a lower book-to-bill overall for early development. but those studies can start and end in the same point in the year. The strength in our book-to-bill was really driven by central laboratories. And if you look at the central laboratories, typically, the book-to-bills for future years. So the strength in our book-to-bill for the quarter of 1.14 or 1.03 trialing 12 months bodes well for the central laboratory business as we look into the future.

And our next question comes from Michael Cherny of Leerink Partners.

Maybe just one quick clarification and then a build on that. Just on the guidance update for Diagnostics segment, is the 20 basis points of volume organic or inorganic in terms of what's changed? And then along those lines, looking at the trend file you sent out, there was a shift higher in patient responsibility as a percent of total revenue versus clients and third party. Anything specific to call out there in terms of what you're seeing?

Yes. I would say -- I'll answer the second question first. If you look at some of the patient pay, typically, the second quarter has been a bit higher than other quarters and patient pay includes a lot of things, co-pays, deductibles as well as patients buying direct. We have seen double-digit growth in our Labcorp OnDemand test, which will be included in patient self-pay and the good news about that is patients pay upfront, so it doesn't increase bad debt. If you look at our bad debt, it remains consistent, and we haven't seen any significant increases there, even with that patient pay. So the more growth we get from Labcorp OnDemand, you will see that fall into the patient pay.

Yes. And the only thing I would add on that patient responsibility and bad debt topic is that if you look at our bad debt as a percentage of revenue for the Diagnostics business, it continues to be in line with prior year as well as historical benchmarks. So from that standpoint, we continue to work very hard on the collection efforts to ensure that we manage it very effectively. I think, Michael, the other question you have is, as it relates to the relates to the midpoint of the revenue guide raise for diagnostics. Now as you might be familiar with our practice, at the beginning of the year, we generally would be planning for certain in-year revenue for deals that we might not necessarily have already linked, so to speak, but have line of sight. But once we got to a point where we feel much more confident about the ability to close and generate revenue in the year, we will move that to the respective segments. And in this particular case, we are moving that an expectation from corporate into the Diagnostics segment because at this moment, we feel more confident about our ability to deliver against that expectation.

And our next question comes from Jack Meehan of [ Operon Research.

I wanted to push a little bit more on the diagnostic lab organic growth. The 3.6%, that's nothing to scoff at here, but comes after a notably stronger print from your closest peer. So I was just curious, like as you kind of look at the landscape, how much of this delta do you think is either competitive or market or just like a conscious decision not to chase certain hospital arrangements that are lower margin or just something else like help us interpret it. .

Yes. No, thank you, Jack, for the question. And if you look at the Diagnostics business, as you said, 3.6% organic growth is a good number. But importantly, if you look at our margin, our margin for the quarter improved 50 basis points. And that is already after we've lapped Invitae. So that's -- and historically, people have said, well, you're lapping Invitae, of course, your margins improved. This is after that. So what we're doing is we're focusing on high-growth areas like the specialty, oncology, women's health, autoimmune disease neurology. We're focusing on higher margin segments, and in some of the lower margin segments, such as some of the partnerships in the consumer area, we've not focused because we have so many other growth opportunities, including our central laboratory business, including some of the other hospital deals that we feel very confident with the guidance that we've given that it's a very high quality, strong set of guidance that's only good top line growth, but also with margin expansion.

Jeff, to build on what Adam just shared, I'd like to provide some additional color as it relates to our margin progression. I would start by saying that we continue to be very pleased with our operating margin expansion trajectory. For perspective, Q2 of this year represents the fifth consecutive quarter that we have been able to expand our operating margin for the enterprise as well as for both of our operating segments. As we just shared in the release this morning, in the second quarter, we delivered basis points of enterprise margin expansion versus prior year. And as Adam also pointed out, if you look at the segment, we improved about 50 basis points in diagnostics and we expanded the BLS segment margin by 130 basis points versus prior year. Now as you look at the full year 2026, consistent with our communications, we continue to expect another year of meaningful margin improvement in both segments. And we also continue to expect even into margin expansion year-over-year by the BLS segment than the Diagnostics segment. So overall, I would say that as an enterprise, we have been highly focused on driving durable top line growth that is profitable, and our relentless focus has clearly been reflected in our financials, including the operating margin trajectory.

And our next question comes from Michael Ryskin of Bank of America.

Maybe let's shift to specialty testing and oncology specifically. You talked about, I think, double-digit growth in specialty in the first half. I don't know if that accelerated or not in the second quarter. I think you only gave a first half number, but would just love to hear more about how that's doing, also double digits sort of a broad range. What I'm trying to get at is sort of how impactful is that to the 3.6% organic growth that you've been talking about in the DX business, how much that's moving the needle, whether it is some of the newer updates and portfolio expansions that you've talked about, whether it's ColoSense or some new organic investments. Just sort of how much upside do you think that could be providing to the second half and beyond?