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

Good afternoon, everyone, and welcome to the Morgan Stanley Global Healthcare Conference. I'm Erin Wright, the lead health care services analyst at Morgan Stanley. For more important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And with that, we're happy to have LabCorp with us today, hot on the heels of their Investor Day last week, CEO, Adam Schechter; as well as CFO, Julia Wang, are with us today. Thank you so much for joining us.

Let's kick it off with just a bigger picture question on the back of the Investor Day, some of your high-level takeaways that you wanted to drive home for investors you reaffirm the long-term kind of guide or largely refer in the long-term guide with some tweaks. And can you kind of break down some of those building blocks and how you think about the long term for LabCorp?

Absolutely. Good afternoon, everybody. Aaron, thanks for having us. It's a pleasure to be here. So last week, we had our Investor Day. And the first thing we did was we showed data on the last 3 years when we provided longer-term guidance and showed that we were able to achieve exactly what we committed to achieving. The second thing we did was we reaffirmed our guidance for the rest of 2026, which we feel very strongly about, remains compelling. -- and we reaffirmed that guidance. The third thing we did was talk about our long-term strategy and provide longer-term guidance for the next 3 years. If you look at that guidance, I believe it's a very compelling proposition. We have revenue growth of 5% to 8% at the midpoint, double-digit EPS growth. We have margin accretion of 75 to 150 basis points and we have very strong free cash flow. Then what we did was provide the strategy that feels -- that shows us the path forward to achieving that growth compelling profile. The strategy focuses on several areas. One is to lead in specialty testing. We're primarily focused in oncology, women's health, autoimmune disease and neurology. Each of those areas are growing significantly faster than the market. We gave some data on those areas that we can talk about, if you'd like to innovate. To continue to win in the hospital, the local regional laboratory business, -- we have a very strong pipeline of potential acquisitions in those areas that will continue to give us growth. We said in the guidance that we expect 1.5% to 2.5% of the revenue growth to come from those types of acquisitions. If you look at the last 3 years, it's been about 2.4% of the growth has come from those types of acquisitions. We talked about the importance of using technology and artificial intelligence in the majority of our business, and we're looking at it in 3 buckets. One, how do we improve the customer experience, thereby driving revenue; two, how do we reduce costs, thereby improving margins? And then how do we think about transforming aspects of our business in a fundamentally different way in the future. And those 3 things are helping us reach the LaunchPad initiative, which we increased in this guidance versus prior guidance where now we expect $125 million to $150 million of savings each year in the longer-term guidance that we provided. So I feel like it was a very successful meeting. We appreciate those that attended. -- and we've gotten very positive feedback on the longer-term outlook that we provided.

Okay. Great. So you also reaffirmed your guidance for 2026 as well at the conference. And -- and can you talk a little bit about some of those key drivers in terms of your expectations for enterprise revenue growth of 5.4% to 6.3%. -- in 2026, how is the year kind of playing out relative to your expectations and relative to the first half? And how do we think about it as we head into sort of the second half and that sort of cadence, some of the nuances we should be thinking about at the high end, low end of the range?

Yes. So I'll give some back. I'll ask Julie to jump in with some specifics. But I'd say overall, we feel like the momentum that we've entered the second half and is very strong. As I look at the guidance we provided, obviously, there's just over 3 months left. I feel very strongly that reaffirming the guidance tells you we see a clear path forward to achieving the objectives that we've set forth for the rest of this year. And the last thing I'll say is that we believe that the guidance and hitting the rest of the year guidance sets us up very well for next year and into the longer-term guidance here.

Everyone, it's a pleasure to be here today. As you were saying that last week, we had an opportunity to reaffirm our guidance for 2026 on a full year basis. Essentially, at the midpoint, you are looking at the revenue growth of almost 6%. Adjusted EPS growth of over 11% and -- and along with continued margin expansion as well as strong growth in free cash flow that is expected to be in line with our earnings growth. I think as Adam just mentioned, we are not only very much encouraged about where we are heading in wrapping up 2026, equally importantly, there's a strong set of expectations is setting us up with a lot of momentum and as well as strength heading into the next 3 years as we just made out last week.

Okay. And how would you characterize the current just underlying utilization environment? Like what metrics do you that internally that you think is the best gauge in terms of just underlying kind of health utilization trends? And -- and maybe it doesn't matter. Maybe it's just because your drivers are broad-based and you have everything from advanced diagnostics or acetic testing to other areas that are obviously key drivers for you. But yes, how would you measure that or gauge that right now?

Yes. So the utilization environment remains strong. And we're talking specifically about the diagnostics right now. But if you look at our central laboratory business, I look at the book-to-bill, which remains very strong in that business as well. When I think about utilization, obviously, I look at volume. When I look at volume, I not only look at the way we describe volume, but I also look at test per accession we continue to see an increase in test per accession. And I think we're seeing that for 2 reasons: One is the specialty business. We reported last week for the first time that when we look at our specialty testing, patients in those areas tend to get 50% more test per accession than the average patient. We've seen a shift in our mix of business where esoteric business back in 2024 was about 38% of our kind of revenue total. It's now about 41%. So you're seeing the mix shift and that mix shift is helping with the test per accession. The second reason I believe you're seeing an increase in test per accession is that there are a lot more new tests that physicians can use to help better diagnose patients. A good example of that is cholesterol testing. If you would have gone back 5 or 7 years ago, doctor would test your total cholesterol, your LDL, your triglycerides Today, they want to understand your APO A, your ApoB, maybe even HDL subtypes. It gives them more information to better diagnose the patient, but also to better determine what treatment might be most appropriate for those patients. So the test per accession increase, I think, is durable and will continue over time, and that's another metric that we look at for under -- for looking at utilization.

Okay. Great. And so it sounds like you think a lot of this is durable, especially as we head into 2027. Can we talk a little bit about some of those factors that we need to keep in mind, PAMA, ACA, Medicaid utilization, which we just talked about in specialty testing as well, which seems durable, but in clinical -- sorry, central lab demand trends then you'll also annualize -- sorry, I'm bringing the line in here, annualize some of your early development actions as well. So can you high level. I know you're not giving '27 guidance, but high level, think about this thing.

I'll give you some context, and then I'll ask Julie to add additional context. But as we look at 2027 and the longer-term guidance, there are certain pushes and pulls. When I think about the headwinds that we could face. Obviously, PAMA remains something that we're watching closely. We built PAMA into the guidance ranges that we provided last week. We put in the assumption that it will occur next year. But I remain cautiously optimistic that working with our trade organization with Democrats and Republicans in the Senate and Congress that will be able to get the results Act to move forward. But we'll continue to watch that as that's obviously a headwind. The second thing we watch closely is a number of patients that lose insurance entirely. In general, if a patient is on Medicare, Medicaid, Medicare Advantage, private pay, as long as they have some type of insurance coverage, we find a way that we can be successful with those patients. When a patient loses all their insurance, that's something we watch very closely, and we tend to have a headwind. I don't think that's likely because you're in an election year this year and then 2 years from now, you'll be in another presidential election. I don't think anybody wants to be in a situation where they were 15 years ago, where there's a large number of people in the United States without access to health care. For the tailwinds, there's a few things. One is the timing and amount of business development. So we've said that the range is 1.5% to 2.5%. Our pipeline is very strong. And the question is how fast can we bring some of that pipeline to fruition. If you look at the last 3 years, we actually were at the higher end of that of 2.4%. So that could certainly be a tailwind for us. The second thing is our specialty testing. We talked a lot about things that we're doing in oncology and other areas. If we can get reimbursement in some of those oncology testing areas or other specialty areas, quicker, that would be a tailwind with us as well. So we certainly have multiple paths of growth that I see that can get us to that longer-term guidance. And I think that the tailwinds actually are greater than the potential headwinds.

Yes. Maybe to add some additional color. I will start with the ACA impact. Our exposure there is limited. In total, that volume is less than 5% of our Diagnostics business. We shared in the past that we expect the impact 2026 full year is about 30 basis points to the volume for Diagnostics. We remain to believe that's the appropriate estimate at this point in time. And then post 2026, we are not anticipating a huge year-over-year increase beyond this estimate at this point in time. The related topic to ACA is really a discussion about the bad debt. In our particular case, our payer mix has remained relatively stable over time. and our bad debt management for the Diagnostics business has been effective. The historical benchmark has been about 5% of the diagnostic revenue, and we've been able to continue to track at that historical level. The one additional comment as it relates to bad debt is over the past couple of years, -- we've made a significant investment in really strengthening our collection infrastructure as it relates to the revenue cycle management, inclusive of digital capabilities to really build and collect. So we continue to manage our collection efforts effectively and efficiently. The last comment is really around the whole Medicaid comment that Adam already shared some color on. Overall, as a percentage of our revenue for Diagnostics, Medicaid is about 8%. But on the enterprise level, it's less than 6% of our overall revenue. So as you can imagine, as we develop our long-term planning process, we actually calibrated across a range of scenarios in the operating environment, but because of our payer diversification, our scale, so that makes the impact more managed for than otherwise, as Adam shared already based on what we know today, we believe the impact is manageable and contemplated in our 3-year outlook. And of course, as we continue to progress to get ready to set the guidance for 2027, we expect to provide update at that point in time based on what we know at that point in time.

And then to answer the second part of your question, which is the central labs, our central laboratory business remains very strong. And when you look at the central laboratory business, we are a leader. We work with almost every a large pharmaceutical company and biotechnology company with our central laboratory and our other biopharma laboratory businesses. . One of the things that you look at, obviously, is where your business comes from. The vast majority of our business in Central Lab, over 70% is from large pharma, large biotech and is focused on Phase III trials. Those are very durable businesses. Pharma would cut many other things before we'd ever try to cut a Phase III trial because that's the lifeblood of the organization over time. And the book-to-bill remains very strong for the Central Laboratory business. So that gives us a good sense not only for this year, but as we go into the following years, many of those trials are multiple-year trials. Many of the Phase III trials could be 3-year trials, for example. So we feel like we've got good line of sight and that we're right in the sweet spot of where we want to be with the central laboratory business.

And Julie, you mentioned some on the bad debt and what you're doing on that front. But can you talk a little bit about what -- how the nature of your relationship with health systems and hospitals right now? What are they feeling in terms of and your exposure to kind of bad debt across that relationship, in particular, are you seeing any shift there?

In terms of our exposure to the health system, it has remained in line with our historical name. We have not seen an uptake in the exposure in that particular regard.

Okay. Okay. And then when I think about all these drivers, whether it's the increase kind of around specialty in central lab is in the refined mix across kind of your biopharma business? And just more holistically, we got the question like was there room for potential kind of upside to even your long-term targets that you laid out there to achieve. But I think you want to be prudent in how you think about that. There are some moving pieces and you do have PAMA in there as well. Is that sort of the right way to think about it?

Yes. I mean, like I said, I think that we've got a lot of tailwinds. I feel very confident in the guidance that we provided. I want to provide guidance that was realistic, that was credible. I saw a clear path forward, and I saw multiple growth opportunities to help us get there. Building PAMA in we're still assuming it's about $100 million impact. We basically -- historically, I said it was $80 million, and I said maybe $80 million to $100 million. As our volume went up, I still use the old methodology, but just kind of increase based upon that. Could it be $90 million or not $100 million? Well, let's see how many customers submitted data to the agency, could it be 110 versus 100. We have to still run the analysis once we have the actual data, but $100 million is a good placeholder and that's what we used -- so obviously, within our guidance, we're assuming we overcome that. If PAMA doesn't come, obviously, that would be very helpful to us achieving that guidance and probably more towards the upside than the downside.

Yes. Since you brought up PAMA, I'll just shift to that a little bit, but you're still going to push for the results, right, in any event, even if this does get pushed through and remind us of when your latest thinking on when we get the next data point on PAMA?

Yes. So what I would say is that I've spent the last couple of weeks talking to Senators, congressmen and women Democrats, Republicans, and everybody I've talked to is very supportive of the Results Act. People truly realize that the implementation of PAMA has been flawed, and therefore, we have a lot of support. We're still waiting for a CBO score, which will be important for us to understand the magnitude. But the people I talked to have said that they will support it irrespective of what the CBO score is, assuming that it's reasonable, which we expect it would be. . We're working very closely with our trade organization, ACLA, ACLA, and they have been really getting a lot of support for the Results Act, not just in Congress and the Senate, but also with other trade organizations with other groups of organizations that will be supportive of results as well. So I'm cautiously optimistic that there's a path forward. We have to wait to see what the CBO score is. We have to wait to see what package of bills will be passed by the end of the year that could be attached to. But we certainly have a lot of support for it, and I feel very good about that. If we don't get the results active, of course, we'll continue to argue and try to find a path forward for a delay, which we've gotten for the last 7 years. But that would be secondary. The first and foremost thing that we think we should do is find a path forward. I talked to a center of the other day, I said, every year for 7 years, I've called you now to ask for your support on the same thing. And let's finally get this to happen, so I don't have to make the same call next year. I think everybody wants to do that. That's the logical path forward just doesn't always end up logical in Washington at times.

Okay. I'll shift a little bit. How is Invitae track you relative to plan as it relates to revenue growth, profitability accretion now that it's fully annualized and -- and what is the normalized growth rate from here? And any other surprises to cross-selling opportunities to call out?

Yes. So Invitae has been a real success for us. It's been a success from revenue growth from operating income growth from launching new products, including new MRD products. We achieved our objectives to make it accretive after the first year. We actually beat our internal expectations in terms of timing -- so it is fully 100% integrated into the organization right now. In fact, we can't even break it out fully anymore because we've moved some tests that we performed at LabCorp into the in Vita Labs. We've moved some of the people that were supporting Invitae products to also support LabCorp products. So the company is fully integrated right now so you can't really break out the operating income any longer. What I would say is that everything that we had committed to do, we had done at least on time, if not faster than what the commitment was.

Okay. And I think oncology was a huge focus at the Investor Day. I feel like it's an area that's underappreciated for LabCorp, which you'd break out just a little bit more for us. as I always want more. But you continue to expand in the oncology portfolio, Colosense, plasma direct, genome MRD a lot of companion diagnostic opportunities as well. What parts of that are going to be the most material for you? Like what are you most excited about? What will kind of move the needle? And what do you need to get in terms of evidence generation reimbursement or physician adoption milestones to get there?