Q2 2020 Laboratory Corporation of America Holdings Earnings Call

The speakers presentation, there will be a question and answer session topped the question. During the session. You want me to press Star one on your telephone. Please be advised the today's conference is being recorded if you're acquiring for that please press star zero I would now like to have the conference over to your speaker today, Clarissa Willis Vice President of Investor Relations.

Thank you. Please go ahead Mike.

Thank you operator, good morning, and welcome to last quarter second quarter 2020 conference call.

As detailed in today's press release, there will be a replay of this conference call available via telephone and Internet.

With me today, our Adam Schechter, Chairman and Chief Executive Officer, and Glenn Eisenberg, Executive Vice President and Chief Financial Officer.

This morning, and the Investor Relations section of our website at <unk> Dot Com, we booked at both our press release and Investor Relations presentation with additional information on our business an operation which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call.

Additionally, we are making forward looking statements.

These forward looking statements include but are not limited to statements with respect to expectations for 2020, and the related assumptions, including the projected impact of the Cobas 19th and then on the company's businesses operating results cash flows and our financial condition.

Responses to any expected future impacts of the cobot 19 signed up on our business more generally as well as on general economic.

Market conditions.

Each of the forward looking statements is based on current expectations and subject to change based upon various factors many of which are beyond our control that could affect our financial results.

Some of these factors are set forth in detail and our most recent annual report on form 10-K, and subsequent quarterly reports on form 10-Q and in the Companys other filings with the FCC.

We have no obligation to provide any updates to these forward looking statements, even if our expectations changed.

Now I'll turn the call over to Adam Schechter.

Before I saw good morning, everyone. Thanks for joining us today.

More than 50 years, Labcorp is life science innovation and technology.

During the current pandemic that leadership has been front and center when a world is needed I smoke.

I continue to be impressed with how quickly our teams have rallied to confront each and every challenge for them.

I don't want to thank our 65000 employees as her efforts have been her ROIC during this difficult time.

During the second quarter, we delivered solid performance across the company despite the impact of dependent.

We delivered revenue of $2.8 billion.

Adjusted EPS of $2.57 and free cash flow of $272 million.

We were encouraged to see study recovery in our base business during the quarter for both diagnostic and drug development as people are starting to return to their doctors for testing and clinical trials activity is resuming including those that are for cobot 19 related research.

More specifically.

Although diagnostics revenue declined 3.9% compared to a year ago.

In the month of June.

Volumes were up year over year.

Oh wouldn't IP related testing more than offset the decline in the base business.

Our drug development business delivered a solid trailing 12 months book to Bill a 1.32.

And our backlog grew to $11.8 billion compared to $11.3 billion last quarter.

We remain committed to bringing the full power of our combined diagnostic in drug development capabilities against this virus.

Apply our scientific expertise and ingenuity across all aspects of testing treatments and vaccines.

From the outside our testing approach has been guided by three steadfast principles.

First.

Build as much capacity as possible as fast as possible across as many platforms as we can just move.

Second no wants to be advantaged or disadvantaged based upon ability to pay we would not charge patients upfront out of pocket cost.

We will use the Medicare price to the PCR test for everyone.

And finally, no one should be prioritized over anyone else.

We performed as their received.

The only exception that's been a response to the guidance prioritize hospitalized patients.

Well continue to work with the HHS, where the CDC if additional parties identified with them in the future.

These principles have guided all of our decisions and I've kept us focused.

Since being the first commercial out for lots of PCR. That's in March we have rapidly expanded both capacity and accessibility for testing.

Astonishing pace.

We're before more than 8.5 billion molecular tests.

With current capacity of 180000 tonnes per day and growing.

Well, let you were talking about processed in 16 labs.

Including our Covance drug development Central lab and Indianapolis.

A great example, the power of our combined business.

We have significantly expanded accessibility of PCR testing to reach as many people, it's possible, including those in underserved communities.

Do you see our cats are available for doctors to hospitals other health care providers retail pharmacy chains drive through testing sites and through our website.

We were the first lab authorized at home sample collection.

Pixel by that core platform.

And recently the first to offer a seamless digital service to help doctors electronically order a covert 19 at home sample collection for patients as appropriate.

With the right in front of coping 19 in the U.S. building further capacity as fast as possible remains a priority and the challenge.

In recent weeks the rapid acceleration sample volume volumes that outpaced our capacity and increased time to deliver results just over four days on average.

We're now back to a two to three day turnaround time on average with hospital inpatient even faster.

We have aggressive efforts underway, despite continued constraints with supplies and equipment.

Continued to grow testing capacity across multiple platforms as fast as we can.

To help achieve that volume received it anyway for pull testing just last week.

In addition to our PCR testing options, we also offer antibody testing.

We began offering antibody testing in April and it before one of 2 million pass with capacity for 300000 Mmbtus per day.

To make it easier for employers and large groups to be tested we lost a finger stick blood test that's the tech antibodies to the virus.

I agree economy Reopens, we're also helping to guide returned to decisions.

We launched Labcorp employer services, which provides a customized solutions to guide strategies for returning to workplaces into universities and we were connected with hundreds of employers.

Beyond greater testing capacity in access new treatments and ultimately a vaccine are critical and.

And Labcorp is playing an important goal there too.

Our enterprise wide early response team continues to feel significant volume of client requests to assist under development of new covert 19 treatments and vaccines.

We're actively working with many clients supporting a significant number of opportunities across all business segments and phases of development with most of it early stages.

We don't have to neutralizing antibody test to assess the capability of the capacity of antibodies and patient plasma, which may help to accelerate the evaluation of vaccines.

These achievements clearly demonstrates the death of scientific delivery of technological innovations that are hallmarks of labcorp coming from both are diagnostics and drug development businesses.

In addition to our critical work in a fight against Tobin 19, we continue to advance our strategic priorities, which include the following leveraging the power of our combined capabilities.

Leading oncology.

Integrating data analytics, AI and digitalization across our business.

Putting customers at the center all we do.

And maximizing high growth opportunities.

Many of the innovations I just shared with you have helped to advance these parties it meaningful ways.

Importantly, oncology continues to be an area of focus.

During the quarter, we launched the liquid biopsy test for patients with non small cell lung cancer.

It's available exclusively through Labcorp. This blood test is designed to detect actionable mutations and non small cell lung cancer genes to help guide patient care decisions.

We're also collaborating with healthy see under development of an oncology care module that will help autologous improve patient outcomes and a cheap cost savings by making it easier for clinicians to assess and compare key data points and performance metrics.

Also the support of parties, we have been several biz development activities.

We expanded our capabilities and hybrid and virtual trials by completing the acquisition of global pair clinical trials.

They are recognized industry leader that provides de centralized and traditional clinical trials studies services in more than 65 countries.

<unk> therapeutic and operational expertise complements our clinical capabilities will expand our ability to provide you centralized trial services.

We also acquired RBL reference laboratory in June.

A pioneer and leader for more than 40 years, and we're going to logic and auto immune testing.

Strengthening wrap ups full range of testing services for complex, although mute syndromes, which is important for rheumatologist hospitals health systems and Biopharma companies.

And lastly, we acquired an ambulatory testing business and entered into a comprehensive laboratory services relationship.

Franciscan missionaries of our Lady Health system, one of the largest health systems, serving Louisiana and Mississippi.

So we cannot fully predict the future we have confidence in our base business and in our ability to continue to aggressively scale cobot 19 testing.

Optimistic about the future.

I want to reaffirm that we are well position to continue to have a very significant impact.

Serve our customers and to drive long term shareholder value.

We will continue to do all that we can to win a fight against covered 90.

I holistic approach inclusive of societies adoption of wearing masks, social distancing and good hygiene practices is crucial.

Testing and effective tracking and Tracy.

Are very important.

And we need new treatments untold vaccine is widely and globally available.

I'm, absolutely confident that can be done and that science will lead the way.

Now I'll turn the call over too when you give more specifics on our financial performance.

Thank you Adam.

I'm going to start my comments with a review of our second quarter results followed by discussion of our performance in each segment and conclude with some commentary regarding our current expectations for the remainder of 2020.

As a reminder, in the first quarter, we were able to estimate the impact of cobot 19 on our results given that the impact was late in the quarter.

However, we commented that we would not be able to do that going forward.

For second quarter results, we have quantified the revenue associated with the Koby 19, molecular Anthropologie test. So that you can see the change in the base business.

Now I'll review, our second quarter performance.

Revenue for the quarter was $2.8 billion, a decrease of 3.9% compared to last year due to lower organic revenue of 5.4% and foreign currency translation of 10 basis points, partially offset by the benefit of acquisitions net of divestitures of 1.6%.

Decline inorganic revenue was driven by the pandemic, which caused our organic base business to declined by 20.9%, which was partially offset by club at 19 testing of 15.4%.

Operating income for the quarter was $298 million or 10.8% of revenue.

We had $23 million of restructuring charges. These special items, primarily due to colder 19 related costs and launchpad initiatives, which was partially offset by an insurance reimbursement.

Adjusted operating income, which excludes amortization of $60 million as well as restructuring charges and special items was $381 million or 13.8% of revenue compared to 447 million or 15.5% last year.

The decrease in adjusted operating income and margin was primarily due to the decline in our base business as a result of a pandemic and higher personnel costs, which was partially offset by cold in 19 testing and launchpad savings.

The decline in the base business includes the negative impact from Panama, a $14 million or 40 basis points.

The tax rate for the quarter was 22%.

Adjusted tax rate, excluding special charges, and amortization was 23.9% compared to 25.2% last year.

The lower adjusted tax rate was primarily due to the geographic mix of burdens.

Net earnings for the quarter were $232 million or $2 from 37 cents per diluted share, which includes the monies from the cares active $56 million or 42 cents per share.

Adjusted EPS, which exclude amortization restructuring charges. The cures Act. Another special items were two daughters, and 57 cents in the quarter down 12% compared to last year.

Operating cash flow was $371 million in the quarter compared to 254 million a year ago.

The increase in operating cash flow was due to higher cash earnings being partially offset by higher working capital.

Cash earnings benefited from the cares act and from tax referrals, while the increase in working capital was primarily due to covert 19 related supplies and receivables.

Capital expenditures totaled $99 million in the quarter or 3.6% of revenue compared to 85 million or 3% last year.

The increase in capital was due to $20 million of investments in adding over 19 testing capacity.

As a result free cash flow was $272 million in the quarter compared to 168 million last year.

During the quarter, we invested $11 million into diagnostics acquisition and as Adam mentioned, we closed two additional tuck in acquisitions in July one for each segment.

At quarter end, our cash balance was $557 million up from 324 million at the end of the first quarter and total debt at quarter end was $6.2 billion and our leverage was 3.3 times gross debt to last 12 months EBITDA.

Now I'll review, our segment performance beginning with Labcorp diagnostics.

Revenue for the quarter was $1.7 billion, a decrease of 3.9% compared to last year due to a decline inorganic revenue of 4.9% and foreign currency translation of 10 basis points, partially offset by the benefit of acquisitions of 1.1%.

The decline in organic revenue was driven by the pandemic, which caused the base business has declined by 30.1%, which was partially offset by cobot 19 testing of 25.2%.

Included in the base business decline was the negative impact from Panama, <unk>, 0.8% and the non renewal of the Beacon LDS United Health care contract of 1.2%.

The 3.8% decline in revenue was comprised of volume decline of 19.5%, partially offset by favorable price mix of 15.6 person.

The total volume decline of 19.5% from last year was due to organic volume declining 20.7%.

Which was partially offset by acquisitions contributing 1.2%.

The decline in organic volume was due to the pandemic, which drove our base business volumes to decline by 35.3%.

Partially offset by increased carbon 19 testing volumes of 14.6%.

Throughout the quarter, both organic base business as well as cobot 19 testing continue to improve.

Before June organic volume per day increased approximately 6% over the prior year as the decline in the base business up 17% was more than offset by Cobra 19 testing of approximately 23%.

As a reminder, we do not include hospital lab management agreements in our volume, which would have added approximately 0.7% to the quarter's growth.

While total volume was down 19.5% price mix increased by 15.6%.

The increase was driven by covert 19 testing of 10.7% and the change in the mix in the business a 5.2%.

Partially offset by currency and acquisitions.

The base business includes the negative impact from Teva of 0.8% and the non renewal of the Beacon lvs contract of 1.2%.

Labcorp diagnostics adjusted operating income for the quarter was $309 million or 18.2% of revenue compared to 345 million or 19.6% last year.

The decrease in adjusted operating income margin was primarily due to the decline in our base business as a result of the pandemic as well as higher personnel costs due to merit increases.

Partially offset by close to 19 testing and Launchpad savings.

The decline in the base business includes the negative impact from have a $14 million were 60 basis points.

We remain on track to delivered $200 million of net savings by the end of 2021 from diagnostics Launchpad initiative.

Now I'll review the performance of Covance drug development.

Revenue for the quarter was $1.1 billion, a decrease of 2.9% compared to last year due to a decline in organic revenue of 5.2% and foreign currency translation of 10 basis points, partially offset by the benefit of acquisitions net of divestitures of 2.4%.

The organic revenue decline was due to the pandemic, which negatively impacted our base business, partially offset by cobot, 19 testing, which added 1.1% to revenue.

Excluding our best estimate of the impact of fold in 19 organic revenue would have grown in the mid to high single digits inline with our targeted performance.

Adjusted operating income for the segment was $113 million or 10.3% of revenue compared to 142 million or 12.6% last year.

The decline in adjusted operating income and margin was primarily due to the negative impact from the pandemic and higher personnel costs, partially offset by club at 19 testing and Launchpad savings we remain on track to deliver $150 million of net savings by the end of this year from drug developments Launchpad initiative.

For the trailing 12 months that orders in that book to Bill remains strong and $6.1 billion and 1.32, respectively.

Backlog at the end of the quarter was $11.8 billion, an increase of approximately 490 million from last quarter.

We expect approximately $4 billion of this backlog to convert into revenue over the next 12 months.

Now I'll provide some commentary regarding our current expectation for the remainder of 20 Twond.

Despite our improved outlook there continues to be uncertainty regarding the duration and future impact from the pandemic. As a result, we continue to not provide 2020 guidance. However, we do expect for the full year to see increased revenue earnings and cash flow compared to last year, driven by Kobin 19 testing demand.

In addition, our current outlook assumes improvement in the base business, both our diagnostics and drug development businesses.

From the very beginning of the crisis, we have been focused on doing everything we can to address the pandemic such as increasing cobot 19 testing capacity as quickly as possible irrespective of demand.

This has helped position us to perform approximately 180000 molecular coven 19 tests per day, and we continue to add capacity subject to supplier availability.

During the first quarter, we commented that given the decline in our business as a result of the pandemic as well as the uncertainty in our outlook, we took actions such as furloughs reduced hours and without merit increases and for what they contributions.

Now with increased demand and an improved outlook. We have brought back employees for furloughs, we are proceeding with merit adjustments and we will retroactively reinstated for I wouldn't say contributions recognizing the significant contributions of our employees.

From a capital allocation standpoint, our current out what does that we will continue the suspension of our share repurchase program, but expect to do tuck in acquisitions across both businesses that meet our heightened threshold of strategic fit and financial returns.

This concludes our formal remarks, and we'll now take questions operator.

As a reminder to ask a question you wanted to press star one on your telephone to withdraw your question press about Keith Please standby will the Kabbalah culinary roster.

Our first question comes from the line of Eric Coldwell from Baird. Your line is now open.

Thanks, very much for all the details a quick question on Covance I'm just curious if you could give us some since on the nature of the strong bookings, a particularly how much might be related to covert specific work and.

Maybe as a follow on to that if you could give us any details on the performance of the three segments clinical Central lab in early development until those individually played out during the quarter. Thanks very much.

Hi, Eric Good morning, So Covance had a very good quarter and I think it continues to show the power of having both diagnostic and drug development. Together. If you look we had put together a enterprise early response team and that team includes people from both our diagnostic business.

And our scientists from diagnostics together with people and scientists from drug development and we've been participating and discussions on almost every vaccine and almost every treatment for covert 19 with that said as I mentioned in my script.

Most of those trials are still pretty early stage, so for the quarter. They didn't necessarily contribute a very significant amount of dollars as we move forward I believe that it will be increasingly important in terms of our revenue.

If you look at three parts of our business early development and Central laboratories began to come back quicker than the clinical work and that's because for example, we have a central lab in China as China opened up we saw the capacity feel pretty fast and as markets open rule, we have the central.

Laboratories, we've seen those countries continue to increase with the capacity that we have quickly.

Early in development, we continue to do very well and that includes some of the early work, but I just mentioned for growth October 19.

Clinical we have seen an increase in accessibility of sites and that's gone up fairly significantly, particularly driven by Asia, Although there's not as many sites in Asia as the R&D U.S. in Europe. Most of the sites in Asia are now accessible. However, many companies are still waiting until this global accessible.

Before starting some of those particular later stage phase three trials and I think that's still going to take some time, so that business coming back has taken longer than the other two.

Yeah them the.

Your peers that have reported to date have talked about co bid awards, comprising somewhere between call it high teens and even mid twenties.

Total bookings could you share with us Youre your experience.

Yes, so I'm not going to give you exact percent because it's a book to bill as you can imagine it moves based upon what makes it through phase one into phase two subjects and so forth, but we're not that dependent on cobot 19 trials.

The moment, so no I think compared to their numbers, but our numbers are not as dependent upon cobot got it. Thanks, thanks very much.

Welcome.

Thank you Sir our next question comes from the line of Jack Leung from Nephron Research. Your line is now open.

Thank you good morning.

Adam I was hoping to get your perspective as to how you think testing for Kobin nineteens going to evolve as we head into the fall.

What portion of the testing do you think is going to move the pool method do you think molecular is going to remain the go to approach and.

Just any perspectives on antigen testing would be great.

Absolutely good morning, Jack So the first thing I'd say, it's been pretty remarkable how in early March we were doing two to 3000 PCR test per week.

And here we are in the end of July and were able to do a 180000 PCR test per day I mean, that's just the started saying it for people that understand the type of equipment that you need to run PCR test, it's completely different than what you would need for blood tests, and we've had a build significant capacity.

I believe that we have to continue to build capacity, we don't know for certain what the fall brain, but as schools opened up as businesses open up and as the fall flu season comes to fruition I think we're going to continue to be more testing and I do believe the PCR testing will remain the gold standard for.

Kelly if somebody currently has been disease and therefore, we will continue to build capacity as fast as we can and overcome some of the issues that we face in terms of supplies and machinery.

At the same time I think thats all testing is going to play a role pull testing is particularly helpful. In areas with low prevalence and things like back to school or back to work because were low prevalence you can do the pull testing and then you don't have to do any retesting.

I don't think it's going to be the most significant amount of testing that we're doing in fact I believed that the standard PCR testing in the fall or remain the most significant by far of the testing that we do for PCR, but I do think that the pull testing will add to our capacity and give us additional capabilities.

Things like antigen testing I think have a role also so for example, if you wanted to test a large group of people with antigen testing point of care quick answers you get then see if theres any positive people in that large group. If there are I would go back and test them with PCR testing.

And there's nothing I would probably feel pretty comfortable that they don't have to read test the issue with the antigen test and has it today is that you can miss some positives. So you want to make sure you have somebody positive you test the people that tested negative, but if it's a pretty large population it would be a statistical.

Anomaly for everybody can test phosphate negative. So if you see one positive enough population I would go back and retest them and PCR. So I think we're going to need all the capacity, we can get to get through the fall assuming that the flu season could be big and we're all through the best we can to prepare for.

Great. Thank you and maybe just building off that.

Given some of the expectations around testing in the second half.

How are the incremental margin on the carbon testing stacking up versus the base business and what's your philosophy on reinvesting portion of that back into the business.

Yes, so I'll give you broad statement I'll ask.

Let me give you some specifics, but yeah, we're going to continue to build capacity irrespective of costs and that's been our philosophy from the beginning buys monies machines or they can get as much testing equipment can and frankly, that's what got us to 180000 per day, along with our scientific capabilities. The Labcorp scientists have just been.

Extraordinary to get us to where we are today and I want to continue to build it will be a good day, if we get to Paul and we have more capacity than the number of samples that we get and that's what we're going to strive for up it's not going to be easy we need help from our suppliers, who are working 24 hours a day seven days a week to try to get.

More reagent more machines, and so forth, but in terms of the margins I'll, let that give you some specifics.

Sure Jack we've commented in the past that would we obviously given the fixed cost nature of the diagnostics business the incremental drop down for new testing call. It was around 65%. So we've used that example, when theres been weather and whats happened. So the cobot tested clearly falls within the ballpark if you will.

What we would experience with our other testing so obviously, helping contribute to to the improved leverage if you will with the additional testing that we're doing.

Thanks, Ron.

Thank you. Our next question comes from the line of Steven Baxter from Wolfe Research. Your line is now for.

Hi, Thanks for question I wanted to follow up on the pool in for molecular test and so my understanding of deal. Initially you doing thats in your Ltd. I guess, how much of your daily volumes today runs through the Ltd, and what do you think it's a multiplier effect you will get on that capacity and then just as a follow up.

What's the process for expanding pulling onto your other testing platforms and when do you expect to see that Craig. Thank you.

Yes. Thank you David Yeah. The first thing I'd say is that we launched back in March with our LDC Thats a laboratory developed test by Labcorp scientists and it's been remarkable the amount of volume that we've been able to do through that LDC of course, we still need our suppliers and the other companies to help us get to 180.

Housing, but I have to say that are scientist at an extraordinary job a with a LPT to get up to 180000 today I'm not going to give you the exact number through the t. because that changes it changes based upon your we have 16 labs running test different labs have the LDC different labs have other equipment. So at the end.

The day it depends on where the samples are which test we run them and what we tried to do is optimize our network. So we can get the best possible turnaround we can be a two to three days right now turned around for patients and the hospital inpatient even faster says that we found a real way to use our capacity industry.

View that successfully with regard to the pull Pat.

I don't think that we want to give a certain percent that will go through that instead, what I would say is we're going to make sure that as much of our LPT that is a significant amount of our volume it's a significant amount.

Go through that if we needed at the same time, we'll have to file you ways to use other platforms to run the pooled analysis on and we would expect to do that as we move forward, but for now I think with our LPT, we can do as much cooling as what we would see appropriate.

Thank you. Our next question comes from the line of Lisa Gill from JP Morgan. Your line is now open. Thanks very much good morning, Adam I wanted to go back to that the quarter volumes.

Can you give us any color as to what you've seen a thus far in July, especially in areas. The country, where we have seen some level of of research and what do you. My first question and then secondly, I know you're not giving guidance, but just curious around your your AG continued expectation not on the reimbursement side for propel the testing.

Sure Good morning, Lisa and you know it was interesting because in the first quarter. When we saw the volumes up by 55% in the month of March we didn't know how fast that would come back and there was concern that it could take an extended period of time to be Frank with you I have been.

Surprised at how fast it has come back as space have open we've seen the testing come back more significantly for example, as Florida and Texas, Georgia opened up first we saw the core testing come back faster.

As fades begin to modulating slow down a little bit you see the testing slowed down so there's definitely a correlation between how far and how fast the states of open that how far can how fast our base business at some back what I would say is for June. It was the first time since codes that we saw.

That's a total testing, including our covert testing was above prior year in July it's still early we don't have all the data for the month, but we're seeing continued strength in the base business and based testing. The reason that we have not giving guidance for the rest of year is because as you say it's impossible.

Good to know how fast pace will move will they slowed down a little bit if they see additional breakout what will the fall looks like what could happen what would be another slowdown of the base business. So we're watching it I mean, frankly, almost every day, but we want to make sure that we continued to do the best we can be able to forecast that in terms of re.

Imbursement they did announce HHS this extended the emergency any United States typically that last for another 90 days, we assume that the reimbursement will continue to be strong as we go through the emergency situation and then we'll just have to see what happens as we go after that 90 day extension.

Yeah.

Thank you.

Thank you. Our next question comes in the line of Dan Leonard from Wells Fargo. Your line is now open.

Thank you so hoping you could elaborate further on what you're seeing from the return to work demand front.

Adam You mentioned you are connected with hundreds of employers, but I'd love to be able to quantify that are better understand the magnitude in some fashion.

Yes, sure Dan good morning.

The first thing I would say that I spend a lot of time talking to other Ceos coffee to present, some universities and we try to help them understand ways that they can think about going back to work or back to school and different companies and universities or thinking about different approaches and sometimes it depends on if there were no.

Hotspot, if they're an area very low prevalence what type of workforce they have in healthcare workers.

They have factory workers. So a lot of things go into the discussion and it's a multi variant discussion in general the first thing that we talked about is the importance of wearing masks social distancing joined the workplaces clean good hygiene cleaning elevators, and elevator buttons and showing the air flow into buildings.

Appropriate prevention and keeping people out of work that are sick, having temperature checked before they come into school or work questionnaires that all critical.

Second thing is that once somebody doesnt make it into score workplace and has any symptoms you want to test them PCR as quickly as possible and you want to have tracking and tracing capabilities and be able to track and trace anybody it's been around them and then you want to have a place to isolate them, particularly if you're in the University, while you wait for the results to come back.

And that's why having the type of turnaround that we do two to three days is so important for tracking and tracing.

And then ultimately over time, we want to work with them to get flu vaccination for their workforce, so that when they get to the fall flu season, so have a sense as to what is flu versus what might be covert 19. So we're trying to work with these companies across the entire front, what they can be thinking about as they go into the.

August September timeframe, what I can say is a lot of my time spent on talking them out of doing testing because the types of testing people says why that might test everybody once a week.

I don't think that makes a lot of sense to do that I think if they want to do surveillance, that's fine but to try to test everybody. Once a week that will give you one point in time and the next day, if somebody second starts to spread it you won't necessarily have done a lot you spent a lot of money and testing that probably was not the best use of your time and money.

So to be honest with you I spent a lot of time trying to help them think about logically and a lot of my time is trying to understand how to best use testing and where it's appropriate.

I can tell you I'm spending a lot of my time in my team is spending a lot of time talking to these folks.

I appreciate all that color and then for my follow up Adam you commented earlier about the differential trended covance backed by line of business can you also comment by customer segment between large pharma, maybe midsize pharma and what you're seeing out of the emerging biotech crowd that it's been pretty successful raising raising money today.

Yeah, I would say, we're seeing increases and we're seeing business across all biopharma Pharmaco pharma large small U.S. ex us.

But in the lines of business like I mentioned earlier that we're seeing the business come back faster in early development Central laboratories, and overtime I believe we'll see more in the clinical area, but I I don't think theres.

Differentiation and segmentation across the customers within those segments were seeing strength, frankly, and RFP is across them all.

I appreciate that color. Thank you.

[music].

Thank you. Our next question comes on the line of Donald Hooker from Keybanc. Your line is open.

Great Good morning.

I was curious you guys took a receivable reserve I think last quarter, given the potential for cash collection issues, obviously with more unemployment how has that played out and I know you guys have invested a lot and technologies in that area as well to mitigate that.

Can you maybe elaborate on your experience there.

Hi, John it's Glenn.

As you mentioned, the first quarter, given the dividend, becoming and looking back at other times, where we've seen significant financial disruption and how it impacted our client base, we established a reserve a 17 million.

We have seen an increase in our bad debt experience, but we feel that the reserves that we have established are very adequate going forward and nothing that was unexpected or at least at this time.

Okay Super and then maybe just last question for me in the Covance business.

Given all the disruptions are you seeing any change in pricing across the various lines of business, you have where particularly early development.

No in general, we're not seeing any significant changes.

Okay. That's helpful. Thank you so much.

Welcome.

Thank you. Our next question comes on the line up can you tell chicory from global your line is now from.

Hi, Good morning, Mrs. Justin Bowers on Threepl and thanks for the questions.

Just.

When with respect to cooling.

Are you is the plan to roll that out so all of.

The 19.

Touched sites and then.

Secondarily, when we when we do some quick math on the.

On the multiplier effect, we arrived let's say 300 350000.

Like at the theoretical capacity.

But just based on your earlier comments it sounds like molecular is going to be the primary modality. So can you help us think about kind of.

The ramp there or what what's the capacity is with cooling.

And then.

And I'll stop there.

Yeah, I think it's a question Justin and you know pulling is an important piece, but it's not in my opinion going to be the primary piece PCR testing will continue to be the primary piece of what we do and if you look at our last we will not be rolling up pulling to all of our labs. It takes a lot of technical capability to do the analysis the analytics.

Over samples while you test the samples is a lot of work can you give some specialized equipment from and so we'll have it in multiple laboratories, but certainly not across all laboratories, and then we have to make sure we use it and the right patient population. So we're not going to just broadly start trying to pull patients were going to look for the right places and the right.

Parts of the country or the right organizations, where we believe the prevalence will be such that pulling makes sense. What I would avoid is trying to go to theoretical.

Capacity and for example, we right now we can do 180000 test per day, we have done in a day 180000 test. So we know we can but I would not take a 180000 times at Pike, seven and try to figure out capacity because if you can do 180000, when you want to maintain a one.

To date or two to three day turnaround you don't want to run at full capacity you want to be below that so we're going to continue to ensure that we do as many tests as we can but we want to manage the turnaround time as best we can as well. So to me theoretical capacity is just that but that's not how I build our financial model I feel that based.

On practical utilization of the task, which pulling will be a part of but the overall PCR testing will drive it.

I appreciate it and I'm just a quick follow up in terms of the base business. When you look at.

Some of the areas, where some of the hot spots around the country now how does how is the base business trending versus you know like earlier in the pandemic and just trying to get a sense of like.

Magnitudes in the swings because I would think it's not.

As severe as it was let's say in April.

Yeah, So it's bounced back pretty significantly and what we've seen as as states have begun to open up the based testing has increased and for the first time. If you look at our base testing plus our cobot 19 testing in June we actually had volume that was above the prior year. So that's just gives you a sense at the base business came.

Back pretty well.

Okay. Thank you.

Right.

Thank you Sir our next question comes from the line of Ral.

Goldman from Citi. Your line is now open.

Thanks, Good morning.

And mentioned flew a few times.

On the call just hoping to get a little bit a sense of what you're expecting for this flu season, how it plays out just given the current backdrop and what are your testing capabilities to sort of do both in one shot and then practically speaking can you just give us a sense of how big testing is for you and again, whether you think theres an uptick there. Thanks, yeah no. Thank you Rob good morning.

And what I would say is if you look at this pandemic. The only thing that has been predictable is the fact that it's been unpredictable and what we want to do is billed as much capacity as fast as we can for any circumstance that comes at US come the fall flu season. When you look at the flu season, you know we.

I think that this will probably be one of the highest years for people to get flu vaccination and we hope as many people that are able and that it's appropriate for to get those vaccinations can do it our labcorp employee services are actually helping businesses get vaccinations for flu for their employees.

It's going to depend on the flu season, the strain how effective those vaccines are as you know every year, there's a different.

Efficacy of the flu vaccine. So we'll see how that plays out based upon the strange but under all circumstances I think that opened 19 together with the flu season is going to be more problematic than where we are today. We are developing combined tests with multiple respiratory elements, including things like flu and cobot 19.

Flu has not been a very significant driver of revenue for us in the past, but I think with cobot 19, it's going to continue to be important to no is it flow or is it coven 19, if somebody does a rapid flu test in a physician's office and it comes back negative and they saw symptoms, they're going to probably want to get the PCR tires.

Yes, if somebody comes back positive for flu in the office I feel good about that but I would still want a validated in case. It was a point of care all positive and get the PCR test. So that's why I believe under almost every circumstance weve got to be prepared to do everything we can to both as much capacity from the flu season.

Okay. That's helpful. And then just a quick follow up I want to go to the pricing number ex co bid. So just the base I think was up almost 7% ex Panna and Beacon is that just all acuity driven or what are the factors and maybe what some more sustainable number as we think looking ahead. Thanks.

Hey, Rob This is Glenn that's right the mix impact on the base business.

It was up with 5.2% that negatively impacted the 2% between Panna B and Beacon LDS so call it around 7%.

Good you'll notice that this time weve use the a price mix to help define the revenue so volume and price mix to get to our change in revenues. We have changed the methodology as you would have seen the past using revenue per requisition given that in the past that was always a good proxy if you will for our pricing or or mix within.

The business and what was interesting this quarter, if we're trying to explain our cost 3.9% reduction in revenue. If you took our volume change and our revenue per requisition change you would get somebody. This 0.1. So this is really the first quarter that there's been a change and that's just due to the dramatic decline in volumes that we've experienced.

So the Rev. Rec number if you will within the base would have been around.

19.4%, so the pricing overall within the base business, we always talk about it being but from a unit price. It's relatively stable. So normally where we see the change is normally and favorable mix could be test per session and it could be acquisition related but most of it just driven off of a test mix or potentially some payer mix.

As well.

Okay.

Alright, thank you.

Thank you. Our next question comes from the line of Ricky Goldwasser from Morgan Stanley. Your line is now open.

Yeah, Hi, good morning.

Yes, a couple of questions here the first one on Surajit. So.

Adam maybe you can share your stock.

What do you think Surajit Pal skiing guidelines could look like when the vaccine is available.

Hi, good morning Ricky.

First thing I would say is that we've built capacity is around the took very significant degree. We can do 300000 test a day, we can do a total antibodies.

We can look at the IBG, Yeah, Hi, Jay and I think that we've done a really good job to get that up and running.

There's really still information and science that we need to understand what those antibodies. We so we need to understand if you have antibodies are you mean, if your immune for how long does that last if you're having antibodies and if you talked to wane overtime, we have T cells kick in if you're exposed the virus again do you have an immune response.

So I would say that there's still more science that needs to be out there before we can give a definitive answer as to what they mean, but at a minimum.

I would want to know if I had cobot 19 in the past because I want to know that I beat it. So if I had the anti bodies I would know that I had cobot 19, the path and I'd be that.

Number two if you start to think about plasma and convalescent a blood plasma collecting that you're going to want to know that people have antibodies in a plasma so that if that works as a treatment we can get plasma from as many people as possible I think antibody testing is will be important for that ultimately I think you're going to need quantitative.

Antibody testing that would say what level antibodies do you have and I think thats going to be important and we have a quantitative antibody test.

As well as a qualitative antibody test so at the end of the day, we're at the forefront of science on antibodies on understanding T cells and other immune responses, but we still need more science and more research to give us the definitive answers.

Okay, and then on the PCR set aside I mean to your point you said, we have 180000.

So you think crush equal utilization is below that so when you think about current demand levels to achieve that one to two days.

I'll turn around.

What does.

Where does capacity needs to be.

Yes, so really that's that's that.

Good question and as you go into the fall I can't tell you the answer to that because we don't know what the demand is going to be and that's why we are building as much capacity as fast as we can I have no constraints on.

Buying machines and buying reagents for working with our suppliers, who have been just terrific to work with.

To build whatever we need and it would be a good day, if we get through the fall and said we had more capacity than what we need it with regard to where we are paid 180000, we're already for hospitalized patients were at about a day Dana half turn around and it for everybody else. We're already right now as we speak at a two to three day turnaround.

No no.

So we're doing really well in terms of turnaround, but we've got to keep building because we don't know what the volume is going to be the fall and we won't rest until we build and build and bill as much as we can.

And just one follow up.

When you think about design is what percent of volumes are hospitals versus the rest.

On the continent, yes, the hospital small volume and overtime. It will get smaller as there is more point of care tests available as is more cartridges for point of care tests available I think the hospitals will try to use those as much as possible. So so and we do some point of care test in our T. assays, which are the hospital labs that we manage.

So for me hospital inpatient point of care is critical right now we have great turnaround, we're doing that as fast as we can form but if I was running a hospital I can get an answer even faster I found even faster so it'll be a smaller percent as we go towards the future.

Thank you.

Welcome.

Thank you. Our next question comes from the line of Dare to burn from Bank of America. Your line is now thing.

Hi, good morning.

So I've got to I got a couple of questions on the lab so.

Your competitor put out a low end to their fourth quarter guidance that basically implied a slowdown in molecular testing I'm. Just wondering you are sort of thoughts on that scenario happening is that even something to remotely possible and then.

Some commentary on.

What you're hearing from the commercial payers in terms of how they are reimbursing and then finally have you looked at next generation sequencing as a way of and of increasing capacity is that something that you could potentially consider thank you.

Yeah. Thanks art, so what I would say into the reason that we have not provided guidance did because there are still so many unknowns as we go into the second half year any unknowns aren't just with PCR testing. It's also with the base business right now the base business is going to come back very well.

Remain that way, particularly if we have another significant covert 19 impact in the fall. It's it's hard to know I believe the cobot 19 testing and told there's a vaccine they're going to need us to do as many as we can possibly do and that's why we're going to build that capacity as quickly as we can so I don't see a scenario.

Except that there is a vaccine or some type of technology that I don't know today that would impact that would say, we don't need a lot PCR testing going throughout this year in terms of next generation sequencing, absolutely we're going to look at everything the question is that while costs and at what price point.

How accurate will be versus the PCR testing and that kind of leads to that your second question what type of third because I think commercial payers are going to look if they can get it very quick turnaround for an accurate task at a reasonable cost we would do that versus other tested lessors. It real scientific reason to do otherwise.

So what I can tell your our scientists are looking at every technology available every time I read about one or I see one I send it to our scientists. They said, yes, we've already talked to now we've already looked at it. So we'll be at the forefront of science and technology here. If there is something that makes sense, we're going to look at it. We can do everything we tend to be a part of it just like we've done already with things like pack pie.

Oh, and adaptive and so forth, but as I sit here today I think PCR testing as we go into the fall is going to be critical and that's why we're so focused on trying to build capacity.

Thank you.

You're welcome.

Thank you. Our next question comes from the line of family dollar from William Blair. Your line is now open.

Hi, Good morning. This is Dan Waller on for Matt Larew.

Thanks for taking my questions.

I wanted to ask about the demand for Kelvin touched on the pixel platform can you give us a sense for what shared their cobot tests have been through the platform and then how meaningful pixel self collection might be from us back to school or returned to work perspective. Thanks.

Yes. Thank you Dan you know so pixel continues to be an important part and one of the many offerings that we have for people to get PCR testing. It is not a significant meeting not more than 25% over volume is less than that but we do see the pixel volume increasing and I do believe that ASP.

Well go back to school or back to work at home collection kits will become more important and that's why we have picked so but we also have other at home collection kits outside of picks. So that we will use for bulk mailings and for things like employers. So I do believe it will become more important piece of our mix.

Even though we're removing a lot of them today there'll be more as we go into the future.

Great. Thanks.

Welcome.

Okay. Thank you.

So so inflows.

Our mission to improve health improved lives. So bands that we say at the forefront and fight against over 19, the importance in the urgency of what we do has never been more clear and our commitment and our ability to support important scientific advances our unwavering and we will only continue to strengthen it as we move into the future. So.

I want to thank everyone for their support as we navigate the crisis, including our customers our suppliers and especially employees were all in this together have a good day stay safe, where your math andone plasma.

Ladies and gentlemen, this concludes todays conference call. Thanks for participating you may now disconnect.

[music].