Q3 2020 Laboratory Corporation of America Holdings Earnings Call
Advised that todays conference is being recorded if required any further stuczynski star zero I would now like to hand, the conference over to your speaker today, unless you're willing Vice President of Investor Relations. Please go ahead.
Thank you operator, good morning, and welcome to Laugh Corp's third quarter 2020 conference call.
Detailed in today's press release, there will be a replay of this conference call available via telephone and Internet.
With me today are Adam Schechter, Chairman, and Chief Executive Officer, and Glenn Eisenberg, Executive Vice President and Chief Financial Officer.
This morning in the Investor Relations section of our website, we posted both our press release and Investor Relations presentation with additional information on our business and operations, 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.
Forward looking statements include but are not limited to statements with respect to expectations for 2020 and the related assumption.
Putting the projected impact of the cold at 19 cents on the company's businesses operating results cash flow and or financial condition, our responses to any expected future impact of the cobot Nike pandemic on our business more generally as well as on general economic business.
End market condition.
Each of the forward looking statements is based upon current expectations and is 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 in our most recent annual report on form 10-K, and subsequent quarterly reports on form 10-Q, and the Companys other filings with the FTC.
We have no obligation to provide any updates to these forward look.
They even if our expectations change.
Now I'll turn the call over time.
Thank you Chris.
Good morning, everyone and thank you for joining us today.
We delivered strong results in the third quarter as a base business continue to recover and significant progress was achieved despite the global pandemic.
Well trial activity is improving and we've had important wins, both covered and non covered related clinical trials.
The diagnostics business has recovered well that's people resumed their routine preventive visits I could we care for their chronic conditions and move ahead with elective surgeries and other procedures.
Coburn related volume was down approximately 9% for the quarter.
As a result, we were.
Reported growth in the third quarter versus the prior year with revenue up $3.9 billion adjusted EPS to be dog and 41 cents.
Free cash flow of $709 million.
Throughout the year, our COVID-19 testing has helped to offset the pressure experienced in our base business.
This is the first quarter were both diagnostics and drug development total businesses grew versus the prior year.
Based on the current and expected strength of our business. We have decided to return a cares act provided relief funds. We greatly appreciate the support the cares act funding afforded US an early days of the pandemic.
But our base business was significantly impacted in the future with uncertain.
We're pleased we can take this action now van will expand on this in a few moments.
Importantly, our strategy extends beyond Coburn bhakti.
Labcorp did prior to the pandemic and what we will do after the pandemic remains important to the country and to the world.
Our strategy is based on the following long term priorities.
First leveraging the power of our combined capabilities across diagnostics and drug development.
Second advancing our leadership position in oncology.
Third integrating <unk> data visualization and analytics across our business.
Fourth putting customers at the center of all that we do.
And finally, we will continue to evaluate and execute on high growth opportunities.
I'll now move to the third quarter.
We made significant progress in the fight against Kobe, which highlights our diagnostics and drug development capabilities to.
Dave We performed approximately 22 million covert Nike pass.
Represents about 19 million Pcr.
And over 3 million antibody tests.
We're performing cobot testing and when it's funky laboratories across United States and our capacity is greater than 210000 PCR test.
And over 300000 antibody tests per day.
We also continue to increase our capacity.
Thus far this month, we're performing approximately a 120000 cobot PCR tests per day with an average time to result of about one day.
During the quarter, we also launched a series of innovations.
We were the first laboratory to offer physicians the ability to order a combined test for respiratory infections.
Including COVID-19, RSV and flu.
The combined test well, how quickly and accurately determine appropriate treatment during flu season.
We also filed an emergency use authorization to make the combined that's available to individuals <unk> at home collection kits pixel by Labcorp and Labcorp at home.
In July we received an easier way to utilize a matrix pools testing method, which test multiple patient samples at once and requires fewer supplies.
We also recently received I mean do you right for a new feature extraction technology that improves the speed and efficiency of our PCR testing and reduces the reliance on certain reagents.
We will continue to work on innovations help respond to the pandemic and to grow our core business.
Moving now to drug development.
We continue to see strong momentum in our drug development business.
The backlog grew to nearly $12.5 billion and.
And our trailing 12 month book to Bill was 1.31.
For the second consecutive quarter, we want a disproportionate share of covert vaccine and therapeutic studies.
Today, we bought approximately 350 opportunities from small programs in the non clinical business through late stage clinical trials.
These opportunities represented roughly 13% of our net orders in each of the past two quarters.
The capabilities the insights and the data from our diagnostic business had been a differentiating factor in winning many of these studies, which once again demonstrates the power of our combined businesses.
Now, let's turn to several important highlights outside of 19 for the quarter.
And apology, we accelerated our leadership position with several advancements including.
A significant award to be the partner of choice for late stage oncology studies from a major pharmaceutical company.
The launch of resolution CTX long, a new noninvasive liquid biopsy test for patients with non small cell lung cancer.
And the collaboration with happens to accelerate clinical trial patient participation.
Our leadership in companion diagnostics combined with our successful track record in executing clinical trials are helping to develop future breakthroughs in cancer therapies, including precision medicine treatments.
During the quarter. We also made several other announcements to advance our strategy, including the extension of an agreement with via email.
Further the development of companion diagnostics in Japan.
And an agreement with Janssen to commercialize a noninvasive blood based diagnostic test for Nash.
We acquired Terawatt health outreach laboratory business.
And have several new laboratory service collaborations brought in a hospital system footprint, such as Infirmary health.
Ross University system for health.
And the University of Miami Health system.
We also renewed our long standing relationship with Swedish.
Strategic acquisitions are made during the quarter to increase de centralized clinical trial capabilities, including the acquisition of Vogel care clinical trials and an early October snap aiotv.
In closing, we delivered strong results amid continuing uncertain times.
We are encouraged that people are returning to the routine care and that drug development trials continue to ramp up in the fourth quarter.
It is anticipated that there will be continued outbreaks as we move into the fall and flu season, and we are preparing accordingly.
Finally, before I turn the call over to Brian.
Want to thank all of our employees around the world are 70000 colleagues across every part of our business have worked tirelessly to serve our customers and our patients at a time when the world is either that's most.
I cannot thank them enough for their sustained commitment and passion and I'm inspired by the countless stories of their great work.
I'm confident that we have the right team in place and are executing against the right strategy to continue Labcorp strong performance on its course over global Health care leader now I'll turn the call over to Brian.
Thank you Adam.
Going to start my comments with a review of our third quarter results followed by a discussion of our performance in each segment and end with some comments on our outlook.
For third quarter results, we have quantified the revenue associated with the COVID-19, PCR and antibody test. So that you can see the change in the base business.
Also during the quarter, we received $76 million and cares Act provider relief funding, which is excluded from earnings but included in cash flow.
As Adam mentioned, we decided to return the funds in the fourth quarter as well as the $56 million of funds, we received in the second quarter.
As a result, we have reversed the 56 million cares act funds from our earnings in the third quarter.
Now I'll review, our third quarter performance.
Revenue for the quarter was $3.9 billion, an increase of 33% over last year due to organic revenue growth of 31.5%.
Acquisitions, a 1% and favorable foreign currency translation of 50 basis points being.
The increase in organic revenue was driven by COVID-19 testing of 32.6%, partially offset by a reduction in our organic base business of 1.1%, which includes the negative impact from Panama a 0.7%.
Operating income for the quarter was $1 billion or 26.9% of revenue compared to 340 million or 11.6% last year.
During the quarter, we had $47 million of restructuring charges impairments in special items, primarily related to launchpad initiatives acquisition integration COVID-19 related costs and an impairment to intangible assets from an acquisition.
Adjusted operating income, which excludes these items and amortization of $62 million was $1.2 billion or 29.7% of revenue.
Here to 431 million or 14.7% last year.
The increase in adjusted operating income and margin was primarily due to COVID-19 testing and launchpad savings, partially offset by Panama higher personnel costs and the funding of the Labcorp charitable Foundation.
The tax rate for the quarter was 25.7% compared to 23.1% last year.
The adjusted tax rate, excluding restructuring charges or special items, and amortization was 25.7% compared to 23.9% last year.
The higher adjusted tax rate was primarily due to the geographic mix of earnings.
Net earnings for the quarter were $703 million or $7.17 per diluted share and includes the reversal of the cures Act funds. We received in the second quarter, which reduced third quarter net earnings by $41 million and diluted EPS by 42 cents per share.
Adjusted EPS, which exclude amortization restructuring charges and special items were $8.41 in the quarter up from $2 or 90 cents last year.
Operating cash flow was $786 million in the quarter compared to 456 million a year ago. The.
The increase in operating cash flow was due to higher cash earnings partially offset by higher working capital to support revenue growth.
Capital expenditures totaled $77 million in the quarter or 2% of revenue and included investments to increase our COVID-19 testing capacity.
This compares to $93 million or 3.2% of revenue in the same period last year.
As a result free cash flow was $709 million in the quarter compared to 363 million last year.
During the quarter, we invested $204 million in acquisitions and pay down $412 million of debt.
At quarter end, our cash balance was $667 million up from $557 million at the end of the second quarter.
Total debt at quarter end was $5.8 billion and our leverage was 2.2 times gross debt to last 12 months EBITDA.
Given the Companys improved financial performance, we are reinstating our share repurchase program.
Now I'll review, our segment performance beginning with Labcorp diagnostics.
Revenue for the quarter was $2.7 billion, an increase of 53.7% compared to last year.
Due to organic growth of 52.3% and acquisitions of 1.4%.
The increase in organic revenue was driven by COVID-19 testing of 54.2%.
Which was partially offset by the decline in the base business of 1.9%, which includes the negative impact from Panama of 1.1%.
The 53.7% revenue growth in the quarter was due to a 21.8% increase in volume and a 31.9% increase in price mix.
The total volume increase of 21.8% over last year was due to organic volume growth of 20% and acquisitions contributing 1.8%.
The increase in organic volume was due to the cold and 19 testing volumes of 28.8% parts.
Partially offset by an 8.9% decline in our base business volumes.
As a reminder, we did not include hospital lab management agreements and our volume, which would have added approximately 1.7% to our organic base business volume growth.
The price mix increase of 31.9% was primarily driven by COVID-19 testing of 25.4%.
And favorable mix in the organic base business of 7%, which includes the negative impact from Teva of 1.1%.
Labcorp diagnostics adjusted operating income for the quarter was $1 billion or 37.1% of revenue compared to 296 million were 16.8% last year.
The increase in adjusted operating income and margin was primarily due to COVID-19 testing and launchpad savings, partially offset by the negative impact from Panama of $20 million.
Diagnostics Launchpad initiative remains on track with our three year target to deliver $200 million of net savings by the end of 2021.
Now I'll review the performance of Covance drug development.
Revenue for the quarter was $1.2 billion, an increase of 5.7% compared to last year due to organic growth of 3.8% acquisitions of 0.5% and favorable foreign currency translation of 140 basis points.
The increase in organic revenue was driven by Coca 19 testing.
Excluding probably 19 testing organic revenue was flat compared to last year.
However, if we exclude the negative impact from the pandemic, we estimate that our organic revenue would have grown in the mid to high single digits in line with our targeted performance.
Adjusted operating income for the segment was $210 million or 16.9% of revenue compared to 175 million or 14.9% last year.
The $35 million increase in adjusted operating income and 200 basis point improvement in margins were primarily due to COVID-19 testing launchpad savings and currency translation, partially offset by higher personnel costs.
Drug developments Launchpad initiative remains on track with our three year target to deliver $150 million of net savings by the end of this year.
For the trailing 12 months net orders and net book to Bill remained strong at $6.1 billion and 1.31, respectively.
Backlog at the end of the quarter was $12.5 billion, an increase of approximately $670 million from last quarter.
We expect approximately $4.2 billion of this backlog to convert into revenue over the next 12 months.
In summary of the quarter, we delivered strong overall performance driven by COVID-19 testing and a continued recovery in both our diagnostics and drug development businesses.
With regard to our outlook, while we've seen our base businesses improve sequentially throughout the third quarter and into October as we enter into the final two months of the year. There continues to be significant uncertainty related to the fall and flu season in the pandemic, resulting in an unusually wide range of potential financial outcomes.
As a result, we are continuing to not provide 2020 guidance.
This concludes our formal remarks, and we'll now take questions.
Operator, thank you.
As a reminder to ask the question you will need to press star one on your telephone switch on your question first Apache.
Our first question comes from Jack Meehan of know from research. Your line is now open.
Thank you good morning.
Wanted to start by asking about the base business recovery is coming in stronger than we were expecting is there any color you can provide around just month by month trend throughout the quarter and then Glenn also if I look at how the base business you saw the negative impact on volume the positive on revenue correct.
Just help us maybe from a test category perspective, what you're seeing as well there.
Hi, Jack this is Adam I'll start with the recovery of the base business I've said it before that it surprised me how fast the base business has recovered if you go back to March our base business at that point was down 55% versus the prior year and this is looking at diagnostics. If you then we'd look at.
June our base business was down about 17% for the month of June but for the quarter second quarter. It was down 35%. If you look at third quarter, which we just discussed were down 9% for the quarter. So you are seeing sequential improvements quarter over quarter and frankly, we're seeing it month over month, so each month.
It's a little bit better than the prior month. So we continue to see that coming back with regard to our other business, our drug development business Thats coming back a bit slower enough not as quickly as a diagnostic business. What we've seen is the preclinical early stage work has come back the fastest of the three.
Businesses in drug development lab.
Last quarter, the Central Laboratory business was not coming back as quickly as the clinical development business for this quarter, we see a significant acceleration in our.
Laboratory business Central laboratory business and that is actually come back a bit faster than the clinical development business with the clinical development business, we have access to about 70% of the sites now so thats better than last quarter, which is still about 30% of the sites that are not open for axis at the moment.
Hey, Jack this is Glenn just to your other question one.
Kind of the volume being down the favorable price mix being up and Adam Obviously, just went through the volume decline on the price mix as you know in kind of a normal environment.
Diagnostics overall, those kind of the 1% to 2% organic volume and then we pick up around a point on favorable price mix and obviously, the last couple of quarters or anything but in a normal environment.
We have seen favorable price mix over the last two quarters, we were up around 5% last quarter and now up around 7% this quarter.
The biggest driving factor to the improvement in price mix really has been an increase in our test per session.
We've also seen an improvement in the mix and to your point some categories.
Ticker like womens health around RPT or hepatitis screening seem to be the bigger test parts that we've seen a higher growth rate than the other but overall a favorable mix, but again the biggest driver being the amount of tests, we're doing per session.
Great and just as a follow up until then testing could you share your thoughts around the sustainability of the rate you're collecting for detection tests and.
Kind of building off that your incremental margins on diagnostics were obviously very strong this quarter should.
Should we expect that rate.
To sustain as we go into the fourth quarter and any thoughts around the durability there would be great.
Yes, hi, Jack So when we launched the PCR testing, we had three core principles. The first one was to use sinus, it's viewed science and innovation and build as much capacity as quickly as we could.
The second was that everybody would have equal access to testing. So we charge nobody upfront out of pocket costs, and we tried to everybody. The Medicare rate in fact, when we first launched the test we launched it before we even knew what the Medicare rate was.
And then the third thing was that nobody would be prioritized or anybody else that ADVATE has came into laboratories, we would do those tests first with the only exception was when the CDC HHS asked us to prioritize. So for example for a hospital in patients and I think that those principles have served us well and.
Adhere to those principles as we sit here today in terms of the longevity I think for as long as the emergency Declaration is here, which now is through the month of January and we'll see if it gets extended after that I think that the pricing is consistent you.
You saw recently that there was a slight change to Medicare where it still will be reimbursed for people up to $100. If your turnaround time is within two days and the good news is our turnaround time is about a day. So that should have a significant impact on us for that Medicare change and then we have to see what.
Happens overtime with the declaration of the emergency after the end of January next year.
Thanks, Adam.
Yes.
Thank you and our next question comes from Peter Children Associates. Your line is now open.
Good morning, guys. Thanks for taking my questions.
During the quarter a lot of code revenues flow through to the bottom line I understand you are giving guidance, but can you walk us through any new.
New costs that we could see during the fourth quarter or are you considering taking excess earnings from covidien and accelerating investments in the near term.
Yep got it good just a comment on the.
The guidance, it's less of call. It an issue on the cost us more as just the.
The significant variance in potential outcomes relative to the business demand. So obviously, we've seen in the third quarter.
Adam I commented in our remarks, the business is performing well in sequentially.
Ending the quarter, even better than where we started so obviously at the current run rates, we would expect to see you know.
Continued good results as we enter into the fall again, the flu season, we just don't know the restrictions that may be in place what the impact of the base businesses will be going forward. So really the uncertainty being driven more off of whats the demand of the business could be continued strength could be some softness if.
If we see that.
Pretty bad flu season ahead of us.
But overall the cost structure of the company.
It was in place and frankly, one of the benefits to the margin improvement as being able to leverage that cost control, while we're seeing enhance revenues.
And just to give you a little additional context, a couple weeks ago, we were averaging about 110000 PCR test today now we're averaging 120000 PCR test today, we could go up to over 200000, a day if the country needed during the flu season, if you look at Australia, Brazil.
I continue and some other countries that have gone through the flu season, it hasn't been particularly a big flu season. In fact, it was very small in those countries could it be because they were not down for cobot net.
Help with the flu season, yes, very possibly so without knowing what the flu season could bring and we're just right at the start of it you can see how much variability there could be.
Okay, and then as a follow up for share repurchases historically, you've been fairly measured on a quarterly.
Repurchases should we expect a similar activity going forward or because their recent influx of cash flows to.
It'd be more accelerate thanks, so much.
Yes, well so we've always looked at our capital allocation very carefully and thoughtfully and our first and foremost thing that we look to do is to buy these tuck in acquisitions. These local laboratories local hospital laboratories, where we can bring them into our business we can.
Very quickly they become accretive in return or cost of capital within a very short period of time, and we know how to integrate them. There are several of those that we are looking at I can tell you I believe that there has been an acceleration in the number of those possibilities as we go through this year into next year, and we'll look to cap allocation from that lens first and then we will.
The opportunistic where it makes sense with the share repurchases.
Thank you and our next question comes from Erin Wright of Credit Suisse. Your line is now open.
Great. Thanks on the Kobe inside of the business, you mentioned, 13% bookings associated with Kobe.
How should we be thinking about the corporate related bookings across coming it's more meaningfully contributing to top line growth and then how much exactly work compared to therapeutic Kobe clinical trial. Thanks.
Yeah, and thank you Aaron so we're making significant progress.
With Kobe them, both diagnostic and the clinical trial business. Many of the study. They said that we've done about 300, and we run about 350 of those opportunities. Many of them are very early stage smaller trials, where we're doing it in preclinical work or we're doing design work and those types of things and then there are.
Others that are late stage in the vaccine space, where were actively involved at the moment they are not materially impacting the revenue at the moment. So that's why we didn't call out revenues specifically.
But as we go through time that will become more meaningful for us.
In terms of vaccine versus.
The other types of treatments, there's less vaccines out there, but the vaccine trials are much much bigger than the other trials. So I would say in numbers of trials most of them are outside of vaccines, but when you look at volume there is a lot of volume coming through the vaccines.
Okay. Thanks, and then quickly on capital deployment again, I guess, how should we be thinking about your condition Nina consolidator in this market in a post closing or all day, where are there more opportunities are less application meeting what does the acquisition pipeline look like.
Yes, I'll start within a diagnostic business one of the things that I've said before that has surprised me since starting as the CEO of the last November is that there are lots of opportunities and lots of discussions that occur about acquiring local laboratories or hospital laboratories, but they just take a bit longer than I had expected I thought that they may.
So much economic sense for both the laboratory Thats looking to be acquired and for Labcorp that I thought they would go faster. So you know at the moment there are many more that we're looking at today.
I would have said before particularly if you look at the size and scale some of them, but how fast. They go is impossible for me to predict because they have in the past taken longer than I expected in terms of other acquisitions, we mentioned global care and snap Aiotv. Those were two acquisitions that would help us with de centralized clinical trials in Harbin truck and hybrid.
A child, we've said that those were critical to our strategy and they were smaller tuck in types of acquisitions to help with our strategy. So we'll continue to look for smaller tuck in acquisitions that help us strategically I do not see the need as I sit here today to do any type of very large scale acquisition I think that we have what.
We need to be successful and we can augment it with smaller targeted strategic acquisitions.
Okay, great. Thanks.
Thank you and our next question comes from Kevin Kelly Endo VBS. Your line is now open.
Hi, Thanks for taking my question.
What are you seeing in terms of the makeup of your base business mix is there any changes if you were to call it out sort of on a year over year basis, how much has it.
Hasn't changed in any way shape or form are you still seeing the same type of mix that you had prior.
Yeah, Hi, Kevin the mix is about the same what's been interesting is in the beginning of the pandemic when our base business was down significantly our esoteric business did not fall as fast as our other business last quarter. We said that both businesses were coming back about equal now I would say in the third quarter our base.
Business actually came back a bit faster than the esoteric business. So we're not necessarily seeing a long term mix shift, but we've seen a different impact on the two businesses as we've gone through the year.
That's helpful and just as a follow up you said you said you were planning to add some capacity.
Your Covance I think you think through sort of what that might be 210000.
Is that where we should think about in what is sort of the breaking point.
When you think about turnaround times in terms of how many times you can you can do in it and still get it done within that 48 hour period.
Yes, so Kevin as I mentioned right now we can do more than 210000 tests per day and our turnaround time today is about one day now right now we're testing an average about 120000 tests and I would say we can go much higher and I still think maintain our current turnaround time or just be within.
The 48 hours.
The 210000 does not include our pooling that we're able to do and if we needed to do more pooling, we can increase that pretty significantly but also we're looking at adding additional capacity in terms of machines and capability. So as we said from the beginning one of our core attendance was to build capacity as quickly as we can.
And we've been doing that since March in July there was a significant increase in the number of samples that we were receiving no matter how fast food had built capacity, we still fell a little bit behind so even though right now we're running at about 50% of our capacity, we're not slowing down we're going to continue to buy the machines that we can.
By Ed and to me that's the biggest rate limiting step is the number of larger machines that we can get as we go into the fall flu season.
Thank you.
Thank you and our next question comes from Lisa Gill of Jpmorgan. Your line is now open.
Great. Thanks, very much hi, Adam and Glenn.
Adam Let me just start with the combination of the flu and PCR test can you just talk about will that count as a kobe counts or will that count as a flu test only think about volume and then secondly, how do we think about reimbursement for a combined like that.
Absolutely Hi, Lisa So we are currently able to do the flu PCR and also RSV test to physicians.
We also notably filed you wait to be able to do it with our pixel and our Labcorp at home pass I think that hasn't been a flu season. If somebody has a lot of symptoms that might be nice to do not even have to go to a doctor their doctor consenting them attached so they can order it fast and get the result.
If you look at the Medicare rates, we believe it's going to be about $143 for the combined test and as we've done in the past we've used the Medicare rate as our guide as we've gone through the.
The pandemic in the emergency declaration. So we'll continue to do that with regard to how were record that Lisa I think we'd have to think that through.
As we decide we'll certainly make sure that we talk to you and let the external environment know, how we're thinking about it.
The day to day leasing we've gotten very few because we're really not in the flu season, yet so there hasn't been a real need at the moment for the combined test.
And Adam how do you think about no testing.
Testing when we do we do have a vaccine with what's your point of view around and I know, you're not giving any guidance for fourth quarter for 2021, but how do we start to think about testing.
Testing as we have vaccines commit to the market in 2021.
Yes, I'll give you my thoughts on it but anybody that tells you that they have any significant degree of certainty is wrong. That's only part im certain about what I'm about to say.
You know I I believe that we'll have a lot more data by the end of this year to know the effectiveness of the various vaccines that are in phase three and that's going to be very helpful. And if we have vaccines that can move forward into the marketplace. I think it could start early next year, but before you can vaccinate a significant number of the population U.S.
I think you're probably talking about the middle of next year My personal opinion based upon experience without knowing all the facts. So I think that they're going to need continued testing for at least through the first quarter of next year from PCR testing I think you're going to continue to needed as you go into the second.
Part of the year and then by the time you get to the Summertime hopefully we'll have the vaccine broadly disseminated and the need for PCR testing will be significantly diminished. The two questions. We have our one we know the pricing relatively you know.
Certain what it could look like through January we have to see what the pricing will look like after January my assumption is that you know.
Why wouldn't you continue to have the emergency authorization through the winter, but we just don't know that for sure and then the second thing to realize that the vaccine is we don't know are they going to be antibody test tighter test they are going to be neutralizing antibody test that might be helpful. As people go through the vaccine. So we're developing a suite of past.
We announced last week.
Our test for.
The antibodies that would give you quantitative analysis used in pharmaceuticals.
To try to help understand what might be helpful. So will there be additional tests that we can do to help in the future given after vaccine my assumption is probably but we still have to wait to see the data is it going to be T cells or is it going to be antibodies, there's still a lot more we're going to learn over the coming months.
Very helpful. Thank you sure.
Thank you and our next question comes from Eric Coldwell of Baird. Your line is now open.
Thanks, very much I.
I just wanted to confirm a couple of things maybe.
Maybe talk through these first off.
Based on your disclosure.
Disclosure on the 13% of awards from co Vid tests.
Clinical trials in the.
In the Covance segment.
I'm coming up with net book to bills this quarter and last quarter of around 1.15 to 1.2.
And that's if I also strip out the COVID-19 active infection testing revenue, which I think you are putting in one for one with bookings.
Is that ballpark and Mike am I getting to the right numbers here.
Eric I guess just a question are you trying to back out the impact.
Of the worst trading your growth I think that yes. Thanks I did the big question I think everyone has is how much of the awards in the CR Road side of the World are coming from COVID-19 trials and.
And then you know how how much revenue how much impact what the comps are going to be down the road. So I'm trying to look at what the I.
Hate to say base business because this is all what you do but the core legacy Noncovered testing and then we also have to make an additional adjustment for the work that would have historically been done an LCD, but it's getting shifted over to Covance Central labs, I know, you're putting that revenue in that kind of a one to one on bookings. So I think if I strip everything.
And we'll get the base I'm still coming up with book to bills. The last two quarters of around 1.2.
No I think the distinction, though is that when you kind of commented we have obviously a lot of awards that have come in a lot of the tending to be more on the early side of our business. So when you look at the book to Bill that's coming in from call. It the non cobot testing, but the awards that were getting for vaccine or therapeutics would be call. It.
Is that a lower book to Bill if you will than what we've been experiencing overall, so if anything youre, taking a lower ratio of book to bill for the at least the words that we have you could even argue could move it somewhat the other way I think for the for the businesses that are seeing more on the late stage clinical trials for those awards that tend to be long.
Her book to Bill type areas, you might see a different outcome than than what we're currently experiencing.
Okay and then on.
On Covance margin getting a lot of inbound questions on what the core margin was if we strip out the COVID-19 testing.
I'm coming up with something around 15% in the quarter, but I was hoping you could.
Lynn some color on that.
Yes, so somebody give you some context I guess one of the things that I had mentioned before is.
When we saw the decline in our business in Covance, we did not reduce the size and the number of people that we have.
And the reason why is a lot of these people are hard to find are hard to train.
Yeah, we thought and we're seeing the business coming back so I'd be careful with the margins because the margins are a little bit worse than they typically would be because we still seeing the revenue come back but at the same time, we kept.
A bit of the expenses for the people. So that we didn't have to try to re hire we find people that we already got yes. The only thing I'd add to that is that when you we've talked about the kind of the organic revenue.
Revenue growth was really the PCR testing. So we would have been flat otherwise. So organically you still have positive call it flat and the pandemic flat organic revenue so from a margin standpoint, plus or minus assumed that our margins. Excluding the PCR testing would be relatively flat as well as Adam said, they had with the headwind from call. It.
The personnel side of it but we also have kind of the tailwind from our Launchpad initiative.
Addition, we get some leverage from Weve talked about the currency conversion and some acquisitions that would be additive as well.
Right and when you say excuse me when you say flat.
Yes, I'm trying to understand what is it flat with last quarter flat with.
Two h. flat, it's a flat with last year I was just trying to get a sense on what you're implying by flat.
Flat would be in explaining the change in our margins were up around call. It 200 basis points of margin.
Yes, thats being attributable to the PCR testing and that margins overall would be relatively flat.
And with the explanation that Adam.
Adam I gave for that right so around.
14.9% last year, I said around 15% so that's correct.
That's relatively flat yes, okay. Okay. Thank you very much I appreciate it.
You're welcome.
Thank you and our next question comes from Donald Hooker Keybanc. Your line is now open.
Great Great. Good morning, everyone. So maybe just a two two questions for me would love to hear kind of an update we've hit a lot of issues already this morning, but maybe an update on the sort of managed care environment on a different topic.
Kind of what the relationship with United with other are those sort of standstills already seeing some movement. There I know, there's a lot of disruption in the markets, we'd love to hear your updated thoughts on that.
Sure good morning.
So we continue to have a very strong relationship United and we were pleased that we were put on the PRN again in July of this year frankly I thought at this time. This year are you able to give you an update on how the PRN has work since we entered into an about a year ago and unfortunately with the pants.
I'm, if we haven't seen a significant amount of progress, but we are continuing to be optimistic that it makes a lot of sense, we will be able to work with United to get the PRN up and running in to help.
Help them shift the business to where they want to shift into which is to that high quality lower cost laboratories like ourselves.
And the P.L. and its appeal and preferred laboratory network.
It's something that other managed care plans have begun to talk about those types of things.
Believed that they were waiting to see if it worked and now that they've waited a while even though they don't necessarily know merchant I think you might see more of that as we move forward because everybody realizes the economic advantage of having these plans in place and I think we'll see more and more of it as we go into the future so stay tuned.
Okay Super and then one last quick one.
You guys I guess the last question was on the COVID-19 testing the covance facilities does that have any kind of crowding out effect on the rest of covance or is it are.
Are you are you not doing work to do otherwise would have done or.
Is there any kind of crowding out from driving putting some of the cobot thanking testing activity at the Covance business.
As I said before we could do 210000 test today, we're doing 120000 tests, we're using that facility opportunistically, but if we had other things that we needed to do in that facility. We would obviously use other facilities to run the test one is one of the good things that we.
We did was to go and run our test on multiple platforms. So we're running on a different platforms, but at the same time, we have a network across the United States that we can kind of have materials and samples sent to the laboratories that we'll have the best turnaround time, and we can use our network to say, let's have more sample. So this laboratory less.
So that was more due this month and we can do it on a very routine basis. So we have the ability to flex where we need to flex.
Thank you.
Sure.
Thank you and our next question comes from Brian Tim Quillin of Jefferies. Your line is now open.
Hey, good morning, guys.
A quick follow up to Eric's question flipping it to the core diagnostics business.
Hey, how are we how are you thinking about margin sustainability. Once you X out the Clovis opportunity I mean, obviously very strong margins during the quarter. So just trying to figure out where you think core margins to be going forward.
Yeah, Brian.
I guess similar obviously, the big driving the margin improvement as you pointed out was the combined testing, we actually did leverage well Oh, even excuse me excluding a co testing in diagnostics this business a little bit because it kind of a the opposite on the drive that old inside as Adam said, you know we have the personnel for the business that we we have so.
We have a little bit more of a headwind on diagnostics because of the significant growth in the business. We continue to add personnel as were going so we from a personnel standpoint, we really leverage so with the launchpad savings we had in the quarter margins held up really well, even despite the negative impact of Panama.
With the diagnostics, but such strong under.
But the base business on an underlying the margins were came in very strong.
All right got it thank you.
Welcome.
Thank you and our next question comes from Stephen Baxter's Wolfe Research. Your line is now open.
Hey, Thanks for the question I wanted to ask you about PCR reimbursement. So it's very helpful. You provide the precise revenue and test and figures around cobot. So thank you for that.
Hoping you could talk a little bit about what your average PCR reimbursement was in Q3 and how that compares to what you saw in Q2, when I look at your disclosures I'm backing into something in the mid Ninetys for Q3, whereas for Q2 I was backing into something more like mid to high Seventys. So just wondering if there was anything in there related to screw up maybe as you got more confidence in your ability to flex and managed care.
Sure and an extension of that would just be how we should be thinking about T cell members and Q4. Thank you yeah.
Yeah sure. So so our reimbursement and this quarter was about the same as last quarter. It was you know in the mid Eightys to upper Eightys and that's been consistent and as I mentioned before we've got three principles. The second principle is that we charge people the Medicare rate, which is a $100.
As we continue to be in the emergency declaration.
Which is through the first month of next year and you know the 22nd or something like that of January I believe we'll continue to have good reimbursement. The question will be will they continue the emergency declaration if they do I believe reimbursement will continue or if they don't I think we'll have pressure on pricing.
Without the emergency declaration.
I guess you did see that Medicare is now still reimbursing for $100 per patient, but only if your turnaround time is two days and you have to average two days for the month before it'd be two days feeds and test. The good news is that we're at about a one day turnaround time, so we feel pretty comfortable with that.
We will continue as we go to fall fall season, and we see numbers increase watched had extraordinarily closely.
Got it and just one somewhat related follow up just on payer mix, obviously is going on with the pricing numbers at the moment.
Just wondering if you could give us an update on what you're seeing in terms of payer mix shift or potentially you know increases.
Since around like the accruals lovely thank you.
Yeah, we're really not seeing any significant change in payer mix is pretty consistent as it's been in the past.
Yeah, I think I think such that the end up on bad debt accruals.
Yes, obviously concerning economic trends across the country wondering if you're seeing any increase in bad debt.
Yeah, I just want to make sure I understood the question right.
Yeah, the from a bad debt standpoint, obviously as you know we reserved in the first quarter $17 million, we have seen an increase in the bad debt just given the financial strain that obviously is impacting some of our clients weve.
We feel that the reserves that we have established our adequate.
But theres no question, we've seen a little bit of a pick up in the bad debt.
We feel our rate that we approve or is very adequate relative to the expectations that we have for that going forward.
Got it okay. Thank you good luck.
Thank you and our next question Johns are Lucky Goldwasser of Morgan Stanley. Your line is now open.
Yes, hi, good morning, I'm, So Adam I'm, writing earlier in response to a question you sort of downplayed your role serology testing once the vaccine took saleable.
Do you think you could do anticipate based on historical context.
Guidelines around use of testing in conjunction.
With the Covance vaccine.
Are you having any conversations with.
The bio pharma company Hello, Doug.
Yeah, absolutely Ricky and I still believe that the Surajit testing is going to be important in the future I. Just don't think we have the science yet to tell US is that neutralizing antibodies is a total antibodies quantitative analysis T cell involvement outside of antibodies. So so my only comment was meant to say that there is a lot more science.
Needs to be done if it really is a is it going to be an annual vaccine or is it going to be every couple of years. If it's more than every year, you'll need tighter as measured and those types of things. So I think there will be a role where conversations I'd say with most if not all of the major pharma companies conversations were operation warp speed in conversation.
As with many other science and are thought leaders in this area. So we're building a whole a whole series of potential ways to measure the impact of vaccines I can't tell you, which one is going to work, but I can tell you. If there is something which historically there has been we're going to do everything as we can to be ready for it.
Okay. So just to clarify because if we think is one of the questions were getting is kind of like what are the drivers are in the second half of 21 and 22 post PCR. So to your point there is going to be some sort of testing that is going to replace PCR or you're just at this point, we don't know, which which kept its going to be.
So I think I think there will be some but but really what I would say is that I look at the PCR testing almost as like a short term opportunity in a period of time and.
And then once that God, there's going to be some type of impact to the ability to grow but what you're going to want to look at is our underlying business. So I mentioned that we have one oncology trials for major pharma company I mentioned that we're starting to see the power of the combined based on what we've done.
With the covert testing what we're looking to show you is the proof that says that having diagnostics with drug development matters, which are really starting to see now we won more than 350 or approximately 350, Cobrand trials, which have very significant number of the total trials and what.
Well, if you're going to start to see is that translating into our core business changing so yes, I do think there will be some things that will continue to do with Kobe testing overtime with vaccines and so forth whether that completely offsets PCR testing I don't know I mean depends on what it is how often you do and so forth, but importantly, the work.
And what we're showing with our underlying business is going to be where you will see growth as we go out into future years.
So then if you think about that pandemic clearly increased focus on the critical role of testing.
Are you seeing this filtering already into discussions with health systems and payers beyond the Covidien past.
I think people have a new recognition for the importance of testing and the importance of testing find with drug development and you already hearing people talk about antibiotic resistance that could be occurring based upon treatment of cove in other things.
And I think there are going to be other bugs that we're going to have to figure out how to detect and how to treat in the future. So I do believe that the world now has a different view of the importance of diagnostic testing and one of the things that I'm going to be advocating for very strongly is the removal of Panama.
There is no impact the panel for next year, but I think it should be removed entirely because I think part of the reason that we were not as prepared as we needed to be for this pandemic is because for years people underestimate the importance of diagnostic testing the start the diagnostic testing business State laboratories for example were using were.
Genes that was so old and antiquated that we need government.
And payers to understand that for us to have excess capacity for us to have dual supply chains for us to have the latest and greatest innovations we need continued to have fair reimbursement.
Thank you.
Sure.
Thank you and our next question comes from Alethia William Blair. Your line is now open.
Yes, hi, good morning, Adam you referenced the sequential improvements in the base business Q2 to Q3, Despite second wave and then further improvement here in October Despite record case count there were some weeks. So just kind of curious what the key underlying improvement you're seeing is it as simple as pp being available in offices are open.
Curious about that and then maybe just comment on demand trends in some geographies, perhaps a peak has already occurred are there places where you're actually seeing year over year growth at this point.
Yeah, Hi, Matt and good morning, So we have seen subs.
So.
Sequential improvement month over month, you know when the country shut down back in March we saw almost all physicians offices are many physicians offices shut down and it took them a while to move over to Tele medicine, frankly, and we saw the hospitals that were pretty overwhelmed and didn't have pp. He didnt have enough ventilators and therefore.
Sure It was hard for people to get routine procedures, and so forth, but we've now seen as even in areas that have a significant.
Outbreak. The physician's office is still stay open where they have significant capabilities and tele medicine to keep people getting routine care. We've seen at the hospitals are able to now have enough PE. They continue to do.
[music] team surgeries and procedures and so forth so.
Unless you saw a major shutdown of the health care system again, I think that you'll continue to see this a good sequential improvement the only caveat I have is if it's a really significant flu season, and physicians offices, our path of people coughing and sneezing and you don't know if it's.
We were hoping I think people may once again say you know what I'm going to wait to get my routine care. So that's why I'm hesitant to say, what I think will happen in the coming months because it really to some degree in my opinion, it's going to depend on how hard to flu season, we had.
Okay I appreciate that and then maybe just actually following up on the point you raised regarding flu season, obviously understand that it's very early here, but just curious what you're hearing from.
You're referring physicians or maybe your own medical team about.
What preference would be for flu versus the combination tasks that whether it's for symptomatic or asymptomatic patients. Obviously, there is a variety of both modalities and touch combinations that are now I think.
Yeah.
Yes, So first and then to your other question about geography, we're not really seeing a significant difference by geography based upon outbreaks, we're seeing pretty consistent growth. Some geographies are using you know more point of care test summer using other laboratories, and so forth, but in general I don't think you see a major difference in geography for us with regard to.
The demand by test I think for asymptomatic patients. So continue to do the cobot test alone if they've been exposed to somebody where they've been in contact with somebody has the disease. I don't think there's any reason to do multiple tasks of the person doesn't have symptoms I think if somebody presents themselves in a doctor's office they do a flu.
We took care of that and if its positive they may say, okay go home.
Take care of yourself and if it doesn't resolve itself what have you tested for Covance I think in some situations even for a positive flu testing to say you know what let's just take you for cold and flu anyway, just to be certain if you have a negative flu test point of care I think there's certainly going to test you for Kobin. If you have symptoms and then the question is will they add on a flu test because they.
I know, sometimes you get false negatives with the point of care test and it may just be easier to say, let's have food test on there. So we're preparing for all those different scenarios as we go forward I think that the majority of tests will still be coping alone, but there could be a significant number particularly for symptomatic patients that are in combination for flu.
RSV.
Thanks Evan.
Sure.
Thank you and our next question comes from Dan Leonard of Wells Fargo. Your line is now open.
Thank you. So first off how would you characterize any efforts you have underway to maintain your share of cold and molecular testing as it seems that there are no new labs, a new entrant spending.
Spinning up all the time in this market.
Yes, hi, there. So if you look at our share I'll first start off with H.C.L.A. laboratory, So we get a sense as CLL.
Hey reports the total number of task I know what our actual number of tests are so I can calculate our share and we have a very strong share of Hcl eight labs and in fact, it's growing slightly if you go quarter over quarter. The question, you're asking though is with more point of care tests out there with additional local laboratories, you know what could the future.
To bring what I would say is today, we haven't seen a very significant impact I think this country needs as many tests as a key yet frankly I think there is a need for point of care tests I think for some balance having antigen tests available are helpful. I think and hospitals and nursing homes, you want faster test to actually do surveillance and then if you have.
Some cases, you do PCR test so I actually think there is a role for all the different types of tests that we have in the marketplace to me. The question really is what was asked before which is once there is a vaccine what is the role of testing look like and that's where it's a little difficult to answer because you know what if a vaccine works and 70% of people it doesn't work.
And the other 30 and one of only 70% of people get the vaccine so that 30% that don't get it in the first place well you still have a lot of people in that scenario that would want PCR testing overtime. So we still have to learn work for that scenario.
I appreciate that and then Adam for my follow up.
I appreciate that there is uncertainty around the market demand for the combo test as opposed to Kobin stand alone, but if demand for the combo test came in higher than you'd anticipate how would you characterize your capacity on that had said last quarter just to meet the demand.
Yeah, Dan I can tell you I had a meeting with the team as it was last week and we're continuing to have ongoing discussions and where you bring up for his many of test that we might need you know when I talked about 210000 capacity you know two three agents that are a bit different and not necessarily the machinery. So as long as we have reagent.
To do those tests, we should be able to do as many is that if we need to so so were going to continue to build the capacity and then we'll have we're trying to get enough reagents that we can go either way if we need to.
Okay. Thank you sure.
Thank you and our next question comes from Boston told me of Citi. Your line is now open.
Great. Thanks.
Glenn I wanted to go back to your comment on increasing test per session.
Do you think that's a consequence of coated where physicians are ordering more panels, even outside of Cove. It and do you think there is sustainability of that where you get kind of a continued uplift there.
Yeah Ralph.
Call it speculative, but the feeling is there's probably been a fair amount of pent up demand as people haven't been going for especially the routine testing and so now as they're coming back there is doing more tests. If you will for the <unk> session as you call. It a catch up if you will so we have seen that we've seen that for the last couple of quarters. It picked up in this quarter.
The assumption would be obviously that does start to sort of come back down to still be a positive.
Favorable price mix for us, but probably not to the levels that we've seen at least over the couple of quarters, but.
We'll have to wait and see.
Got it Okay makes sense and then just quickly on if you could help on the volume mix of Cove. It first between if you could split out commercial versus Medicare versus Medicaid in terms of the volume mix the cobot and then if.
If you could also help across where it's essentially coming from between.
Drive up sites versus employers versus universities versus health providers.
I don't know if you have that breakout, but it'd be helpful. Just to kind of understand where the volumes come from thanks.
Yeah. So so let me start with the second question first you know the vast majority of the test that we do I'm not talking about all the tests in the marketplace, but the ones that we do are still coming from urgent care centers from physician offices from people that are treating patients you.
We do some obviously from employers we do some for hospitals fell but the vast majority is in those physician offices and the the.
Urgent care centers those types of places yeah, we continue to see pixel doing well, it's about 5% to 10% of our volume and that's something that is with employers, but a lot of that is just people ordering at home test and we expect that will continue to be a good portion of our mix and then if you look at the breakout you know it's not too.
Different than what you would expect the overall baked out of our business to be in terms of reimbursement because it's coming primarily from urgent cares and physicians.
So I want to thank everybody for joining us today.
Hopefully you can see that Labcorp is leading with science and I believe it's never been more important or more apparent than right now as we continue our unwavering commitment to our mission of improving health and improving lives I can tell you that our team will continue to partner with our customers or suppliers other organizations, who share our commitment to lead the way through this.
Crisis and at the same time importantly at the same time, we're going to continue to execute on our strategy for growth, which remains our long term consistent strategy. We appreciate your time today have a great day.
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