Q4 2020 Laboratory Corporation of America Holdings Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to Labcorp fourth quarter, 'twenty and 'twenty earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
You require any further assistance please press star zero.
It is now my pleasure to introduce vice President of Investor Relations Clarissa Willett.
Thank you operator, good morning, and welcome to last for the fourth quarter of 'twenty and 'twenty Conference call.
And 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 average director 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, we've posted both of our press release and and Investor Relations presentation with additional information on our business and operations.
Which includes a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call.
And we are making forward looking statement these.
These forward looking statements include but are not limited to statements with respect of 'twenty 'twenty, one guidance and the related assumptions, including the projected impact of the COVID-19, pandemic and the company's businesses operating results cash flow and our financial condition, our responses to and the expected for.
The impact of the COVID-19, pandemic and our business more generally and followed by.
And general economic and market conditions.
Each of the forward looking statements and based upon current expectations and are subject to change based upon various factors many of which are beyond our control that could affect our financial results. Some.
Some of these factors are set forth and detail and our most recent annual report on form 10-K, and subsequent quarterly reports on form 10-Q, and and the company's other filings with the SEC.
We have no obligation to provide any updates to these forward looking statements, even if our expectations change and.
Now I'll turn the call over to Adam share.
Thank you for and so good morning, everyone. Thanks for joining us today.
Before I come from 2020 results I wanted to first thing for risks are for our leadership and Investor relations for the last several years.
Current has been promoted to lead our revenue cycle management team, which is a very important role.
I also want to take this opportunity to welcome Chad Cook, who has been appointed to Vice President of Investor Relations and we will continue to strengthen the foundation built upon by the IR team channel.
Chad and had been a strong leader and our finance organization since he joined Labcorp and 2018.
Moving now for 2020 results.
2020 will be remembered for many things, including the fight against Covid and the tragic loss and abroad and.
It also emphasize is of critical importance of frontline health care workers and scientist amongst others.
And looking back on this past year I cannot be more impressed or thankful to my colleagues across labcorp.
Together, our team developed six FDA EUA Covid test.
For fourth approximately 35 million Covid test in 2020.
And helped to bring multiple treatments and vaccines to market and record time.
Our ability to adapt quickly and a changing environment, our resilience and our strength of our more than 50 year history has been foundational and the fight against Covid and 2020 was transformational for Labcorp let.
Let me begin with a brief update on our financial results, which Glenn will cover in more detail shortly.
We reported full year 2020 revenue of $14 billion.
Adjusted EPS of $23 94.
And free cash flow of $1 8 billion.
Our base businesses and both segments continue to improve as we close the year.
And diagnostics our base business performed well, however volume remains below prior year.
We also reported continued improvement and our drug development business with strength across all three business lines, leading to a revenue increase and the total and the base business and our fourth quarter.
And I talked about and that business ended the year with a trailing 12 months book to Bill of one for three driven by strong demand across therapeutic areas.
Our performance was strong and our fourth quarter and full year of 2020 of our teams of our agile they move fast and it clearly demonstrated the strength of our science technology and innovation.
We quickly brought innovation to market, while simultaneously advancing each pillar of our company strategy here and just some of the highlights from the year.
I'll start with we were the first commercial lab to bring and FDA EUA for Covid test to market, we became the first to offer and at home PCR collection kit.
And prescription through pixel by Labcorp.
And we were early to market with neutralizing antibody tests that are important and of development of Covid vaccines.
In addition, early and a pandemic our scientists partnered with Pac bio to genetically sequence of Covid samples. So that we can detect changes to the virus and use that information to develop future therapies.
Recently, we announced our efforts to sequence of Covid samples for the CDC and the agency continues its important work and the fight against Covid.
We are seeing the importance of these efforts and believe sequencing will be critical going forward.
Also and our diagnostics business and we brought innovative platforms and test the market that it can improve the diagnosis of important health conditions, such as lung cancer and liver disease.
Looking at oncology and continues to be of strategic focus for us.
And 2020, we expanded our leadership position oncology for the launch of a new noninvasive liquid biopsy tests using next generation sequencing for patients with non small cell lung cancer.
We were also selected by a major pharmaceutical company as their partner for late stage oncology trials.
And collaborating with purpose to accelerate clinical trial patient participation.
And as you read and our recent announcement, we have formed and oncology team made up of strong and talented leaders and the field.
Additionally, we are continuing to integrate digital data analytics and artificial intelligence and everything we do.
Our drug development business is changing of clinical trials and managed using digital technology.
We completed acquisitions of global per and snap Iot and AR and working with clients to use mobile and digital technology to accelerate trial and to make virtual and hybrid clinical trials of reality.
Also within our own lab operations are engineers, and scientists developed proprietary robotics capabilities that increased our COVID-19 testing capacity.
As we look at several of innovative partnerships to support our clients patients and scientists our partnership with Pac bio adaptive biotechnologies, Microsoft and size helps enable scientists and researchers to better understand COVID-19.
Our collaborations with Infirmary Health Rush University system for health, and Walgreens, and others expanded our services to patients and providers across the United States.
We also extended and agreement with BMS to further the development of companion diagnostics and Japan.
And lastly, we remain committed to customer satisfaction and remain focused on increasing access to testing.
Improving time to results and improving delivery to provide our customers and the best in class testing and support for important clinical trials.
As noted science technology and innovation are behind these successes and are foundational to our future.
Our updated brand represents the power of our combined businesses and highlights our commitment to science and innovation to improve the health and lives of people around the world.
Our first of a few comments about 2021.
As you can appreciate there is still uncertainty heading into 2021, but.
But we believe we have enough visibility to reinstate full year guidance targets, albeit with a wider range than we've historically provided.
The fight against Covid is not over and neither is our commitment to the feeding it and.
We believe the lessons learned and this past year have enhanced the progression of our long term strategic goals.
We will continue to seek and invest in high growth opportunities and positively impact People's health and around the world and areas such as cancer Nash Alzheimers disease, and autoimmune diseases just to name a few.
There remain many significant unmet needs and healthcare and Labcorp will continue to play an important role and helping to solve them.
I am confident and both our short term and our long term prospects and and our strategy and will continue.
And to provide a strong platform for growth as we move forward.
Before I turn it over to Glenn I want to thank all of our employees around the world. We were honored to be recognized by Fortune magazine as one of the world's most admired companies for the efforts of our over 75000 global.
Noise and are working tirelessly every day to help people live better and live longer and I'll turn it for you.
Thank you al.
Going to start my comments with a review of our fourth quarter results followed by a discussion of our performance in each segment and conclude with our 2021 guidance.
Revenue for the quarter was for $5 billion and increase of 52% over last year due to organic revenue growth of 51% acquisitions of <unk>, 9% and favorable foreign currency translation of 100 basis points the.
The increase and organic revenue was driven by Covid testing of 46, 4% and organic base business growth of three 7%, which includes the negative impact from Panama of 6%.
Operating income for the quarter was $1 3 billion or 28, 8% of revenue compared to $336 million or 11, 4% last year.
During the quarter, we had $46 million of restructuring charges and special items, primarily due to COVID-19 related costs and acquisition integration charges.
We also had $91 million of amortization, which was higher than recent quarters as.
And as part of our new branding initiative, we are transitioning out of the Covance trading.
As a result, we are accelerating the amortization of its trading over the next year.
Adjusted operating income for the quarter was $1 4 billion or.
For 31, eight percentage of revenue compared to $422 million of 14, 3% last year, the increase and adjusted operating income and margin was primarily due to COVID-19 testing organic base business growth acquisitions, and launchpad savings, partially offset by Panama and higher personnel costs and invest.
<unk> to support the company's new branding initiative.
The tax rate for the quarter was 24, 5% compared to 22, 4% last year.
The adjusted tax rate, excluding restructuring charges and special items and amortization was 24, 8% compared to 22, 9% last year.
The higher adjusted rate was primarily due to the geographic mix of earnings for.
For modeling purposes, we expect the company's adjusted tax rate for 2021 to be comparable to 2020 at approximately 25%.
This does not include any potential increase and the federal tax rate from 2021.
Net earnings for the quarter were $938 million or $9 54 per diluted share and.
Adjusted EPS, which exclude amortization restructuring charges and special items were $10 56, and the quarter up from $2 86 last year.
Operating cash flow was $775 million and the quarter compared to $570 million a year ago.
The increase in operating cash flow was due to higher cash earnings partially offset by higher working capital to support growth.
Higher working capital was primarily due to the increase in accounts receivables and supplies related to Covid testing.
Capital expenditures totaled $99 million or two two percentage of revenue and included investments to increase COVID-19 testing capacity.
This compares to $128 million or for 3% of revenue and the same period last year.
As a result of free cash flow was $675 million and the quarter compared to $442 million last year.
This brings our full year of free cash flow to $1 8 billion.
Up from 1 billion and 2019.
During the quarter, we invested $59 million of acquisitions.
At year, and the company had $800 million of share repurchase authorization remaining.
As previously communicated the company, we will repurchase shares in 2021 as part of its capital allocation strategy.
Now I'll review, our segment performance beginning with diagnostics.
Revenue for the quarter was $3 $2 billion and increase of 79, 5% compared to last year <unk>.
Primarily due to organic growth of 78, 5%.
The increase and organic revenue was driven by Covid testing of 78% and base business growth of 5%, which includes the negative impact from Pam <unk> of 1%.
Total volume increased 33, 9% over last year, primarily due to organic volume growth of 33, 3%.
The increase and organic volume was due to the contribution from Covid testing volumes of 41%.
Partially offset by a decline and base business volumes of seven 7%.
As a reminder, we do not include hospital lab management agreements and our volume, which would have added approximately 2% to our organic base business volume growth.
In the fourth quarter of the company achieved both of its highest COVID-19 testing results as well as the highest year over year volume performance and the base business since the pandemic began in March of 2020.
Price mix increased 45, 5% over last year, primarily driven by Covid testing of 37% and favorable mix and the organic base business of eight 2%.
Diagnostics adjusted operating income for the quarter was $1 2 billion.
For 39, one percentage of revenue compared to $277 million of 15, 8% last year the.
The increase and adjusted operating income and margin was primarily due to COVID-19 testing and launchpad savings, partially offset by the negative impact from Panama and higher personnel costs.
Diagnostics three year Launchpad initiative remains on track to deliver approximately $200 million.
Of net savings by the end of 2021.
Now I'll review the performance of drug development.
Revenue for the quarter was $1 4 billion and increase of 16, 4% compared to last year, primarily due to organic growth of 13, 1%.
The increase of organic revenue was due to the base business growth of eight 4%.
And of four 7% contribution from Covid testing for both through our Central lab business.
Drug development delivered broad based revenue growth, including Covid vaccine and therapeutic studies.
Adjusted operating income for the segment was $248 million or 17, 8% of revenue compared to $183 million or 15, 2% last year.
The increase and adjusted operating income and margins were primarily due to COVID-19 testing organic base business demand and launchpad savings, partially offset by higher personnel costs.
The company achieved its goal to deliver approximately $150 million of net savings from its three year drug development Launchpad initiative.
Launchpad and will continue to be the company's primary business process improvement initiative going forward.
For the trailing 12 months net orders and net book to Bill remained strong at $7 billion and one for three respectively.
Backlog at the end of the quarter was $13 8 billion.
And increase of approximately $1 3 billion from last quarter.
We expect approximately $4 5 billion of this backlog to convert into revenue over the next 12 months.
Now I'll discuss our 2021 guidance, which assumes foreign exchange rates as of December 31, 2020 for the entire year.
In addition enterprise guidance includes the impact from currently anticipated capital allocation with free cash flow and targeted to acquisitions and share repurchases.
We expect to change and revenue for the enterprise of minus one to plus four 5% compared to 2020 revenue of $14 billion.
And includes the benefit from foreign currency translation of 90 basis points.
This guidance range also includes the expectation that the base business will grow 11% to 13, 5% over 2020 revenue of $11 2 billion, while Covid testing revenue will declined 35% to 50%.
We expect a decline in revenue for diagnostics of minus five to minus seven 5% compared to 2020 revenue of $9 3 billion.
This guidance range includes the expectation that the base business will grow 11% and 14% over 'twenty and 'twenty revenue of $6 5 billion.
While COVID-19 testing revenue of declined 35% to 50%.
We expect drug development revenue to grow 8% to 10, 5% over 'twenty and 'twenty revenue of $4 9 billion.
And includes the benefit from foreign currency translation of 220 basis points.
This guidance range also includes the expectation that the base business will grow nine 5% of 12% over 'twenty and 'twenty revenue of $4 8 billion.
Despite the continuing negative impact from the pandemic.
Our adjusted EPS guidance is $19 to $23 compared to 2020, adjusted EPS of $23 94.
The adjusted EPS guidance reflects the expected decline and Covid testing and 2021.
Free cash flow is expected to be one seven for $1 9 billion.
Compared to $1 75 billion last year.
And 2021, we expect capital expenditures to be approximately 4% of revenue driven by investments to support base business growth and productivity.
Yes.
In summary of the company achieved strong performance and the fourth quarter and full year 2020.
Since the beginning of the pandemic. We have remained focused on ramping up COVID-19 testing capacity, while also managing our base business, including continuing to execute on our launchpad initiatives.
As we look forward to 2021, we expect to drive profitable growth and our base business, while Covid testing is expected to decline throughout the year.
We also expect another strong year, our free cash flow generation that we will use for acquisitions to supplement our organic growth, while returning excess cash flow to shareholders through our share repurchase program.
This concludes our formal remarks, and operator, we will now take questions.
Certainly as.
A reminder to ask a question and you will need to press star one on your telephone.
And withdraw your question press the pound key.
We ask that you please limit yourself to one question and one final one.
Our first question comes from the line of Jack Meehan with Nephron research.
Thank you and good morning.
I was wondering if you could start and just provide a little additional color on the assumption and the guidance for 2021 Covid testing by my math of teams that.
And assumes the Covid sales are going to be essentially zero and the second half of the year I think thats world, We all want to live in but I'm not sure. If that's exactly how it is going to play out so just to be great debt.
More on your philosophy there.
Hi, Jack good morning, and thanks for the question.
Reason, we had to give such a wide range minus 35 to minus 50% for the testing is because as you say, it's very difficult to have precision and you could get to the minus 35 to minus 50% and several different ways right.
Right now we've seen a decline and past if you look at the last several weeks versus the end of 2020 and that decline continued and then you saw continued throughout the whole year you could get there.
If the amount of testing we're doing today on average was maintained for the six months of this year and the first six months well then you could do zero for the second half of the year and still be there. So there are multiple different ways to get there my assumption going in is that the price is going to remain.
<unk>.
And where it is right now so right now it's $100.
We're still in the emergency situation and that's been extended through the year.
You have to hit the CMS guidelines, which is basically for the previous months do you have to have more than 50% at a two day turnaround and then they look at each sample for the current month.
And well within that range I mean, right now we did 275000 tests per day, we're not doing anywhere near that and our turnaround times of about a day. So I expect that the price you should assume is still about what we've average till now I think for this quarter. It was about $90 on average.
And then it comes down for the volume and I assume that the volume is going to continue to decline, albeit maybe at a lower rate and we saw from the end of last year into this year and then for the second half of the year there'll be significantly less than the first half of this year, that's our base case assumption.
And Jerry.
To reinforce it to one of the reasons, we did breakout.
Level of Covid testing separate from our base business, just given that we put a wider range around something that we feel is more uncertain vs frankly, having a better visibility on just the performance of our base business.
Great Yeah, I like the way you laid it out I think it is helpful. Just for teasing out the parts.
On that last point on the base business Glenn I was wondering if you could provide some more color I think.
For a little bit of the same dynamic from last quarter, where it looks like maybe there is some mixed benefit or additional tests per rack.
Whats going on there between kind of core volume versus mix.
Yes, Jack as you saw from a revenue standpoint, what was nice is that we saw <unk>.
5% growth and revenues in the quarter. So it's the first time, we've seen the positive but to your point. It's a combination of we still saw lower volumes thats down seven 7%, but still less and improvement as we trended through the earlier parts of the year and it was more than offset by favorable price mix and we can.
To see and unusually high level of a favorable mix.
<unk> driven by higher test per session. So the feeling is with the fewer visits that.
<unk> are going there and conducting more tests per visit that theyre going through so again, as we think going forward and reflected and the guidance is we will continue to see overtime the pickup in our base volumes, but with that Youll see that the core level corollary of if you will you'll start to see that favorable mix start to come back down sort of.
For historical levels.
Thanks Thats helpful.
Yeah.
Thank you.
Our next question comes from the line of Dan Leonard with Wells Fargo.
Thank you. So first question can you talk about them and drug development business.
The contribution of Covid trials, either sales or bookings and the outlook there.
Yeah, absolutely. Thanks for the question. So first thing is if you look at drug development business, we grew 16%, but if you take out the PCR testing, we had growth of eight 4%, which was strong growth and we did well across all of our businesses. If you look at Covid right now basically the cash.
And with trials accounted for about 12% of our net orders. If you look at the last three quarters. So you can see that it's meaningful but.
A lot of our growth is coming from outside of Covid trials, and we've mentioned on the last quarter that we won a large farmers oncology book of business I think thats helpful to us, but also we won another farmers non oncology business. So we continue to show strength.
Outside of Covid, which is very important as we move forward for the base business and that's what gives us confidence as we look at the range. We provided for the drug development business for this year.
Okay. Thank you and then just a follow up on the diagnostics business out of you mentioned that the work with the CDC and sequencing for Covid surveillance.
How do we think about the economics of that or frame that as that of it could that be a meaningful part of your business or is it.
And just trying to emphasize that the high science there. Thank you.
Yes, so right now we're doing a couple of thousand sequences of week for the CDC, we can increase that significantly.
We're working with them to see what number of se.
Like us to go to that's more science and more for the benefit of understanding the mutations we could use it for drug development and understand what we need to do and the future of drug development.
Look at that as a separate significant revenue stream.
Okay. Thank you very much sure.
Thank you and our next question comes from the line of Lisa Gill with Jpmorgan.
Sure.
Yes.
Yes.
And.
Lisa we can't hear you.
Sorry, I'm sorry can you hear me now yes, we can good morning, good morning, and myself on mute.
Adam when we spoke about a month ago I think I ask you a question around the tie between diagnostics and drug development and did it makes sense for the two entities to be together.
Clearly you put up a great number obviously on both sides, but especially on the drug development side for book to Bill can you talk about outside of Covid.
Youre seeing between drug development and diagnostic for winning businesses is helping and some way.
And the correlation that you see between those two businesses and then lastly, how do we think about virtual trials plane and for all of this.
Sure. So I'll start by saying that I continue to believe that having diagnostics and drug development together is a winning.
And then you can do significantly better with drug development business by having diagnostic capabilities. There's no doubt in my mind that we've seen that with Covid I mean being able to do the diagnostic test and what we're doing drug development and enabled us to win more than 400 opportunities across COVID-19 at the same time I believe that people.
And now have seen it and pharma and biotech so it opens up the doors for other areas. We won large farmers oncology business I think and apologies for the next area that we'll be able to show the benefit of having diagnostics capabilities, particularly companion diagnostic capabilities, along with drug development and we are beginning to see.
In the biotech and pharma clients that this is mattering more and more so I continue to be very bullish about the ability to have both of these businesses together I've always said that I think that's the drug development business benefits more by having diagnostic capabilities and diagnostics by having drug development for.
With that said we've seen some synergy has gone the other way where the drug development group has been working on companion diagnostics, and we're able to potentially launch that and that diagnostic area. So im actually seeing benefit to diagnostics overtime from drug development. So we continue to make progress there if you look at virtual and hybrid.
Trials and the reason we've invested there is because I believe it's going to be more important and it's been in the past and it's been talked about for quite some time I don't think of a lot of pharma companies were willing to go there because they do how to do the other trials and we still have to get regulators to approve how we'll look at virtual and hybrid trials.
But with Covid all of that has changed and.
And there's still about 20% to 30% of clinical sites that are not open and if you're starting to trial now and you want to make sure. If there is another event for example, if in November and Theres, a new variant and you need another vaccine there could be another impact from Covid. Later this year you don't want your trials to be interrupted.
You want to have the possibility to do virtual and hybrid trials. So I think it is going to serve number one as a backup to ensure the trials can continue number two I believe that particularly in specialty areas youre going to see more and more use of the hybrid trials because of what we're seeing is they can work and that can work well and they can actually.
Allow you to potentially enroll more patients faster and therefore I think it's here to stay now that we've seen it work.
Great. Thank you.
Sure.
Thank you and our next question comes from the line of Erin Wright with Credit Suisse.
Okay.
Quickly on the diagnostic testing.
In terms of your thoughts around serology testing guarantees and that will kick off with that.
Is that net of on terms of your guidance.
David.
And.
Yes, higher and that's an important question. It's a very important scientific question. We are very specific to say COVID-19 testing and not break apart PCR and serology because it could go in multiple different directions.
If you end up having to have a vaccine every year serology might not be that important.
If you need of vaccine every several years and I believe serology will be very important and of real question is going to be what level. What's the quantitative analysis that you need for a certain level of antibodies to feel that you are protected if there is a quantitative number that people can feel comfortable they can fly that can go to events that they.
And do many other things than it will be very important and what we're doing is we're preparing for that just in case. So we already have the ability to do a semi quantitative antibody test, which I think would help if you have to get to a certain level of know what debt level is and we're going to be prepared to scale that we already have where we can run thousands but I wanted to.
Prepared and the case, we need hundreds of thousands and the future. It's just too early to know from the science and we're learning so much about the variance and so forth that there'll be more to come as we go through this year.
The only other thing I would add for that is that as Adam said Covid testing and the guidance that we gave down under the 35% to 50 is our expectation for the full year, but while serology is a small piece of that frankly from our guidance and the weight and the range that we have we would actually have a range where serology testing would go up.
At the upper end of the range could go down again at the lower end of the range versus the Tcr's to your point is once the vaccines of readily available more interest and seeing if the antibodies are there. So again, it's a smaller piece of the total COVID-19 business that we have.
Okay, great. Thanks, and then from capital deployment.
Consolidated and opportunity across the core and last evening.
The deal pipeline look like now and done.
The broader installed base of suite.
And.
And Jerry layers.
Thought process I guess around deal activity and the near term.
Yes, so as I look at capital deployment of the first thing we look forward to see if there are hospital laboratories, local and regional laboratories that we can acquire and those makes a lot of sense. They are accretive and the first year. Typically you return your cost of capital and about two years and we know how to integrate those we are seeing.
More opportunities for those we are spending a lot more time and discussions.
With various.
Hospitals, and local laboratories, and I can tell you even as of senior management team. We are spending a lot more time and those discussions ourselves. So I feel good that there will be multiple opportunities as we go through this year. The second thing I look forward is strategic acquisitions. So if there is something in one of the pillars of our strategy for example.
And <unk> that we need to acquire in order to be successful, we would look to do something like that and those will be kind of smaller tuck in type of acquisitions versus large scale Mega deals and then the third thing we look at is the share buybacks.
You asked me about large scale acquisitions. So for example, and other large CRO I don't think we need to do that I think we have what we need to be successful. So we're mostly interested in laboratory hospital laboratory local regional laboratories, and strategic acquisitions of acquisitions, helping us and the pillars.
Okay, great. Thank you.
Thank you and our next.
Next question comes from the line of Ralph Giacobbe with Citi.
Thanks, Good morning, just.
Wanted to go back on the commentary around visibility on the for trends and maybe the assumptions and comfort around those core trends and more specifically when I look at the numbers compared to 2019.
And look at the lab side mid point looks like it's about 4% growth and then on the CRO side and thinking.
About 15% growth off of that sort of 2019 baseline so anything to call out there and on either side around sort of the visibility and talks about the purchase of the growth.
Yeah and Ralph.
Yes from our perspective, it's kind of and interesting viewpoint, because as we go into 2021 and look at our comp for 2020, obviously, we see significant growth in both of our base businesses, because it's coming off of the pandemic here as we look back to 2019 kind of pre pandemic levels to your point your growth rates, we actually look at it.
And on a compound growth rates and say is that kind of fitting and within our historical growth rates and.
And the guidance range that we have kind of implies obviously, we're giving a range, but for both businesses clearly of the upper end of the range that we're back to kind of the normal historical growth and so as we think about the pieces. So first within diagnostics, while we've already seen of favorable revenue trend and the fourth quarter compared to 2018, So revenue was already there.
But our volume wasn't we were down call it around 8% in the fourth quarter. So the range that we have as we look to 2019 is that for the most part call. It the mid mid part of the guidance that the volume now and we'll get back to 2019 levels call. It of the midyear to second half of the year and again the price of oil.
We'll come down to more historical levels as well, but similarly within the drug development side of the business. We've already had good growth compared to a year ago, and we expect that to continue relative to 2019 levels, where again the range. If you looked at it as of catered of 19 Similarly within.
The range gets us back to our historical growth rates again, depending where you are and the range. So with a recognition that there is still going to be some softness of the base business. That's expected and the first half of 'twenty, one because of the pandemic ship still here the vaccine broadly available, but clearly with the second half of the year expectations. We're now growing.
<unk> of to 19 out of more historical level.
Okay got it that's.
That's helpful. And then just a follow up on the 100 dollar commentary for Covid testing and just wanted to share that across your managed care book as well and how.
Has there been any discussion or pushback, if you will with managed care or perhaps.
The argument of lower rate for maybe more favorable pricing terms on sort of that base business longer term. Thanks.
Yes.
Our average price is about $90.
And of course, we're having discussion of managed care, but as the volume has gone down significantly.
And we see the testing that where it was say back in December of those discussions continue to happen, but I think we are of very strong rationale based upon the CMS pricing guidance.
Okay. Thank you.
Sure.
Thank you and our next question comes from the line of Eric Coldwell with Baird.
Yes, I wouldn't you know Ralph Scott.
Got my two questions kind of wrapped up and the last two and there.
And then I'm going to just jump off that a little bit I mean, ultimately I think I was doing the same direction, which is king.
Peeling back the layers of the young and on diagnostics on the base business. You clearly have a lot of literature of hospital lab management, which index revenue and pricing, but not volumes you have easy comps you have no Panama and M&A, even a little FX it sounds like Youre, saying.
The.
2021 core base volumes.
Maybe start the year below 2019 finished the year the second half of above 2019. So are you basically seen of flat year on volume and total or maybe a little bit of growth and total.
And then I have a follow up clarification and after that.
Yes again Eric.
You look at it relative to the.
And the range so.
And part of the supplemental information that we provided and we actually did get of.
Colette compound growth rates for the businesses based on the base business and Covid testing and kind of help frame.
Frame the growth to your point within that obviously, there is some M&A and currency that impacts the numbers, but as we think about again the volume for diagnostics, depending where you are and the range of at some point, we're going to crossover to.
Being favorable volume and so again at the midpoint of the range just assume thats relatively mid point of the year.
After that point, we're then looking at getting back to more historical growth rates, but even there the trajectory of the recovery.
And it will be stronger it could be a little softer, but overall, we do expect to see depending on where you are from the range to for the full year, we could be still below on volume for the full year, but favorable on price mix.
Or at the upper end of the range, we could be both favorable on volume as well as favorable on price for the full year. So again, just a varying degree of how fast the recovery will come in and.
How much it's accelerates got it and my quick follow up here is within diagnostics. Obviously, you are doing M&A you have and you have a positive outlook on M&A and I'm curious what percentage of growth in that 11% to 13, 5% base what percentage of that it's actually M&A driven as opposed to non.
Yes, so when you when you look at the guidance that we provided for.
Call it for both of our businesses the M&A, that's associated and our guidance range as all deals that had been done and the past so youre just getting the annualized <unk> Park.
Of that growth if you will in our enterprise numbers, we do assume that part of our capital allocation will go to M&A. So we've reflects some of that growth and revenue at the enterprise level.
And for that but if you think about just the level of M&A in the quarter that we had.
For diagnostics was 9%. So obviously, we will look to see that number would be a smaller piece within the guidance range that we had for 2021 subject to any deals that we do would be additive to that.
Got it thanks very much guys.
Absolutely. Thank you.
Thank you and our next question comes from the line of Eugene <unk> with Wolfe Research.
Thank you and congrats.
And on this.
Thank you and congrats on the strong quarter.
I guess of quick follow up to Rob question earlier on the Covance side.
You are expecting base business revenue to comment about 15% higher than 2019 at the midpoint can.
Can you maybe break down how much of that is driven by COVID-19 related trials versus non COVID-19 business.
Yes, so if you look at the.
The growth that we had for the fourth quarter. It was very strong it was about eight 4%. If you take out for PCR testing and the strength is coming from all three businesses, it's coming from.
The early stage, the central laboratory as well as of clinical development business as we look at the Covid trials and what they accounted for it was about 12% of our net orders across the last three quarters. So you can see that it's meaningful but it's not that much we still would impact great growth even without the COVID-19 trials in terms of our net order.
<unk>.
Got it.
And quickly on share repo and quality if I missed this but have you provided how much buyback you are assuming in your.
And your full year EPS guidance.
No.
And what we've said is that.
Debt, we expect to target that free cash flow that we generate this year to both M&A and to buybacks. So assume that we will be and the market each quarter within buybacks, but the level of buybacks will be Adam commented earlier driven off of the amount of acquisitions, we do and we are of good pipeline of deals, but likely and most years or at least most normal.
All years always expect it to be they're not mutually exclusive debt. We expect to continue to do strategic M&A acquisitions, as well as repurchasing shares with our excess cash flow.
But we've not quantified the amount, but obviously it would be within a range of our guidance.
Got it thank you.
Thank you.
Next question comes from the line of <unk> Chickering with Deutsche Bank.
Good morning, guys and thanks for taking my question sort of two quick ones here as you think of that deals for 'twenty 'twenty, one and obviously the COVID-19 tailwind helped some of the smaller hospital labs and struggling previously you think debt deal sort of pause during 2021 as of Covid tailwind normalized.
And so wait till 2002 until.
The normal environment was back.
I think for deals theyre going to continue to be at least at the same pace here in the past and in fact, I think there might be some acceleration and based upon the number of discussions that we're having.
I think theres a couple of reasons why one is for example of hospitals have realized how capital intensive. This business is so many hospitals had and update their labs to be able to do COVID-19 testing and any scale and as they start to look at keeping those labs updated outside of Covid and they realize they probably need to do some additional upgrades to the equipment.
So they would rather use that capital for example for a new surgery suite versus having to just update the lab to run the test and they've done and the past. The second thing is that even though COVID-19 has been significant many of the hospitals haven't had their base business back to the level that we've seen and they don't have the COVID-19 testing ability.
We have so the COVID-19 testing has not necessarily offset the other base business.
The issues that they face so I feel pretty good about deals this year and I don't think it will slow down and if anything I think it will be the same or accelerate.
Great that makes a lot of said net question.
Are you passing for Tobey testing is obviously above the demand right now and you're guiding to and client throughout 2021.
Think about Covid testing globally.
A lot of countries that don't have the capacity to test and the U S does there any opportunity to use the excess of testing capacity to work with other countries and their COVID-19 testing.
So we do testing and Canada.
Also.
And the capacity of do some testing and.
The U K because we have of lab there that has the equipment outside of that we don't necessarily do testing and any other country of the U. S. Is obviously, we do the vast vast majority of the testing what I'd worry about with other countries as turnaround time.
Would it be easy to get the samples to the U S and turn those around fast enough and then the ability to move equipment or have equipment and those other parts of the world I don't think is necessarily that feasible. So the good news is that there are many additional alternatives that are coming to market and I think that most countries right now have learned how to.
Use of testing and they have and some countries don't use nearly as much testing as the U S and for example, and Japan, They do significantly less testing, even though they have the capacity of that they could do more if they chose to so I think it really is country by country basis about how they approach it and it's not in our plan to expand outside of where we currently offer.
<unk>.
Great. Thanks, so much.
Sure.
Thank you and our next question comes from the line of Kevin Kelly and Doe with UBS.
Great. Thanks for the question. This is Adam noble on for Kevin just wanted to go back to kind of PCR volumes.
Your standing debt.
Infection rates have gone down and to the extent that those continue to go down debt would be a headwind to the piece of our volumes.
From your previous comments you guys have because of the act of infections, you haven't had a chance to.
Go too far down the pipeline of back to work back to school asymptomatic testing and and just curious if you could comment on your pipeline there and what are your expectations for for those volume as the year progresses.
Thank you Adam and.
And again the reason, we gave such wide guidance of minus 35% to minus $50 because there's still so many unknowns.
And for back to work back to school, we've been a big part of that but many companies have not gone back to work, yet and you see more and more companies, saying that they might not go back to work and the ways that they've done and in the past some of the companies that we're working with we're actually using point of care testing to help them get up and running somewhere using our pixel by Labcorp and <unk>.
<unk> test, where they can send them to employees, particularly if they have large sales forces across the countries of very easy way for them to do it. So our labcorp employee services is very busy with back to work and back to school and it really is just a matter of how many of those tests do you do while you're also vaccinating people.
And then at the end of the day, frankly, it's going to come down too.
And the fall, we there'll be another strain and will there be another outbreak will be of big flu season, and everybody has flu youre going to want of tests for both of Covid and for flu. So I do believe that there's opportunity in the second half of the year potentially it's just too hard to know right now and Thats why we gave you of such a wide.
And range of possibilities.
That makes a ton of sense.
Maybe just to sneak.
One and on the Covance.
I appreciate that.
And the guidance you guys gave on of breaking out.
The COVID-19 side specifically.
And just curious.
And you could kind of break that out further between COVID-19.
Trial work versus east Central lab impacted that's obviously benefited.
And at the end of this year, but.
And if volumes come down for Covid testing.
You could probably expect that to come down.
And you are progressing as well.
Yes, So I think if you look at the different parts. So for example, and Central Laboratory work, we've been very busy, but we would probably fill that with other potential opportunities. So to me. It's kind of we're building capacity, we're doing both COVID-19 and non Covid Central laboratory work and we're very busy and a central laboratories and as you.
And imagine in terms of the trials were again were doing.
The non Covid trials clinical trials, but we're also doing some COVID-19 clinical trials I think the best way for you to kind of gauge. It is to know that the trials were 12% of our net orders over the last three quarters that should give you the best sense of what that's kind of looked like over time I don't think it's kind of slowed down a lot. This year I think theres going.
And be more work that youre going to need for variance for vaccines. For example, theres still a lot of anti virals that are being studied.
So I do think for this year youre going to still see significant work for Covid and then we'll have to see where it ends up as we go into next year.
Great. Thanks for the questions.
Thank you.
Thank you and our next question comes from the line of Ricky Goldwasser with Morgan Stanley.
Yeah, Hi, good morning, Adam.
Response, one of the questions I think you said something really interesting in terms of the pricing dynamics, and Nebraska, Youre seeing higher number of free cash.
Thank you Sir.
Okay.
Do you think that this is sort of and.
You sort of step up and.
And the demand curve or is this just temporary.
Temporary cash.
Sure.
And it's a very important question, we have that discussion and often amongst ourselves.
I believe that because people are not going to their doctor as often as they have where they may have missed their wellness programs that when the doctors are seeing the patient sort of just trying to get as many tests and as they can to make sure that they can treat that patient appropriately I do not personally believe it's going to be of long term sustainable number of.
Test per acquisition I think we will get back to closer to where it was but we're also trying to understand the difference between telemedicine and doctor visits and if Theres a difference there. We don't think there is but we're still trying to understand that so our base case assumes that as the business comes back and starts to grow again that it is.
Not based upon increasing numbers of tests per acquisition is based upon more people going to their physicians.
Okay, and then from your point on telemedicine.
And interesting read because.
Please go ahead of 50% of requisitions and they are.
John in your sites versus physician offices do you think of those anything thats going to impact physician behavior, because youre not getting reimbursed for drug.
And this dustmen wanted to telehealth visit.
And Ricky I think that first of all.
Telemedicine has been.
Very important as we've gone through the pandemic I think that there had been some restrictions have lifted that will probably stay lifted in terms of being able to do things overstate volume and so forth and I think it's going to be important to understand that more of as we move forward. The good news for Labcorp is that we're involved with almost every major telemedicine companies so that they can.
Usually access the ability to get testing and gun for patients and we of so many service centers across the country, including the ones through Walgreens that I believe that we are easily accessible patients whether it's and their physicians offices are true tele medicine, but I do believe it's here to stay and.
Bad debt, where part of it and we're able to make it an easy transition through their EMR.
And then just one last one on utilization you broke for us.
And for revenue growth and instead of 4% of for the year from M&A.
Organic how should we think about utilization and proceed to run rate in 2021.
Yes, so ricky.
As we talked about just thinking about it as organic core volume for us.
We were down seven 7%. So we saw good trends throughout the year as you'll recall, we ended the third quarter call. It April eight nine but at the end of the quarter was more like eight numbers. So we have seen that the base volumes have stabilized.
And we've seen that throughout the quarter and frankly, we've seen it also into January of this year, obviously, we're going to start to see the favorable comps as we compare against the pandemic year and.
In 2020, but again as we talked about earlier when we look at the range of guidance, we gave for the business.
Pending upon where we are in the range of guidance that we do expect to see call. It mid year and so the second half of the year as the midpoint of the guidance that you should see the organic volumes be picking up relative to 19 levels.
Okay. Thank you.
Your next question comes from the line of Matt low room with William Blair.
Hi, good morning, I appreciate it.
Wide range.
And so called upon to filter into your guidance could you maybe comment on.
And whether this is true.
And sort of your perspective on how the Covid testing market is going to evolve over time. So in other words go.
And going to evolve into more of a point of care market and like flu for reference labs aren't really play and much of a role for <unk>.
Reflects or maybe do you think kind of go away entirely.
An update of heightened broader market share loss.
Yes, Hi, Matt.
Yes, I think it's kind of depend on the treatments that we have available and the anti virus and how effective they are if at the end of the day, you're diagnosed with Covid and the future, but we know you are not going to end up and the hospital youre going to die because we have great ways to treat it and then I think it could become a point of care testing like flu.
If it's a serious as it is today, where people are and vaccinated. They could end up and a hospital and of time, then I think it's going to end of PCR testing, particularly for people with symptoms because we do know that the point of care testing is not necessarily as accurate and you do Miss some people through that.
Don't think youre going to want to Miss people think and end up and a hospital and die. So so I think it's really going to take some time for us understand how good of therapeutics work outside of vaccination, because when you think about it if 20% or 25% of the population doesn't get vaccinated and for vaccine doesn't work and 10% of the population that's 35.
Percent of several hundred million people and the U S. That's a big number of people that were still going to have to worry about getting COVID-19 over time and the real question and it's going to be how well of those therapeutics and our hope is that we get great therapeutics and that we can keep everybody out of the hospital and from dying, but we just don't know yet if it ends up there.
There will be more point of care I think that we're going to end up to and PCR testing for quite some time for at some level.
Okay and then just.
On the drug.
Drug development side.
And you have to create differentiation and Theyre, obviously the capability of distance you made.
And in October with snap and global care, maybe just give us a sense for.
Where you look to continue to create differentiation and how maybe to measure.
And success with some of these capability of additions and if not through revenue and perhaps through win rates for <unk>.
And the broader business.
Yes, so to me the differentiation is having diagnostic capabilities and coding companion diagnostics with drug development and the ability to virtual and hybrid clinical trials I think everybody is going to have to do that and you have to do it extraordinarily well, but the difference that we have versus other as our companion diagnostics and our diagnostic kit.
Both of these and you've seen it with Covid I believe youre going to see it with oncology and and and other therapeutic areas as well.
Okay.
Sure. Thank you.
Thank you.
Our next question comes from the line of Brian <unk> with Jefferies.
Hey, good morning, guys, congrats on the quarter and the <unk>.
Good day guidance for 'twenty, 'twenty, one and I guess, just a couple of questions on the Trs.
Zero side would you be able to give us kind of like a balance of the bookings across preclinical central lab and clinical because obviously, that's pretty good growth you've shown in other bookings number for Q4.
Yes.
Yes, so we don't break it out necessarily five of individual areas.
I would say is that we have shown strength across all three of the therapeutic areas. If you look historically, we have real strength and early clinical development. We're a leader there we have strength and our central laboratories, we're a leader there where we're continuing to progress and we want to grow most substantially moving forward is and the clinical trial.
Miles and particular later stage III clinical trials, so youre going to see US continue to have a major focus to win more in that area. As we move forward and I would expect over time that we would disproportionately growth from that area.
Got it and then Glenn I guess, just a quick question on working capital for the quarter. It was probably a little.
There was a drag that we saw in Q4 is that kind of normalize in 2021 or how should we be thinking about working capital trends.
And when you look at the fact that our guidance range for earnings is kind of flat to slightly down, but our free cash flow is kind of flat to slightly up if you will for from a year ago, It's really from working capital so to your point.
We've used cash from working capital to support the strong growth that we've had as that growth rate debt tempers. The PCR for call. It. The Covid testing comes down we expect to monetize the cash from that working capital buildup and.
And then obviously, partially offsetting that we do expect to see a higher level of our cash spend for capital expenditures and 21 that we kind of held back a little bit in 'twenty as we we're obviously dealing through the pandemic.
So we're going to try and get through two last questions as fast as we possibly can and respect of everybody's time.
And our next question comes from the line of Derik de Bruin with Bank of America.
Hey, great. Thank you for squeezing me and can we talk a little bit about.
Oncology testing trends and.
And ITT and consumer genomics.
Talk about what those expectations are and sort of the esoteric testing business is there and how they are picking up and sort of where you are exiting the year.
Alright.
Yes, so if you look at the esoteric testing.
And that declined the least amount frankly, as we began with the pandemic and its recovered the best about the same frankly as our base business now so it's still down a bit versus prior year, but nowhere near what it was down in March and March obviously, it was down less and our core business was I have no doubt that oncology testing is.
<unk> continued to be important and as we think about things like liquid biopsy, I think thats going to be increasingly important in the future of southern glad that were part of that market now with our non small cell lung cancer capabilities and we're going to continue to look for opportunities to be involved and that moving forward.
Great and if I can do one follow up.
There is lack.
Labcorp has a very long history of doing more technology focused acquisitions and given sort of the <unk>.
Spansion of at home and point of care testing do you have any desire to sort of become and equipment manufacturer or equipments of provider as opposed to just sort of testing lab.
So as I've said before.
When we look at our.
Capital allocation first and foremost we wanted to do additional laboratory acquisitions, but then I would say we want to look at our strategic pillars, and if we see something for example, and oncology that makes sense that would be our next area that we would go for acquisitions.
At this moment, we're not looking at equipment and.
Being of equipment makers, but I can tell you we are looking at other areas to kind of enhance our.
And our core focus strategic areas.
Thank you.
Okay. Thank you for your question.
And our next question comes from the line of Donald Hooker with Keybanc.
Alright.
Barely.
The other day.
Hello.
I guess your relationship with some of the Big managed care.
Many of them probably fairly dispatch.
Particularly of the UNH relationship for the Pls.
And would it be fair for us to assume there was made.
Some pent up.
Momentum with Unitedhealth and some of the big managed care companies of Covid wind down and the distraction stayed away or are they going to kind of step up there revisit their strategies, maybe more earnestly.
To kind of drive volume two more.
More efficient labs like lab equipment and other.
For us.
Yes, and I think that's an important point and we are of great relationship with Unitedhealthcare, we have great relationships with the managed care organizations across the country and I do believe that as things go back to kind of more of a normal scenario of though and I don't think of ever be completely normal to what we had in the past I do think there'll be opportunity.
And for us to work with them closer. So for example on the <unk>.
Oh, and the preferred laboratory network I would've thought we'd make more progress together, but with the distraction and COVID-19, it's been nearly impossible to do that.
I'm hopeful that we'll be able to get back to that when things normalize a bit.
Okay, Great I'll leave it there and thanks for squeezing me in here at the end.
Perfect. Thank you. So the last thing I want to just say is first of all thank you for joining us and there's no doubt that we achieved strong performance and our fourth quarter and full year of 2020.
But from the beginning of the pandemic, we've been focused on what we can do to help as best we can and I think our agility our ability to move quickly combined with our science innovation and technology is what has really differentiated us and what we've learned about agility and moving quickly and the marketplaces here to stay and I think.
That's going to continue to serve us well as we go into the future. So thanks for your time today, we look forward to talking to you soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
And.
And.
Yes.
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And then.
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