Labcorp Holdings Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 LabCorp conference call. At this time, all participants are in the 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Clarissa Willett, Vice President of Investor Relations. Thank you. Please go ahead, ma'am.

Thank you, Operator. Good morning, and welcome to last quarter's first quarter 2020 conference call. As detailed in today's press release, there will be a replay of this call available via telephone and Internet. With me today are Adam Schechter, President and Chief Executive Officer of and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the investor relations section of our website at labcorp.com, we posted both our press release and an 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, These forward-looking statements include, but are not limited to, statements with respect to expectations for 2020 and the related assumptions, including the projected impact of the COVID-19 pandemic on the company's businesses, operating results, cash flows, and or financial conditions, our responses to and the expected future impacts of the COVID-19 pandemic on our business more generally, as well as on general economic, business, and market conditions. 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 in the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now, I'll turn the call over to Adam Schechter.

Thank you, Clarissa. Good morning, everyone, and thank you for joining us today. These are certainly unprecedented times in which we've been living and working as a result of the global pandemic. Every country, government, customer, shareholder, and employee has been impacted by these turbulent times, and LabCorp is no exception. Given our unique role across the spectrum of diagnostic testing and drug development, we have risen to the challenge to help combat the virus. We are supporting the protection of both those who are currently or previously infected by the virus, and we are involved in the development of potential treatments and vaccines. Our teams, like many who are directly involved in fighting this pandemic, have been working around the clock, and they remain energized by all that we are doing to minimize the impact in the United States and around the world. I have been incredibly proud and impressed with how quickly and effectively we have mobilized our response. And I am confident that our company's mission to improve health and improve lives by delivering world-class diagnostics, accelerating the availability of innovative medicines and vaccines, and using technology resonates even more in the most difficult of environments. In the first quarter, we delivered solid performance despite the challenges associated with COVID-19, with first quarter revenue of $2.8 billion, adjusted EPS of $2.37, and free cash flow of over $97 million. During the first quarter, both diagnostics and drug development began experiencing the impact of the global pandemic, with clients postponing programs and lower demand for diagnostic testing. The increased testing that performed for COVID-19 did not nearly offset the decline in other testing. Diagnostics revenue declined 1.2 percent compared to a year ago due to lower organic revenue from the impact of COVID-19 and continued price pressures from PAMA. Drug development revenue grew 6.4 percent from a year ago. Margins expanded 30 basis points and trailing 12 months book to bill remains strong at 1.26. The backlog remains unchanged from last quarter at $11.3 billion. Given the significant uncertainty regarding the duration and the severity of the pandemic on a global basis, the company is withdrawing its 2020 financial guidance provided on February 13, 2020. To protect our longer-term prospects and to preserve jobs that we believe will be necessary in the future, we have taken a number of prudent steps to manage expenses as we make our way through these unusual times. Glenn will provide specifics of the expense actions in a moment, but importantly, we are not planning large-scale employment reductions. Looking forward, despite the unpredictability of the pandemic, we believe that we are well-positioned to continue to serve our customers and to drive long-term shareholder value. My belief and what I continue to come back to as I assess our business now and for the future is this. The work we do was important before the crisis, and I believe it will be even more important as we move forward. Just consider how we're making a difference during this time. We were the first commercial lab to launch PCR testing on March 5th, only five days after the FDA loosened rules around emergency use testing. PCR is a technology that LabCorp played a central role in commercializing when it was first introduced nearly 30 years ago. So it is no surprise that we're able to mobilize quickly. Since that time, working in close collaboration with the White House Coronavirus Task Force and with federal and state agencies across the United States, we have continued to apply our science at scale as we develop new methodologies to test more people and to test them faster. To date, we've conducted over 1 million COVID-19 tests, and we're capable of performing more than 60,000 per day, or 1.8 million per month nationwide, and we continue to build additional capacity. In addition, we launched the LabCorp COVID-19 at-home test collection kit on our Pixel by LabCorp platform. This is the first at-home collection kit to receive FDA EUA approval, and is currently available to healthcare workers and first responders who may have been exposed to COVID-19 or have symptoms consistent with the virus. We will roll out this at-home collection more broadly in the coming weeks. We also launched serology testing, which helps to determine if an individual has had an immune response to the virus. Currently, we can perform more than 50,000 serology tests per day, and we expect to perform more than 200,000 tests per day by MidMed. This test will be available in our 2,000 patient service centers, including our 100 LabCorp at Walgreens sites and thousands of doctor offices across the country. At the same time, we've safely kept our routine and specialty diagnostics operations running, and we continue to offer our usual test menu for patients who need diagnostic answers. That includes the critical services provided by our phlebotomists. We even made special hours available for our most vulnerable populations in our patient service centers. Moving now to drug development. Our drug development business has benefited from our diagnostic testing and understanding of the virus, demonstrating once again the power of the combined capabilities. As you know, there are many pharmaceutical and biotechnology companies that are working on potential treatments and vaccines for the virus. Our drug development teams are working around the world on these promising antivirals, other potential treatments, and vaccines. In fact, we have mobilized a dedicated COVID-19 response team to help expedite treatments, enabling us to accelerate development and reach patients faster through a highly coordinated effort across diagnostics and drug development. These teams have been highly successful in identifying and winning business. well above what our market share would imply. One example of how this team is quickly delivering value is through our collaboration with Ridgeback Biotherapeutics to test an antiviral drug. Less than 24 hours after receiving NHRA clearance, the Covins team began screening patients. Three days later, on a public holiday, the first patient received the drug. We continue to use our scientific capabilities to make advancements that will help in the present, the near term, and the future. This includes advances such as launching a patient registry with SIOPs, health, that will enable researchers to better understand and characterize COVID-19 diagnosis and treatments and generate insights that will aid ongoing and future pandemic preparedness and prevention efforts. It also includes working with companies like Adaptive Biotechnologies and Microsoft to focus on immune response to the virus, where we have already recruited our first patient for this trial. And separately, we're working with Pacific Bioscience on unique programs that can shed light on virus characteristics that can support more informed patient treatment decisions. In conclusion, our commitment and our ability to support COVID-19 testing, treatments, and vaccines as well as important scientific advances is unwavering, and it will continue as we go into the future. Beyond our response to the pandemic, we will continue to move forward with our key priorities, which leverage the power of our uniquely combined capabilities across diagnostics and drug development. The priorities remain to win in oncology, integrate data and analytics, AI and digitalization across our business, to put customers at the center of all we do, and to focus on high growth opportunities. We remain committed to beating the virus in the short term and to our long-term strategy, which I'm even more convinced is the right path to grow and for success. Now I'll turn the call over to Glenn to discuss more specifically our financial performance. Thank you, Adam.

I'm going to start my comments by discussing the impact that the COVID-19 pandemic had on our business and then provide some details on our first quarter results. While we're not providing specific items today for the year, I'll provide some commentary on our current assumptions and expectations for the remainder of 2020. As Adam noted, our combined diagnostics and drug development offering uniquely enables us to help combat the global COVID-19 pandemic by supporting the detection of the virus through diagnostic testing, as well as the development of treatments. While we continue to play a critical role in combating this pandemic, COVID-19 has had an adverse impact on the performance of both of our businesses, albeit at different magnitudes and in different ways. In our diagnostics business, at the end of the quarter, we experienced reductions in demand for testing of 50% to 55% versus the company's normal daily levels. This reduction in demand impacted testing volume broadly, but was more heavily weighted towards routine procedures. It also impacted esoteric tests, but to a lesser degree, sensitive nature of these test results. In addition, while we ramped up capacity for COVID-19 tests, the impact of the new volume has only marginally offset the lower volume we're experiencing with a broader test offering. While not impacting the quarter, we're also focused on increasing capacity of our new COVID-19 serology antibody tests to over 200,000 per day by mid-May, along with increasing capacity of our COVID-19 at-home test kit offerings. In our drug development business, the COVID-19 impact started earlier than in our diagnostic segment due to the more global nature of the business. However, while the impact has been less severe, the business has been impacted by customer-initiated trial delays, limitations in access to certain trial sites, and interruptions to the supply chain. Now I'll review our first quarter performance. In our discussion, we will be breaking out the impact from COVID-19 biggest impact was late in the quarter. Our expectation is that we will not be able to break out the impact in future quarters. Revenue for the quarter was $2.8 billion, an increase of 1.2 percent over last year, driven by the benefit of acquisitions net of divestitures of 2.9 percent, partially offset by lower organic revenue of 1.8 percent. Organic revenue was negatively impacted by COVID-19 of approximately 136 17 million of increased accounts receivable reserves in our diagnostic segment. The company increased its reserves as a result of rising unemployment and the financial difficulties faced by our customers in the wake of the COVID-19 pandemic. Operating income for the quarter was a net loss of $193 million compared to $318 million last year. During the quarter, as a result of the ongoing COVID-19 pandemic and lower market valuations, We reported impairments to Goodwill and other assets, totaling $437 million, or 3.7% of the company's total Goodwill and intangible assets. The impairment was primarily related to one reporting unit in our drug development business. In addition, we had $59 million of restructuring charges and special items, primarily related to Launchpad Initiative and COVID-19 related charges. As a result, adjusted operating income, which excluded items and impairments was $366 million, or 12.9% of revenue, compared to $411 million, or 14.7% last year. The decrease in adjusted operating income and margin was due to the negative impact from COVID-19 of $72 million. Excluding the impact from COVID-19, adjusted operating income and margins grew approximately 27 million and 20 basis points, respectively. This increase benefited from launch pad savings and other top line growth, partially offset by PAMA and higher personnel costs, including one additional payroll day. The tax rate for the quarter was negative 18.4% compared to 27% last year. The adjusted tax rate excluding special charges, impairments and amortization was 25.3% compared to 26.3% last year. The lower adjusted tax rate was primarily due to a higher percentage of the company's earnings coming from lower tax rate jurisdictions. Net earnings for the quarter were in a loss of $317 million, or a net loss of $3.27 per diluted share. Adjusted EPS were $2.37 in the quarter, or 25 cents below last year, due to the negative impact from COVID-19 of approximately 55 cents. Operating cash flow was $204 million in the quarter compared to $166 million a year ago. The increase in operating cash flow was due to favorable working capital, partially offset by lower cash earnings as a result of COVID-19. Capital expenditures totaled $107 million or 3.8% of revenue compared to $94 million or 3.4% last year. As a result, free cash flow was $97 million in the quarter compared to $72 million last year. Early in the quarter, the company repurchased $100 million of its stock. However, we have since suspended our share repurchase program, given the uncertainty of the COVID-19 pandemic, as well as we focus on liquidity and financial flexibility. At quarter end, our cash balance was $324 million, down from $338 million at the end of 2019. Total debt at quarter end was $6.2 billion. and our leverage was 3.2 times gross debt to last 12 months EBITDA. Now I'll review our segment performance, beginning with LabCorp Diagnostics. Revenue for the quarter, adjusting out the $17 million increase in accounts receivable reserves as a result of the COVID-19 pandemic, was $1.7 billion, a decrease of 1.2% compared to last year. The decrease was due to lower organic revenue of 2.9%, partially offset by the benefit of acquisitions of 1.7%. Excluding the negative impact from COVID-19 of 93 million, PAMA of 20 million, and the positive impact of an additional one-half revenue day of 12 million, organic revenue grew approximately 3%. In addition, the impact from the non-renewal of the Beacon LDS UnitedHealthcare contract was largely offset by the benefit of weather. Total volume decreased by 4.4% compared to last year, as acquisitions contributed 1.6%, while organic volume decreased 6.1%. The decline in organic volume was due to a net reduction in demand from COVID-19 of 7.3%, partially offset by other organic volume growth of 1.2%. The reduction in demand impacted testing volume broadly, but was heavily weighted towards routine procedures, Also, the benefit from an additional one-half revenue day and favorable weather versus the prior year was essentially offset by the negative impact from lower consumer genetics demand of 1.6%. As a reminder, we do not include hospital lab management agreements in our volume, which would have added approximately 0.6% to our volume growth. Revenue per requisition increased by 3.4%. The increase was due to favorable mix, which includes the impact from COVID-19 of 1.9%, consumer genetics of 0.9%, other organic growth of 2.8%, partially offset by PAMA of 1.1%, and the non-renewal of the Beacon LBS contract of 1.1%. LabCorp Diagnostics adjusted operating income for the quarter was $254 million, or 14.9% of revenue. compared to 310 million or 18% last year. The decline in adjusted operating income and margin was primarily due to the negative impact from COVID-19 of $62 million, PAMA of $20 million, and higher personnel costs, partially offset by launchpad savings and other organic growth. Excluding the negative impact from COVID-19 and PAMA, adjusted operating income and margins grew approximately 26%. remain on track to deliver $200 million of net savings by the end of 2021 from our Diagnostics Launchpad Initiative. Now I'll review the performance of Covance Drug Development. Revenue for the quarter was $1.1 billion, an increase of 6.4% compared to last year due to the benefit of acquisitions net of divestitures of 4.9%. Excluding the negative impact from COVID-19 of approximately $27 million, organic revenue grew approximately 4.1%. Adjusted operating income for the segment was $151 million, or 13.2% of revenue, compared to $138 million, or 12.8% last year. The increase in adjusted operating income and margin was primarily due to organic demand, acquisitions, net of divestitures, and launchpad savings, partially offset by higher personnel costs and the negative impact from COVID-19 of $12 million. Excluding the impact from COVID-19, adjusted operating income and margins grew approximately 25 million and 120 basis points respectively. We remain on track to deliver 150 million of net savings by the end of this year from Drug Development's Launchpad initiative. For the trailing 12 months, net orders and net book to bill remain strong at $5.8 billion Backlog at the end of the quarter was $11.3 billion. We expect approximately $3.9 billion of this backlog to convert into revenue over the next 12 months. Now I'll provide some commentary for the remainder of 2020. As we announced this morning in earnings press release, due to the unpredictability regarding the duration and impact of the COVID-19 pandemic, we have withdrawn our full year 2020 guidance. Especially during times like these, the strength and power of our combined diagnostics and drug development business is evident both from a strategic as well as financial standpoint. Given the current environment, we continue to adjust our operations and manage costs while still investing in the company to achieve the best long-term outcome for our customers, employees, and shareholders. While revenues and earnings are expected to be down in 2020, we still expect to generate both solid earnings and free cash flow. Some of the actions we are taking to help mitigate the impact of COVID-19 include furloughs, delaying hiring, reducing temporary and contract workers, or limiting hours where demand for our services is soft, suspension of discretionary merit adjustments and 401k plan contributions. In addition, the company's cash flow for the year is expected to include government-related actions, such as the deferral of payroll tax payments, the upcoming benefit from the suspension of sequestration, and the CARES Act, from which we received $56 million, which will help support the increased spend related to ramping up testing capacity to address the COVID-19 pandemic. From a capital allocation standpoint, we will continue to make internal investments to support long-term growth and profitability. However, even after the increased spend to develop and expand test capacity for the molecular COVID-19 and serology tests, we expect our capital spend to be less this year than last year. Similarly, we will continue to evaluate acquisition opportunities, but with a heightened threshold as we focus on liquidity. In addition, as I mentioned earlier, we have suspended our share repurchase program for the foreseeable future. Our investment grade philosophy has served us well in these challenging times. From a liquidity standpoint, on top of the strong free cash flow we expect to generate this year, as of March 31st, we had $324 million of cash on hand, and $924 million of available credit for our $1 billion revolving credit facility that matures in 2022. The only debt we have due this year is $412 million of notes maturing in November that we expect to pay down using free cash flow. However, we may opt to refinance these notes in the public bond market depending upon our needs. As I mentioned earlier, our leverage at the end of the quarter was 3.2 times gross debt to last 12 months EBITDA, within our four times debt covenant. While we currently expect to be within our covenant throughout the year, we have had discussions with our banks to add future flexibility to this covenant given the uncertainty related to COVID-19. We continue to actively monitor the evolving COVID-19 pandemic and will provide updates as appropriate. And this concludes our formal remarks and we'll now take questions.

Operator? Thank you, sir. As a reminder, to ask a question, you would need to press star one on your telephone. To withdraw your question, press the pound key. Due to the essence of time, we ask that you please limit yourselves to one question each. Please stand by while we compile the Q&A roster. I show our first question comes from Lisa Gill from J.P. Morgan. Please go ahead.

Good morning, and thanks very much. Adam, thank you for all that your team is doing on the front lines of these difficult times. I just really want to understand just a couple things. As we think about the testing volume for both COVID-19 as well as serology, can you first talk about expectations around reimbursement? And then secondly, I know that you've pulled guidance, but with the anticipation of 200,000 serology tests a day, how many tests do you expect that you can get on the molecular side and do you think, I know you said you expected the numbers to be down this year, but is there an anticipation that potentially this testing volume could help to offset some of what you're seeing as far as traditional volumes? And then just lastly, like when we think about volumes going into the back half of the year, what are your expectations around kind of getting back to more normalization? Will that happen potentially by the time we get to the third or fourth quarter? I know that's a lot of questions in one, but I just want to try to understand how we think about these volumes.

Yeah, sure. Good morning, Lisa. And I'll start off by saying, you know, I've been involved with LabCorp now for six years, and I began as CEO in November. And, you know, when an organization is pushed to the limits, you really learn a lot about an organization. And the people at LabCorp work so hard and are doing so much and care for about their work in a remarkable way. And just, you can get to see the heart and the soul of an organization. And what I've seen is just amazing. And I'm just very impressed with the people that I'm working with, the scientists, the frontline workers, the phlebotomists, the couriers, the people that are building our capacity have just been outstanding. So I'm just, it's a pleasure for me to be able to work with such great people. With regard to the testing, let me try to give you some background of where we are and where I see things going. So it was just about 45 days ago that we began testing, and we were able to do several thousand tests a day. Right now, we can do about 60,000 tests a day. I'm talking PCR testing first. I'll get to serology in a moment. And we're going to continue to build that capacity. I don't know the exact number that we'll be able to build to and how fast, but I would like to get over 100,000 tests per day as quickly as possible. The issue that you run into is you need additional machines, and you can imagine there's lots of back orders, and doing these RNA tests and the PCR tests takes a lot of equipment. But we're going to try to build to get to over 100,000 as quickly as we can. The interesting thing is for a short period of time when we're doing thousands a day, we did have some back orders for several weeks. We no longer have any back orders. And in fact, we have some additional capacity. So we're not using all of our capacity at the 60,000 per day right now. I think that's just short term. And I think as states become up and running and back to business, I think that we will be at full capacity in the very near future, which is why we're trying to build more and more capacity as quickly as we can. So I believe that the PCR testing will be running at capacity for quite some time. With regard to serology, it's still very early, and it's not easy to predict. I think there's still some debate, frankly, in the marketplace on how to utilize the serology test and the way in which to go about using serology. Right now, we can go over 50,000 serology tests a day, but we'll be able to do well over 200,000 a day by the middle of next month. I don't know how long it will take, though, in order for us to use all of that capacity per day. And I think that there's several reasons why. One is, as companies, particularly large companies, are coming back to work, some of them are talking about serology tests and doing them on large scale. Some of them are saying they don't see the need. In addition to that, I believe there will be other ways, such as point-of-care serology tests, and I don't know how they're going to be used in the marketplace. My expectation is that we'll be able to use most of our serology capacity as we get in through the summer months and into the fall. And I just don't know how quickly that will ramp up, but I think we'll be able to find ways to appropriately utilize most of the serology testing as we move forward through the summer. With regard to that, though, when you think about those numbers, over 200,000 tests a day in serology and maybe 100,000 tests over time for PCR, it's still a very small number compared to the 530 million or so tests that we do a year across all of our testing. So, unless we start to see that come back, it will be hard for these tests to make up for the difference in what we've seen at the last weeks of March. Now, the good news is we are starting to see a little bit less of a decline as we go towards the end of this month. And as the country gets back up and running, I would expect we'll start to see less of a decline over the summer. And assuming that there's no additional impact in the fall of this year with another impact from the COVID-19 virus, I would expect that as we get towards the end of the year, a lot of the volume will come back. And I always come back to the fact that what we did before was important for health. I worry right now that a lot of people that need diagnostic testing are not getting what they need. Once they feel comfortable again to go outside of their home, I believe they will start to go back for their diagnostic testing like they have in the past. Hopefully I've answered your questions, Lisa. Thank you.

Thank you.

Thank you. Our next question comes from Ralph Gacobi from Citi. Please go ahead.

Thanks. I just wanted to continue on the serology testing. I mean, do you have any expectation of pricing at this point and timing of when CMS is going to release the rate? And then is your expectation that commercial rates are going to mirror those for serology testing? and have insurers come up and match the $100 molecular test. Thanks.

Yeah, so let me start out with the molecular testing. So the molecular test, the reimbursed rate by Medicare is $100, and that's what we charge all customers, $100. We're trying to, in this pandemic and time of need, we're looking for consistency, and we're charging a consistent price across the marketplaces. We don't have a Medicare price yet for the serology testing. I'm not saying for certainty that that will be our price that we charge to all customers, but if you look at what we've done with the PCR testing, that's something that I'll be looking at very, very closely. Again, I want to make sure that we're seen as doing everything we can in this pandemic to help in every way which we can, and I think that we should know something, hopefully, in the next days, certainly not more than a week or so, I would expect.

Thank you. Our next question comes from Kevin from UBS. Please go ahead.

Thank you. Good morning. I'd like to talk a little bit about the CRO. If you've seen any cancellations yet in anything and how the three segments are performing from a demand and disruption standpoint, the level of work that you can continue, any sort of visibility around that, or if you can break it down by the three CRO segments. and maybe when you expect to get some activity ramping back up as the year progresses.

Kevin O' Sure. Good morning, Kevin. So, a couple things. First of all, with regard to cancellations, in the first quarter, we saw about the same number of cancellations that we would expect to see in any quarter. So, we didn't see an acceleration of cancellations. With regard to the overall CRO business, we continue to have growth despite COVID-19 in the first quarter, but obviously towards the end of the quarter, we start to see a significant impact for people postponing trials. Interestingly, that business started to be impacted a little bit earlier than the end of March because we do have a central laboratory business in China. The impact there was earlier than the United States, and we've actually seen our business in China start to pick up as China has begun to open up. But What I look at more than the segments and the timing of them coming back, because they will come back, is what's happening in the marketplace right now. And I mentioned that if you look at the COVID-19 trials, whether it be for vaccines, whether it be central laboratory work, or it be early stage development for antivirals, we are winning more than our share would predict. In fact, almost twice the amount of studies as a percent than what you would have expected based on our share. I think that truly demonstrates the power of the combined. When I watch what our teams are doing and our diagnostic teams are joining our drug development team in conversations with clients, and even with our diagnostic teams, our drug development teams are coming into the diagnostic discussions to help understand what is being done in the marketplace and the studies that are underway, we are really starting to see significant advantage of having both the diagnostics and drug development business. Now, most of the trials are preclinical or phase one. Even there, we're winning more than our fair share of market. But what I want to see is as those vaccines and those antivirals go into phase two and phase three, that we continue to win above what our market share would suggest. So I'm excited about the long-term prospects for certain. I'm seeing the power combined. How quickly the business comes back is going to be determined to some extent how quickly markets around the world open up, particularly for the Phase III clinical trials, because most of those are global clinical trials. But I would say that we're optimistic that the world needed what we did before this, and certainly with what's happening today in the trials for COVID-19, I think our capabilities are needed even more so in the future.

Thank you.

Thank you. Thank you. Our next question comes from Dan Lennett from Wells Fargo. Please go ahead.

Thank you. So trying to understand the organic volume growth trend in the quarter in your lab business and the disparity versus your large competitor, can you comment on maybe any share dynamics in the quarter? And were there any lingering headwinds from the expanded managed care access for your competitor, or has that all annualized at this point? Thank you.

Yeah, I'll give some context, and I'll ask Len if he wants to jump in. But, you know, basically you saw our decline of between 50% to 55% towards the end of the quarter in terms of volume the last several weeks of March. And we've seen that kind of level off, and I'd say in the last couple weeks we've actually seen it begin to come back a little bit. We saw a little bit of a change and mix as well, that the esoteric testing did not decline as fast as the overall testing did. And that's not a surprise because esoteric testing typically is more severe diseases and so forth. That's a little bit why you saw an increase in our average price for the quarter. It's because the esoteric business held a bit stronger than the typical regular diagnostic business. But as we go forward, we would expect both businesses to begin to pick up, and assuming that the country begins to come back to work, and as we get through the summer, there's no additional impact in the fall season, I would expect both esoteric and the other diagnostic tests to come back to somewhat normal as we get through the end of the year.

Yeah, Dan, I guess just to add to, when you look at our normalized level of organic volume, it was pretty consistent with where we've been. at roughly around 1.3% when you take out the unusuals, if you will. So as Adam said, obviously backing out the impact of COVID, which we said was around 7.3% impact. Then we had three other kind of discrete items, two that were positive. So we benefited from the half of revenue day, and that was around 0.7% benefit to our volume growth. And then we had favorable weather compared to a year ago of around 0.8, but that was offset at a 1.3 for us has been kind of where we've tracked and obviously improved over the fourth quarter, but kind of where we would expect to track. And I know you mentioned our competitor. We do talk about that. We do treat the treatment of volume differently for our lab management fees, which would have added around 60 basis points. So we feel really good that the base business from a demand standpoint, a volume standpoint, has been pretty consistent. What we've also been very pleased about and really impacts our revenues even more is on the price side. And while overall our pricing, we would say, is relatively flat, the mixed impact really was nice. So, again, in a similar vein, while we show kind of organic pricing at around a 3.4% increase, we had a couple of headwinds and tailwinds. We benefit from, as Adam said, from COVID where we're helped us around 1.9%. Similarly, with lower consumer demand, consumer genetics demand at a lower price point, that helped our mix at 0.9. And then the headwinds we talked about already of PAMA and Beacon, each at around 1.1. So again, getting to a normalized price would get us to around price mix of 2.8%, which actually is tracked higher than what we've done the past year, you know, in line, call it with the last COVID, we felt we had actually a very strong quarter.

Okay. Thank you.

Thank you. Our next question comes from Derek DeBrun from BOA. Please go ahead.

Hi. Good morning. Thank you for taking the question. So I just wanted to go back on the testing side for COVID. So we've seen estimates of anywhere from the need for 500,000 molecular test day and up on that one. I'm just sort of curious in terms of what sort of capacity expectations or need expectations you're planning for and you're looking for and sort of how you think about that. And this sort of goes into a question about, you know, your ultimate share and where you think it is. So the first part of that question is one on what you think the ultimate testing need will be and how long the duration of that is. And the follow-up on that one is going to be something similar for serology. I mean, there's clearly a lot more serology capacity in the U.S. than there is molecular. And I'm just sort of curious on how you sort of see demand for that market evolving going forward, just given there are so many more players that can do serology testing. Thank you.

Yeah, hi, Derek. A couple thoughts. First of all, if you look at overall capacity needed for PCR testing, which is testing to tell if a person actually has the virus, is actively shedding the virus, It's impossible to know the exact number that you need across the United States. I would say right now, if you look at what's been done, over 5 million tests, that's pretty significant. I just said that we could do today 1.8 million tests per month, and we're going to try to increase that. If we can get 100,000 tests or greater a day alone, we could do 2.5 million per month. And then you would add in all the other commercial labs, the state labs, the local labs, the academic medical centers. I think there's going to be a very significant amount of capacity that at least will get people through stage one of what the White House Coronavirus Task Force is recommending to get states up and running. At the same time, we're going to all continue to build capacity because until there's a vaccine, I think we're going to have to have the ability to continue to do testing to see who has the virus. And I think that type of testing will continue even when there's a treatment up until there is a vaccine. Separate and distinct from that is the serology, which is to tell who has been exposed to the virus in the past. And scientifically, frankly, there's still a lot of discussion on what's the most appropriate way to use the serology testing. For surveillance, I think it's going to be used for a long time. I also believe that as businesses get up and running, they're going to test large parts of the population for serology tests. And I believe if somebody tests positive for serology, meaning if they've been exposed to the virus in the past, they'll probably need a second test in order to validate that it wasn't a false positive. And then the question becomes, how often does somebody who's negative to serology get tested? Is it every three months? Is it every six months? And I don't think that there's any known recommendation at this time. The good news for us for serology is it's a blood test. And we run blood tests all the time. We know how to run blood tests. And we're going to build as much capacity as we can. We'll utilize as much of that capacity as we can. But at the same time, a lot of those will be run on the machines that we run our typical blood tests on anyway. So I think for us it's a matter of build as much as you can, see how the science plays out, see how the marketplace plays out, and just be prepared for whatever volume we may need.

Thank you. Our next question comes from Erin Wright from Credit Suisse. Please go ahead.

Great, thanks. I have a couple of questions on Covance. I guess what percentage of the sites would you consider offline or inaccessible right now, and what percentage of that clinical trial work do you anticipate will convert to more virtual at home or remote monitoring? And then a second part to that would be, How many of these COVID-19 trials have you won, and do you anticipate those trials to actually be material from a financial perspective? Others, I guess, in the industry have downplayed contribution from those COVID trials. Thanks.

Yeah. Okay. And I'm going to start with your last question first, and I'll answer the other ones. So, first of all, if you look at the COVID-19 trials, whether they be for antivirals, whether they be the things that we're doing with A company like PacBio or Ridgeback Biotherapeutics, you know, most of them are early stage, smaller trials. So we're winning, I said, more than twice our market share would expect us to win, but they're still relatively small trials. They're early stage, preclinical, or phase one. As those progress, I would expect that we would win more than our fair share in phase two and three, and then I believe they become much more meaningful in terms of dollars. Right now they're meaningful because it really is demonstrating the power of having a diagnostic capability combined with drug development capability. Separate and distinct from that, with regard to sites up and running, we think it's that about 70 to 80% of sites are not up and running at the moment for clinical trials. At the same time, we're working hard because we have made significant advances in hybrid and virtual clinical trials, and I think as the trials come back, there'll be even greater utilization for things like hybrid and virtual trials. So we'll continue to work with our pharmaceutical and biotechnology colleagues to help them get their trials up and running as quickly as possible.

Thank you. As a reminder to ask a question at this time, you would need to press star 1 on your telephone. To answer your question, press the pound key. Due to the absence of time, we ask that you please limit yourselves to one question each. Our next question comes from Ricky Goldwasser from Morgan Stanley. Please go ahead.

Yeah, hi. Good morning, and thank you for all the details. A question on reimbursement of the PCR. Obviously, CMS raised reimbursement for $51 to $100. But what are your thoughts as testing expands and we shift to Phase 2 and Phase 3? Do you anticipate the reimbursement is going to stay at those levels or as volumes pick up and the testing guidance is relaxed that we're going to see changes to the price metric?

So thank you for the question, Ricky. And right now the Medicare price is $100. And that's been our price and our philosophy on pricing, which is to use the Medicare price, which they take a lot of time, spend a lot of effort to think through what is appropriate. And therefore, we've charged all customers at that price. I have no reason to believe that that price would change based upon anything I know today. And I think that the testing for PCR will continue to grow, but the importance of it, it makes it very cost-effective to test patients and actually find out who has the disease and then isolate them so others don't. get the disease. So I think it's a very cost-effective way in order to ensure that you do everything you can. At the same time, I would say that the capital expense and the difficulty of PCR is pretty high. And doing the PCR testing is not simple. I mean, it's an RNA extraction that has multiple steps. So I feel like the reimbursement where it is today is at a good rate.

Thank you.

Thank you. Our next question comes from Steven Baxter from Wolf Research. Please go ahead.

Hey, good morning. Thanks for all the color you guys provided today. I was hoping to get a little more insight into the increase in accounts receivable allowance that you guys mentioned during prepared remarks. Have you started to actually see anything yet in terms of your ability to collect on copays and deductibles on the lab side of the business? And just in terms of what this, you know, this charge actually represents, is this covering, you know, Q1 dates of service, you know, some wider range of time? And then how are you thinking or expecting this to play out kind of throughout the balance of the year? And is this going to be an item that you continue to exclude from earnings for the balance of the year? Thank you.

Yeah, this is Glenn. I'd say, you know, as we looked at our it's having on our customers, if you will. Our expectation is that business that we've already conducted that we currently have as receivables outstanding, we've assessed that full amount and have taken kind of a one-time charge or one-time reserve relative to the adequacy of all of our reserves. So at this point, we would say we're fully reserved based upon what we believe, and that if anything changes in the future, we'll adjust that. But our expectation is that the reserves that we established are adequate to deal with the environment that we're operating in.

Okay. Thank you.

Thank you. Our next question comes from Matt LaRue from William Blair. Please go ahead.

Hi. Good morning. This is Dan Lawler. I'm for Matt LaRue. Thanks for taking my question. I wanted to ask about the initial demand that you're seeing for your at-home COVID tests and whether or not you think COVID-19 could be a catalyst for you to ramp up PIXL over the long term. Thanks.

Yeah. Hi, Dan. Thanks for the message. And, you know, we announced the launch of our PIXL by LabCorp at-home test for COVID-19 about a week ago. And we're focused right now on frontline healthcare workers and first responders that have symptoms. And, you know, we've seen the demand is pretty significant in terms of not only people that are going to our website, but other people that are trying to reach out and see when it will be available more broadly to additional people outside of those subgroups. So I do believe that this may be a reason that PIXL continues to grow over time as we go into the future. At the same time, we do plan to launch PIXL to additional groups of people as we get through the next weeks. And I would expect right now we have over 100,000 kits available that will continue to make that much, you know, as we look out into the future on a weekly to every other week basis.

Thanks. Thank you. Okay. I show our next question comes from Michael Polark from Baird. Please go ahead.

Hey, good morning. Thanks for taking the question. I wanted to get a bit more detail on the Goodwill impairment. Glenn, I think you mentioned it. It relates predominantly to one of the reporting units in drug development. What piece of the Covance business took the impairment? And I guess more context around why. A lot of companies are viewing Covance The COVID disruption is a transitory influence, so I was a little surprised to see a permanent impairment charge taken. Any color on this topic would be helpful.

Sure, Michael. It is kind of an interesting exercise, given that these are point in time. So, as you recall, in our 10-K, we commented that we did bring it to our kind of outside firm that does our valuations. It's based upon a point in time. And so what's interesting that's happened is now we, you know, move forward to March 31st where we've now done it again. And obviously the business has been impacted by COVID as a lot of others, but we look at the valuations or they look at valuations based upon, you know, DCI March 30, they're down 30%. And so we're effectively, half of the valuation is saying the value of the business is down 30% at that one point in time. Frankly, if we were to do it today, it would be a very different number, but accounting says you do it on that date. And then also, given the volatility of the market, of which we took the non-cash charge, you know, during the quarter.

Would you say it's equally spread across lab clinical early, or was this related predominantly by Chiltern or InVigo or anything else that you could specifically call out?

Sure. Effectively, you know, When you look at even an acquisition and you break out the pieces to it, it doesn't necessarily say it's reflective of the total valuation of a company. It's just the specific reporting unit that's broken out as well as the specific goodwill that's allocated to that business at that point in time. And so to your point, you could say that within a year ago you acquired a business you know, resulted in the impairment charge.

And the only thing I would add is strategically, there is no doubt in my mind, and we are seeing more and more evidence every day, particularly as we go through the COVID-19 pandemic, having the drug development business together with the diagnostic business was a great strategic move. And I believe in the importance of the combined today as much, if not more, based upon what we're going through and what we're seeing, than I did even before the virus.

I appreciate all that color. If I could sneak one more in on the CARES Act, the $56 million that you received, I presume, in April, will you carve that out of adjusted earnings for future reporting, just a housekeeping item? And then do you expect any additional disbursements under the CARES Act? I know there was a second round of payments expected here in the very near term. Anything else you might anticipate to receive?

Yeah, I'd say, obviously, how we'll account for it, you know, we'll determine as we go through the quarter report. I think it's fair to say, given we've even done it now, anything that is unusual, we will either call out separately or at least explain that the performance benefited from that. But clearly, you know, that's to some extent a recoup, if you will, of the negative impact that we're being impacted by COVID as we're making in order to ramp up our testing as well. And while there are other tranches of the CARES Act that we could potentially be included in at this stage, it's just too early to tell what that would be and obviously once we have more clarity on that, we'll be able to convey that.

Okay, so. First of all, thank you, everybody, for joining us today. And I have to say I am so proud of the way our company has mobilized to serve patients, customers, our local communities, and the world. LabCorp has been innovators in science and medicine to help address global needs, and I am deeply grateful for the way in which our 65,000 employees have stepped up in every country around the world. What we do matters, and I believe it matters more in the future than it did in the past, and I believe it mattered a lot in the past. The challenge is far from over, but as I said previously, I have no doubt that we can beat this virus, and also that LabCorp will remain committed to our mission to improve health and improve lives as we move forward. So thank you so much for joining the call today. Ladies and gentlemen, this concludes today's conference call.

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