Labcorp Holdings Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the LabCorp third quarter 2020 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 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. Closer, will it? Vice President of Investor Relations, please go ahead.

Thank you, operator. Good morning and welcome to LabCorp's third quarter 2020 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and internet. With me today are Adam Schechter, Chairman and Chief Executive Officer, and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning in the Investor Relations section of our website, We posted both our press release and 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. We delivered strong results in the third quarter as our base business continued to recover and significant progress was achieved to fight the global pandemic. Clinical trial activity is improving and we've had important wins in both COVID and non-COVID related clinical trials. The diagnostics business has recovered well as people resume their routine preventive visits, actively care for their chronic conditions, and move ahead with elective surgeries and other procedures. Non-COVID related volume was down approximately 9% for the quarter. As a result, we reported growth in the third quarter versus the prior year, with revenue of $3.9 billion, adjusted EPS of $8.41, and free cash flow of $709 million. Throughout the year, Our COVID-19 testing has helped to offset the pressure experienced in our base business. This is the first quarter where both the diagnostics and drug development total businesses grew versus prior year. Based on the current and expected strength of our business, we have decided to return to CARES Act provider relief funds. We greatly appreciate the support the CARES Act funding afforded us in the early days of the pandemic. when our base business was significantly impacted and the future was uncertain. We are pleased we can take this action now. Then we'll expand on this in a few moments. Importantly, our strategy extends beyond COVID-19. What LabCorp did prior to the pandemic and what we will do after the pandemic remains important to the country and to the world. Our strategy is based on the following long-term priorities. First, leveraging the power of our combined capabilities across diagnostics and drug development. Second, advancing our leadership position in oncology. Third, integrating AI data digitalization and analytics across our business. Fourth, putting customers at the center of all that we do. And finally, we will continue to evaluate and execute on high growth opportunities. I'll now move to the third quarter. We made significant progress in the fight against COVID, which highlights our diagnostic and drug development capabilities. To date, we've performed approximately 22 million COVID-19 tests, which represents about 19 million PCR tests and over 3 million antibody tests. We are performing COVID testing in more than 20 laboratories across the United States. and our capacity is greater than 210,000 PCR tests and over 300,000 antibody tests per day. We also continue to increase our capacity. Thus far this month, we're performing approximately 120,000 COVID PCR tests per day, with an average time to result of about one day. During the quarter, we also launched a series of innovations, We were the first laboratory to offer physicians the ability to order a combined test for respiratory infections, including COVID-19, RSV, and flu. The combined test will help quickly and accurately determine appropriate treatment during flu season. We also filed an emergency use authorization to make the combined test available to individuals through our at-home collection kits, Pixel by LabCorp, and LabCorp at home. In July, we received an EUA to utilize a matrix pools testing method which tests multiple patient samples at once and requires fewer supplies. We also recently received an EUA for a new heat extraction technology that improves the speed and the efficiency of our PCR testing and reduces the reliance on certain reagents. We will continue to work on innovations to help respond to the pandemic and to grow our core business. Moving now to drug development. We continue to see strong momentum in our drug development business. The backlog grew to nearly $12.5 billion and our trailing 12 months book to bill was 1.31. For the second consecutive quarter, we won a disproportionate share of COVID vaccine and therapeutic studies. To date, we have won approximately 350 opportunities from small programs in the non-clinical business through late stage clinical trials. These opportunities represented roughly 13% of our net orders in each of the past two quarters. The capabilities, the insights, and the data from our diagnostic business have been a differentiating factor in winning many of these studies, which once again demonstrates the power of our combined businesses. Now let's turn to several important highlights outside of COVID-19 for the quarter. In oncology, we accelerated our leadership position with several advancements, including a significant award to be the partner of choice for late-stage oncology studies from a major pharmaceutical company. The launch of Resolution CTDX Lung, a new non-invasive liquid biopsy test for patients with non-small cell lung cancer. And a collaboration with Tempus to accelerate clinical trial patient participation. Our leadership and companion diagnostics, combined with our successful track record in executing clinical trials, are helping to develop future breakthroughs in cancer therapies, including precision medicine treatments. During the quarter, we also made several other announcements to advance our strategy, including the extension of an agreement with BML to further the development of companion diagnostics in Japan, and an agreement with GenFit to commercialize a non-invasive blood-based diagnostic test for NASH. We acquired Teramont Health's outreach laboratory business and have several new laboratory service collaborations broaden our hospital system footprint, such as Infirmary Health, Rush University System for Health, and the University of Miami Health System. We also renewed our long-standing relationship with Swedish. Strategic acquisitions were made during the quarter to increase decentralized clinical trial capabilities, including the acquisition of global care clinical trials and, in early October, SNAP IoT. In closing, we delivered strong results amid continuing uncertain times. We are encouraged that people are returning to their routine care and that drug development trials continue to ramp up in the fourth quarter. It is anticipated that there will be continued outbreaks as we move into the fall and flu season, and we are preparing accordingly. Finally, before I turn the call over to Glenn, I want to thank all of our employees around the world. Our 70,000 colleagues across every part of our business have worked tirelessly to serve our customers and our patients at a time when the world has needed us most. I cannot thank them enough for their sustained commitment and passion, and I'm inspired by the countless stories of their great work. I'm confident that we have the right team in place and are executing against the right strategy to continue LabCorp's strong performance on its course of a global healthcare leader. Now I'll turn the call over to Glenn.

Thank you, Adam. I'm going to start my comments with a review of our third quarter results, followed by a discussion of our performance in each segment, and end with some comments on our outlook. For third quarter results, we have quantified the revenue associated with the COVID-19 PCR and antibody tests, so that you can see the change in the base business. Also during the quarter, we received $76 million in CARES Act provider relief funding, which is excluded from earnings but included in cash flow. As Adam mentioned, we decided to return the funds in the fourth quarter, as well as the $56 million of funds we received in the second quarter. As a result, we have reversed the $56 million CARES Act funds from our earnings in the third quarter. Now I'll review our third quarter performance. Revenue for the quarter was $3.9 billion, an increase of 33% over last year, due to organic revenue growth of 31.5%, acquisitions of 1%, and favorable foreign currency translation of 50 basis points. The increase in organic revenue was driven by COVID-19 testing of 32.6%, partially offset by a reduction in our organic-based business of 1.1%, which includes the negative impact from PAMA of 0.7%. Operating income for the quarter was $1 billion, or 26.9% of revenue, compared to $340 million, or 11.6% last year. During the quarter, we had $47 million of restructuring charges, impairments, and special items, primarily related to launchpad initiatives, acquisition integration, COVID-19 related costs, and an impairment to intangible assets from an acquisition. Adjusted operating income, which excludes these items and amortization of $62 million, was $1.2 billion, or 29.7% of revenue, compared to $431 million, or 14.7% last year. The increase in adjusted operating income and margin was primarily due to COVID-19 testing and launchpad savings, partially offset by PAMA higher personnel costs and the funding of the Lapcorp Charitable Foundation. The tax rate for the quarter was 25.7% compared to 23.1% last year. The adjusted tax rate, excluding restructuring charges, special items, and amortization, was 25.7% compared to 23.9% last year. The higher adjusted tax rate was primarily due to the geographic mix of earnings. Net earnings for the quarter were $703 million, or $7.17 per diluted share, and includes the reversal of the CARES Act funds we received in the second quarter, which reduced third quarter net earnings by $41 million, and diluted EPS by 42 cents per share. Adjusted EPS, which exclude amortization, restructuring charges, and special items, were $8.41 in the quarter, up from $2.90 last year. Operating cash flow was $786 million in the quarter compared to $456 million a year ago. The increase in operating cash flow was due to higher cash earnings, partially offset by higher working capital to support revenue growth. Capital expenditures totaled $77 million in the quarter, or 2% of revenue, and include This compares to $93 million or 3.2% of revenue in the same period last year. As a result, free cash flow was $709 million in the quarter compared to $363 million last year. During the quarter, we invested $204 million in acquisitions and paid down $412 million of debt. At quarter end, our cash balance was $667 million Total debt at quarter end was $5.8 billion, and our leverage was 2.2 times gross debt to last 12 months EBITDA. Given the company's improved financial performance, we are reinstating our share repurchase program. Now I'll review our segment performance, beginning with LabCorp Diagnostics. Revenue for the quarter was $2.7 billion, an increase of 53.7% compared to last year, due to organic growth of 52.3% and acquisitions of 1.4%. The increase in organic revenue was driven by COVID-19 testing of 54.2%, which was partially offset by the decline in the base business of 1.9%, which includes the negative impact from PAMA of 1.1%. The 53.7% revenue growth in the quarter was due to a 21.8% increase in volume and a 31.9% increase in price mix. The total volume increase of 21.8% over last year was due to organic volume growth of 20% and acquisitions contributing 1.8%. The increase in organic volume was due to the COVID-19 testing volumes of 28.8%, partially offset by an 8.9% decline in our base business volumes. As a reminder, we do not include hospital lab management agreements in our volume, which would have added approximately 1.7% to our organic-based business volume growth. The price-mix increase of 31.9% was primarily driven by COVID-19 testing of 25.4% and favorable mix in the organic-based business of 7%, which includes the negative impact from HAVA of 1.1%. LabCorp Diagnostics' adjusted operating income for the quarter was $1 billion, or 37.1% of revenue, compared to $296 million, or 16.8% last year. The increase in adjusted operating income and margin was primarily due to COVID-19 testing and Launchpad savings, partially offset by the negative impact from PAMA of $20 million. Diagnostics' Launchpad initiative remains on track with our three-year target to deliver $200 million of net savings by the end of 2021. Now I'll review the performance of Covance drug development. Revenue for the quarter was $1.2 billion, an increase of 5.7% compared to last year due to organic growth of 3.8%, acquisitions of 0.5%, and favorable foreign currency translation of 140 basis points. The increase in organic revenue was driven by COVID-19 testing. Excluding COVID-19 testing, organic revenue was flat compared to last year. However, if we exclude the negative impact from the pandemic, we estimate that our organic revenue would have grown in the mid to high single digits in line with our targeted performance. Adjusted operating income for the segment was $210 million, or 16.9% of revenue, compared to $175 million or 14.9% last year. The $35 million increase in adjusted operating income and 200 basis point improvement in margins were primarily due to COVID-19 testing, Launchpad savings, and currency translation, partially offset by higher personnel costs. Drug Development's Launchpad initiative remains on track with our three-year target to deliver $150 million of net savings by the end of this year. For the trailing 12 months, net orders and net book to bill remained strong at $6.1 billion and 1.31 respectively. Backlog at the end of the quarter was $12.5 billion, an increase of approximately $670 million from last quarter. We expect approximately $4.2 billion of this backlog to convert into revenue over the next 12 months. In summary, in the quarter, we delivered strong overall performance driven by COVID-19 testing and a continued recovery in both our diagnostics and drug development businesses. With regard to our outlook, while we've seen our base businesses improve sequentially throughout the third quarter and into October, as we enter into the final two months of the year, there continues to be significant uncertainty related to the fall and flu season and the pandemic, resulting in an unusually wide range of potential financial outcomes. As a result, we are continuing to not provide 2020 guidance. This concludes our formal remarks, and we'll now take questions. Operator?

Thank you. Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To wish out your question, press the pound key. Our first question comes from Jacqueline of Nefron Research. Your line is now open.

Thank you. Good morning. I wanted to start by asking about the base business recovery. It was coming in stronger than we were expecting. Is there any color you can provide around just month-by-month trends throughout the quarter? And then, Glenn, also, if I look at how the base business, you saw the negative impact on volume but positive on rev correct, just help us maybe from a test category perspective what you're seeing as well there.

Hi, Jack. This is Adam. I'll start with the recovery of the base business. I said it before that it surprised me how fast the base business has recovered. If you go back to March, our base business at that point was down 55% versus the prior year, and this is looking at diagnostics. If you then would look at June, our base business was down about 17% for the month of June, but for the quarter, second quarter, it was down 35%. If you look at third quarter, which we just discussed, we're down 9% for the quarter. So you are seeing sequential improvements quarter over quarter. And frankly, we're seeing it month over month. So each month is a little bit better than the prior month. So we can continue to see that coming back. With regard to our other business, our drug development business, that's coming back a bit slower, not as quickly as the diagnostic business. What we've seen is the Preclinical, early stage work has come back the fastest of the three businesses in drug development. Last quarter, the central laboratory business was not coming back as quickly as the clinical development business. For this quarter, we've seen a significant acceleration in our laboratory business, central laboratory business, and that has actually come back a bit faster than the clinical development business. With the clinical development business, we have access to about 70% of the sites now, so that's better than last quarter. but just still about 30% of the sites that are not open for access at the moment.

Hey, Jack, this is Glenn. Just to your other question on kind of the volume being down but the favorable price mix being up, and Adam obviously just went through the volume decline. On the price mix, as you know, in kind of a normal environment, you know, diagnostics over all a normal environment. We have seen favorable price mix over the last two quarters. We were up around 5% last quarter and now up around 7% this quarter. The biggest driving factor to the improvement in price mix really has been an increase in our test per session. We've also seen an improvement in the mix, and to your point, some categories, in particular like women's Overall, a favorable mix, but again, the biggest driver being the amount of tests we're doing per session.

Great. And just as a follow-up on COVID testing, could you share your thoughts around the sustainability of the rate you're collecting per detection test and kind of building off that? Your incremental margins and diagnostics were obviously very strong this quarter. Should we expect that rate? to sustain as we go into the fourth quarter, and any thoughts around the durability there would be great.

Hi, Jack. So when we launched the PCR testing, we had three core principles. The first one was to use science and innovation and build as much capacity as quickly as we could. The second was that everybody would have equal access to the testing, so we charged nobody upfront out-of-pocket costs, and we charged everybody the Medicare rate In fact, when we first launched the test, we launched it before we even knew what the Medicare rate was. And then the third thing was that nobody would be prioritized over anybody else, that as the test came into our laboratories, we would do those tests first, with the only exception was when the CDC and HHS asked us to prioritize, so for example, for hospital inpatients. And I think that those principles have served us well, and we adhere to those principles as we sit here today. In terms of the longevity, I think for as long as the emergency declaration is here, which now is through the month of January, and we'll see if it gets extended after that, I think that the pricing is consistent. You saw recently that there was a slight change to Medicare where it still will be reimbursed for people up to $100 if your turnaround time is within two days. And the good news is our turnaround time is about a day. So that shouldn't have a significant impact on us for that Medicare change. And then we have to see what happens over time with the declaration of the emergency after the end of January next year.

Thanks, Adam.

Yeah. Thank you. And our next question comes from Peter Chickering of Deutsche Bank. Your line is now open.

Good morning, guys. Thanks for taking my questions. During the quarter, a lot of COVID revenues flowed through to the bottom line. I understand you aren't giving guidance, but can you walk us through any new costs that we could see during the fourth quarter, or if you're considering taking the excess earnings from COVID and accelerating any investments in the near term?

Yeah, go ahead. Just a comment for the guidance. It's less to call it an issue on the costs. It's more as just a As Adam and I commented in our remarks, the business is performing well sequentially, ending the quarter even better than where we started. So obviously at the current run rates, we would expect to see continued good results. As we enter into the fall, again the flu season, we just don't know the restrictions that may be in place, what the impact of the base businesses will be going forward. So really the uncertainty being driven more off of what's the But overall, the cost structure of the company is in place. And frankly, one of the benefits to the margin improvement is being able to leverage that cost control while we're seeing enhanced revenues.

And just to give you a little additional context, a couple weeks ago, we were averaging about 110,000 PCR tests a day. Now we're averaging 120,000 PCR tests a day. We could go up to over 200,000 a day if the country needed it during the flu season. If you look at Australia, Brazil, Argentina, and some other countries that have gone through the flu season, it hasn't been particularly a big flu season. In fact, it was very small in those countries. Could it be because they were in lockdown for COVID, and that would help with the flu season? Yeah, very possibly. So without knowing what the flu season could bring, and we're just right at the start of it, you can see how much variability there could be.

Okay. Then as a follow-up for Sarah, Repurchases historically even fairly measured on the quarterly, you know, repurchases. Should we expect a similar activity going forward or because of a recent influx of cash flows, could it be more accelerated? Thanks so much.

Yeah, well, so we've always looked at our capital allocation very carefully and thoughtfully. And our first and foremost thing that we look to do is to buy these tuck-in acquisitions, these local laboratories, local hospital laboratories, where we can bring them into our business. We can very quickly, they become accretive. They return their cost of capital within a very short period of time, and we know how to integrate them. There are several of those that we're looking at. I can tell you I believe that there has been an acceleration in the number of those possibilities as we go through this year into next year, and we'll look at cap allocation from that lens first, and then we'll be opportunistic where it makes sense with the share repurchases.

Thank you. And our next question comes from Erin Wright of Credit Suisse. Your line is now open.

Great, thanks. On the CoVant side of the business, you mentioned 13% of bookings associated with COVID. How should we be thinking about the COVID-related bookings across CoVants more meaningfully contributing to top line growth? And then how much is vaccine work compared to therapeutic COVID clinical trial?

Thanks. Yeah, thank you, Erin. So we're making significant progress With COVID on both the diagnostic and in the clinical trial business, many of the studies, they said that we've done about 300, we've won about 350 of those opportunities. Many of them are very early stage, smaller trials where we're doing either preclinical work or we're doing design work and those types of things. And then there are others that are late stage in the vaccine space where we're actively involved at the moment. They are not materially impacting the revenue at the moment, so that's why we didn't call out revenue specifically. But as we go through time, they'll become more meaningful for us. In terms of vaccine versus the other types of treatments, you know, there's less vaccines out there, but the vaccine trials are much, much bigger than the other trials. So I would say in numbers of trials, most of them are outside of vaccines. But when you look at volume, there's a lot of volume coming through the vaccines.

Okay, thanks. And then quickly on capital deployment, again, I guess how should we be thinking about your positioning as a consolidator in this market in a post-COVID world? Where are there more opportunities or less opportunities, and what does the acquisition pipeline look like?

Yes, I'll start with the diagnostic business. You know, one of the things that I've said before that has surprised me since starting as the CEO here last November is that there are lots of opportunities and lots of discussions that occur about acquiring local laboratories or hospital laboratories, but they just take a bit longer than I had expected. I thought that they make so much economic sense for both the laboratory that's looking to be acquired and for LabCorp that I thought they would go faster. You know, at the moment, there are many more that we're looking at today than what I would have said before, particularly if you look at the size and scale of some of them. But how fast they go is impossible for me to predict because they have, in the past, taken longer than I expected. In terms of other acquisitions, we mentioned GlobalCare and SnapIoT. Those were two acquisitions that would help us with decentralized clinical trials and hybrid trials. We've said that those were critical to our strategy. and they were smaller tuck-in types of acquisitions to help with our strategy. So we'll continue to look for smaller tuck-in acquisitions that help us strategically. I do not see the need, as I sit here today, to do any type of very large-scale acquisition. I think that we have what we need to be successful, and we can augment it with smaller targeted strategic acquisitions.

Okay, great. Thanks. Thank you. And our next question comes from Kevin Caliendo of UBS. Your line is now open.

Hi. Thanks for taking my question. What are you seeing in terms of the makeup of your base business mix? Is there any changes, if you were to call it out, sort of on a year-over-year basis? How much has it changed in any way, shape, or form? Are you still seeing the same type of mix that you had prior?

Yeah. Hi, Kevin. The mix is about the same. What's been interesting is in the beginning of the pandemic, when our base business was down significantly, our esoteric business did not fall as fast as our other business. Last quarter, we said that both businesses were coming back about equal. Now I would say in the third quarter, our base business actually came back a bit faster than the esoteric business. So we're not necessarily seeing a long-term mixed shift, but we've seen a different impact on the two businesses as we've gone through the year.

That's helpful. And this is a follow-up. You said you were planning to add some capacity to your COVID testing. Can you take us through sort of what that might be? It's 210,000. Is that where we should think about? And what is sort of the breaking point when you think about turnaround times in terms of how many tests you can do and still get it done within that 48-hour period?

Yes, so Kevin, as I mentioned, right now we can do more than 210,000 tests per day, and our turnaround time today is about one day. Now, right now we're testing on average about 120,000 tests, and I would say we can go much higher, and I still think maintain our current turnaround time or just be within the 48 hours. The $210,000 does not include our pooling that we're able to do. And if we needed to do more pooling, we could increase that pretty significantly. But also, we're looking at adding additional capacity in terms of machines and capabilities. So, you know, as we said from the beginning, one of our core tenets was to build capacity as quickly as we can. We've been doing that since March. In July, there was a significant increase in the number of samples that we were receiving. And no matter how fast we had built capacity, we still fell a little bit behind. So even though right now we're running at about 50% of our capacity, we are not slowing down. We're going to continue to buy the machines that we can buy. And to me, that's the biggest weight-limiting step is the number of larger machines that we can get as we go into the fall flu season.

Thank you.

Thank you. And our next question comes from Lisa Gill of JP Morgan. Your line is now open.

Great. Thanks very much. Hi, Adam and Glenn. Adam, let me just start with, you know, the combination of the flu and PCR test. Can you just talk about will that count as a COVID test or will that count as a flu test when we think about volume? And then secondly, how do we think about reimbursement for a combined test like that?

Yeah, absolutely. Hi, Lisa. So, you know, we are currently able to do the flu PCR and also RSV test through physicians. We also notably filed an EUA to be able to do it with our PIXL and our LabCorp at-home test. I think that as we go into flu season, if somebody has a lot of symptoms, it might be nice that they not even have to go to their doctor. Their doctor can send them a test or they can order a test and get the results. You know, if you look at the Medicare rates, we believe it's going to be about $143 for the combined test. And as we've done in the past, we've used the Medicare rate as our guide as we've gone through the pandemic and the emergency declarations, and we'll continue to do that. With regard to how we'll record that, Lisa, I think we have to think that through. As we decide, we'll certainly make sure that we, you know, talk to you and let the external environment know how we're thinking about it. To date, Lisa, we've gotten very few because we're really not in the flu season yet, so there hasn't been a real need at the moment for the combined test.

And Adam, how do you think about testing when we do have a vaccine? What's your point of view around, and I know you're not giving any guidance for fourth quarter or for 2021, but how do we start to think about testing as we have vaccines coming to the market in 2021?

Yes, I'll give you my thoughts on it, but anybody that tells you that they have anything significant degree of certainty is wrong. That's the only part I'm certain about what I'm about to say. You know, I believe that we'll have a lot more data by the end of this year to know the effectiveness of the various vaccines that are in phase three. And that's going to be very helpful. And if we have vaccines that can move forward into the marketplace, I think it could start early next year. But before you could vaccinate a significant number of the population in the U.S., I think you're probably talking about the middle of next year, my personal opinion, based upon experience without knowing all the facts. So I think that you're going to need continued testing for at least through the first quarter of next year for PCR testing. I think you're going to continue to need it as you go to the second part of the year. And then by the time you get to the summertime, hopefully we'll have the vaccine broadly disseminated and the need for PCR testing will be significantly diminished. The two questions we have are, one, we know the pricing relatively, you know, certain what it could look like through January. We have to see what the pricing will look like after January. My assumption is that, you know, why wouldn't you continue to have the emergency authorization through the winter? But we just don't know that for sure. And then the second thing to realize with the vaccine is we don't know, are there going to be antibody tests, titer tests? Are there going to be neutralizing antibody tests that might be helpful? As people go through the vaccine so we're developing a suite of past we announced last week, you know our test for the antibodies that would give you quantitative analysis used in pharmaceuticals. To try to help understand what might be helpful so will there be additional tests that we can do to help in the future, even after vaccine. My assumption is probably, but we still have to wait to see the data. Is it going to be T cells or is it going to be antibodies? There's still a lot more we're going to learn over the coming months.

Very helpful. Thank you.

Sure.

Thank you. And our next question comes from Eric Holdwell up there. Your line is now open.

Thanks very much. I just wanted to confirm a couple of things and maybe talk through these. First off, Based on your disclosure on the 13% of awards from COVID clinical trials in the Covant segment, I'm coming up with net book to bills this quarter and last quarter of around 1.15 to 1.2. And that's if I also strip out the COVID-19 active infection testing revenue, which I think you're putting in one for one with bookings. Is that correct? Ballpark, am I getting to the right numbers here?

Eric, I guess just a question. Are you trying to back out the impact of the awards?

Yes, thanks. The big question I think everyone has is how much of the awards in the CRO side of the world are coming from COVID-19 trials and then how much revenue, how much impact, what the comps are going to be down the road. So I'm trying to look at what the I hate to say base business because this is all what you do, but the core legacy non-COVID testing. And then we also have to make an additional adjustment for the work that would have historically been done in LCD, but it's getting shifted over to Covant Central Labs. I know you're putting that revenue in at kind of a one-to-one on booking. So I think if I strip everything out and look at the base, I'm still coming up with book-to-bills the last two quarters of around 1.2%.

I think the distinction, though, is that when you, and Adam kind of commented, we have obviously a lot of that tend to be longer book-to-bill time periods, you might see a different outcome than what we're currently experiencing.

Okay. And then on Covance margin, getting a lot of inbound questions on what the core margin was if we strip out the COVID-19 testing. I'm coming up with something around 15% in the quarter, but I was hoping you could lend some color on that.

Yeah. So let me give you some context. And one of the things that I had mentioned before is, you know, when we saw the decline in our business in Covance, we did not reduce the size and the number of people that we had. And the reason why is a lot of these people are hard to find. They're hard to train. We thought and we're seeing the business coming back. So I'd be careful with the margins because the margins are a little bit worse than they typically would be because we're still seeing the revenue come back, but at the same time we kept a bit of the expenses for the people so that we didn't have to try to rehire and refine people that we already had.

Yeah, the only thing I'd add to that is that when you would be additive as well.

Right. And when you say flat, I guess I'm trying to understand, is it flat with last quarter, flat with 2H, flat with last year? I'm just trying to get a sense on what you're implying by flat.

The flat would be, you know, in explaining the change in our margins, where we're up around, call it 200 basis points in margins. that both Adam and I gave for that.

Right, so around, you know, you did 14.9% last year. I said around 15%, so that's correct?

That's relatively flat, yes.

Okay, good. Thank you very much. I appreciate it.

You're welcome.

Thank you. And our next question comes from Donald Hooker of KeyBank. Your line is now open.

Great, great. Good morning, everyone. So maybe just two questions for me. We'd love to hear kind of an update. We've hit a lot of issues already this morning, but maybe an update on the sort of managed care environment on a different topic, kind of with the relationship with United, with other. Are those sort of at standstills, or are we seeing some movement there? I know there's a lot of disruption in the markets. We'd love to hear your updated thoughts on that.

Sure. Good morning. You know, so we continue to have a very strong relationship with United, And we were pleased that we were put on the PRN again in July of this year. Frankly, I thought at this time this year, I'd be able to give you an update on how the PRN has worked since we entered into it about a year ago. And unfortunately, with the pandemic, we haven't seen a significant amount of progress, but we are continuing to be optimistic that it makes a lot of sense and we'll be able to work with United to get the PRN up and running and to you know, help them shift the business to where they want to shift it to, which is to the high-quality, lower-cost laboratories like ourselves. And the PLN, it's the PLN, Preferred Laboratory Network, is something that other managed care plans have begun to talk about, those types of things. I believe that they were waiting to see if it worked, and now that they've waited a while, even though they don't necessarily know if it works or not, I think we might see more of that as we move forward, because everybody realizes the economic advantage of having these PLNs in place. And I think we'll see more and more of it as we go into the future. So stay tuned.

Okay, super. And then one last quick one. You guys, I guess the last question was on the COVID-19 testing at the Covance facilities. Does that have any kind of crowding out effect on the rest of Covance, or is it, you know, are you not doing work that you otherwise would have done, or... Is there any kind of crowding out from driving, putting some of the COVID-19 testing activity at the Covance business?

As I said before, we can do 210,000 tests a day. We're doing 120,000 tests. We're using that facility opportunistically. But if we had other things that we needed to do in that facility, we would obviously use other facilities to run the test. One of the good things that we did was to go and run our tests on multiple platforms. So we're running on eight different platforms. But at the same time, we have a network across the United States that we can kind of have materials and samples sent to the laboratories that will have the best turnaround time. And we can use our network to say, let's send more samples to this laboratory, less to that one, more to this one. And we can do it on a very routine basis. So we have the ability to flex where we need to flex.

Thank you. Sure. Thank you. And our next question comes from Brian Tenquillette at Jefferies. Do you want to start open?

Hey, good morning, guys. Just a quick follow-up to Eric's question, flipping it to the core diagnostics business. How are you thinking about margin sustainability, you know, once you exit out the COVID opportunity? I mean, obviously very strong margins during the quarter, so just trying to figure out what you think core margins could be going forward.

Yeah, Brian, I guess similar, obviously the big drive and the margin improvement, as you pointed out, was the COVID testing. We actually did leverage well, even excluding COVID testing and diagnostics. This business a little bit kind of the opposite on the drive development side. As Adam said, we have the personnel for the business that we have, so we have a little bit more of a headwind on diagnostics because of the significant growth in the business. Yeah, we continue to add personnel as we're going. So we, from a personnel standpoint, we really leverage. So with the launch pad savings we had in the quarter, you know, margins held up really well, even despite the negative impact of PAMA with the diagnostics. But strong under, you know, call it the base business underlying the margins came in very strong.

All right, got it. Thank you.

You're welcome. Thank you.

Thank you. And our next question comes from Stephen Baxter of Wolf Research. Your line is now open.

Hey, thanks for the question. I wanted to ask you about PCR reimbursement. So it's very helpful you provide the precise revenue and testing figures around COVID. So thank you for that. I was hoping you could talk a little bit about what your average PCR reimbursement was in Q3 and how that compares to what you saw in Q2. When I look at your disclosures, I'm backing into something in the mid-90s for Q3, whereas for Q2 I was backing into something more like mid to high 70s. So just wondering if there was anything in there related to true-up maybe as you got more confidence in your ability to collect and manage care, and an extension of that would just be how we should be thinking about PCR reimbursement and Q4. Thank you.

Yep, sure. So our reimbursement in this quarter was about the same as last quarter. It was, you know, in the mid-'80s to upper-'80s, and that's been consistent. And as I mentioned before with those three principles, you know, the second principle is that we charge people the Medicare rate, which is $100,000. As we continue to be in the emergency declaration, which is through the first month of next year, I think the 22nd or something like that of January, I believe we'll continue to have good reimbursement. The question will be, will they continue the emergency declaration? If they do, I believe reimbursement will continue. Or if they don't, I think we'll have pressure on pricing without the emergency declaration. The other thing is, you did see that Medicare is now still reimbursing for $100 per patient, but only if your turnaround time is two days. And you have to average two days for the month before and be two days for each of the tests. The good news is that we're at about a one-day turnaround time, so we feel pretty comfortable with that. But we'll continue as we go into the fall season and we see numbers increase. Watch that extraordinarily closely.

Got it. And just one somewhat related follow-up. Just on payer mix, obviously there's a ton going on with the pricing numbers at the moment. Just wondering if you could give us an update on what you're seeing in terms of any payer mix shift or potentially, you know, increases in, you know, assumptions around, like, bad debt accruals and the like. Thank you.

Yeah, we're really not seeing any significant change in payer mix. It's pretty consistent as it's been in the past.

Yeah, and I think I did catch the end on bad debt accruals.

Yeah, obviously concerning economic trends across the country, wondering if you've seen any increase in bad debt.

Yeah, I just want to make sure I understood the question right. Yeah, from a bad debt standpoint, obviously, as you know, we reserved in the first quarter $17 million. We have seen an increase in the bad debt just given the financial strain that's rate that we approve for is very adequate relative to the expectations that we have for that going forward.

Got it. Okay. Thank you. You're welcome.

Thank you. And our next question comes from . Your line is now open.

Yeah. Hi. Good morning. So, Adam, I think earlier in response to your question, you sort of downplayed the role of serology testing once a vaccine is available. Do you anticipate, based just on historical context, any guidelines around use of testing in conjunction with the COVID vaccine? And are you having any conversations with the biopharma company around that?

Yeah, absolutely, Rikki. And, you know, I still believe that the serology testing is going to be important in the future. I just don't think we have the science yet to tell us. Is it neutralizing antibodies? Is it total antibodies? Quantitative analysis? T-cell involvement outside of antibodies? So my only comment was meant to say that there's a lot more science that needs to be done. If it really is, is it going to be an annual vaccine or is it going to be every couple years? If it's more than every year, you'll need titers measured and those types of things. So I think there will be a role. We're in conversations, I'd say, with most if not all the major pharma companies, conversations with Operation Warp Speed, and conversations with many other science and thought leaders in this area. So we're building a whole series of potential ways to measure the impact of vaccines. I can't tell you which one's going to work, but I can tell you if there is something, which historically there has been, we're going to do everything as we can to be ready for it.

Okay, so just to clarify, because if you think of one of the questions we're getting, it's kind of like what are the drivers, right, in the second half of 21 and into 22 post-PCR? So to your point, there's going to be some sort of testing that's going to replace PCR. You're just at this point, we don't know which test it's going to be.

I think there will be some, but really what I would say is that You know, I look at the PCR testing almost as like a short-term opportunity in a period of time. And then once that's gone, there's going to be some type of impact to the ability to grow. But what you're going to want to look at is our underlying business. So, you know, I mentioned that we have won oncology trials for a major pharma company. I mentioned that we're starting to see the power that combined based on what we've done with the COVID testing companies. What we're looking to show you is the proof that says that having diagnostics with drug development matters, which you're really starting to see now. We won more than 350 or approximately 350 COVID trials, which is a very significant number of the total trials. And what you're going to start to see is that translating into our core business changing. So yes, I do think there will be some things that we'll continue to do with COVID testing over time with vaccines and so forth. Whether that completely offsets PCR testing, I don't know. I mean, it depends on what it is, how often you do it, and so forth. But importantly, the work and what we're showing with our underlying business is going to be where you'll see growth as we go out into future years.

So then if you think about that, the pandemic clearly increased focus on the critical role of testing, right? Are you seeing this filtering already into discussions with health systems and payers beyond the COVID impact?

I think people have a new recognition for the importance of testing and the importance of testing combined with drug development. And you're already hearing people starting to talk about antibiotic resistance that could be occurring based upon treatment of COVID and other things. And I think there are going to be other bugs that we're going to have to figure out how to detect and how to treat in the future. So I do believe that the world now has a different view of the importance of diagnostic testing. And one of the things that I'm going to be advocating for very strongly is the removal of PAMA. You know, there's no impact of PAMA for next year, but I think it should be removed entirely because I think part of the reason that we were not as prepared as we needed to be for this pandemic is because for years, people underestimated the importance of diagnostic testing. They starved the diagnostic testing business. State laboratories, for example, were using machines that were so old and antiquated that we need government and payers to understand that for us to have excess capacity, for us to have dual supply chains, for us to have the latest and greatest innovations, we need to continue to have fair reimbursement.

Thank you.

Sure.

Thank you. And our next question comes from . Your line is now open.

Yeah. Hi. Good morning. Adam, you referenced the sequential improvements in the base business Q2 to Q3 despite a second wave and then further improvement here in October despite, you know, record case counts in recent weeks. So I'm just kind of curious what the key underlying improvements you've seen. Is it as simple as PPE being available when offices are open? I'm curious about that. And then maybe just comment on demand trends in some geographies where perhaps a peak has already occurred. Are there places where you're actually seeing year-over-year growth at this point?

Yeah. Hi, Matt, and good morning. So, you know, we have seen some sequential improvement months over months. You know, when the country shut down back in March, we saw almost all physicians' offices or many of physicians' offices shut down, and it took them a while to move over to telemedicine, frankly. And we saw the hospitals that were pretty overwhelmed and didn't have PPE, didn't have enough ventilators, and therefore it was hard for people to get routine procedures and so forth. What we've now seen is even in areas that have a significant outbreak, the physician's offices still stay open or they have significant capabilities through telemedicine to keep people getting routine care. We've seen that the hospitals are able to now have enough PPE, they continue to do routine surgeries and procedures and so forth. So, you know, unless you saw a major shutdown of the healthcare system again, I think that you'll continue to see the sequential improvement. The only caveat I have is if it's a really significant flu season and physicians' offices are packed with people coughing and sneezing, and you don't know if it's flu or COVID, I think people may once again say, you know what, I'm going to wait to get my routine care. So that's why I'm hesitant to say what I think will happen in the coming months, because it really, to some degree, in my opinion, is going to depend on how hard a flu season we hit.

Okay, I appreciate that. And then maybe just actually following up on the point you raised regarding flu season, obviously understanding that it's very early here, but just curious what you're hearing from your referred physicians or maybe your own medical team about what preference will be for flu versus the combination tests, whether it's for symptomatic or asymptomatic patients. Obviously, there's a variety of both modalities and test combinations that are now available.

Yeah. So, first thing, to answer your other question about geography, we're not really seeing a significant difference by geography based upon outbreaks. We're seeing pretty consistent growth. Some geographies are using, you know, more point-of-care tests. Some are using other laboratories and so forth. But in general... I don't think you see a major difference in geography for us. With regard to the demand by test, I think for asymptomatic patients, they'll continue to do the COVID test alone if they've been exposed to somebody or if they've been in contact with somebody who has the disease. I don't think there's any reason to do multiple tests if the person doesn't have symptoms. I think if somebody presents themselves in a doctor's office, they may do a flu point-of-care test. And if it's positive, they may say, okay, go home. you know, take care of yourself. And if it doesn't resolve itself, we'll have you tested for COVID. I think in some situations, even for a positive flu test, they're going to say, you know what, let's just test you for COVID and flu anyway, just to be certain. If you have a negative flu test point of care, I think they're certainly going to test you for COVID if you have symptoms. And then the question is, will they add on a flu test because they know sometimes you get false negatives with the point of care test. And it may just be easier to say, let's add a flu test on there. So we're preparing for all of those different scenarios as we go forward. I think that the majority of tests will still be COVID alone, but there could be a significant number, particularly for symptomatic patients that are in combination for flu and or RSV.

Thanks, Adam. Sure.

Thank you. And our next question comes from Dan Leonard of Wells Fargo. Your line is now open.

Thank you. So first off, you know, how would you characterize any efforts you have underway to maintain your share of COVID molecular testing, as it seems that there are, you know, new labs and new entrants spinning up all the time in this market?

Yeah, hi, Dan. So if you look at our share of I'll first start off with ACLA laboratories. So we get a sense ACLA reports the total number of tests. I know what our actual number of tests are, so I can calculate our share. And we have a very strong share of ACLA labs. And in fact, it's growing slightly if you go quarter over quarter. The question you're asking, though, is with more point of care tests out there, with additional local laboratories, you know, what could the future bring? What I would say is, to date, we haven't seen a very significant impact. I think this country needs as many tests as it can get, frankly. I think there is a need for point-of-care tests. I think for surveillance, having antigen tests available are helpful. I think in hospitals and nursing homes, you want faster tests to actually do surveillance. And then if you have positive cases, you do PCR tests. So I actually think there's a role for all the different types of tests that we have in the marketplaces. To me, the question really is what was asked before, which is once there's a vaccine, what does the role of testing look like? And that's where it's a little difficult to answer because, you know, what if a vaccine works in 70% of people and doesn't work in the other 30? And what if only 70% of people get the vaccine, so there's 30% that don't get it in the first place? Well, you still have a lot of people in that scenario that would want PCR testing over time. So we still have to learn more for that scenario.

Appreciate that. And then, Adam, for my follow-up, you know, I appreciate that there's uncertainty around the market demand for the combo test as opposed to COVID standalone, but if demand for the combo test came in, you know, higher than you'd anticipate, how would you characterize your capacity on that test at LabCorp to meet the demand?

Yeah, Dan, I can tell you, I had a meeting with the team, I think it was last week, and we're continuing to have ongoing discussions, and we're gearing up for as many tests that we might need. You know, when I talk about 210,000 capacity, you know, it's the reagents that are a bit different, not necessarily the machinery. So as long as we have reagents to do those tests, we should be able to do as many as that if we need to. So we're going to continue to build the capacity, and then we'll have – we're trying to get enough reagents that we can go either way if we need to.

Okay. Thank you.

Sure. Sure.

Thank you. And our next question comes from Alistair Covey of Citi. Your line is now open.

Great. Thanks. Glenn, I wanted to go back to your comment on increasing tests per session. Do you think that's a consequence of COVID where physicians are sort of ordering more panels even outside of COVID? And do you think there is sustainability of that, you know, where you get kind of a continued uplift there?

Yeah, Ralph. this quarter, you know, the assumption would be, obviously, that that would start to come back down, still be a positive, favorable price mix for us, but probably not to the levels that we've seen, at least over the couple of quarters. But, you know, we'll have to wait and see.

Got it. Okay. Makes sense. And then, just quickly, if you could help on the volume mix of COVID, first between, if you could split out, you know, commercial versus Medicare versus Medicaid in terms of the volume mix of COVID, and then If you could also help across where it's essentially coming from between, you know, drive-up sites versus employers versus universities versus health providers. I don't know if you have that breakout, but it would be helpful just to kind of understand where the volumes come from. Thanks.

Yeah, so let me start with the second question first. You know, the vast majority of the tests that we do, I'm not talking about all the tests in the marketplaces, But the ones that we do are still coming from urgent care centers, from physician offices, from people that are treating patients. We do some, obviously, from employers. We do some for hospitals still. But the vast majority is in those physician offices and in the urgent care centers, those types of places. We continue to see PIXL doing well. It's about 5% to 10% of our volume. You know, some of that is with employers, but a lot of that is just people ordering at-home tests, and we expect that will continue to be a good portion of our mix. And then if you look at the breakout, you know, it's not too different than what you would expect the overall big gap of our business to be in terms of reimbursement because it's coming primarily from urgent cares and physicians. So I want to thank everybody for joining us today. Hopefully you can see that LabCorp is leading with science. And I believe that's never been more important or more apparent than right now as we continue our unwavering commitment to our mission of improving health and improving lives. I can tell you that our team will continue to partner with our customers, our suppliers, other organizations who share our commitment to lead the way through this crisis. And at the same time, importantly, at the same time, we're going to continue to execute on our strategy for growth, which remains our long-term consistent strategy. We appreciate your time today. Have a great day.