Labcorp Holdings Inc.

Ladies and gentlemen, thank you for standing by, and welcome to LabCorp's fourth 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. It is now my pleasure to introduce Vice President of Investor Relations, Clarissa Willey.

Thank you, Operator. Good morning and welcome to LabCorp's fourth 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 measure 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 2021 guidance 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. And now I'll turn the call over to Adam Schechter.

Thank you, Clarissa. Good morning, everyone. Thanks for joining us today. Before I cover 2020 results, I want to first thank Clarissa for her leadership in investor relations for the last several years. Clarissa has been promoted to lead our revenue cycle management team, which is a very important role. I also want to take this opportunity to welcome Chas Cook, who has been appointed to vice president of investor relations and will continue to strengthen the foundation built upon by the IR team. Chas has been a strong leader in our finance organization since he joined LabCorp in 2018. Moving now to 2020 results. 2020 will be remembered for many things, including the fight against COVID and the tragic loss that it brought. It also emphasized the critical importance of frontline healthcare workers and scientists amongst others. Looking back on this past year, I cannot be more impressed or thankful to my colleagues across LabCorp. Together, our team developed six FDA EUA COVID tests, performed approximately 35 million COVID tests in 2020, and helped to bring multiple treatments and vaccines to market in record time. Our ability to adapt quickly in a changing environment, our resilience, and our strength of our more than 50-year history have been foundational in the fight against COVID, and 2020 was transformational for LabCorp. Let me begin with a brief update on our financial results, which Glenn will cover in more detail shortly. We reported full-year 2020 revenue of $14 billion, adjusted EPS of $23.94, and free cash flow of $1.8 billion. Our base businesses in both segments continued to improve as we closed the year. In diagnostics, our base business performed well. However, volume remains below prior year. We also reported continued improvement in our drug development business, with strength across all three business lines, leading to a revenue increase in the total and the base business in the fourth quarter. Our drug development business ended the year with a trailing 12 months book to bill of 1.43, driven by strong demand across therapeutic areas. Our performance was strong in the fourth quarter and full year of 2020. Our teams are agile, they move fast, and they clearly demonstrated the strength of our science, technology, and innovation. We quickly brought innovations to market while simultaneously advancing each pillar of our company strategy. Here are just some of the highlights from the year. I'll start with, we were the first commercial lab to bring an FDA EUA COVID test to market. We became the first to offer an at-home PCR collection kit with or without a prescription through Pixel by LabCorp. And we were early to market with neutralizing antibody tests that are important in the development of COVID vaccines. In addition, early in the pandemic, our scientists partnered with PacBio to genetically sequence COVID samples so that we could detect changes to the virus and use that information to develop future therapies. Recently, we announced our efforts to sequence COVID samples for the CDC as the agency continues its important work in the fight against COVID. We are seeing the importance of these efforts and believe sequencing will be critical going forward. Also, in our diagnostics business, we brought innovative platforms and tests to market that can improve the diagnosis of important health conditions, such as lung cancer and liver disease. Looking at oncology, it continues to be a strategic focus for us. In 2020, we expanded our leadership position in oncology through the launch of a new non-invasive liquid biopsy test using next generation sequencing for patients with non-small cell lung cancer. We were also selected by a major pharmaceutical company as their partner for late stage oncology trials. We collaborated with Tempest to accelerate clinical trial patient participation. And as you read in our recent announcement, we have formed an ecology team made up of strong and talented leaders in the field. Additionally, we are continuing to integrate digital data analytics and artificial intelligence in everything we do. Our drug development business is changing how clinical trials are managed using digital technology. We completed acquisitions of GlobalCare and SnapIoT and are working with clients to use mobile and digital technology to accelerate trials and to make virtual and hybrid clinical trials a reality. Also, within our own lab operations, our engineers and scientists developed proprietary robotics capabilities that increased our COVID testing capacity. As we look at several and scientists. Our partnership with PacBio, Adaptive Biotechnologies, Microsoft, and SciX Health enabled scientists and researchers to better understand COVID. Our collaborations with Infirmary Health, Rush University System for Health, Walgreens, and others expanded our services to patients and providers across the United States. We also extended an agreement with BML to further the development of companion diagnostics in Japan. And lastly, we remain committed to customer satisfaction and remain focused on increasing access to testing, improving time to results, and improving delivery to provide our customers with the best in class testing and support for important clinical trials. As noted, science, technology, and innovation are behind these successes and are foundational to our future. Our updated brand represents the power of our combined businesses and highlights our commitment to science and innovation to improve the health and lives of people around the world. I'll close with a few comments about 2021. As you can appreciate, there's still uncertainty heading into 2021, but we believe we have enough visibility to reinstate full-year guidance targets. albeit with a wider range than we've historically provided. The fight against COVID is not over, and neither is our commitment to defeating it. We believe the lessons learned in this past year have enhanced the progression of our long-term strategic goals. We will continue to seek and invest in high growth opportunities and positively impact people's health around the world in areas such as cancer, NASH, Alzheimer's disease, and autoimmune diseases, just to name a few. There remain many significant unmet needs in health care, and LabCorp will continue to play an important role in helping to solve them. I am confident in both our short-term and our long-term prospects and in our strategy. It will continue to provide a strong platform for growth as we move forward. Before I turn it over to Glenn, I want to thank all of our employees around the world. We were honored to be recognized by Fortune magazine as one of the world's most admired companies for the efforts of our over 75,000 global employees that are working tirelessly every day to help people live better and live longer. Matt, I'll turn it to you. Thank you, Adam.

I'm going to start my comments with a review of our fourth quarter results, followed by a discussion of our performance in each segment, and conclude with our 2021 guidance. Revenue for the quarter was $4.5 billion, an increase of 52% over last year, due to organic revenue growth of 50.1%, acquisitions of 0.9%, and favorable foreign currency translation of 100 basis points. The increase in organic revenue was driven by COVID testing of 46.4% and organic-based business growth of 3.7%, which includes the negative impact from PAMA of 0.6%. Operating income for the quarter was $1.3 billion, or 28.8% of revenue, compared to $336 million or 11.4% last year. During the quarter, we had $46 million of restructuring charges and special items, primarily due to COVID-related costs and acquisition integration charges. We also had $91 million of amortization, which was higher than recent quarters. As part of our new branding initiative, we are transitioning out of the Coban's trade name. As a result, we are accelerating the amortization of its trade name over the next year. Adjusted operating income from the quarter was $1.4 billion, or 31.8% of revenue, compared to $422 million, or 14.3% last year. The increase in adjusted operating income and margin was primarily due to COVID testing, organic-based business growth, acquisitions and launchpad savings, partially offset by PAMA, higher personnel costs, and investments to support the The tax rate for the quarter was 24.5% compared to 22.4% last year. The adjusted tax rate, excluding restructuring charges, special items, and amortization, was 24.8% compared to 22.9% last year. The higher adjusted rate was primarily due to the geographic mix of earnings. For modeling purposes, This does not include any potential increase in the federal tax rate in 2021. Net earnings for the quarter were $938 million or $9.54 per diluted share. Adjusted EPS, which exclude amortization, restructuring charges, and special items, were $10.56 in the quarter, Operating cash flow was $775 million in the quarter compared to $570 million a year ago. The increase in operating cash flow was due to higher cash earnings, partially offset by higher working capital to support growth. The higher working capital was primarily due to the increase in accounts receivables and supplies related to COVID testing. Capital expenditures totaled $99 million, or 2.2% of revenue, and included investments to increase COVID testing capacity. This compares to $128 million or 4.3% of revenue in the same period last year. As a result, free cash flow was $675 million in the quarter compared to $442 million last year. This brings our full year of free cash flow to $1.8 billion, up from $1 billion in 2019. During the quarter, we invested $59 million in acquisitions. At year end, the company had $800 million of share repurchase authorization remaining. As previously communicated, the company will repurchase shares in 2021 as part of its capital allocation strategy. Now I'll review our segment performance, beginning with diagnostics. Revenue for the quarter was $3.2 billion, an increase of 79.5 percent compared to last year. primarily due to organic growth of 78.5%. The increase in organic revenue was driven by COVID testing of 78% and base business growth of 0.5%, which includes the negative impact from PAMA of 1%. Total volume increased 33.9% over last year, primarily due to organic volume growth of 33.3%. The increase in organic volume was due to the partially offset by a decline in base business volumes of 7.7%. As a reminder, we do not include hospital lab management agreements in our volume, which would have added approximately 2% to our organic base business volume growth. In the fourth quarter, the company achieved both its highest COVID testing results as well as the highest year-over-year volume performance in the base business since the pandemic began in March of 2020. Price mix increased 45.5% over last year, primarily driven by COVID testing of 37%, and favorable mix in the organic-based business of 8.2%. Diagnostics adjusted operating income for the quarter was $1.2 billion, or 39.1% of revenue, compared to $277 million, or 15.8% last year. The increase in adjusted operating income and margin was primarily due to COVID testing the negative impact from PAMA and higher personnel costs. Diagnostics' three-year launchpad initiative remains on track to deliver approximately $200 million of net savings by the end of 2021. Now I'll review the performance of drug development. Revenue for the quarter was $1.4 billion, an increase of 16.4% compared to last year, primarily due to organic growth of 13.1%. The increase in organic revenue was due to base business growth of 8.4% and a 4.7% contribution from COVID testing performed through its central lab business. Drug development delivered broad-based revenue growth, including COVID vaccine and therapeutic studies. Adjusted operating income for the segment was $248 million or 17.8% of revenue compared to $183 million or 15.2% last year. The increase in adjusted operating income and margins were primarily due to COVID testing, organic-based business demand, and Launchpad savings, partially offset by higher personnel costs. The company achieved its goal to deliver approximately $150 million of net savings from its three-year drug development Launchpad initiative. Launchpad will continue to be the company's primary business product. For the trailing 12 months, net orders and net book-to-bill remain strong at $7 billion and 1.43 respectively. Backlog at the end of the quarter was $13.8 billion, an increase of approximately $1.3 billion from last quarter. We expect approximately $4.5 billion of this backlog to convert into revenue over the next 12 months. Now I'll discuss our 2021 guidance, which assumes foreign exchange rates as of December 31, 2020, for the entire year. In addition, enterprise guidance includes the impact from currently anticipated capital allocation with free cash flow targeted to acquisitions and share repurchases. We expect a change in revenue for the enterprise of minus one to plus four and a half percent compared to 2020 revenue of $14 billion and includes the benefit from foreign guidance range also includes the expectation that the base business will grow 11 to 13.5 percent over 2020 revenue of $11.2 billion, while COVID testing revenue will decline 35 to 50 percent. We expect a decline in revenue for diagnostics of minus 0.5 to minus 7.5 percent compared to 2020 revenue of $9.3 billion. This guidance range includes the investing revenue will decline 35 to 50 percent. We expect drug development revenue to grow 8 to 10.5 percent over 2020 revenue of $4.9 billion and includes the benefit from foreign currency translation of 220 basis points. This guidance range also includes the expectation that the base business will grow 9.5 to 12 percent over 2020 revenue Our adjusted EPS guidance is $19 to $23 compared to 2020 adjusted EPS of $23.94. The adjusted EPS guidance reflects the expected decline in COVID testing in 2021. Free cash flow is expected to be $1.7 to $1.9 billion compared to $1.75 billion last year. In 2021, we expect capital expenditures to be In summary, the company achieved strong performance in the fourth quarter and full year 2020. Since the beginning of the pandemic, we have remained focused on ramping up COVID testing capacity while also managing our base business, including continuing to execute on our launch pad initiatives. As we look forward to 2021, we expect to drive profitable growth in our base business while COVID testing is expected to decline throughout the year. We also expect another strong year of free cash flow generation that we will use for acquisitions to supplement our organic growth while returning excess cash flow to shareholders through our share repurchase program. This concludes our formal remarks, and operator, we will now take questions.

Certainly. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. We ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Jack Meehan with Nefron Research.

Thank you. Good morning. I was wondering if you could start and just provide a little additional color on the assumption and the guidance for 2021 COVID testing. By my math, it seems that it assumes the COVID sales are going to be essentially zero in the second half of the year. I think that's a world we all want to live in, but I'm not sure if that's exactly how it's going to play out. So it would just be great to a little bit more on your philosophy there.

Hi, Jack. Good morning, and thanks for the question. You know, the reason we had to give such a wide range, minus 35 to minus 50% for the testing is because, as you say, it's very difficult to have precision. And you can get to the minus 35 to minus 50% in several different ways. Right now, we've seen a decline in tests if you look at, you know, the last several weeks versus the end of 2020. If that decline continued and then you saw it continue throughout the whole year, you could get there. If the amount of testing we're doing today, on average, was maintained for the six months of this year, the first six months, well, then you could do zero for the second half of the year and still be there. So, there are multiple different ways to get there. My assumption going in is that the price is going to remain at where it is right now. So right now, it's $100. We're still in the emergency situation that's been extended through the year. You have to hit the CMS guidelines, which is basically for the previous month, you have to have more than 50% at a two-day turnaround, and then they look at each sample for the current month. we're well within that range. I mean, right now, we can do 275,000 tests a day. We're not doing anywhere near that. And our turnaround time is about a day. So, I expect that the price, you should assume, is still about what we've averaged until now. I think for this quarter, it was about $90 on average. It then comes down to the volume. And I assume that the volume is going to continue to decline, albeit maybe at a lower rate than we saw from the end of last year into this year. And then for the second half of the year, they'll be significantly less than the first half of this year. That's our base case assumption.

To reinforce it to one of the reasons we did break out the level of COVID testing separate from our base business, just given that we put a wider range around something that we feel is more uncertain versus, frankly, having a better visibility on just the performance of our base businesses.

Great. Yeah, I like the way you laid it out. I think it's helpful just for teasing out the parts. On that last point on the base business, Glenn, I was wondering if you could provide some more color. I think I saw a little bit of the same dynamic from last quarter where it looks like maybe there's some mix benefit or additional tests per rec. What's going on there between kind of core volume versus mix?

Yeah, Jack, as you saw from a revenue standpoint, what was nice is that we We continue to see an unusually high level of favorable mix, primarily driven by higher tests per session. So the feeling is with the fewer visits that patients are going, they're conducting more tests level.

Thanks, that's helpful. Thank you. And our next question comes from the line of Dan Leonard with Wells Fargo.

Thank you. So first question, can you talk about on the drug development business the contribution of COVID trials to either sales or bookings and the outlook there?

Yeah, absolutely. Thanks for the question. So first thing is, if you look at drug development business, we go 16%, but if you take out the PCR testing, we had growth of 8.4%, which was strong growth, and we did well across all of our businesses. If you look at COVID right now, basically the COVID trials accounted for about 12% of our net orders if you look at the last three quarters. So you can see that it's meaningful, but the a lot of our growth is coming from outside of COVID trials. And we mentioned in the last quarter that we won a large pharma's oncology book of business. I think that's helpful to us, but also we've won another pharma's non-oncology business. So we continue to show strength outside of COVID, which is very important as we move forward for the base business. That's what gives us confidence as we look at the range we provided for the drug development business for this year.

Okay, thank you. And then just a follow-up on the diagnostics business. Adam, you mentioned the work with the CDC on sequencing for COVID surveillance. You know, how do we think about the economics of that or frame that? Could that be a meaningful part of your business, or were you just trying to emphasize the high science there? Thank you.

Yeah, so right now we're doing a couple thousand sequences a week for the CDC. We can increase that significantly. We're working with them to see what numbers they might like us to go to. That's more science and more for the benefit of understanding the mutations. We could use it for drug development and understand what we need to do in the future with drug development. But I wouldn't look at that as a separate significant revenue stream.

Okay. Thank you very much. Sure. Thank you. And our next question comes from the line of Lisa Gill with J.P. Morgan.

Lisa, we can't hear you.

Sorry. I'm sorry. Can you hear me now?

Yeah, we can.

Good morning. Okay. Thanks. Good morning. I had myself on mute. Adam, when we spoke about a month ago, I think I asked you a question around the tie between diagnostics and drug development and did it make sense for the two entities to be together. You clearly put up a great number, obviously, on both sides, but especially on the drug development side for book to bill. Can you talk about outside of COVID, the tie you're seeing between drug development and diagnostic for winning business? Is this helping in some way? Any of the correlation that you see between those two businesses? And then lastly, how do we think about virtual trials playing into all of this?

Sure. So I'll start by saying that I continue to believe that having diagnostic and drug development together is a winning scenario. and that you can do significantly better with drug development business by having diagnostic capabilities. There's no doubt in my mind that we've seen that with COVID. I mean, being able to do the diagnostic test while we're doing drug development enabled us to win more than 400 opportunities across COVID. At the same time, I believe that people now have seen it in pharma and biotech, so it opens up the doors for other areas. We won large pharma's oncology business. I think oncology is the next area. that we'll be able to show the benefit of having diagnostic capabilities, particularly companion diagnostic capabilities, along with drug development. And we are beginning to see in the biotech and pharma clients that this is mattering more and more. So, I continue to be very bullish about the ability to have both these businesses together. I've always said that I think that the drug development business benefits more by having diagnostic capabilities than diagnostics does by having drug development. But with that said, we've seen some synergies going the other way, where the drug development group has been working on companion diagnostics, and we're able to potentially launch that in that diagnostic area. So I'm actually seeing benefit to diagnostics over time from drug development. So we continue to make progress there. If you look at virtual and hybrid trials, the reason we've invested there is because I believe it's going to be more important than it's been in the past. And it's been talked about for quite some time. I don't think a lot of pharma companies were willing to go there because they knew how to do the other trials, and we still have to get regulators to approve how to look at virtual and hybrid trials. But with COVID, all that has changed. I mean, there's still about 20 to 30 percent of clinical sites that are not open. And if you start a trial now, you want to make sure if there's another event that, for example, if in November there's a new variant, and you need another vaccine, there could be another impact from COVID later this year. You don't want your trials to be interrupted. You want to have the possibility to do virtual and hybrid trials. So I think it's going to serve, number one, as a backup to ensure that trials can continue. Number two, I believe that, particularly in specialty areas, you're going to see more and more use of the hybrid trials. Because what we're seeing is they can work, and they can work well. And they can actually allow you to potentially enroll more patients faster. And therefore, I think it's here to stay now that we've seen it work.

Great. Thank you.

Sure. Thank you. And our next question comes from the line of Aaron Wright with Credit Suisse.

Great, thanks. Quickly on the diagnostic segment, has anything changed in terms of your thoughts around serology testing here? Do you think that'll pick up with vaccine utilization or is that minimal in terms of your assumptions and the guidance at this point?

Yeah. Hi, Erin. That's an important question. It's a very important scientific question. We're very specific to say COVID testing and not break apart PCR and serology because it could go in multiple different directions. I think if you end up having to have a vaccine every year, serology might not be that important. If you need a vaccine every several years, then I believe serology will be very important. And the real question is going to be, you know, what level, what's the quantitative analysis that you need for a certain level of antibodies to feel that you're protected? If there is a quantitative number that people can feel comfortable, they can fly, they can go to events, that they can do many other things, then it will be very important. And what we're doing is we're preparing for that just in case. So we already have the ability to do a semi-quantitative antibody test, which I think would help if you have to get to a certain level and know what that level is. And we're going to be prepared to scale that. We already have it where we can run thousands, but I want to be prepared in case we need hundreds of thousands in the future. It's just too early to know from the science. And we're learning so much about the variants and so forth that there'll be more to come as we go through this year.

Aaron, the only other thing I'd add for that is that, you know, as Adam said, COVID testing, the guidance that we gave down under the 35 to 50 is our expectation for the full year. But while serology is a small piece of that, you know, frankly, from our guidance in the range that we have, we would actually have a range where serology testing would go up at the upper end of the range, could go down, again, at the lower end of the range. versus the PCRs. To your point, once the vaccines are readily available, more interest in seeing if the antibodies are there. But again, it's a smaller piece of the total COVID business that we have.

Okay, great. Thanks. And then on capital deployment, can you speak to the consolidation opportunity across the core lab business? What does the deal pipeline look like now? And does the broader installed base of skincare instruments and other concepts change or delay or your thought process, I guess, around deal activity in the near term? Thanks.

Yeah, so as I look at capital deployment, the first thing we look forward to see if there are hospital laboratories, local or regional laboratories that we can acquire. And, you know, those make a lot of sense. They are accretive in the first year. Typically, you return your cost of capital in about two years, and we know how to integrate those. We are seeing more opportunities for those. We're spending a lot more time in discussions with various hospitals and local laboratories. And I can tell you, even as a senior management team, we're spending a lot more time in those discussions ourselves. So I feel good that there will be multiple opportunities as we go through this year. The second thing I look for is strategic acquisitions. So if there's something in one of the pillars of our strategy, for example, oncology, that we need to acquire in order to be successful, we would look to do something like that. And those would be kind of smaller tuck-in type of acquisitions versus large-scale mega deals. And then the third thing we look at is the share buybacks. If you ask me about large-scale acquisitions, so for example, another large CRO, I don't think we need to do that. I think we have what we need to be successful. So we're mostly interested in laboratory, hospital laboratories, local regional laboratories, and strategic acquisitions helping us in the pillars.

Okay, great. Thank you.

Thank you. And our next question comes from the line of Ralph Giacobbe with Citi.

Thanks, morning. Just wanted to go back on the commentary around visibility on the core trends and maybe the assumptions and comfort around those core trends. And more specifically, when I look at the numbers compared to 2019, I look at the lab side, midpoint, looks like it's about 4% growth. And then on the CRO side, looks like it's about 15% growth off that sort of 2019 baseline. So anything to call out there on either side around sort of the visibility you talked about that bridges the growth?

Yeah, Ralph. Yeah, from our perspective, it's kind of an interesting viewpoint. growth rates and say, is that kind of fitting in within our historical growth rates? And the guidance range that we have kind of implies, obviously we're getting a range, but for both businesses, clearly at the upper end of the range, that we're back to kind of the normal historical growth. And so as we think about the pieces, so first within diagnostics, while we've already seen a favorable revenue trend in the fourth quarter compared to 19, so revenue is already there, but our volume wasn't. You know, we were down, you know, have as we look to 2019 is that, for the most part, call it the mid part of the guidance, that the volume now will get back to 2019 levels, call it the mid-year to second half of the year. And again, the price will come down to more historical levels as well. But similarly, within the drug development side of the business, we've already had good growth compared to a year ago. generally within the range gets us back to our historical growth rates, again, depending where you are in the range. So with the recognition that there's still going to be some softness in the base business that's expected in the first half of 21 because of the pandemic still here, the vaccine not broadly available, but clearly with the second half of the year expectations, we're now growing relative to 19 at a more historical level.

Okay. All right. Got it. That's helpful. And then just to follow up, On the $100 commentary for COVID testing, I just want to make sure that's across your managed care book as well. And has there been any discussion or pushback, if you will, with managed care or perhaps, you know, the argument of a lower rate but maybe more favorable pricing terms on sort of that base business longer term? Thanks.

Yeah. No, so average price is about $90. And, you know, of course, we're having a discussion with managed care. But as the volume has gone down significantly, and we see the testing not where it was, say, back in December. Those discussions continue to happen, but I think we have a very strong rationale based upon the CMS pricing guidance.

Okay.

Thank you.

Sure.

Thank you. And our next question comes from the line of Eric Holdwell with Baird.

Yeah, wouldn't you know, Ralph, got my two questions kind of wrapped up in the last one there. But I'm going to just jump off that a little bit. I mean, ultimately, I think I was going the same direction, which is, you know, peeling back the layers of the onion on diagnostics on the base business. You clearly have a lot of layers. You have hospital lab management, which impacts revenue and pricing, but not volumes. You have the easy comps. You have Nopama, M&A, even a little FX. It sounds like you're saying... the uh the 2021 core base volumes uh maybe start the year below 2019 finish the year uh the second half above 2019 so are you basically saying a flat year on volume in total or maybe a little bit of growth in total and then i have a a follow-up clarification after that yeah again eric did

Part of the supplemental information that we provided, we actually did give compound growth rates for the businesses based on the base business and COVID testing to kind of help frame the growth. To your point, within that, obviously there is some M&A and currency that impacts the numbers. But as we think about, again, the volume for diagnostics, depending where you are in the range, at some point we're going to cross over to, you know, being favorable volume. And, you know, so again, After that point, we're then looking at getting back to more historical growth rates. But even there, the trajectory of the recovery could, you know, be stronger, could be a little softer. But overall, you know, we do expect to see, you know, depending on where you are from the range to for the full year, we could be still below on volume for the full year, but favorable on price mix. Or at the upper end of the range, we could be both favorable on volume as well as favorable how much it accelerates.

Got it. My quick follow-up here is within diagnostics, obviously you are doing M&A. You have a positive outlook on M&A. I'm curious what percentage growth in that 11% to 13.5% base, what percent of that is actually M&A driven as opposed to not?

Yes. So when you look at the guidance that we provide for, call it for both of our businesses, of that growth, if you will. In our enterprise numbers, we do assume that part of our capital allocation will go to M&A, so we reflect some of that growth in revenue at the enterprise level for that. But if you think about just the level of M&A in the quarter that we had for diagnostics was 0.9%. So obviously we'll look to see that number be a smaller piece within the guidance range that we had. would be additive to that.

Got it. Thanks very much, guys.

Absolutely. Thank you.

Thank you. And our next question comes from the line of Eugene Kim with Wolf Research.

Thank you, and congrats on the strong quarter. I guess a quick follow-up to Rob's question earlier on the co-event side. you are expecting base business revenues to come in about 15% higher than 2019 at the midpoint. Can you maybe break down how much of that is driven by COVID-related trials versus non-COVID business?

Yeah, so if you look at the growth that we had for the fourth quarter, it was very strong. It was about 8.4% if you take out the PCR testing. And the strength is coming from all three businesses. It's coming from the early stage, the central laboratory, as well as the clinical development business. As we look at the COVID trials and what they accounted for, it was about 12% of our net orders across the last three quarters. So you can see that it's meaningful, but it's not that much. We still would have had great growth even without the COVID trials in terms of our net orders.

Got it. And quickly on Share Repo, apologies if I missed this, but have you provided how much buyback you're assuming in your full-year EPS guidance?

No. Eugene, what we've said is that, you know, that we expect to target the free cash flow that we generate this year to both M&A and to buybacks. So, assume that we will be in the market each quarter within buybacks, but the level of buybacks will be, as Adam commented earlier, driven off of the amount of acquisitions we do. And we have a good pipeline of deals, but like in most years, or at least most normal years, always expect it to be, you know, they're not mutually exclusive, that we expect to continue to do strategic M&A acquisitions as well as repurchasing shares with our excess cash flow. But we've not quantified the amount, but obviously it would be within a range of our guidance.

Got it. Thank you.

Thank you. Our next question comes from the line of Pito Chickering with Deutsche Bank.

Good morning, guys. Thank you for taking my questions. There are two quick ones here. As you think about deals for 2021, obviously the COVID tailwinds helped out some of the smaller hospital labs that were struggling previously. Do you think that deals will sort of pause during 2021 as COVID tailwinds normalize and, you know, wait until 2022 until, you know, the normal environment comes back?

No, I think the deals are going to continue to be at least at the same pace in the past year. In fact, I think there might be some acceleration based upon the number of discussions that we're having. I think there's a couple of reasons why. One is, for example, hospitals have realized how capital intensive this business is. So many hospitals had to update their labs to be able to do COVID testing at any scale. And as they start to look at keeping those labs updated outside of COVID, they realize they probably need to do some additional upgrading to the equipment. So they'd rather use that capital, for example, for a new surgery suite versus having to just update the lab to run the tests that they've done in the past. The second thing is that even though COVID has been significant, many of the hospitals haven't had their base business back to the level that we've seen, and they don't have the COVID testing ability that we have. So the COVID testing has not necessarily offset the other base business issues that they face. So I feel pretty good about deals this year and I don't think it will slow down. If anything, I think it will be the same or accelerate.

Great. That makes a lot of sense. Next question. Your capacity for COVID testing is obviously above the demand right now and you're guiding to decline throughout 2021. If I think about COVID testing globally, there's still a lot of countries that don't have the capacity to test as the U.S. does. Is there any opportunity to use the excess testing capacity to work with other countries to assist in their COVID testing?

So we do testing in Canada. We also have the capacity to do some testing in the U.K. because we have a lab there that has the equipment. Outside of that, we don't necessarily do testing in any other country. The U.S. is obviously where we do the vast, vast majority of the testing. What I'd worry about with other countries is turnaround time. It wouldn't be easy to get the samples to the U.S. and turn those around fast enough. And then the ability to move equipment or have equipment in those other parts of the world I don't think is necessarily that feasible. So the good news is that there are many additional alternatives that are coming to market. And I think that most countries right now have learned how to use the testing that they have. And some countries don't use nearly as much testing anymore. So, for example, in Japan, they do significantly less testing, even though they have the capacity that they could do more if they chose to. So I think it really is country by country based on how they approach it, and it's not in our plan to expand outside of where we currently are for testing.

Great. Thanks so much.

Sure. Thank you. And our next question comes from the line of Kevin Caliendo with UBS. Yes.

Great, thanks for the question. This is Adam Noble on for Kevin. I just wanted to go back to kind of PCR volumes, understanding that the infection rates have gone down, and to the extent that those continue to go down, that would be a headwind to the PCR volumes. But I think from your previous comments, you guys have, because of the active infections, you haven't had a chance to go too far down the pipeline of back to work, back to school. asymptomatic testing, and I'm just curious if you could comment on your pipeline there, and what are your expectations for those volumes as the year progresses?

Yeah, thank you, Adam. And again, the reason we gave such wide guidance of minus 35 to minus 50 is because there are still so many unknowns. For back to work, back to school, we've been a big part of that, but many companies have not gone back to work yet, and you see more and more companies saying that they might not go back to work in the ways that they've done it in the past. Some of the companies that we're working with, we're actually using point of care testing to help them get up and running. Some we're using our Pixel by LabCorp at home test, where they can send them to employees, particularly if they have large sales forces across the country, it's a very easy way for them to do it. So our LabCorp employee services is very busy with back to work and back to school. And it really is just a matter of How many of those tests do you do while you're also vaccinating people? And then at the end of the day, frankly, it's going to come down to in the fall, will there be another strain? And will there be another outbreak? Will it be a big flu season? And everybody has flu. You're going to want to test for both COVID and for flu. So I do believe that there's opportunity in the second half of the year, potentially. It's just too hard to know right now. And that's why we gave you such a wide range of possibilities.

That makes a ton of sense. Maybe just to sneak one in on Covan, appreciate the guidance you guys gave on it, breaking out the COVID side specifically. Just curious if you could kind of break that out further between COVID trial work versus the central lab impact. That's obviously benefited at the end of this year, but you know, if volumes come down for COVID testing, you know, I guess we could probably expect that to come down as the year progresses as well.

Yes, I think if you look at the different parts, so for example, in central laboratory work, we've been very busy, but we would probably fill that with other potential opportunities. So, you know, to me, it's kind of we're building capacity. We're doing both COVID and non-COVID central laboratory work, and we're very busy in those central laboratories, as you can imagine. In terms of the trials, again, we're doing mostly non-COVID trials, clinical trials, but we're also doing some COVID clinical trials. I think the best way for you to kind of gauge it is to know that the trials were 12% of our net orders over the last three quarters. That should give you the best sense of what that's going to look like over time. I don't think it's going to slow down a lot this year. I think there's going to be more work that you're going to need for variants, for vaccines, for example. There's still a lot of antivirals that are being studied. So I do think for this year, you're going to still see significant work for COVID, and then we'll have to see where it ends up as we go into next year.

Great. Thanks for the question.

Thank you. Thank you. And our next question comes from the line of Vicki Goldwasser with Morgan Stanley.

Yeah, hi, good morning. You know, Adam, in response to one of the questions, I think you said something really interesting in terms of the pricing dynamics and the fact that you're seeing higher number of tests per visits or fewer visits and more tests. Do you think that this is sort of a new sort of step up in the demand curve, or is this sort of a temporary catch-up?

Yeah, Vicki, it's a very important question. We have that discussion often amongst ourselves. I believe that because people are not going to their doctor as often as they have, or they may have missed their wellness programs, that when the doctors are seeing the patients, they're just trying to get as many tests done as they can to make sure that they can treat that patient appropriately. I do not personally believe it's going to be a long-term, sustainable number of tests per acquisition. I think we'll get back to closer to where it was. But we're also trying to understand the difference between telemedicine and doctor visits, and if there's a difference there. We don't think there is, but we're still trying to understand that. So our base case assumes that as the business comes back and starts to grow again, that it's not based upon increasing numbers of tests per acquisition. It's based upon more people going to their physicians.

Okay. And to your point on telemedicine, you know, it's interesting, right, because is it about 50% of requisitions that are done in your sites versus physician offices? Do you think that there's anything that's going to impact physician behavior because they're not getting reimbursed for drawing the specimen when it's a telehealth visit?

You know, Ricky, I think that, first of all, telemedicine has been very important as we've gone through the pandemic. I think that there have been some restrictions that have lifted that will probably stay lifted in terms of being able to do things over state lines and so forth. And I think it's going to be important to understand it more as we move forward. The good news for LabCorp is that we're involved with almost every major telemedicine company so that they can easily access the ability to get testing done for patients. And we have so many service centers across the country, including the ones through Walgreens, that I believe that we're easily accessible to patients, whether it's in their physician's offices or through telemedicine. But I do believe it's here to stay, and I'm glad that we're part of it and we're able to make it an easy transition through their EMRs.

And then just one last one on the utilization. You broke for us the core revenue growth, I think sort of 4% for the year, half from M&A, half organic. How should we think about utilization exit run rate in 2021?

Yes, so, Ricky, we talked about just thinking about it as organic core buy. As you recall, we ended the third quarter, you know, call it an 8.9, but the end of the quarter was more like an 8 number. So we have seen that the base volumes have stabilized. We've seen that throughout the quarter, and frankly, we've seen it also into January of this year. Obviously, we're going to start to see the favorable comps as we compare against a pandemic year in 2020. But again, as we talked about earlier, when we look at the range of guidance we gave for the business, depending upon where we are in the range of guidance, you know, that we do expect to see, call it mid-year into the second half of the year, is the midpoint of the guidance that you should see the organic volumes, you know, be picking up relative to 19 levels.

Okay, thank you. Thank you. And our next question comes from the line of Matt LaRue with William Blair.

Hi, good morning. You know, I appreciate that there's a wide range of potential COVID volumes built into your guidance. But could you maybe comment on whether this is, you know, sort of your perspective on how the COVID testing market is going to evolve over time? So, in other words, is it going to evolve into more of a point of care market like flu or reference labs aren't really playing much of a role? unless it's a reflex or maybe do you think it's going to go away entirely? It's just an update on how the broader market is going to evolve.

Hi, Matt. I think it's going to depend on the treatments that we have available and the antivirals and how effective they are. If at the end of the day you're diagnosed with COVID in the future, but we know you're not going to end up in a hospital, you're going to die because we have great ways to treat it, then I think it could become point of care testing like flu. If it's as serious as it is today, where people are unvaccinated, they could end up in a hospital and end up dying, then I think it's going to end up PCR testing, particularly for people with symptoms. Because we do know that the point of care testing is not necessarily as accurate, and you do miss some people through that. I don't think you're going to want to miss people if they can end up in a hospital and die. So I think it's really going to take some time for us to understand how good the therapeutics work outside of vaccinations. Because when you think about it, if 20% or 25% of the population doesn't get vaccinated, and if the vaccine doesn't work in 10% of the population, that's 35% of, you know, several hundred million people in the U.S. That's a big number of people that we're still going to have to worry about getting COVID over time. And the real question that's going to be how well are those therapeutics? And Our hope is that we get great therapeutics and that we can keep everybody out of the hospital and from dying, but we just don't know yet. If it ends up there, it will be more point-of-care. I think that we're going to end up doing PCR testing for quite some time at some level.

Okay, and then just on the drug development side, as you look to create differentiation there, obviously there were two capability additions you made back in October with SNAP and GlobalCare. Maybe just give us a sense for where you look to continue to create differentiation and how maybe to measure the success of some of these capability additions, if not through revenue, if it's perhaps through win rates or through broader business.

Yes, so to me, the differentiation is having diagnostic capabilities, including companion diagnostics with drug development. The ability to do virtual and hybrid clinical trials, I think everybody's going to have to do that. and you have to do it extraordinarily well. But the difference that we have versus others is our companion diagnostics and our diagnostic capabilities. And you've seen it with COVID. I believe you're going to see it with oncology and then in other therapeutic areas as well.

Thanks, Adam.

Sure. Thank you.

Thank you. And our next question comes from the line of Brian Tanquillit with Jefferies.

Hey, good morning, guys. Congrats on the quarter and the good guidance for 2021. I guess just a couple of questions. On the CRO side, would you be able to give us kind of like a balance of the bookings across preclinical, central lab, and clinical? Because obviously, that's pretty good growth you've shown on the booking summer for Key4.

Yeah, so we don't break it out necessarily by the individual areas. What I would say is that we've shown strength across all three of the therapeutic areas. If you look historically, we have real strength in early clinical development. We're a leader there. We have strength in our central laboratories. We're a leader there. Where we're continuing to progress and where we want to grow most substantially moving forward is in the clinical trials, in particular, later stage three clinical trials. So you're going to see us continue to have a major focus to win more in that area as we move forward. And I would expect over time that we would disproportionately grow from that area.

Got it. And then, Glenn, I guess just a quick question on working capital for the quarter. It was probably a little, you know, there was a drag that we saw in Q4. Is that going to normalize in 2021, or how should we be thinking about working capital trends?

You know, when you look at the fact that our guidance range for earnings blow is... that we kind of held back a little bit in 20 as we were obviously dealing through the pandemic.

So we're going to try to get through two last questions as fast as we possibly can in respect of everybody's time.

And our next question comes from the line of Derek DeBruin with Bank of America. Hey, great.

Thank you for squeezing me in. Can we talk a little bit about oncology testing trends and Can we talk about what those expectations are and sort of the esoteric testing business is there and how they're picking up and sort of where you're exiting the year?

Yeah, so if you look at the esoteric testing, that declined the least amount, frankly, as we began with the pandemic, and it's recovered the best, about the same, frankly, as our base business now. So it's still down a bit versus prior year, but nowhere near what it was down in March. In March, obviously, it was down less than our core business was. You know, I have no doubt that oncology testing is going to continue to be important. And as we think about things like liquid biopsy, I think that's going to be increasingly important in the future. So I was glad that we're part of that market now with our non-small cell lung cancer capabilities, and we're going to continue to look for opportunities to be involved in that moving forward.

Great. If I can do one follow-up question. LabCorp has a very long history of doing more technology-focused acquisitions. And given sort of the expansion of at-home and point-of-care testing, do you have any desire to sort of become an equipment manufacturer or equipment provider as opposed to just a testing lab?

So as I've said before, when we look at our capital allocation, first and foremost, we want to do additional laboratory acquisitions. But then I would say we want to look at our strategic pillars. And if we see something, for example, in oncology that makes sense, that would be our next area that we would go for acquisitions. At this moment, we're not looking at equipment and being equipment makers, but I can tell you we are looking at other areas to kind of enhance our core focus strategic areas.

Thank you.

Okay, next question.

And our next question comes from the line of Donald Hooker with KeyBank.

All right, I made it in barely at the end. So I guess your relationships with some of the big managed care companies were probably fairly distracted, particularly the UNH relationship preferred to PLN. Would it be fair for us to assume there's maybe some pent-up momentum with UnitedHealth and some of the big managed care companies as COVID winds down, the distractions fade away, or are they going to kind of step up their, revisit their strategies maybe more earnestly to kind of drive volumes to the more efficient labs like LabClip and others?

Yeah, Don, I think that's an important point. And we have a great relationship with UnitedHealthcare. We have great relationships with the managed care organizations across the country. And I do believe that as things go back to kind of more of a normal scenario, though I don't think it will ever be completely normal what we had in the past, I do think there will be opportunities for us to work with them closer. So, for example, on the PLN, the Preferred Laboratory Network, I would have thought we'd make more progress together. But with the distraction and COVID, it's been nearly impossible to do that. I am hopeful that we'll be able to get back to that when things normalize a bit.

Okay, great. I'll leave it there, and thanks for squeezing me in here at the end.

Terrific. Thank you. So the last thing I want to just say is, you know, first of all, thank you for joining us. And there's no doubt that we achieved strong performance in the fourth quarter and full year of 2020. But from the beginning of the pandemic, we've been focused on what we can do to help as best we can. And I think our agility, our ability to move quickly, combined with our science, innovation, and technology is what has really differentiated us. And what we learned about agility and moving quickly in the marketplace is here to stay. And I think that's going to continue to serve us well as we go into the future. So thanks for your time today. We look forward to talking to you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.