Laboratory Corporation of America Holdings (NYSE:LH) Q1 2024 Earnings Call Transcript

Laboratory Corporation of America Holdings (NYSE:LH) Q1 2024 Earnings Call Transcript April 25, 2024

Laboratory Corporation of America Holdings beats earnings expectations. Reported EPS is $3.68, expectations were $3.46. Laboratory Corporation of America Holdings isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Laboratory Corporation of America Holdings First Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Christin O’Donnell, Vice President, Investor Relations. Please go ahead.

Christin O’Donnell: Thank you, operator. Good morning, and welcome to Labcorp’s first quarter 2024 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 at www. Labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business operations, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures, both of which are 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 the estimated 2024 guidance and the related assumptions, the recently completed spin-off of Fortrea Holdings Inc., the impact of various factors on the company’s businesses, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and global economic and market conditions; future business strategies, expected savings, benefits and synergies from the LaunchPad initiatives and from other acquisitions and other strategic transactions and partnerships and opportunities for future growth. Each of the forward-looking statements is subject to change based upon various factors, many of which are beyond our control.

More information is included 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.

Adam Schechter: All right. Thank you, Chris, and good morning, everyone. It’s a pleasure to be here with you today. We look forward to sharing our first quarter 2024 results and progress on our strategy. But before I do that, I want to address the recent announcement that Labcorp was selected as the winning bidder for select assets of Invitae. This transaction will advance our strategy to launch and scale specialty testing in areas such as oncology rare diseases. These are strong assets in important disease areas and strategically with our focus on specialty testing. Invitae has strong science, a great NGS platform and strong talent. Upon completion of the transaction, Labcorp expects approximately $275 million to $300 million in annual revenue, with the vast majority in specialty areas, such as oncology and rare diseases.

The purchase price for the transaction is $239 million. We expect the transaction to be dilutive to adjusted earnings by approximately 2% to 3% in the first full year. We expect the transaction to be accretive in year two and to exceed our cost of capital in year three. Now I’ll move to the quarter. Labcorp delivered strong top line performance in the first quarter driven by growth in both of our businesses, diagnostic laboratories and biopharma laboratory services. We continue to execute well on our strategic priorities through being a partner of choice for health systems and regional local laboratories through launching key new tests in important therapeutic areas and by harnessing science, technology and innovation to bring new tests services and capabilities to our customers around the world.

Let’s turn now to our first quarter financial results. In the first quarter, revenue totaled $3.2 billion and adjusted earnings per share was $3.68. Enterprise revenue for the quarter increased 5% compared to first quarter of 2023, with diagnostics revenue up 4% and biopharma revenue up 8%. Biopharma’s growth was driven by strength in central laboratories, partly offset by early development research laboratories. Enterprise-based business margins are up compared to the prior year. Higher margins in biopharma were partially offset by diagnostics margins. We expect margins in both businesses to be up for the full year. The overall strength in our business enabled us to narrow the range and raised the midpoint of our EPS full year guidance to $14.90 despite a negative impact from currency.

Glenn will provide more details on our results and 2024 outlook in just a moment. In the first quarter, Labcorp advanced key growth initiatives that support our strategy. We began 2024 with positive momentum, reinforcing our position as a partner of choice for health systems and regional local laboratories. We continue to be active on the acquisition front. We closed three transactions in March, including health system agreements with base state health in Massachusetts and Providence in California and a regional lab acquisition in California. In March, we also entered into an agreement to acquire select assets of BioReference health diagnostics business. This transaction will increase access to Labcorp’s high-quality clinical laboratory services.

These new assets are focused on clinical diagnostics and reproductive women’s health. Our business development pipeline remains strong. Building on the success of our acquisitions and strategic partnerships, we continue to incorporate the power of science, technology and innovation across the organization. This commitment is demonstrated by how we’ve expanded our test menu this quarter. We advanced our leadership in neurodegenerative disease with the launch of our pTau217 blood-based biomarker test that aids in the diagnosis of Alzheimer’s disease and the monitoring of patients undergoing treatment with new therapies. It’s also available to be used in clinical trials. In addition, earlier this month, we announced the launch of our GFAP blood biomarker test for the early detection of neurodegenerative diseases and neurological injuries.

Following the launch of our ATN Profile last fall, these two significant advances in the company’s testing portfolio extend our leadership in a rapidly accelerating field of blood-based biomarkers for neurodegenerative diseases. We continue to accelerate our leadership in oncology. We launched Labcorp Plasma Detect, the first clinically validated whole genome sequencing MRD solution for early-stage colon cancer to identify patients at increased risk of reoccurrence after surgery or adjuvant chemotherapy. Labcorp Plasma Detect developed by our PGDx laboratory is a significant achievement that enhances our liquid biopsy portfolio and strengthens our position at the forefront of driving better patient outcomes in oncology. We introduced a weight loss management test portfolio in the quarter, a suite of tests that supports individuals and physicians with accessible convenient testing options to guide weight loss management decisions and treatment, including lifestyle modifications, GLP-1 medications or bariatric surgery.

Labcorp OnDemand introduced a magnesium test and a micronutrient test to measure key vitamin and mineral levels to support individual wellness. We also announced an STI test for Mgen. Mgen can be as widespread as chlamydia and gonorrhea. This test includes a reflex to identify resistance macrolides, a commonly used treatment addressing high antibiotic resistance and treatment failures associated with the infection. In April, we received emergency use authorization from the FDA for our Mpox PCR test, a home collection kit. The test is the first annual collection kit authorized by the FDA to aid in the diagnosis of infection with Mpox. Physicians can order for patients 18 years of age or older who are suspected of Mpox infection. In addition, we launched our electronic requisition digital capability to help biopharma customers and investigator sites, improve protocol compliance by reducing errors queries, holes and data revisions.

Earlier this month, we released our latest corporate responsibility report, which highlights the significant progress that we’re making as we pursue our mission to improve health and to improve lives in a sustainable way. We invite you to take some time to review the report that can be found on our Investor Relations website. As part of our earnings release this morning, we also announced our intention to create a new holding company named Labcorp Holdings Inc. to more closely align with our brand and better position us as a global organization. I’d like to thank our team of more than 67,000 employees around the world. Their ongoing commitment has once again earned us recognition of Fortune’s World’s most Admired Companies list. We’re extremely proud of this recognition.

In summary, we continue to make progress against our strategy and to achieving both near-term and longer-term goals. We remain focused on our position as leaders in science, technology and innovation and driving further value for our customers, our shareholders and our employees. With that, I’ll turn the call over to Glenn.

Glenn Eisenberg: Thank you, Adam. I’m going to start my comments with a review of our first quarter results, followed by a discussion of our performance in each segment and conclude with an update on our full year guidance. For reference, we’ve also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.2 billion, an increase of 4.6% compared to last year primarily due to organic base business growth and the impact from acquisitions, partially offset by lower COVID testing. The base business grew 6.7% compared to the base business last year, while COVID testing revenue was down 70%. Organically, in constant currency, the base business grew 4.3%.

Operating income for the quarter was $321 million, 10.1% of revenue or 14.3% on an adjusted basis. During the quarter, we had $49 million of restructuring charges and special items, primarily related to acquisitions and LaunchPad initiatives. In addition, we had $22 million of expense for transition service agreements related to the spin Fortrea, with corresponding income recorded in other income. Excluding these items and amortization of $60 million, adjusted operating income in the quarter was $453 million or 14.3% of revenue compared to $448 million or 14.7% last year. The margin decline was due to lower COVID testing. Base business margins were up as the benefit demand and LaunchPad savings were partially offset by higher personnel costs.

Our LaunchPad continues to be on track to deliver $100 million to $125 million of savings this year, consistent with our long-term target. The adjusted tax rate for the quarter was 23% compared to 22.1% last year. The higher adjusted tax rate was primarily due to a stock-based compensation benefit in the prior year. We continue to expect the full year adjusted tax rate to be approximately 23%. Net earnings from continuing operations for the quarter were $228 million or $2.69 per diluted share. Adjusted EPS were $3.68 in the quarter, up 7% from last year. Operating cash flow from continuing operations was a use of $30 million in the quarter compared to $186 million generated a year ago. The reduction in cash flow was due to lower cash earnings, primarily related to deferred taxes and the timing of working capital requirements.

Capital expenditures totaled $134 million in the quarter or 4.2% of revenue. This compares to $78 million or 2.6% in the prior year, which was impacted by the then pending spin Fortrea. For the full year, we continue to expect capital expenditures to be approximately 3.5% of revenue. Free cash flow from continuing operations for the quarter was a use of $164 million. The first quarter is seasonally the company’s lowest quarter for free cash flow. We continue to expect free cash flow for the full year to be between $1 billion to $1.15 billion. During the quarter, the company invested $259 million in acquisitions and paid out $62 million in dividends. At quarter end, we had $99 million in cash, while debt was $5.1 billion. Our leverage was 2.5 times gross debt to trailing 12 months adjusted EBITDA.

Now I’ll review our segment performance, beginning with Diagnostics Laboratories. Revenue for the quarter was $2.5 billion, an increase of 4.1% compared to last year, with organic growth of 1.8% and acquisitions net of contributing 2.2%. The base business grew 6.8% compared to the base business last year, while COVID testing revenue was down 70%. Organically, in constant currency, the base business grew 4.4%. Total volume increased 3.4% compared to last year. Base business volume grew 4.9% compared to the base business last year as organic volume increased 2.7%, while acquisitions contributed 2.2%. Price/mix increased 0.6% versus last year due to an organic base business increase that’s partially offset by lower COVID testing. Base business organic price/mix was up 1.7% compared to the base business last year.

Diagnostics adjusted operating income for the quarter was $418 million or 16.9% of revenue compared to $442 million or 18.5% last year. The decrease in adjusted operating income was due to a reduction in COVID testing, while base business income was up as the benefit of demand and LaunchPad savings were partially offset by higher personnel costs. The decrease in adjusted operating income margin was due to a reduction in COVID testing, the negative impact from weather and the mix impact from lab management agreements, which we expect to improve over time. Now I’ll review the segment performance of biopharma laboratory services. Revenue for the quarter was $711 million, an increase of 7.5% compared to last year due to increase in organic revenue of 5.1% and foreign currency translation of 2.4%.

The revenue growth was driven by continued strength in Central Labs, which was up 13%, while early development was down 4% due to continued higher-than-normal cancellations and lower orders. While cancellations are higher than normal, we have seen a sequential improvement from last quarter. Biopharma adjusted operating income for the quarter was $100 million or 14.1% of revenue compared to $74 million or 11.1% last year. Adjusted operating income and margin increased due to organic growth and LaunchPad savings, partially offset by higher personnel costs. We ended the quarter with a backlog of $7.9 billion, and we expect approximately $2.5 billion of this backlog to convert into revenue over the next 12 months. The trailing 12 months book-to-bill was 1.00, which we expect to increase throughout the year.

Now I’ll discuss our updated 2024 full year guidance, which assumes foreign exchange rates effective as of March 31, 2024, for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases and dividends. We expect enterprise revenue to grow 4.8% to 6.4% compared to 2023. Compared to prior guidance, this is a narrowing of the range with the same midpoint despite a 50 basis point headwind from currency. We continue to perform well in diagnostics and are narrowing the full year guidance range and increasing the midpoint. We expect diagnostics revenue to be up 4.8% to 6% compared to 2023. This is an increase at the midpoint from our prior guidance of 140 basis points, primarily due to stronger base business demand as well as acquisition revenue that is now forecasted in this segment, where it was previously only included in the enterprise guidance prior to the closing of the transactions.

We expect biopharma revenue to grow 3.7% to 5.7% compared to 2023. The decrease at the midpoint from our prior guidance of 180 basis points is due to currency. This guidance includes the year-over-year positive impact from foreign currency translation of 40 basis points versus 220 basis points in the prior guidance. An improvement in the outlook for Central Labs is expected to be offset by early development. We continue to expect margins in diagnostics and biopharma to be up in 2024 versus 2023, driven by top line growth and LaunchPad savings. Our guidance range for adjusted EPS is $14.45 to $15.35. We have narrowed the range and increased the midpoint of guidance by $0.05, driven by improvement in diagnostics, partially offset by the change in currency.

The free cash flow guidance range is $1 billion to $1.15 billion, unchanged from prior guidance. In summary, we expect to drive continued profitable growth and strong free cash flow generation that will be used for acquisitions that support our strategy and supplement our organic growth while also returning capital to shareholders through our share repurchase program and dividends. Operator, we will now take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. And our first question comes from Jack Meehan of Nephron Research. Your line is open.

Jack Meehan: Good morning. So I wanted to focus on the Invitae deal here. Let’s start with Adam. Can you talk about the strategic value of these assets why you’re excited to acquire them out of bankruptcy? And how does the oncology business complement? What you’re doing already internally?

Adam Schechter: Hi, Jack. So they’re strong assets. And we’ve always said that oncology is one of our core therapeutic areas, and they have a very big hereditary oncology business, much bigger than the business that we have in that area. So it certainly augments what we’re doing and it accelerates it in a fairly significant way. They also have quite a bit of rare disease work that they’ve done, and that augments our focus on specialty testing. They have a very good NGS platform. We have a platform, but we’re going to look to see what we can use that they have and use what we have and get the best platform we can possibly get. They have very good talent. And I think we’re able to do it at a reasonable deal. It’s a company that people have looked at for years and years that their valuation you could never get past. But the science was always very good. Their capabilities were always very good. So strategic that feel fits very well for us.

Jack Meehan: Yes, that makes a ton of sense. And then a second one for Glenn. Can you just talk about the strategy to work down the dilution? Prior to the bankruptcy, I think Invitae was targeting a burn of over $200 million. Some of that’s related to things you’re not acquiring, but your target — you laid out calls for maybe $30 million to $50 million burn was my math. Can you just talk about the confidence it won’t be worse than that and then the action steps to get to accretion in year two?

Glenn Eisenberg: Yes. Hi, Jack. So again, as Adam commented, we’re very excited about the acquisition. And frankly, going out of acquiring the select assets through bankruptcy from a purchase price, obviously, relative to other deals that we see of similar focus in our therapeutic areas is quite attractive. As we think about long-term value creation, you heard in the opening comments that we expect this to exceed our cost of capital in year three and have a very attractive overall return on our investment. But to your point, in the near term, it will be dilutive. This is a business that has a high cost structure. And from our perspective, like other acquisitions that we’ve done of similar ilk we’ll be able to leverage the cost structure within Labcorp to leverage.

It’s a business that has a very high gross margin, which is, again, very attractive to us. Obviously, we’ll continue to instill launch pad disciplines that we have which will benefit them as well. But the big opportunity to improve their profitability is on the cost side. They spend a fair amount in R&D, which we would expect to continue. Obviously, the value of what we’re acquiring. But from sales, marketing and especially general administrative costs, where we can leverage our infrastructure we’ll be able to get it profitable, as Adam said, within the first year. So it’s all about integration. We’ll do it on a very disciplined and timely manner, but we expect it to ultimately be accretive in the second full year of our ownership

Jack Meehan: Sounds good. Thanks, guys.

Operator: Thank you. One moment for our next question. And our next question comes from Erin Wright of Morgan Stanley. Your line is open.

Glenn Eisenberg: Good morning, Erin.

Erin Wright: Good morning. Could we talk a little bit about what’s embedded in guidance as it relates to the acquisition contribution versus organic growth and base business strength in the diagnostics segment? I just want to make sure kind of can you remind us what’s embedded in the enterprise level guidance versus the segment level guidance as well. Thanks.

Glenn Eisenberg: Yes. Hi, Erin. When we talk about the three acquisitions that we announced in the quarter, that’s adding obviously to the change in the guidance we did for diagnostics. So when you look at the change, just use the midpoint of our guidance, it improved 140 basis points, I assume roughly half of that is from those three acquisitions. And again, those were already incorporated in our enterprise guidance but not until the segment until the deals were closed. So half of it is due to the acquisitions, and then the other half of the growth is demand. The strength that we saw in the first quarter that we also expect to see continued through the year.

Erin Wright: Okay. That’s helpful. And then switching to the biopharma segment, what are you expecting for the balance of the year at this point? What are you seeing in terms of RFP flow and cancellations? And how would you just characterize the underlying health, particularly across that early development business? Thanks.

Adam Schechter: Yes. So I’ll start overall and then I’ll answer early development specifically. So overall, BioPharm Laboratory Services grew 8% and Central Labs had very strong growth at 13%. Now realizing Central Labs had a relatively easy compare versus first quarter of last year. You probably remember in first quarter of last year, there were a lot of personnel issues at investigator sites. If you look at the growth, it’s coming back slower than we anticipated, but it’s being offset by the strength in our Central Lab business. If you look at RFP flow, for central lab, everything looks normal, everything looks really strong. That business is very healthy. If you look at early development, we still continue to have good RFP flow.

The win rates are good. The cancellations still remain higher than what we would expect. The first quarter was a bit better than fourth quarter of last year, but still higher than what we anticipate. So as we go through the rest of the year, we were able to maintain the revenue guidance for BLS if you just adjust only for foreign exchange where Central Labs is going to continue to outperform, and we expect it’s going to take a bit longer for the early development business to fully come back.

Erin Wright: Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from Patrick Donnelly of Citi. Your line is open.

Adam Schechter: Good morning, Patrick.

Patrick Donnelly: Hi. Good morning, guys. I want to pick up kind of right where you left off there on the biopharma piece. Can you just dive a little bit deeper into early development? Obviously, again, the book-to-bill softened a little bit there on the BLS side. There’s a lot of focus on the early development piece. Can you just talk about the visibility on that front? And again, the expectations as we work our way through the year, maybe both on orders and the revenue side would be helpful.

Adam Schechter: Sure. So I’ll start with the book-to-bill. So the book-to-bill was 1.0 that’s lower than we would typically like. However, we’ve got insight to the book-to-bill for second quarter already and insight to the rest of the year. And I expect the book-to-bill to continue to grow starting next quarter throughout the rest of the year. The health of the book-to-bill still looks good across the business. It’s an early development part of the book-to-bill, which frankly, is a little bit less relevant because early development, a lot of the studies start in the year and finish in the year. Typically with the book-to-bill, you look for things that go more than a year or over time. So as I look at the early development book to bill, it’s not where we would like it at the moment, but the RFPs are good.

The win rate looks good. It’s the cancellations that are driving the majority of the issues. But that can correct itself faster typically because the burn rate is so much quicker. As we go through the rest of the year, we expect that the early development business starting in the second half will begin to be stronger than the first half.

Glenn Eisenberg: Yes. The only thing I’d add too, Patrick, is when you put the size of the business in perspective, obviously, it’s less than 10% of the company. But even within biopharma you have two-third of the segment, let’s say, Central Lab. And that’s really where the backlog, if you will, the book-to-bill is probably more applicable because the backlog that we have in Central Lab is effectively supporting most of the revenues over the next 12 months. So to your point on visibility with early development, we have less visibility because it’s a much lower percentage of the backlog with that business and much shorter lead times. So it just puts in a little bit more volatility, if you will. But on a positive side, as we ultimately see the rebound in that business, we’ll be able to get those revenues and bring them into revenues on a quicker basis than we could have within Central Labs.

Operator: Thank you. One moment for our next question. And our next question comes from Michael Cherny of Leerink Partners. Your line is open.

Glenn Eisenberg: Good morning, Michael.

Michael Cherny: Good morning and thank you so much for taking the question. Maybe just one quick clarification on Invitae. You talked about the financial impact in the first full year post close. Is there any financial impact currently embedded in the guidance?

Glenn Eisenberg: So Michael, this is Glenn. When you look at the guidance that we’ve given, and we always kind of say the midpoint of the range is what our expectation is, and then there’s always going to be pluses and minuses, which is why we put a range. So at the midpoint of our guidance, the answer is Invitae is not in those numbers. But when you look at the guidance range, so relative to the revenues of Invitae or the potential dilution in the first year, that would be incorporated, if you will, sizing it within the range we’ve given. So I guess the answer is it’s not in the explicit guidance, but it’s captured within the range that we’ve provided. We’re looking to close this and it will obviously depend when we do, but let’s say it’s in the third quarter.

Obviously, when we have our announcement of our quarterly call, we will update our guidance to reflect, obviously, a half a year left. But obviously, acquisitions that would have been completed as well which, again, we may see Invitae for that time frame.

Michael Cherny: Okay. That’s helpful, Glenn. And then maybe just on price and rev per rec. Can you just give us a sense on how it tracked over the quarter relative to your expectations? And in terms of the base business guidance increase for the Diagnostic Laboratories business, how much of that is the difference between improvements in volume versus improvements in price?

Glenn Eisenberg: Yes. So overall, we normally talk about our growth weighted to volume versus price mix and ratio, if you will. Obviously, it was a little different during the quarter, but strength, frankly, on both volume and on price mix. The price/mix really is mix related. We would normally say unit price is relatively flat. But the improvement that we saw in the quarter from a mix standpoint was the live management agreements, was the — our test per session. We continue to see favorable movement and we’re seeing a higher percent of our growth coming from our esoteric business versus routine. So all those three kind of improved our mix. But clearly, the growth that we expect to see is driven off of demand, which is volume.

Michael Cherny: Got it. Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from Ann Hynes of Mizuho Securities. Your line is open.

Adam Schechter: Good morning, Ann.

Ann Hynes: Good morning. Thank you. How are you? So I just want to talk about just the volume and obviously, the Diagnostics segment is very strong. And it’s in line with what your largest period as reported. And I’m just trying to figure out like how much is driven by underlying demand, which is strong, but also how much is driven by maybe the national companies taking market share? And if you are taking market share, who are you taking it from?

Adam Schechter: Yes. So Ann I’ll give you — broadly speaking, and then maybe Glenn can add some details. But broadly speaking, if you look at the hospital deals that we’re doing, there’s a significant number of them that we had last year at the end of the quarter going into this year. And when you do those, those are, by definition, getting some market share. And then when you think about what’s happening in the marketplace around those hospitals, you expect that you’ll pick up some market share there as well. So I think a lot of it is that the market is strong. You’re seeing a lot more people getting procedures and so forth. But in addition to that, I think there is some share gains that you’re seeing because of what we’re doing and the strength that we have in the hospital market sector.

Glenn Eisenberg: Yes. No, the only thing I’d add is just that we had a good quarter, and we took our full year outlook up to reflecting the stronger demand than we’ve been seeing. We also look back to pre-pandemic, and we’re tracking well within the range that we would normally expect to be. So some of the year-over-year improvement arguably has driven a bit about and not fully recovered year — the prior year. But to see that kind of growth, we feel very good about and expect that to continue.

Ann Hynes: All right. And then secondly, heading into the final LDT rules for the FDA, what is backlog looking? Like what are the key things we should look for that you won’t change in the final role?