Laboratory Corp. of America Holdings (NYSE: LH) ahead of the company’s 3Q20 earnings report. LH is a leading diagnostics company with just one direct competitor – Quest Diagnostics (DGX: BUY). However, much of the company’s work has now shifted to fighting the coronavirus. LabCorp has responded to the pandemic in a number of ways, including developing viral and serology tests, building solutions to aid in the reopening of businesses and the continuation of clinical trials, and partnering with other companies to enhance their response capabilities. However, as attention has shifted to the virus, many patients have delayed routine doctor’s visits, reducing the volume of other tests that LabCorp relies on for revenue.
In particular, management has noted that the new PAMA rules, though a near-term headwind, could provide the company with opportunities for additional partnerships and acquisitions over time. Furthermore, the company is advancing its LaunchPad cost-savings initiative, which it believes can deliver significant savings over the next few years, and continues to pursue strategic acquisitions.
The beta on LH is 1.02.
On October 19, the company launched a new test that provides a quantitative measurement of SARS-CoV-2 IgG antibodies. While available only for use in clinical trials and research, the test provides information about the strength of person’s immune response, which can help determine the effectiveness of vaccines and therapies. On October 2, the company received FDA Emergency Use Authorization (EUA) for a new high-throughput method of extracting RNA from samples collected for COVID-19 molecular testing, improving the speed and efficiency of its RT-PCR tests. On September 8, it launched a combined test for COVID-19, influenza A/B, and respiratory syncytial virus (RSV), helping doctors diagnose patients correctly and make decisions about treatment options; the company is also awaiting an FDA determination about offering the combined test through its Pixel by LabCorp at-home test collection kit, which would offer added convenience and accessibility. On July 25, the company received an FDA EUA for COVID-19 sample pooling, a method that allows larger groups of samples to be tested at one time, thus increasing capacity and optimizing testing supplies. On July 7, the company launched an at-home COVID-19 test collection service, allowing doctors to protect patients by testing them for the virus before surgeries and other treatments.
Earlier, on June 29, LabCorp announced that Covance, the company’s drug development business, deployed its Xcellerate COVID-19 solution, which helps study teams to resume clinical studies and protect patients. It also launched a new neutralizing antibody test on June 25 to assist in the development of COVID-19 vaccines and plasma-based treatments. On June 1, Covance launched its COVID-19 Clinical Trial Connect website to help people access information about how to participate in clinical studies. On May 14, it launched a return-to-work service for employers, providing customized solutions that include the company’s fingerstick antibody blood test, its at-home collection test kit. It also recently added flu vaccination services.
The company has also worked with various partners in its COVID-19 response. On October 5, LabCorp announced a partnership with CLEAR, a secure identity company, to integrate COVID-19 test results with Health Pass, a mobile app that connects a person’s verified identity to real-time surveys and temperature checks. The collaboration is intended to provide a touchless coronavirus screening solution on a national scale. On October 1, a group of 19 healthcare companies, including LabCorp and led by Bristol Myers Squibb, formed the COVID-19 Testing Industry Consortium, with the goal of improving and accelerating testing. On July 30, the company announced that it was working with public health authorities on a no-charge antibody program to accelerate COVID-19 blood plasma donations. On July 22, it entered into a collaboration with JLL, a professional services firm specialized in real estate and investment management, to provide wellness screenings for workplace re-entry and management.
LabCorp has also benefited from partnerships unrelated to the pandemic. On October 19, the company and Swedish, the largest nonprofit healthcare system in the Greater Seattle area, announced an agreement to extend their more than 20-year relationship, allowing LabCorp to continue to provide laboratory services to Swedish’s patients. On October 9, the company and HealthEC, a provider of population health management solutions, launched the Oncology Care Module, a new software tool designed to help oncologists reduce costs and improve patient outcomes. On September 29, LabCorp formed a partnership with Infirmary Health, the largest nongovernmental health organization in Alabama, to provide laboratory services to patients and providers in the eastern Gulf Coast region. On September 28, it signed an agreement with GENFIT, a late-stage biopharmaceutical company, to commercialize a diagnostic test for liver disease; the test is expected to be available in early 2021. On September 16, it announced a collaboration with Tempus to accelerate patent enrollment for oncology clinical trials. On May 28, the company’s Covance unit announced a partnership with software provider Medable that will help accelerate the adoption of decentralized clinical trials.
LabCorp will report 3Q20 results on October 27, 2020. The consensus forecast calls for adjusted earnings of $5.31 per share, up more than 80% from last year’s comparable $2.90; the consensus has risen over the last four weeks. Revenue is expected to grow 25% to $3.65 billion.
The company reported second-quarter results that beat consensus estimates. On July 28, LabCorp reported 2Q20 adjusted earnings of $2.57 per share, down from $2.93. Second-quarter revenue fell 4% to $2.77 billion. Revenue beat the consensus by $332 million. The adjusted operating margin fell 170 basis points to 13.8%.
Along with the 2Q results, management noted that it would not provide guidance for 2020, following its withdrawal of guidance in 1Q20.
EARNINGS & GROWTH ANALYSIS
In 2Q20, the Diagnostics segment saw revenue fall 4% to $1.69 billion. Diagnostics revenue reflected a 5% decrease in organic revenue, partially offset by 1% growth from acquisitions. The change in organic revenue was the result of a 30% decline in the company’s base business, partially offset by a 25% boost from COVID-19 testing. The segment adjusted operating margin fell 140 basis points to 18.2%.
In the Covance business, 2Q20 revenue fell 3% to $1.09 billion.
The decrease reflected a 5% decline in organic revenue and a 1% impact from the disposition of businesses, partially offset by a 3% contribution from an acquisition. The adjusted operating margin fell 230 basis points to 10.3%.
However, we believe that caution is warranted given the continued increase in the number of new coronavirus cases, which could lead to further pressure on the company’s base business.
FINANCIAL STRENGTH & DIVIDEND
The company also had $997 million available under its revolving credit facility, which matures in 2022. Total debt was $7.11 billion.
While LabCorp has bought back stock in recent quarters, it suspended its program in April due to the uncertain impact of the pandemic. As of June 30, 2020, the company had $800 million remaining on its suspended authorization.
Given the suspension of buybacks and coronavirus uncertainties, we do not expect LH to initiate a dividend.
MANAGEMENT & RISKS
Adam Schechter is the company’s president and CEO, having succeeded David King following his October 31, 2019 retirement. Mr. Schechter also assumed the role of chairman on May 13, 2020. He was previously lead independent director of LabCorp, and had been a longtime Merck executive, most recently serving as special advisor to the CEO.
Investors in LabCorp face risks. The company saw patient volume in most specialties decline in 2009-2013 in the wake of the Great Recession, and could see a similar decline in the event of another economic downturn. It could also see lower volume and higher bad debt expense due to changes in the Affordable Care Act, especially if more patients opt for high-deductible insurance plans.
LabCorp faces aggressive competition from Quest Diagnostics (DGX), as well as from other laboratories and hospitals. The company must stay competitive on pricing while still providing high-quality service.
LabCorp operates one of the largest global clinical laboratory networks, managing more than 120 million patient encounters each year.
With a market cap of about $20 billion, LH shares are generally regarded as large-cap growth.
LH shares have recovered nicely since the market downturn in March 2020, rising above their previous all-time-high near $196. However, we believe that they have now entered overbought territory, trading at a relative strength index of 74. While LH may continue to post higher lows and higher highs, we recommend waiting for a better entry point before purchasing the stock.
Nevertheless, we believe that caution is warranted given the recent run-up and uncertainties related to the next wave of the pandemic. We would consider an upgrade if the company’s coronavirus tests are able to offset a decline in routine medical tests, medical testing volumes begin to recover, or the stock pulls back for nonfundamental reasons.
On October 23, HOLD-rated LH closed at $207.49, up $2.23