Laboratory Corporation of America Holdings (Labcorp) reported its financial performance for the fourth quarter of 2020, which included a jump in revenues of 52%, a result enabled in part by its quick response to the COVID-19 pandemic. However, Labcorp said that revenues related to pandemic testing could decline by anywhere from 35% to 50% over the course of calendar year 2021. Company President and CEO Adam Schechter said it is difficult to offer a more precise impact for several reasons, principally because of the difficulty in accurately predicting any declines in testing over the course of this year.
Labcorp said in a Feb. 11 statement that revenue for the fourth quarter was $4.49 billion, which represents an increase of 52% over the fourth quarter of 2019, when revenues reach $2.95 billion. Organic growth was up 50%, but the company said that figure includes a 46.4% contribution from testing for the pandemic. The remaining 3.7% was driven by non-COVID sources of income. For the entire year, revenues stood at $14 billion, a substantial uptick from the $11.6 billion in 2019.
The company’s adjusted earnings per share in the fourth quarter skyrocketed to $10.56 from less than $3 in the same quarter in 2019, but the adjusted earnings per share for the entire year ($23.94) were easily double over 2019 ($11.32). Labcorp predicted that adjusted earnings per share would range between $19 and $23 over the course of 2021, while free cash flow would likely land between $1.7 billion and $1.9 billion, roughly the same as seen in 2020 ($1.8 billion). The company noted that it was the first to receive an emergency use authorization from the FDA for several types of testing items, such as a non-prescription, at-home specimen collection kit for use in PCR testing systems.
COVID testing volumes already trending down
Labcorp said it broke out COVID-driven diagnostic earnings from the base diagnostic business to get a better handle on the uncertainty facing the company in 2021, and Schechter noted that COVID testing over the past few weeks in 2021 have ebbed compared to the final weeks of 2020. Should current rates of COVID testing hold for the first six months of 2021, the drop of 35-50% would likely be met by the end of June, he said.
At present, the company’s reimbursement for testing is still nominally $100, and Schechter said that this rate, which is set for the public health emergency (PHE), might hold for the entirety of 2021 as the Biden administration has hinted that it will extend the PHE for the rest of the year. The Centers for Medicare & Medicaid Services still requires a two-day turn-around on PCR testing for at least 50% of tests to hold that rate, which he said Labcorp is still meeting. Hence, the company is enjoying rates of about $90 per test run when considering all sources of reimbursement.
Nonetheless, Schechter said the volume of COVID testing should continue to decline, “albeit maybe at a lower rate than we saw from the end of last year into this year.” The company is assuming that COVID testing volumes will ease further in the second half of 2021.
Labcorp invested nearly $60 million in acquisitions last year, and had $800 million in share repurchase options on hand at year’s end. The capital allocation strategy calls for a significant repurchase of shares in 2021. Schechter said the base diagnostics business performed well in 2020, albeit at a volume that fell below the prior year. Non-COVID testing revenues rose 0.5% in 2020 while volumes actually fell by nearly 8%, but Labcorp managed a more favorable blend of prices and testing services to wring an improved revenues picture out of the base diagnostic business. Labcorp may see a resurgence in overall base diagnostic volume toward the end of 2021 or early 2022, but Schechter said much of this depends on the recovery of the U.S. and other economies.
CDC sequencing work may prove valuable in drug business
Schechter noted that Labcorp is handling “a couple of thousand sequences” per week for the CDC for surveillance of the novel versions of the SARS-CoV-2 virus, an effort he said could be used to foster more activity in the company’s drug development division. However, he advised that this would not likely constitute a meaningful revenue stream over the course of this year. Still, he said the synergies between these two operations would eventually yield tangible results, citing companion diagnostics for oncological applications as an example. Schechter also remarked that the company’s drug division enjoys the greater benefit from that synergy compared to the diagnostics business.
Analysts with Morningstar Equity Research expressed confidence in Labcorp’s position in both diagnostic labs and drug development, the latter of which is enabled by the company’s acquisition of Covance, but also because of an emphasis on efficiency. Senior analyst Debbie Wang predicted that Labcorp would bring in revenues of roughly $14.2 billion in 2021, a 6% boost over 2020. Adjusted net income should rise 4% to $1.5 billion.
Wang pointed out that the Medicare rate-setting exercised triggered by the Protecting Access to Medicare Act of 2014 still represents a potential source of drag, although she indicated that most of the rates captured by that mechanism have already settled. This dynamic may trend back to industry’s favor once the rate reset effort begins to incorporate data from hospital-based clinical labs, which typically snare higher rates from private payers, she said.