Labcorp Holdings Inc (LH) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the LabCorp of America Q2 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Clarissa Willett, Vice President of Investor Relations. Thank you. Please go ahead, ma'am.

Thank you, operator. Good morning, and welcome to LabCorp's Second 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 at labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call.

Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to expectations for 2020 and the related assumptions, including the projected impact of the COVID-19 pandemic on the company's businesses, operating results, cash flow and our financial condition, our responses to and the expected future impact of the COVID-19 pandemic on our business more generally as well as on general economic, business and market conditions.

Each of the forward-looking statements is based upon current expectations and is subject to change based upon various factors, many of which are beyond our control that could affect our financial results. Some of these factors are set forth in detail in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change.

Now I'll turn the call over to Adam Schechter.

Thank you, Clarissa. Good morning, everyone. Thanks for joining us today.

For more than 50 years, LabCorp has led through science, innovation and technology. During the current pandemic, that leadership has been front and center when the world has needed us most. I continue to be impressed with how quickly our teams have rallied to confront each and every challenge put before them. And I want to thank our 65,000 employees, as their efforts have been heroic during this difficult time.

During the second quarter, we delivered solid performance across the company despite the impact of the pandemic. We delivered revenue of $2.8 billion, adjusted EPS of $2.57 and free cash flow of $272 million. We were encouraged to see steady recovery in our base business during the quarter for both Diagnostics and Drug Development, as people are starting to return to their doctors for testing and clinical trials activity is resuming, including those that are for COVID-19-related research. More specifically, although Diagnostics revenue declined 3.9% compared to a year ago, in the month of June, volumes were up year-over-year. COVID-19-related testing more than offset the decline in the base business.

Our Drug Development business delivered a solid trailing 12 months book-to-bill of 1.32 and our backlog grew to $11.8 billion compared to $11.3 billion last quarter. We remain committed to bringing the full power of our combined Diagnostics and Drug Development capabilities against this virus. We'll apply our scientific expertise and ingenuity across all aspects of testing, treatments and vaccines.

From the outset, our testing approach has been guided by 3 steadfast principles. First, build as much capacity as possible, as fast as possible across as many platforms as we can, just move. Second, no one should be advantaged or disadvantaged based upon ability to pay. We would not charge patients upfront out-of-pocket cost, and we will use the Medicare price for the PCR test for everyone. And finally, no one should be prioritized over anyone else. Tests will be performed as they are received. The only exception has been in response to the guidance to prioritize hospitalized patients. We will continue to work with the HHS or the CDC if additional priorities identified with them in the future. These principles have guided all of our decisions and have kept us focused.

Since being the first commercial lab to launch a PCR test in March, we have rapidly expanded both capacity and accessibility for testing at an astonishing pace. We have performed more than 8.5 million molecular tests with current capacity of 180,000 tests per day and growing. Molecular testing is now processed in 16 labs, including our Covance Drug Development central lab in Indianapolis, a great example of the power of our combined business.

We have significantly expanded accessibility of PCR testing to reach as many people as possible, including those in underserved communities. Our PCR tests are available through doctors, through hospitals, other health care providers, retail pharmacy chains, drive-through testing sites and through our website.

We were the first lab authorized for at-home sample collection through our Pixel by LabCorp platform and recently, the first to offer a seamless digital service to help doctors electronically order a COVID-19 at-home sample collection for patients as appropriate.

With the rising spread of COVID-19 in the U.S., building further capacity as fast as possible, remains a priority and a challenge. In recent weeks, the rapid acceleration in sample volumes had outpaced our capacity and increased time to deliver results to just over 4 days on average. We are now back to a 2- to 3-day turnaround time on average, with hospital inpatients even faster. We have aggressive efforts underway despite continued constraints with supplies and equipment to continue to grow testing capacity across multiple platforms as fast as we can. To help achieve that volume, we received an EUA for pool testing just last week.

In addition to our PCR testing options, we also offer antibody testing. We began offering antibody testing in April and had performed more than 2 million tests with capacity for 300,000 tests per day. To make it easier for employers and large groups to be tested, we launched a fingerstick blood test that detects antibodies to the virus.

As the economy reopens, we are also helping to guide return-to decisions. We launched LabCorp Employer services, which provides customized solutions to guide strategies for returning to workplaces and to universities, and we are connected with hundreds of employers.

Beyond greater testing capacity and access, new treatments and ultimately a vaccine are critical, and LabCorp is playing an important role there, too. Our enterprise-wide early response team continues to feel significant volume of client requests to assist in the development of new COVID-19 treatments and vaccines. We are actively working with many clients, supporting a significant number of opportunities across all business segments and phases of development, with most in early stages. We launched a neutralizing antibody test to assess the capability of the capacity of antibodies in patient plasma, which may help to accelerate the evaluation of vaccines. These achievements clearly demonstrate the depth of scientific delivery and technological innovations that are hallmarks of LabCorp, coming from both our Diagnostics and Drug Development businesses.

In addition to our critical work in a fight against COVID-19, we continue to advance our strategic priorities, which include the following: leveraging the power of our combined capabilities; leading in oncology; integrating data analytics, AI and digitalization across our business; putting customers at the center of all we do; and maximizing high-growth opportunities. Many of the innovations I've just shared with you have helped to advance these priorities in meaningful ways.

Importantly, oncology continues to be an area of focus. During the quarter, we launched a liquid biopsy test for patients with non-small cell lung cancer. It's available exclusively through LabCorp. This blood test is designed to detect actionable mutations in non-small cell lung cancer genes to help guide patient care decisions. We're also collaborating with HealthEC on the development of an oncology care module that will help oncologists improve patient outcomes and achieve cost savings by making it easier for clinicians to assess and compare key data points and performance metrics.

Also to support our priorities, we have made several business development activities. We expanded our capabilities in hybrid and virtual trials by completing the acquisition of GlobalCare Clinical Trials. They are a recognized industry leader that provides decentralized and traditional clinical trial study services in more than 65 countries. Their therapeutic and operational expertise complements our clinical capabilities and will expand our ability to provide decentralized trial services.

We also acquired RDL Reference Laboratory in June, a pioneer and leader for more than 40 years in rheumatologic and autoimmune testing, strengthening LabCorp's full range of testing services for complex autoimmune syndromes, which is important for rheumatologists, hospitals, health systems and biopharma companies.

And lastly, we acquired the ambulatory testing business and entered into a comprehensive laboratory services relationship with Franciscan Missionaries of Our Lady Health System, one of the largest health systems serving Louisiana and Mississippi.

Though we cannot fully predict the future, we have confidence in our base business and in our ability to continue to aggressively scale COVID-19 testing. I am optimistic about the future, and I want to reaffirm that we are well positioned to continue to have a very significant impact to serve our customers and to drive long-term shareholder value. We will continue to do all that we can to win the fight against COVID-19.

A holistic approach, inclusive of society's adoption of wearing masks, social distancing and good hygiene practices is crucial. Testing and effective tracking and tracing are very important. And we need new treatments until a vaccine is widely and globally available. I am absolutely confident that it can be done and that science will lead the way.

Now I'll turn the call over to Glenn to give more specifics on our financial performance.

Thank you, Adam. I'm going to start my comments with a review of our second quarter results, followed by a discussion of our performance in each segment and conclude with some commentary regarding our current expectations for the remainder of 2020. As a reminder, in the first quarter, we were able to estimate the impact of COVID-19 on our results, given that the impact was late in the quarter. However, we commented that we would not be able to do that going forward. For second quarter results, we have quantified the revenue associated with the COVID-19 molecular and serology tests so that you can see the change in the base business.

Now I'll review our second quarter performance. Revenue for the quarter was $2.8 billion, a decrease of 3.9% compared to last year due to lower organic revenue of 5.4% and foreign currency translation of 10 basis points, partially offset by the benefit of acquisitions net of divestitures of 1.6%. The decline in organic revenue was driven by the pandemic, which caused our organic base business to decline by 20.9%, which was partially offset by COVID-19 testing of 15.4%.

Operating income for the quarter was $298 million or 10.8% of revenue. We had $23 million of restructuring charges and special items, primarily due to COVID-19-related costs and LaunchPad initiatives, which was partially offset by an insurance reimbursement. Adjusted operating income, which excludes amortization of $60 million as well as restructuring charges and special items, was $381 million or 13.8% of revenue compared to $447 million or 15.5% last year. The decrease in adjusted operating income and margin was primarily due to the decline in our base business as a result of the pandemic and higher personnel costs, which was partially offset by COVID-19 testing and LaunchPad savings. The decline in the base business includes the negative impact from PAMA of $14 million or 40 basis points.

The tax rate for the quarter was 22%. The adjusted tax rate, excluding special charges and amortization, was 23.9% compared to 25.2% last year. The lower adjusted tax rate was primarily due to the geographic mix of earnings.

Net earnings for the quarter were $232 million or $2.37 per diluted share, which includes the monies from the CARES Act of $56 million or $0.42 per share. Adjusted EPS, which exclude amortization, restructuring charges, the CARES Act and other special items, were $2.57 in the quarter, down 12% compared to last year.

Operating cash flow was $371 million in the quarter compared to $254 million a year ago. The increase in operating cash flow was due to higher cash earnings being partially offset by higher working capital. Cash earnings benefited from the CARES Act and from tax deferrals, while the increase in working capital was primarily due to COVID-19-related supplies and receivables.

Capital expenditures totaled $99 million in the quarter or 3.6% of revenue compared to $85 million or 3% last year. The increase in capital was due to $20 million of investments in adding COVID-19 testing capacity. As a result, free cash flow was $272 million in the quarter compared to $168 million last year.

During the quarter, we invested $11 million in the Diagnostics acquisition. And as Adam mentioned, we closed 2 additional tuck-in acquisitions in July, one for each segment. At quarter end, our cash balance was $557 million, up from $324 million at the end of the first quarter. And total debt at quarter end was $6.2 billion, and our leverage was 3.3x gross debt to last 12 months EBITDA.

Now I'll review our segment performance, beginning with LabCorp Diagnostics. Revenue for the quarter was $1.7 billion, a decrease of 3.9% compared to last year due to a decline in organic revenue of 4.9% and foreign currency translation of 10 basis points, partially offset by the benefit of acquisitions of 1.1%. The decline in organic revenue was driven by the pandemic which caused the base business to decline by 30.1%, which was partially offset by COVID-19 testing of 25.2%. Included in the base business decline was the negative impact from PAMA of 0.8% and the nonrenewal of the BeaconLBS-UnitedHealthcare contract of 1.2%.

The 3.9% decline in revenue was comprised of volume decline of 19.5%, partially offset by favorable price/mix of 15.6%. The total volume decline of 19.5% from last year was due to organic volume declining 20.7%, which was partially offset by acquisitions contributing 1.2%. The decline in organic volume was due to the pandemic, which drove our base business volumes to decline by 35.3%, partially offset by increased COVID-19 testing volumes of 14.6%.

Throughout the quarter, both our organic base business as well as COVID-19 testing continue to improve. For June, organic volume per day increased approximately 6% over the prior year, as the decline in the base business of 17% was more than offset by COVID-19 testing of approximately 23%. As a reminder, we do not include hospital lab management agreements in our volume, which would have added approximately 0.7% to the quarter's growth.

While total volume was down 19.5%, price/mix increased by 15.6%. The increase was driven by COVID-19 testing of 10.7% and the change in the mix in the business of 5.2%, partially offset by currency and acquisitions. The base business includes the negative impacts from PAMA of 0.8% and the nonrenewal of the BeaconLBS contract of 1.2%.

LabCorp Diagnostics adjusted operating income for the quarter was $309 million or 18.2% of revenue compared to $345 million or 19.6% last year. The decrease in adjusted operating income and margin was primarily due to the decline in our base business as a result of the pandemic as well as higher personnel costs due to merit increases, partially offset by COVID-19 testing and LaunchPad savings. The decline in the base business includes the negative impact from PAMA of $14 million or 60 basis points. We remain on track to deliver $200 million of net savings by the end of 2021 from Diagnostics LaunchPad initiative.

Now I'll review the performance of Covance Drug Development. Revenue for the quarter was $1.1 billion, a decrease of 2.9% compared to last year due to a decline in organic revenue of 5.2% and foreign currency translation of 10 basis points, partially offset by the benefit of acquisitions net of divestitures of 2.4%. The organic revenue decline was due to the pandemic, which negatively impacted our base business, partially offset by COVID-19 testing which added 1.1% to revenue. Excluding our best estimate of the impact of COVID-19, organic revenue would have grown in the mid- to high single-digits, in line with our targeted performance.

Adjusted operating income for the segment was $113 million or 10.3% of revenue compared to $142 million or 12.6% last year. The decline in adjusted operating income and margin was primarily due to the negative impact from the pandemic and higher personnel costs, partially offset by COVID-19 testing and LaunchPad savings. We remain on track to deliver $150 million of net savings by the end of this year from Drug Development's LaunchPad initiative.

For the trailing 12 months, net orders and net book-to-bill remained strong at $6.1 billion and 1.32, respectively. Backlog at the end of the quarter was $11.8 billion, an increase of approximately $490 million from last quarter. We expect approximately $4 billion of this backlog to convert into revenue over the next 12 months.

Now I'll provide some commentary regarding our current expectation for the remainder of 2020. Despite our improved outlook, there continues to be uncertainty regarding the duration and future impact from the pandemic. As a result, we continue to not provide 2020 guidance. However, we do expect for the full year to see increased revenue, earnings and cash flow compared to last year, driven by COVID-19 testing demand. In addition, our current outlook assumes improvement in the base business of both our Diagnostics and Drug Development businesses.

From the very beginning of the crisis, we have been focused on doing everything we can to address the pandemic, such as increasing COVID-19 testing capacity as quickly as possible, irrespective of demand. This has helped position us to perform approximately 180,000 molecular COVID-19 tests per day, and we continue to add capacity subject to supplier availability.

During the first quarter, we commented that given the decline in our business as a result of the pandemic as well as the uncertainty in our outlook, we took actions such as furloughs, reduced hours and withheld merit increases and 401(k) contributions. Now with increased demand and an improved outlook, we have brought back employees from furloughs, we are proceeding with merit adjustments, and we will retroactively reinstate 401(k) contributions, recognizing the significant contributions of our employees.

From a capital allocation standpoint, our current outlook is that we will continue the suspension of our share repurchase program but expect to do tuck-in acquisitions across both businesses that meet our heightened threshold of strategic fit and financial returns.

This concludes our formal remarks, and we'll now take questions. Operator?

(Operator Instructions) Our first question comes from the line of Eric Coldwell from Baird.

Quick question on Covance. I'm just curious if you could give us some -- sense on the nature of the strong bookings, particularly how much might be related to COVID-specific work? And maybe as a follow-on to that, if you could give us any details on the performance of the 3 segments: clinical, central lab and early development, how those individually played out during the quarter?

Eric, so Covance had a very good quarter. And I think it continues to show the power of having both Diagnostics and Drug Development together. If you look, we had put together a enterprise early response team. And that team includes people from both our Diagnostics business and our scientists from Diagnostics together with people and scientists from Drug Development. And we've been participating in discussions on almost every vaccine and almost every treatment for COVID-19.

With that said, as I mentioned in my script, most of those trials are still pretty early stage. So for the quarter, they didn't necessarily contribute a very significant amount of dollars. As we move forward, I believe that it will be increasingly important in terms of our revenue.

If you look at the 3 parts of our business, early development and central laboratories began to come back quicker than the clinical work. And that's because if, for example, we have a central lab in China, as China opened up, we saw the capacity fill pretty fast. And as markets open, where we have the central laboratories, we've seen those countries continue to increase with the capacity that we have quickly.

Early development, we continue to do very well, and that includes some of the early work that I just mentioned for COVID-19.

Clinical, we have seen an increase in accessibility of sites, and that's gone up fairly significantly, particularly driven by Asia. Although there's not as many sites in Asia as there are in the U.S. and Europe, most of the sites in Asia are now accessible. However, many companies are still waiting until there's global accessibility before starting some of those particularly later stage Phase III trials, and I think that's still going to take some time. So that business coming back has taken longer than the other 2.

Adam, the -- your peers that have reported to date have talked about COVID awards comprising somewhere between, call it, high teens and even mid-20s of total bookings. Could you share with us your experience?

Yes. So I'm not going to give the exact percent because the book-to-bill, as you can imagine, it moves based upon what makes it through Phase I, into Phase II and so forth, but we're not that dependent on COVID-19 trials at the moment. So I can't compare it to their numbers, but our numbers are not as dependent upon COVID.

Our next question comes from the line of Jack Meehan from Nephron Research.

Adam, I was hoping to get your perspective as to how you think testing for COVID-19 is going to evolve as we head into the fall. What portion of the testing do you think is going to move to pooled methods? Do you think molecular is going to remain the go-to approach? And just any perspectives on antigen testing would be great.

Absolutely, Jack. So the first thing I'd say, it's been pretty remarkable how in early March, we were doing 2,000 to 3,000 PCR tests per week. And here we are in the end of July, and we're able to do 180,000 PCR tests per day. I mean, that's just astonishing. And for people that understand the type of equipment that you need to run PCR tests, it's completely different than what you would need for blood tests. And we've had to build significant capacity.

I believe that we have to continue to build capacity. We don't know for certain what the fall will bring. But as schools open up, as businesses open up and as the fall flu season comes to fruition, I think we're going to continue to need more testing. And I do believe that PCR testing will remain the gold standard for telling if somebody currently has the disease. And therefore, we will continue to build capacity as fast as we can and overcome some of the issues that we face in terms of supplies and machinery.

At the same time, I think that all testing is going to play a role. Pool testing is particularly helpful in areas with low prevalence, in things like back to school or back to work because with low prevalence, you can do the pool testing and then you don't have to do any re-testing. I don't think it's going to be the most significant amount of testing that we're doing. In fact, I believe that the standard PCR testing in the fall will remain the most significant by far of the testing that we do for PCR, but I do think that the pool testing will add to our capacity and give us additional capabilities.

Things like antigen testing, I think, have a role also. So for example, if you wanted to test a large group of people with antigen testing point-of-care, get quick answers, you could then see if there's any positive people in that large group. If there are, I would go back and test them with PCR testing. If there's none, I would probably feel pretty comfortable that I don't have to retest. The issue with the antigen testing as it is today is that you can miss some positives. So you want to make sure if you have somebody positive, you test the people that tested negative. But if it's a pretty large population, it would be a statistical anomaly for everybody to test falsely negative. So if you see one positive in that population, I would go back and retest them with PCR.

So I think we're going to need all the capacity we could get to get through the fall, assuming that the flu season could be big, and we're all doing the best we can to prepare for it.

Great. And maybe just building off that, given some of the expectations around testing in the second half, how are the incremental margins on the COVID testing stacking up versus the base business? And what's your philosophy on reinvesting a portion of that back into the business?

Yes. So I'll give you a broad statement, and then I'll ask Glenn to give you some specifics. But we're going to continue to build capacity irrespective of cost. And that's been our philosophy from the beginning, buy as many machines as you can, get as much testing equipment as you can. And frankly, that's what got us to 180,000 per day, along with our scientific capabilities. The LabCorp scientists have just been extraordinary to get us to where we are today. And I want to continue to build that.

It will be a good day if we get to fall, and we have more capacity than the number of samples that we get in. And that's what we're going to strive for albeit it's not going to be easy. We need help from our suppliers who are working 24 hours a day, 7 days a week to try to get more reagent, more machines and so forth. But in terms of the margins, I'll let Glenn give you some specifics.

Sure, Jack. We've commented in the past that when we -- obviously, given the fixed cost nature of the Diagnostics business, the incremental drop down for new testing, call it, was around 65%. So we've used that example when there's been weather and what's happened. So the COVID testing clearly falls within the ballpark, if you will, of what we would experience with our other testing. So obviously, helping contribute to the improved leverage, if you will, with the additional testing that we're doing.

Our next question comes from the line of Stephen Baxter from Wolfe Research.

I wanted to follow-up on the pooling for molecular testing. So my understanding is you'll initially be doing this on your LDT. I guess how much of your daily volume today runs through the LDT? And what do you think is the multiplier effect that you'll get on that capacity?

And then just as a follow up, what's the process for expanding pooling onto your other testing platforms? And when would you expect to see that occur?

Yes. Thank you, Stephen. The first thing I'd say is that we launched back in March with our LDT, and that's a laboratory developed test by LabCorp scientists. And it's been remarkable, the amount of volume that we've been able to do through that LDT. Of course, we still need our suppliers and the other companies to help us to get to 180,000. But I have to say that our scientists did an extraordinary job with the LDT to get us to 180,000 today.

I'm not going to give you the exact number through the LDT because that changes. It changes based upon -- we have 16 labs running tests. Different labs have the LDT. Different labs have other equipment. So at the end of the day, it depends on where the samples are, which tests we run them, and what we try to do is optimize our network so we can get the best possible turnaround we can. To be at 2 to 3 days right now of turnaround for our patients and the hospital inpatients even faster says that we found a real way to use our capacity and distribute it successfully.

With regard to the pooled test, I don't think that we want to give a certain percent that we'll go through that. Instead, what I would say is we're going to make sure that as much of our LDT, that is a significant amount of our volume, it's a significant amount, and go through that if we need it.

At the same time, we'll have to file EUAs to use other platforms to run the pooled analysis on. And we would expect to do that as we move forward. But for now, I think with our LDT, we can do as much pooling as what we would see appropriate.

Our next question comes from the line of Lisa Gill from JPMorgan.

Adam, I want to go back just to the core volumes. Can you give us any color as to what you've seen thus far in July, especially in areas of the country where we have seen some level of resurgence? Would be my first question.

And then secondly, I know you're not giving guidance, but just curious around your continued expectation on the reimbursement side for COVID testing.

Sure, Lisa. And it was interesting because in the first quarter, when we saw the volume dropped by 55% in the month of March, we didn't know how fast it would come back. And it was concern that it could take an extended period of time. To be frank with you, I've been surprised at how fast it has come back. As states have opened, we've seen the testing come back more significantly.

For example, as Florida and Texas and Georgia opened up first, we saw the core testing come back faster. As states begin to modulate and slow down a little bit, you see the testing slow down. So there's definitely a correlation between how far and how fast the states have opened to how far and how fast our base business had come back. What I would say is for June, it was the first time since COVID that we saw that the total testing, including our COVID testing, was above prior year.

In July, it's still early. We don't have all the data for the month, but we're seeing continued strength in the base business and base testing. The reason that we have not given guidance for the rest of the year is because, as you say, it's impossible to know how fast things will move, will they slow down a little bit if they see additional breakout? What will the fall look like? What could happen? Will it be another slowdown in the base business? So we're watching it, I mean, frankly, almost every day, but we want to make sure that we continue to do the best we can to be able to forecast that.

In terms of reimbursement, they did announce, HHS, that they extended the emergency in the United States. Typically, that lasts for another 90 days. We assume that the reimbursement will continue to be strong as we go through the emergency situation, and then we'll just have to see what happens as we go after that 90-day extension.

Our next question comes from the line of Dan Leonard from Wells Fargo.

So hoping you could elaborate further on what you're seeing from the return-to-work demand front. Adam, you mentioned you're connected with hundreds of employers, but I'd love to be able to quantify that or better understand the magnitude in some fashion.

Yes. Sure, Dan. The first thing I would say is that I spent a lot of time talking to other CEOs, talking to presidents of universities, and we try to help them understand ways that they can think about going back to work or back to school. And different companies and universities are thinking about different approaches. And sometimes, it depends on if they're in a hotspot, if they're in an area with very low prevalence, what type of workforce they have, do they have health care workers, do they have factory workers. So a lot of things go into the discussion, and it's a multi-variant discussion.

In general, the first thing that we talk about is the importance of wearing masks, social distancing, ensuring the workplace is clean, good hygiene, cleaning elevators and elevator buttons, ensuring the airflow in the buildings are appropriate. Prevention and keeping people out of work that are sick, having temperature checks before they come into school or work, questionnaires, that's all critical.

The second thing is that once somebody does make it into school or workplace and has any symptoms, you want to test them with PCR as quickly as possible, and you want to have tracking and tracing capabilities and be able to track and trace anybody that's been around them. And then you want to have a place to isolate them, particularly if you're in a university, while you wait for the results to come back. And that's why having the type of turnaround that we do, 2 to 3 days, is so important for tracking and tracing.

And then ultimately, over time, we want to work with them to get flu vaccinations for their workforce, so that when they get to the fall flu season, they'll have a sense as to what is flu versus what might be COVID-19. So we're trying to work with these companies across the entire front of what they can be thinking about as they go into the August, September time frame.

What I can say is a lot of my time is spent on talking them out of doing testing because the types of testing people have said is, well, why don't I test everybody once a week? I don't think that makes a lot of sense to do that. I think if they want to do surveillance, that's fine. But to try to test everybody once a week, that will give you one point in time. And the next day, if somebody, is sick, starts to spread it, you won't necessarily have done a lot. You've spent a lot of money on testing that probably was not best use of your time and money.

So to be honest with you, I spent a lot of time trying to help them think about it logically. And a lot of my time is trying to make them understand how to best use testing and where it's appropriate. And I can tell you, I'm spending a lot of my time, and my team is spending a lot of time talking to these folks.

I appreciate all that color. And then for my follow-up, Adam, you commented earlier about the differential trends at Covance by line of business. Can you also comment by customer segment between large pharma, maybe midsized pharma and what you're seeing out of the emerging biotech crowd that's been pretty successful raising money to date?

Yes. I would say we're seeing increases, and we're seeing business across all: biopharma, pharma, large, small, U.S., ex U.S. But it's in the lines of business, like I mentioned to you earlier, that we're seeing the business come back faster in early development, central laboratories. And over time, I believe we'll see more in the clinical area. But I don't think there's a differentiation and segmentation across the customers within those segments. We're seeing strength, frankly, and RFPs across them all.

Our next question comes from the line of Donald Hooker from KeyBanc.

I was curious, you guys took a receivable reserve, I think, last quarter, given the potential for cash collection issues, obviously, with more unemployment. How has that played out? And how is -- I know you guys have invested a lot in technologies in that area as well to mitigate that. Can you maybe elaborate on your experience there?

Don, it's Glenn. Yes. As you mentioned, in the first quarter, given the pandemic coming and looking back at other times where we've seen significant financial disruption and how it impacted our client base, we established a reserve of $17 million. We have seen an increase in our bad debt experience, but we feel that the reserves that we have established are very adequate going forward and nothing that was unexpected, at least at this time.

Okay, super. And then maybe just last question for me in the Covance business, given all the disruptions, are you seeing any change in pricing across the various lines of business you have there, particularly early development?

No. In general, we're not seeing any significant changes.

Our next question comes from the line of Pito Chickering from DB.

This is Justin Bowers on for Pito. Just with respect to pooling, are you -- is the plan to roll that out to all of the 19 sites?

And then secondarily, when we do some quick math on the multiplier effect, we arrive, let's say, 300,000 to 350,000 like a theoretical capacity. But just based on your earlier comments, it sounds like molecular is going to be the primary modality. So can you help us think about kind of the ramp there? Or what the capacity is with pooling? And then -- and I'll stop there.

Yes. Thank you for the question, Justin. And pooling is important piece, but it's not, in my opinion, going to be the primary piece. PCR testing will continue to be the primary piece of what we do. And if you look at our labs, we will not be rolling out pooling to all of our labs. It takes a lot of technical capabilities to do the analysis, the analytics to hold the samples, where you test the samples, is a lot of work and you need some specialized equipment for it. So we'll have it in multiple laboratories, but certainly not across all laboratories.

And then we have to make sure we use it in the right patient population. So we're not going to just broadly start trying to pool patients. We're going to look for the right places and the right parts of the country or the right organizations where we believe the prevalence will be such that pooling makes sense.

What I would avoid is trying to go to theoretical capacity. And for example, right now, we can do 180,000 tests per day. We have done in a day 180,000 tests, so we know we can. But I would not take 180,000 and times it by 7 and try to figure out capacity. Because if you can do 180,000, but you want to maintain a 1- to 2-day or 2- to 3-day turnaround, you don't want to run at full capacity. You want to be below that. So we're going to continue to ensure that we do as many tests as we can, but we want to manage the turnaround time as best we can as well. So to me, theoretical capacity is just that, but that's not how I build our financial model. I build it based upon practical utilization of the test, of which pooling will be a part of, but the overall PCR testing will drive it.

Appreciate it. And just a quick follow-up. In terms of the base business, when you look at some of the areas where some of the hotspots around the country now, how is the base business trending versus like earlier in the pandemic? And just trying to get a sense of like the magnitudes and the swings because I would think it's not as severe as it was, let's say, in April.

Yes. So it's bounced back pretty significantly. And what we've seen is as states have begun to open up, the base testing has increased. And for the first time, if you look at our base testing plus our COVID-19 testing in June, we actually had volume that was above the prior year. So that just gives you a sense that the base business came back pretty well.

Our next question comes from the line of Ralph Giacobbe from Citi.

Adam, you talked and mentioned the flu a few times during the call. Just hoping to get a little bit of a sense of what you're expecting for the flu season, how it plays out, just given the current backdrop, and what are your testing capabilities to sort of do both one shot? And then practically speaking, can you just give us a sense of how big flu testing is for you? And again, whether you think there's an uptick there.

Yes. Thank you, Ralph. And what I would say is if you look at this pandemic, the only thing that has been predictable is the fact that it's been unpredictable. And what we want to do is build as much capacity as fast as we can for any circumstance that comes at us come the fall flu season. When you look at the flu season, we think that this will probably be one of the highest years for people to get flu vaccinations. And we hope as many people that are able and that it's appropriate for to get those vaccinations could do it.

Our LabCorp Employer Services are actually helping businesses get vaccinations for flu for their employees. It's going to depend on the flu season, the strain, how effective those vaccines are. As you know, every year, there's a different efficacy of the flu vaccine. So we'll see how that plays out based upon the strains. But under all circumstances, I think that COVID-19, together with the flu season, is going to be more problematic than where we are today.

We are developing combined tests with multiple respiratory elements, including things like flu and COVID-19. Flu has not been a very significant driver of revenue for us in the past. But I think with COVID-19, it's going to continue to be important to know, is it flu or is it COVID-19? If somebody does a rapid flu test in a physician's office and he comes back negative and they saw symptoms, they're going to probably want to get the PCR test. If somebody comes back positive for flu in the office, I'd feel good about that, but I would still want to validate it in case it was a point-of-care false positive and get the PCR test. So that's why I believe, under almost every circumstance, we've got to be prepared to do everything we can to build as much capacity for the flu season.

Okay. That's helpful. And then just a quick follow-up. I want to go to the pricing number ex COVID. So just the base, I think it was up almost 7% ex PAMA and Beacon. Is that just all acuity-driven? Or what are the factors? And maybe what's a more sustainable number as we think looking ahead?

Hey Ralph, it's Glenn. That's right. The mix impact on the base business was up with 5.2% but negatively impacted the 2% between PAMA and BeaconLBS, so call it around 7%. Again, you'll notice that this time, we've used the price/mix to help define the revenue, so volume and price/mix to get to our change in revenues. We have changed the methodology, as you would have seen in the past using revenue per requisition, given that in the past, that was always a good proxy, if you will, for our pricing or our mix within the business. And what was interesting this quarter is we're trying to explain our, call it, 3.9% reduction in revenue. If you took our volume change and our revenue per requisition change, you would get to minus [0.1]. So this is really the first quarter that there's been a change, and that just due to the dramatic decline in volumes that we've experienced.

So the rev rec number, if you will, within the base, would have been around, well, 19.4%. So the pricing overall within the base business, we always talk about it being that from a unit price is relatively stable. So normally, where we see the change is normally in favorable mix. It could be test per accession. It could be acquisition-related, but most of it driven off of test mix or potentially some payer mix as well.

Our next question comes from the line of Ricky Goldwasser from Morgan Stanley.

Just a couple of questions here. The first one on serology. So Adam, maybe you can share your thoughts. What do you think serology testing guidelines could look like when the vaccine is available?

Ricky, the first thing I would say is that we've built capacity in serology to a very significant degree. We can do 300,000 tests a day. We can do the total antibodies. We can look at the IgG, IgM, IgA. And I think that we've done a really good job to get that up and running. There's really still information and science that we need to understand what those antibodies mean. So we need to understand if you have the antibodies, are you immune? If you're immune, for how long does that last? If you have the antibodies and they start to wane over time, will your T-cells kick in if you're exposed to virus again and you have an immune response?

So I would say that there's still more science that needs to be out there before we can give a definitive answer as to what they mean. But at a minimum, I would want to know if I had COVID-19 in the past because I want to know that I beat it. So if I had the antibodies, I would know that I had COVID-19 in the past, and I beat it.

Number two, as you start to think about plasma and convalescent blood plasma and collecting that, you're going to want to know that people have antibodies in the plasma so that if that works as a treatment, we can get plasma from as many people as possible. I think antibody testing is going to be important for that.

Ultimately, I think you're going to need quantitative antibody testing that would say what level of antibodies do you have, and I think that's going to be important. And we have a quantitative antibody test as well as a qualitative antibody test. So at the end of the day, we're at the forefront of science on antibodies, on understanding T-cells and other immune responses, but we still need more science and more research to give us the definitive answers.

Okay. And then on the PCR side, I mean, to your point, you said we have 180,000 capacity, but practical utilization is below that. So when you think about current demand levels, to achieve that 1 to 2 days ideal turnaround, what does of -- where does capacity need to be?

Yes. So Ricky, that's a big question. And as you go into the fall, I can't tell you the answer to that because we don't know what the demand is going to be. And that's why we are building as much capacity as fast as we can. I have no constraints on buying machines and buying reagents. We're working with our suppliers who have been just terrific to work with to build whatever we need. And it will be a good day if we get through the fall and said we had more capacity than what we needed.

With regard to where we are today at 180,000, we're already at -- for hospitalized patients, we're at about a day, 1.5 days turnaround. And then for everybody else, we're already right now, as we speak, at a 2- to 3-day turnaround. So we're doing really well in terms of turnaround, but we've got to keep building because we don't know what the volume is going to be in the fall, and we won't rest until we build and build and build as much as we can.

And just one follow-up. When you think about the volumes, what percent of the volumes are hospital versus the rest on the COVID side?

Yes. The hospital is small volume. And over time, it will get smaller as there's more point-of-care tests available, as there's more cartridges for a point-of-care test available. I think the hospitals will try to use those as much as possible. So -- and we do some point-of-care tests in our TSAs, which are the hospital labs that we manage. So for me, hospital inpatients' point-of-care is critical. Right now, we have a great turnaround. We're doing that as fast as we can for them. But if I was running a hospital and I can get an answer even faster, I want it even faster. So it will be a smaller percent as we go towards the future.

Our next question comes from the line of Derik De Bruin from Bank of America.

So I've got a I got a couple of questions on the lab. So your competitor put out a low end of their fourth quarter guidance that basically implied a slowdown in molecular testing. I'm just wondering your sort of thoughts on that scenario happening. Is that even something that's remotely possible?

And then some commentary on what you're hearing from the commercial payers in terms of how they're reimbursing.

And then finally, have you looked at next-generation sequencing as a way of increasing capacity? Is that something that you would potentially consider?

Yes. Thanks, Derik. So what I would say is the reason that we have not provided guidance is because there is still so many unknowns as we go into the second half of the year. And the unknowns aren't just with PCR testing. It's also with the base business. Right now, the base business has come back very well. Will it remain that way, particularly if we have another significant COVID-19 impact in the fall? It's hard to know.

I believe that COVID-19 testing, until there's a vaccine, they're going to need us to do as many as we can possibly do. And that's why we're going to build that capacity as quickly as we can. So I don't see a scenario except if there's a vaccine or some type of technology that I don't know of today that would impact us, that would say we don't need a lot of PCR testing going throughout this year.

In terms of next-generation sequencing, absolutely, we're going to look at everything. The question is at what cost and at what price point and how accurate will it be versus the PCR testing. And that kind of leads to your second question, which I put third, because I think commercial payers are going to look, if they can get a very quick turnaround for an accurate test at a reasonable cost, they would do that versus other tests, unless there's a real scientific reason to do otherwise. So what I can tell you, our scientists are looking at every technology available. Every time I read about one or I see one, I send it to our scientists. And they said, "Yes, we've already talked to them. We've already looked at it." So we'll be at the forefront of science and technology here. If there's something that makes sense, we're going to look at it. We're going to do everything we can to be a part of it, just like we've done already with things like PacBio and Adaptive and so forth. But as I sit here today, I think PCR testing, as we go into the fall is going to be critical, and that's why we are so focused on trying to build capacity.

Our next question comes from the line of Dan Lawler from William Blair.

This is Dan Lawler on for Matt Larew. I wanted to ask about the demand for COVID test on the Pixel platform. Can you give us a sense for what share of your COVID tests have been through the platform? And then how meaningful Pixel self-collection might be from a back-to-school or return-to-work perspective?

Yes. Thank you, Dan. So Pixel continues to be an important part and one of the many offerings that we have for people to get PCR testing. It is not a significant, meaning, not more than 25% of our volume, it's less than that. But we do see the Pixel volume increasing. And I do believe that as people go back to school or back to work, at-home collection kits will become more important. And that's why we have Pixel, but we also have other at-home collection kits outside of Pixel that we will use for bulk mailings and for things like employers. So I do believe it will become a more important piece of our mix, even though we're moving a lot of them today, there'll be more as we go into the future.

Okay. Yes. So in close, our mission to improve health and improve lives demands that we stay at the forefront in the fight against COVID-19. The importance and the urgency of what we do has never been more clear. And our commitment and our ability to support important scientific advances are unwavering, and we will only continue to strengthen it as we move into the future. So I want to thank everyone for their support as we've navigated the crisis, including our customers, our suppliers and especially, employees. We're all in this together.

Have a good day, stay safe, wear your mask and donate plasma.

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