LabCorp Earnings: COVID-19 Headwinds Partially Offset by Surprisingly Strong Base Business

LabCorp LH remained on the pandemic seesaw in the first quarter, as quarterly COVID-19 test revenue fell 18% year over year, and nonpandemic diagnostic revenue rose 14%. This made the 5% decline in overall diagnostic revenue slightly smaller than we’d anticipated but not material enough to shift our fair value estimate. With the impending spinoff of the drug development unit (named Fortrea) set for the coming months, we think LabCorp’s remaining diagnostics business will still enjoy a defensible narrow economic moat that stems from cost advantage. Considering LabCorp’s efficient lab footprint, consistent investment in upgrading information technology systems, and immense test volume, the firm should easily maintain its lower cost structure compared with the hospital-based labs.

We were pleasantly surprised to see stronger-than-expected demand in nonpandemic diagnostics where quarterly organic volume grew 7% and the new Ascension collaboration boosted base business price/mix up to 7% (though this should moderate once the technical services agreement is folded into the organic business later in the year). Though results from this segment weren’t enough to fully offset the declines in COVID-19 testing in the quarter, they were solid, in our view, and suggest the rise in healthcare utilization we’re seeing across the sector could last through the near term.

We’re eager to see how the Ascension business plays out this year. While LabCorp has easily absorbed and integrated many hospital outreach programs in the past, this arrangement includes management of Ascension’s hospital-based labs. Considering how large the Ascension provider system is and its numerous labs, this situation could demonstrate just how much LabCorp’s expertise in operating labs can be applied to improve efficiency in these smaller facilities. As rival Quest Diagnostics has proved, these lab management arrangements can be economically attractive even if they aren’t as high-margin as outreach programs.