Good afternoon. My name is Lisa Gill, and I am Head of Healthcare Services with J.P. Morgan. I am incredibly happy this afternoon to be sitting with Labcorp. I think many of you know that I followed the labs for a number of years, and in 2021, I gave them up for a two-year hiatus, and so I'm really happy to be back. Sitting with me today, we're gonna do a fireside chat. To my right is CEO Adam Schechter, and to Adam's right is CFO Glenn Eisenberg. So welcome, guys.
Thank you, Lisa.
Good to have you back.
And end of the conference presentation for day two, but what I really want to do is just start by talking about the prospects as an independent lab. And I think that, you know, there are so many different challenges when we think about the pricing and the cost model today, but what do you think are your competitive advantages in the marketplace? And what do you think about the future of independent labs?
Terrific. Well, first of all, happy New Year, everybody. It's good to be back in San Francisco. I'm gonna answer your question directly in just one minute, 'cause I just wanted to give people a sense of what a transformational year 2023 was for Labcorp. It started where we finished the integration of Ascension, one of the largest deals in the history of laboratory, and then we announced six or seven other hospital deals. Then in the middle of the year, we had a spin of our clinical development business, and then we had our Analyst Day, where we talked about our strategy.
When you look at our strategy, we also provided longer-term guidance, which I think was very strong, 6%-8% or 5%-8% top-line growth, margin improvement of 100-150 basis points, and EPS growth of high single digits to low double digits. I think a big part of the reason that we're able to do that is because of what you just asked, Lisa. Being a large-scaled lab is a significant advantage, and here's why. Number one, we have breadth. We have over 8,000 access points where people can go to give blood, whether it be our own service centers or people we have in physicians' offices. We have depth. We have over 6,500 tests that we can perform, and we add 100-150 new tests every single year.
The key, the key to having that kind of scale, it enables us to use technology, science, innovation, to invest, to reduce cost while we increase quality and we increase speed for turnaround time. The real key to having scale is making sure it doesn't slow you down for decision making. The key is using our scale as an advantage, but we're also agile and nimble, and we make decisions quickly. I think those types of reasons are why many other people that develop tests want to partner with Labcorp, so that we can bring their tests to the market as well as our own tests.
You know, one of the challenges was the comparison for COVID tests as we thought about 2023. But one of the things that really stood out is that your underlying organic growth of your base business was strong in 2023. I know we're not sitting here giving guidance for 2024; Glenn would kill me. But when I think about, you know, that base business and I think about growth in that base business, how do we think about how your position going into 2024?
So I'll give some general statements, I'll ask Glenn to add some specifics of what we've provided for longer-term guidance.
Yeah
Because it gives you a sense of how we see the strength in our business. But the first thing I'd say is both businesses, our biopharma laboratory service business, as well as our diagnostic business, and in diagnostics, both routine and esoteric testing, have come back to pre-COVID volumes. And in fact, in some instances, we're seeing a bit of an acceleration from prior to COVID. In diagnostics, some of that acceleration is because of the hospital deals that we've announced, and those are giving us increased share quicker than we historically have had. But maybe you could talk a little bit about the guidance in those numbers.
No, sure. So it will be nice as we go into 2024, not have the, the COVID testing comparatives, if you will. But in the guidance that we gave, the three-year outlook that we've given, it includes all in, so we're no longer going with base business versus how our COVID testing is, even though it still will be a little bit of a headwind for us in 2024. But overall, for our diagnostics business, we're talking about 2.5%-4.5% organic top-line growth over the next three years, inclusive of, of COVID. So it really speaks to the strength of the underlying base business that we have that can even overcome that. We've talked a little bit about PAMA and the issues that we have, which again, has been deferred for a year.
So, as we'll talk later, maybe about a little bit about 2024, benefit of not having that headwind, but in the three years, it's still gonna be reflective in it. So diagnostics, overall strong. Our volume levels are now tracking to where we would expect them to be, comparing it to pre-pandemic levels. So while 2023 would have had really strong growth rates year-over-year, it was driven in part because of a softer 2022-
Right
Not fully recovered. As we think about 2023 as a normalized base year, we expect that 2.5%-4.5% to be there. On the biopharma lab services side, we're looking at around 4.5%-7.5% organic growth in that business. Again, call it midpoint of 6%, consistent with our historical growth rate. So again, as Adam started the conversation, really 2023, we really feel good because we feel like we're now in a much more normalized environment and with a lot of momentum that will take us into 2024 and beyond.
You talked about the number of tests that you have today, and when we think about lab, we think about it broken down into two areas, routine and esoteric. For those of you that don't follow labs as closely, esoteric just means tissue versus blood and urine when we think about routine. Has the growth differentiated between the two, whether it's have you seen more routine versus esoteric or the opposite way?
Yeah, I'll, I'll speak about it in volume. I think that's the best way to understand the underlying dynamics. We've seen growth in both routine testing and esoteric testing. We've seen slightly faster growth in the esoteric testing. We also, when we thought about our strategy, see two short-term significant opportunities. One is hospital system, local laboratory acquisitions. The second is focusing on specialty testing, but in four specific areas, and these four areas we believe are going to show disproportionate growth in the short term with oncology and women's health.
Mm-hmm.
Longer term in neurology and autoimmune disease. So we have significant efforts underway to have a full set of diagnostic tests for both our biopharma services laboratory business, as well as our esoteric diagnostic testing business, because we believe there will be disproportionate growth in those areas, and we're already starting to see that those areas are growing faster than the routine diagnostic testing areas.
So when we think about those specialties, you know, I think many of you know that Adam came from Merck, and so has a pharma background. When we think about oncology being such a big area, and we think about the future of different kinds of tests that can come to the marketplace, can you, one, maybe size the potential opportunity on oncology specifically, and then maybe talk about some of the tests that you've developed or plan to develop in that area?
Yeah. So when I think about oncology, about 40% of clinical trials in pharma are in oncology, so you know that that part of the market is going to continue to grow significantly into the future. And I think about three different ways of diagnostic testing. The first one is for screening, and I think if you can develop a blood test that helps screen for cancers before people are fully diagnosed, I think that could be a very large opportunity, but that's going to take a longer time period to develop the test, to study the test, and to also get reimbursement. The second thing is about therapy selection, and we're already starting to make progress with some of the acquisitions we made, in particular OmniSeq and PGDx, where we can actually study tumors and help understand what type of therapeutic would best work for that cancer.
Then the third thing is MRD, minimal residual disease. So after somebody has been treated, how do you monitor their blood to know if the cancer's coming back before you might otherwise see it? I think the second one for selecting products will be the part of the market that is recognized the fastest, that's developed the quickest, and will work side by side with our pharma colleagues in central laboratories, early development, and also in diagnostic in the marketplace over time. I think minimal residual disease, once we actually are able to have enough data and to study it enough, I think that will be the next area of growth in oncology for diagnostic testing. And then longer term, the largest potential market opportunity would be in actually using it as screening all through blood types.
So at Labcorp, we've had a significant investment that we've made in oncology. We acquired a company called OmniSeq that does tissue diagnostic testing, and we acquired a company called PGDx that also does liquid biopsies.
Right.
They have a kitted solution that can be distributed broadly to academic medical centers, and we have that available for our biopharma colleagues around the world, but they also have a central laboratory way that we can measure that. As we go into the future, we want to develop our own tests, we want to license in tests that others develop, and we want to bring tests for others to the marketplace, through licensing and/or acquisitions. We want to just make sure we have the broadest menu for oncology as possible.
If I remember correctly, on the women's health side, you made an acquisition a number of years ago. Please, Glenn, correct me if I'm wrong, but did you buy it from Genzyme? Was that right? In the women's health area.
We did the NIPT test-
Right
Sequenom.
So when I think about the women's health segment, if we just think about each of these segments, you highlight these specialty areas as real growth drivers. You walk through oncology. You know, maybe talk about some of the opportunity in women's health. When you talk about neurology, are we talking about testing around potential Alzheimer's drugs? And you know, autoimmune, you know, maybe if we can just kind of walk through each of those just to help us better understand what the opportunities are.
Yeah. So I just explained oncology, and I think that's going to be a real short- and long-term opportunity. If you look at women's health, it's more in the prenatal care or the NIPT testing. That is a very fast-growing part of the market, and I actually believe in the short term, women's health will outpace the growth of all the other specialty areas. If you look at autoimmune, those are areas like rheumatology, rheumatoid arthritis, anti-inflammatory types of diseases. We see a lot of drugs in development in those areas. There's a lot of new science in those areas, in particular in things like cell and gene Therapy. I think that will take longer to come to fruition, but over time, I think there'll be more needs for specialized testing in that area.
And then when it comes to neurology, obviously, we launched our ATN test, which is a, you know, three tests that helps a physician diagnose Alzheimer's in a patient. Hopefully, there will be new Alzheimer's drugs that come to market. When they do, I think new tests will be needed, and we want to be at the forefront of that. But also in other areas in neurology, whether it be Parkinson's disease or other neurologic disease, I think that as there are more products in develop, as there's more information that we learn, there's no doubt in my mind that there'll be more testing that'll be necessary. But I think that will be a longer-term opportunity. So the two short term, oncology, women's health. Longer term, neurology, immunology, or autoimmune.
You've talked longer term that these specialty tests can drive your mix over time. But when we think about 2024, is it too early for it to really have an impact on driving?
Yeah. So, we've seen some change in mix over time, and I think we'll continue to see that. But Glenn, why don't you talk a little bit about price mix and how we've seen esoteric impact that?
So, when you think about the diagnostics business, and again, about our 2.5%-4.5% growth going forward, we tend to think about a 1%-2% of that coming from organic volume, and then call it 1% from price mix. Historically, mostly from mix, but now we're actually seeing unit pricing flat to slightly up, which is encouraging. From the mix standpoint, the big drivers are, to your point, the fact that we do see esoteric testing growing faster than our routine testing, but mostly we see that we're performing more tests per session that help drive that.
So, between strong fundamental demand utilization, as well as favorable price mix, gives us the confidence for the, call it that 2.5%-4.5%, even with the constraint, again, of COVID that we would have in the first year of the three year.
And when we think about that pricing aspect, if I go back to the third quarter, you talked about managed care contracting. You talked about that you expected to be flat to slightly positive. Can you give any additional color on the progress and Labcorp's ability to negotiate with managed care as we think about those rates? And you know, there's so much talk about value-based care, and I think of value-based care really in a couple different buckets. One, the shift in site of care, which I think you can play a part of, but also, two, there's other programs, whether it's physicians taking risk, and then that also shifts in site of care, or you know, when you think about outcomes or utilizing these tests when you think about outcomes. So maybe those-
Yeah.
I know that's multiple questions in a single question.
That's okay.
But when we think about managed care-
Yeah
H ow should we think about some of those things?
Yeah. So, I'm gonna start broad, and then I'm gonna narrow down and answer the question specifically. I think one of the biggest issues that our children, grandchildren are gonna face almost anywhere in the world is that healthcare costs are growing too fast. They're too high as a percent of GDP in almost every market, in every country in the world, and we've got to find ways to reduce costs while increasing quality and care. And I think the right way to do that is through value-based care and value-based programs . The good news about diagnostic, it represents only about 3% of total spend of any healthcare budget in the world, yet it's involved in almost every medical decision that people make. So, we're in a good position to actually be part of value-based care . Separate and distinct from that, we have great relationships with managed care.
We have for many, many years.
Yeah.
We finalized all of our contracts that were up in 2023. We feel great about our progress and discussions that we had with our managed care partners. We're basically either flat to slightly accretive based on price, which is the first time we can say that in a long time. But I think a part of that is that the payers have seen the impact of us having a lot of these hospital deals. When you do a hospital deals, the price of the tests in the hospital come down immediately, and the payers benefit from that. And therefore, we were able to show them the benefit and say: "You know, we should be able to partake in a little bit of that benefit." So I think we had a very good discussion, very strong negotiations. I feel good about where we are.
The biggest issue I see is that to do value-based care is not simple, and it's no one single part of the healthcare system, it's multiple parts. So even though I would like to do more, and any customer that can hear me out there, call us. We're willing to work with you. We wanna find ways to do more value-based care and to reduce costs, but it's not simple, and it takes a group to come together to really try to tackle it, and there's not enough of it that's occurring, in my opinion. It's not happening fast enough.
Well, I would like to think that this conference is a healthcare services conference.
Yes.
I can clearly articulate that it is more of a biopharma conference. From that perspective, when I think about biotech cancellations, we talked about this on the last quarter call, where the expectation for book-to-bill in Q4 would get better. What, what are your expectations and timeline for this to normalize, would be my first question. And then secondly, I also assume that there's probably some opportunity for business development while you're here with potential small biotech companies.
Yeah. So I think anybody, this is, I think, my 19th JPM. And, I always tell people, your dance card gets filled very quickly because everybody wants to sit down and meet and discuss, and it is a great opportunity for people to get together and have discussions. So we spend a lot of time doing that, as I do. But I think that the important thing is, you know, as you start to really think about the future and think about where we need to go, it really is the healthcare system coming together in order to make a difference. No one part has enough to make the real differences. You have to come together. So you asked about the book-to-bill and what we're doing. So we have two parts of our business in our biopharma laboratory services business.
One is early development. That's the smallest part of the business. By far, the largest part of our business is our central laboratory business. If you look at our central laboratory business, the kits that we send out for clinical trials and the kits that are coming back to us for clinical trials are now back to pre-COVID levels, and the business is doing very well, it's very strong, it's very healthy. We feel confident as we look at our longer-term guidance. And the mix of that business is heavily skewed towards large pharma and large biotech, and it's mostly Phase II and Phase III trials.
Right.
If you look at our early development business, the smaller business, much of that is in small biotechnology companies. And we've seen issues with cancellations, and there's two reasons that we saw the cancellations. The first one is, for a while, there was an NHP supply shortage... So when people wanted us to do an NHP trial for them, they would call us, and we'd say, "It's going to be about eight months." So people started to get in line right away. Then when we called them and we said it's time for their trial, some of them said, "We're not ready yet." Some of them said, "Oh, we didn't think it would be this fast." So we saw cancellations for that reason. The second thing is the macro environment right now for small biotech is tough, and we see people making trade-offs, making different decisions.
The cancellations were at a very high level in both businesses, but in particular in the smaller part of our business, in early development. We said in the third quarter that we expect the fourth quarter book-to-bill sequentially to be better than third quarter. I'm not giving the fourth quarter results today. I don't have all the results today, but we expect it's going to be better in the fourth quarter than it was in the third quarter. We're seeing in our central laboratory business, normalization to pre-COVID levels. Our early development is not yet where it was before. There's still room for improvement there. Once again, I feel confident that when that business turns around, it's fast because many of those trials are very small. You get them in the same year that you run them.
Once the biotechnology sector is stronger again, particularly for small companies, I believe that business will come back.
And as we think about each of those businesses, early development as well as central lab, can you talk about your competitive positioning?
Yeah.
Help people to understand who you're competing against? You've always been big in, in central lab, right?
Yeah.
Labcorp traditionally, and then post-Covance, even bigger. But maybe help people to understand the competitive landscape.
Yeah. So if you look at the central laboratory business, we are the leader in the central laboratory business, and it's a very strong business. It's global in nature. We work with almost every pharmaceutical company. If you look at our early development business, we're a leader. We're not the leader. There's three large companies: there's CRL, there's ourselves, and there's WuXi based out of China. But those are the three larger companies. We're one of three, not necessarily the largest.
When I think about, like, long-term opportunities within early development, as well as the central lab business, you know, you've talked about this compound annual growth rate of 4.5%-7.5%. Can you talk about what some of the key drivers are going to be to drive-
Yeah
... that revenue growth?
Yeah. So I'll talk about that, but first, I think I talked about the two short-term opportunities with the hospital acquisitions and the specialty testing. We also said there were three longer-term opportunities. One of those three was cell and gene therapy.
Mm-hmm.
A big part of what we need to do in early development and ultimately in our central laboratories, is be the best at cell and gene therapy because about 20% of trials that are starting in early development are happening in cell and gene therapy. So that's an area that we have to be a leader in. The second opportunity was international expansion. So as we develop these specialized tests and we work side by side with the pharma colleagues to develop those, if there's companion diagnostics that need to be with a product that they launch, we want to be able to bring that companion diagnostic to markets around the world.
So as I said, for biopharma, we can now do our liquid biopsies in China, we can do that in Geneva, we can do it in other parts of the world. Ultimately, I want to be able to launch those tests into the market if a pharma company needs to have a companion diagnostic with them. And then the third is in consumers, and we believe consumers will play an increasingly important role in their healthcare decisions, and we want to make sure that we have growth in our consumer capabilities and the offerings that we have for consumers.
You touched on cell and gene therapy, and we hear a lot about cell and gene therapy, but from your perspective, can you maybe talk a little more broadly about what the or maybe a little deeper on what the specific opportunities are?
Yeah. So again, if you look at pharma and you look at the percent of trials, not the dollar amount, not the number of patients, 'cause they're typically smaller number of patients-
Right
... but if you look at the number of trials, about 20% of them are in cell and gene therapy. If you're good in cell and gene therapy, and you're working with pharma cell and gene therapy, I believe that will spill over into other therapeutic areas and actually enable us to grow in other areas. In addition to that, if you're good at cell and gene therapy and early development, and you develop specific capabilities and testing capabilities, I believe you'll be the first choice that they use when they go into later trials, Phase II, Phase III, for our central laboratory business. So I think that, that those are going to be important for us. Now, to be good in cell and gene therapy, you have to have experts in the field. You have to have unique equipment.
You have to have unique facilities. So if you do testing on various, NHPs or other things for cell and gene Therapy, the way in which you collect waste and the way in which you do things has to be very specific-
Right
... different than the other areas. So there's certainly some investment that we've made over time. We're going to continue to look at that. But if you win there, I think it helps you win in other specialty areas. And if you win in early development, I think you can win more in your central laboratories.
Shifting to PAMA, you talked about PAMA a little bit earlier, and it's been delayed again in 2024.
Mm-hmm.
As we think about that delay, can you talk about, at least if I remember correctly, it drops right to the bottom line, so it should be margin accretive by being delayed. So I want to confirm that. And then secondly, while it's not necessarily a tailwind, it's a lack of a headwind, and so therefore, any cash outlay that... or lack of cash that would have come in, you may have a little bit more cash. So, can you, one, talk about margins and two-
Yeah
... talk about, you know, if it will be a positive to cash flow-
Yeah
... versus what you were originally expecting for 2024?
Yeah. So I'll let Glenn talk about the free cash flow, and I'll let him talk a little bit about the margin. What I want to say is that we're still supportive of SALSA.... Right? SALSA is the right answer. It's a legislation that, once it's implemented, I think solves some of the fundamental underlying issues around PAMA. We have support from Republicans and from Democrats, and we have very strong support from the Senate and also Congress. It's just been very difficult to get passed. So I don't believe in hope as a strategy, but I hope that we'll finally be able to get SALSA approved, and if we do, the one-year delay would hopefully be much longer than that. But I always build in our base case that it's gonna come the next year, and if it doesn't, that's just a benefit.
But talk about the benefit.
Yes, so the impact of PAMA as we had was an $80 million revenue-
Yeah
as well as profit. Obviously, price reduction. So when we put out our three-year outlook, it included 100-150 basis points of margin improvement from the 2023 base, it was with the expectation PAMA would occur.
Right.
It still is, as Adam says, we're modeling it to occur, but instead of it being in 2024 to start-
2025
... it's deferred to 2025. So the positive news for us is, at least from the starting point, getting a little bit to your 2024 view, is that we expected that first year, 2024 margins would have been flat if PAMA were to have occurred, even though we'll still get the full 100-150 basis points over the three years. At $80 million, if it truly dropped all the way down to the bottom line, that would be around 50 basis points of margin improvement for Labcorp, so 50 out of that 100-150. Then you also translate that down to earnings per share. Actually, it has even a bigger impact because it would have around a 520 basis point impact to earnings per share.
So where we would have set our longer-term target of 8.5%-11.5% growth rate from 2023 is still there with PAMA in 2025, but the first year, instead of it being below the range, would be now within the range. And then finally, to your point, it's cash to us. So as we think about our free cash flow, while we said that we expect our free cash flow to grow in line with earnings-
Mm-hmm
... that 8.5%-11.5% per year, the base year of 2023 actually was a little bit constrained because we used cash for the pre-buys of the NHP to lock up that long-term supply arrangement, as well as some working capital. So actually, we expect free cash flow to grow even a little bit stronger than the earnings. So PAMA, to your point, it, you know, we view it as a big positive. It's just, it's a headwind that we were expecting that hasn't occurred.
Right.
You know, we'll get through another year. Hopefully, that will again be further deferred, or we'll move to SALSA and have it more regulated.
Do you think that 2024 as an election year makes it more difficult for SALSA to get passed?
Not necessarily, because I think that there is strong support from Republicans and for Democrats. I think that everybody that you talk to, whether it be ACLA, our trade group talking or individual companies talking, we all hear the same thing, which is they believe it's the right answer. They understand that this is the right thing to do.
Right.
It's been hard, even in a non-election year. I can't imagine it being any harder in an election year. The good news is the support is continuing, and what we would like to do is get it passed before we actually get to the election. But then the free cash flow in the long-term guidance that we gave, can you repeat what that was?
Sure. So we've given guidance for 2023, so we'll report out on our full year at the end of this year. It was $900 million of free cash flow from continuing operations, excluding the spin. We've talked about that we would grow with earnings, so that $900 million would grow at an 8.5%-11.5% growth rate over the next three years.
Mm-hmm.
We actually said, because 2023 was a little bit constrained, that we would expect that free cash flow to grow even at a higher rate. So double, call it double-digit free cash flow growth over the next few years. And starting with 2024, with again, being helped by not having the headwind from PAMA, cash flow will even be that much stronger.
Great. Well, cash is king, right?
Cash is king.
So, you know, there's been a lot of labor constraints when we think about healthcare services in the last couple of years, and I've heard you talk about it in your business as well. Can you maybe talk about the current environment when we-
Yeah
... we think about labor costs?
Yeah. The first thing I want to do is, is thank all of the Labcorp employees. I mean, our 60,000 employees over the last several years, as we've gone through COVID, it's been really hard. And having people on the front line is not easy.
Right.
When you see the inflationary cost of just about everything, whether it be gas or, you know, groceries and so forth, it's been hard for a lot of people. I want to thank the Labcorp employees for staying focused and ensuring that we do everything to improve healthcare wherever we can. If you look first at inflation, the first thing I think about is turnover.
Right.
I ask myself: Where's the turnover? If you look at our biopharma laboratory services businesses, the turnover rates are back to where they were prior to COVID, so that's a very good-
That's good, yeah.
... sign. If you look at our diagnostic business, it's not yet back to where it was prior to COVID, but it's certainly significantly better than it was in 2021 and 2022. So I think we've seen the turnover rate come down significantly in both businesses, and I think that's a good sign. As we think about the future, I believe that the inflationary pressures that we'll face will be significantly less than what they've been over the last couple of years, and I'm assuming it gets back to the 3% or so, as we go forward. We're gonna continue to look for ways to reduce costs wherever we can and try to find ways to ensure that we have market-based pricing and that we remain competitive in the areas that we need to be competitive in.
If we think about cutting costs, you have LaunchPad and you've talked about $100 million-$125 million of savings between 2024 and 2026. Glenn, can you just help us, you know, think about where those savings are coming from?
Mm-hmm. So, as you know, LaunchPad's been a program for us for a continuous business process improvement for a long time and will continue to be, and we've actually targeted it as much to help offset those inflationary costs.
Mm-hmm.
So as Adam said, normal inflation for wages of 3% for Labcorp would be around $100 million of incremental expense year on year, and our LaunchPad initiative at $100-$125 million is really meant to help offset those inflationary pressures. So we continue to see good progress in doing it, trying to become more labor efficient, and one of the biggest drivers that we have is really driven off of technology.
Mm-hmm.
We spent a fair amount of time at our Investor Day talking and showing examples and videos, if you will, of the amount of automation now that we're putting into the lab. So robotics that help improve efficiencies, reduce cost, improve quality, even for other labor-sensitive or intensive areas where we can use automation, we are. In addition to the technology advancements in AI, we continue to have a global footprint that we look to leverage, so we still see opportunities to consolidate our facilities. We also have put in centers of excellence, whether they be in Asia, in Bangalore, India, or Europe, in Sofia, Bulgaria, where we now have big infrastructure, so we're able to now move a lot of our positions that we need-
Mm-hmm.
But can be operated in lower cost environments. And just overall, LaunchPad is part of our culture, if you will, of business process improvement. We're still also a very acquisitive company. So we really use the same tools that we use for our day-to-day improvements to make sure that we can integrate those acquisitions and derive the synergies and the returns that we expect from all of our acquisitions.
Can we talk about lab-developed tests, right? The FDA has a proposal out there. One, can you give us an update on any progress? And two, when I think about lab-developed tests, it's a smaller part of your business today, but how do you think about that longer term?
Yeah, so I'll start with, you know, if you look at lab-developed tests, it's about 5% of our volume. So it's not a lot, but those are important tests, and they're very important for the people that need them. We've been very supportive of the VALID Act, which was legislation that would actually give the FDA appropriate oversight for laboratory-developed tests. We are not supportive of the current request from the FDA for laboratory-developed tests. What they're trying to do is take legislation that was specific to the device industry and apply it to an entirely different focus, and therefore, we don't think that that's the right answer. We think going back to something that's developed specific for laboratory-developed tests versus developed for devices is a better path forward. So we're supportive of oversight through VALID.
We're not supportive of the current way in which they're suggesting to move forward. Comments were requested. The trade organization that we're part of, ACLA, submitted comments, and we expect to hear more information in April when they come with their potentially final ruling.
You touched earlier on sites of care, of where you can get a lab test done. When we think about opportunities around the consumer, you've had a relationship with Walgreens and have put Labcorp inside of Walgreens. How do we think about the consumer opportunity as well as the opportunity with, like, a large-scale drug retailer?
Yeah, so, you know, I think that customer satisfaction, NPS scores, the way in which consumers want to work with you, is becoming increasingly important in almost every aspect of healthcare. So therefore, we have to have a good consumer offering, a great consumer experience and customer experience, and we have to find ways to meet the consumers where they want to be met. So therefore, we have our service centers, we have people in physician offices, we have service centers in Walgreens, we have our Labcorp On Demand, where consumers can order tests directly through On Demand, and we want to continue to make sure that consumers can access the tests that we have through the way in which they want to interact with us.
You know, a big part of our consumer focus is watching the NPS scores and understanding the satisfactions that people have when they interact with Labcorp, whether it be through our On Demand, our service centers, through Walgreens, and so forth. But we're gonna continue to look for more ways to work with consumers. You know, people ask me, do I believe that what we saw in at-home testing with COVID is sustainable over time? And during COVID, I think it was a very unique situation. Typically, people want the highest quality test with a reasonable turnaround time at the best cost they can get it. That's what we're excellent at. During COVID, people were willing to take a test that wasn't as accurate, pay almost anything for it, to get the answer right away. I don't think that's the typical market.
I think that that is just specific to what happened to COVID. So the question is, how fast will things like On Demand grow? How fast will consumerism, doing direct acquisitions of lab tests, grow? We'll be ready for it. We'll be prepared for it. We're gonna have many offerings. We already do. It's just not a significant amount of our business today, and it's hard to tell how fast that will scale up.
In our last few minutes together-
Mm-hmm.
I want to talk about health system partnerships. You know, really two questions here. One, why do you think that so many hospitals today are looking to outsource and partner with entities like yourself? And then secondly, maybe you can help us understand how big that pipeline is. I know when I saw you at your Investor Day, you spent a good amount of time talking about how exciting that aspect of the business is.
Yeah, it's a very exciting aspect of the business. The pipeline is as strong as I've seen it. It still takes a while to have the deals from the time you first have a discussion to them actually occurring. There's a lot to work through, a lot that you have to map out, but I think it's gonna be a significant part of our growth in the future. If you look at the inorganic growth in our longer-term outlook, it's 1.5%-2.5%.
Right.
Historically, it was 1%-2%. We increased that because we see the continued growth in the hospital system acquisitions. I think during COVID, hospitals realized several things. One, they weren't prepared to do the testing for PCR, for COVID tests. They realized they hadn't invested necessarily in the latest, most up-to-date equipment for their labs. If they have to make a choice in capital, they're gonna put it behind surgery versus put it in the labs. The second thing is, they realized that it would take a lot of capital to keep their lab up to date, and they'd prefer to spend their capital in other areas.... When we started to do large hospital deals, such as Ascension, and you saw us work side by side with Ascension.
They've been a terrific, just a terrific partner, and you can integrate 90 + hospitals and do it without impacting patient care to actually achieve what we set out to achieve together. I think other hospital systems said, "Boy, if you can do it in that scale-
Right.
You ought to be able to do it at almost any scale." And I think it allowed hospitals to feel more comfortable, 'cause the number one issue that a hospital thinks about when they're doing this deal is: Will our physicians be upset based upon the ability to get test results for their patients when they want it? And there's no amount of money that they would accept if it actually interrupted patient care. So we've been able to show time and time again now that we know how to do this. We can do it really well. We'll take our time, we'll be methodical, and they have confidence that we're gonna work very good with them as a partner, because it's really a longer-term partnership. All the deals are accretive in the first year.
They return their cost to capital in two-three years, and we make sure that the culture between us and the other organization is right.
Right.
There's been some deals that we've actually said, "No, we don't think we're the right fit," because the most important thing I want to be able to do is tell the next hospital CEO to talk to the last five we did deals with and say, "Did they do what they said they were gonna do in the time that they said they were gonna do it?" I want every one of those answers to be, "Yes, they did," because that gives confidence to the next one that we're gonna do.
On Ascension, you talked earlier that it's gone very well. But I believe that's one of the deals that will take a little bit more time to get to profitability. Is that?
No, it was accretive in the first year.
Okay.
The margins, it was dilutive to margins-
Margins, okay.
-accretive to earnings. We said in the beginning it would have low single-digit margin, and that was purposeful, because a big part of that deal, 80% of it, was running their hospital laboratories.
Right.
The margin in that business is lower in general. We were slow and methodical to make sure there was no interruption to patient care, and it's taking us time to actually bring in some of our equipment, bring in some of our capabilities, and we're gonna just do it systematically. We said it would take two-three years, that the margins would never be at the level of our average margin, but the margin will improve-
Will improve.
year-over-year for a couple of years, and that's what we're seeing.
We only have a minute left. You know, as I sit here today, that there's so much going on in your business. When we sit here in 2025, what do you hope that investors will appreciate about Labcorp that maybe they don't appreciate today?
So I'll start with what I want the investment community to realize. I mean, 6%-8%, or 5%-8% top-line growth, 100-150 margin improvement, basis point margin improvement, and solid high single- digit to low double-digit growth is a very strong profile. And I want the world to see that when we say we're gonna do something, we do it, we do it right, we do it well, and we deliver on our commitments. And I think that that's what you're gonna see as we go through 2024, 2025, and 2026.
Great. Well, thank you so much. Thank you everyone for joining us.
It's nice to see everybody. Thank you. Thank you.