Barron's - USA (2020-10-12)

(Antfer) #1

October 12, 2020 BARRON’S 9


STREETWISE


For a decade, LabCorp stock had lagged behind


the broad market. Since November, the stock has


returned 16.8%, versus 14.5% for the S&P 500.


ATestedLabCorp


Looks Beyond Covid


T


his past week, I


swirled a cotton


swab around the


inside of one nos-


tril, then the other,


on the recommen-


dation of LabCorp’s


new CEO. It was no deep-sinus affair,


like other Covid-19 tests I’ve heard


about. I had only to venture as far as


an ambitious toddler gets his finger.


See, early in the week I had what


I’m guessing was either a flu shot


reaction or a case of the sniffles. I


was thinking about a Covid-19 test


but I’ve been too busy, I said during a


Zoom call with Adam Schechter, who


took over at testing giant Laboratory


Corp. of America Holdings (ticker:


LH) in November. He suggested his


company’s Pixel home kit, which the


Food and Drug Administration ap-


proved in April. You give some quick


details online, and FedEx brings a box


in about a day. My insurance paid.


If you can fill out an absentee ballot


without accidentally voting for Kanye,


you’re more than qualified to collect a


nasal sample. Late in the week, I


dropped the Pixel box in a FedEx bin;


FedEx will pick it up if you want. Re-


sults appear online, they say, a day or


two after the kit is received, on average.


You’d think LabCorp would be


booming financially during the pan-


demic, but this year has been lumpy.


During the first half, revenue and prof-


its fell because quarantining cut into


doctor visits and routine testing. Now


business is returning, and Schechter


says the company has gone from 2,


to 3,000 Covid-19 tests per week to


200,000 per day. He says that like any


business, it wasn’t especially profitable


at first, but it now carries margins sim-


ilar to the rest of testing.


For the full year, revenue for Lab-


Corp’s diagnostics, or testing, busi-


ness, is expected to rise 18%, to $8.


billion. That compares with a 16%


rise, to $8.6 billion, expected for rival


Quest Diagnostics (DGX). The two


are sometimes called a testing


duopoly, but the overall market is esti-


mated at $72 billion, and hospitals


testing in-house are collectively the


biggest player. As health-care payers


squeeze reimbursement rates to bring


down costs, pure-play test companies


could gain share, because they have


more scale than hospitals to invest in


money-savers like automation.


There’s another side to LabCorp.


Five years ago, it bought Covance,


which runs trials on experimental


drugs on behalf of developers. Revenue


was affected during the first half by


some clinical sites overseas shutting


down, but it’s rebounding. It’s expected


to rise 1% to $4.6 billion for the year,


then shift to 10% growth next year.


LabCorp stock lagged behind the


broad market by an average of several


points a year over the decade before


Schechter took over. Since then, the


stock has returned 16.8%, versus


14.5% for the S&P 500. Schechter says


the benefit of the Covance deal might


not have been obvious to investors at


first, but the pandemic is making it


clearer. “We’re really the only com-


pany that does both significant diag-


nostic work and also drug develop-


ment,” he says. “We tell our clients,


‘We can help you develop drugs


faster.’ ” All of that test data can help


LabCorp enroll drug trials quickly


with patients with specific attributes.


Also, modern drugs often come paired


with tests that tell doctors whether


and how to administer them, so


Schechter says test-designing and


trial-running are a natural fit.


LabCorp last month launched a


new combination test for Covid-19,


the flu, and a respiratory virus called


RSV. Schechter says the company is


also developing blood tests that could


take the place of biopsies—removing


and testing tissue—for certain lung


cancers and a fatty liver condition


called NASH.


When will life get back to normal?


Perhaps around the middle of next


year, says Schechter, and effective new


treatments for Covid-19 are likely to


play a larger role than vaccines early


on. When will the next 100-year pan-


demic hit? It won’t take 100 years, he


says, and antibiotic resistance and


superbugs are threats, too. We have to


apply what we learn from Covid-


and be prepared, he says.


LabCorp trades at 14 times this


year’s projected earnings. Next year’s


earnings growth is pegged at 9%.


P


resident Donald Trump’s doc-


tors say he’s recovering well


from Covid-19. The trio of


drugs he took are likely to


become more widely available. Two


are proven to be moderately helpful.


The third is unproven, more contro-


versial than it should be, and perhaps


the most promising of the three.


There’s remdesivir from Gilead


Sciences (GILD), which began this


year as an experimental antiviral and


was quickly repurposed for Covid-19.


This past week, Gilead’s chief said that


the drug is in ample supply. Then


there’s dexamethasone, a cheap,


generic steroid.


The third drug, REGN-COV2, an


antibody cocktail made specifically for


Covid-19 by Regeneron Pharmaceu-


ticals (REGN), hasn’t been approved


yet. In a video shot on the White House


lawn and tweeted on Thursday, the


president touted the drug as a “cure”


with the same zeal he has shown for


malaria pills and other dubious treat-


ments. Critics rolled their eyes. The


Lincoln Project, comprised of anti-


Trump Republicans, edited the video


with 1980s timeshare infomercial mu-


sic, VHS-tape static, and a flashing


“CALL NOW.”


Truth-telling is important, the epi-


sode reminds. To add to the distrac-


tion, the president listed Regeneron


and Gilead shares among his assets a


few years ago (but not recently).


I’m not a doctor. But SVB Leerink


analyst Geoffrey Porges is, and he


wrote this past week that Regeneron’s


antibody cocktail and a single antibody


from Eli Lilly (LLY) are likely to re-


ceive emergency-use authorization


soon from the FDA, with a Lilly cock-


tail following several months later.


Both cocktails appear early on to be


“highly effective” in nonhospitalized


patients and could eventually be vali-


dated for hospitalized ones, he says. He


expects Regeneron to dominate sales of


the new cocktails this year and next by


getting a jump on production.


These are not cures. Perhaps it’s


even too early to call them break-


throughs. But Regeneron had recent


success in a race to develop an antibody


cocktail for Ebola, and it’s using the


same technology for Covid-19. What-


ever suspicion the president’s Regen-


eron endorsement has raised among


the embellishment-weary, we should


take it more seriously than his past


Covid-19 pitch work.B


email: [email protected]


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