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]
Barron’s Streetwise
InanewweeklypodcastbyBarron’s, columnist Jack Hough
looks at the companies, people, and trends you should be
watching. This is Wall Street like you’ve never heard before.
Subscribe to Barron’s Streetwise on Spotify, Apple Podcasts,
or your favorite listening app.
BARRONS.COM/PODCASTS
By Jack Hough