Labcorp Holdings Inc. Q2 FY2025 earnings call

• Adam mentioned that the company delivered double-digit top line growth and solid margin expansion in the quarter. The Diagnostics Laboratory segment is focused on being the partner of choice for health systems and regional local laboratories, launching new and innovative tests in specialty areas, and enhancing customer and employee experiences and leveraging technology for efficiencies. Julia provided details on Q2 financials, including revenue, operating income, adjusted EPS, operating cash flow, free cash flow, and segment performance. The LaunchPad initiative continues to be on track, offsetting typical increases in personnel costs.

Diagnostics Laboratories

• Revenue for the quarter was $2.7 billion, an increase of 8.9% compared to last year, with organic growth of 4.5% and acquisitions of 4.5%, partially offset by foreign currency translation of 0.1%. Total volume increased 4.9% compared to last year, with organic volume contributing 3.4%. Price/mix increased 4% versus last year due to organic growth of 1.1% and acquisitions of 3%, partially offset by foreign currency translation of 0.1%. Diagnostics adjusted operating income for the quarter was $483 million or 17.6% of revenue compared to $442 million or 17.5% of revenue last year. Adjusted operating margin was up 10 basis points.

Biopharma Laboratory Services (BLS)

• Revenue for the quarter was $785 million, an increase of 11% compared to last year due to an increase in organic revenue of 7.8% and foreign currency translation of 3.2%. In constant currency, Central Labs revenue was up approximately 4%, while early development was up approximately 18%. BLS adjusted operating income for the quarter was $123 million or 15.7% of revenue compared to $107 million or 15.2% of revenue last year. Adjusted operating income and margin increased primarily driven by organic demand and operating efficiencies.

• Enterprise guidance is raised. Enterprise revenue guidance is raised by 70 basis points at the midpoint, narrowing the growth range to 7.5% to 8.6% compared to 2024. Diagnostics revenue guidance is raised by 40 basis points at the midpoint, narrowing the growth range to 7% to 8%. BLS midpoint is increased by 280 basis points, narrowing the growth range to 6.1% to 7.5%. The guidance range for adjusted EPS is $16.05 to $16.50 with an implied growth rate at the midpoint of 12%. Free cash flow guidance range is $1.125 billion to $1.275 billion, with the midpoint raised by $25 million.

• PAMA legislation could have an impact, with potential $100 million downside if it occurs next year and efforts to offset it ongoing. Healthcare exchange tax credit expiration could have a negative impact, measured as high as 30 basis points. Medicaid-related uncertainties, with key being whether people have insurance and potential impact on business.

Q: Congrats on a nice quarter. Maybe if I could just dive in a little bit on the volume dynamics and mix. Adam: Yes, we'll do. And first of all, we appreciate the congratulations. It was a very strong quarter. And we saw the strength across both the diagnostics and the BLS business, which gives us a lot of momentum for the second half of the year as we go into next year. Specific to your question on Diagnostics, the revenue was $2.7 billion, about 10% growth. But I think that the important thing is to look at the volume and where the growth came from. So about half of the 9% growth came from organic growth and about the other half, 4.5% came from acquisitions. So then I look separately at what was volume. Overall, volume was up about 5% and then price/mix was up 4%. And then I take it to organic volume. If you look at organic volume, it was up about 3.5%. And I think that shows the strength of the underlying growth that we have. Historically, that growth was 1% to 2%. So I do think we're seeing some accelerated growth. I think the accelerated growth is coming from several areas. One is the hospital regional local laboratory deals that we're doing are serving us well. It expands access in the hospitals and the surrounding geographies. But I think when you win those hospital deals, the access in those geographies works to your benefit and you actually gain share. The second thing is the focus on our specialty products in the areas of oncology, neurology, autoimmune disease and neurology. Those areas are growing 3 to 4x faster than the overall diagnostic market. And by focusing on those areas, you not only do well in those areas, -- but typically, those patients have more severe disease. And with more severe disease, physicians typically look for more tests in order to understand the diseases. So therefore, the routine tests that we do actually grow faster when you have a focus on the specialty areas. And I think those 2 things are helping us accelerate our growth faster than you would expect, which gives me a lot of -- gives us a lot of momentum going into 2026.

Q: I just want to ask about the legislative and regulatory outlook. Obviously, there's a lot of changes coming over the next few years. Maybe how we should think about PAMA going into 2026. Do you think the risk has increased of those cuts coming back? And just on the legislative front, as time goes by, it probably seems clear that the ACA subsidies are not being extended. How do you think those enhanced subsidies have positively impacted your business? And how should we view the risk in 2026? And just on the Medicaid side, could you remind us what Labcorp's Medicaid exposure and how changes to enrollment over the next few years could impact you? Adam: Yes. So let me start overall with how I think about the momentum we're going into the year next year with. And I think that the strength that you see in the quarter is going to serve us well. As I look at the legislative changes and you look at the one beautiful bill, you look at PAMA and so forth, I look at them individually. So let me start with PAMA. PAMA, we are continuing to work with ACLA, the trade organization to try to get legislation approved that actually would be more apt to what they were trying to achieve with PAMA in the first place. And we're going to continue to work on a legislative solution. If that doesn't happen, we'll continue to seek ways to see if it can be delayed again so that we can get appropriate legislation approved, of which we have very strong support from both Democrats and Republicans. If the delay doesn't occur, then we could also work to see, is there a way to ensure that the appropriate data is available to help calculate PAMA in the way which it was intended to be calculated, meaning that you need more data than just some of the laboratories. You need a lot of the hospital laboratories to get all the data you need. All 3 of those things are things that we'll be working on as we go through this year. In my base case, I've always said, assume PAMA comes next year. And I've said that for the last probably 5 years now. And we build our base case that it's coming because we don't know if any of these other strategies will actually occur. If PAMA does come next year, it will be about $100 million impact top and bottom line, of which we've work hard to offset as much of that as we possibly could through things like LaunchPad and even going further than what we've done with LaunchPad. Separate and distinct from that, when I think about other legislation, I would say, in broad terms, we see some tailwinds and we see some headwinds. But if you look at it altogether and you look at all the different scenarios for our business, we think it's manageable. First of all, if you look at lab testing, it's a very small fraction of U.S. health care spend, but it's an essential tool and it's used in almost every health care decision. So people realize the importance of laboratory testing. If you think about the legislation, I think it's going to be hard in some of our customers like hospitals. And it could have hospitals work with us faster and want to do even more deals with us in terms of outreach business and also running the hospital laboratories. In addition to that, if you look at the health care exchange and expiration of the tax credits, there could be a negative impact, and we've measured that to be as high as 30 basis points. If you look at Medicaid, I don't think anything is going to really happen until 2028. And the key is going to be, do people find insurance through other ways through states or spouses that might have insurance. To me, the key is if people have insurance, we find ways to be successful. When there's a very large group of people that could become uninsured, that's where we get concerned. I don't think that's likely. I don't think it's very likely in the United States that you'll have a very big group of people automatically become uninsured in a specific period of time. So net-net, boiling it all down, PAMA put aside, we'll do everything we can to either change the legislation delay or offset as much as we can. The other legislative things are manageable when you look at the impact net- net. Julia: The only thing I would add is we do not expect the one big beautiful bill to have a material impact on our overall effective tax rate. We continue to expect our tax rate to be approximately 23% for full year 2025 and beyond.