Barron's Streetwise - LabCorp CEO Talks Covid Testing and Treatments

Episode Date: October 9, 2020

Plus, the founder of Whole Foods on pandemic shortages and obesity. And Jack eyes Airbnb's IPO. Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. I actually believe that therapeutics are as important as vaccines. What I mean by that is if I can tell you that if you get COVID, we can prevent you from going into the hospital,

and it starts to look more like the flu where you can be treated, I think you'd be more comfortable doing your daily activities. Welcome to the Barron Streetwise podcast. I'm Jack Howe. The voice you just heard is Adam Schechter. It's just about a year since he started as CEO of LabCorp, a giant in medical testing and in developing new medicines. LabCorp is at the center of many COVID-19 storylines, companies that have lost business to the pandemic

and gained business, the search for treatments and vaccines. I'll also chat with John Mackey. He's the founder of Whole Foods and he says the grocery supply chain is ready to withstand another wave of the virus. He also wants to clear up a little controversy. It has to do with remarks he made recently about why Americans are getting fatter. Some Americans. This American.

Listening in is our audio producer, Metta. Hi, Metta. Hey, Jack. Metta, I've allotted 15 seconds for small talk. Let's take turns telling each other things that are happening in our lives without expanding on them. I'll start. Okay, hang on. I'll set a timer. I emptied my compost bin and planted some new grass. I killed around six fruit flies over the course of the last three days.

I bought a new battery for my boy's dune buggy. I've been drinking seltzer with apple juice. I think I'm looking forward to seeing the new Borat movie. I'm getting married this week. Wow. You know, I had to put that one before the fruit flies. I have a few questions. Oh, looks like we're out of time.

Fair enough. Okay, so let me talk for a moment about President Trump and COVID-19. The president's doctors say they're happy with the pace of his recovery. His treatment reminded me of many of the conversations we've had on this podcast. In our first episode last March, Regeneron CEO Len Schleifer talked about an experimental antibody cocktail. The president received it. We also spoke with Gilead CEO Dan O'Day in early summer about remdesivir, one of the first effective treatments for the virus. The president received that too. He was also given a steroid called dexamethasone. That one's generic. It brought to mind what drug analyst Jeffrey Porges

at SVB Lyric told us about stacking medicines, that it might be possible to combine treatments and get additive effects. It's good that we have multiple treatment options now, but they're not perfect and we're not nearly out of danger yet from the pandemic, so stay safe. Speaking of COVID, to learn more about where we stand on both testing and drug development, I recently spoke with the chief of a company involved in both. Hi Adam, it's Jack Howitt, Barron's. How are you? I'm good, Jack. How have you been? All right? That's Adam Schechter. He's the CEO of LabCorp, which processes every type of medical test you can think of, from complex biopsies to routine pee-in-a-cup stuff.

You might say that what follows is my analysis of your analysis. I should never say that. My bad. LabCorp is expected to bring in more than $8 billion this year from testing, but the overall market is estimated at $72 billion a year. There's another big player called Quest Diagnostics, and hospitals that handle their own testing make up a large portion of the market. Like much of healthcare now, testing is a target for reimbursement cuts by health plans, including Medicare. LabCorp corpse goal is to use its scale and technology, including automation to bring down its costs faster than reimbursement rates are falling and to win more business from smaller players like hospitals. At the same time,

lab corp is developing new tests back in April. The company won approval for the first at-home COVID test. You can order it through a service called Pixel by Labcorp. Answer a few questions online and Labcorp will FedEx you a kit with a nasal swab. When you're done FedEx will pick it up. Last month Labcorp launched a combined home kit for the flu season. It tests for COVID, the flu, and a respiratory virus called RSV. Returns for Labcorp shareholders, I should note, weren't especially impressive over the decade before Adam was appointed chief last November.

The stock returned an average of 9.2% a year, including dividends. That's more than four points behind the S&P 500. Since Adam became chief, the stock has returned 16.6%, which is about five points ahead of the S&P 500. There's another side to LabCorp. In 2015, it bought a company called Covance, which does drug development. If you're a drug company with an experimental treatment that's ready for trials, you can hire Covance to run those trials for you.

Why would you want to do that? Well, one reason is that if you want to identify a large patient population with specific attributes, it helps to have all that data that LabCorp produces in its testing business. Also, these days, drugs for complex diseases often come with what are called companion diagnostics. Those are tests that tell doctors which patients are likely to respond best to the drugs and what dosages to use. It helps if companies that make drugs can work from the start with companies that make tests. It's the combination of diagnostics and drug development that makes LabCorp unique, and I think that we can accelerate the development of drugs and vaccines through

having a strong diagnostics platform. LabCorp's revenue and profits fell during the first half of this year. People weren't going to doctors for routine care, which reduced testing. Also, some clinical trial sites around the world had to close, which hurt LabCorp's drug development business. At the same time, the company was ramping up capacity to meet a sudden explosion in demand for COVID testing. We began building significant demand for COVID testing. We began building significant capacity for PCR testing. PCR testing is a test that is the gold standard for testing for COVID if you have it. It looks for the genetic material of the virus and it takes significant equipment.

So we had to build capacity from 2,000 to 3,000 tests per week to now we can do more than 200,000 tests per day. Now Wall Street expects LabCorp to report higher sales and profits for the full year, despite the first half slump. Non-COVID business began bouncing back as people resumed visiting their doctors. Drug development has picked up too. Adam says much of that has been from work on COVID treatments and vaccines. In the near term, treatments could provide the most help. Here's Adam. I actually believe that therapeutics are as important as vaccines. What I mean by that is if I can tell you that if you get COVID, we can prevent you from

going into the hospital, or if you're in the hospital, we can prevent you from going on a ventilator, or if you're on a ventilator, we can prevent you from dying because we have therapeutics that help you each step of the way, and it starts to look more like the flu where you can be treated. I think you'd be more comfortable doing your daily activities. Vaccines could begin to return life to normal starting as soon as next year, but Adam says there's a lot of uncertainty. We don't know when a vaccine will be launched. We don't know how many doses of the vaccine you'll need, if it's going to be every year or every two years. And we don't know for the vaccines at launch what percent of people that get the vaccine will actually be immune to the virus. So there's still a lot more we have to learn,

but I think with the combination between new therapeutics, we're making a lot of progress, and new vaccines, we're making a lot of progress, that by the middle of next year, things should look much more normal than where we are today. I asked about the profitability of COVID testing. Adam said that like any business, it started off with low margins while the company was ramping up capacity, but that now margins are similar to those for the rest of testing. I asked Adam about his plan for continuing to unlock better returns for investors. He says every country in the world is looking to contain health care costs, and it's important to be in a business that can help with that. Di says every country in the world is looking to contain health care costs,

and it's important to be in a business that can help with that. Diagnostics in the United States, for example, is about 3% of health care spend, but it's involved in over 90% of decisions on health care. So the diagnostic testing that we do can actually reduce overall health care costs. In addition to that, if we can help our pharmaceutical and biotechnology companies and colleagues show who's most apt to respond to their medicines, I think that's another way that we can show value by helping governments reduce their overall health care costs. Adam also says that the importance of having a testing business combined with a drug development business might not have been obvious to investors five years ago when LabCorp bought Covance,

but that it's becoming clearer now, in part due to the pandemic, because LabCorp has been able to help enroll drug trials quickly. He hopes that will help the company win more business for trials and other diseases like cancer. One last thing, is COVID a one-off? I mean, if it's the worst pandemic in about a century, should we expect to not have another one for that long? Or is there something that suggests that the pace of pandemics will accelerate? Adam says maybe, and that we have to prepare. My personal belief is that it will not be another hundred years before we have another significant issue.

So we have to stay in a state of preparedness. And there are other issues like antibiotic resistance, superbugs, and those things I think we have to prepare for as well. So nobody can predict exactly when there's going to be these types of issues. But I think we have to be in a constant state of preparedness and take the learnings from COVID and make sure we apply those for the next major disease, irrespective of when it is, that we are more prepared next time.

Meta, do you like Whole Foods? Do you shop there? Yes and yes. I go there for one very specific item that's very important to me. Leodami. It's a mayonnaise. Really? Like a different brand? Their store brand? Sir Kensington Mayo. Whoa. When you use that mayo, do you extend one of your pinkies for extra classiness while you eat it? Because it sounds very classy. I do. I do like my mayo to be slightly royal. If I can't call a mayo sir, I don't have any respect for it.

Well, I'm glad you found the condiments to your satisfaction. In my household, my wife buys the groceries and she's a Whole Foods loyalist. I've made my peace with it. our grocery bills could pass for mortgage payments, but the food is good and it comes with a pleasing backstory about fair wages for suppliers and kind treatment of animals. I picture the cows and the chickens smiling with approval. It makes me happy.

Technically I also eat the cows and the chicken, so there are some inconsistencies in the narrative playing in my head, but let's put that aside for now. Whole Foods traces its roots back to 1978, back when I was a first grader in New York. back when I was a first grader in New York. At that time in Austin, Texas, a college dropout named John Mackey borrowed $45,000 from family and friends and together with his girlfriend opened a natural food store. It's kind of a colorful story. The couple got kicked out of their apartment for storing food they were selling. They had to move into the store and there was no shower. They had to wash in a commercial dishwasher that had an attached hose.

Fast forward 40 years and John and Whole Foods are cleaning up. You see what I did there, with the cleaning up and the dishwasher and forget it. Whole Foods was bought by Amazon three years ago. And last year it opened its 500th store. Mackey talks a lot about ethical business practices. His book, Conscious Capitalism, got a lot of attention when it was published in 2013. And now he has a follow-up out called Conscious Leadership. We spoke recently. Hi, it's Jack Howe from Barron's. How are you? Hey, pretty good, Jack.

How are you doing? We're a Whole Foods household. My wife is, it's like a religion for her. She shops there regularly. Well, any products you don't like, I hope you're not going to take it out on me. I actually did have one urgent matter to bring to John's attention. It's about all that storytelling that goes on the product packages, the exotic ingredients, the ethical business practices. My only complaint about all the storytelling, just so you know, is that the shampoo bottles, right? You get a long

story, but they don't make the word shampoo large enough. And if I don't have my glasses on in the shower, we've got like 12 bottles in there. I can't tell which is conditioner and which is shampoo. I want to put the word out to all shampoo makers to make that word shampoo larger. That's my one comment, John, if you could put the word on the street. I just love that. That's really funny. With that out of the way, I asked about business. John says the natural food business has gotten more competitive, but that having Amazon as

a parent has helped Whole Foods reduce prices and invest in technology. He said Whole Foods will never be the lowest price grocer because it's trying to be the highest quality one, but that it also shouldn't charge more than others for exactly the same products. He says Whole Foods has made three rounds of sizable price cuts since the merger. I asked about the surge in online ordering this year. Recent surveys suggest it peaked in June and has since subsided a bit. John expects that some customers who are ordering online now will stick with it, but that many will return to stores. There are lots of foodies out there that just enjoy food.

They enjoy shopping for food. I'm in that category myself, so it's easy for me to say this. I like going to the stores and shopping for food. I like looking at the food. I want to pick out my own produce. I'm a cook. I want to get exactly what I want to get. And it's not just a transaction for me.

It's an experience. What about shortages? Has anyone else been wondering if they should stock up in case of another COVID wave on Charmin and Dinny Moore beef stew? For Meta, maybe a jug of Sir Kensington mayo? Now we're talking. John says he personally doesn't expect another big wave, but that if we get one, he expects it will be totally different this time in terms of product availability. The problem in spring, he says, is that the supply chains for grocery stores are different than those for restaurants and that they had to adjust. People stopped using toilet paper in offices. People stopped using toilet paper in restaurants.

And those are different types of toilet papers that you get in a commercial establishment than what people use for home use. So the supply chain had to recalibrate itself. And it did. It just was a lag time. And that same thing happened to happen with meat and seafood and produce. It had to shift. The supply was there, but it was a lot more needed to go to grocery stores than the other

alternatives. And it took a while for needed to go to grocery stores than the other alternatives. And it took a while for that to happen, but it has happened. Okay, I had to ask about a recent media kerfuffle John set off with another interview where he talked about obesity. He said it was caused by bad choices and ignorance, not so much by poor people lacking access to fresh veggies and such. Critics called that out of touch. John says he was taken out of context. I asked him to clarify. He's not shy about the size of the problem, especially in America, where he points out that seven out of 10 adults are overweight. That's changed radically in the last 50 or 60 years. When I was a kid growing up, there were fat people, but they were people point at them because they were unusual.

Now, most people are fat. 70% of the people are fat. And according to the CDC, and it's not my data, I'm not making it up. John says we're fat because for most of our evolutionary history, we were hungry. So we've evolved to crave calorie-dense foods and that fat and sugar have high calorie density. Today, animals are raised corn-fed with lots of fat. And sugar and refined grains are widely available. So we're eating calorie-dense foods more often than our bodies are equipped to handle, and putting on four or five pounds a year, which works out to 40 or 50 pounds over a decade. That's causing disease, and John says it hasn't peaked yet. He's a vegan,

by the way. He wrote a book on how to eat called The Whole Foods Diet. But what about inner cities and poor people who don't have access to stores like Whole Foods or can't afford it? John says that lack of access isn't the root of the problem. If there's a strong market demand for things, the market will serve it. There's not a conspiracy to not sell healthy foods to people. People would love to sell healthy foods to people, but people have to buy them. And so when we say there's a lack of access, it's true, there's a lack of access. But what's not told in that full story is to ask the question, why is there a lack of access? Is it because capitalism is failing? Are markets inefficient? Is there a plot to keep healthy foods out of the inner cities?

And to me, the answer is obvious. No, there's no plot against it. If people would want to buy those foods, the market will, entrepreneurs will come fill that need. And so they're making bad choices. And part of that's due to poor education, a lot of ignorance, people not knowing any better. But this is not an inner city problem, Jack. This is an American problem. It's a controversial subject, I realize. John says Whole Foods has programs that provide salad bars to schools and education on nutrition in poor inner cities. He says he doesn't blame the poor or anyone else, that America is killing itself through eating calorie-dense food, and that he wants to help. He points out that people are getting fat in rich suburbs and on Wall Street, too. Meta, we've heard from two chiefs.

We've heard about your wedding and your fruit flies. Dare we try to fit in a listener question? Don't forget the mayo, but sure. We've got a question from Nancy. Good, roll it. Hi, Jack and Meta. Love your podcast. Jack, can you comment generally on IPOs and private placements

and how investors should evaluate these opportunities, I'm especially interested in the IPO for Airbnb that should be coming up in the next several weeks. Good to hear from you, Nancy, and thank you for the question. You mentioned IPOs or initial public offerings and private placements. Let me start with IPOs. Companies raise money in two main ways, by borrowing and by selling part ownership in themselves called equity. Now, an IPO is an example of selling equity. A private company issues shares to the public for the first time and the shares begin trading. This has been a huge year for IPOs. Over 100 companies went public from June to August. Lindsey Bell, the chief investment strategist at Ally Invest, calls that the biggest stretch in

20 years. Companies want to come public now because the stock market is soaring. All that demand makes them likely to get high prices for their shares. For the general public, IPOs aren't necessarily automatic moneymakers. Looking at companies that came public between 2015 and 2019, about half were trading below their offering price a year after their IPO dates. I think new investors sometimes see an exciting company that comes public at, let's say, $25 a share, and the stock opens at $40 the first day of trading. They think, wow, I should have gotten in at $25.

But two things about that. First, it's difficult to get shares of popular IPOs at what's called the subscription price before they open for trading. The shares are often made available by the underwriting firms only to select clients who generate a lot of fees. Second, just so we're clear, if an IPO is priced at $25 and it opens at $40, that doesn't mean it quickly trades at all the prices in between $25 and $40 so that if you're fast enough you can catch it. It means the first price it's available to the general public at is 40 bucks no matter how fast you are. So Nancy, the answer to your question about whether to like IPOs

in general is not especially. There are plenty of ones that started off hot and got clobbered, like a company called Blue Apron. Let's take a look at one of last year's high-profile IPOs that's getting absolutely smoked. We're talking, of course, about Blue Apron. The stock sinking as much as 4% on Friday and now down 80% from its IPO price of $10. Look at that, $2. And ones that started off cold but then soared, like Facebook. Facebook is flying high. The stock is up more than 66% since the beginning of last year. Despite the company facing antitrust scrutiny, getting hit with that $5 billion FTC fine, and its CEO taking part in a heated hearing on Capitol Hill... Now, private placements are stock deals that happen before a company goes public

and aren't available to most investors. Whether those are good deals depends entirely on the company, the price, and what the IPO market will look like by the time the company decides to go public, because IPOs give investors who bought during earlier private financing rounds a chance to exit. You mentioned Airbnb specifically. That serves as a go-between for travelers and private property owners who want to make a little bit of extra income. I haven't used it myself. Meta, you've used Airbnb? Yeah, many times. How did you like it? I really like it. It's usually really easy. Places are clean and nice. You get a kitchen and, It's usually really easy. Places are clean and nice. You get a kitchen and, you know, a little more of a house than just a small hotel room.

And it's usually priced cheaper than hotel rooms. Are you going to keep doing it? Yep. Okay, Airbnb is expected to come public around December. And I've seen estimates that an IPO could value the company at $30 billion. I've also seen reports that the pandemic sharply reduced Airbnb's revenues, and that the company loses money after expenses. If you're wondering whether to buy, Nancy,

I'd say wait until after the stock opens for trading and consider carefully. There's a lot to think about. But let me give you a starting point. Compare the company's stock market value with its revenues, which were reportedly several billion dollars last year and which are surely in flux now because of the pandemic. We should know more about revenues by the time of the market and what portion of the market Airbnb is likely to secure, how large its revenues can grow, and whether they're likely to grow much faster than expenses. Also consider whether the stock, once it's trading, is attractively priced. For purposes of comparison, Uber isn't profitable now, and it was hit hard by the pandemic.

Its shares recently traded at around five times this year's estimated revenue. Will Airbnb begin trading higher than that, at 10 times revenue? Will the travel industry rebound next year? Will investors remain ravenous for story stocks, with no profits today, but with prospects for fast growth in years to come? with no profits today, but with prospects for fast growth in years to come. After the stock begins trading, Wall Street firms will initiate research coverage. And although I don't find their buy, sell, and hold ratings especially useful,

their initiation reports are often packed with useful information. If you can, get your hands on a couple of those and read up. Good luck. Thank you, Nancy, for sending in your question. And everyone, please keep the questions coming. Just tape on your phone using the voice memo app. Send it to jack.how, that's H-O-U-G-H, at barons.com. Thank you for listening.

Metaloot Soft is our producer. Subscribe to the podcast on Apple Podcasts Spotify or wherever you listen to podcasts and if you listen on Apple please write us a review if you want to find out about new stories and new podcast episodes you can follow me on Twitter that's at Jack Howe

H-O-U-G-H see you next week Meta, congratulations again on your wedding. I know it's a Zoom ceremony. You'll do the big festivities after the pandemic. Yeah, TBD. Do you need anyone to sing for the Zoom portion of it? I don't.

I don't need anyone at all. Are you sure? Because my wedding song, I still remember, it was Quando, Quando, Quando. And I still remember at least three of the words. They're all Quando. Yeah, no, I really don't need anyone to sing. Tell me Quando, Quando, Quando. I really don't need. Forget exactly. You know what? Just in case, I'm going to brush up on it. I mean, you know, we won't use it, but just in case you change your

mind, I'll be ready.