Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Q4 2019 Laboratory Corporation of America Holdings Earnings Conference call. At this time, all participants are in listen only mode. After the speakers presentation. There will be a question answer session thrust of course wondering especially to press star one on your telephone. Please be advised to todays conference is being recorded if you require further says.
Please press Star then zero in your touched on telephone.
I'd now like to be supposed to this conference call me personally <unk> Vice President Investor Relations you May begin man.
Thank you operator.
Marty and welcome to last Corp's fourth quarter 2019 conference call.
As detailed in todays press release, there will be a replay of this conference call available via telephone and Internet.
With me today, our edge sector, President and Chief Executive Officer, and Glenn Eisenberg, Executive Vice President and Chief Financial Officer.
This morning.
<unk> relations section of our website at <unk> Dot Com, we posted both our press release and Investor Relations presentation with additional information on our business in operation, which include a reconciliation of non-GAAP financial measures to the GAAP financial measures during discussed during today's call.
Additionally, we oh.
These forward looking statements include but are not limited to statements with respect to estimated 2020 guidance and the related assumptions the impact of various factors on operating and financial results expected savings and synergies and the opportunities for future growth.
Each of the forward looking statements based upon current expectation and subject to change based on various factors many of which are beyond our control that could affect our financial results.
Some of these factors are set forth in detail and our most recent annual report on form 10-K, and subsequent quarterly reports on form 10-Q included in each case under that Rick.
And the company other filings with.
We have no obligation to provide any updates to these forward looking statements, even if our expectations change and now I'll turn the call overtime.
Thank you for us and good morning, everyone.
I'm pleased to speak with you today and thank you joining the call.
Well more than 50 years Labcorp is running cost for putting talented people behind the vital health care mission.
Improving health and improving lives.
We delivered by Ignostic solutions, great innovative medicines to patients faster and use technology to improve the delivery of care that is on LIBOR.
As I forgot to travel colleagues around the world.
I see that we have dedicated employees at every level.
From a bottom mr. careers, the lab technicians clinical research associates, and scientists all who care deeply about the mission and the successful Bancorp.
Excited about the opportunities from that from the cheapest mention and to drive profitable growth into the future.
So Dan we haven't solved fourth quarter in 2019, and we are well positioned for growth this year.
During the fourth quarter, we saw progress.
Our diagnostics and our drug development businesses.
Our diagnostics business grew revenue by 3.7%.
And your strong growth given the headwinds.
Although margins were down 70 basis points in the quarter.
I had a negative impact of 130 basis points.
Our truck.
As grew revenue by 9.3% well margins expanded only 30 basis points and we approved our trailing 12 months book to Bill to 1.29.
We closed down 29 team with revenue over $11.5 billion.
Adjusted EPS of 11032 cents.
And free cash flow of over $1 billion.
We also made strategic acquisitions of $876 million.
Returned $450 million for shareholders through share repurchases.
I was a significant headwind for us and 29 team and I'm pleased with our performance given its impact.
Well, we appreciate the Congress passed the lab and that believes the next time. It did were 43 by one year until 2021.
Regrettably the legislation not fall and reimbursement cuts that went into effect this year [laughter].
We continue to pursue legislative solution and our industry litigation with the goal of correcting improper implementation of Panama.
Before I shouldn't discussing your parties for 2020 beyond I want to take a moment to discuss platforms response to the 2090 novel chronic virus.
That's a leading global life Science company, we have nearly 65000 employees around the world and are doing business more than 100 countries, including China, it's around the geography.
Our teams have been mobilized since the first importantly, this virus to protect our employees to communicate transparently with our customers to manage our supply chain and to support the global health care response.
We immediately engagement the CDC on the status of its becoming available commercial labs.
And utilizing our own expertise in PCR and testing other strains in front of virus. We've also begun to work on test for the novel running virus.
I am pleased with <unk> response, which had been focused on well being and safety employees and patients supporting business continuity bras and our customers and preparing to support the global response is necessary.
Moving now to 2020.
Our guidance includes continued profitable growth and significant cash flow generation that we plan to deployed to strategic acquisitions and share repurchases.
We continue to focus on our five key priorities which include the following.
First we continue to leverage the power of our uniquely combined capabilities across diagnostics and drug development.
Second we will either like policy by using our breadth of capabilities to wait and the fastest growing therapeutic area.
Sure, we're integrating data artificial intelligence digitalization and analytics across our business.
For we're putting our customers at the center of all we do.
And fifth we continue to focus on high growth opportunities.
As examples recently announced two new offerings that underscore our ability to deliver on the power over combined businesses.
First is the launch of our expanded suite a few centralized trials solutions.
Which seamlessly integrates cobian central labs, Labcorp specialty diagnostic labs.
Direct to patient market access call centers, and a suite of technology solutions.
The top posts on Facebook and to streamline trial execution.
The second is our cell and gene therapy development solutions, which offer a coordinated approach the scientific and program consultation.
Biomarkers companion diagnostic development study management, and regulatory commercialization support activities and capabilities.
With these two new offerings, we are well positioned to partner with sponsors to address complexity to reduce cost and risk into effectively accelerate timelines for their novel therapies.
We will continue to focus on executing against these five key absolute priorities, which will help us achieve our goal is to strengthen our marketing positions and diagnostics and drug development.
Impressed tick opportunities that drive new business, it's a break away based upon our unique offerings capabilities and financial performance.
Now I'll turn call over do you plan to discuss more specifically, our financial performance and our 2020 guidance.
Thank you Rob.
Going to start my comments with review of our fourth quarter results, followed by a discussion of our performance in each segment and conclude with our 2020 guidance.
Revenue for the quarter was $3 billion, an increase of 6% over last year driven by the benefit of acquisitions net of divestitures of 3.9% inorganic growth of 2.3%, which includes a 90 basis point negative impact from them.
In addition, foreign currency translation negatively impacted revenue grew by 20 basis points.
Operating income for the quarter was $336 million or 11.4% of revenue compared to 308 million or 11% last year.
During the quarter, we had $21 billion restructuring charges and special items, primarily related to launch pad initiatives acquisition integration and executive transition costs, partially offset by an additional insurance reimbursement.
For cost related to the 2018 ransomware attacks.
Adjusted operating income in the quarter was $422 million were 14.3% of revenue compared to 395 million or 14.2% last year.
The increase in adjusted operating income end March was primarily due to launchpad savings organic growth in acquisitions net of divestitures, partially offset by the impact from Pamela higher personnel costs and cyber security investments.
The tax rate for the quarter was 22.4% or 22.9%, excluding special charges and amortization.
This adjusted tax rate was favorable to our fourth quarter imply tax rate of 110 basis points worth four cents per share primarily due to changes in state tax walk treatments that occurred during the quarter.
We expect the company's adjusted tax rate for the full year 2020 to be approximately 25% compared to 24.6% for 2019.
Net earnings for the quarter with $227 billion or $2.32 per diluted share.
Adjusted EPS for $2.86 in the quarter up 13.5% compared to last year.
Adjusted earnings in the quarter benefited from top line growth margin expansion and or share repurchase program.
Operating cash flow was $570 million in the quarter compared to 486 million a year ago.
The increase in operating cash flows due to higher cash earnings partially offset by increased working capital to support growth.
Capital expenditures totaled $120 billion or 4.3% of revenue compared to $122 million were 4.4% last year.
As a result free cash flow was $442 million in the quarter compared to 364 million last year.
This brings our full year free cash flow to $1.4 billion up from 926 million in 2018.
We remained active throughout the quarter in terms of capital allocation.
Investing in acquisitions share repurchases and debt pay down.
At year end, we had $6.2 billion in total debt translating to leverage of 3.1 times gross debt to last 12 months EBITDA.
Now I'll review, our segment performance beginning with Labcorp diagnostics.
Revenue for the quarter was $1.8 billion, an increase of 3.7% compared to last year due to the benefit of acquisitions net of divestitures of 3%.
Organic growth and 0.8%.
Excluding the negative impact from Teva and managed care contract changes organic revenue grew 3.2%.
In addition, the benefit of one additional revenue days this quarter was largely offset by the impact from the non renewal the beacon Lvs, United Health care contracting with large market.
Total volume, excluding divestitures increased by 2.6% over last year of which acquisition volume was 1.8%.
And organic volume was 0.8%.
The benefit from one additional revenue day of 1.6% was essentially offset by the negative impact from the managed care contract changes of 1% and lower consumer genetics demand a 0.4%.
As a reminder, we did not include hospital lab management agreements in our volumes, which would have added approximately 0.8% tour volume growth.
Revenue per requisition, excluding the impact from divestitures increased by 1.6% due to acquisitions.
Favorable mix, including lower consumer genetics demand was offset by the negative impact from Teva 150 basis points and the non renewal of the deepen lvs contract of approximately 150 basis points.
Labcorp diagnostics adjusted operating income for the quarter was $277 million or 15.8% of revenue compared to $279 million were 16.5% last year.
The decline and adjusted operating income in margin was primarily due to the negative impact to Panama higher personnel costs and cyber security investments.
Partially offset by topline growth and launchpad savings.
The benefit from the additional revenue during the quarter was offset by the negative impact from the non renewal of the Deca LDS contract and managed care contract changes.
We remain on track to deliver $200 million of net savings by the end of 2021 from diagnostics Launchpad initiative.
Now I'll review the performance of Covance drug development.
Revenue for the quarter was $1.2 billion, an increase of 9.3% compared to last year due to the benefit of acquisitions net of divestitures, 5.2%.
And organic growth of 4.6%, partially offset by foreign currency translation of 40 basis points.
Excluding pass throughs organic revenue continued to grow in the mid to high single digits.
Adjusted operating income for the segment was $183 billion or 15.2% of revenue compared to 154 million or 14% last year.
The increase on adjusted operating income in margin was primarily due to launchpad savings acquisition net of divestitures inorganic growth, partially offset by higher personnel costs.
We remain on track to deliver a $150 million of net savings by the end of 2020 from drug developments Launchpad initiative.
For the trailing 12 months net orders in that book to Bill remains strong at $5.9 billion and 1.29, respectively.
Backlog at the end of the order was $11.3 billion that increase of around 600 million from last quarter.
We expect approximately $4.2 billion of this backlog to convert into revenue over the next 12 months.
Now I'll discuss our 2020 guidance, which assumes foreign exchange rates as of December 30, Onest 2019 for the entire year.
In addition enterprise guidance includes the impact on currently anticipated capital allocation with free cash flow targeted acquisitions and share repurchases.
Also as 2020 as a leap year the company will have one additional revenue and payroll.
Primarily impacting the diagnostic business.
Additional details on the impact of days can be found in the supplemental financial presentation posted on our website.
We expect revenue growth of 4% to 6% over 2019 revenue of $11.6 billion.
This guidance includes the negative impact from divestitures of 0.2% and the benefit from foreign currency translation of 40 basis points.
We expect Labcorp diagnostics revenue growth of 0.5% to 2.5% over 2019 revenue of $70 billion.
This guidance includes the negative impact from Teva of 1.3%.
And the renewal of the Beacon Lvs contracted 0.9%.
In addition revenues are expected to benefit from one additional revenue day of 0.4% and favorable foreign currency translation up 10 basis points.
We expect Covance drug development revenue growth of 7% to 9.5% over 2019 revenue of $4.6 billion.
This guidance includes the negative impact from divestitures of 0.5% and the benefit from foreign currency translation of 70 basis points.
We continue to expect organic revenue growth in the mid to high single digits.
Our adjusted EPS guidance is $11.75 to $12 in 15 cents, which is an increase of 47% over 2019 adjusted EPS of $11.32.
Free cash flow is expected to be 950 million to $1.05 billion compared to 1.04 billion last year.
In 2020, we expect capital expenditures to be between three and a half and 4% of revenue driven by investments to support growth and productivity.
This concludes our formal remarks, and we'll now take questions operator.
Ladies and gentlemen, if you have a question or comment at this time. Please press the star than the one key on your Touchtone telephone. If your question has been answered you wish to your slow from the Q. Please press the pound keep in the interest of time, we as a to limit yourself to one question, but feel free to get back in queue. If you have additional questions.
Our first question comes from Jack Meehan with Barclays.
Thank you good morning.
Adam is your first quarter as CEO I was just curious if you can talk about.
Maybe the go to market strategy at Covance, given some of the leadership changes just how you feel your ability to go in wind business, there and one of your big customers talked about some.
Pipeline Reprioritizations at the end of the or just you know any cancellation activity or anything in the fourth quarter any expectations in the 2020 guidance related to that.
Sure Jeff Good morning.
As I look at our strategy I think we're uniquely positioned to be successful in the marketplace and it starts with the fact that we have so much data from our diagnostics. We go over 500 million tests per year.
And when we use that data to try to help stratify disease or to develop companion diagnostics or develop asset base. I think we're uniquely qualified to work with pharma, whether it be biotech or big pharma to help them.
Figure out which patients are most likely to respond to their medicines are vaccines.
And then we can work with them through all phases of their clinical development and ultimately help with registration and then in market capabilities that we have so we have a full spectrum strategically what I believe.
Biotech and large pharma is looking for and I truly believe are unique in that manner.
Right now we're doing very well in early development.
We continued to grow into small to medium biotech area I'd like to see us do even better large pharma.
Based upon recent announcements and so we don't see any significant impact to our business as we got to 2020 and based upon the numbers in the guidance that we provided today hopefully see that we continue but leave that we have real strength and momentum as we go into 2020.
One of my strategic pillars is really maximizing the power of the combined and I believe that disproportionately will help the drug development business because I believe the diagnostic capabilities. We have will be more helpful to the drug development business than the other way Matt.
Thank you. Our next question comes from Lisa Gill with JP Morgan.
Good morning, and thank you Adam I appreciate your comments on the current a virus that I just want to follow up to understand if you have anything guidance for 2020. So you talked about the impact to the supply chain for talked about exposure, how big employees and the Asian markets.
Ben disruption and any of the studies are doing in the Asian market. How do we think about any potential impact that might have on your 2020 guidance.
Sure. Thank you for the question lease and good morning, as we look at the front or buyer, some where we stand today, we believe that everything will be covered within the ranges that you provided to you and we've seen some minimal impact, particularly in China with people coming back to work a bit later when in front of buyers first came out.
A little bit less people coming to work, but we believe that it's all manageable within the year, we'll have to watch quarter by quarter, if theres any minor impacts but over the year period of time, we think that we'll be fine based upon what we know today, obviously things change with the current environment becomes more of a global issue or have an impact to China.
For an extended period of time things may change, but based on everything that we know today.
The guidance that we provided we believe that it covers what we foresee could happen based on todays knowledge of the front end buyers.
Okay.
Thank you. Your next question comes from Michael Newshel with Evercore.
Thanks, Keith just give an update on the lab M&A environment. So you've continued to some more tuck ins and maybe just talk to the pace, you're expecting there and im just like.
We don't broader just what your capital allocation plans are for 2020, that's the mix of share repo and M&A that's embedded in your guidance.
Yes, sure and good morning first of all I would say, we feel good about our ability to grow based upon what we have today and our diagnostics and our drug development business.
I don't see any major things that we're missing in order for us to be successful compete successfully environments that we compete with Ben.
When I think about capital allocation, specifically around acquisitions here is quite thinking about it.
First is the regional and local labs or hospital labs acquisitions that you can do I think those are great use of capital they can be accretive in the first year. They typically returned or cost of capital within two or so years, and we know how to integrate those and we know how to make those happen very quickly.
The environment right now continues to be.
Building I would say they take longer than what I would've expected for them to take we have a long list of potential.
Tuck in acquisitions, and we continue to work through those Theres no nothing stepped remark capabilities to do that it's more how quickly we can get the customers have driven regional or local labs to consider moving forward I believe as people have seen the impact of Pam and they've seen some of the pricing thats incurred that theyre more open.
Today to have those discussions and they have been in the past.
Next I'd look at whether Theres strategic needs that we have for example, do we do you too.
Look at building our presence in Japan, China, and if we have to do those things in order to be successful there typically very small in nature I look to see if we can build them ourselves if not and there's a small acquisition we've considered us.
And then of course, we look at everything that's out there, but as I said I don't see the indeed as they sit here today for any type of large scale acquisition or changed for because I believe we have we need to be successful as we go into 2020 well of course look at everything.
But that's how I think throughout the allocations and then we you share repurchases.
If there are not as many acquisitions as we made like within the cash flow that regenerate each year.
Yes, the only thing.
I'd add to that is as you know what we've discussed that from our guidance standpoint, we are assuming that the full usage of our free cash flow will be deployed as Adam said, both M&A and to share repurchases. Obviously, we don't break that out as far as an outlook, but just from a modeling purposes assume that that is reflected into our ranges that we provided.
Thank you. Your next question comes from Kevin Caliendo Tvs.
Hi, Thanks for taking my call.
I just want to talk a little bit about your diagnostic revenue outlook.
And you can break it down between organic growth in sort of what you expect organic growth M&A contribution revenue per req any sort of guidance around those metrics and also maybe what you're expecting incrementally.
With regards headwinds are from market access changes.
Sure I'll start anything to add good morning, Kevin So as I look at the diagnostic business like first think about what's the underlying growth that you see in volume and if you go back for many years, you typically see the underlying growth between 1% to 2%.
I don't see any reason that that's going to change as we look forward to future I believe that that growth will continue to gain a future what it's been the past so that I think about what can we do to try to increase our growth rate versus the underlying growth rate. The first thing as I mentioned the tuck in acquisitions I think that those are very.
Beneficial and a good use of capital I don't put a specific number into the plan for this because it really depends on what's available how many are willing to move in any given year and whether or not the all make good financial sense, because we have a really strong financial fiscal occupancy that we plan to any acquisition. So I don't build the plan that we have to.
Do a certain amount the volume based upon those acquisitions.
The second thing you can do is trying to ship share and I think about shifting share I think about things like.
That United is launching I don't assume that there will be a significant shift in 2020, because they're rolling it out as we speak but if successful in the future I believe that that could benefit like us where we have very high quality at lower costs.
And as it thinking about the future if it works for United I think that other organizations may see this is an opportunity to help them reduce or laboratory cost by moving over business too.
Like ours, so I believe that we will over time be able to shift some share which will help us to grow our volume faster than the underlying.
Market growth.
I don't anticipate that this year by anticipated been successful what happened in future years. So that's kind of how I think about the underlying dynamics within the marketplace.
Yes.
Just to have little bit.
Color to that so to your point when you look at our guidance range for diagnostics next year, we have around <unk> 0.22 and half percent.
We did comment on kind of the unusual if you will headwinds and tailwinds that we expected for 2020, another Europe the impact of camera plus just the annualization of the Beacon contract, but also diagnostics benefiting from an extra revenue days slips flight favorability with currency. So when you take out those for kind of items that.
At around the constraint of around 1.7% you can kind of get to see that we're looking at north of a 3% growth rate with everything else, which is effectively the annualization of acquisitions already completed plus organic growth and the Atlas point from a forecast standpoint, we talk about.
Normalized organic revenue growth of 2% to 3% in.
In fact, this past year, we were at the upper end of that range from again that normalized basis, taking out those impacts.
And within the guidance range, that's a fair assumption so organically again, the 2% to 3% continues to be expectation within range plus. The addition of those annualized acquisitions and the net impact of those headwinds.
Thank you. Your next question comes from Dan Leonard with Wells Fargo.
Thank you.
Maybe on Covance for for the 2020 outlook can you be specific about what do you expect the pass through headwind to look like in 2020, and maybe offer what it was in 2019 and then on the margin side, how much of margin expansion do you expect you could achieving covance and 2020. Thank you.
Hi, Dan good morning.
Okay covenants I first want to say that we're pleased with the performance and I think that our revenue growth and our book to Bill continues to be strong as I'll start with the margins. If you look at the margins we had expansion into fourth quarter of 130 basis points. As we look at margins next year, we expect to have an improvement in margins once again, albeit.
Not as much as what we sorry, 2019, we announced our Launchpad initiative across the enterprise is 30 $350 million for the drug development is $150 million and we're on track to achieve that.
As we look forward to future I think we'd have to continue to post cost across all the businesses, even above and beyond what we have enough that it just has to be a mindset going into the future in terms of continued increased productivity.
So if you look at the full year, we grew at about 6.8% X pass throughs and I would say, that's probably a pretty good read for what next years.
The plenty plenty look like.
Yeah.
And just the other thing idea is that when you think about 2019 pass throughs were down in call. It around 10%. So given the volatility of that particular quarter and it was primarily in the first but it did impact each quarter.
First it was the most we've kind of called it out a bit and talked about that organic revenue excluding pass throughs would be within the guidance range of the five of the after 7% last year and in fact.
Again organic growth was probably little bit north or wasn't a little bit north of the center of the range. So we felt good what the overall organic performance of the business taking out that volatility of pass throughs and really good performance across the spectrum of our businesses really doesn't change our outlook for 2020 much other than for again forecasting purposes, we've assumed.
Normal increase in pass throughs commensurate with the business growth that we have which pass throughs or more in line to it so.
So that again thinking about mid to high single digit growth rate think about it is organic revenue within that range, both with and without pass throughs each quarter to the extent that we see volatility in that will again call. It out just to focus on obviously, the big driver, which is the the revenue without pass throughs, but hopefully it will be.
Better.
Morning.
Okay.
Thank you. Your next question comes from roughly at home with Citi.
Thanks, Good morning.
If I look at revenue distribution coal, that's about 40% of revenue and if I talk on earnings to about 35%.
I guess the question is given the faster top line and margin expansion within coal Vance.
Thats come up more muted revenue growth from the lab side and some margin contraction there on top of sort of maybe the M&A opportunities and fragmentation certainly within the aerospace.
I guess, how quickly do you see the business moving closer to more of maybe 50 50 types blood and or do you have a target as you think about sort of the split into two businesses going forward. Thanks.
Yes sure. Thanks, Ralph Good morning, So first of all I don't have a target for the percent of the business is moving forward and if you notice I used the words diagnostics and drug discovery, because I don't think of it as just labcorp and Covance I think of it as a spectrum of offerings that we have for our customers.
That are linked together in order to make us successful.
Obviously, the clinical trial business continues to grow at a faster rate and in terms of drug development grows faster rates and therefore, if you look at doing what you looked at it over time I Wouldnt expect as that becomes a larger part of our total percentage of revenue, but I think a big reason that that will grow faster is because of our capabilities that we have.
Within the diagnostic area so to me there.
The linked when we look at the acquisitions as I spoke about before the tuck ins and diagnostic area local labs and regional labs as well as hospital labs I think are good use of our capital. So you will continue to see some acceleration to those acquisitions, the PEO and works in which the way we think it might.
Hi, I believe that well see additional growth there. So to me, it's really about making sure. We have good fiscal discipline that we put our money behind the opportunities that give us some best growth but.
Please continue offerings that we have versus just looking at one segment versus the other.
Thank you. Your next question comes from Gold West with Morgan Stanley.
Yes, hi, good morning, So couple of questions here first of all Glenn on Kevin's question regarding the pricing seems it in the fourth quarter actually was really strong even when you normalize for Panna and the Beacon Hill headwinds 1.6, an acceleration so.
Maybe you can help us parts to benefit from the tuck in acquisition that you did in the quarter in how they contributed to it and should we think about that at 1.6.
All.
Right run rate for 2020, and then on this your ROE side Adams for you. If you can give us maybe some more color on whats covance Curran win rate and whats a realistic goal that you think about longer term is.
We continue to better align to capabilities.
The diagnostic drug discovery business.
Sure I'll start with the second question that we can.
Work in the first one.
Back to our Covance business.
As I said before early development I look at share. In addition to win rate as I look at early development I think we do really well and we disproportionately win and probably development as you start to look at how we do in the small to medium sized biotech I think we could very well, they're also and a lot of growth has come from that segment overtime.
Well I'd like to see us to better is in the Big pharma segment.
And I believe we will be able to do that for several reasons. One is one of our key pillars is to win in oncology and I think we have a very unique set of capabilities oncology from our ability to develop companion diagnostics and assays all the way through doing the clinical trials identifying patients most likely to respond but also.
So helping to find patients based upon our large amount of data that we haven't diagnostic area and I also believe that that's the fastest growing largest area for pharma. If you look at the number of compounds as a percent in oncology. It's very significant so when we went there I think we'll be able to show that we can all.
So do well other areas such as specialty.
Sure I'll, Angie and other areas. So to me winning on oncology is important because it allows us to be successful in other areas overtime. So that's an area that I want to see continued growth in large pharma in oncology I'd like to see us disproportionally when share in that segment.
Hey, brickey on the.
With regard to revenue for acquisition. So the 1.6 for the quarter, which was a strong number for us, but we commented that it was acquisition growth.
And as you think about organic pricing.
We just talked about obviously the headwinds coming from.
Beacon combines around the 3% headwind so as we think about the quarter, firstly going back to call it normalized backing up those.
Those unusual items and from an organic standpoint, you won't get the 2% to 3% organic revenue growth the quarter would have come in at the upper end of that range as we did for the full year. So as we think about.
A normal environment, Matt I think started the conversation with thing organic volume of one or two and then let's say, we pick up or in the point on price to get to the 2% to 3% range.
As we think about our outlook that's normally the way we gauge each quarter, we may see a little bit fluctuation from quarter to quarter, but again as we think about 2020, we still have within our guidance range bullet that organic normalized growth about 2% to 3% with a pretty normal one or two volume.
And the rest being priced.
Thank you. Your next question comes from Brian Tanquilut with Jefferies.
Hey, good morning, guys.
Just a follow up on Kevin's question earlier, Glenn how are you thinking about.
Market share shift within the contract I mean should we expect more.
Network access changes impacting organic growth and I guess, the fall, but that last call me you had been in lab on the acquisitions from hospitals I think Adam you talked about the pace the slower than you expected. There is there anything you guys see in the horizon that will accelerate that or anything else labcorps can proactively due to get the deals larger deals go.
Thanks.
Yes, Hi, Brian This is Adam good morning.
First of all when you look at the environment and market share, particularly if you look at managed care.
Kind of overlap the markets or the managed care losses that we had last year as we go through the first quarter of this year. So the first for this year should be the last quarter, where you see that overlapping occur. So therefore for the majority of year I don't see any additional significant downside.
Based upon in managed care contract changes that occurred last year as I look at 2020, I don't see any significant managed care shifts that tends United Horizon that we saw last year. So I don't see that type of volatility as I look at the hospital tuck in acquisitions, but I can tell you is our list is law there are.
Many discussions that we're having around the country with both local and regional labs and hospitals.
It's not a lack of resources that were putting behind it will put resources that we need to be successful there. It's a discussion that we're having with our customers I believe overtime. It will begin to accelerate particularly as they feel the continued impact for camera and if you look at what we're expecting for Pamela we expect.
This year's impact would be about the same as last year. So no 19 was about $100 million. This you will get about another $100 million and I think 2021, baring any change to legislation or legal.
We will be about the same these regional local labs are feeling that as well and I think that that pressure will continue to.
To make them evaluate us working with them or find her labs as we move forward.
Thank you. Your next question comes from Donald Hooker with Keybanc.
Great Good morning.
One of that maybe smaller area focus for you guys, maybe but in terms of your investments and the accelerate informatics.
Functionalities that you guys have developed over the years at Covance.
He just curious kind of at a high level kind of where you're seeing success there in terms of using ita.
To drive trials, you have a number or tools there just would love to hear an update on that part of Covance.
Sure.
You saw one of the pillars of the strategy is to utilize.
Data analytics artificial intelligence and.
Basically everything that we do including our ability to Covance I also mentioned some of the new offerings that we have in one of which was the virtual trials in the hybrid trial a lot of that is based upon our ability to use information to use technology in a better different way than we've done in the past and we do today, we will continue to ensure that were at the lead.
Edge of understanding the hybrid and virtual trials that we invest in technology necessary to be successful in those areas and.
I believe that as we move forward and we used the power of our combined organization the ability to use data and analytics in our 500 million data points that we get every year diagnostics and understand how to use that in drug development to help identify patients better enrolled trials faster is going to be.
So that's why it's one of our top five pillars of our strategy.
Thank you. Your next question comes from Derek risks with Bank of America.
Hi, Good morning, Hey, a couple of question I guess the first one can you talk a little about the operating margin in lab.
It was that I was a little bit lower than we thought in the fourth quarter and can you talk about some of the personnel costs and things there and sort of how should we think about the operating margin for lab and then the Covanta question, which is the backlog conversion.
Was down to 37% this quarter had been averaging.
Fortys last year in 39%. Most this year can you talk about sort of why the backlog conversion stepping in sort of like what how should we sort of think about that in 2020. Thanks.
Sure I'll start with how I think that's hard to pin up I'll talk more broadly and then I'll answer the question specific thing as an enterprise we expect our margins this year to be relatively flat, we're going to see an increase in our margins in drug development, albeit maybe a little bit less than what we saw in 2019, and we're going to continue to see.
The diagnostic margins and we expect those to be continuing under pressure and there will be slightly down in 2020 versus 2019, but net net we believe it will be relatively flat this year versus last year and with the two puts that we have if you look at what we've been able to do and I'll use the third quarter is the example, I mean I haven't had.
At an impact of 130 basis points and our margin was down 70 basis points. So we were able to make up a good portion of the Pam impact as we move into this year I think we can do a bit better or similarly, because of the lines pet initiatives that we've put in place and we will continue to push hard on reducing cost.
Where we can.
Diagnostic business, we have a 200 million dollar launch pad commitment and we're going to meet that commitment and then we'll continue to see if there's additional opportunities and ways to even bring down cost further.
On the other thing I'd say with regard to Covance and backlog the Covance book to business is doing well continues to build.
And I think that we have real opportunity moving forward quarter by quarter I'd be a little bit careful looking to closely because there is a lot of variability in.
Numbers across the segments.
More towards our yearly guidance, that's why we've given guidance on a year.
A year long time period.
Derek I'd, just add to that maybe first with the with the backlog question. So lot of things come into play obviously the business mix that we have the therapeutic mix the stage of where the trials are again, we have kind of the end to end business. If you will historically plus or minus we've been around 40% of backlog conversion as Adam said.
It's both a look I did want to kind of the an annual basis, because there's fluctuations. So we did see a drop down a little bit to the 37% Proto quarter, but again still in line, but as a general maybe for modeling. If you will we tend to say around 40% of conversion.
Two revenues the next 12 months and that would represent roughly around 85% of the revenues for the next month. So another 15% comes in with obviously new business Thats transacted during the year.
On the diagnostics margin standpoint, but.
And really hit it well from the standpoint, while margins were down.
Again, excluding Panama, we would have had nice margin appreciation and in fact, the fourth quarter margins were down the least amount that they were all year. So as launch past ticking and is the growth of our underlying business is kicking in and so while we still expect to see margins down next year slightly down because of another year ever we'd also similar.
Only say, we're not prepared but we'd actually be seeing nice margin appreciation. Our goal is to continue to manage our cost structure to do that what we talked about higher personnel costs, that's kind of our way of every year, saying personnel costs, our biggest cost and so that does increase with normal inflation and obviously, depending upon the markets.
That we serve and so nothing if you will unusual about it other than that's just the biggest costs that we have tough to overcome.
Thank you. Your next question comes from Erinn right with credit Suisse.
Great. Thanks, I'm on the fundamentals in the CRL business can you just speak to RFP flow.
Pricing dynamics is relatively rational pricing environment out there and could you parse out for us a little bit on the central lab business in particular, how big that businesses for you today and what that's growing at.
It hasn't been exceeding your expectations on that front and then could you also just comment on.
The direct to consumer kind of genetic testing market kind of where what your guidance now implies.
Thanks.
Okay. So I'll start with the genetic testing market you saw significant decline in 2019 versus 2018, it's now a very small amounts of our total volume and of our total revenue and operating income. So although it may go down again in 2020 and should not have any.
No significant impact to our fundamentals our financials with regard to our central lab into strength and we continue to do very well in our central labs and.
I think with the acquisitions that we've done and our capabilities and brilliant development in general, including Central Laboratories, I continues to be real strength for us and I don't see that changing over time, and then lastly, with regard to that environment I believe that biotechnology and pharmaceutical is.
Really doing well when it comes a new molecule as a new chemical entities in a number of products in development and the environment itself I think feeds well into our ability to continue to grow our drug development business pricing will always be competitive in every market in healthcare I don't see any fundamental shift.
Sure trend other than it continues to be a competitive environment and we can compete very well within that environment.
Thank you. Your next question comes from met through with William Blair.
Hi, Adam I wanted to go back to your comments on preferred lab definitely seen you said.
Patients and providers were pretty meaningful incentives overtime to new volume into the PLM is there anything you can do thanks proactively work with United or even other payers in terms of accelerating the transition of some of that.
Some of that line given that it seems that longer term incentives for all parties involved are aligned.
Yes, so Matt I agree with you that it rationally it makes a lot of sense and the good news is when you have a lab like we have we have really high quality and you have at a lower cost price structure, it's something that could actually help reduce overall health care costs in every part of the healthcare system in the U.S.
Got it states and around the World frankly is struggling with health care costs and I believe that we can be part of the solution with the quality that we bring at the cost that we bring it we worked very closely with United Obviously, we will continue to work then we will do whatever we can within the regulatory and legal environment to work with them to make sure.
This is successful from book them and for the patients.
And we serve together so we're glad to work with them and we'll continue to do so.
Thank you. Your next question comes from Steven Becker with Wolfe Research.
Hi, Thanks for the question I wanted to ask about the fourth quarter in the lab business.
Appreciate the color you gave on the organic volume and the moving parts there it looks like when you adjust for those parts and also the the Capitated contract wins that you add from your largest competitor it looks like the underlying organic growth as maybe a little bit weaker than the past couple of quarters. I was wondering if there's any specific drivers we should think about for the quarter and then also how to think about.
Volumes seasonality during 2020, given the Annualization of managed care network changes in the calendar shift. Thank you.
Yes, Stephen this is Glenn.
I'll start.
I'd say from organic revenue growth within diagnostics in the fourth quarter again normalizing for the headwinds that will go through.
We were at the upper end of our expectations. If you will from the call it 2% to 3% normalized organic revenue growth. So.
Consistent as we've had in the full year take on an earlier question. There was a little bit of a difference in the mix between normalized organic volume versus our revenue per requisition, but.
When you look back again from what's driving the.
The organic business, we did benefit from that extra day that was timing related to kind of a headwind from days in the in the first half of the year, but we still had obviously the impact from managed care contract changes as well as some lower consumer genetics demand as separately, we have the big ones, which was Panama and and the ups.
Back to beacons contract. So when you net all those out again, we would say kind of normalized organic revenue growth in the quarter would have been a little bit north of that 2% to 3% range.
Thank you. Your next question comes from Bill Quirk with Piper Sandler.
Great. Thanks, Ken Good morning, everyone.
So couple of questions. So first off how much of any of the supply chain for the is manufactured in China, and obviously is there any risk to that given the current situation and then another one on the PLN.
When do you think we might see other payors follow United's lead here could we see something happened in 2020 or or do you think they want to actually assess some of the results before they go ahead and roll their own plan out. Thank you.
Sure Good morning, Bill sorry, the second question.
I think that the p. on its going to take a little bit of time to actually show that benefited the PEO and show that.
You can actually be execute and implemented well so I would expect although I don't over certain but I would expect other managed care organizations to wait to see the impact and as they start to see early impact Theres, a timing where you don't hit July it's hard to implement in the next year. So they don't good. This July it would probably happened in 2000.
The 21, and it's too early to tell what's the other managed care organizations may may or may not do but what I built into the plan is no upside from PLN based upon this year and we've not build anything for other managed care organizations as we look into this year for into the future.
With regard to other Cronto virus I mean, obviously, we do have us over supply chain that goes through China. Our team is working to ensure that we have consistent supply I think we're in good shape as we sit here today well have to watch it closely depending on how long or if it gets worse in China or as a global impact, but if it gets to that point.
Significant across many different areas within the healthcare system and I don't think there'll be anything specific in our business or to what we do that is overly concerning as I sit here today I don't see an impact it would only be something got really worse on an unanticipated at the moment.
Again, ladies and gentlemen, if you have a question or comment at this time. Please press star than the one key on your touched on telephone.
Next question comes from Jack Meehan with Barclays.
Thank you I'm back [laughter].
[laughter].
Glenn I just had one follow up I wanted to make sure we were setting expectations rate for the first quarter on the lab side for earnings because I think you have a couple of headwind. One is obviously a Pam you also have be again and then finally, thank you have an extra wage day so.
Maybe just talk about kind of the pacing of earnings throughout the year on the lab side and just any overall commentary on one Q would be helpful.
Yes, Hi, Jack and welcome back.
When you think about just the timing of I guess first lets say just overall that.
The two businesses as you know have a little bit these different seasonality patterns. If you will so the drug development side really straight more so in the second half that first but several lay on the diagnostic side a stronger first half the second so kind of levels off at an enterprise level and so when you look at our performance overall, especially again.
Driving even down to the earnings per share you can kind of take a look at each quarter relative to the total together reasonable proxy of of where it will do to your point within diagnostics. We do have the issue of an extra day.
And again, if you look on our website, you'll notice that we pick up around a half a day benefit on revenue in the first quarter ended the third that shows how it falls out while there's the extra payroll day that there will be in the first quarter. So you know as a proxy a revenue day for US is around 25 million revenue and on the cost side for a payroll.
Hey, it's around 10 million. If you will so I think that will give you at least the sense of how you wanted to tweak a little bit for that but to your point on the.
You can renewal. So obviously, that's still has the impact in the first half of the year until late Annualizes, obviously, Pam as going to stay on for for the full year and then finally, just what the managed care contract changes again, they'll still be a little bit of a headwind.
As that Annualizes.
There will be through the first quarter than the rest of the year will be flat, but hopefully that gives you a little bit of.
Some color into the quarter.
Okay. So.
Okay.
No so similar to what I didn't see any more questions in the queue.
Yes. Thanks, Thank you very much Kevin, but I'd like to do is close the call now first of all thank you all for joining the call today.
As we look ahead, we're well positioned for another year of strong profitable growth.
The work that we do it matters to customers and matters to patients around the world every single day, and our ethics, our integrity, our pursuit of scientific excellence, our strong and a steadfast foundation for every single thing that we do we're helping to save improved lives than we are poised to play even greater role in the future by helping solve some of the most pressing global.
Health care issues. So we appreciate your time today and hope you have good rest of the day. Thank you.
Ladies and gentlemen. This concludes todays presentation you may now disconnect have a wonderful day.