Q2 2019 Earnings Call
Thank you.
Just on all participants are in a listen only mode. Following management's prepared remarks, we will host a question answer session and our instructions will be given at that time gifting or compensate you acquire persistence press Star then zero and I'll be happy to assist you. As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure hand, the conference over to Miss Clarissa Willis VP of Investor Relations Ma'am you may begin.
Good morning, and welcome to Lab Corp, second quarter 2019 conference call.
As detailed in today's press release, there will be a replay of this conference call available via telephone and Internet.
With me today are Dave King Chairman and Chief Executive Officer.
Hi, Sunburn Executive Vice President and Chief Financial Officer, and John Ratliff CEO of Covance drug development.
This morning in the Investor 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 and operation.
Which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call.
Additionally, we are making forward looking statements.
These forward looking statements include but are not limited to statements with respect to estimated 2019 guidance and the related assumption.
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 is based upon current expectations and subject to change based upon various factors that could affect our financial results.
Some of these factors are set forth in detail in our 2018 Form 10-K and subsequent forms 10-Q.
And in the company's other filings with the FCC.
We have no obligation to provide any updates to these forward looking statements, even if our expectations change.
Now I'll turn the call over to Jason.
Thank you, Chris and good morning.
I'll begin by discussing financial highlights of the second quarter.
Our results in the quarter were again, driven by strong demand across both businesses and consistent execution of our strategy to deliver world class diagnostics spring, new medicines to patients faster and use technology to change the way care is delivered.
We delivered another strong quarter across the enterprise revenue of 2.9 billion was not only an increase of 0.5% over last year.
But this significantly understates the strength of our operational performance.
Top line revenue from continuing operations grew 4% decrease by three major non operational items, 1.9% of divestitures.
0.9% and the impact and 0.7% of negative currency.
We delivered excellent margin performance, given the impact from Panama, and adjusted EPS of $2 or 93 cents, we also deployed $656 million to strategic acquisitions and $200 million to share repurchase.
Our diagnostics business again performed well as our team continued its outstanding work retaining volume put at risk by managed care contract changes.
Revenue per requisition in the quarter, excluding divestitures with very strong growing at 2.5%, excluding the impact of pounds.
Despite panna and other headwinds our organic volume revenue per requisition and diagnostics launch pad two initiatives combined to deliver an impressive 19.6% adjusted operating margin.
Our priorities and co has continued to be driving net orders converting backlog into profitable revenue growth capitalizing on strategic investments such as in Vigo and focusing on our key initiatives precision medicine patient solutions data as a differentiator and new global delivery models.
Investments in our Covanta team end to end capabilities therapeutic expertise and global infrastructure translated into over 6.8% revenue growth margin expansion of 90 basis points over $10 billion of backlog and a trailing 12 month book to Bill of 1.26.
The backlog growth exceeding 10 billion for the first time is further evidence that our differentiated data driven offerings are resonating with existing clients and attracting new business.
Now I will review the quarter's performance highlights.
Our integrated diagnostics and drug development capabilities in data continue to create value in innovative ways that our competitors cannot match.
I'll review several examples that showcase these capabilities.
First.
Our unique virtual and hybrid cloud capabilities that bring together, our diagnostics PSC infrastructure, including last word walgreens locations and logistics capabilities as well as our Covance Central lab market access project management study design and data capabilities. These combined assets ease the patient burden of study participation and deliver faster and more cost effective trials for sponsors.
In the quarter, we won several new awards, including an eight year phase three b cell and gene therapy study, specifically designed to keep patients engaged over the lengthy timeline.
The sponsors cited our unique ability to conduct blood draws at the labcorp season deliver and track kits and samples.
Form a full range of testing a covances central labs provide patient support through the comments market access business and deliver FDA compliance data in selecting labcorps from this important opportunity.
Second.
We introduced our innovative new patient direct offering streamlining patient recruitment by using lab core data and our direct connection to patients to quickly and effectively contact appropriate candidates for trials.
Taking the sponsors criteria, we sent emails through a targeted set of patients likely to qualify for the study based on diagnosis code test results and geographic location.
The E mails referred to patients to the sponsored website to enroll they were then routed to a labcorp patient service center for testing.
We were compensated for threeg email for the testing and for each enrolled patients.
Based on the results of the initial campaign for a cardiovascular study the sponsor has already significantly expanded the scope of this work.
Sure.
Covance want to screening and recruitment study for a very rare pediatric disease, where data from Labcorp diagnostics, our recent MSG acquisition and other Labcorps partners combined to offer unique solution.
Our capabilities here, our unparalleled because they enable us to identify patients who are potentially eligible for the study that may have been misdiagnosed and to screen them for definitive diagnosis of the condition and for study eligibility.
Finally, we continue to advance our strong leadership position in companion diagnostics and did oncology with the introduction of two new companion diagnostic tests Pixthree CA for breast cancer and after you got bar for bladder cancer.
Revenue from all aspects of companion diagnostics grew nearly 30% and orders more than doubled in the second quarter versus last year.
These are among a growing number of proof points that our combined capabilities create unique and highly desired solutions for our customers needs that only labcorps can deliver.
I'll now discuss this quarter's diagnostics highlights our managed care portfolio continued to perform well.
The business grew in the second quarter with United and Horizon volume holding stable and we won several important contracts in key markets.
As a reminder, all of our lab core brands are included in Unitedhealthcares preferred lab network, which went into effect on July 1st.
Although we expect limited impact from the PLN in 2019, we are optimistic about the opportunity to grow volume with United healthcare through the PL in 2020 and beyond.
We continue to grow our hospital and health system revenue and deepen our relationships in the quarter, we announced the Mount Sinai digital pathology and artificial intelligence collaboration and finalize several other new relationships with health systems.
We continue to work to overcome the equitable Medicare price reductions imposed by the flawed implementation of Pam.
We are encouraged by the introduction of the laboratory access for beneficiaries at significant step in reforming permit to produce a truly market based Medicare fee schedule.
The Lab Act would delay the second round of Pam are reporting to the first quarter of 21.
And we commissioned a study by the National Academy of Medicine focused on how to implement Pam a properly and deliver truly market based reimbursement.
In the quarter, we continue to work on providing a seamless customer experience.
Our Labcorp Walgreens partnership is on track to have at least 125 stores by the end of this year, including sites in new States and major metropolitan markets.
We are on track to achieve our target of at least 600 locations by 2022.
We are also moving toward integrations of our locations and capabilities into each other digital experiences and Walgreens and find care platform and continuing to discuss a broader collaboration on health and wellness offerings and the next generation Sciarra.
We also added consumer initiated phlebotomy based testing to pixel by Labcorp.
This new offering expands the number of testing options available to consumers and enhances access and convenience by giving them. The option to have self directed testing collected at Labcorp patient service centers, where labcorp Walgreens locations in states, where pixel is available.
[noise] launch pad to continues to progress well in transforming our business a significant number of projects are underway, including digitizing operations, expanding digital and mobile options available to our patients increasing transparency for consumers and health care providers and streamlining all of our workflows. We remain on track to deliver a transformed business and a total of $200 billion net savings by the end of 2021.
Now I'll discuss covanta highlights in the quarter.
On June 3rd co. We have completed the indigo transaction divesting, our CRP business and enhancing the reach and scope of our Nonclinical early development business.
This transaction infuse the scientific talent and technical expertise into our Nonclinical business and substantially increases local global capacity, we've expanded footprint into Europe and the US we are excited to welcome our new colleagues to Covance as we focused on integrating our expanded capacity capabilities seamlessly.
Recognizing our strength in drug development across the Covance business, a sponsor recently awarded US a full molecule development program, which included a preclinical toxicology study a phase one pharmacokinetic pharmacodynamic study to be conducted in our clinical pharmacology unit and a large phase two program, including three studies across two cardiovascular indications.
This award was driven by our regulatory expertise and our biomarker capabilities and demonstrates covances ability unique among CR rose to take drugs from early discovery through to FDA approval.
Covance continues to improve its award winning accelerate platform, which facilitates complete study quality management and risk based monitoring according to the IMF CH guidelines. Recent additions include implementation of a company wide risk library and deployment of accelerate action alerts.
These enhancements increased our capabilities in managing study risks and overall study quality, leading to improved safety for study subjects more efficient trial operations and more effective use of study budgets.
We continue to execute our Covance Launchpad initiative and are on track to deliver $150 million of that savings through Covance launchpad initiatives by the end of 2020.
We completed the $30 million and cost synergies from the integration of filter that we committed to deliver in 2020 and expect to achieve $10 million in net cost synergies from the integration of a d. go by the end of 2021.
In closing we are pleased with our second quarter performance.
When we acquired Covance, we knew that the power of the combined would result in a differentiated offering that would position us to become a unique global life Sciences company.
That decision reflected our strategic vision for the company's future our established commitment to playing the long game and our confidence in our exceptional team of colleagues around the world dedicated to caring for patients.
We are seeing our vision for the combined enterprise come increasingly to life as we pursue our mission of improving health and improving lives now I'll turn the call over to Glen.
Thank you Dave.
Im going to start my comments with a review of our second quarter results followed by a discussion of our performance in each segment and conclude with an update on our 2019 guidance.
Revenue for the quarter was $2.9 billion, an increase of 0.5% over last year. The increase was primarily due to organic revenue growth of 1.7% and acquisitions of 1.4%.
Partially offset by divestitures of 1.9% and foreign currency translation of 70 basis points.
Excluding the negative impact from Teva of 90 basis points organic revenue grew 2.6%.
Operating income for the quarter was $336 million or 11.6% of revenue compared to $369 million or 12.9% last year.
During the quarter, we had $51 million of restructuring charges and special items, primarily related to launchpad initiatives and acquisition integration.
Adjusted operating income, which excludes amortization of $60 million as well as restructuring charges and special items was $447 million or 15.5% of revenue compared to $464 million or 16.2% last year.
The decline in adjusted operating income and margin was due to the impact from Pam of $27 million higher personnel costs and cyber security expenses, partially offset by organic demand and launchpad savings.
The tax rate for the quarter was 29.4% compared to 25.1% last year, the adjusted tax rate, excluding special charges and amortization was 25.2% compared to 24.5% last year.
The higher adjusted tax rate was primarily due to the mix of earnings we continue to expect the company's adjusted tax rate for the full year to be between 25 and 26%.
Net earnings for the quarter were $190 million or $1.93 per diluted share adjusted EPS, which exclude amortization restructuring charges and other special items were $2.93 in the quarter down 2% compared to last year.
Operating cash flow was $254 million in the quarter compared to $387 million a year ago. The decrease in operating cash flow was primarily due to higher working capital requirements to support growth.
Capital expenditures totaled $85 million or 3% of revenue compared to $87 million or 3% last year. As a result free cash flow was $160 million in the quarter compared to $300 million last year.
We remain on track to achieve our free cash flow guidance of $950 million to $1.05 billion in 2019.
We remained active throughout the quarter in terms of capital allocation.
During the quarter, we invested $656 million of acquisitions and repurchase $200 million of stock.
As of June Thirtyth, we had $1.05 billion of authorization remaining under our share repurchase program.
At quarter end, our cash balance was $265 million down from $349 million at the end of the first quarter.
Total debt at quarter end was $6.6 billion at our leverage was 3.4 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, a decrease of 2.9% compared to last year due to divestitures of 2.8% foreign currency translation inorganic revenue, partially offset by acquisitions.
Organic revenue was down 8.3% in the quarter, which includes the negative impact from Camma of 1.5% and fewer revenue days of 0.6%.
Total volume, excluding divestitures decreased 5.9% from last year due to the decline in organic volume of 1.2%, partially offset by acquisitions of 0.2%.
Organic volume was reduced by approximately 2.5% due to the combination of lower consumer genetics demands managed care contract changes and fewer revenue days.
Excluding these items organic volume was up 1.3%.
As a reminder, we did not include hospital lab management agreements in our volume, which would have added approximately 1.8% to our volume growth.
Revenue per requisition, excluding the impact from divestitures increased by 1% due to mix revenue per requisition was negatively impacted by 150 basis points for Pam.
Labcorp diagnostics adjusted operating income for the quarter was $345 million or 19.6% of revenue compared to $376 million or 20.7% last year.
The $31 million decline in adjusted operating income was primarily due to perama of $27 million.
The negative impact from divestitures managed care contract changes cyber security expenses fewer revenue days in personnel costs was essentially offset by launchpad savings other organic revenue growth and acquisitions.
We remain on track to deliver $200 million of net savings by the end of 2021 from our diagnostics Launchpad initiative.
Now I'll review the performance of Covance drug development.
Revenue for the quarter was $1.1 billion, an increase of 6.8% compared to last year due to organic growth of 5.5% and acquisitions of 3.3%.
Partially offset by foreign currency translation of 1.6% and divestitures of 0.3%.
Adjusted operating income for the segment was $142 million or 12.6% of revenue compared to $123 million or 11.7% last year.
The 18 million dollar increase in adjusted operating income and 90 basis point improvement in margins were primarily due to organic demand launchpad savings acquisitions and currency translation, partially offset by higher personnel costs cyber security investments and facility expenses to support the company's global expansion.
We remain on track to deliver $150 million of net savings by the end of 2020 from Covances Launchpad initiative.
For the trailing 12 months net orders and that book to Bill remains strong at $5.5 billion and 1.26, respectively.
Backlog at the end of the quarter was $10.3 billion, an increase of approximately $350 million from last quarter.
We expect approximately $4.1 billion of this backlog to convert into revenue over the next 12 months.
Now I'll discuss our 2019 guidance, which assumes foreign exchange rates as of June Thirtyth for the remainder of the year and includes the impact from currently anticipated deployment of free cash flow toward acquisitions share repurchases and debt repayment.
We expect revenue growth of 1% to 2% over 2018 revenue of $11.3 billion, a narrowing of the range as compared to our prior guidance of <unk>, 0.5% to 2.5%.
This guidance includes the negative impact from divestitures of 1.5% and foreign currency translation of 50 basis points.
We expect Labcorp diagnostics revenue to be down 3% to down 2% as compared to 2018 revenue of $7 billion. This is an improvement over our prior guidance of down 4% to down 2%, primarily due to organic performance.
This guidance includes the negative impact from divestitures of approximately 2% and foreign currency translation of 20 basis points.
We expect Covance drug development revenue growth of 5.5% to 8.5% over 2018 revenue of $4.3 billion, a narrowing of the range as compared to our prior guidance of 5% to 9%.
This guidance includes the negative impact from foreign currency translation of 90 basis points.
Our adjusted EPS guidance of $11 and 10 to $11.40, which is an increase of 1% to 3% over 2018, adjusted EPS of $11 in two cents and a narrowing of our range as compared to our prior guidance of $11 and five to $11.45.
Free cash flow is expected to be $950 million to $1.05 billion, which is an increase of 3% to 13% over 2018 and unchanged from our prior guidance.
This concludes our formal remarks, and we'll now take questions. Thanks operator.
Ladies and gentlemen at this time, we will be now taking your questions. If you would like to ask a question over the phone. Please press Star then one on your telephone keypad.
If your questions have been answered or you wish to move yourself you just simply press the pound key until everyone. A chance to ask questions. We kindly ask everyone to please limit yourself to one question and a follow up.
Our first question will come from Jack Meehan with Barclays. Your line is now open.
Thank you good morning.
I wanted to maybe talk a little bit about the lab business in the quarter and was hoping you could break out for us.
Within the 2.5% what the impact in the quarter was from some of the managed care access changes versus the consumer genetics and.
Just given some of the noise on the consumer genetic side just.
What's built into the second half in terms of an impact in the comps in the fourth quarter.
Yes, good morning, Jack it's Dave.
So in terms of the consumer genetics business.
The volume for the second quarter was down about 1.1% versus last year.
It's the first time, we've actually seen a volume decline, but as we.
Have foreshadowed for you over the last couple of quarters. We had said we expected consumer genetics volume to be flat to down for for the balance of 19 that is built into the guidance in terms of the changes in managed care access we haven't broken out that number specifically, but what I'd say it was basically flat from first quarter to second quarter.
And the.
The typical.
Thing that you would be interested in United and horizon volumes basically remained stable.
And that the volumes increased a little bit for us so.
Broadly the managed care book did increase overall in terms of revenue and volume.
But those three key components basically remained stable.
For the quarter.
Great.
We also had two quick follow ups on Covance.
Is there any color you never know I don't.
I'm going to separate set the precedent right here right now this morning.
Okay sure Bill.
I appreciate it Dave and also undertaking bratz and see in a few weeks.
Thank you Jeff.
Thank you and our next question what sounds like Ross Muken with Evercore. Your line is now open.
Hey, guys. This is the on for Ross. Thanks for taking my question.
I guess just honing in on consumer genomics, what are your expectations for windows volumes could bounce back post 2019.
And was the low demand a function of just one or two partners or the overall DTC genomics market.
First of all Jack you're still entitled to one follow up sorry, I didn't mean to cut you off completely just to just to say one follow up.
You answered the question on consumer genomics.
We're not guiding into 2020, what we've said for the balance of 2019 as we expect.
Consumers genetics volumes to be flat to down.
As you know we have one primary partner into consumer genetics business versus 23 and me. So I think it's a fair inference that thats, where the the volume decline is coming from.
And.
In terms of what the future of the consumer genetics business looks like.
Our assumption is that it's going to be flat to down for the foreseeable future.
Got it and as a follow up around 23 and me is there any color you can provide around 22 in may pose some promotional periods we discussed.
No I had.
The only guidance I can give you on 23 and me is what I responded in the prior question, which is.
Last year, we were slightly up in the first quarter. This year were down in the second quarter, we expect and we expect volumes to be flat to down for the balance of the year.
Got it thank you.
Thank you and our next question will come from Jack Meehan with Barclays. Your line is how open.
Thank you I, except the follow up question.
Wanted to focus on Covance, just any color you can provide on how pass throughs may have impacted revenue in the quarter and I'll follow up to the follow up is with patient direct how broad of a patient pool do you think you can now address with that.
On past is Jack this is John .
It was.
Past fees were up this quarter.
And at the same time comparable to the organic growth.
That we stated in constant currency.
5.5% level. So we didnt have the anomaly that we had in first quarter.
And patient direct Jack it's Dave the issue.
Is.
Where the sponsor comes to us with criteria that fit well within the the items that we highlighted which is geographic location diagnosis codes and.
And.
Lab results, but you have a potential opportunity there is very significant because.
Part of what.
Is is.
Differentiator in terms of.
Winning studies is that we have the covance capabilities of protocol optimization.
Combined with the ability to look at Labcorp data and see as you're optimizing the protocols, where your patients are most likely to be and where you're going to so to speak what what plans are going to catch the most efficient so.
We are excited about the patient direct than expected is going to continue to be a growing area and as mentioned we get compensated for each email that we send from the lab testing that we do and then for each patient that enrolled in the study.
Appreciate it thank you.
Thank you and our next question will come from Lisa Gill with Jpmorgan. Your line is now open.
Hi, Thanks, very much good morning.
Steve I, just want to talk about the competitive landscape and some recent news around shifting some competitive.
Capitated contracts said I would presume shifted to Labcorp from quest when I look at your revenue per req being up 2.5% versus last year it doesn't seem to.
Really jive with what we heard around pricing. So really just two questions. There one how do we think about the competitive landscape today and Q.
How do we think about the actual.
Profitability of this piece of business that shifted.
Well the competitive landscape is the same as it's always been which is.
Quest is an excellent competitor, we like to think of ourselves as excellent competitors. There are other rational competitors in the market as well and of course, we have the built in.
Competition of health systems, which have the ability to actually own.
Providers and direct business internally, which is something that is not an option available to us so the competitive landscape.
Remains challenging, but it's no more challenging that it's been.
In.
In my career so.
It's.
We're out there competing every single day.
You know on the specific question about the contracts.
I would just say.
I think.
When you when you win a contract it's always on quality and service on you lose a contract it's always on price so I wouldnt discount somewhat the observations around.
You know pricing and profitability in those things and what I would point to is.
Our revenue per requisition was up 1%.
X., panna and 2.5%, including pad on our adjusted operating income was 19.6%.
27 of the $31 million in decline.
Operating income versus last year was due to Pamela that to me does not indicate aggressive price cutting here at Labcorp and.
We have been very disciplined around pricing, we continue to be disciplined around pricing.
And I'm not going to comment on specific contracts, but I am going to say that.
We don't go out and solicit and win business that is bad business or that is below our.
Our profitability or our our price per excess ship for revenue per requisition expectations.
We haven't done it.
And we're not going to start doing that now.
That's very helpful. And then just my follow up would be Glenn you talked about cash flow acquisitions share repurchases paying down debt do you have specific things in the pipeline around acquisitions that we should be thinking about for the back half of the year or is that just kind of the general language of these are the kind of three things that we look at.
I think it's.
Yes on both if you will I mean, we generate as you know the bulk of our free cash flow in the second half of the year.
We did lever up a little bit obviously with the indigo acquisition. So part of our free cash flow will be used to pay down debt in the second half.
But we still have obviously a lot of financial flexibility to continue to pursue tuck in acquisitions as well as.
In the market repurchasing shares so the acquisition pipeline continues to be good across both businesses as we evaluate opportunities and I think it's fair to assume that.
Without obviously, saying that we will do transactions, but that part of that capital in the second half could go to tuck in acquisitions as well.
Okay, great. Thank you.
Thank you and our next question will come flat, Eric Coldwell with Baird. Your line is now open.
Hey, thanks very much.
I just had a technical question on the calendar.
I think this is the third quarter in a row, where you've talked about count calendar headwinds revenue day headwinds can you tell us what exactly is going on there and.
How does the calendar shake out for the rest of this year and maybe I could.
Love the future request that we get revenue days are calendar days, so analysts can be more thoughtful about modeling this going forward.
Yes, good morning, it's Dave.
So when we calculate the calendar.
Obviously, there is the same number of days every year, but what's important to us is the strength of days so.
Monday's are not strong day Saturday is not strong days Tuesdays and Wednesdays are stronger days and obviously then there is the impact of holidays and free holiday days. So.
It's it's not quite as simple as saying, there's so many days in this month. So many days in that month, it's it's how many tuesdays and Wednesdays fall in a particular month versus versus.
Sundays and Mondays.
That said every year, we look at the calendar and we calculate that the strength of the total revenue days across the year.
In the first quarter of this year, we were about half a day below the first quarter of.
2018 in this quarter were about half a day below the second quarter of 2018 in the third quarter. The number of days will be identical year over year and in the fourth quarter will have the benefit of one more revenue day.
So that is the calendar for the balance of the year and we will.
Consider your request to give you.
More insight earlier in the year on the on the strength of the calendar and come back to you on that.
Thats great. Thanks very much.
Thank you and our next question will come five Kevin Kelly Aondoakaa dubious. Your line is now open.
Thank you thanks guys.
Oh I wanted to talk about the diagnostic margin there was a lot better than what we had.
Models.
And you called out launch pad can you can you talk specifically about the incremental savings that you got from launch pad in the quarter and how we should be thinking about the diagnose the diagnostic margin going forward.
Yes, I'll, let Glenn.
Start on that and then I'll add any comments that I might have sure yes.
Kevin what we obviously talk about is the total launchpad initiative over the the three years and the 200 million that we expect to realize and we basically said to use a pro pro rata for each of the three years of the program but.
The reality is as we do ramp up as we go.
Throughout the program. So we don't quantify how much impact it as in any particular quarter, but clearly when we talk about the headwinds that we had and how well diagnostics performed one of the key drivers to the performance was all the launchpad initiatives that will continue to benefit as we think about the diagnostics margins.
For the year, what we've said was that.
If you will the second the decline in margins year on year is there given the significant impact of Pam.
But that we expect to see less of a year over year decline as the year progresses, because launchpad is ramping up so even though margins will be down in the second half year over year, they will be down less than they were in the first half year on year and obviously.
Improvements expected as we get into 2020.
And I would just say.
Great with everything Glenn said I think it's also important to recognize that a lot of what launchpad is about as.
It's more than just near term savings so.
The business transformation from the Digitization of the business and the streamlining of workflows is.
Is that an ongoing.
Savings for our business out in 2021 and beyond because we're able to do more without adding new heads because we're able to redeploy the people that we have poured customer facing positions. So there is a pretty profound element of business transformation here that I don't want to lose sight of and that has greater long term benefits than just the near term cost savings.
Got it and just a quick follow up.
On Indigo I know it was only in for a short period of time, but was there any impact.
On bookings book to Bill any of that kind of stuff as you as you brought it on.
As you said, Kevin this is John .
It was only in there for one month, so a nominal effect.
As you know in the early development.
Area that has a quicker burn on the revenue side little bit lower book to Bill that had nominal effect on the quarter.
Great. Thanks, guys.
Thank you and our next question will come from the line of Ricky Goldwasser with Morgan Stanley . Your line is now open.
Yes, hi, good morning.
So Dave you seemed more positive.
Today on the opportunity from.
United.
Not network. So when you think about the.
Friction to genetic put in place.
Dave.
All right.
Providers to do certain things to go out of network.
Is this came out better than what you expected and how should we think about that opportunity for next year.
Good morning, Randy.
As I said in the prepared remarks, I think the impact.
This we're not expecting or or.
Factoring into guidance any significant impact on the PL in 2019, just because of the startup and the time is going to take providers to become adjusted to the to the restrictions.
I think the requirements that United is at least talked about.
For what they would.
Asked providers to do before they go out of network are.
Positive.
For those of US who are in the network I think as we've said for a long time to real long term opportunity.
Is in benefit design and it's also in.
Creating.
Appropriate incentives for patients and for physicians to use the.
More efficient lower cost providers.
Versus versus referring either out of network or to higher cost providers.
Who are in the network so.
I'm pleased with.
The initiative that United is taking I'm pleased with the collaborative way, which they're talking to us and to the industry about how we can use the PLM as a as a device to improve quality and reduce cost of lab services.
And I'm hopeful that in 2020, we are going to see some nice benefit from it.
And then my follow up is in.
In earlier comment you said, it's good to see.
Good volumes from United in Horizon.
I was like stabilized.
One Q2, Q I think that in the first quarter, you mentioned that the impact a negative impact was about 70 basis points on volume growth. So should we assume 70 basis points this quarter as well.
I would say approximately I mean, we're not going to give the.
Basis point by basis point, but it was in that ballpark.
Of the 70 basis points and.
Not materially different from what we saw in the first quarter as we said Ricky that we expected the major impact to be in the first quarter.
And that's how it's played out for us.
Ricky another way to kind of get to that number a little bit. If you will as we talked about the three big headwinds on the volume.
Accounted for roughly 2.5% headwind.
We quantified the day impact of 60 basis points in our opening remarks, Dave commented about consumer genetics being around 1%.
So you can get to the managed care impact of a comparably around 1% as well a little bit below.
Great. Thank you.
Thank you and our next question will come from Dan Leonard with Deutsche Bank. Your line is now open.
Maybe a quick clarification on that last point, Glenn was consumer genetics volume down 1% or was the headwind from the consumer genetics volume declined 1%, meaning that the business was down a lot more than that.
No the consumer genetics volume was down 1.1%.
Versus last year.
Okay and don't want to send my follow up on that so it's been just a quick follow up here. Dave you mentioned in your in your prepared remarks that you had important contract wins in key markets can you can you elaborate or are these contracts with managed care companies contracts with physician networks are hospitals kit fee for service or Capitated any any elaboration would be helpful. Thank you.
Yes, there they were.
A couple of managed care contracts.
And yes, I am not going to go into the minutia of every of every contract but.
But the reason we felt they were in key markets with was that they were in markets, where we probably felt that our exposure from the.
From the contract changes with United and Horizon were greater so they help to.
Reinforce the strength of the business. There there were also a couple of.
Health system.
Transactions and as well the expansion of the Mount Sinai.
Partnership to sort of another leg of growth with.
The artificial intelligence and the digital pathology.
Collaboration.
Appreciate the color. Thank you.
Thank you and our next question will come from Aaron Wright with Credit Suisse. Your line is now open.
Before we do this I just I want to correct.
Miss statement that I made just moments ago, which is the 1.1% negative for consumer genetics was negative to two volume for the business. It was not the consumer genetics year over year I want to make sure I'm, saying this right. So when we look at the organic volume being down.
Right. It was 60 basis points for the year over year comparison of days, 1.1% for consumer genetics and the balance being the managed care. So my 0.8 on the managed care right. So thats, how we got to the down number. So it wasn't the delta just within consumer genetics that was a drag on the overall volume for the business I'm, sorry, I missed that.
Okay. Thanks, that's helpful. Then Darren.
I hope I've answered switching gears here to Covance I guess, what inning would you say that we're in in terms of better leveraging the data assets across Europe .
CRM platform and then cross the diagnostics platform I guess, it's still relatively early but you did highlight several examples in the prepared remarks and I'm. Just curious if you could quantify or characterize what the how the win rate is improving how you're leveraging kind of some of the diagnostic capabilities and data assets and also kind of are you winning customers that you haven't worked with before on the CRM side.
Yes, Aaron this is Sean.
From the standpoint of what inning of we'll call it.
In the right in the middle of the game you know the fourth inning, let's say in a from the vantage point of.
Data is mandated in every deal that we did and so when we win that is based on yes data, but its also based on the quality of the team the quality the Medix project management et cetera. So there's multiple factors of why you win.
From the standpoint of.
We potentially are going to be continuing to be in the middle of the game only because we're looking at more data more were loyal data more international data looking at very specifically additional data when you get into the oncology areas you need additional data and that being a majority of our portfolios. So.
The strength of our data is a meant you have the worldwide nature of the Central lab data and then on the very specific capabilities of the diagnostics data.
And having that two and a half million.
In assessment the week that we can analyze so the data is tremendous we feel.
Capabilities have increase on and continue to increase and we'll be looking at additional data to enable the business wins that we have had but we'll have in the future.
Okay. Thanks, and a quick follow up I think speaking to underlying test mix dynamic slate, what meaningfully influence kind of that revenue per req in the quarter.
Aaron its Dave so.
We had strength in.
In the non consumer genetics so.
Genetics broadly noninvasive prenatal testing.
We have strengthened allergy and we had strength in oncology, which was a nice.
Trend over you know, what's previously been sort of a.
A flat business down cause your business is trending up a lot of that having to do with the companion diagnostic capabilities.
We had strength in women's health and we had.
Some strength in medical drug monitoring so broadly the esoteric testing base performed very well.
And that benefited us in terms of of our mix.
Okay. Thank you.
Thank you and our next question will come from the line of Patrick Donnelly with Goldman Sachs. Your line is now open.
Great. Thanks, maybe just one for John on the Covance side, just looking at the back half ramp can you just talk through the moving pieces. There I mean, obviously in Vigo roles and but in order to get to maybe the midpoint or even top end of guidance.
We see baking in some pretty nice growth in the back half can you just talk through confidence level. There is in the moving pieces.
Yes, confidences there Patrick.
It's a combination of organic demand.
Yes to your point acquisitions, but it's also that you have less currency headwinds in the second half of the year. So its really enabled by those three things.
In EMEA the backlog of 10 billion as Glenn stated the 40% of the backlog in terms of line of sight.
Tactically and then.
Clearly the acquisitions kick in.
As well as in the currency based on todays currencies.
You wouldn't see as much headwinds as you've seen in the first half.
Okay, and then maybe just one for Glenn just on the margin cadence staying on the Covance business.
Again in Vigo coming in there can you just talk through the back half how we should expect the margins to trend obviously the cost savings initiatives are really taking hold but maybe just talk through again, the moving pieces, there with M&A coming in and how we should expect it to trend.
Yes, no you kind of hit on the points, we expect to see a nice improvement in the margins in the second half of the year driven off of the the organic growth of the business and the launchpad initiatives that are kicking in the acquisition of in Vigo will mix up our margins as well as we have a full second half of the year with them.
Great. Thanks.
Thank you and our next question will come from the line of Ralph Giacobbe with Citi. Your line is now open.
Thanks, Good morning.
Hey, Bose those contract wins that you mentioned could just give a sense or when they were one and was there an impact to volume in the second quarter and or is that more of a back half story.
I believe one of them Ralph took effect February Onest, a one of a march 1st so there was a little bit of.
There was a little bit of impact at the end of the first but I would say most of the impact started in the second quarter and so it's going to continue to ramp throughout the year, but but it's in the numbers.
Okay, and any I mean, I guess, just any sense of the size of those I mean, it was their capitated contracts I guess the argument is there is there is a lot more sort of volume not as much sort of revenue per rack or.
Any more insight there.
Well.
I think you guys are inferring that the contracts that our competitor talked about or the contracts that we won and.
Honestly I don't know the answer that question because they didn't specify the contracts, but what I will say is.
If you look at the revenue per requisition number for the quarter.
Looking at the volume number for the quarter.
It doesn't suggest to me that there you know that there is anything thats going to a.
I have a significant impact one way or the other for the balance of the year either on the volume more on the on the on the price.
Okay Fair enough and then obviously there there's been the opening of the <unk>.
The United contracts and sort of this argument a of a sea change, but then when we hear about sort of the competitiveness of the market. So.
Or the United Aetna contracts more of sort of the one off national is doing this more sort of a status quo within regional contracts, where there's just more exclusivity and that's just the way it's going to be.
Okay.
I think it's hard to generalize.
Because for example, you know horizon, which is a regional a regional contract.
Opened up on the other hand.
The Florida Blue contract is still exclusive and we're not participating in it so I think.
The.
The.
Regional plans because of the concentration of.
Where the patients are located.
And because of the.
Not having a need.
For I have a broad national network.
Probably have more.
Openness to exclusive contracts, but I would also say I think the trend is.
The trend increasingly is how do we optimize the network to get the highest quality for our for our patients.
You know at a favorable price point.
Okay, Yes that makes sense. Thank you.
Thank you and our next question will come from line of Derik de Bruin with Bank of America Merrill Lynch. Your line is now open.
Hey, this is Doug demo today.
Thank you for the question.
I just wanted to ask with the updated outlook for early stage with late stage goes honesty, our own site.
Overall.
In the two trends thank you.
I think from the standpoint of high need it's John the.
Late stage versus early stage.
Most analysts payout the early stage.
In and around the 4.5% to 5% growth with the later stage the industry growth is a little bit higher than that in 5% to 7% range.
We see just based on the RFP flows proposal flows.
Actually nice growth in both areas as well as even on our central lab. So we see pipeline strong.
Thank you that's very helpful. John just a follow up.
I also know coincide wanted to see what the not to feel slow quarter, and if there's any possible impact on revenues and bookings.
Thank you.
In as the bookings.
Regularly shift between the quarters. So we're focused on that trial on trailing 12 month period versus the quarterly.
Yeah, we expect to continue to deliver and we did that in terms of the 1.26.
What I will say is that we been remarkably consistent.
Ranging from around the one to four to a 126 over the last four core quarters.
Service makes leans a little bit more heavily to the faster burning business and some of our competitors. So.
Clearly you know a slow burning where can provide a boost to build that alone gates out the revenue generation, but we've been as I said before consistent with that one to four to one to six over the last four quarters.
Thank you for the question.
Thank you and our next question will come from Kevin Ellich with Craig Hallum. Your line is now open.
Hey, Dave two quick questions. So first you guys announced the Mount Sinai digital pathology in an ideal and then you also recently announced up happy I strategic investment just.
Could you give us a little bit more color as to how big that opportunity is and how much you think that could dampen growth over time and then the second question is about pixel and how big that is for you guys now and also where do you see that going thanks.
Sure Good morning, Kevin.
Start with with them.
The artificial intelligence so you know.
This is.
The digital pathology is.
He is a long term.
I think significant opportunity in terms of both.
The improvement of the of the quality of care and the optimization of our pathology resources I don't think you're going to see any material near term impact the ideal at Mount Sinai is to introduce digital pathology.
Do side by side comparisons with with.
Actual pathologists.
See how we optimize the use of digital pathology and routine pathology and are able to direct the.
Pathologists towards the more complex and difficult cases, so I would say.
Long term I do see digital pathology, expanding broadly across the laboratory business.
But I don't and there is a significant opportunity to better allocate and deploy resources I don't see any major impact in the near term in terms of path. They are you know we continue to be very interested in all forms of artificial intelligence and machine learning will help of diagnosis.
I remember it was more than 10 years ago, when we introduced.
Image guided path, which in those days was thought to be.
And was I mean, a very dynamic change in the market from the traditional way of looking at past fair. So it takes time for these innovations to.
To take hold and to transform the business, but they but they are transformational over time.
On pixel its not material right now.
The self collection devices, we continue to refine our abilities around the self collection device. We view the self collection device over time is a very important.
Tool for our health system partners for the care of patients in the home.
But.
You know the Big initiative this quarter it was to get the pixel offering into the patient service centers, where consumers can go they can self direct testing they can.
Get the results and is in a.
Separate secure web site. They can do is they choose with those results.
So there is a health and wellness component there are multiple reasons why people may want to get there.
You don't get their testing done that doesn't come back through their primary care physician or you know through their insurance company and what we're trying to do is.
Is as Weve said.
For a number of years now we're trying to meet the consumer where they want to be met and serve them and the way that we want to be served and I think the long term opportunity with the consumer direct testing is quite significant for us.
Thank you.
Thank you and our next question will come from the line of Brian Tanquilut with Jefferies. Your line is now open.
Hi, This is Brian Ross on for Brian .
Maybe sticking with the consumer side I want to get your thoughts on the Walgreens retail strategy and maybe parsing out on the center side, what's the thought process on the pace of center development and where those ultimately end up being located is that more just where consumers may not have easy access to labcorps currently or there are other reasons, such as maybe aligning to a certain payer population and as a follow up.
No you discuss some of the other areas, we collaborate with Walgreens. So just want to hear your thoughts there and if anything has progressed on that front over the last couple of months.
Sure.
As I said, we're on track for 200 stores by.
By the end of 2020 and 600 overtime.
The goal is again meeting the consumer where the consumer wants to be met and.
So.
Part of the rationale for Walgreens centers is.
Places where.
We feel that we don't have the density of patient service centers the density of access points or the convenience that we would like to have.
Part of it is.
Is our ability to.
Draw patients, who are who have other needs I mean, we do market research on the patients in the stores we find that.
I think the I think the number is about a quarter the buy something else of Walgreens or filled prescription at Walgreens. So you know that's an important reason why they may choose a walgreens versus versus a standalone patient service center.
And you know we have we have a great partnership with Walgreens, We are we meet and talk with them regularly we had a senior executive meeting just this week and talked about the opportunities ahead as I highlighted in the prepared remarks, the integration of our digital and mobile experiences in AR and the integration of Labcorp capabilities into Walgreens Fine care now we think is a great.
<unk> is a great step forward and gives us get more opportunity for exposure and.
And for.
Ill patients being aware of the collaboration of opportunity there and then on the next generation CRM, though.
We have some very specific things that we're working on that I'm quite enthusiastic about and we'll have more to talk about.
With those in the next couple of quarters ahead.
Thanks.
Thank you and our next question will come from the line of Matt Larew with William Blair. Your line is now open.
Hi, good morning.
Wanted to ask about capital deployment last quarter, John mentioned that falling in FICO transaction you felt good about the capabilities on the Covance side, and then obviously you alluded to some nice new contract wins this quarter the leverage that capability. So in light of those comments just wondering how you're viewing your pipeline both on the covance side as well as on the diagnostic side, and where you think youd still like to add capabilities across the enterprise.
Yes, Glenn mentioned.
The pipeline is robust.
When we think about adding capabilities.
We've said many times, we always look at the strategic fit that's the number one thing that we look at the financial criteria.
To me that there's no.
There is no area in which we are.
We are significantly deficient in terms of the market, we always look on the diagnostic side at.
Where can we increase our critical mass are their tests out there or capabilities out there. The MN GE acquisition for example, small deal, but very very significant for us because it significantly increased our capabilities around next gen sequencing and our ability to bring next gen sequencing and genetic testing to market rapidly. So.
And on the Covance side, I know, John I would say always looking at building strength in Asia Pac and getting more critical mass there.
But there, but there is no area, we're going to look at every opportunity as does it fit strategically is it financially attractive does give us the appropriate returns and.
And we'll we'll choose among a very robust pipeline in that way.
Thank you.
Thank you and as a reminder to ask the question a star and then one.
Our next question will come from the line of Mark Massaro with Canaccord Genuity. Your line is now open.
Hey, guys. Thank you, Dave you talked about the oncology.
Offerings showing growth can you provide some examples of where you're seeing the strongest growth.
I ask given that there seems to be a renaissance in the precision medicine liquid biopsy space on the cancer monitoring in the M. R&D detection side.
And I'm curious to see.
To what extent Labcorp is looking to drive innovation in this space relative to some other really strong allowed companies moving the needle.
Yeah, we've been very involved marketing in liquid biopsy actually for a number of years going back to the covance using them.
In the in the Covance business as.
Yes, it was.
Innovative.
Ways of looking at cancer trials.
I think a lot of the strength that we're showing commercialization of companion diagnostics again that are developed for Covance trials are developed across to come as business and then commercialized.
And then what I would describe is sort of more you know.
Traditional oncology.
Flow cytometry, I think it's really important to recognize that the genetics of cancer, becoming.
Becoming much much better understood and so we're seeing genetic testing around tumors were seeing testing route sequencing of tumors.
Grow as well so it's a nice broad base.
A growth area that highlights the combined capabilities of Labcorp covance as well as.
No. The the one stop shop that can be obtained by doing business with labcorps because of our capability to do the oncology do the genetics do the routine.
You know blood counts it other and other tests that are required as part of.
As part of the oncology treatment and also look at recurrence and look at.
Tumor burden, even though a tumor burden and other aspects of the continuing course of patient care.
Am I. Thank you and then my related question.
Going back to direct to consumer genetic testing some people that we've talked to have a view that DTC was great for ancestry testing, but has limitations for health given perhaps the lack of utility around are raging typing.
Do you have a view about how the space potentially.
You know how this market could evolve and perhaps whether it's a technology transfer more to sequencing.
My view is that.
That.
You know the the consumer genetics market is a is a market that consumers are very interested in as you say there's been no. There there was a lot of interest in.
[noise] in sort of the ancestry side of it or the genealogy side of it.
It is more complex with health I think some of the consumer genetics companies have done a very impressive job of getting the FDA to approve health based claims.
And to be able to educate consumers on those health based claims I think the real question is.
To what extent are our consumers going to.
Our consumers going to adopt direct to consumer genetic testing for health space as opposed to.
Genealogy base purposes, and I think Thats a question that remains to be answered I do agree obviously that the.
That there would be.
Benefits from moving more from a rate.
Analysis to sequencing, but the other side of that is you know when you do a sequence. There are so many things that are not known and so much opportunity for.
For.
Confusion or uncertainty that I think is just going to.
It's going to really be years before we know what the what the long term.
Future of the consumer genetics movement is.
Operator, I think radek questions.
Yes, Sir we are you May proceed with your closing remarks, very well well. Thank you for joining US. This morning again I'm very pleased with the strong performance this quarter.
And Andy and particularly want to highlight.
That.
We have more and more proof points about the power of the combined enterprise in the way in which Labcorp covance are delivering unique solutions.
And we're tracking.
New partners and.
And new opportunities every day as a result of the capabilities that we bring to the market together, so I want to thank our.
60000 colleagues around the world for the outstanding effort this quarter and I wish you all a great day. Thank you.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect everybody have a wonderful day.