Q4 2022 Laboratory Corporation of America Holdings Earnings Call
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Good day and thank you for standing by welcome to the Q4 and full year 2020 to Labcorp conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message advising.
Your hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Chad Cook head of Investor Relations you may begin.
Thank you operator, good morning, and welcome to Lab Corp, 's fourth quarter 2022 conference call.
Held in today's press release, there will be a replay of this conference call available via telephone and Internet with me today are Adam Schechter, Chairman and Chief Executive Officer, and Glenn Eisenberg Executive Vice President and Chief Financial Officer. This morning in the Investor Relations section of our website at Www Dot Labcorp Dot Com, we posted both our press release and an Investor relations.
Presentation with additional information on our business and operations, 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 the estimated 2023 guidance and related assumptions the proposed spin off of the clinical.
All of that business the impact of various factors on the Companys businesses operating and financial results cash flow and financial condition, including the COVID-19, pandemic and general economic and market conditions future business strategies expected savings and synergies, including from the launchpad initiatives acquisitions, and other transactions and opportunities for future.
Growth each of the forward looking statements are subject to change based upon various factors many of which are beyond our control more information is included in our most recent annual report on Form 10-K, and subsequent quarterly reports on Form 10-Q and in the Companys other filings with the SEC. 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 Adam.
Thank you Charles Good morning, everyone. It's a pleasure to be here with you today to discuss our fourth quarter results as well as the progress that we've made towards our strategy.
2022 ended strong for Labcorp with accelerated revenue growth in diagnostics and continued strong underlying fundamentals in drug development.
Drug development continues to have a tough year over year comparison, mostly due to less COVID-19 related work.
In 2022, we took decisive actions to navigate a challenging operating environment, we advanced our strategy with the announcement of our planned spin of our clinical development business and we closed several important hospital laboratory partnerships.
I'll now discuss our fourth quarter performance.
In the quarter revenue totaled $3 7 billion adjusted.
Adjusted earnings per share was $4.14 and free cash flow was $536 million.
The base business remains strong.
Constant currency basis, excluding COVID-19 testing revenue.
Enterprise space business revenue grew 6% in the fourth quarter versus prior year.
Broken diagnostics base business revenue in the fourth quarter was strong.
Routine and esoteric testing and revenue from you essentially partnership.
Covid PCR testing volumes declined during the quarter as expected.
At like $1 4 million tests performed and averaging 16000 per day.
Looking forward, our diagnostic business will accelerate with 10 and a half to 12, 5% base business growth benefiting by around five percentage points with a full year of our Samsung partnership.
For drug development fourth quarter base business revenue in constant currency declined 1% versus prior year.
Early development and critical development both crew.
Were offset by lower Central laboratory revenue due mostly to COVID-19 related work.
Drug development ended the quarter with a strong trailing 12 month book to Bill of 127.
Looking forward, we expect the momentum to continue in drug development orders and we expect that site enrollment and kids return, we will continue to increase throughout the year.
We also anticipate the drug development business to return to 5% to 7% growth with a stronger second half than first half due to oil development and the annualized <unk> of an FSP contract Ross.
Finally in the quarter the board authorized a $1 billion increase to the company's share repurchase program, bringing our remaining total share repurchase authorization to $1 5 billion.
Fred will provide more detail on our quarterly results and we'll review full year 2023 guidance in just a moment.
Moving now to an update on the plant span of our clinical development business.
We have been pleased with the positive response from customers and employees.
And we remain on track to complete the spin in mid 2023 subject to satisfying certain customary conditions.
Recently, we unveiled <unk>.
As the name of the clinical development business post spin.
You can learn more by visiting <unk> Dot com.
Also in January Tom Pike joined Labcorp, as President and CEO of our clinical development business Tom.
Tom will serve as Chief Executive Officer, and Chairman of the board of <unk> upon completion of the spin.
Tom brings significant CRO experience.
Serving as CEO of a public CFO .
He has worked with many of our customers and he knows the business well.
We welcome Tom and look forward to working with him as we continue making progress towards the completion of the spin.
Upon completion through a tax free transaction, we will have two strong independent companies Labcorp, Unfortunately, which will emerge to the transaction with the ability to better meet customer needs to drive sustainable and profitable growth and deliver attractive shareholder returns.
In the coming months, we plan to announce the board of directors of <unk>, including the lead independent director and other members of the executive leadership team.
We also intend to Hudson analysts day in advance of the spin and I look forward to working with Tom.
<unk>.
I'll now move to our enterprise strategy.
We made significant advances on our strategy in 2022.
We accelerated posed several hospital and health system partnerships and acquisitions during the year.
Most recently, we completed the integration of certain essential assets and operations.
<unk> now provides laboratory management services for nearly 100 hospitals across the Ascension Hospital system.
We are pleased with the smooth transition and we want to thank our partners that are essential for enabling our teams to help deliver the best patient care possible.
In addition to Ascension, we entered strategic relationships with our WJ Barnabas health Atlantic her personal health and safe Dominic's during the year.
The pipeline for hospital, and local laboratory acquisition and investment is robust.
It'll be a key area of opportunity for growth in 2023 and beyond.
We also made progress in using digital technology and data to deliver better outcomes for patients.
By significantly improving our web mobile and digital channels, we've made it easier for customers to access critical data and health information.
Using digital technology and artificial intelligence, we are re imagining a result reports to provide deeper insights scientific expertise and critical information to guide patient care.
Additionally, we are encouraged by increased customer adoption of Labcorp diagnostic assistant.
Will that equips positions with the information they need to improve care.
Also our investment in call center automation is improving the customer experience by enabling patients and providers to get answers faster through self service features.
Turning to oncology, we continue to expand our apology capabilities to serve clinicians and drug development customers.
In the fourth quarter, we launched a liquid biopsy test called Labcorp plasma focus.
This test is used to match cancer patients with FDA approved therapies using the patient's circulating tumor DNA taken from a blood draw.
This is the first new products coming from <unk> acquisition of personal genome diagnostics in 2022.
Today that offers customers and patients access to the most comprehensive oncology portfolio in the market.
Our teams are evaluating and executing on growth opportunities in areas, such as neuro degenerative autoimmune and liver disease as well as cell and gene therapy and more in 2022, our team supported over 5000 clinical trials work at over 90% of new FDA approvals and launched over 130 <unk>.
Test.
In the area of neuro degenerative disease. For example, we launched new test to assist the diagnosis and treatment of Alzheimer's multiple sclerosis, and Parkinson's disease.
We anticipate more innovative launches in 2023.
Finally, we made progress in our direct to consumer business.
In 2022, we introduced Labcorp on demand a platform aimed at providing consumers with easy and convenient access to our leading diagnostic tests.
We now offer over 45 test that cover over 100 Biomarkers to help consumers monitor the health stay current with wellness screening planned.
Plan for families and manage a broad range of chronic health questions.
The progress we made this year is a direct result of the commitment of our employees, who fuel our confidence and the outlook for 2023.
We are recognized by Forbes list of the world's best large employers in 2022, and we also earned the top score in 2022 disability equality index.
Attracting and retaining the best talent is key to our success and we remain focused on being an employer of choice and destination for talent.
As I looked at 2023, I'm optimistic about the growth and strategic opportunities before us are.
Our business fundamentals remained strong and we are well positioned for the future.
With that I'll turn the call over to Glenn.
Thank you Adam.
I am going to start my comments with a review of our fourth quarter results followed by discussion of our performance in each segment and conclude with our 2023 full year guidance for reference. We've also included additional business information that can be found in our supplemental deck on our Investor Relations website.
Revenue for the quarter was $3 7 billion, a decrease of nine 4% compared to last year due to lower COVID-19 testing and the negative impact from foreign currency.
This was partially offset by organic base business growth and the impact from acquisitions.
Covid testing revenue was down 79% compared to Covid testing last year, while the base business grew four 8% compared to the base business last year.
Organically in constant currency the base business grew four 7%.
Benefiting from the Ascension Lab management agreement, which contributed approximately 4% of the organic growth.
While the outreach business that we acquired from Ascension is treated as an acquisition. The lab management agreement is treated as organic growth.
Operating income for the quarter was $91 million or two 5% of revenue during the quarter, we had $61 million of amortization and $88 million of restructuring charges and special items, primarily related to acquisitions launchpad initiatives in the proposed spinoff for trio.
In addition, the company recorded $270 million of goodwill and other asset impairment primarily related to the early development business due to short term labor and supply constraints.
This impairment represents approximately 2% of <unk> goodwill and intangible assets.
Excluding these items adjusted operating income in the quarter was $510 million or 13, 9% of revenue compared to $902 million or 22, 2% last year the.
The decrease in adjusted operating income and margin was due to a reduction in COVID-19 testing.
The benefit from Launchpad savings and lower personnel expense were essentially offset by lower COVID-19 related demand in inflationary cost.
Our launchpad initiatives continues to be on track to deliver $350 million of savings over the three year period ending 2024.
The adjusted tax rate for the quarter was 20% compared to 24, 6% last year.
The lower adjusted tax rate was primarily due to the geographic mix of earnings as well as the benefit from increased R&D tax credits and year end true ups for completed tax returns.
We expect our 2023 full year adjusted tax rate to be approximately 24%.
Net earnings for the quarter were $76 million or <unk> 86 per diluted share adjusted EPS were $4 14 in the quarter down from $6 77 last year due to lower Covid testing earnings.
Operating cash flow was $654 million in the quarter compared to $698 million a year ago the decrease.
And operating cash flow was due to lower Covid tested earnings partially offset by higher base business earnings.
Capital expenditures totaled $118 million down from $150 million last year.
For the year capital expenditures were three 5% of base business revenue and we expect that to continue into 2023.
Free cash flow in the quarter was $536 million, bringing our full year free cash flow generation to one 5 billion.
During the quarter, we invested $150 million on acquisitions and paid out $64 million in dividends and repurchased $300 million of stock representing approximately one 4 million shares.
At the end of the quarter, we had $532 million of share repurchase authorization remaining.
<unk> recently approved an additional $1 billion for share repurchases, taking our total available authorization to approximately $1 5 billion.
For the full year, we invested $1 2 billion on acquisitions paid out $195 million in dividends and repurchased $1 $1 billion of stock.
We continue to have a robust pipeline of potential acquisition opportunities that will supplement our organic growth.
In addition, we continue to believe that our shares are undervalued and that our share repurchase program is an important part of our capital allocation strategy.
At year end, we had $430 million in cash while debt was $5 3 billion. Our leverage was one nine times gross debt to trailing 12 months EBITDA.
Excluding COVID-19 testing earnings our leverage was around one five times in line with our targeted range of two five to three times.
Now I'll review, our segment performance beginning with diagnostics.
Revenue for the quarter was $2 3 billion a decrease of 12, 8% compared to last year, primarily due to organic revenue being down 14, 3%, which was due to COVID-19 testing.
Partially offset by acquisitions of one 7%.
Covid testing revenue was down 79% compared to Covid testing last year, while the base business grew organically by eight 6% compared to the base business last year.
The Ascension Lab management agreement contributed approximately 7% of the growth.
While the negative impact of weather and fewer revenue days constrained growth by approximately one 2%.
Relative to the fourth quarter of 2019, the compound annual growth rate for base business revenue was six 9%.
Total volume decreased 11, 8% compared to last year as organic volume decreased by 13, 8%, primarily offset by acquisition volume of 2%.
The decline in volume was due to Covid testing base business volume grew 3% comparative base business last year, including the benefit from acquisitions of two 4%.
Was constrained by unfavorable impacts from weather and fewer revenue days of approximately one 2%.
Price mix decreased 1% versus last year due to lower COVID-19 testing of six 4% currency at 3% and acquisitions of 2%, partially offset by base business growth of five 9%.
Base business price mix was up seven 6% compared to base business last year benefiting from the Ascension Lab management agreement of approximately 7%.
Diagnostics adjusted operating income for the quarter was $387 million or 16, 9% of revenue compared to $776 million or 29, 6% last year.
The decrease in adjusted operating income and margin was due to a reduction in COVID-19 testing as the Covid margin was approximately 50% for the quarter down from approximately 70% last year.
We expect the COVID-19 margin to be approximately 50% through the duration of the public health emergency at which point, we would expect the margin to decline, but still be above the segment average.
Base business margin was down approximately 30 basis points due to the impact from Ascension higher personnel expense and other inflationary costs, partially offset by organic growth and launchpad savings.
Excluding ascension margin would have been up approximately 50 basis points.
Now I'll review the performance of drug development.
Revenue for the quarter was $1 4 billion a decrease of four 1% compared to last year, primarily due to foreign currency of three 1%.
Organic base business revenues declined one 4% compared to last year due to the negative impact from lower Covid related work in Ukraine, Russia crisis, excluding these impacts organic base business revenue grew three 7%.
The Central lab business continued to be the most constrained by these impacts.
Central Lab based business revenues were down 11, 5%. However, excluding these impacts organic constant currency revenue was up four 7%.
On a comparable basis early development was up three 4% and clinical development was up three 2%.
<unk> reported fourth quarter drug development revenues on a compound annual basis grew five 1% compared to the fourth quarter of 2019.
Adjusted operating income for the segment was $209 million or 15% of revenue compared to $206 million or 14, 2% last year. The increase in adjusted operating income and margin was due to the launch pad savings and lower personnel costs, partially offset by lower COVID-19 related demand the Ukraine, Russia crisis.
And inflationary costs.
We ended the quarter with backlog of $16 3 billion in.
We expect approximately $4 9 billion of this backlog to convert into revenue over the next 12 months.
Now I will discuss our 2023 full year guidance, which assumes foreign exchange rates effective as of December 31, 2022 for the full year.
The enterprise guidance also includes the impact from currently anticipated capital allocation.
With free cash flow targeted for acquisitions share repurchases and dividends.
Also our guidance assumes that for trio will be part of <unk> for the full year.
Upon its spin currently anticipated in the middle of the year, we expect to provide updated guidance.
We expect enterprise revenue to grow 1% to 4% compared to 2022.
This guidance includes the expectation that the base business will grow eight five to 10, 5%, while COVID-19 testing is expected to decline 75% to 90%.
This assumes a PCR volume range of 5000 to 12000 tests per day on average for the year.
We expect diagnostics revenue to be down 2% to up one 5% compared to 2022.
This guidance includes the expectation that the base business will grow 10, five to 12, 5%.
Which has approximately 5% growth due to ascension.
At the midpoint of our base business guidance, the compound annual growth rate compared to 2019 at six 4%.
Including the benefit from Ascension of approximately 2%.
We expect diagnostics base business margin to be slightly up in 2023 versus 2022, including the unfavorable mix impact from essentially.
We expect drug development revenue to grow 5% to 7% compared to 2022. This guidance includes the positive impact from foreign currency of 20 basis points.
At the midpoint of our guidance the compound annual growth rate compared to 2019, a seven 2% primarily due to organic growth.
While we have increased the number of <unk> vendors with multiyear agreements to secure supply lead times are projected to negatively impact drug development revenue between $80 million to $100 million.
Early in the year as a result, we expect drug development first quarter revenue growth to be lower than the average for the year. We also expect drug development margin to increase in 2023 compared to 2022 with the first quarter coming and comparable to the first quarter of 2020 to do.
Due to the early development supply constraint.
Our guidance range for adjusted EPS is 16% to $18 compared to $19 94 in 2022.
Adjusted EPS is expected to be lower compared to 2022 due to COVID-19 testing, while base business adjusted EPS at the midpoint of guidance implies approximately 13% growth.
Free cash flow guidance is one to $1 2 billion compared to $1 5 billion in 2022 the.
The decline in cash flow is due to lower COVID-19 testing.
In summary, we expect to drive continued profitable growth in our base business, while COVID-19 testing volumes are expected to continue to decline through the year.
We expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth. While also returning capital to shareholders through our share repurchase program and dividends.
Operator, we will now take questions.
Certainly as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced you withdraw. Your question. Please press star one again, please limit yourself to one question. Please rejoin the queue for any follow up questions. Please standby, while we compile the Q&A roster.
Yeah.
One moment.
And our first question will come from Kevin Caliendo of UBS. Your line is open.
Thanks, Thanks for taking my call right away I appreciate it.
There is a lot to unpack here.
I guess I'll start with a couple.
Is there any cost being built into the business right now ahead of the spin.
I don't want to say the stranded costs or it costs, but there's a couple of line items. It looks like corporate has been higher.
Intersegment eliminations are seem to be a lot higher as well I'm just trying to understand what's driving that if theres any investment being made there.
But that would show up there or in a way that we can't necessarily see.
And then secondly.
I guess.
This is such a wide range of earnings.
Can you tell us is it all just based on Covid at that based on the spin timing.
It's unusual to have such a wide range and I'm wondering what would be sort of low end versus high end of what would be driving that thanks.
Yes, good morning, Kevin and I will take the second question first I'll ask Glenn to provide some impact on the.
Your first question. So the range that we gave is 16 to $18 at midpoint of $17 and we can.
Kind of focused and targeted on that midpoint, but there are things, particularly around COVID-19 that could still happen, where we've given a pretty broad range of COVID-19 coming down between 75% and 90% is still very difficult to predict that the second thing is we gave a range for NH P of $80 million to a 100 million.
Really good news is we've started to receive supply and we've received.
To receive shipments, but it's still early as we get those shipments and then it takes time to get the study starts up and then the third thing I would say is while we're waiting for supply we're still hiring people as you recall last quarter. We noted that in early development, we needed to hire more people, so I'm not slowing down the hiring process.
While.
Waiting for some of the supply shipments that we have so we're going to hire people, while we can't yet run some of those trials. So those are some of the pushes and pulls but I would focus on the mid point more so than the low end of the range I think is highly unlikely.
Yes.
To follow up on that when you look at the guidance ranges for both of our base businesses, we keep those rates within call it 2% each points and it's really the COVID-19 given the volatility in Covid, we provide a wider range, which causes that overall EPS number to be a little bit wider.
Kevin when you talk about the spin costs Youll see that we treat that as kind of an unusual item. Obviously, we're going through it spend these are onetime costs youll see that in the reconciliation.
Between call it our GAAP and our adjusted earnings Youll see in the footnotes that we incurred around $29 million of costs during the quarter related to the spin. So again those would be backed out of our adjusted numbers. When you look at our.
Enterprise segment performance.
Great. Thanks can I ask a quick follow up just on Panama. The benefit you saw from <unk> and also the change in the code that occurred in December that was that was obviously a positive benefit to the company did you reinvest those dollars here, it's all of that sort of.
You are letting that fall to the bottom line, how should we think about that in terms of the way you accounted for it or thought about it.
Yes, so again, when we gave our range.
Two things one for diagnostic business 10, five to 12, 5% growth I think is pretty extraordinary.
But if you look at Panama. We've included when we talked about margins that we expect margins to be.
Slightly.
Crude even with the impact of Ascension and if you just look at fourth quarter. For example, our margins were down 30 basis points essentially was a negative 80 basis point hit. So you can see the impact from essentially for us to be able to offset that impact on margins is due to the lack of Panama being implemented this year as.
As well as some of the benefit from the draw fees.
Thank you so much yes. Thank you.
One moment.
Okay.
And our next question will come from Jack Meehan of Nephron Research. Your line is open.
Thank you good morning.
Good morning. My question. Good morning, My question's on just commercial payer negotiations, we're coming up on the five year anniversary.
Unitedhealth announcement I don't know if you want to address that directly or national payers kind of broadly speaking, but are there any notable shifts you're seeing in the structure of your contracts and just how do you feel about the ability to maintain price.
Yes, so obviously, we work with the payers all the time, whether it's a year, we have a negotiation with them or not we're constantly in contact and working very closely with them and we've seen continued pressure over the last five years and I think that pressure will continue but it's not accelerating its kind of very steady.
And where we can get price concessions, we do but in general I would say that there is continued pressure, but no different than what we've seen in the past.
Yeah the answer again.
Jack just just to add on that too is that when we think about price mix, we've always talked about unit pricing being a headwind, but the favorability of our mix of esoteric growing faster than routine or tests per session and so when you look at the growth rate that we have envisioned for 'twenty three in our guidance it assumes both and mostly by.
Favorable volume appreciation, but also favorable price mix, even with unit pricing headwinds.
Got it and I heard your commentary Glenn on some of the revenue pacing to start here verify your point you can draw on EPS, just either expectations percentage of the full year.
Just any color to help on that would be great.
Yes, it's interesting if you go back and look to even pre pandemic levels 2023, even though we have some pluses and minuses that trend in the earnings would come in similar so I think that'll give you roughly a good approximation.
Interestingly enough plus or minus.
And fairly.
Quarter, each time, but you'll see it's a little bit different in the first quarter, a little bit lower a little bit higher throughout the rest of the year, but I think it will give you a good proxy.
Great. Thank you.
Okay. Thank you.
One moment our next question.
Our next question will come from Erin Wright of Morgan Stanley . Your line is open.
Great.
Could you give us a little bit more of a breakdown of what youre seeing across the different segments that covance Central lab business in terms of volume trends RFP at the clinical level and then and then on the early development side. What's your level also a commitment to early development business as you kind of retain that as part of their process here.
Sure. Good morning, Erin Thanks for the question, so I'll start with drug development and performance. What you saw for the fourth quarter was early development grew 5% on a constant currency basis, and I always give the CAGR as well from 2019, because that's before all the COVID-19 related work it was about 6% CAGR from fourth quarter.
<unk> of 2019, if you look at the clinical business, we saw about two 5% growth in the corner a constant currency basis, if you compare that to the fourth quarter CAGR of 2019, it was about 5%, but both of those were offset by a 9% decline in our central laboratory business.
Prior year, that's again constant currency, but if you look at the.
Business for the Central Laboratory.
And on a CAGR basis through 2019, it actually grew about 5%. So it shows you that the business remains healthy. It's just as you recall on our fourth quarter of 2021, we were doing a huge amount of COVID-19 work for boosters for vaccines because that was right when the omicron variance hit so that's why you see such.
A tough year over year comparison for the Central Laboratory business.
As I look at Rfps across the segments, meaning I looked at them in total the rfps remain very strong and very consistent so we haven't seen a change as I look through last year and cancellation rates I haven't seen a change the cancellation rates remain low they are up a little bit from one quarter down a little bit for the next quarter, but.
Totally flat and remained very low and then to me. The most important thing is the book to Bill and as you see the book to Bill was very strong. It was a $1 27, and if you were to look at each of the individual segments for the quarter. Although we don't typically give individual segment book to Bill you would see that they are all above the $1.
So we feel good about each of the segments about the book to bills as we move forward.
In terms of the I'm sorry go ahead I'll answer the second question after you.
No go ahead go ahead.
Okay, and then in terms of.
If you look at the <unk> business, we think it's a good business. It's a global business, we're looking to bring our innovative diagnostic tests globally, and we think that they'll be able to help us do that with their global laboratory footprint. So we remain committed to that business.
We think it's a good business.
And I guess, just my follow up as you prepare for the spin how we should be thinking about the priorities around capital deployment M&A pipeline as well as buyback.
We should be thinking about that.
Yes.
After the spin, which we are on track for the middle of this year.
We'll continue to provide a dividend we expect to get dividends approved moving forward for Labcorp for Labcorp and then we would continue to look to do these hospital and local laboratory deals of which our pipeline is very full and there is a significant number of those that we're looking at evaluating and we will win some of those.
This year and then we believe our shares are still significantly undervalued. So we have now $1 5 billion of authorization for share repurchases and we will use those as appropriate.
One moment for our next question.
Our next question will come from Tim Donnelly of Wells Fargo. Your line is open Sir.
Great. Thanks.
No.
The first one I'm not trying to step on Tom towards or anything here, but just isolating the drug development assets that will stay.
We remain co could you just give us some color directionally.
<unk> magnitude anything here on the EBITDA margins for early development and Central Labs.
They look to 'twenty, two not trying to ask for stranded cost adjustments or anything like that.
Hey, Tim this is Glenn.
You know we breakout.
The two segments and then with that the revenue and margin suffered drug development.
We provide that we haven't broken out the pieces. If you will because again, if all the inter relationships and shared services and so forth. So part of the issue of doing the spin obviously is now we're standing up an.
An independent company with where we have a lot of direct cost. But then we also have a lot of indirect costs and we're working through obviously all of those costs and including transition services that we would be required for a period of time. So we're currently in the process of getting all of the numbers done once we're complete with that we will obviously be sharing kind of a spin co view.
Both on the top line and the bottom line at the appropriate time, including an anticipated investor.
Analyst day, if you will prior to the spin and obviously to the extent we have those financials done prior to that we can also share them, but at this point.
We've talked in the past about here's the segment average and that the businesses that are for the plus or minus in line before you get to those independents standup costs.
Alright I appreciate it.
A shot.
And then secondly on the.
Just staying here on the early development business. So if we were to exclude the 80 to 100 million and HP headwind you guys are baking into the guidance.
<unk> be growing in FY2023.
And what's the price assumption embedded in there for the year.
So the short answer is yes, it would be growing for the year with the $80 million to $100 million and they're growing nicely and what was your second question.
The pricing assumption embedded in that.
The EDI business for 'twenty three in terms of the pricing. So first thing I'd say is that we expect the primary pricing to go up significantly because of.
The supply issues.
And I think therefore, there you would expect to have better pricing overall.
Alright, thank you.
Yes.
Just to be clear that pricing, especially for prime if it does get passed on to customers. So it doesn't impact our margins.
Perhaps the margins because we don't get a margin on that but the pricing can be passed on to the customers.
One moment for our next question.
And our next question will come from Patrick Donnelly of Citi. Your line is open.
Hey, guys. Thank you for taking the questions.
Morning, maybe hey, good morning, maybe one on the NSP side.
Certainly it was expecting a headwind maybe a little bit higher than we were thinking can you just remind us I guess kind of your full exposure there just thinking about that $80 million to $100 million.
What the supply disruption looks like currently and then again I guess visibility into that normalizing I'm just trying to figure out against that 80 to 100 is.
Is that kind of fully grappling. It is there is that a conservative number or maybe just kind of walk us through your thought process and again, maybe what the sizing was and what that looks like appreciate it yes, we've said before that the NHS.
Part of our total revenue was less than 2% and 80 to 100 and we've also said that we will not be a full year impact. So you can see the $80 million to $100 million within those guidelines that we have said previously the majority of the impact will be in the first quarter and there'll be some impact into the second quarter over the past three months.
We've contracted with multiple organizations to secure supply for the near but also importantly for the longer term.
And as I, just said that we believe is going to be temporary because we've already begun to receive the beginning of the shipments. So I feel that the 80 to 100 is a realistic range.
But we will hopefully be more towards the lower end of that but we'll know with time.
Okay. So you've got decent visibility into things normalizing by call. It. Yes, we have we have visibility that we have the contracts in place that we've started to begin to receive some of the shipments. So I feel good about those things also Patrick when you think about the growth rate for 23 of the 5% to 7% growth within drug developer.
But that 80 to 100 or obviously the midpoint gets you to around a point and a half of a headwind that's captured within that growth rate, but similarly, we expect to have less COVID-19 related vaccine a therapeutic work in 23 versus <unk> 22, which is at a similar number. So you are looking at around three percentage points of.
Headwind from those two issues that are reflected in that 5% to 7% growth, which obviously would have been greater.
Without those constraints, but both of which we would expect to then be done with through.
2023.
Alright, I appreciate it guys. Thanks.
Yes.
Please standby for our next question.
And our next question will come from Brian <unk> of Jefferies. Your line is open.
Morning, Brian Hey, good morning, good morning.
Glen if I think about guidance.
Obviously, COVID-19 rolling off here, but as I think about margin I mean anything you can share with us in terms of what drives your confidence in.
And the margin, especially in the core lab business going forward.
Yes, no we actually feel good about.
How the business is performing we obviously give guidance to the revenues.
Within diagnostics, so that 10 five to 12, 5% overall.
Overall again the interesting part is part of that growth a little less than half of it call it with ascension, which will mix down our margins, but the underlying business growth is very strong in 'twenty three in part due to the fact that 'twenty two wasn't a full year. So the recovery is coming in and what that incremental demand, mostly driven by volume.
We're going to get good leverage on it helpful. Again that we don't have Panama, but we believe that we can drive margin improvement slightly in 'twenty three versus 22 with the headwind of Ascension.
But again without the headwind coming in from Panama, but overall launchpad continues to be on track good expense control.
And again fundamentally good growth in the business.
Alright, thank you.
Okay.
Mike.
Please standby for our next question.
And our next question comes from Eric Coldwell of Eric Your line is open.
Thanks, Good morning so.
Yes, I'm going to kind of come back to the in hps, but hopefully pretty quick.
The only supply constraints that you're seeing today related to the one Cambodian manufacturer in the news.
As the original source and your suppliers that receive some or all of their volume from that source or have you seen supply constraints from.
Other existing partners that you used to work with.
Yes, so again at some of the partners use that same supply source. So it might have some issues with that specific source, but what I can say with the contracts that we've signed and the suppliers that we have we're confident that we'll be able to use that supply.
Going forward, so I feel good about the contracts that we put in place there and then on margin in drug development I thought I heard you say you expected flat margin here in Q1 can you confirm that so something around 11, 5% is that reasonable.
Yes, so we're assuming that the margin will be flat versus margin last year. So I think thats about right. Yes. The big issue. There is the fact that we are not going to have the supply of the <unk> in the first quarter in.
Therefore, we won't be able to.
We'll have most of that $80 million to $100 million impact with a lot of it flows through because we still have all of the people.
People are hiring people for that group, we have the facilities and so forth. So we're not making any changes to try to manage that margin because we know the supplies coming in so that will be the toughest quarter.
Quarter, there might be a little bit spillover to second quarter, but overall, we expect that we will have some margin appreciation for the drug development business for the full year with the second half certainly be better than the first half great and then last one for me if I can central lab has apparently one more tough quarter on last year's activity Q.
122 was pretty pretty solid.
Are you expecting central lab to be back to growth by the second quarter and can you give any updates on how those past kits that were sent didn't come back or are you seeing any any changes in dynamics in terms of <unk>.
Order flow on kits or returns on kits.
Just trying to get a better sense on when we can expect the central lab business to resume year over year growth. Thanks. So the first quarter of 2019, we were still doing a lot of COVID-19 related work, particularly for the booster shots for <unk>. So that will be the toughest quarter of next year will be the first quarter.
As I look at orders in that business, they look great and I'm actually very optimistic about our central laboratory business moving forward I think we're just overlapping tough comparisons, but book to Bill orders I mean, everything I look at for that business is good we are not yet at the return level that we were at in 2019.
I still think Thats some sites are struggling to enroll as many patients that they have in the past, but we are seeing the kit returns increased month over month and I feel confident that we will continue to see that as we go through this year.
Eric the only thing I'd add to that is to your point the first quarter will be the one that would be down year on year before things annualized and then we'll look at good growth throughout the remainder of the year, but we will still have that constraint. We've talked about that we're still going to see while the supply chain.
Issues, which was really more of a 'twenty one issue. So we were down in 'twenty two from the supply 22 supply levels were more normalized so the year on year Covid related impact will still be with us doing less vaccine and therapeutic work in 'twenty three than we did in 'twenty, two even with that headwind that again weak sized up at around $90 million so call it up.
And a half for the overall segment, obviously, it's a bigger constraint when you just look at it because it's mostly within our central lab business, but even with that headwind, we still expect to see very good top line growth throughout the three quarters second third and fourth quarter of 'twenty three.
Great. Thank you.
Thank you.
Please standby for our next question.
Our next.
Comes from Derik de Bruin of Bank of America. Your line is open.
Good morning Derik.
Good morning, this is John on for Derek.
I wanted to ask.
Yeah.
I wanted to ask about the free cash flow guide.
Obviously, the last few years, you've benefited from the Covid testing, but even when I look at the 2019 level it was around one.
One 3 billion so.
I was wondering if you could dig into what sort of factors.
Yes.
There are some large spin expenses.
That you've mentioned before.
Sure John .
First of all obviously, we wrapped up the year of <unk>.
2022 on a very strong level of $5 billion of cash flow in the quarter getting us to 1 billion and a half for the full year. When you look at the midpoint of our guidance at $1 1 billion. The decline from 'twenty to 'twenty three is all attributable to lower Covid.
Testing earnings in fact, we're looking at good growth in base business earnings we've talked about earnings per share on a base business being up around 13% in our guidance. So we're getting good cash generation from our base business and that's going to be partially offset by <unk>.
Increased spending in Capex, we kind of talked about around a three 5% rate in revenues that are growing. So we continue to see good investments for capital Investiture and in addition, working.
Working capital will be a use of cash a bit supporting the growth in the base business as well, albeit we do expect to see an improvement in our Dsos, which will help mitigate the cash needed for working capital, but overall, we feel good year of free cash flow generation.
Great and.
Wanted to ask what the site access level is looking like you've talked about.
Puts and takes of that.
The clinical lab, and the EDI, but compared to.
This quarter past has there been any improvement and also on labor constraints. If you could comment on that that'd be great.
Yes, I mean, I would say there is still a difficult labor environment and health care in general.
Have made some progress and acceptance rates that we make offers we're getting more people that are accepting our offer that we have in the past we are working hard on retention because what happens is once you get somebody and you train them. It takes time you have to find a way to retain them over time and we're working hard on that I would say that there is.
No doubt that.
Getting a little bit better, but it's still not where it used to be and there's still a lot of issues.
Issues in terms of the labor market across all of healthcare frankly.
Got you that's all for me. Thank you yes. Thank you.
Stambaugh our next question.
And our next question comes from a J Rice of credit Suisse. Your line is open.
Good morning.
Got it.
I know you've given some very specific information about your assumptions around COVID-19 testing and we can.
Develop estimates around that but I wondered in the capacity that you've had historically the last three years devoted to COVID-19 testing is that redeployment into other areas pretty seamless is there any drag that you're dealing with is that it's been coming down that will then become a tailwind for you.
Is it fully gets redeployed can you talk about that a little bit sure. Jay So just to give a sense. So in the fourth quarter. The volume was about 16000 per day, we're giving you a bit of a wide range because it's difficult to tell but we're giving somewhere between 5012 thousand per day as guidance. If you just look at the month of January .
<unk> just to give you a sense it was about 11000 per.
Per day.
And what we're trying to do is make sure that we have capacity to do more than what we think we need but we are nowhere near as much capacity as we had historically when we used to be able to do over 300000 tests per day, we brought that capacity down we can redeploy some of that equipment we.
We don't expect to have any large write offs from equipment or anything like that that equipment returned to its cost of capital very quickly as you can imagine so I don't think it's neither a headwind nor a tailwind I think it's basically.
We've done what we can do for Covid whenever we need to do for the tailwind of covered we will do but now we're really focused on driving our base business and that's where we're excited because the base business looks really strong in the diagnostic area a.
Hey, Jason.
I'd add too is we commented that the coated business. Obviously it was still at a very attractive margin at 54.
Percent, we've said that we've kept excess capacity available as long as we continue to be within the public health emergency.
When that expires, which at least is anticipated in call. It the middle of May the assumption is that the pricing and reimbursement will come down and then from our perspective as well, we will manage our cost structure appropriately and take out some of that excess capacity still leaving enough to hopefully handle if there would be an increase but that will result, obviously.
And the margins coming down a bit as well, but still COVID-19 should continue to be at a margin greater than what the segment average would be.
Okay, that's great and then maybe just on the.
The hospital business I think if I remember right you would assume that essentially really wouldn't contribute much on the bottom line in the fourth quarter is that we're sort of ramping up but it may be.
As you get everything working well you make sure the customers happy et cetera, you would see gradual margin improvement over the course of 'twenty. Three can you give us any more flavor for how much that is.
Baked in and with Ascension and some other high profile deals announced I know you guys mentioned the pipeline looks good I wondered if.
Sometimes deals we get more deals are you seeing even an acceleration of activity behind the scenes and people that are interested in perhaps taking a look at this yes.
So to answer the second part of the question first yes, we are seeing an increased number of people that are interested in looking at us running acquiring parts of their hospital business.
You look at 2023.
<unk> revenue is going to be about 5% of the base business growth. So you can do the math, that's approximately $550 million to $600 million in.
In 2023, that's consistent with the initial guidance that we gave at the time of the acquisition. So we feel good about where we are and how we've been achieving.
The goals of that deal the margins expected to be in a low to mid single digits in the first year, but it will improve over time, it will never get to our average margins because the hospital business margins never get as high as our average diagnostic testing, but it certainly will improve as we go through this year and into next year and beyond.
Okay, great. Thanks, so much.
So I want to thank everybody for joining us today are.
Looking ahead, we are on track to achieve important milestones on our spin we're looking to deliver on our enterprise strategy and commitments and we feel great about the future business. So I want to thank you for joining us and we'll look forward to talking to all of you soon.
I would now like to hand the call for.
Back to Adam Schechter for closing remarks.
Okay.
Thank you everybody it's been a pleasure to spend time with you. We appreciate that looking ahead. We are on track to achieve important milestones since the spin and we're excited about 2023 and beyond so have a great day and we'll talk to you. All soon and this concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
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