Q1 2023 Laboratory Corp of America Holdings Earnings Call
Okay.
Customers have been positive about the transaction and our progress with some short term customer delays as well as a slightly slower backlog burn rate compared to previous years.
Some clients are waiting until after the transaction is complete to award new business, but.
But our dialogue remains encouraging as we approach the close as evidenced by our renewal FSP contract with a large pharma customer this quarter.
In the first quarter revenue totaled $3 8 billion.
Adjusted earnings per share was $3.82.
Free cash flow was $27 million.
Overall, our base business is performing well.
Excluding excluding COVID-19 testing revenue.
Enterprise base business revenue grew 10% in the first quarter versus the same period prior year.
Since 2019 prior to Covid for <unk>.
Agnostics and drug development based businesses have grown revenue at approximately 7% CAGR.
The diagnostics base business revenue grew 20% year over year in the quarter.
This strong top line performance continues to be driven by both routine and esoteric testing.
As well as the benefit from hospital deals, including our Ascension partnership.
For drug development first quarter revenue declined 4% versus prior year.
Drug development entered the quarter with a trailing 12 month book to Bill of one point to seven.
Enterprise base business margins were lower than prior year How's.
However, we still anticipate slight margin expansion for 2023, as we continue to be a search of integration, we overcome an HP supply issues and we realized benefits from our Launchpad initiative.
We are continuing to implement cost control across both businesses to offset inflationary pressures.
Finally covered PCR testing volumes declined during the quarter more than expected totaling more than 870000 tests performed and averaging 10000 tests per day.
We expect Covid testing to continue to decline.
Glenn will provide additional detail on our quarterly results as well as our 2023 outlook in just a moment.
Moving now to an update on our planned spin of our critical development business.
We are on track to complete the spin mid year subject to the regulatory approval process.
We have confidence in the foundation that has been established despite short term pressures.
Fortunately, we will benefit from the leadership of Todd as CEO .
We plan to announce the leadership team and a four three of board of directors in the near future. We encourage you to visit fortunate of dot com to learn more.
Upon completion, we will create two strong independent companies through a tax free transaction.
And they are seeking the right laboratory partner Abaxis headwinds.
We are working with our health system partners to develop tailored innovative and cost effective solutions that meet the unique needs of their patients and providers.
Last month, we entered into agreement with Enzo Biochem to acquire the assets of its clinical Laboratory Division.
Today, we are in active discussions to expand relationships and execute your engagements with other partners.
The pipeline for hospital, and local lab acquisition and investment is robust.
And we look forward to updating you on existing and new partnerships throughout the year.
Turning to oncology, we pause.
Partnering with immuno Chad I mean, immuno histochemistry sponsored testing program.
Increased access for patients with ovarian cancer.
Additionally, laptop added her to low reporting to him.
<unk> test for breast cancer.
This test is the only FDA approved companion diagnostics of her two low status for patients with metastatic breast cancer.
Impacting patient eligibility for treatments and therapies that can improve outcomes.
Lathrop also entered into a strategic collaboration with <unk> to provide physicians greater access to precision oncology decision support.
This collaborative this collaboration builds on our capabilities to improve access to high quality care for cancer patients and their community cancer care providers.
We continue to expand our digital health platform laptop on demand, we launched three new tests in the first quarter, a putting a PSA prostate cancer screening test.
If the titles be immunity test.
Fatigue test for people with chronic fatigue symptoms it really post COVID-19 fatigue.
Before I wrap up we are looking forward to two upcoming events that will provide investors more color on our near to mid term future.
We have a fortress investor day tentatively scheduled for June six at which we'll discuss the exciting opportunities ahead.
We expect a foreign tend to be available in advance of the meeting.
Additionally, we are planning a labcorp investor day, which is tentatively scheduled for September .
Labcorp is strong today and will emerge to the completion of the upcoming spin even stronger.
Our diagnostics laboratory.
Early development Research laboratory.
In Central laboratory businesses are market leaders with solid fundamentals.
We're executing against our long term strategy that will position. These businesses for continued growth in the future.
I wanted to take a moment to thank our team for their continued contributions to labcorp and our customers.
The team is generating strong base business performance.
Perry for a transformational transaction midyear.
More than 80000 strong our team works every day to find new ways to harness science innovation and technology for the betterment of our stakeholders.
Blackrock is well positioned to progress our mission to improve health and improve lives, while generating attractive returns for our shareholders with that I'll turn the call over to Glenn.
Thank you Adam.
I'm going to start my comments with a review of first quarter results followed by a discussion of our performance in each segment.
Conclude with an update on our 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 8 billion, a decrease of three 1% 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.
Testing revenue was down eight 4% compared to Covid testing last year, while the base business grew nine 8% compared to the base business last year.
Organically in constant currency the base business grew nine 2% benefiting from the Ascension Lab management agreement, which contributed approximately 4% of the organic growth.
As a reminder, the outreach business that we acquired from Ascension is treated as an acquisition while the lab management agreement is treated as organic growth.
Operating income for the quarter was $341 million or 9% of revenue.
During the quarter, we had $69 million of amortization and $83 million of restructuring charges and special items, primarily related to acquisitions launchpad initiatives and the proposed spinoff for trio.
Excluding these items adjusted operating income in the quarter was $9 $494 million or 13, 1% of revenue compared to $794 million or 24% last year.
The decrease in adjusted operating income was due to lower Covid testing demand.
Margin decline was also negatively affected by the mix impact from the Ascension TSA and HP related constraints.
Excluding these items margins would have been up slightly as the benefit of demand and launchpad savings were partially offset by higher personnel expense inflationary cost and increased R&D investments in oncology.
Our Launchpad initiative continues to be on track to deliver $350 million of savings over the three year period ending 2024.
The tax rate for the quarter was 23, 2% the.
The adjusted tax rate for the quarter was 22, 9% compared to 23, 4% last year.
The lower adjusted tax rate was primarily due to the benefit from increased R&D tax credits.
We continue to expect our full year adjusted tax rate to be approximately 24%.
Net earnings for the quarter were $213 million or $2 39 per diluted share.
Adjusted EPS were $3 82 in the quarter down 37% from last year due to lower Covid test your earnings as base business adjusted EPS was up 10%.
Operating cash flow was $121 million in the quarter compared to $356 million a year ago.
The decrease in operating cash flow was due to lower coated tested earnings and spin related costs, partially offset by higher base business earnings.
Capital expenditures totaled $94 million down from $117 million last year.
For the full year, we continue to expect that capital expenditures will be approximately three 5% base business revenue.
Free cash flow for the quarter was $27 million and the company paid out $64 million in dividends.
The first quarter is generally the company's softest quarter for free cash flow. We continue to expect our full year free cash flow to be between one to $1 2 billion.
Now I'll review, our segment performance beginning with diagnostics.
Revenue for the quarter was $2 4 billion a decrease of two 9% compared to last year, driven by organic revenue being down four 7%, which was due to COVID-19 testing, partially offset by acquisitions up 2%.
Covid testing revenue was down 84% compared to Covid testing last year, while the base business grew organically by 17, 5% compared to the base business last year.
The Ascension Lab management agreement contributed approximately 7% of the growth.
While the impact of weather in revenue days benefited growth by approximately 2%.
Total volume decreased three 3% compared to last year as organic volume decreased by five 6%, partially offset by acquisition volume of two 3%.
The decline in volume was due to Covid testing.
Business volume grew 11% compared to base business last year, including the benefit from acquisitions of two 6% and favorable weather in revenue days of approximately 2%.
The strong year over year growth rate was also impacted by lower than normal volume in the first quarter of 2022 due to homework rock.
Price mix increased <unk>, 4% versus last year as the base business improved six 6% and was partially offset by lower COVID-19 testing, a five 7% currency of four 3% and acquisitions of 2%.
Base business price mix was up eight 8% compared to base business last year benefiting.
Benefiting from the Ascension Lab management agreement of approximately 7%.
Okay.
Diagnostics adjusted operating income for the quarter was $442 million or 18, 5% of revenue compared to $683 million or 27, 8% last year.
The decrease in adjusted operating income and margin was due to a reduction in COVID-19 testing, which carried a margin of approximately 50% for the quarter.
Going forward, we expect a lower margin for COVID-19 testing, but still above the segment average.
Base business margin was up approximately 80 basis points, driven by organic growth and launchpad savings, partially offset by higher personnel expense and the mix impact from the Ascension TSA.
Now I'll review the performance of drug development.
Revenue for the quarter was $1 4 billion.
Decrease of 4% compared to last year, primarily due to decreased organic revenue of two 4% and foreign currency of one 5%.
The decrease in adjusted organic revenue was negatively impacted by approximately 8% due to <unk> related constraints reduce COVID-19 vaccine a therapeutic work and the previously mentioned FSP contract loss.
The early development business was the most constrained by these items.
Excluding these impacts organic base business revenue for this segment grew approximately 6% with.
With early development up 17% Central lab up 6% and clinical development up 3%.
Reported first quarter drug development revenues on a compounded annual basis grew six 9% compared to the first quarter of 2019.
Adjusted operating income for the segment was $124 million or eight 8% of revenue compared to $169 million or 11, 6% last year.
The decrease in adjusted operating income and margin was due to an HP related constraints reduce COVID-19 vaccine, a therapeutic work and the FSP contract loss, which negatively impacted margins by approximately 350 basis points.
Excluding these items margins would have been increased primarily due to demand and launchpad savings being partially offset by higher personnel expense inflationary costs and a write off of receivables related to small biotech customers.
We ended the quarter with backlog of $16 $6 billion, and we expect approximately $4 9 billion of this backlog to convert into revenue over the next 12 months.
Now I'll discuss our updated 2023 full year guidance, which assumes foreign exchange rates effective as of March 31, 2023 for the full year.
The enterprise guidance also includes the impact from current Lee 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 Labcorp for the full year.
Following its spin currently anticipated in the middle of the year, we expect to provide updated guidance.
We expect enterprise revenue to grow one 5% to 4% compared to 2022.
This is an increase at the midpoint from our prior guidance of 25 basis points.
This increase reflects the base business range, increasing to nine 5% to 11%.
While COVID-19 testing guidance range has been lowered to minus 80% 90%.
We continue to perform well in diagnostics that are taking up our full year guidance range, we expect.
Diagnostics revenue to be down 5% to up 2% compared to 2022.
This is an increase at the midpoint from our prior guidance of 100 basis points, primarily due to stronger base business volume.
This guidance includes the expectation that the base business will now grow 12, 5% to 14%.
Which has approximately 5% growth due to essentially.
We expect diagnostics base business margin to be up in 2023 versus 2022, including the unfavorable mix impact from essentially.
We expect drug development revenue to grow three five to five 5% compared to 2022.
This is a decrease at the midpoint from our prior guidance of 150 basis points.
Due to slower than expected backlog conversion, primarily due to investigator site constraints and lower than expected first quarter orders.
This guidance includes the positive impact from foreign currency of 60 basis points.
At the midpoint of our guidance the compound annual growth rates compared to 2019 is six 8% primarily due to organic growth.
We also continue to expect that the drug development margin will increase slightly in 2023 compared to 2022.
Our guidance range for adjusted EPS was $16 25 to $17 75 says.
This is a tightening of the range from our prior guidance, while the midpoint is unchanged there.
This guidance reflects lower earnings from Covid testing, while base business adjusted EPS is expected to increase 15% at the midpoint.
Free cash flow guidance is one to $1 $2 billion unchanged from our prior guidance.
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.
And operator, we will now take questions.
Thank you, ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
We ask that you limit yourself to one question only.
Feel free to jump back into the queue for any follow up questions.
He standby, while we compile the Q&A roster.
Our first question comes from the line of Ann Hynes with Mizuho Group. Your line is open.
Hi, Good morning, Good morning can you just.
Can you just provide some more color on the NSP issue I think you said in your prepared remarks, you think you would get better in the second half of May be the CFO in general improve in the second half maybe what gives you that confidence and when do you think we get some type of Arista with an HP <unk>.
And if it doesn't resolve by year end when do you think it could impact maybe late stage business yes.
Thank you Anne.
Good morning, So I'll give you some additional context on NH piece and where we stand.
If you look at the first quarter. The NXP impacted early development was approximately $50 million to $60 million, but it's important to note that that does not leverage well because we're continuing to hire people and we're continuing to keep people because we now have enough supply that we feel confident in the second half.
For the year and we feel confident as we go into next year. If you look at the underlying demand.
The early development business, excluding that impact it looks good it actually grew 15% to 17%. So we feel good about the second half of the year for that reason, we said that the first quarter would have the highest impact of NH piece and it still will be some impact in the second quarter in the second quarter, we expect the impact.
To be between $30 million to $40 million. The reason why is as we get supply and it still takes time to acclimate and to train and to be ready for the new study starts. So we feel good about our supply situation. We feel good about the second half of the year, we feel good about going into next year.
First quarter was certainly the biggest impact at $50 million to $60 million second quarter will be less of an impact of $30 million to $40 million, but most importantly, the underlying early development business would have grown 15% to 17% I had it not been for NH pace.
Alright, thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Jack Meehan with Nephron Research. Your line is open.
Jack.
Good morning.
So my questions are going to be focused on the diagnostics business at the first one is if I look at <unk> sales in the first quarter sequentially. They were up 7%, which is really strong versus what we've seen historically.
So I heard calendar days and weather were favorable I'm guessing the Medicare dropped he was probably helpful. There too is there anything else you would call out to explain sort of the sequential pick up.
Yeah, So Jeff first of all I'd say, we're very pleased with the performance in diagnostics every which way you look at it whether you look at asset tariff routine look at our hospital X Hospital. If you look at our mix. We're looking very very strong in the diagnostics and that enabled us to up the guidance range for that.
Base business, if you look at volume specifically the base business last year compared to this year were up 11% this year versus last year about two 5% of that was acquisitions and then there was favorable weather in revenue days that was about 2%.
But also remember we're comparing to last year, where overtime was impacting our business.
So when you look it's still very very strong, but it's a little bit more typical to what you would expect as we look at the sequential difference I feel really good about where we are with ascension and things that are Uh huh.
Happy with not just the TSA, but also the acquisition part of essentially in the business that we bought roughly it's Ben wants to add some additional color.
I think that gets to that I mean, I think anytime you look, especially in the diagnostics business, we've talked about the seasonality of the business. So looking at sequential you do have to factor in those issues up days. If you will the obviously the impact of acquisitions that are annualizing.
Well, it's the I guess the fundamental issue that Adam spoke to it's just we're continuing to see strong demand.
As we go forward in the year over year comps look good and sequentially. Similarly, we expect the growth to continue throughout the year.
Great and then on the margin front and the diagnostics segment can you share like what was the ascension business margin in the first quarter, how is that trending and can you quantify how big the TSA is.
Yeah. So I'll give you some context, if you can jump in as well, but we always said at the beginning when we first were doing the integration.
Ratios the margin would be at the lowest point, which would be in the low single digits.
We're actually saying.
Getting closer to the mid single digits now, although not quite there over time the margin will continue to improve it will never reach the average margin of our current business, but we have already started to see some margin improvement and we expect that that's going to continue as we go through this year into next year.
Yes, just and it speaks a little bit to the early <unk>.
Earlier question too on the sequential we continue to see revenues within essentially continue to grow. So it grew sequentially were still as Youll recall, when we announced the transaction.
Expected around $550 to $600 million in revenue.
Based upon our current guidance our revenue would be at the upper end or maybe even slightly above it can contribute around 5% of our growth. This year and as you know it'll annualize after the third quarter. So the fourth quarter comp will have it in both periods. So we're seeing good growth obviously it impacted our revenue in the first quarter.
Call it around seven 5% year on year. So the revenues are coming in nicely and as Adam said, while we've talked about mid to.
Low to mid single digit margins were kind of at the upper end of that range right now with the expectation that margin growth or improvement will continue.
We go forward through the year, but especially on beyond that.
Thank you Glenn.
Thank you.
Please standby for our next question.
Our next question comes from the line of Kevin Kelly <unk> with UBS. Your line is open good.
Morning, Kevin.
Good morning, guys. Thanks for taking my question I guess I wanted to understand the margin progression on the on the CRO business I understand sort of what youre guiding for year over year margin expansion a little bit high.
How do we get there what.
What's the cadence of that like what drives that can you just talk through sort of the execution of how we get.
Year over year margin expansion in that segment of the business.
Glad to.
I'll first start off by saying that if you look at early development as I said before excluding that HP.
Constraints the underlying business is strong same thing I mean, if you look at our Central laboratory business that looks very strong and especially when you look at it at a CAGR you can see strength in that business as well it was a mixed quarter for the clinical development business, which I can talk about but there are three things that impacted our.
Jane significantly in the quarter that we think as we go through the year at least two of them will start to look much better. The first one is and HP revenue I already stated that was a $50 million to $60 million impact in first quarter, we expect it to be $30 million to $40 million in second quarter.
That loss falls to the bottom line it doesn't leverage well because we're continuing to hire people and we're continuing to run that business like we didnt have the constraints. It's been hard to find people. It takes time to train people. It was one of the issues. We faced last year. So we've purposely decided to manage that difference.
Business differently, even though the revenue was down for any speed constraints, we continue to hire people and we continue to run the margins at a very low rate for that reason.
The second thing is there was a write down of bad debt for a small biotech company.
It was one small company that actually.
I actually went bankrupt and we had to write off was about $10 million to $12 million and then the third thing is we are seeing a bit of a lower burn rate in clinical it's not surprising overly because we've seen chips coming back not where they were prior to 2019, we think that is now flowing through a bit to that.
Clinical business, but those three things we expect we will get better in the first two certainly the third one we think we will continue to improve as we go through the year and I'd say the other thing too Kevin If you look at the first quarter and again it goes back a little bit to the seasonality question first quarter margins for drug development.
Historically, the lowest and if you looked at what we did last year, we did around 11 six in margin, but for the full year, we delivered 14%.
Margins when you look at this year, obviously, we have a low first quarter margin.
But our expectation is that it'll be slightly above <unk>.
Next year in part B of constraints that I've said about the topline growth that we expect in the business. That's implied in our revenue guidance would get you roughly around seven 5% for the remaining nine months, so topline growth launchpad savings not having the constraints.
We will drive the margin improvement.
Thanks, that's helpful can I ask a quick follow up just on the on the clinical backlog how it how has that changed.
By segment, maybe a year over year or the like I'm not trying to ask for any forward look on the form 10, and what the backlogs are gonna look between the two businesses, but maybe if you can describe.
How the backlog has changed in terms of customer or type or even duration any any color on that year over year or even sequentially. It would be really helpful.
Yes, I would say in general if you look at early development, we do much more of a backlog in small to medium biotech business.
<unk> as a percent and pharma.
If you look at our clinical business, we do more in pharma and small biotech than we do in our early development business.
And then if you look at our Central laboratory, it's pretty evenly split, but it's much more.
I mean, it's in between the two but it's more towards large pharma than it is to small and medium sized biotech. So I would say large pharma.
<unk> pharma is the majority of our book to Bill in the clinical business as well as our central lab business and it's much more skewed to small too.
Medium sized biotech in the early development business and overall the book to Bill was 127.
For the trailing 12 months.
And that Hasnt that when I say the mix that hasnt changed at all like that backlog or the book to bill between clinical stage and the early stage is that migrated in any way over the last 12 months.
Meaning is there more on clinical now that lesson and early stage or vice versa.
Yeah, we don't we don't really break it out that way, obviously as we get closer to spin we will be breaking it out differently than we do today.
But at this time, we really haven't broken out by the different business segments.
I appreciate that thanks, Thanks, guys yeah. Thank you.
Thank you ladies name back for our next question.
Our next question comes from the line of Brian Tim Quillin with Jefferies. Your line is open.
Hey, good morning, Good morning, guys, maybe just a follow up on Kevin's questions from earlier, because I think about your comic blend in the prepared remarks about book to Bill conversion being a little slower than you expected maybe what gives you the confidence in the visibility into that improvement as we think about the back half of the year and book to Bill.
Yeah.
So no we have seen the trend go down if you look at the fourth quarter, we were rounding around 30% backlog conversion, where this quarter, we're kind of at the 29 and a half. So we have seen kind of the trend down we've assumed at this level going forward. So when you look at the call down in our revenue outlook for the year yeah.
Effectively what's happened is that.
The reason for the decline with the other being a little bit of softer orders that we had in the first quarter that as you know, we still need roughly around 20% of current year revenues to come from new orders and we did see a little bit of a softness there but overall, we're looking at the backlog. We're looking at the contracts that we have the burn rate that we currently see from those contracts.
We feel comfortable with the current expectation frankly, there's well there's always a range. So you can say that we can see it pick up a bit there were a couple of large contracts in particular that caused the conversion to come a little bit lower.
So once those burned through a little bit or the mix improves hopefully, we'll see a little bit of a pick up but for right now that kind of 29 and a half ish kind of percent conversion is what we're assuming.
Awesome. Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Patrick Donnelly with Citi. Your line is open.
Patrick.
Hey, good morning, Thank you guys for taking the questions maybe.
Maybe one on the diagnostics business just on the price mix.
It can be a pretty nice story for you guys can you just give a bit more color. There in terms of how we should expect that to trend in the remainder of the year any change to the tone with payers and I know things have improved a bit there but would.
Would that be just kind of give a bit more color in terms of the payer conversations any change there and again, what we should be thinking for the rest of the year on that front.
Hi, Patrick I'll start and I'll ask Tim to give some specifics but in terms of <unk>.
We have very good conversations with the payers very constructive I feel good about our access and the continued access that we will have.
You continue to see price pressure in every single part of health care.
But at the same time, we're not seeing any significant changes to the trends of what's happened in the past so I feel good about our pricing.
Price did price mix as we go through this year into next year, maybe you could give some specifics but sure Patrick.
When you look at the you know we talked about the 75% kind of growth.
This year organically in diagnostics the price mix benefit from that was a little over 9% nine two we commented that ascension. The TSA, we treat as all price so that was seven five.
Percent, if you will so we did around call. It one 7% in price mix, which is not too dissimilar.
You back out the essentially to where we've done where we've been we continue to track well.
When you look at even our guidance for the full year, which will help to kind of convey what we continue to expect at the midpoint of our revenue guidance, we have around $13 two 5% growth.
We're picking up around close to 5% from Ascension.
As well as.
Probably around a point and a half from M&A. So overall call it that mid point, excluding ascension and acquisitions, we'd be up around 7%. So we're tracking similarly, we expect roughly around 6% of it from volume 1% of it from price again now that it doesn't include.
The essentials. So historically, we would've said organic revenue or volume of call. It around 2% you pick up a point from a price mix of three.
Yeah, So where we see price right now continues to be pretty consistent with that and as Adam said the payer mix has helped our we continue to see a positive trend in our tests per recession, we continue to see a positive trend with our esoteric growing faster than routine.
We also picked up a little bit on the draw fee, but we continue to do have headwinds from unit pricing. So the fact that we continue to see price mix favorable was really the mix impact of our business more than offsetting any pricing headwinds.
Yes, no. That's helpful. And then maybe a quick one just on the drug discovery side, you know you mentioned it.
Write down one biotech contract can you just talk about any change in tone from those early biotech customers as the quarter progressed, obviously, you had a little bit of the banking fallout mid quarter.
Just wondering if you sense the change in tone or change in appetite for spend from from that customer base as the quarter progressed. Thank you guys.
Yeah, what I would say there is overall.
Is that a smaller part of our business, obviously than that mid to large size.
Pharma and biotech.
Some small companies are struggling a bit right now with cash and.
You hear that a little bit, but it hasn't really impacted the flow of rfps or the dollar amount of rfps at the moment, but that's something that we're watching very closely.
And obviously in the market environment that we're in it's harder for these very small startup companies, which represent a pretty small amount of our business frankly.
The only thing I'd add to us.
Which to your point, so the the large or the small but biotech customer that went bankrupt was around $5 million of the $12 million that we put in place. So we built up reserves just given the current environment.
To make sure that if were there any other issues that we would have that we feel that we're adequately reserved for it but as Adam said, a small part of the business.
We're just being hopefully prudent and establishing a reserve for the potential that some other smaller players could have some issues.
Okay. That's helpful. Thank you guys.
Thank you.
Please standby for our next question.
Our next question comes from the line of Derik de Bruin with Bank of America. Your line is open good morning.
Hey, good morning. Thank you for taking my question, Hey, I just wanted to follow up on Patrick's question. There you talked about 6% volume, 1% price. This year historically, 2%, 1% how do we think about that going forward or does it revert back to historical levels.
Is the 6% volume.
Is that just sort of easier comps just sort of like some color on how to think about it going forward.
So Derek.
I guess in February of this year, we kind of gave our longer term outlook of what we felt.
For diagnostics that we'd see kind of a 2.5% to 4.5% so little bit better than what we've done historically again in that 3% ish range. So to your point. The fact that we had such a strong quarter in the first quarter to some extent, we had a soft quarter of a year ago because of overrun. So we would expect volumes to be higher but frankly one of the.
Reasons, we talked about what our full year guidance is is that we're tracking really well and we continue to see that favorable kind of 6% ish.
Number throughout this year as a base volume, but I think at this stage when you look at the call it the cage or to 2019 to say how are we tracking.
We're doing around a 7% CAGR in diagnostics revenue compared to 2019.
That's at the call it the midpoint of our guidance essentially.
Ascension this year is going to benefit us around a couple of points and we always have around a point for acquisition. So from a revenue standpoint. This.
This year compared to pre pandemic, we're growing at around 4% So again.
Call it the middle to upper end of our targeted range. So again part of the issues on a year on year comparison is that last year in diagnostics given all the issues with Covid was softer than we expect so now as we're coming through the recovery, we would expect a stronger growth rate, which is what we're experiencing and the only thing I would add to that is.
With the health systems that we're winning and the pipeline that we have I do believe that there's spillover that occurs in the surrounding geographies when your windows health systems, it's very hard to quantify.
But I believe that it helps with our underlying demand.
Great that's really helpful and just as one quick follow up.
Have you seen any business shifts in the <unk> given that you've got some NH piece of clients in the back half of the year on your main competitors.
The question Mark have you seen any sort of like contracts, maybe no body business moving over.
At this point, we have not but we're in a lot of discussions.
Thank you very much.
Yeah.
Thank you.
Please standby for our next question.
Our next question comes from the line of Tim Daly with Wells Fargo. Your line is open good morning.
Tim.
Hi, Thank you.
Just quickly on <unk> question there.
Supply in Hp's potential share gains.
Are you guys seeing any customers pushing back I know that supplier was probably I think it was domestically bread and probably at elevated levels.
Pricing is still an issue or if we have a sits where are we in a situation where you know by being available.
Overcoming.
Any price headwinds or price concerns on the customer angle.
The customers wanted to get their study is gone.
And they understand the pricing issues that we're all facing.
So they continue to fill the pipeline with studies that they want a complete even though there are pricing issues that we're all facing.
Alright, I appreciate that and then just the obligatory saw quick question here.
The noise in Washington, not really looking to call them down anytime soon how can you give us an update of Panama salsa.
And our progress there that'd be great yeah. So.
So I was very happy about the one year Pampa Repreve.
I wish we would've had legislation passed at the end of last year software certainly has bipartisan support and I'm glad it continues to have bi partisan support so everybody I talk to anybody that you are.
Yeah.
Give them the understanding of SASSA I havent read into anybody that doesn't understand the issues and isn't supportive. So I feel like we still have a good chance to get also approved I know our trade group Acoa is working very hard to make sure that we continue to have our voice heard and although I.
Continue to put it in our base case that will impact us next year.
I continue to be cautiously optimistic that we'll find a way to get some type of legislation approved as we go through this year, but I agree with you it's not easy in the current environment.
Alright, Thank you yep. Thank you.
Thank you please standby for our next question.
Our next question comes from the line of Eric Coldwell with Baird. Your line is open.
Thank you and good morning.
I want to hit first on the.
Small biotech bad debt write down.
I have to say you know however.
Many decades of watching this space, it's pretty rare to see a small client.
Get talked about as a $10 million plus write down I'm just.
Curious.
How did the receivables expanded that level in this case and what kind of.
Yes, no. This is I think we commented on I believe on the last question or two that.
The $12 million that we took was both a write down of a receivable from a customer that went bankrupt as well as the buildup of reserves. So the $5 million exposure. We did have two a small biotech customer.
Obviously had gone.
For a while before they obviously went bankrupt and so that was the write off the other 7 million again, which is unusual to your point, we normally don't speak about bad debt with regard to our drug development business, but in the current environment. We felt it was appropriate to build up an additional reserve just given what's going on rather than just do it once and then if something occurs.
Later, we do it again, so we feel we're adequately reserved in the current environment, but again, which is unusual but that's the extent of the 12 as a total in the five is unique to that one customer.
Rick I think.
And Eric I don't think this is a new trend or something that I think this was a very specific.
The thing that happened here.
Sorry, I missed the follow up on that I was juggling a couple of calls here.
So.
I had a couple of quick follow ups, hopefully first on Covid Pcr.
You mentioned the adjusted margin around 50% in Q1, I believe and again signaled it would be lowered the rest of the year can you give us a sense on directionally, where youre thinking this COVID-19 margin plays out in <unk>.
LCD and is there any phasing we should be aware of <unk> may be better than <unk> given.
Mid quarter timing on Phe et cetera, I'm, just curious if you could give us a bigger ballpark of what you think a sustainable COVID-19 operating margin might be particularly.
Particularly in the back half of the year when everything's, perhaps more normal on the reimbursement front.
Yeah. So overall, we've talked about the CMS reimbursement at around $100.
Obviously, our average is probably in the low to mid eighties overall, but we've talked about that post public health emergency that we expect that the CMS reimbursement rate will call. It drop in half. So ultimately that's where we're coming down on pricing and then the volumes. We spoke till we get around 10000 PCR tests per day in the <unk>.
<unk> really we're currently at a rate that is closer to 5000, and that's really our expectation going forward. So you're looking at relatively low volumes of kind of half of the pricing.
It's going to come off of the 50% that's benefiting from full pricing and stronger volume.
But we do believe that the overall margin if you look at the base business is in the high teens.
We currently expect that the call it the Covid margins will at least start with the two so it'll be greater than <unk>.
The margins that we have for the overall segment, but again at lower volumes.
Okay.
That's that's helpful. And then last one for me I know, it's been hit on a few times, but could you be more specific on clinical developments net book to Bill in Q1 just.
What's it above one was it significantly below the overall average just trying to get a sense on what kind of a whole it might be digging out of it.
Progress towards the spin.
Yes, so when we provided the book to Bill you, we normally focus on AR on the trailing 12, which as Adam said was a 107, we do in our supplemental information provides a quarterly Smith, which was at a 1.18. So overall the orders or the book to Bill continues to be what we feel healthy overall again, focusing more on the trailing <unk>.
We did comment on the Adam's remarks that we didn't have the benefit of an FSP renewal contract.
<unk> of the quarter, so which again periodically.
It comes out but overall.
Backlog looks good the conversion is a little bit lower but we also spoke to that in the first quarter. We saw orders come in softer than what we expected and to your point it is.
Really all driven on our clinical business, which again in part is the issue with spending all this time on the spin.
Adam commented that some of the customers are waiting before giving us orders until after the spin is up and running independent and very focused.
Forward, but.
The overall book.
To build consistent we always try to shoot for at one point too to be able to support mid to high single digit growth rates and currently even for the quarter were at a 118, but again benefiting with a renewal of an FSP, yeah, and the only thing I would add Eric is that.
The customers I've spoken to are pleased with the work we're doing we're actually excited about the increased focus that will occur after the spin it's temporary they're just saying you've said dissipated as mid year get that got it and then come back. So I think there's a short term issue that we're facing I don't get any sense. If there's any I think other than a short.
Term issue in fact, the customers are excited about overall spend.
Okay. Thank you very much.
Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Brian <unk> with Morgan Stanley . Your line is open.
Good morning.
On the M&A pipeline in core diagnostics, how's that shaping up relative to your maybe what you were seeing a year ago or how would you characterize the M&A pipeline now.
Yeah. Thank you Eric for the question I mean, the pipeline is robust I would say, it's better today than it was a year ago, I mean, theres not too many deals the size of ascension, but when you look at the number of deals and the number of health systems that we're talking to are very pleased with where we are we will have more to announce.
We move forward this year, so stay tuned, but it's a very robust pipeline of health systems and local laboratories that we're looking at.
Okay, Great and a quick one on the CRM side can you describe a little bit more of the nature of the <unk>.
You mentioned, the new business win in large pharma on the Aero side of the business with the FSP contractor or was it something else or anything that.
But you can describe on that front in terms of the nature of that.
Yeah. It was it was a renewal of a large pharma FSP and the reason I think it's important to us because you know as we're going through the spin and I mentioned that some customers are excited about the spin, but they've said, let's wait until after the fed will talk about more business. This large pharma company said no. We're so please.
With the work that you've done that we wanted to renew that FSP now. So it just gives you a sense that we are continuing to have good momentum as we go into expanded through the spin. Despite some short term pressures there.
Okay got it thank you.
Take care.
Thank you.
I'm showing no further questions in the queue I would now like to turn the call back over to Adam for closing remarks.
Well. Thank you for joining us today, we're continuing to drive performance across our businesses, while we're making great progress towards completing the planned mid year spend of clinical development.
Look forward to updating you further at our upcoming Fortunately a investor day in June and I cant wait to provide you with additional information about labcorp and a bright future I believe we have in September talk to you soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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