Q3 2023 Laboratory Corporation of America Holdings Earnings Call

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Thank you for standing by and welcome to the Laboratory Corporation of America Holdings third quarter 2023 earnings 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 this session you will need to press star one on your telephone to remove.

Yourself from the queue simply press star one again.

Reminder, today's program is being recorded and now I'd like to introduce your host for today's program Christian O'donnell, Vice President of Investor Relations. Please go ahead.

Thank you operator, good morning, and welcome to a lot of course third quarter 2023 conference call as detailed in today's press release, there will be a replay of this conference call available via telephone and Internet with me today are 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 lock or 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 impact of various factors on the company's businesses operating and financial results cash flows or 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 is subject to change based upon various factors many of which are beyond our control more information.

Included in our most recent annual report on Form 10-K, and subsequent quarterly reports on Form 10-Q and in the company's 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 Schechter. Thank.

Thank you, Chris and good morning, everyone today I'll cover our third quarter performance.

Strategy, which we reviewed at our recent Investor day.

In the third quarter laptop delivered strong year over year growth across the enterprise with acceleration in our diagnostic laboratories and Biopharma Laboratory service businesses are.

Our growth is fueled by our ability to execute well and to deliver greater value for our customers through our leadership in science innovation and technology.

We see strength in our businesses.

We have enhanced financial flexibility and a clear strategic focus.

All of which enable us to end the year with significant momentum.

We'll continue to drive growth by expanding our base business.

Finalizing and integrating our hospital and health system, and our local and regional laboratory transactions and by advancing our leadership in high growth strategic areas, including specialty testing.

Moving to our third quarter results.

Third quarter revenue totaled $3 1 billion.

Adjusted earnings per share was $3 38.

And free cash flow from continuing operations, excluding spin related items was $227 million.

Enterprise revenue increased 7% compared to the prior year diagnostics.

Diagnostics laboratory based business revenue continued exceptional year over year growth with a 16% increase driven by organic growth and progress in our hospital and health system strategy, including Ascension.

Biopharma Laboratory services had a strong growth in the third quarter of 8%.

Enterprise base business margin was down 50 basis points compared to the prior year, primarily due to the mix impact of Ascension we.

Turning to expect full year base business margins to be flat to slightly up versus prior year, implying an increase in fourth quarter margins year over year.

Glenn will provide more detail on our quarterly results as well as a 2020 outlook in just a moment.

Turning now to our enterprise strategy in the third quarter, we have significant momentum in our health system and local and regional laboratory partnership strategy.

I believe the momentum is due to our leadership in science and technology, and our dedication to patients and in our commitment to quality and efficiency.

With the most recent partnership announcement.

We strengthened our presence and scale in the northeast and West Coast.

In the northeast, we advanced three partnerships during the quarter.

In July we finalized our strategic relationship with Jefferson Health, one of the largest most prominent health systems, serving the greater Philadelphia area in Southern New Jersey.

In August reports, a strategic partnership with tough medicine.

Leading health system in Massachusetts pay.

Patients and providers of pest medicine, now have improved access to standardized laboratory testing throughout the cost medicines Cisco.

We recently finalized our initial agreement with tough medicine, and we reached agreement to expand the relationship to manage cost medicine inpatient Hospital laboratories later this year.

And earlier this month, we announced a strategic relationship with Bay State Health, and which we would acquire its outreach laboratory business and select operating assets, including laboratory service centers operated throughout Western Massachusetts.

On the northwest, we announced a comprehensive lab relationship with legacy health important where we are.

The acquired assets of its outreach laboratory business and manage its inpatient hospital laboratories.

We also finalized our acquisition of Providence, Oregon's outreach laboratory business in September.

The depth and the breadth of opportunity and the quality of our pipeline is robust.

We are optimistic about continued expansion there.

These partnerships meet our financial criteria, including being accretive in the first year and returned their cost of capital within three years while.

While the first year margins are typically lower than <unk> historical margin levels.

As a clear path to improvement.

Turning now to our advancements in innovation and technology.

In late September laptop became the first company to broadly offer an ATM profile a blood based test that combines three well researched blood biomarkers to identify and to SaaS biological changes associated with Alzheimers disease.

Amyloid plaques jalapeno and neuro degeneration.

Targeted for patients who are being evaluated for mild dementia.

This new test builds on laptops leadership in neuro degenerative testing options.

This is an easily accessible and interpretable blood test to assess the biology is associated with Alzheimers disease and other neurodegenerative conditions.

Turning to women's health, we announced the new consumer operating <unk> in the quarter.

Therefore on demand manifest that aims to help women understand symptoms in a matter of factors related to menopause. So they can have more informed conversations with their provider.

Finally, our Biopharma Laboratory services team opened two new international facilities in China.

Chip production facility, and then immunology and immuno toxicology laboratory.

Before I turn the call over to Glenn as we discussed at Investor Day, We are excited about the future of Labcorp and our strong financial outlook.

On a CAGR basis through 2026, we expect overall enterprise revenue growth of 5% to 8%, including one 5% to two 5% from acquisitions.

For diagnostic laboratories, we expect organic growth of two and a half to four 5%.

We expect Biopharma laboratory services to grow organically between four and five to seven 5%.

We are focusing on two significant drivers of near term growth and differentiation as we move towards those target ranges.

The first is to be the partner of choice for health systems, and local or regional laboratories.

And the second is to develop the license and ultimately to scale specialty testing, including companion diagnostics.

I mentioned the momentum that we have in our health system strategy earlier, we've announced five new agreements this year.

Additionally, especially testing we're focused on four primary areas oncology women's health autoimmune disease, and neurology, which we anticipate will outpace the growth of other therapeutic areas.

The development of specialty test and companion diagnostics makes us attractive partners to health systems, and Biopharma as they continue to develop more therapies and higher specialty areas.

Our scale and our geographic presence will be differentiators for both growth initiatives.

We're also well positioned for long term success in cell and gene therapy, expanding into the consumer market and international growth through our innovative specialty testing and Biopharma business.

All of this will culminate the topline performance that we expect will exceed $14 billion by the end of 2026.

To close our team of over 60000 global employees is executing your outlooks global strategy at scale and then an exceptional pace.

We closed as we close 2023, we will continue to capitalize on the momentum that we've created and drive further value creation for our shareholders.

This year has been transformational for Labcorp, we are focused on our growth strategy and we plan to finish strong as we pursue our mission to improve health and to improve lives.

With that I will turn the call over to Glenn.

Thank you Adam I'm going to start my comments with a review of our third quarter results followed by a discussion of our performance in each segment and 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 1 billion, an increase of six 6% compared to last year, primarily due to organic base business growth and the impact from acquisitions, partially offset by lower Covid testing.

The base business grew 14% compared to the base business last year, while Covid testing revenue was down 87%.

Organically in constant currency in the base business grew 10, 8% 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.

Essentially annualized on September 30.

Operating income for the quarter was $252 million or eight 3% of revenue.

During the quarter, we had $56 million of amortization and $116 million of restructuring charges and special items due to the spin unfortunate COVID-19 acquisitions and launchpad initiatives.

Excluding these items adjusted operating income in the quarter was $424 million or 13, 9% of revenue compared to $491 million or 17, 1% last year.

The decrease in adjusted operating income was due to lower Covid testing.

The margin decline was also negatively affected by the mix impact from the Ascension why management agreement.

Excluding these items margins would have been flat as the benefit of demand and launchpad savings were offset by higher personnel expense.

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, 1%.

The adjusted tax rate for the quarter was 24% compared to 19, 4% last year.

The increase in the adjusted rate was primarily due to higher R&D tax credits realized last year, we continue to expect the fourth quarter and full year adjusted tax rate to be approximately 24%.

Net earnings for the quarter from continuing operations were $184 million or $2 11 per diluted share <unk>.

Adjusted EPS were $3 38 in the quarter down 16% from last year due to lower Covid testing earnings as base business adjusted EPS was up approximately 10%.

Operating cash flow from continuing operations was $276 million in the quarter, which was burdened by approximately $56 million of spin related items.

Operating cash flow of $276 million is up from $253 million a year ago due to higher cash earnings.

Capital expenditures totaled $105 million up from $83 million last year.

For the full year, we continue to expect that capital expenditures will be approximately three 5% of base business revenue.

Free cash flow from continuing operations for the quarter was $171 million.

Which was burdened by approximately $56 million of spin related items.

The company invested $380 million in acquisitions paid out $64 million in dividends and used $1 billion for an accelerated share repurchase program that we expect will be completed by year end.

At quarter end, we had around $725 million in cash while debt was $5 4 billion.

Our leverage was two seven times gross debt to trailing 12 months adjusted EBITDA.

Okay.

Now I'll review, our segment performance beginning with diagnostics laboratories.

Revenue for the quarter was $2 3 billion, an increase of six 2% compared to last year, driven primarily by organic growth of three 4% and acquisitions of 3%.

The base business grew organically by 12, 8% compared to the base business last year, while Covid testing revenue was down 87% the.

The Ascension Lab management agreement contributed approximately 6% of the growth.

Total volume increased two 3% compared to last year as acquisitions volume grew three 4%, primarily offset by organic volume of minus one 1% due to COVID-19 testing.

Base business volume grew seven 2% compared to the base business last year as organic increased three 6% for volume while acquisitions also contributed three 6%.

Price mix increased three 9% versus last year, primarily due to an organic base business increase partially offset by lower COVID-19 testing.

Base business organic price mix was up nine 2% compared to base business last year benefiting from the Ascension Lab management agreement of approximately 6%.

Diagnostics laboratories, adjusted operating income for the quarter was $386 million or 16, 5% of revenue compared to $440 million or 19, 9% last year the.

The decrease in adjusted operating income was due to a reduction in COVID-19 testing while the margin was also affected by the mix impact from Ascension.

Base business margin, excluding the mix impact of Ascension was up approximately 30 basis points as the benefit of organic growth and launchpad savings were partially offset by higher personnel expense.

Now I'll review our segment performance, our Biopharma Laboratory services.

Revenue for the quarter was $719 million, an increase of seven 9% compared to last year, primarily due to an increase in organic revenue of four 9% and foreign currency of three 3%.

The seven 9% revenue growth was driven by continued strength in central labs, which was up 9% while early development was up five 7%.

While early development is no longer constrained by an HP availability it has experienced higher than normal cancellations and lower orders, primarily due to small biotech funding.

Yes.

Biopharma Laboratory services adjusted operating income for the quarter was $109 million or 15, 2% of revenue compared to $105 million or 15, 8% last year.

The decrease in adjusted operating margin was due to stranded costs as a result of the spin or for Korea, which is timing related.

Excluding stranded cost margins were up in the third quarter as the benefit of topline growth and launchpad savings were partially offset by higher personnel costs.

We expect margins in the fourth quarter to be up sequentially and year over year.

We ended the quarter with a backlog of $7 $8 billion and we expect approximately $2 4 billion of this backlog to convert into revenue over the next 12 months trailing.

Trailing 12 months book to Bill was 112.

Now I'll discuss our 2023 full year guidance, which assumes foreign exchange rates effective as of September 32023 for the remainder of the year.

The enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted for acquisitions share repurchases and dividends in.

In addition, the guidance includes the impact from the $1 billion accelerated share repurchase program, which was funded with proceeds from the spin.

Operator: Thank you for standing by and welcome to the laboratory Corporation of America Holdings 3rd quarter, 2023 earnings conference call. At this time, all participants are not listening only mode. After this because presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. To remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded.

With regard to our 2023 full year guidance, we have narrowed the ranges, but have maintained the same midpoint from our prior guidance for enterprise revenue earnings and cash flow.

We expect enterprise revenue to grow $1 90 to two 7% compared to 2022.

This increase reflects the base business growing 11, 5% to 12, 2%, while COVID-19 testing is expected to decline 85% to 86%.

Operator: And now I'd like to introduce your host for today's program.

Kristen O'Donnell: Kristen O'Donnell, Vice President and Vice Relations. Please go ahead. Thank you operator.

Kristen O'Donnell: Good morning and welcome the lab course 3rd quarter, 2023 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and internet. With me today, our 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.commentary.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-gap financial measures to the gap financial measures discussed during today's call.

We expect diagnostics laboratories revenue to be up one 5% to 2% compared to 2022.

This guidance includes the expectation that the base business will grow a 14, 1% to 14, 6%.

Which includes approximately 5% growth from Ascension.

The base business has improved from our prior guidance as acquisition related revenue that was forecasted at the enterprise level is now reflected in the segment as we've closed those transactions.

We continue to expect diagnostics laboratory space business margin to be up slightly in 2023 versus 2022, including the unfavorable mix impact from ascension.

Kristen O'Donnell: 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 the related assumptions, the impact of various factors on the company's businesses. Operating and financial results, cash flows and or financial condition, including the COVID-19 pandemic and general economic and market conditions, future business strategies, expected savings and synergies, including from the launch pad initiatives, acquisitions and other transactions, and opportunities for future growth.

We expect Biopharma laboratory services revenue to grow three 1% to 4% compared to 2022.

Excluding the change in currency translation of negative 20 basis points, the midpoint of the guidance range remains unchanged from our prior guidance.

We expect the revenue growth rate to continue to improve in the fourth quarter.

In addition, we expect margins for the full year to be flat to slightly up while the fourth quarter is expected to see both sequential and year over year improvement.

Our guidance range for adjusted EPS is $13 25 to $13 75.

Kristen O'Donnell: Each of the forward-looking statements is 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 10K and subsequent quarterly reports on form 10Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements, even if our expectations change.

Unchanged at the midpoint from our prior guidance.

Free cash flow from continuing operations, excluding spin related items is expected to be between $850 to $950 million.

Also unchanged from our prior guidance at the midpoint.

In summary, we expect to drive continued profitable growth in our base business. 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.

Adam Schechter: Now I'll turn the call over to Adam Schechter. Thank you, Kristen. Good morning, everyone.

Adam Schechter: Today, I'll cover our third-quarter performance and of the trust strategy, which we reviewed at our recent investor debt. In the third-quarter lab program delivered strong year-over-year growth across the enterprise, with acceleration in our diagnostic laboratories and biopharma laboratory service businesses. Our growth is fueled by our ability to execute well and to deliver greater value for our customers through our leadership in science, innovation and technology. We see strength in our businesses. We have enhanced financial flexibility and a clear strategic focus, all of which enable us to end the year with significant momentum.

Operator, we will now take questions Sir.

Certainly and as a reminder, ladies and gentlemen, if you have a question at this time. Please press star one on your telephone one moment for our first question.

And our first question comes from the line of Kevin Caliendo from UBS. Your question. Please.

Sure I guess I wanted to go into the into the book to Bill in the sequential commentary about Biopharma and cancellations.

When did you start to see that.

How meaningful is it is it across multiple.

Adam Schechter: LabCorp will continue to drive growth by expanding our base business, finalizing and integrating our hospital and health system and our local and regional laboratory transactions, and by advancing our leadership in high-growth strategic areas, including specialty testing.

Customers any more color around what's happening with that.

With the orders in the Biopharma bid.

Business cancellations as much color as you can provide would be super helpful.

Sure. Good morning, Kevin Yes, when you look at the third quarter book to Bill It was a bit light versus the.

Adam Schechter: Moving to our third-quarter results. In the third-quarter revenue total $3.1 billion, adjusted earnings per share with $3.38 and free cash flow from continuing operations, excluding spend-related items, was $227 million. Enterprise Revenue increased 7% compared to the prior year. Diagnostic Laboratory's base business revenue continued exceptional year-over-year growth with a 16% increase driven by organic growth and progress in our hospital and health system strategy, including ascension. Fileformer Laboratory Services had a strong growth in the third quarter of 8%.

The prior quarter and it was mostly due to small and emerging biotech and it was mostly due to those customers in our early development research laboratories large pharma medium sized biotech, which is the majority of our customers and our central laboratories, which is the largest part of our Biopharma segment remained strong.

Yes.

And as I look at fourth quarter I expect the book to Bill in the fourth quarter to be better than it was in the third quarter.

If you look at the trailing 12 months it was $1 one two and three.

To me Thats still remains pretty healthy if you remember last quarter I mentioned that with clinical development business now being a separate company you would expect the book to bill to be lower in particular, because in early development. Most of those trials are very short term it could be one month three months, they usually start and end in the <unk>.

Adam Schechter: Enterprise base business margin was down 50 basis points compared to the prior year, primarily due to the mixed impact of ascension. We continued to expect full-year base business margins to be flat to slightly out versus prior year, implying an increase in fourth-footer margins year-over-year.

Same year that you have them. So that's why I feel confident that we'll continue to see progress I feel that the largest part of our business Central laboratories remains very strong and Rfps book to Bill and we just have to continue to try to find a way to change our mix a bit in early development I'd like to move early development to work more.

Adam Schechter: Glenn will provide more detail on our quarterly results as well as our 2023 outlook in just a moment. Turning now to our Enterprise Strategy in the third quarter, we have significant momentum in our health system and local and regional laboratory partnership strategy. I believe the momentum is due to our leadership and science and technology in our dedication to patience and in our commitment to quality and efficiency. With the most recent partnership announcement, we strengthened our presence and scale in the Northeast and West Coast. In the Northeast, we advanced three partnerships during the quarter.

Or with the mid sized biotech maybe some of that farm.

Pharma companies versus having too much reliance on the smaller emerging biotech companies. If you look at the revenue I felt very good about the revenue in the bio pharma business with 8% revenue growth in this segment for the quarter and we accept expect to see continued strength in revenue growth.

And just the confidence that it gets better next quarter is that visibility is that just basically writing off some of the stuff that the cancellations are going to improve like what gives you that sense. Obviously, you can see more than we can and I am just wondering what that is that we can sort of rely on.

Adam Schechter: In July, we finalized a strategic relationship with Jefferson Health, one of the largest and most prominent health systems serving the Greater Philadelphia area in Southern New Jersey. In August, we forged a strategic partnership with Tufts Medicine, a leading health system in Massachusetts. Patients and providers of Tufts Medicine now have improved access to standardized laboratory testing throughout the Tufts Medicine system. We recently finalized our initial agreement with Tufts Medicine and we've reached agreement to expand the relationship to manage Tufts Medicine in patient hospital laboratories later this year.

Yeah. So again I'm just looking at the number of Rfps coming through our run rate and so forth and based upon what I see as I sit here today I expect us to have a better quarter in fourth quarter for book to Bill in the third quarter and sometimes book to Bill is timing related do you think you might get a trial in the third quarter. It ends up going through the court I've always said to be careful to look at any one quarter when it comes to <unk>.

Book to Bill and Thats why we also provide the trailing 12 months.

Yes.

Adam Schechter: And earlier this month, we announced the strategic relationship with Bay State Health in which we would acquire its outreach laboratory business and select operating assets, including laboratory service centers operated throughout Western Massachusetts. On the Northwest, we announced a comprehensive lab relationship with legacy health and Portland, where we will acquire select assets of its outreach laboratory business and manage its inpatient hospital laboratories. We also finalized our acquisition of provenance organs outreach laboratory business in September.

Fair enough. Thanks, Thanks, so much super helpful.

Sure.

Thank you one moment for our next question.

And our next question comes from the line of Lisa Gill from Jpmorgan. Your question. Please.

Thanks, very much good morning.

One of the other side of the business. Good morning, when I think about the diagnostics part of the business.

Strong core growth.

Two questions. One can you talk about where you are on managed care contracting and helping them and they'll slip from quarter to quarter going to have lower cost.

Adam Schechter: The depth and the breadth of opportunity and the quality of our pipeline is robust and we are optimistic about continued expansion. These partnerships meet our financial criteria, including being your creative in the first year and return your cost of capital within three years. While the first year margins are typically lower than last year's historical margin levels, there is a clear path to improvement.

Lab services like Labcorp versus.

Pietersen et cetera, and then secondly, as we think about routine testing.

An increase in metabolic testing, specifically like Z as we think about that.

DLP one great.

Sure.

First one you were very pleased with the performance of the diagnostic sector not just when you look at overall revenue, which includes ascension, but when you look at the base business volume. If you look at that the base business volume was up seven 2% and about three 6% was.

Adam Schechter: Turning now to our advancements in innovation and technology.

Adam Schechter: In late September, Laptop became the first company to broadly offer an ATM profile, a blood-based test that combines three well-researched blood biomarkers to identify and to assess biological changes associated with Alzheimer's disease. I'm a Lloyd Platt, Cal Pengels, and neurodegenerations, targeted for patients who are being evaluated from mild dementia. This new test builds on lab groups leadership in neurodegenerative testing options against physicians and easily accessible and interpretable blood tests to assess pathologies associated with Alzheimer's disease and other neurodegenerative conditions.

From acquisitions. So it just tells you that the organic.

Base business remains very strong our managed care contracting we're in very good position.

Theyre finalized are close to finalizing all of the contracts that were large and need to be renewed and I would say there'll be basically flat to slightly positive.

Which is a good place for us to be as we move into next year. So I feel very good about that.

Look at metabolic testing and we look at all the different types of routine testing and we havent, yet we see that growing but it's growing at consistent rates as it's grown before and we still see our esoteric testing growing a little bit faster, but almost about the same as our routine testing and if you look at like our meta.

Adam Schechter: Turning to women's health, we announced a new consumer offering for menopause in the quarter. Lab groups on-demand menopause tasks aims to help women understand symptoms and hormonal factors related to menopause so they can have more informed conversations with their providers.

Malik testing and so forth, we don't really see acceleration there and a lot of the metabolic testing is done in panels and it's done with other tests and so forth. So I wouldn't expect to see a significant change necessarily with the GOP ones moving forward with the growth is very broad based it's across.

Adam Schechter: Finally, our Biopharma Laboratory Services team opened two new international facilities in China, a new kit production facility, and an immunology and immunotoxicology laboratory.

Geographies, it's across routine and esoteric testing it's across all the different types of testing that we have so the underlying dynamics are very strong.

Adam Schechter: Before I turn a call over to Glenn, as we discussed that investor's day, we are excited about the future of lab work and our strong financial outlook. On a cable basis to 2026, we expect overall enterprise revenue growth of 5 to 8 percent, including 1.5 to 2.5 percent from acquisitions. For diagnostic laboratories, we expect organic growth of 2.5 to 4.5 percent. We expect biopharma laboratory services to grow organically between 4.5 to 7.5 percent.

Thanks, that's very helpful.

Sure.

One moment for our next question.

And our next question comes from the line of Patrick Donnelly from Citi. Your question. Please.

Hey, guys. Thanks for taking the questions.

Other than just good morning, just a follow up on the early development side interesting to hear kind of maybe shifting towards a little bit new newer or a customer base more towards the mid size does that I guess, what does that entail do you just have to cater the offering a little bit more towards that customer base and is there a little bit of disruption as that happened and maybe just talk.

Adam Schechter: We're focusing on two significant drivers of near-term growth and differentiation as we move towards those target ranges. The first is to be the partner of choice for health systems and local or regional laboratories. And the second is to develop a license and ultimately to scale specialty testing, including companion diagnostics. I mentioned the momentum that we have in our health system strategy earlier. We've announced five new agreements this year. Additionally, especially testing, we are focused on four primary areas, oncology, women's health, autoimmune disease, and neurology, which we anticipate will outpace the growth of other therapeutic areas.

Through how you think about moving the portfolio more towards that client base.

Yeah, absolutely one of the things Patrick we're trying to do is to focus more on the specialty testing and also.

Thinking about how to expand internationally on things like companion diagnostics. When you think about our mid to large pharma company as they develop more personalized medicine, they're going to want to have some take a diagnostic tool our companion diagnostic that they can use to develop to identify which patients are most apt to respond to the medicine, but also have it available.

Ultimately in the marketplace. So we're we're trying to go with the show pharma that they work with US early we can help them develop their diagnostic test we have very strong capabilities in companion diagnostics and developing specialty diagnostic tests, we can help them do their clinical trials through our central laboratories, and do all of the companion.

Adam Schechter: The development of specialty tests and companion diagnostics makes us attractive partners to health systems and biopharma as they continue to develop more therapies and higher specialty areas. Our scale and our geographic presence will be differentiators for both growth initiatives.

Gnostic testing and specialty testing and ultimately we want to be able to offer to them that we can launch that test not only in the United States, where we can help them bring those specialty and companion diagnostic test to other parts of the world I think it will be a very compelling discussion to have with pharma and we're having some of those discussions as we speak.

Adam Schechter: We're also well positioned for long-term success in challenging therapy, expanding into the consumer market, and international growth through our innovative specialty testing and biopharma business.

Understood. Thanks, and then maybe just on the margin piece. Obviously, you guys gave a pretty detailed guidance at the at the analyst day, maybe just near term if you could talk through the moving pieces it sounds like pricing relatively stable, but just the moving parts as we work our way into the end of the year and then 24.

Adam Schechter: All of this will culminate in top-line performance that we expect will exceed $14 billion by the end of 2026.

Adam Schechter: To close, our team of over 60,000 global employees is executing lab work's global strategy of scale and down an exceptional pace. We've closed, as we closed 2023, we will continue to capitalize on the momentum that we've created and drive further value creation for our shareholders.

I think high level about about the margin piece. Thank you, yes, hi level askmen to jump in as well I would say the largest impact to margins as I think about 2024 is Panama.

And we've built in about $80 million almost $80 million of downside into our base case, assuming that Pam comes next year, we're still trying to see working with our trade group, if there's a way to get.

Adam Schechter: This year has been transformational for last work. We are focused on our growth strategy and we plan to finish strong as we pursue our mission to improve health and to improve lives.

The saucer legislation approved we have bipartisan support, but we had that last year. So it's very hard to get things approved right. Now we're also going to see if theres a way to delay for another year the implementation, but for our base case, we're assuming that there is about an $80 million impact that would negatively impact the margins next year.

Glenn Eisenberg: With that, I'll turn the call over to Glenn. Thank you, Adam. I'm going to start my comments with a review of our third quarter results followed by a discussion of our performance in each segment and conclude with an update on our full year guidance.

Glenn Eisenberg: 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 with $3.1 billion, an increase of 6.6% compared to last year, primarily due to organic base business growth and the impact from acquisitions, partially offset by lower COVID testing. The base business grew 14% compared to the base business last year, while COVID testing revenue was down 87%. Organically in constant currency, the base business grew 10.8%, benefiting from the ascension lab management agreement, which contributed approximately 4% of the organic growth.

That's why we gave the long term guidance and we said, it's a 100 to 150 basis point increase over the time period. We said most of that will be after 2024, we'll get into 2024, we have to overcome.

Panama, let's wait and see if <unk> doesn't come or if it's delayed then we will have some upside there for sure.

Yes, Patrick.

Just I guess as you look to the two businesses, we feel good about where we are with the margins. They continue to improve on a base business level as we think about going into the fourth quarter. We commented that within the Biopharma side, we expect margins to be up in the fourth quarter and year on year, such that for the full year there'll be flat to slightly up.

Glenn Eisenberg: 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, ascension annualized on September 30. Operating income for the quarter was $252 million or 8.3% of revenue. During the quarter, we had $56 million of amortization and $116 million of restructuring for arduous and special items, due to the spin of Fortria, COVID, acquisitions and launch pad initiatives. Excluding these items, adjusted operating income in the quarter was $424 million or 13.9% of revenue compared to $491 million or 17.1% last year.

And diagnostics, obviously, we have seasonality that impacts margins fourth quarter sequentially margins will be down, but they will still be up year over year. So that we expect diagnostics margins for the full year to be up slightly even after absorbing the negative impact from the ascension mix.

As Adam commented in the hundreds.

Call. It 150 basis point margin improvement that we expect over the next three years. We commented that the first year margins would be relatively flat we have around a 70 basis point headwind. If you will between the combination of lower COVID-19 testing as well as the Panama headwind that Adam commented, but that's reflected still.

And the three year expectation that margins would grow that 100 to 150 basis points.

Glenn Eisenberg: The decrease in adjusted operating income was due to lower COVID testing. The margin decline was also negatively affected by the mix impact from the ascension lab management agreement. Excluding these items, margins would have been flat as the benefit of demand and launch pad savings were offset by higher personnel expense. Our launch pad 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 23.1%, the adjusted tax rate for the quarter was 24%, compared to 19.4% last year.

Understood. Thanks, guys.

Yes.

Thank you one moment for our next question.

And our next question comes from the line of Jack Meehan from from Research. Your question. Please.

Jack.

Good morning.

I wanted to stick with the macro environment on the diagnostic lab side.

Adam are you seeing any recessionary signals at all in terms of the testing getting ordered and then maybe on the flip side.

Glenn Eisenberg: The increase in the adjusted rate was primarily due to higher R&D tax credits realized last year. We continue to expect the fourth quarter and full-year adjusted tax rate to be approximately 24%. The earnings for the quarter from continuing operations were $184 million or $2.11 per deluded share. Adjusted EPS were $3.38 in the quarter, danced 16% from last year due to lower COVID testing earnings, as based business adjusted EPS was up approximately 10%.

Hearing any change in the tenor of your hospital conversations around consolidation opportunities.

Yes, Jack so when you look at the macro dynamics I would say for testing it remains strong and when you look at the volume.

We're seeing it remains very strong as well and it's broad based across the country in esoteric and routine testing.

If you go back to historical recessionary periods, the diagnostic business tends to continue to do well through this period, so I feel.

Confident that we're going to continue to be strength see strength there when it comes to hospitals I've.

Glenn Eisenberg: Operating cash flow from continuing operations was $276 million in the quarter, which was burdened by approximately $56 million of spin-related items. Operating cash flow of $276 million is up from $253 million a year ago due to higher cash earnings. Capital expenditures totaled $105 million up from $83 million last year. For the full year, we continue to expect that capital expenditures will be approximately 3.5% of base business revenue. Free cash flow from continuing operations for the quarter was $171 million, which was burdened by approximately $56 million of spin related items.

I've talked about how the hospital health system, but also local and regional laboratory acquisition possibilities remain extraordinarily strong I think its because they are struggling in the economic environment with reimbursement with wages and other things and Theyre looking for ways that they can get some capital, but also look for people that are like.

Experts in hiring the types of jobs that we hire for managing the type of people that we manage so I think the macro environment for the health systems and for these local smaller regional laboratories is very strong for us to continue to find ways to do.

Glenn Eisenberg: The company invested $380 million in acquisitions, paid out $64 million in dividends, and used $1 billion for an accelerated share repurchase program that we expect will be completed by year end. At quarter end, we had around $725 million in cash, while debt was $5.4 billion. Our leverage was 2.7 times gross debt to trailing 12 months suggested EBITDA.

New business development and find additional partnerships. So it's actually a good environment for us to compete but obviously, we want our hospital systems to remain solvent.

A lot of things that they have to do to continue to be successful.

Great and Glenn at the Analyst day for 2024, you laid out some initial thinking it will be slightly below the $8, 5% to 11% EPS CAGR range.

Im just curious if anything.

In terms of the orders on the Biopharma lab side or just anything else changes the way youre thinking about that thanks.

Glenn Eisenberg: Now review our segment for Paulments, beginning with diagnostics laboratories. Revenue for the quarter was $2.3 billion, the increase of 6.2% compared to last year, driven primarily by organic growth of 3.4% and acquisitions of 3%. The base business grew organically by 12.8% compared to the base business last year, while COVID testing revenue was down 87%. The ascension lab management agreement contributed approximately 6% of the growth. Total volume increased 2.3% compared to last year, as acquisitions volume grew 3.4%, primarily offset by organic volume of minus 1.1% due to COVID testing.

Yes, no Jack again, when we basically reaffirmed kind of our outlook for this year as well as our three year. When we were at the analyst day. We knew there were some softness we had experience with an early development earlier, so that continues but as Adam said kind of offset by the strength that we're seeing with on the central lab side So for Biopharma.

And for diagnostics segments.

We feel very good. So if you look at call. It that eight five to 11, 5% EPS target over the next three years. The caterer, we still feel very good about that realizing that for 2024, because again of the headwinds from less COVID-19 testing in Panama.

Have around 800 basis point headwind to EPS in 2024, so still positive EPS growth year on year, even with those headwinds, but lower than if you will the range that we had but again that the three year range includes that expectation for 2024.

Glenn Eisenberg: Base business volume grew 7.2% compared to the base business last year, as organic increased 3.6% for volume, while acquisitions also contributed 3.6%. Price mix increased 3.9% versus last year, primarily due to an organic base business increase, partially offset by lower COVID testing. Base business organic price mix was up 9.2% compared to base business last year, benefiting from the ascension lab management agreement of approximately 6%. Diagnostics laboratories adjusted operating income for the quarter was $386 million, or 16.5% of revenue compared to $440 million or 19.9% last year. The decrease in adjusted operating income was due to reduction in COVID-19 testing, while the margin was also affected by the mix impact from ascension.

Okay.

Thank you one moment for our next question.

And our next question comes from the line of Eric Coldwell from Baird. Your question. Please.

Morning, Eric.

Thank you I have I have two the first one maybe a bit confusing so bear with me.

Your largest competitor in early development, given some interesting color around their cancellations.

<unk> talked about how a majority of those cancellations they've experienced ware.

Glenn Eisenberg: Base business margin excluding the mix impact of ascension was up approximately 30 basis points, as the benefit of organic growth and launch pad savings were partially offset by higher personal expense.

Predicated on awards that were made a year ago two years ago stuff that was clients pre booking stuff when they were concerned about capacity and access in the future.

You are talking more about small clients and it sounds like maybe this is more recent stuff, but I'm curious if you could talk at all about the aging of the cancellations I E. How long ago, where these awards made and is this something more in the moment or perhaps just clean up from past client activity that was abnormal and then.

Glenn Eisenberg: Now review our segment performance of biopharmal laboratory services. Revenue for the quarter was $719 million, an increase of 7.9% compared to last year, primarily due to an increase in organic revenue of 4.9% and foreign currency of 3.3%. The 7.9% revenue growth was driven by continued strength in central labs, which was up 9%, while early development was up 5.7%.

Yes, I think thanks for that clarification, we're seeing a similar thing that primarily with NXP trials that where when there were supply issues people started to get in line much earlier than they typically would to ensure that they could run near trials.

Glenn Eisenberg: While early development is no longer constrained by NHP availability, it has experienced higher than normal cancellations and lower orders, primarily due to small biotech funding. Biopharm laboratory services adjusted operating income for the quarter, was $109 million or 15.2% of revenue compared to $105 million or 15.8% last year. The decrease in adjusted operating margin was due to stranded costs as a result of the spin of Fortria, which is timing related. Excluding stranded costs, margins were up in the third quarter, as the benefit of top-line growth and launch pad savings were partially offset by higher personnel costs.

As fast as they could now that we have supply and so forth as those clients studies are ready to go they're not necessarily ready to go or they're thinking about their pipeline and other priorities and so forth because they book the spot so far ago. So that's the primary reason that we believe we are seeing these cancellations in early development.

And then could you talk at all about gross awards in early development was that book to bill above one or below one this quarter.

So if you look overall, if you just looked at the quarter. It would have been below one.

Glenn Eisenberg: We expect margins in the fourth quarter to be up sequentially and year-over-year. We ended the quarter with a backlog of $7.8 billion and we expect approximately $2.4 billion of this backlog to convert into revenue over the next 12 months.

But as and again with early development.

I don't think book to Bill is really a good way to look at that business because when it comes to a development. There one month trial three months trials will be six month trial. So you can burn through those in the same year very quickly I look at the book to Bill.

Glenn Eisenberg: Trailing 12 months booked a bill was $1.12.

Glenn Eisenberg: Now I'll discuss our 2023 Fullyer Guidance, which assumes foreign exchange rates effective as of September 30, 2023 for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases, and dividends. In addition, the guidance includes the impact from the $1 billion accelerated share repurchase program, which was funded with proceeds from the spin. With regard to our 2023 Fullyer Guidance, we've narrowed the ranges but have maintained the same midpoint from our prior guidance for enterprise revenue, earnings, and cash flow.

Because I think it's a historical way to look at the business, but <unk> is very small compared to the central laboratory, but a vast majority of our central laboratory work remains very strong. So that's why I feel confident as I look at the numbers for the future because of the size of our Central laboratory the mix of customers in Central laboratory is more to it.

Pharma and big biotech and the book to Bill there remains pretty good. Okay. Thank you for that Adam and I was just hoping you could talk a bit about the fda's LDP proposal here and maybe help us with some quantification of what your <unk> mix looks like by revenue or volume or any color.

Glenn Eisenberg: We expect enterprise revenue to grow 1.9 to 2.7 percent compared to 2022. This increase reflects the base business growing 11.5 to 12.2 percent, while COVID testing is expected to decline 85 to 86 percent. We expect diagnostics laboratories revenue to be up 1.5 to 2 percent compared to 2022. This guidance includes the expectation that the base business will grow 14.1 to 14.6 percent, which includes approximately 5 percent growth from ascension. The base business has improved from our prior guidance as the acquisition related revenue that was forecasted at the enterprise level, is now reflected in this segment as we've closed those transactions.

Commentary on what you see progressing with the.

Proposed rule at the FDA. Thank you.

Yes, absolutely Eric So we were supportive of legislation called valid last year that would have given FDA oversight for laboratory developed tests and it was unfortunate that it didn't get passed last year had bipartisan support we were supportive.

Disappointing that that legislation is going to go through so we're supportive of working.

With the FDA to find ways for them to give appropriate oversight, we think that our science and our innovation our technology capabilities actually differentiate us and if you look at the rigor that we go through with our laboratory developed test. We think we do the vast majority of what they would be asking for anyway.

Glenn Eisenberg: We continue to expect diagnostics laboratories base business margin to be up slightly in 2023 versus 2022, including the unfavorable mix impact from ascension. We expect biopharma laboratory services revenue to grow 3.1 to 4 percent compared to 2022. Excluding the change in currency translation of negative 20 basis points, the midpoint of the guidance range remains unchanged from our prior guidance. We expect the revenue growth rate to continue to improve in the fourth quarter.

Working with Acoa, our trade organization, but we're worried about is if you take legislation that had an intended purpose for one thing and then you've tried to apply it to another thing you have to be very thoughtful about that the good news is the FDA has asked for comments and we're going to provide comments and thoughts and at the end of the day if it's fairly.

<unk> done, meaning that all laboratory developed tests have to do the same thing across big labs, small labs and everything else as long as they can get the filings done quickly. So that people have access to new innovations in a timely manner like they do today, we believe that it would be minimal impact to us in terms of.

Glenn Eisenberg: In addition, we expect margins for the full year to be flat to slightly up, while the fourth quarter is expected to see both sequential and year over year improvement. Our guidance range for adjusted EPS is $13.25 to $13.75. Unchanged at the midpoint from our prior guidance, free cash flow from continuing operations excluding spin related items is expected to be between $850 to $950 million, also one change from our prior guidance at the midpoint.

The amount of money are spent because we do a lot of that work anyway with that said, it's less than 10% of our volume. So laboratory developed tests are not a significant portion of our volume.

But sometimes they are the most important test for new specialty areas and trying to get those to patients quickly is what's most important for them.

Glenn Eisenberg: In summary, we expect to drive continued profitable growth in our base business. We expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth. We'll also returning capital to shareholders through our share repurchase program and dividends.

Adam with less than 10% of volume I would assume the revenue contribution would be higher because they are as you just stated a bit unique and the testing. So could you talk and I would say.

Yes.

Operator: Operator, we'll now take questions. Certainly, and as a reminder ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. One moment for our first question.

Less than 10% of the $1 two when I say less than 100%.

The volume is.

It's less than 5% frankly, and then the dollar is less than 10%.

Kevin Caliendo: And our first question comes in the line of Kevin Caliendo from UBS, your question, please. Sure, I guess I want to go into the into the book to bill and the sequential, the commentary about biopharma and cancellation. When, when did you start to see that?

Perfect. Thank you so much sure.

Thank you one moment for our next question.

And our next question comes from the line of Tim Daley from Wells Fargo. Your question. Please.

Good morning.

So first one on diagnostics I think.

Adam Schechter: How meaningful is it is it across multiple customers, any more color around what's happening with the with the orders in the bio pharma business cancellations as much color as you can provide to be super helpful? Sure, good morning, Kevin. You know, look at the third quarter of book to bill. It was a bit light versus the prior quarter and it was mostly due to small and emerging biotech and it was mostly due to those customers in our early development research laboratories.

<unk> base business price mix, excluding ascension was roughly 320 bps.

Just kind of back out the numbers.

Could you break that out from like for like price versus mix impact for us in the corner and how it is.

Standalone <unk> been trending.

Last quarter last year.

There would be great.

Sure.

This is Glenn.

That's right we would agree that your 320 is in line with that.

Adam Schechter: Large pharma, medium size biotech, which is the majority of our customers in our central laboratories, which is the largest part of our biopharma segment remains strong. And as I look at fourth quarter, I expect the book to bill in fourth quarter to be better than it was in the third quarter. If you look at the trailing 12 months, it was 1.12. And you know, to me, that still remains pretty healthy. If you remember last quarter, I mentioned that with the clinical development business now being a separate company, you would expect the book to bill to be lower.

Call it the organic price mix favorability, excluding the impact that we would get from ascension.

From a pricing standpoint, we continue to say pricing is kind of flat, maybe a little bit of a headwind you heard Adam earlier in the future with the renewals of the managed care contracts that actually is a positive for us, but most of the time that favorability in our price mix continues to be on the mix side, we continue to see favorability in our test per session.

Whether it be payer mix test mix, but a lot of things esoteric relative to routine. So we continue to experience good favorable price mix, but more on the mix side.

Adam Schechter: In particular, because in early development, most of those trials are very short term. It can be 1 month, 3 months. They usually start and end in the same year that you have them. So that's why I feel confident that we'll continue to see progress. I feel that the largest part of our business central laboratories remains very strong in RFPs book to bill. And we just have to continue to try to find a way to change our mix of it in early development.

Alright, I appreciate that and then.

My second question is on the direct consumer so good to see continued margin expansion.

This quarter, but with the announcement just can you update us on the revenue mix within consumer.

Where was it this quarter, but are you expecting as a piece of that 23 guidance.

Thank you.

Adam Schechter: I'd like to move early development to work more with the mid size biotech, maybe some of the former companies versus having too much reliance on the smaller emerging biotech companies. If you look at the revenue, I felt very good about the revenue and the bio farmer business with 8% revenue growth in the segment for the quarter. And we expect to see continued strength in revenue growth. And just the confidence that it gets better next quarter is that visibility is that just basically writing off some of the stuff that the cancellations are going to improve.

No no content direct to consumer advertising remains an important.

A way for us to enable consumers to monitor and take care of the health. If you look at the dollar volume, especially if you take out the testing for Covid is still very small and it has not worked its not material enough to actually break out the numbers, we see a growing very substantially but it's not necessarily at a point, where we would break it.

Out and give specific numbers for it.

I think when it comes to consumer testing, we're going to see a lot more growth as we go through the years at some point if it reaches that material threshold, Tim will certainly start to break it out.

Adam Schechter: Like what gives you that sense, obviously you can see more than we can. I'm just wondering what that is that we can sort of rely on. Yes, so again, I'm just looking at the number of RFPs coming through our run rate and so forth and based upon what I see as I said here today, I expect us to have a better quarter and fourth quarter for book to bill in the third quarter.

Got it appreciate the time thank you.

Yes. Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Erin Wright from Morgan Stanley. Your question. Please.

Adam Schechter: And sometimes book to bill is timing related. You think you might get a trial in the third quarter. It ends up falling to the fourth. I've always had to be careful to look at any one quarter when it comes to book to bill. And that's why we also provide the trailing 12 months. Yeah. Fair enough, thanks so much, super helpful. Sure. Thank you, one moment for our next question.

Great. Thanks, Hi, good morning.

I know you mentioned the base margin improvement sequentially in the fourth quarter, but are you seeing the need and one of your competitors has been mentioning this stepped up investment in labor.

And just the current utilization environment, maybe that some of the seasonality you were talking about in the fourth quarter, but how are you just thinking about the labor environment right now thanks.

Thanks, Darren so labor environment is tough across industries across countries I mean, theres no doubt that the good news is.

Lisa Gill: And our next question comes in the line of Lisa Gill from JP Morgan. Your question, please. Thanks very much.

Lisa Gill: Good morning. I'm just going to go to the other side of the business. Good morning. When I think about the diagnostic side of the business and the strong core growth, there's two questions there. One, can you talk about where you are on managed care contracting and, you know, in helping them in the shift inside of care, going to lower cost, lab services, like lab course versus, you know, in how in patient, etc.

Look at our retention rates and if you look at retention from 2019, we saw a significant loss of people in our actual turnover rate was up substantially in 2021 and 2022.

If we now look at 2023, we've seen those rates come down and our Biopharma business, they've come down almost to the 2019 levels.

You look at our diagnostic business, they're not yet at our 2019 levels, but they're getting closer.

Lisa Gill: And then secondly, as you think about routine testing, are you seeing an increase in metabolic testing, specifically like A1C as you think about the GLP one phrase? Sure, Lisa. First of all, you know, we're very pleased with that. The performance in the diagnostic sector, not just when you look at overall revenue, which includes ascension, but when you look at the base business volume, if you look at that, the base business volume was up 7.2% and about 3.6% was from acquisition.

And we expect there to be continued progress there.

But we have had to pay a bit more in certain areas, we've had to be competitive in the marketplace. It does impact the margins, but at the same time, that's why we've been so aggressive with launch pad and we're on track to deliver the $350 million of Launchpad savings that we discussed in the past we also at Investor.

They talked about a $100 million to $125 million year reduction through launch pad and we also mentioned that we have a increase in our margins over the 23% to 26 period of 100 to 150 basis points, mostly coming after the payment of year end 2024, so most of that in.

Lisa Gill: So it just tells you that the organic base business remains very strong. Our managed care contracting, we're in very good position. We've either finalized or close to finalizing all the contracts that were large and need to be renewed. And I would say, you know, there'll be basically flat to slightly positive, which is a good place for us to be as we move into next year. So I feel very good about that.

25, and 26, so at the end of the day, we realize we've got to find ways to reduce cost. So that we can offset some of the pressure that we're facing when it comes to.

Lisa Gill: You know, we look at metabolic testing and we look at all the different types of routine testing. And we haven't, we see that growing, but it's growing at consistent rates as it's grown before. And we still see our esoteric testing growing a little bit faster, but almost about the same as our routine testing. And if you look at like our metabolic testing and so forth, we don't really see acceleration there. And a lot of the metabolic testing is done on panels and it's done with other tests and so forth.

Wages and so forth.

Okay. Thanks, that's helpful and then on the early development business your.

Your line of environment in terms of the volatility EMEA, what you've been talking about in terms of the biopharma landscape.

Has anything changed in terms of their commitment to the business. At this point is that an area that you will continue to evaluate.

Yeah. Thanks Darren.

Again, it is a very small part of our business I mean, if you look at the business as a percent of Labcorp is it's very small it's less than 10% frankly, and if you look at it as a percent of the Biopharma business. It maybe.

Lisa Gill: So I wanted to expect to see a significant change necessarily with the GLP ones moving forward. But the growth is very broad based. It's across geographies. It's across routine and esoteric testing. It's across all the different types of testing that we have. So the underlying dynamics are very strong. Thanks. It's very helpful. Thank you. One moment for our next question.

Maybe 30% or so so at the end of the day, it's really central laboratory that drives our success in Biopharma at the same time with the strategic things that we're trying to do with companion diagnostics and work with pharma earlier, bringing those companion diagnostics to a central laboratories, and then ultimately bring them to the Mark.

Place strategically I still think it makes sense and I still think that we could do a lot of other things with our early development that helps us in the broader bigger business that we have and we continue to evaluate all things.

Patrick Donnelly: And our next question comes from the line of Patrick Donnelly from city. Your question, please. Hey guys, thanks for taking the questions.

Adam Schechter: They did not are just morning. She's the follow up on the early development side, you know, interesting to hear kind of maybe shifting towards a little bit do newer of a customer base more towards the mid size. Does that. I guess what does that entail? You just have to cater the offering a little bit more towards that customer base. And is there, you know, a little bit of disruption is that happened.

Okay. Thank you.

Thank you.

Thank you one moment for our next question.

And our next question comes from the line <unk> Chickering from Deutsche Bank. Your question. Please.

Good morning, Peter either.

Adam Schechter: Let me just talk through how you think about moving the portfolio more towards that client base. Yeah, absolutely. One of the things Patrick, we're trying to do is to focus more on the specialty testing and also thinking about how to expand internationally on things like companion diagnostics. When you think about a mid to large farmer company as they develop more personalized medicine, they're going to want to have some type of diagnostic tool or companion diagnostic that they can use to develop to identify which patients are most apt to respond to the medicine.

Kieran Ryan on for Peter Thanks for taking the question.

Just a quick one here I just wanted to see how you guys are tracking on taking out some of the stranded costs. After the spin I believe you were talking about targeting $25 million to $45 million at the Investor day. So just wanted to see if there's any update there.

No Ryan So we're on target we said we have the $25 million by the end of this year. So if the run rate next year that would be taken out, but I think the most important.

Piece is that that's not enough and we're going to do that plus we have to do more so as I said, we're on track for our $350 million Launchpad initiative, and we are committed to a $100 million to $125 million per year in the outer years as we look at a longer term forecast that includes $25 million of stranded cost, but it just tells you we have.

Adam Schechter: But also have it available ultimately in the marketplace. So where we're trying to go with the show farmer that they work with us early, we can help them develop their diagnostic test. We have very strong capabilities in companion diagnostics and developing specialty diagnostic tests. We can help them do their clinical trials or central laboratories and do all the companion diagnostic testing and specialty testing. And ultimately we want to be able to offer to them that we can launch that test not only in the United States, but we can help them bring those specialty and companion diagnostic tests to other parts of the world. I think it'll be a very compelling discussion to have with farmer and we're having some of those discussions as we speak.

Got to do a lot more.

Okay.

Got it. Thank you and then just real quick on the Biopharma side I just wanted to check is there as we head into 'twenty. Four is there any seasonality that we should be aware of there and does that change at all after the spin various since pre spin or.

Glenn Eisenberg: I understand. Thanks. And then maybe just on the margin piece, you know, obviously you guys gave a pretty detailed guidance at the, at the analyst day, maybe just near term, if you could talk through the moving pieces, it sounds like, you know, pricing relatively stable, but, you know, just the moving parts as we work away into the end of the year and then 24, you know, as you think high level about about the margin piece.

Not not too much to call out.

<unk>.

Yes, I'll, let Matt answer that question in general I don't see that there'll be a significant shift in terms of we've always had some seasonality.

And if you look at like potential.

Central Labs for example, they always start off a little bit slower in the first quarter because a lot of pharma are starting to get their studies.

Glenn Eisenberg: Thank you. Yeah. I love last night to jump as well. I'd say the largest impact to margins as I think about 2024 is panel. And we've built in about $80 million, almost $80 million of downside into our base case, assuming that come up comes next year. We're still trying to see working with our trade group. If there's a way to get the salsa, red legislation approved, we have bipartisan support, but we had that last year.

Studies running in third quarter, sometimes a little slower as Europe comes back after vacation, but net net there shouldn't be any significant changes to what we've seen in the past yeah, that's right and the numbers that we've provided historically have been.

Restated for the company. We are today. So you can look at our enhanced disclosures that we have that youll see some.

Historical numbers, but the other interesting thing is the seasonality of the two segments are a little bit counter to each other so it actually when you look at it from an enterprise level mutes the seasonality is for each of the businesses.

Glenn Eisenberg: So it's very hard to get things approved right now. We're also going to see if there's a way to delay for another year, the implementation. But for our base case, we're assuming that there's about an $80 million impact that would negate the impact of margins next year. That's why when we gave the long term guidance and we said it's 100 to 150 basis point increase over the time period. We said most of that will be after 2024.

Thanks, so much.

Thank you one moment for our next question.

<unk>.

And our next question comes from the line of Derik de Bruin from Bank of America. Your question. Please.

Glenn Eisenberg: We'll get in 2024. We have to overcome Pamela. Let's wait and see if Pamela doesn't come or if it's delayed, then we'll have some upside there for sure. Yeah, Patrick, just I guess as you look to the two businesses, we feel good about where we are with the margins. They continue to improve on a base business level. As we think about going into the fourth quarter, we commented that within the biopharmicide, we expect margins to be up in the fourth quarter and year on year such that for the full year, there'll be flat to slightly up.

Good morning, Derek Good morning. Good morning. This is John on for Derek.

Wanted to revisit the Panama issue.

There.

I recognize that your guidance is assuming the PMI impact as a base case and.

You talked about the 70 basis points of headwind between Panama and Colgate, but.

In the case of a delay, but would you allocate that $80 million benefit that would turn into a benefit now.

Glenn Eisenberg: In diagnostics, obviously, we have seasonality that impacts margins of fourth quarter sequentially margins will be down, but they'll still be up year over year so that we expect diagnostics margins for the full year to be up slightly even after absorbing the negative impact from the ascension mix. As Adam commented in the 100 to call it 150 basis point margin improvement that we expect over the next three years, we commented that the first year margins would be relatively flat.

Between maybe letting it trickled down to margins versus investments.

Yes, we're going to push for the vast majority of it to come down to margin I mean, there might be some incremental minor investments, but we've got almost $80 million into the plan and I would expect the vast majority of that to come down.

Got you I appreciate it and then.

With the ATM profile could you comment on what sort of reimbursement you have been able to negotiate with the payers versus what youre getting from the CMS.

Glenn Eisenberg: We have around a 70 basis point headwind if you will between the combination of lower COVID testing as well as the Pamela headwind that Adam commented, but that's reflected still in the three or expectation that margins would grow that 100 to 150 basis points.

And I know.

Earlier, you talked about.

<unk> test is a volume it's less than 5% of net sales thats less than 10%, but still curious if you plan on taking it for the FDA approval or if theres going to be any sort of disruption there.

Patrick Donnelly: Understood. Thanks. Thank you. One moment for our next question.

Yes. So at this point, we don't think there'll be any disruption to the ATM profile, we've launched it into the marketplace. Some managed care organizations are starting to reimburse others. We're in discussions with but a lot of the reimbursement in that area is from providers and the health systems and so forth. So we expect we will have.

Jack Meehan: And our next question comes from the line of Jack Mehan from from research. Your question, please. Good morning, Jack. Good morning. One to stick with the macro environment on the diagnostic lab side.

Adam Schechter: Adam, are you seeing any recessionary signals at all in terms of the testing, getting ordered and then maybe on the flip side hearing any change in the tenor of your hospital conversations around consolidation opportunities? Yeah, Jack. So, you know, when you look at the macro dynamics, I would say for testing, it remains strong and when you look at the volume that we're seeing, it remains very strong as well and it's broad based across the country and esoteric and routine testing.

Good reimbursement from those areas as we go forward, it's still a relatively new test, we're still have physicians learning about the panel and so forth. So it will take time, but over time, we expect it to be reimbursed as well.

Thank you that's all.

Thank you one moment for our next question.

And our next question comes from the line of Brian <unk> from Jefferies. Your question. Please.

Adam Schechter: If you go back to historical recessionary periods, the diagnostic business tends to continue to do well through those periods. So, I feel, you know, pretty confident that we're going to continue to be strength, see strength there. When it comes to hospitals, you know, I've talked about how the hospital health system but also local and regional laboratory acquisition possibilities remain extraordinarily strong. I think it's because they're struggling in the economic environment with reimbursement with wages and other things and they're looking for ways that they can get some capital, but also look for people that are like experts in hiring the types of jobs.

Hey, good morning, guys. Good morning, good morning, good morning.

I guess I'll start Adam as I think about a comment that your competitor made yesterday by contract renewables just curious what youre seeing on your side in terms of contracting with payers and you've kind of great trends there as we think about.

Adam Schechter: That we hire for managing the type of people that we manage. So, I think the macro environment for the health systems and for these local, smaller regional laboratories is very strong for us to continue to find ways to do business development and find additional partnerships. So, it's actually a good environment for us to compete, but obviously we want our hospital systems to remain solvent and, you know, they have a lot of things that they have to do to continue to be successful.

Upcoming re up some contracts.

Yes, absolutely Brian So we've renegotiated the majority of our contracts were really will be finished and really close on one last one.

But they ended up being very good negotiation is very good discussions we think that ultimately it will be flat flat maybe slightly positive.

So I feel really good about that.

Got it and then Glenn you talked about the three year margin goals of 100 to 150 basis point improvement.

As we think about the moving parts between labor launch pad.

I think we're getting questions from people asking when do we see the flow through of all of that.

Glenn Eisenberg: Well, great. And Glenn, at the analyst day for 2024, you laid out some initial thinking. It would be slightly below the in half to 11% EPS Kager range. Just curious if anything, you know, in terms of the orders on the biofarmal lab side or just anything else changes the way you're thinking about that. Thanks. Yeah, no, Jack. Again, when we basically reaffirmed kind of our outlook for this year as well as our three year when we were at the analyst day, we knew there was some softness we had experienced with an early development earlier.

No.

The improvement in volumes through the margin line, how should we be thinking about that.

Well again, a lot of the and the expectation is that we're looking at good topline growth. So we would expect to leverage off of that.

Launchpad savings that we've identified as well and then being offset by labor and.

Potentially continued inflationary environment for us we've talked a lot about labor because it represents around 50% of our cost structure. So we're very focused on it and as Adam said, we are seeing some improvement in the attrition levels, but it's still higher than where it's been in the past and there is a cost of that let alone just the labor wage rate inflation, if you will but.

Glenn Eisenberg: So that continues. But as Adam said, kind of offset by the strength that we're seeing with on the central lab side. So for biofarmer and for diagnostic segments, we feel very good. So if you look at tall, that eight and a half to 11 and a half percent EPS target over the next three years, the Kager, we still feel very good about that, realizing that for 2024 because, again, of the headwinds from less COVID testing and PAMA, you know, you'd have around a 800 basis point headwind to EPS in 2024. So still positive EPS growth year on your even with those headwinds, but lower than if you will, the range that we had. But again, that three year range includes that expectation for 2024.

Operator: Thank you. One moment for our next question.

All of that's been factored in so to the extent, we can continue to drive the top line that we feel confident about and realize the launchpad savings, which we feel confident about we equally expect to see that margin improvement.

Awesome. Thank you.

Thank you.

Does conclude the question and answer session of today's program I'd like to hand, the program back to Adam Schechter for any further remarks.

Thank you. Thank you all for joining US today hope you can tell that we remain very optimistic about the prospects for lab Corp. As we continue to execute and we execute well on our strategy and that we believed our strategy is going to continue to drive substantial shareholder value.

Everybody has a good rest of the day.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Eric Coldwell: And our next question comes in line of Eric Coltwell from Baird. Your question, please. Good morning, Eric. Good morning. Thank you. I have to the first one maybe a bit confusing. So bear with me. Your largest competitor in early developments given some interesting color around their cancellations and talked about how a majority of those cancellations they've experienced were predicated on awards that were made a year ago, two years ago, stuff that was, you know, quite pre booking stuff when they were concerned about capacity and access in the future.

Okay.

Okay.

Eric Coldwell: You're talking more about small clients and it sounds like maybe this is more recent stuff, but I'm curious if you could talk at all about the aging of the cancellations, IE, how long ago were these awards made? And is this something more in the moment or perhaps just cleanup from past client activity that was abnormal? Yeah, thanks for that clarification. We're seeing a similar thing that primarily with NHP trials that were when there was supply issues, people started to get in line much earlier than they typically would to ensure that they could run their trials as fast as they could.

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Eric Coldwell: Now that we have supply and so forth as those clients studies are ready to go, they're not necessarily ready to go or they're thinking about their pipeline and other priorities and so forth because they booked these spots so far ago. So that's the primary reason that we believe we're saying these cancellations in early development. And then we're, could you talk at all about gross awards and early development was that book to bill above one or below one this quarter?

Eric Coldwell: So if you look overall, you just look at the quarter would have been below one. But as and again with early development, I don't think book to bill is really a good way to look at that business because when it comes to early development, there are one month trials, three months trials, maybe six months trials, so you can burn through those in the same year very quickly. I look at the book to bill, you know, because I think it's a historical way to look at the business, but he is very small compared to central laboratory.

Eric Coldwell: I mean, the vast majority of our central laboratory work remains very strong. So that's why I feel confident as I look at the members of the future because of the size of our central laboratory, the mix of customers and central laboratories, more towards pharma and big biotech and the book to bill there remains pretty good. Okay, thank you for that Adam and I was just hoping you could talk a bit about the FDA's LDT proposal here and maybe help us with some quantification of what your LDT mix looks like by revenue or volume or or any color commentary on what you see progressing with the proposed rule at the FDA.

Eric Coldwell: Thank you. Yep, absolutely, Eric. So, you know, we were supportive of legislation called valid last year that would have given FDA oversight for laboratory developmental tests and it was unfortunate that it didn't get passed last year had bipartisan support. We were supportive. It's disappointing that that legislation didn't go through. So we're supportive of working with the FDA to find ways for them to give appropriate oversight. We think that our science, our innovation innovation or technology capabilities actually differentiate us.

Eric Coldwell: And if you look at the rigor that we go through with our laboratory developmental tests, we think we do the vast majority of what they would be asking for anyway. Working with ACLA or trade organization, what we're worried about is if you take legislation that had an intended purpose for one thing and then you try to apply it to another thing, you have to be very thoughtful about that. The good news is the FDA has asked for comment and we're going to provide comments and thoughts.

Eric Coldwell: And at the end of the day, you know, if it's fairly done, meaning that all laboratory developmental tests have to do the same thing across big labs, small labs and everything else, as long as they can get the filings done quickly so that people have access to new innovations in a timely manner like they do today. We believe that it would be minimal impact to us in terms of the amount of money or spend because we do allow that work anyway.

Eric Coldwell: With that said, it's less than 10% of our volume. So laboratory developmental tests are not a significant portion of our volume. But sometimes they are the most important tests for new specialty areas and trying to get those to patients quickly is what's most important for them. Adam, with less than 10% of volume, I would assume the revenue contribution would be higher because they are, as you just stated, a bit unique the testing.

Eric Coldwell: So could you. So I would say, yeah, less than 10% of the dollars to when I say less than 100% of the volume is less than 5%, frankly, and then the dollar is less than 10%. Perfect. Thank you so much. Sure. Thank you one moment for our next question.

Timothy Daley: And our next question comes from the line of dim daily from Wells Fargo. Your question, please. So first one on diagnostics. I think organic basis is this price mix, excluding ascension was roughly 320 bits. If I just kind of back out the numbers. You know, could you break that out from like light for light price versus mix impact for us in the quarter and how is, you know, standalone price been trending for last quarter or last year? Any health there would be great.

Timothy Daley: Sure. Hey, Tim. This is Glenn. That's right. We'd agree that your 320 is in line with the call at the organic price mix favorability, excluding the impact that we would get from ascension. You know, from a pricing standpoint, we continue to say pricing is kind of flat, maybe a little bit of a headwind. You heard Adam earlier in the future with the renewals of the managed care contracts. You know, that actually is a positive for us, but most of the time the favorability in our price mix continues to be on the mix side.

Timothy Daley: You know, we continue to see favorability in our test per session, you know, whether it be payer mix, test mix, a lot of things, esoteric relative to routine. So we continue to experience good favorable price mix but more on the mix side.

Operator: All right, appreciate that.

Aaron Wright: And then my second question is on the direct consumer. So good to see you continue by doing expansion, this quarter with the announcement. Just, you know, can you update us on the revenue mix within consumer? You know, where was it this quarter? What are you expecting as a piece of that 23 guidance? Thank you. Yeah, yeah, no problem. So our direct consumer advertising remains important. We wait for us to enable consumers to monitor and take care of the health.

Aaron Wright: If you look at the dollar volume, especially if you take out the testing for COVID, it's still very small and it's not worth the material and not to actually break out the numbers. We see it growing very substantially, but it's not necessarily at a point where we would break it out and give specific numbers for it. You know, I think when it comes to consumer testing, we're going to see a lot more growth as we go through the years. At some point, if it reaches that material threshold, Tim, we'll certainly start to break it out. Got it. Appreciate time. Thank you.

Operator: One moment for our next question.

Brian Tranquillet: And our next question comes from the line of Aaron Wright from Morgan's family. Your question, please. Morning. Thanks. Hi, good morning.

Adam Schechter: I know you mentioned the base margin improvement sequentially in the fourth quarter, but are you seeing the need in one of your competitors as mentioning that mentioning this, but stepped up investments in the labor and just the current utilization environment, maybe that some of the seasonality you were talking about in the fourth quarter, but how are you just thinking about the labor environment right now? Thanks. Yeah, thanks Aaron. So labor environment is tough across industries across countries.

Adam Schechter: I mean, there's no doubt that the good news is, you know, I look at our retention rates. And if you look at retention from 2019, we saw a significant loss of people and our actual turnover rate was up substantially in 2021 and 2022. If we now look at 2023, we've seen those rates come down in our bio farmer business, they come down almost to the 2019 levels. If you look at our diagnostic business, they're not yet at our 2019 levels, but they're getting closer and, you know, we expect there to be continued progress there.

Adam Schechter: But we have had to pay a bit more in certain areas. We've had to be competitive in the marketplace. It does impact the margins. But at the same time, that's what we've been so aggressive with launch pad and we're on track to deliver the $350 million of launch pad savings that we discussed in the past. We also, and invested, they talked about a 100 to 125 million dollar year reduction through launch pad.

Adam Schechter: And we also mentioned that we have a increase in our margins over the 23 to 26 period of 150 basis points, mostly coming after the family year in 2024, so most of that in 25 and 26. So at the end of the day, we realized we've got to find ways to reduce costs so that we can offset some of the pressure that we're facing when it comes to, you know, the wages and so on. [inaudible] Thank you so much.

Glenn Eisenberg: Thank you one moment for our next question.

John Kim: And our next question comes from the line of Director Bruin from Bank of America. Your question, please. Good morning, Derek. Good morning. This is John on for Derek. I wanted to revisit the PAMA issue. I recognize that your guidance is assuming the PAMA impact as the base case. And you've talked about the 70 basis points of headwind between PAMA and COVID.

John Kim: But in the case of a delay, what would you allocate that 80 million benefit that would turn into a benefit now between maybe letting it trickle down to margins versus investments? Yeah, we're going to push for the vast majority of it to come down to margin. I mean, there might be some incremental minor investments, but we've built almost 80 million dollars into the plan. And I would expect, you know, the vast majority of that to come down. That's appreciated.

Adam Schechter: And then with the AT&T profile, could you comment on what sort of reimbursements you've been able to negotiate with the payers versus what you're getting from the CMS. And I know early earlier you talked about the LBT test as a volume. It's less than 5% and as failed, it's less than 10% but still curious if you plan on taking it for the FDA approval or if there's going to be any sort of disruption there.

Adam Schechter: Yeah, so at this point, we don't think there'll be any disruption to the ATM profile. We've launched it into the marketplace. You know, some managed care organizations are starting to reimburse others we're in discussions with. But a lot of the reimbursement in that area is from providers and the health systems and so forth. So we expect we'll have, you know, good reimbursement from those areas as we go forward. It's still a relatively new test. We're still have positions learning about the panel and so forth. So it will take time. But over time, we expect it to be reimbursed well.

Operator: Thank you. That's all. Thank you. One moment for our next question.

Brian Tranquillet: And our next question comes from the line of Brian Tranquillet from Jeffries. Your question, please.

Adam Schechter: Good morning. I guess I'll start Adam as I think about a comment that your competitor made yesterday by contract renewables. Just curious what you're seeing on your side in terms of contracting with the payers and you kind of like rate trends there as we think about. Upcoming reups and contracts. Yeah, absolutely Brian. So yeah, we've renegotiated the majority of our contracts were really we finished and you know, really close on one last one. But they ended up being very good negotiations, very good discussions. We think that ultimately it will be flat flat, maybe slightly positive. So I feel really good about that. Got it.

Glenn Eisenberg: And then Glenn, you talked about this three year kind of margin goal of 100 to 150 basis point improvement. As we think about the moving parts between labor, launch pad. And I think we're getting questions from people asking, you know, when do we see the flow through of all that, and, you know, improvement in volumes to the margin line. How should we be thinking about that? Well, again, a lot of the expectation is that we're looking at good top line growth, so we would expect to leverage off of that launch pad savings that we've identified as well and then being offset by labor and, you know, potentially continued inflationary environment.

Glenn Eisenberg: You know, for us, we talk a lot about labor because it represents around 50% of our cost structure. So we're very focused on it. And as Adam said, we are seeing some improvement in the attrition levels, but it's still higher than where it's been in the past. And there's a cost of that let alone just the labor weight rate inflation, if you will, but all that's been factored in. So to the extent we can continue to drive the top line that we feel confident about and realize the launch pad savings, which we feel confident about, we equally expect to see that margin improvement.

Operator: Awesome. Thank you.

Adam Schechter: This does conclude the question and answer session of today's program.

Adam Schechter: I'd like to hand the program back to you, Adam. Check there for any further remarks. Thank you. Thank you all for joining us today. Hope you can tell that we remain very optimistic about the prospects for lab work as we continue to execute, and we execute well on our strategy, and that we believe our strategy is going to continue to drive substantial shareholder value. Hope everybody has a good rest of the day.

Operator: Thank you, ladies and gentlemen for your participation at today's conference.

Operator: This does conclude the program. You may now disconnect. Good day. Thank you.