Q1 2024 Laboratory Corporation of America Holdings Earnings Call
Unknown Executive: Good day, and thank you for standing by. Welcome to the Laboratory Corporation of America Holdings first quarter 2024 conference call. At this time, all participants are in a listen only mode.
Okay.
Speaker Change: Good day and thank you for standing by welcome to the Laboratory Corporation of America Holdings' first quarter 'twenty 'twenty four conference call. At this time, all participants are in a listen only mode.
Unknown Executive: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised.
Speaker Change: After the Speakers' presentation, there won't be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising your hand, just raised to withdraw your question. Please press star one one again please.
Unknown Executive: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kristen O'Donnell, Vice President, Investor Relations. Please go ahead.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Christian Odonnell, Vice President Investor Relations. Please go ahead.
Kristen O'Donnell: Thank you, Operator. Good morning, and welcome to LabCorp's first quarter 2024 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and the internet. With me today are Adam Schechter, Chairman and Chief Executive Officer, and Glenn Eisenberg, Executive Vice President and Chief Financial Officer, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures, both of which are discussed during today's call.
Christian Odonnell: Thank you operator, good morning, and welcome to a lot of course first quarter 'twenty 'twenty four 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.
Sure.
Speaker Change: Morning in the Investor Relations section of our website at Www Dot Dot Dot com, we posted both our press release and Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures both of which are discussed.
Kristen O'Donnell: Each of the forward-looking statements is subject to change based on various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SBA. But before I do that, I want to address the recent announcement that LabCorp was selected as a winning bidder for select assets of Invitae. Invitae has strong science, a great MGS platform, and strong talent.
Speaker Change: Today's call.
Speaker Change: We are making forward looking statements. These forward looking statements include but are not limited to statements with respect to the estimated 2020 for guidance and the related assumptions and recently completed the spin off of four Tier Holdings, Inc.
Speaker Change: Various factors on the company's businesses operating and financial results cash flows or financial condition, including the COVID-19, pandemic and global economic and market conditions and future business strategy as expected savings benefits and synergies from the Launchpad initiative and from acquisitions and other strategic transactions.
Speaker Change: And partnerships the plan, our holding company reorganization and opportunities for future growth each of the forward looking statements are subject to change based upon various factors many of which are beyond our control more information is included in our most recent annual report on Form 10-K, and subsequent quarterly reports on Form 10-Q and in the company's.
Adam H. Schechter: Upon completion of the transaction, LabCorp expects approximately $275 to $300 million in annual revenue, with the vast majority in specialty areas such as oncology and rare diseases. The purchase price for the transaction is $239 million. In the first quarter, revenue totaled $3.2 billion, and adjusted earnings per share was $3.68. Enterprise revenue for the quarter increased 5% compared to the first quarter of 2023. Glenn will provide more details on our results and 2024 outlook in just a moment.
Speaker Change: Other filings with the SEC, we have no obligation to provide any updates to these forward looking statements, even if our expectations change.
Speaker Change: Now I'll turn the call over to Adam Schechter, Alright. Thank you Christian good morning, everyone. It's a pleasure to be here with you today, we look forward to sharing our first quarter 2024 results and progress on our strategy.
Adam H. Schechter: But before I do that I want to address the recent announcement that Labcorp was selected as the winning bidder for select assets that we can beat that.
Adam H. Schechter: This transaction will advance our strategy to launch and scale specialty testing in areas, such as oncology and rare diseases.
Speaker Change: These are strong assets and important disease areas and it fits strategically with a focus on specialty testing.
Speaker Change: They have strong science, a great MTS platform.
Speaker Change: Carolyn.
Speaker Change: Upon completion of the transaction Labcorp expects approximately $275 million to $300 million in annual revenue.
Speaker Change: With the vast majority and specialty areas, such as oncology and rare diseases.
Speaker Change: The purchase price the transaction is $239 million.
Speaker Change: We expect the transaction to be dilutive to adjusted earnings by approximately 2% to 3% in the first full year.
Speaker Change: We expect the transaction to be accretive in year two.
Speaker Change: And to exceed our cost of capital in year three.
Speaker Change: Now I'll move to the quarter.
Adam H. Schechter: In March, we also entered into an agreement to acquire select assets of bioreference's health diagnostic business. This transaction will increase access to LabCorp's high-quality clinical laboratory services. In addition, earlier this month, we announced the launch of a GFAT blood biomarker test for the early detection of neurodegenerative diseases and neurological injuries. This test includes a reflex to identify resistance to macrolide, a commonly used treatment addressing high antibiotic resistance and treatment failures associated with the infection.
Speaker Change: <unk> delivered strong top line performance in the first quarter driven by growth in both of our businesses diagnostic laboratory and Biopharma Laboratory services.
Speaker Change: We continue to execute well on our strategic priorities through being a partner of choice for health systems and regional local laboratories.
Speaker Change: If youre launching key new tests and important therapeutic areas.
Speaker Change: And by financing science technology, and innovation to bring new test services and capabilities to our customers around the world.
Speaker Change: Let's turn now to our first quarter financial results.
Speaker Change: In the first quarter revenue totaled $3 2 billion.
Speaker Change: And adjusted earnings per share was $3 68.
Speaker Change: Enterprise revenue for the quarter increased 5% compared to the first quarter of 2023.
Speaker Change: With diagnostics revenue up 4% and Biopharma revenue up 8%.
Speaker Change: <unk> growth was driven by strength in central laboratories, partially offset by early development research laboratories.
Speaker Change: Enterprise base business margins are up compared to the prior year.
Glenn A. Eisenberg: In April, we received emergency use authorization from the FDA for our MPOX PCR test, a home collection kit. In addition, we launched our electronic requisition digital capability to help biopharma customers and investigator sites improve protocol compliance by reducing errors, queries, holds, and data revisions. We invite you to take some time to review the report, which can be found on our investor relations website. With that, I'll turn the call over to Glenn
Speaker Change: Higher margins in Biopharma were partially offset by diagnostics margins.
Speaker Change: We expect margins in both businesses to be up for the full year.
Speaker Change: The overall strength in our business enabled us to narrow the range and raised the midpoint of our EPS full year guidance to $14.90. Despite a negative impact from currency.
Speaker Change: Glenn will provide more details on our results in 2020 outlook in just a moment.
Glenn A. Eisenberg: In the first quarter Labcorp advanced key growth initiatives that support our strategy.
Glenn A. Eisenberg: We began 2020 forward positive momentum reinforcing our position as a partner of choice for health systems and regional local laboratories.
Glenn A. Eisenberg: We continue to be active on the acquisition front.
Speaker Change: We closed three transactions in March, including Health system agreement with Bay State Health in Massachusetts, and Providence in California, and a regional lab acquisition in California.
Speaker Change: In March we also entered into an agreement to acquire select assets of bio reference health diagnostic business.
Glenn A. Eisenberg: Thank you, Adam. I'm going to start my comments with a review of our first 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. Operating income for the quarter was $321 million, 10.1% of revenue, or 14.3% on an adjusted basis.
Speaker Change: This transaction will increase access to Labcorp high quality clinical laboratory services.
Speaker Change: These new assets are focused on clinical diagnostics and reproductive and women's health.
Speaker Change: Our business development pipeline remains strong.
Speaker Change: Building on the success of our acquisitions and strategic partnerships. We continue to incorporate the power of science technology and innovation across the organization.
Speaker Change: This commitment is demonstrated by how we've expanded our test menu this quarter.
Speaker Change: We advanced our leadership in neuro degenerative disease with the launch of our <unk> 2017 blood based biomarker test that AIDS in the diagnosis of Alzheimer's disease, and the monitoring of patients undergoing treatment with new therapies. It is also available to be used in clinical trials.
Speaker Change: In addition earlier this month, we announced the launch of our <unk> blood biomarker test for the early detection of neuro degenerative diseases and neurological injuries.
Glenn A. Eisenberg: Base business margins were up as the benefit of demand and launchpad savings was partially offset by higher personnel costs. Our Launchpad initiative continues to be on track to deliver $100 to $125 million of savings this year, consistent with our long-term partnership. We continue to expect the full year adjusted tax rate to be approximately 23 percent. Operating cash flow from continuing operations was a use of $30 million in the quarter, compared to $186 million generated a year ago. The reduction in cash flow was due to lower cash earnings, primarily related to deferred taxes, and the timing of working capital requirements.
Speaker Change: Following the launch of our ATM profile last fall. These two significant advances in the company's testing portfolio extend our leadership in a rapidly accelerating.
Speaker Change: Blood based biomarkers for newer degenerative diseases.
Speaker Change: We continue to accelerate our leadership in oncology, we launched Labcorp plasma attacked the first clinically validated whole genome sequencing MRV solution for early stage colon cancer to identify patients at increased risk of Reoccurrence after surgery or adjuvant.
Speaker Change: Chemotherapy.
Speaker Change: Lastly, plasma attacked developed by our <unk> Laboratory is a significant achievement that enhances our liquid biopsy portfolio and strengthened our position at the forefront of driving better patient outcomes in oncology.
Speaker Change: We introduced a weight loss management test portfolio in the quarter.
Speaker Change: Sweden test that supports individuals and physicians with accessible and convenient testing options.
Speaker Change: Weight loss management decisions and treatment, including lifestyle modifications, GOP, one medications or bariatric surgery.
Glenn A. Eisenberg: Free cash flow from continuing operations for the quarter was a use of $164 million. While debt was $5.1 billion, our leverage was 2.5 times gross debt to trailing 12-months adjusted EBIT dollars. Revenue for the quarter was $2.5 billion, an increase of 4.1% compared to last year, with organic growth of 1.8% and acquisitions net of divestitures contributing 2.2%. Total volume increased 3.4% compared to last year. Base business volume grew 4.9% compared to the base business last year, as organic volume increased 2.7%, while acquisitions contributed 2.2%. Price mix increased 0.6% versus last year due to an organic-based business increase that was partially offset by lower COVID testing. Base business organic price mix was up 1.7% compared to the base business last year.
Speaker Change: Lastly on demand introduced some magnesium test and a micro nutrient test to measure key vitamin and mineral levels to support individual wellness.
Speaker Change: We also announced an STI path for Amgen Amgen.
Speaker Change: And then can be as widespread as familiar and gonorrhea.
Speaker Change: This test includes a reflex to identify resistance to macrolide, a commonly used treatment addressing high antibiotic resistance and treatment failures associated with the infection.
Speaker Change: In April we received emergency use authorization from the FDA for our impact.
Speaker Change: <unk> PCR test our home collection kit.
Speaker Change: The test is the first at home collection kit authorized by the FDA to aid in the diagnosis of infection with impacts physicians can order for patients 18 years of age or older who are suspected of impacts infection.
Speaker Change: In addition, we launched our electronic requisitions digital capability to help biopharma customers and investigator sites improved protocol compliance by reducing errors queries hold and data revisions.
Speaker Change: Earlier. This month, we released our latest corporate responsibility report, which highlights the significant progress that we're making as we pursue our mission to improve health and to improve lives in a sustainable way we are.
Speaker Change: Invite you to take some time to review the report that can be found on our Investor Relations website.
Speaker Change: As part of our earnings release. This morning, we also announced our intention to create a new holding company named Labcorp Holdings incorporated to more closely align with our brand and better position us as a global organization.
Speaker Change: I'd like to thank our team awarded 67000 employees around the world. Their ongoing commitment has once again earned us recognition of <unk> world's most admired companies list. We're extremely proud of this recognition.
Glenn A. Eisenberg: While base business income was up, as the benefit of demand and launchpad savings was partially offset by higher personnel costs, the decrease in adjusted operating income margin was due to the reduction in COVID testing, the negative impact from weather, and the mixed impact from lab management agreements, which we expect to improve over time. Now I'll review the segment performance of BioPharma Laboratory Services. We ended the quarter with a backlog of $7.9 billion, and we expect approximately $2.5 billion of this backlog to convert into revenue over the next 12 months.
Speaker Change: In summary, we continue to make progress against our strategy and to achieving both near term and longer term goals. We remain focused on our position as leaders in science technology, and innovation and driving further value for our customers our shareholders and our employees with that also.
Speaker Change: Turn the call over to Brian.
Brian: Thank you Adam.
Brian: I'm going to start my comments with a review of our first quarter results followed by a discussion of our performance in each segment and conclude with an update on our full year guidance.
Brian: For reference we've also included additional business information that can be found in our supplemental deck on our Investor Relations website.
Brian: Revenue for the quarter was $3 2 billion, an increase of four 6% compared to last year, primarily due to organic base business growth and the impact from acquisitions, partially offset by lower Covid testing.
Brian: The base business grew six 7% compared to the base business last year, while Covid testing revenue was down 70%.
Glenn A. Eisenberg: The trailing 12 months booked to bill was 1.00, which we expect to increase throughout the year. Now, we discuss our updated 2024 full-year guidance, which assumes foreign exchange rates effective as of March 31, 2024 for the remainder of the year. We expect enterprise revenue to grow 4.8 to 6.4% compared to 2023. We continue to perform well in diagnostics and are narrowing the full-year guidance range and increasing the midpoint. We expect diagnostics revenue to be up 4.8 to 6% compared to 2023. This is an increase at the midpoint from our prior guidance of 140 basis points. The decrease at the midpoint from our prior guidance of 180 basis points is due to currency.
Brian: Organically in constant currency the base business grew four 3%.
Brian: Operating income for the quarter was $321 million 10, 1% of revenue or 14, 3% on an adjusted basis.
Brian: During the quarter, we had $49 million of restructuring charges and special items, primarily related to acquisitions and Launchpad initiatives. In addition, we had $22 million of expense for transition service agreements related to the spinoff our Korea with the corresponding income recorded in other income excluding.
Brian: Excluding these items and amortization of $60 million adjusted operating income in the quarter was $453 million or 14, 3% of revenue compared to $448 million or 14, 7% last year.
Brian: The margin decline was due to lower Covid testing.
Brian: Base business margins were up as the benefit of demand and launchpad savings were partially offset by higher personnel costs.
Brian: Our Launchpad initiative continues to be on track to deliver $100 million to $125 million of savings this year consistent with our long term target.
Brian: The adjusted tax rate for the quarter was 23% compared to 22, 1% last year the higher adjusted tax rate was primarily due to our stock based compensation benefit in the prior year.
Glenn A. Eisenberg: This guidance includes the year-over-year positive impact from foreign currency translation of 40 basis points versus 220 basis points in the prior guidance. Our guidance range for adjusted EPS is $14.45 to $15.35. The free cash flow guidance range is $1 to $1.15 billion, unchanged from prior guidance.
Brian: We continue to expect our full year adjusted tax rate to be approximately 23%.
Brian: Net earnings from continuing operations for the quarter were $228 million or $2 69 per diluted share adjusted EPS were $3 68 in the quarter up 7% from last year.
Brian: Operating cash flow from continuing operations was a use of $30 million in the quarter compared to $186 million generated a year ago. The reduction in cash flow was due to lower cash earnings primarily related to deferred taxes and the timing of working capital requirements.
Brian: Capital expenditures totaled $134 million in the quarter or four 2% of revenue. This compares to $78 million or two 6% in the prior year, which was impacted by the then pending spend for treatment.
Unknown Executive: And our first question comes from Jack Meehan of Nephron Research. Your line is open. Morning, Jack. So I wanted to focus on the In Vitae deal here. Let's start with Adam.
Brian: For the full year, we continue to expect capital expenditures to be approximately three 5% of revenue.
Adam H. Schechter: Can you talk about the strategic value of these assets? Why are you excited to acquire them out of bankruptcy, and how does the oncology business complement what you're doing already? Yeah, hi, Jack.
Brian: Free cash flow from continuing operations for the quarter was a use of $164 million.
Brian: The first quarter is seasonally the company's lowest quarter for free cash flow. We continue to expect free cash flow for the full year to be between one to one 5 billion.
Adam H. Schechter: So they're strong assets. And, you know, we've always said that oncology is one of our core therapeutic areas, and they have a very big hereditary oncology business, much bigger than the business that we have in that area. So it certainly augments what we're doing, and it accelerates it in a fairly significant way. They also have quite a bit of rare disease work that they've done, and that complements our focus on specialty testing.
Brian: During the quarter, the company invested $259 million in acquisitions and paid out $62 million in dividends.
Brian: At quarter end, we had $99 million in cash.
Brian: While debt was $5 1 billion.
Brian: Our leverage was two five times gross debt to trailing 12 months adjusted EBITDA.
Speaker Change: Now I'll review, our segment performance beginning with diagnostics laboratories.
Speaker Change: Revenue for the quarter was $2 5 billion, an increase of four 1% compared to last year with organic growth of one 8% and acquisitions net of divestitures contributing to 2%.
Speaker Change: The base business grew six 8% compared to the base business last year, while Covid testing revenue was down 70%.
Speaker Change: Organically in constant currency the base business grew four 4%.
Speaker Change: Total volume increased three 4% compared to last year base business volume grew four 9% compared to the base business last year as organic volume increased two 7% while acquisitions.
Adam H. Schechter: They have a very good NGS platform; we have a platform, but, you know, we're going to look to see what we can use that they have and use what we have and get the best platform we can possibly get. They have very good talent.
Speaker Change: <unk> contributed two 2%.
Speaker Change: Price mix increased <unk>, 6% versus last year due to an organic base business increase that was partially offset by lower COVID-19 testing.
Speaker Change: Base business organic price mix was up one 7% compared to the base business last year.
Speaker Change: Diagnostics adjusted operating income for the quarter was $418 million or 16, 9% of revenue compared to $442 million or 18, 5% last year the.
Adam H. Schechter: And I think we're able to do it, you know, a reasonable deal. It's a company that people have looked at for years and years, but their valuation was always too high, but the science was always very good. Their capabilities were always very good.
Speaker Change: The decrease in adjusted operating income was due to a reduction in Covid testing.
Speaker Change: While base business income was up as the benefit of demand and launchpad savings were partially offset by higher personnel costs.
Speaker Change: The decrease in adjusted operating income margin was due to the reduction in Covid testing the negative impact from weather and the mixed impact from lab management agreements, which we expect to improve over time.
Unknown Executive: So strategically, I feel it fits very well for us. Thank you. One moment for our next question. Yeah, hi, Erin.
Speaker Change: Now I'll review the segment performance of Biopharma Laboratory services.
Unknown Executive: When we talk about the three acquisitions that we announced in the quarter, that obviously adds obviously to the change in the guidance we did for diagnostics. So when you look at the change, just use the midpoint of our guidance, it improved 140 basis points. Assume roughly half of that is from those three acquisitions.
Speaker Change: Revenue for the quarter was $711 million, an increase of seven 5% compared to last year due to an increase in organic revenue of five 1% and foreign currency translation of two 4%.
Speaker Change: The revenue growth was driven by continued strength in central labs, which was up 13%. While early development was down 4% due to continued higher than normal cancellations and lower orders.
Speaker Change: While cancellations are higher than normal we have seen a sequential improvement from last quarter.
Unknown Executive: And again, those were already incorporated in our enterprise guidance, but not until the segment until the deals were closed. So half of it is due to the acquisitions, and then the other half of the growth is due to demand. The strength that we saw in the first quarter that we also expect to see continued through the year. Thank you. One moment for our next question. Good morning, Patrick.
Speaker Change: Biopharma adjusted operating income for the quarter was $100 million or 14, 1% of revenue compared to $74 million or 11, 1% last year.
Speaker Change: Adjusted operating income and margin increased due to organic growth and launchpad savings, partially offset by higher personnel costs.
Speaker Change: We ended the quarter with a backlog of $7 9 billion and we expect approximately $2 5 billion of this backlog to convert into revenue over the next 12 months.
Speaker Change: The trailing 12 months book to Bill was one point of ROE.
Speaker Change: Which we expect to increase throughout the year.
Speaker Change: Now I'll discuss our updated 2020 for full year guidance, which assumes foreign exchange rates effective as of March 31, 2024 for the remainder of the year.
Speaker Change: The enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted for acquisitions share repurchases and dividends.
Unknown Executive: Yeah, the only thing I'd add to Patrick is when you put the size of the business in perspective, obviously, it's less than 10% of the company. But even within biopharma, you have two-thirds of the segment, let's say Central Lab. And that's really where the backlog, if you will, in the book-to-bill is probably more applicable, because the backlog that we have in Central Lab is effectively supporting most of the revenues over the next 12 months, so to your point on visibility.
Speaker Change: We expect enterprise revenue to grow four 8% to six 4% compared to 2023.
Speaker Change: Compared to prior guidance. This is a narrowing of the range with the same midpoint. Despite a 50 basis point headwind from currency.
Speaker Change: We continue to perform well in diagnostics and are narrowing our full year guidance range and increasing the midpoint we.
Speaker Change: We expect diagnostics revenue to be up four 8% to 6% compared to 2023.
Speaker Change: This is an increase at the midpoint from our prior guidance of 140 basis points.
Speaker Change: Merrily due to stronger base business demand as well as acquisition revenue that is now forecasted in this segment, where it was previously only included in the enterprise guidance prior to the closing of the transactions.
Speaker Change: We expect Biopharma revenue to grow three 7% to five 7% compared to 2023.
Unknown Executive: With early development, we have less visibility because it's a much lower percentage of the backlog for that business and has much shorter lead times. So it just causes a little bit more volatility, if you will. But on the positive side, as we ultimately see the rebound in that business, we'll be able to get those revenues and bring them in on a quicker basis than we could have within Central Lab. Thank you.
Speaker Change: The decrease at the midpoint from our prior guidance of 180 basis points is due to currency.
Speaker Change: This guidance includes the year over year positive impact from foreign currency translation of 40 basis points versus 220 basis points in the prior guidance.
Speaker Change: An improvement in the outlook for Central Labs is expected to be offset by early development.
Speaker Change: We continue to expect margins in diagnostics and biopharma to be up in 2024 versus 2023, driven by topline growth and launchpad savings.
Speaker Change: Our guidance range for adjusted EPS is $14 45 to $15 35.
Speaker Change: We have narrowed the range and increased the midpoint of guidance by <unk>.
Speaker Change: Driven by improvement in diagnostics, partially offset by the change in currency.
Unknown Executive: One moment for our next question, and our next question comes from Michael Cherney of Leering Partners. Your line is open.
Speaker Change: Free cash flow guidance range is one to one 5 billion.
Speaker Change: <unk> from prior guidance.
Speaker Change: In summary, we expect to drive continued profitable growth and strong free cash flow generation that will be used for acquisitions that support our strategy and supplement our organic growth. While also returning capital to shareholders through our share repurchase program and dividends.
Unknown Executive: Yeah, so overall, we normally talk about our growth weighted to volume versus price mix and kind of a, Okay. Thank you. Morning, morning. Thank you. How are you?
Speaker Change: Operator, we will now take questions.
Speaker Change: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
Unknown Executive: So I just want to talk about just the volume, and obviously, the diagnostic segment is very strong. And that's in line with what your largest peer just reported. And I'm just trying to figure out how much is driven by underlining demand, which is strong, but also how much is driven by maybe the national companies taking market share. And if you are taking market share, who are you taking it from? Yes, and I'll give you a broad overview and maybe some details.
Speaker Change: Withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: And our first question comes from Jack Meehan of Nephron Research. Your line is open good.
Jack Meehan: Good morning, Jack.
Jack Meehan: Good morning.
Jack Meehan: So wanted to focus on the <unk> deal here.
Jack Meehan: Let's start with Adam can you talk about the strategic value of these assets why you're.
Jack Meehan: Excited to acquire the amount of bankruptcy.
Unknown Executive: But broadly speaking, you know, if you look at the hospital deals that we're doing, there's a significant number of them that we had last year at the end of the quarter going into this year. And when you do those, those are, by definition, getting some market share. And then when you think about what's happening in the marketplace around those hospitals, you expect that you'll pick up some market share there as well. So I think a lot of it is that the market is strong. You're seeing a lot more people getting procedures and so forth.
Jack Meehan: How does the oncology business complement what you're doing already internally.
Adam H. Schechter: Yes, Hi, Jeff.
Adam H. Schechter: So they are strong assets and we've always said that oncology is one of our core therapeutic areas and they have a very big hereditary.
Adam H. Schechter: Apology business much bigger than the business that we have in that area. So.
Jeff: Certainly augments, what we're doing and it accelerates it and a fairly significant away. They also have quite a bit of rare disease work that they've done and that augments our focused on specialty testing.
Jeff: A very good mgs platform, we have a platform, but we're going to look to see what we can use that they have and use what we have and get the best platform. We can possibly get there very good talent and I think we are able to do it.
Jeff: <unk>, it's a company that people have looked at for years and years, but theyre valuation you can never get passed but the science was always very good their capabilities. We're always very good at so strategic that fits very well for us.
Speaker Change: Yes that makes a ton of sense and then.
Unknown Executive: But in addition to that, I think there are some share gains that you're seeing because of what we're doing and the strength that we have in the hospital market sector. Yeah, no, the only thing I'd add is just that, you know, we had a good quarter, and we took our full year outlook up, so reflecting the stronger demand than we've been seeing. We also look back to pre-pandemics, and we're tracking well within the range that we would normally expect to be, so some of the year-over-year improvement arguably has driven a bit of a not-fully-recovered year, the prior year, but to see that kind of growth, you know, we feel very good about and expect that to continue. All right. And then secondly, heading into the final LDT rule from the FDA, what is LabCorp looking like? What are the key things we should look for that you want changed in the final rule?
Speaker Change: Second one for Glenn can you just talk about the strategy to work down the dilution prior to the bankruptcy I think <unk> was targeting burn of over $200 million some of thats related to things youre not acquiring but.
Glenn A. Eisenberg: The target you laid out calls for maybe $30 million to $50 million burn was my math can you just talk about the confidence it won't be worse than that and then the action steps to get to accretion in year two.
Glenn A. Eisenberg: Yes, Hi, Jack So again as Adam commented, we're very excited about the acquisition and frankly.
Glenn A. Eisenberg: Going out of acquiring the select assets through a bankruptcy from a purchase price obviously relative to other deals that we see a similar.
Glenn A. Eisenberg: Our focus in our therapeutic areas is quite attractive as.
Glenn A. Eisenberg: As we think about long term value creation you heard in the opening comments that we expect us to exceed our cost of capital in year, three and have a very attractive overall return on our investment.
Glenn A. Eisenberg: But to your point in the near term it will be dilutive.
Glenn A. Eisenberg: This is a business that has a high cost structure.
Glenn A. Eisenberg: And from our perspective like other acquisitions that we've done a similar ilk will be able to leverage our cost structure within labcorp to leverage.
Glenn A. Eisenberg: It's a business that has a very high gross margin, which is again very attractive to us. Obviously, we will continue to instill a launchpad disciplines that we have which will benefit them as well, but the big opportunity to improve their profitability is on the cost side.
Unknown Executive: And our next question comes from Elizabeth Anderson of Evercore ISI. Your line is open. Yeah, so, you know, we've gotten quite good at being able to efficiently and effectively run the lab management agreements that we have. You know, when you do 100 hospitals with one organization quickly, you become an expert pretty fast. So, what I would say is that we take our time because the most important thing is to ensure that there's no patient disruption.
Glenn A. Eisenberg: They spend a fair amount in R&D, which we would expect to continue obviously the value of what we're acquiring.
Glenn A. Eisenberg: From sales marketing and especially general administrative costs, where we can leverage our infrastructure, we will be able to get it profitable as Adam said within the first year. So it's all about integration, we'll do it on a very disciplined and timely manner, but we expect it to ultimately be accretive in the second full year of our ownership.
Speaker Change: Sounds good thanks, guys.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And our next question comes from Erin Wright of Morgan Stanley. Your line is open.
Unknown Executive: The second thing is that we make sure that physicians are very satisfied with the way in which they can order and the speed in which they get their results. And then, over time, we find ways to, you know, use our size, our scale, and our ability to synergize to reduce costs. And we've learned that, you know, the most important thing is to do it really well.
Erin Elizabeth Wilson Wright: Good morning.
Erin Elizabeth Wilson Wright: Good morning.
Erin Elizabeth Wilson Wright: Could we talk a little bit about what's embedded in guidance as it relates to the acquisition contribution versus organic growth in base business strengthen the diagnostics segment I just wanted to make sure Kenneth can you remind us what's embedded in the enterprise level guidance fragrances segment level guidance as well thanks.
Kenneth: Yeah, Hi, Erinn.
Kenneth: When we talk about the three acquisitions that we announced in the quarter.
Kenneth: Thats, adding obviously to the change in the guidance we did for diagnostics. So when you look at the change just use the midpoint of our guidance it improved 140 basis points.
Unknown Executive: And although the margins never get to our average margins, they start off low, and they increase over time. I think you've seen with the announcement of several deals closing in the first quarter, and multiple deals closing at the end of last year; there's a slight impact on our margins in the beginning. But over time, the margin is going to improve, and that's why we believe our diagnostics margin will increase when you look at the totality of 24 versus 23.
Kenneth: Roughly half of that is from those three acquisitions and again those were already incorporated in our enterprise guidance, but not until the segment until the deals were closed so half of it is due to the acquisitions and then the other half of the growth is demand the strength that we saw in the first quarter that we also expect to see continued through the year.
Speaker Change: Okay. That's helpful and then switching to the Biopharma segment, what are you expecting for the balance of the year at this point what are you seeing in terms of RFP flow.
Speaker Change: And how would you just characterize the underline how particularly across that early development. Thank you.
Speaker Change: Yes, so I'll start overall and then I'll answer early development specific Erin. So overall Biopharma laboratory services grew 8% and Central Labs had very strong growth at 13% now realizing central labs had a relatively easy compare versus first quarter of last year Youll, probably remember first quarter of last year there were a lot.
Unknown Executive: So what I would say is that there's no longer a supply issue with NHPs. The only thing that we're seeing with NHPs is a bit of a revenue drag because the cost of NHPs, when there was a supply issue, was much higher. We were charging the higher price, but we weren't making a margin on that higher price.
Speaker Change: Personnel issues and investigator sites.
Speaker Change: If you look at the growth, it's coming back slower than we anticipated, but it's being offset by the strength in our central lab business. If you look at RFP flow for Central lab, everything looks normal everything looks really strong.
Speaker Change: Business is very healthy if you look at early development, we still continue to have good RFP flow. The rig rates are good but cancellations still remained higher than what we would expect the <unk>.
Unknown Executive: So now that the prices have come down, the actual revenue for those studies has come down with the price. So you're seeing less revenue growth in that area, which I would say is probably a bit artificial because of the price of the NHPs coming down. Yeah, that makes sense. I just wanted to sort of understand that versus the dynamics in the non-NHP portion of the business.
Speaker Change: First quarter was a bit better than fourth quarter of last year, but still higher than what we anticipate so as we go through the rest of the year, we were able to maintain the revenue guidance for BLS. If you just adjust only for foreign exchange, where our central labs is going to continue to outperform and we expect it's going to take a bit.
Speaker Change: Longer for the early development business to fully come back.
Speaker Change: Thank you.
Unknown Executive: Thanks. And our next question comes from Kevin Caliendo of UBS. Your line is open.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And our next question comes from Patrick Donnelly of Citi. Your line is now open.
Unknown Executive: Morning, Kevin. Good morning. [inaudible] I'll try to add to it, but we wanted to talk a little bit about margins, expectations in the DX segment, specifically, around your expectation of labor and trends and absolute margins in the GX business going forward. I'd like to see this in the first quarter as a jumping off point.
Patrick Bernard Donnelly: Good morning, Patrick.
Patrick Bernard Donnelly: Hey, good morning, guys.
Patrick Bernard Donnelly: Want to pick up right, where you left off there on the on the Biopharma piece can you just dive a little deeper into early development, obviously again, the book to Bill softened a little bit there on some of the BLS side.
Speaker Change: There's a lot of focus on the early development piece can you just talk about the visibility on that front and again the expectations as we work our way through the year, maybe both on the orders and the revenue side would be helpful.
Speaker Change: Sure. So I'll start with the book to Bill. So the book to Bill was 1.0, that's lower than we would typically like however, we've got insight to the book to Bill for a second quarter already and insight for the rest of the year and I expect the book to the book to Bill to continue to grow starting next quarter throughout the rest of the year.
Unknown Executive: Okay, in diagnostics. What I would say is that if you look at the diagnostic business, the business performed very well. We had basically 7% growth in the base business, and volume was good at almost 5%. The margin was down versus the prior year. It was driven by three things. It was driven by COVID. There was some impact from weather. And, as I previously mentioned, there was some impact from the lab management agreements.
Patrick Bernard Donnelly: The health of the book to Bill still looks good across the business. It's the early development part of the book to Bill, which frankly is a little bit less relevant because early development a lot of the study start in the year and finishing the year typically with the book to Bill you look for.
Patrick Bernard Donnelly: Things that go more than a year overtime. So as I look at the early development book to Bill, it's not where we would like it at the moment, but the Rfps are good the win rate looks good. It's the cancellations that are driving the majority of the issues, but that can correct itself faster typically because the burn rate is so much quicker.
Patrick Bernard Donnelly: We go through the rest of the year, we expect that fee.
Patrick Bernard Donnelly: Early development business, starting in the second half will begin to be stronger than the first half.
Speaker Change: Yes, the only thing I'd add to Patrick is when you put the size of the business in perspective, obviously, it's less than 10% of the company, but even within Biopharma you have two thirds of the segment, let's say central lab, and that's really where the backlog. If you will in the book to Bill is probably more applicable because the backlog that we have in central lab is it.
Unknown Executive: As we begin to roll those out in the fourth quarter of last year and some in the first quarter, we'll see the margins get better as we go through the year. Overall, we expect the diagnostic margins in 24 to be higher than the margins in 23.
Speaker Change: Secondly, supporting most of the revenues over the next 12 months so to your point on visibility with early development, we have less available visibility because it's a much lower percentage.
Unknown Executive: And the only thing I'd add is, as Adam said, margins up even despite COVID and weather and lab management agreements for the full year margins to be up slightly, but also to see that expected beginning in the second quarter, where you'll see nice growth year over year. We'll have normal seasonality. So when you look at the absolute margins, they'll fluctuate based on seasonality, but the year over year improvement you'll see pick up nicely beginning in the second quarter.
Patrick Bernard Donnelly: Of the backlog with that business in much shorter lead times so adjusting.
Patrick Bernard Donnelly: Is it a little bit more volatility if you will but on the positive side as we ultimately see the rebound in that business, we will be able to get those revenues and bring them into revenues on a quicker basis than we could have within central labs.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Okay.
Speaker Change: And our next question comes from Michael Cherny of Leerink Partners. Your line is now open.
Michael Cherny: Good morning, Mike Good morning.
Michael Cherny: Morning, and thank you so much for taking the question maybe just one quick clarification on <unk> you talked about the financial impact in the first full year post close is there any financial impact currently embedded in the guidance.
Unknown Executive: That gives us confidence that the margins will be up for the full year. Thank you. One moment for our next question. And our next question comes from Andrew Brackmann of William Blair. Your line is open.
Michael Cherny: So Michael this is Glenn when you look at the guidance that we've given and we always kind of say the midpoint of our range is what our expectation is and then there is always going to be pluses and minuses, which is why we put a range. So at the midpoint of our guidance. The answer is in <unk> is not in those numbers, but when you look at the guidance range. So.
Michael Cherny: Relative to the revenues of <unk> or the potential dilution in the first year that would be incorporated if you will the sizing it within the range we've given so.
Unknown Executive: Morning, thanks for taking the questions. Maybe just to piggyback off some of those margin questions on the diagnostics front, but more specifically on the specialty diagnostics side of things. I guess, how should we be thinking about moving the moving pieces there moving forward? Obviously, you gave some color around in V-TAPE, but just as that entire specialty business grows, how are you thinking about its impact on total segment margins here? Yeah, so the first thing I would say is, as we look at the businesses, they're both strong right now, routine testing, as well as our specialty testing.
Speaker Change: So I guess the answer is it's not an explicit guidance, but it's captured within the range that we've provided.
Michael Cherny: We're looking to close this and it obviously depends on when we do but let's say it's in the third quarter, obviously, when we have our announcement our quarterly call.
Michael Cherny: We will update our guidance to reflect obviously a half a year left but obviously acquisitions that was had been completed as well, which again, we may see in DTA over that timeframe.
Michael Cherny: Okay. That's helpful. Glenn and then maybe just on price and Rev per req can you just give a sense on how it tracked over the quarter relative to your expectations in terms of the base business guidance increase for the.
Michael Cherny: The diagnostic laboratories business, how much of that is the difference between improvements in volume versus improvements in price.
Unknown Executive: We are seeing specialty testing grow at a slightly accelerated rate versus routine testing, but routine testing is still the vast majority of the business that we do. A big part of the reason that specialty testing is important is, number one, that they're typically very serious diseases.
Glenn A. Eisenberg: Yes. So overall, we normally talk about our growth weighted to volume versus price mix and kind of a.
Michael Cherny: Three to one kind of ratio if you will obviously it was a little different during the quarter, but strength frankly on both volume and price mix.
Michael Cherny: Rice mix frankly is mix related we would normally say unit prices relatively flat.
Michael Cherny: But the improvement that we saw in the quarter from a mixed standpoint was the <unk> management agreements.
Adam H. Schechter: Number two, when people get specialty testing, they get a lot of routine tests around those specialty tests as well. And then, third of all, they typically show how strong you are in science and innovation, and it's got a good kind of overhang on the company because we are a scientifically-based organization. So for those three reasons, you'll see specialty testing growing faster than routine testing, but routine tends to go with specialty testing to some degree.
Michael Cherny: Our test per session. We continue to see favorable movement and were seeing a higher percent of our growth coming from our esoteric business versus routine. So all of those three kind of improved our mix, but clearly the growth. We expect to see is driven off of demand, which is which is volume.
Speaker Change: Got it thank you.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Okay.
Speaker Change: And our next question comes from Ann Hynes of Mizuho Securities. Your line is now open.
Ann Kathleen Hynes: Good morning. Good morning. Thank you how are you. So I just want to talk about.
Ann Kathleen Hynes: And obviously the diagnostics segment is very strong.
Ann Kathleen Hynes: And it's in line with what your largest peer just reported.
Adam H. Schechter: Yeah, what I would say right now, it's not a large part of our business; it's a very small part of our business, but it's an important part because there are new therapies that we believe will be available over time. It's such an important disease, and it's growing in the United States and around the world. So we want to have the broadest portfolio for physicians to use to help with the diagnosis and monitoring of Alzheimer's patients. But once again, many of those patients not only need these Alzheimer's tests, but they'll use a lot of routine tests as they learn to diagnose those patients and monitor them over time.
Ann Kathleen Hynes: I'm trying to figure out like how much is driven by underlying demand, which is strong but also how much is driven by maybe the national companies taking market share and if you are taking market share who are you taking a tablet.
Speaker Change: Yes, so I'll give you broad speaking then maybe think has some details but broadly speaking if you look at the hospital deals that we're doing as a significant number of them that we had last year at the end of the quarter going into this year and when you do those those are by definition getting some market share.
Speaker Change: And then when you think about what's happening in the marketplace around this hospitals, you expect that you'll pick up some market share there as well. So I think a lot of it is that the market is strong you're seeing a lot more people getting procedures and so forth. But in addition to that I think there is some share gains that youre seeing because of what we're doing and the strength that we have in there.
Speaker Change: Hospital market sector.
Speaker Change: The only thing I'd add is just that.
Adam H. Schechter: I would expect over time that the market will grow, those tests will grow, but I think it'll be to some degree commensurate with how fast the overall prescription drug market grows because when diagnosed, physicians also want to know what they can do about that and what they should do about that. Okay, thanks, Adam. Thank you. Please take a moment for our next question. And our next question comes from Eric Caldwell of Baird. Your line is open.
Speaker Change: We had a good quarter and we.
Speaker Change: We took our full year outlook up so reflecting the stronger demand than we've been seeing we also look back to pre pandemic and we're tracking well within the range that we would normally expect to be so some of the year over year improvement arguably has driven a.
Speaker Change: A bit about and not fully recovered year to the prior year, but to see that kind of growth.
Speaker Change: Very good about and expect that to continue.
Speaker Change: Alright, and then secondly, heading into the final <unk> from the FDA what is <unk> okay.
Speaker Change: What are the key things, we should look for that you aren't changed and the final graph.
Speaker Change: Yes. So the first thing I'd say is that the Labcorp was supported supportive of the valid Act, which we thought was the right way to provide oversight of the Fas Ldp's. It was legislation that was fit for purpose for our industry.
Unknown Executive: Morning, Eric. Good morning. You know, it's going to be an embarrassing question when you're afraid to ask it.
Speaker Change: We're not supportive of the current.
Speaker Change: Although we haven't seen the final rule, we still have to see that it will hold judgment until we see exactly what's in there.
Speaker Change: I worry about most.
Speaker Change: We have great quality organization, we have.
Unknown Executive: But on NHP and the pricing comments, I'm curious if you could give us any more detail on where your pricing is today and what it looks like going forward versus the recent past. One of your smaller competitors recently shared with The Street that its pricing is down about 18% versus last quarter. I'm curious if you could frame it for us. And then, I believe at the top of the market, NHP was about half of your early development work in total. I'm curious if you could give us a sense of what that mix looks like today. Yeah. Hey, Erica.
Speaker Change: Terrific scientists and we do so many.
Speaker Change: So much research and each set that we put in the marketplace. What I worry about is speed to market of <unk> and patients that meet these <unk>. They are typically smaller groups of patients.
Speaker Change: Other people arent necessarily developing tests for them.
Speaker Change: And they need the test as quickly as possible. So the real question to me is going to be how fast the FDA will be able to review them <unk> and get them into the marketplace.
Speaker Change: Great. Thanks.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And our next question comes from Opus Anderson of Evercore ISI. Your line is open.
Elizabeth Hammell Anderson: Hi, guys.
Elizabeth Hammell Anderson: Good morning. Thanks, so much for the question I was wondering if you could comment on the pacing of that lab management and then Dr. <unk>.
Elizabeth Hammell Anderson: And I think to pick up on proceeding no sort of direct you guys thought any learnings you would say in terms of other others as you continue on that path.
Glenn A. Eisenberg: With regard to NHP pricing, we've not given what the step down in the pricing has been, and obviously, it impacts the mix and where we get the primates from and where they're used in the studies. What we've commented is that it's been a nice reduction in the price from when we were capacity constrained, and obviously, the prices were significantly higher. And I think Adam referenced this earlier as well, that from our perspective, while it impacts our revenues, it's really not impacting our profitability because most of the step down in the price of NHPs was past the group.
Speaker Change: Yes, so we've gotten quite good at.
Elizabeth Hammell Anderson: Being able to efficiently and effectively run the lab management agreements that we have when you do a 100 hospitals with one organization quickly.
Elizabeth Hammell Anderson: You become an expert pretty fast so what I would say is we take our time because the most important thing is to ensure that there is no patient disruption. The second thing is it makes sure that the physicians are very satisfied with the way, we're second order and the speed in which they get the results and then over time, we find ways to.
Elizabeth Hammell Anderson: Use our size, our scale and our ability to synergize to reduce cost and we've learned that the most important thing is to do it really well and although the margins never get to our average margins. They start off slow and May increase over time, I think you've seen with the announce.
Glenn A. Eisenberg: So the positive is that it shows us a lower cost for our customers to get their studies done, so they're seeing the benefit of it without a negative impact from us overall. To your point, roughly half of the studies that we do are NHP-based, with the other half that are not. That mix really hasn't changed very much.
Elizabeth Hammell Anderson: Net of several deals closing in the first quarter multiple deals closing at the end of last year.
Elizabeth Hammell Anderson: <unk> impact on our margin in the beginning but over time the margin is going to improve and Thats why we believe our diagnostics margin will increase when you look at the totality of 24 versus 23.
Speaker Change: Got it that's helpful and then.
Speaker Change: If you can comment too in the early development business about sort of non HP grows because I just wanted to sort that out in terms of the impact on the revenues in the quarter. Thank you.
Glenn A. Eisenberg: Thanks, Glenn, I appreciate that. Just maybe another macro question, the HLM deals come in at a lower, lower margin, as you've always said, and you've done a flurry of them here recently. And then the very big deal with Ascension, I know you're talking about improvements as you integrate and get those onboarded each year, each time. But could you give us an update on where Ascension is at this point, kind of the journey on that contract from the beginning to the present, and how it stacks up on a margin profile and possibly also a revenue profile versus your original expectation?
Speaker Change: Yes, so what I would say is that there is no longer a supply issue with managed fee. The only thing that we're seeing within each piece is a bit of a revenue drag because the cost of nxp's. When there was a supply issue or much higher we were charging the higher price, but we werent, making a margin on that higher price. So now that the prices.
Speaker Change: Have come down the actual revenue for those studies come down.
Speaker Change: The price so you're seeing less revenue growth in that area, which I would say, it's probably a bit artificial because of the price of the NXP is coming down.
Speaker Change: Yes that makes sense I, just wanted to sort of understand that versus the dynamics in the non HP portion of the business.
Speaker Change: Yes, I would say that that happened.
Speaker Change: And the non mid HP person Youre seeing.
Speaker Change: Growth rates that would be a bit higher than the NSP, but again that's more.
Speaker Change: They are both less than what we had seen historically because of what's happening in the biotech world. We are beginning to see signs of recovery in the biotech growth of both of those parts of the business should recover over time.
Speaker Change: Got it thanks, so much.
Speaker Change: Thank you one moment for our next question.
Glenn A. Eisenberg: Yeah, I'll let Glenn answer that question, Eric. But before he does, you know, I think it's important to note that no two hospital deals are exactly the same. And it really is three pieces to them, right?
Speaker Change: And our next question comes from Kevin Caliendo of UBS. Your line is open.
Kevin Caliendo: Hey, good morning, Kevin good.
Kevin Caliendo: Good morning.
Kevin Caliendo: All right.
Kevin Caliendo: Absolutely.
Speaker Change: Kevin We can't hear you, you're breaking up pretty significantly.
Adam H. Schechter: There's a lab management part where you run the hospital's labs, there's the outreach business, and there's the referral business. Ascension was kind of an outlier to most of the deals that we do because so much of it was the lab management part of the business, which has by far the lowest margin that starts out low and improves over time. Most of the deals that we do, they start out with a lower margin, but overall, with the kind of portfolio of the three types of business, they get to about our average margin over time. So that's the typical deal. Ascension's a bit of an outlier, but maybe you can talk about Ascension, Glenn. Yeah, no.
Speaker Change: Sorry.
Speaker Change: No.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Goodbye.
Speaker Change: Margin expectation.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Your expectation.
Speaker Change: Correct.
Speaker Change: Absolute margin.
Speaker Change: Got it.
Speaker Change: Nice quarter.
Speaker Change: Yes are you talking our margins.
Speaker Change: CLS or diagnostics I couldn't tell.
Speaker Change: Alright.
Speaker Change: And diagnostics.
Speaker Change: What I would say is that if you look at the diagnostic business to business performed very well.
Speaker Change: We had basically 7% growth in the base business and volume was good at almost 5% the margin was down versus prior year was driven by three things by Covid.
Speaker Change: There was some impact from weather and as I previously mentioned there was some impact from the lab management agreements as we begin to roll those out in the fourth quarter of last year from the first quarter, we will see the margins get better as we go through the year overall, we expect the diagnostic margins in 'twenty four to be higher than the margins in 'twenty three.
Glenn A. Eisenberg: I think that's right, especially given the size of the transaction overall, let alone the percentage that was lab management. But we normally, and Ascension was a good example, would start in a mid-single digit kind of margin. So obviously, mixing us down as we've talked about, and then we normally see the margin step up over the years. With that one, while we expect to see a step up, probably not as strong in just the second year of ownership as relative to others, as we continue to share on a value-based basis, if you will, some of the synergies and the savings that we get, we're obviously passing on to our large partner there, So, positive direction, but we'll see more of an incremental improvement next year, and the revenue for that looks very strong. It's slightly above what we had guided to originally, Eric. Okay, thanks very much, guys.
Speaker Change: Yeah, the only thing I'd add to is as Adam said margins up even despite COVID-19.
Speaker Change: Whether the lab management agreements for the full year margins to be up slightly.
Speaker Change: But also to see that expected.
Speaker Change: Beginning in the second quarter will Youll see nice growth year over year, we will have the normal seasonality. So when you look at the absolute margins will fluctuate based on seasonality, but the year over year improvement Youll see pick up nicely.
Speaker Change: Beginning in the second quarter that gives us the confidence that the margins will be up for the full year.
Speaker Change: Thanks, guys.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Okay.
Speaker Change: And our next question comes from Andrew Brachman of William Blair. Your line is open.
Andrew Frederick Brackmann: Good morning, Andrew.
Andrew Frederick Brackmann: Good morning, Thanks for taking the question.
Andrew Frederick Brackmann: Maybe just to piggyback off of some of those margin questions on the diagnostics front, but more specifically on the specialty diagnostics kind of thing I guess, how should we be thinking about moving the moving pieces. There moving forward. Obviously you gave some color around in detail, but just is that entire specialty business growth. How are you thinking about the impact on total segment margins here.
Andrew Frederick Brackmann: Thanks.
Speaker Change: Yes. So the first thing I would say is as we look at the businesses. Both strong right now a routine testing as well as our specialty testing we are seeing the specialty testing grow at a slightly accelerated rate versus the.
Speaker Change: The routine testing, but routine testing is still the vast majority of the business that we do a big part of the reason that specialty testing is important is number one they are typically very serious diseases number two when people get specialty testing they get a lot of routine tests around the specialty test as.
Unknown Executive: Thank you. Thank you. One moment for our next question, and our next question comes from Michael Riskin of Bank of America. Your line is open.
Speaker Change: Well and then third of all they typically.
Unknown Executive: Good morning, Michael. Hello. Good morning. This is John Kim on the forward mic.
Speaker Change: Our show how strong you are in science and innovation and it's got a good kind of overhang of the company because we are scientifically based organization. So for those three reasons youll see specialty testing growing faster than routine testing, but routine tends to go with the specialty testing to some degree.
Unknown Executive: Good morning, John. Morning. You've done a lot of deals. You have NBTA, BioReference, and the three health system agreements that you closed in the first quarter. And Glenn, you talked about how, given the range that in detail would be included in the top end of the guidance. So could you just update us on your thoughts on the deal funnel and your capital allocation priority? Yes.
Speaker Change: Okay. That's helpful and then I guess, maybe a little bit unrelated, but but as it relates to your Alzheimer's portfolio more specifically can you maybe just give us a sense of the current scale for that business today, and I guess as you're thinking longer term here. Just can you talk about the market opportunity that you see in that segment moving forward. Thank you.
Speaker Change: But I would say right now it's not.
Speaker Change: Part of our business, it's a very small part of our business, but it's an important part because there are new therapies that we believe are becoming available over time.
Glenn A. Eisenberg: So when you think about, to your point, the transactions that we've done this year, and as we've commented, embedded in our guidance is the assumption that we'll use our free cash flow for acquisitions, dividends, and share repurchases. This has been a good year for M&A. We've always talked about that we have a strong pipeline of deals, and we're seeing them come to fruition this year. But between the three deals that we closed in the first quarter, the announcement of BioReference and Invitae, you're looking, from an M&A standpoint, over $700 million of capital allocated to M&A this year. And then you add that with the dividends, and you're getting closer to a billion.
Speaker Change: An important disease and it's growing in the United States and around the world. So we want to have the broadest portfolio for physicians to use to help with the diagnosis and monitoring of <unk> patients, but once again many of those patients not only need these alzheimer's tests, but don't use a lot of routine test as they learn to diagnose these patients and monitor them.
Speaker Change: Overtime I would expect over time that market will grow those tests will grow but I think it will be to some degree commensurate with how fast the overall.
Speaker Change: Prescription drug market grows because when diagnosed the physicians also want to know what can I do about that and what should I do about that.
Speaker Change: Okay. Thanks, Adam.
Adam H. Schechter: Sure. Thank you one moment for our next question.
Adam H. Schechter: And our next question comes from Eric Coldwell with Baird. Your line is now open.
Eric White Coldwell: Good morning, Eric.
Eric White Coldwell: Good morning, it's going to be embarrassing question, when youre afraid to ask it but.
Eric White Coldwell: On the and HP and the pricing comments I'm curious if you could give us any more detail on.
Eric White Coldwell: Where your pricing is today, what it looks like going forward versus the recent past one of your.
Glenn A. Eisenberg: On the positive side, we have a strong balance sheet. So another $100 million, I'll call it free cash flow-ish, that'll be used between M&A and share repurchases. But we're currently leveraged at around two and a half times debt to trailing 12-month EBITDA, and we're at the low end at two and a half times, and we give a targeted range of two and a half to three.
Eric White Coldwell: Smaller competitors recently shared with the street that it saw pricing down about 18% versus last quarter.
Eric White Coldwell: I'm curious if you could frame it for you for you and then I believe at the top of the market and HP was about half of your early development work in total.
Speaker Change: I'm curious if you could give us a sense on what that mix looks like today. Thank you.
Speaker Change: Yes, Hey, Eric.
Speaker Change: With regard to an HP pricing, we've not given what the step down in the pricing has been and obviously it impacts the mix and where we get the primary from and where they are used in the studies. What we've commented is that thats been a nice reduction in the price from when we were capacity constrained and obviously the prices were significantly higher and I think Adam reference.
Glenn A. Eisenberg: So within that, call it half a point on a $2 billion plus EBITDA basis, we have another billion dollars of capacity. So we'll still have a lot of financial flexibility to do share repurchases, and to do tuck-in acquisitions that we feel are strategic. But we feel very good about the deals that we've announced this year. Obviously, we'll spend a lot of time integrating them into the company. But we have the, obviously, the financial flexibility, as well as still a good pipeline of potential opportunities on the deal front going forward.
Speaker Change: Cyst earlier as well that from our perspective, while it impacts our revenues, that's really not impacting our profitability because most of the step down in the price of in Hps were pass through so the positive is it shows us a lower cost for our customers to get their study is done so they are seeing the benefit of it.
Speaker Change: Without a negative impact from us overall.
Speaker Change: To your point roughly half of the studies that we do are an HP based with the other half of that or not that mix really hasnt changed very much.
Speaker Change: Thanks, Glenn and I appreciate that just maybe another macro question the HL limb deals come in at a lower at a lower margin as <unk> always said and you've done a flurry of them here recently and then the very big deal with Ascension I know youre talking about improvements as you integrate and get those on board at each.
Unknown Executive: Appreciate that. And if I could ask one on biopharma early development, talked about the cancellations coming down still a little high. But I wanted to ask, you previously talked about targeting perhaps medium-sized clients. Has there been any shift? or your win rates are good, at least in the central lab.
Speaker Change: Over the next year, each time, but could you give us an update on where ascension is at this point kind of the the journey on that that contract from the beginning to the present and how it's stacking up on our margin profile and possibly also a revenue profile versus your original expectations.
Unknown Executive: Has there been any shift in that direction in terms of garnering attention or RFPs from medium-sized clients? Yes, so we're trying to improve our mix to more larger to medium-sized clients. It takes some time because many of those clients have master service agreements, and you have to wait for those to expire or find ways to be part of those.
Speaker Change: Yes, I'll, let Glen answer that question, but before you guys. I think it's important to note that no. Two hospital deals are exactly the same and it really has three pieces to that right. There's the lab management part where you run hospitals labs. There is the outreach business and then there is the referral business.
Glen: <unk> was kind of an outlier to most of the deals that we do because so much of it was the lab management part of the business and that has by far the lowest margin that starts out low improves over time most of the deals that we do they start out with a lower margin, but overall with the kind of.
Speaker Change: Portfolio of the three types of business they get to about our average margins overtime. So thats. The typical <unk> a bit of an outlier, but maybe you can talk about essentially but yes, no I think thats right, especially given the size of the transaction overall, let alone the percentage that was lab management, but we normally and ascension.
Unknown Executive: But over time, I'm confident that we'll continue to shift the mix more towards the medium to larger size farms. Got it. Appreciate that. Thank you. Thank you. One moment for our next question. And our next question comes from Brian Tanquilut of Jeffries. Your line is open.
Speaker Change: A good example, let's say would be start in a mid single digit kind of margin.
Speaker Change: So obviously mixing us down that we've talked about.
Speaker Change: And then we normally see the margin step up over the years with that one while we would expect to see a step up probably not as strong in just the second year of ownership as relative to others. As we continue to share on our value base basis. If you will some of the synergies and the savings that we get we're obviously passing onto that our large partner there and there.
Unknown Executive: Morning, Brian. Good morning. I guess my question for you guys is, in the past, as we thought about hospital lab acquisitions and outsourcing contracts, the distress in the space or the pressures in the hospitals was one of the driving factors. So as we're seeing broad utilization pickup in the hospital industry, health seems to be improving. Adam, have the conversations changed, or what does that pipeline look like today? And yeah, just curious about those dynamics and how they're playing into future deals and agreements with hospitals. Yeah, no, it's a good question, Brian, and it's good news that the systems are doing better and that the hospitals are performing better. I think that's good for all of healthcare, frankly.
Speaker Change: Thereafter are starting to see the step up so positive direction, but we will see more of an incremental improvement next year.
Speaker Change: And the revenue for that looks very strong.
Speaker Change: It's slightly above what we had guided to originally.
Speaker Change: Thanks, very much guys.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: And our next question comes from Michael Riskin of Bank of America. Your line is open.
Michael Riskin: Good morning, Michael.
Speaker Change: Hello. Good morning, This is John Kim on for Mike.
John Kim: Good morning, John.
John Kim:
John Kim: So.
John Kim: You've done a lot of deals you have in BK bio reference and <unk> helps us in agreement that you closed in the first quarter and.
John Kim: Glenn you talked about how given the range that <unk> would be included in that top end of the guidance.
John Kim: So could you just update us on your thoughts on the deal funnel.
John Kim: Capital allocation priority.
John Kim: Are there any out there.
John Kim: Larger deals independent labs or health system.
John Kim: Still.
John Kim: Coming our way.
Speaker Change: Yes, and so when you when you think about to your point the transactions that we've done this year and as we've commented embedded in our guidance is the assumption that we will use our free cash flow for acquisitions dividends and share repurchases.
Speaker Change: We have been this has been a good year for M&A, we've always talked about that we've had a strong pipeline of deals and we're seeing them come to fruition. This year, but between the three deals that we closed in the first quarter. The announcement of bio reference and Vijay you're looking from an M&A standpoint over $700 million.
Adam H. Schechter: So I'm pleased that they are beginning to rebound and do better. You know, the interesting thing was before the issues with the health systems, a lot of the discussion was, can you do it, and can you do it well, and should we take the risk that things aren't going to go well? Because we've done so many in so many large institutions, I don't think people have that question anymore.
Vijay: Capital allocated to M&A. This year and then you put that with the dividends you are getting closer to $1 billion. So on the positive side.
Vijay: We have a strong balance sheet, so another $100 million of call. It free cash flow ish that'll be used between M&A and share repurchases.
John Kim: But we're currently leveraged at around two five times.
Adam H. Schechter: They realize that, you know, we're really good at this, that we can manage it better than they probably can by themselves, that we'll have no physician interruption or patient interruption of note. So they're willing to look at us and talk to us about continuing to do these deals. Now, I think there was a sense of urgency that caused these deals to move quicker in the past. So I'm not quite sure the sense of urgency is there as much as it was before, but the number of discussions and the types of discussions we're having remain very good. It was awesome.
John Kim: Debt to trailing 12 months EBITDA and we're at the low end at two five times and we get a targeted range of two five to three so within that call. It half a point on a call. It a $2 billion plus EBITA basis, Yes, we have another $1 billion of capacity. So it will still have a lot of financial.
John Kim: <unk> to do share repurchases to do.
John Kim: In acquisitions that we feel are strategic but we feel very good about.
John Kim: The deals that we've announced this year, obviously, we'll spend a lot of time integrating them into the company.
John Kim: But we have the obviously the financial flexibility as well as still a good pipeline of potential opportunities on the deal front going forward.
Speaker Change: Got it I appreciate that.
Speaker Change: If I could ask one on the Biopharma early development, so you're talking about the cancellations coming down still a little high.
Unknown Executive: Thank you. Thank you. One moment for our next question. And our next question comes from Peter Chickering of Deutsche Bank. Your line is open. Morning, Peter. Hi there. You've got Kieran Ryan on for Peto.
Speaker Change: But I wanted to ask you previously talked about targeting perhaps medium sized clients any there've been any shifts.
Speaker Change: Or.
Speaker Change: Right.
Speaker Change: Maybe send that central lab has there been any shift in that direction in terms of <unk>.
Unknown Executive: Thanks for taking the questions. I noticed you didn't touch on labor when discussing the diagnostic margin drivers. I think one of your peers cited some, some modest improvement in the environment. So can you just give us an update on what you're seeing on labor as it relates to things like wage growth and turnover? Yeah, so I'll start with turnover.
Speaker Change: During.
Speaker Change: Attention or RFP, some medium sized clients.
Speaker Change: Yes, so we are trying to improve our mix to more larger two medium sized clients. It takes some times some time because many of those clients have master service agreements and you have to wait for those to expire or find ways to be part of those but over time I'm confident that we'll continue to shift the mix more towards the medium to larger sized pharma.
Speaker Change: Got it I appreciate that thank you.
Speaker Change: Thank you. Thank you one moment for our next question.
Speaker Change: And our next question comes from Brian <unk> of Jefferies. Your line is now open good morning, Brian.
Brian: I guess my question for you guys.
Unknown Executive: And I'll give you a sense of overall, across LabCorp, our turnover is better now than it was last year, the year before that. In our biopharma business, I'd say it's back to pre-COVID levels, maybe even a little bit better. So the turnover there is really improved.
Brian: In the past as we thought about hospital lab acquisitions in outsourcing contracts.
Brian: The distressed in this space or the pressures in the hospitals was one of the driving factors. So as we're seeing broad utilization pick up in the hospital industry health seems to be improving Adam has the conversations change or what does that pipeline look like today and just.
Unknown Executive: In our diagnostics, we see in certain areas, there's still higher turnover than what we would have seen prior to the pandemic, particularly among frontline employees, where they have not only other choices in healthcare but in other industries. But even there, we start to see less turnover than we've seen in the past. There's been a significant inflation of costs due to retaining employees in the past. As we go forward, I think it'll move back more towards the level of inflation of about 3% or so. I got it.
Brian: Just curious what those dynamics are and how they're playing into.
Speaker Change: Future deals and agreements with hospitals, yes.
Speaker Change: Yes, no. It's a good question Brian.
Speaker Change: It's good news that the <unk>.
Adam H. Schechter: Systems are doing better than that the hospitals are performing better I think thats good for.
Adam H. Schechter: Are all of health care, frankly, so I'm pleased that they are beginning to rebound and get better.
Adam H. Schechter: The interesting thing was before the issues with the health systems allow for discussing what can you do it and can you do it well and should we take the risk that things aren't going to go well.
Adam H. Schechter: Because we've done so many and so many large institutions I don't think people have that question anymore. They realize that we're really good at best that we can manage it better than they probably can buy themselves that will have no physician interruption in our pacing the eruption of note. So therefore, they're willing to.
Adam H. Schechter: Look and talk to us about continuing to do these deals now I think there was a sense of urgency that caused <unk> to move quicker in the past so I'm not quite sure of the sense of urgency is there as much as it was before but the number of discussions and the types of discussions we're having remained very good.
Unknown Executive: And then just a quick follow-up. Um, you know, the prior question was kind of talking about the strong demand that hospitals and some providers are seeing now. I was just wondering, does the top line guide and diagnostics at all contemplate, you know, a normalization of kind of broader utilization? Or, or are you just really not seeing anything outside of what you'd expect at this point?
Speaker Change: Awesome. Thank you.
Speaker Change: Yes. Thank you.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And our next question comes from Peter Chickering with Deutsche Bank. Your line is now open.
Philip Chickering: Good morning, Peter.
Philip Chickering: And there you have got Kieran Ryan on for Peter Thanks for taking the questions. Good morning, I noticed you.
Kieran Joseph Ryan: You didn't touch on labor when discussing the diagnostic margin drive areas.
Philip Chickering: I think one of your peers cited some some modest improvement in the environment. So can you just give us an update on what you're seeing on labor as it relates to things like wage garrison turnover.
Kieran Joseph Ryan: Yes, so I'll start with turnover and I will give a sense overall across lab Corp. Our turnover is better now than it was.
Kieran Joseph Ryan: Last year the year before that in our Biopharma business I'd say, it's back to pre COVID-19 levels, maybe even a little bit better. So the turnover there has really improved and our diagnostics. We see in certain areas are still higher turnover than what we would've seen prior to the pandemic, particularly in frontline employees, where they have.
Unknown Executive: Thanks. Yeah, I would say that, you know, we're seeing what we would expect at this point. It's slightly higher. We give a range because there's a range of different things that may or may not occur. But overall, we think that the environment is healthy. Yeah, when you look at the, also, Peter, I guess our implied guidance, so you're looking at stronger top-line growth than what we did in the first quarter with our guidance, but that's just really driven off of COVID becoming less of an issue. It was a bigger issue in the first quarter decline year on year. Plus, that's where we had the adverse impact from weather.
Kieran Joseph Ryan: Not only other choices in health care, but in other industries, but even there we start to see less turnover than what we've seen in the past.
Kieran Joseph Ryan: Theres been a significant inflation of our cost.
Kieran Joseph Ryan: Due to retaining employees in the past, but as we go forward I think it will move back more towards the level of inflation of about 3% or so.
Speaker Change: Got it thanks, and then just a quick follow up.
Kieran Joseph Ryan: Yes.
Speaker Change: The prior question was kind of talking about the strong demand that hospitals and some providers Youre seeing now I was just wondering does the does the top line guide and diagnostics at all contemplate.
Speaker Change: A normalization in kind of broader utilization.
Kieran Joseph Ryan: Or are you just really not seeing anything outside of what you would expect at this point. Thanks.
Kieran Joseph Ryan: Yes, I would say that we're seeing what we would expect at this point is slightly higher we give a range because there is a range of different things that may or may not occur.
Unknown Executive: So really, when you adjust for that, as Adam commented, you know, the demand that we're seeing, which came in a little bit stronger than we expected. We expect that to be similar demand going forward throughout the rest of the year. Thank you. Please take a moment for our next question. And our next question comes from Stephanie Davis of Barclays. Your line is open.
Kieran Joseph Ryan: But overall, we think that the environment is healthy.
Speaker Change: Yes, when you look at the also Peter I guess, our implied guidance. So youre looking at a stronger topline growth than what we did in the first quarter.
Speaker Change: With our guidance, but that's just really driven off of COVID-19, becoming less of an issue. It was a bigger issue in the first quarter decline year on year, plus that's where we have the adverse impact from weather.
Speaker Change: So really when you adjust for that Theres Adams commented the demand that we're seeing which is came in a little bit stronger than we expected we expect that to be similar demand going forward throughout the rest of the year.
Unknown Executive: Good morning, Stephanie. Hey, guys. Good morning.
Speaker Change: Okay.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And our next question comes from Stephanie Davis of Barclays. Your line is open.
Unknown Executive: Thanks for taking my question. I feel bad asking about early development because I said we're all focusing on this as a really small part of your business, but I have to ask because you did talk about some risk of potential share ships when I saw you in March. So I think about the cut; is this more a function of a hire for a longer term that could be impacting biotech funding? Is it something defensive early on, just in case maybe there are some potential share shifts?
Stephanie July Davis: Morning, Stephanie.
Stephanie July Davis: Don Ramon Thank you for taking my question.
Speaker Change: Sure.
Stephanie July Davis: Feel bad asking about early development as I said, we're all focusing on that that's a really small part of your business, but I have to ask because you did talk about the risks of potential share shifts lifestyle in March so I think about the Cai.
Speaker Change: It's more a function of a higher for longer environment that could be impacting biotech funding.
Speaker Change: That being defensive early on just in case, there are some potential sure Jed.
Adam H. Schechter: And how do we think about the underlying assumptions in terms of how they may have changed and been used on cancellations and biotech funding in order to kind of ensure new numbers? Yeah, so as I think about the early development business, I don't think that it's a share shift thing. I think our share is remaining consistent within the parts of the market that we compete in. We don't compete in all aspects of the market. We don't have a contract manufacturing organization, for example.
Speaker Change: And how do we think about the underlying assumptions in terms of how they may be changing.
Speaker Change: Cancellation and biotech funding kind of its European numbers.
Speaker Change: Yes, so as I think about the early development business.
Speaker Change: I don't think that its a share shifting I think our shares remaining consistent within the parts of the market that we compete we don't compete in all aspects of our we don't have a.
Speaker Change: Contract manufacturing organization for example, but in the areas that we compete our win rates look good Rfps look good. So I believe that our market share is being maintained I think we're seeing more of that there is still a higher level of cancellations than what we've seen in the past and in some instances, it's taking a bit.
Adam H. Schechter: But in the areas that we compete, our win rates look good, and our RFPs look good. So I believe that our market share is being maintained. I think we're seeing more that there's still a higher level of cancellations than we've seen in the past. And in some instances, it's taking a bit longer for the companies to make their final decisions because they're still managing what I would say is a rather restricted budget, even with the funding being better than it has been before.
Speaker Change: Longer for the companies to make their final decisions.
Speaker Change: Because they're still managing what I would say is a rather a rather restricted budget, even with the funding being better than it has been before so the good news is central laboratory, which is by far the largest part of that business remains very strong.
Adam H. Schechter: So the good news is Central Laboratory, which is by far the largest part of that business, remains very strong. And we continue to expect it to be strong. And that's offsetting the weakness that we continue to see in ED that could go on for a bit longer. But even if it does, we feel that the strength that we're seeing in the largest part of the business offsets that.
Speaker Change: We continue to expect it to be strong and its offsetting the weakness that we continue to see that could go on for a bit longer but even if it does we feel that the strength that we're seeing and the largest part of the business offsets that.
Speaker Change: Super helpful. Thank you. Thank.
Speaker Change: Thank you.
Speaker Change: I would now like to turn it back to Adam Schechter for closing remarks.
Adam H. Schechter: I want to thank you all for joining us today and hopefully you can see we continue to advance our strategy and make significant progress and we're going to continue our mission to improve health and improve lives around the world Hope everybody has a good day.
Adam H. Schechter: Super helpful. Thank you. Thank you. I'd now like to turn it back to Adam Schechter for his closing remarks. I want to thank you all for joining us today, and hopefully, you can see we continue to advance our strategy and make significant progress, and we're going to continue our mission to improve health and improve lives around the world. I hope everybody has a good day. This concludes today's conference call. Thank you for participating, and you may now disconnect.
Speaker Change: This concludes today's conference call. Thank you for participating and you may now disconnect.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: No.
Speaker Change: Dan.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.