Labcorp Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

Key Takeaways

  • LabCorp delivered a 7% year-over-year increase in Q3 enterprise revenue to $3.1 billion, generated $227 million in free cash flow, and reported adjusted EPS of $3.38.
  • Diagnostics Laboratories base business revenue jumped 16% and Biopharma Laboratory Services revenue rose 8% year-over-year, driven by organic growth and recent acquisitions.
  • Enterprise base business margin fell 50 basis points in Q3, primarily due to mix impact from the Ascension lab management agreement, though full-year margins are still expected to be flat to slightly up.
  • LabCorp finalized five new strategic health system and regional lab partnerships in Q3, expanding its footprint in the Northeast and West Coast and meeting financial accretion criteria in the first year.
  • The company anticipates an approximately $80 million reimbursement headwind in 2024 from PAMA rate changes, compounded by the impact of sharply lower COVID testing revenue.
AI Generated. May Contain Errors.
Earnings Conference Call
Labcorp Q3 2023
00:00 / 00:00

There are 14 speakers on the call.

Operator

You for standing by, and welcome to the Laboratory Corporation of America Holdings Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Kristin O'Donnell, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to LabCorp's Q3 2023 conference call. As detailed in today's press release, There will be a replay of this conference call available via telephone and Internet. With me today are Adam Schechter, Chairman and Chief Executive Officer and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.

Speaker 1

At core.com, we posted both our press release and an Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non GAAP financial measures to the GAAP financial measures discussed during today's call. Additionally, we are making forward looking statements. These forward looking statements include, but are not limited to, statements with respect to Cash flows and or financial condition, including the COVID-nineteen pandemic and general economic and market conditions, Future business strategies, expected savings and synergies, including from the LaunchPad initiative, acquisitions and other transactions and opportunities for future growth. Each of the forward looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report Form 10 ks and subsequent quarterly reports on Form 10 Q and in the company's other filings with the SEC.

Speaker 1

We have no obligation to provide any updates to these forward looking statements even if our expectations change. Now, I'll turn the call over to Adam Schechter.

Speaker 2

Thank you, Chris, and good morning, everyone. Today, I'll cover our Q3 performance and our strategy, which we reviewed at our recent Investor Day. In the Q3, LabCorp delivered strong year over year growth across the enterprise with acceleration in our diagnostic laboratories and biopharma laboratory Our growth is fueled by our ability to execute well and to deliver greater value for our customers Through our leadership in science, innovation and technology, we see strength in our businesses, We have enhanced financial flexibility and a clear strategic focus, all of which enable us to end the year with significant momentum. LabCorp will continue to drive growth by expanding our base business, finalizing and integrating our hospital and health system and our local and regional laboratory transactions and by advancing our leadership in high growth strategic areas including specialty testing. Moving to our Q3 results.

Speaker 2

In the 3rd quarter revenue totaled $3,100,000,000 adjusted earnings per share was $3.38 And free cash flow from continuing operations excluding spin related items was $227,000,000 Enterprise revenue increased 7% compared to the prior year. Diagnostics Laboratories based business revenue Continued exceptional year over year growth with a 16% increase driven by organic growth and progress in our hospital and health system strategy including Ascension. Biopharma Laboratory Services had a strong growth in the 3rd quarter of 8%. Enterprise base business margin was down 50 basis points compared to the prior year, primarily due to the mix impact of Ascension. We continue to expect full year base business margins to be flat to slightly up versus prior year, implying an increase in 4th quarter margins year over year.

Speaker 2

Glenn will provide more detail on our quarterly results as well as our 2023 outlook in just a moment. Turning now to our enterprise strategy in the 3rd quarter. We have significant momentum in our health system and local and regional laboratory partnership strategy. I believe the momentum is due to our leadership in science and technology, in our dedication to patients and in our commitment to quality and efficiency. With the most recent partnership announcement, we strengthened our presence and scale in the Northeast and West Coast.

Speaker 2

In the Northeast, we advanced 3 partnerships during the quarter. In July, we finalized our strategic relationship with Jefferson Health, one of the largest and most prominent health systems serving the Greater Philadelphia area and Southern New Jersey. In August, we forged a strategic partnership with Tufts Medicine, a leading health system in Massachusetts. Patients and providers of Tufts Medicine now have improved access to standardized laboratory testing throughout the Tufts Medicine system. We recently finalized our initial agreement with Tufts Medicine and we've reached agreement to expand the relationship to manage Tufts Medicine inpatient hospital laboratories later this year.

Speaker 2

And earlier this month, we announced a strategic relationship with Baystate Health in which we would acquire its Outreach Laboratory business and select operating assets, including laboratory service centers operated throughout Western Massachusetts. On the Northwest, we announced a comprehensive lab relationship with Legacy Health in Portland, We will acquire select assets of its outreach laboratory business and manage its inpatient hospital laboratories. We also finalized our acquisition of Providence Oregon's Outreach Laboratory business in September. The depth and the breadth of opportunity and the quality of our pipeline is robust. We are optimistic about continued expansion.

Speaker 2

These partnerships meet our financial criteria including being accretive in the 1st year and return your cost of capital within 3 years. While the 1st year margins are typically lower than LabCorp's historical margin levels, There is a clear path to improvement. Turning now to our advancements in innovation and technology. In late September, LabCorp became the 1st company to broadly offer an ATM profile, a blood based test that combines 3 well researched blood biomarkers to identify and to assess biological changes associated with Alzheimer's disease. Amyloid plaques, tau tangles and neurodegeneration targeted for patients who are being evaluated from mild dementia.

Speaker 2

This new test builds on LabCorp's leadership in neurodegenerative testing options and gives physicians an easily accessible An interpretable blood test to assess pathologies associated with Alzheimer's disease and other neurodegenerative conditions. Turning to women's health, we announced a new consumer offering for menopause in the quarter. LabCorp's on demand menopause test aims to help women understand symptoms and hormonal factors related to menopause, so they can have more informed conversations with their providers. Finally, our biopharma laboratory services team opened 2 new international facilities in China, a new kit production facility and an immunology and immunotoxicology laboratory. Before I turn the call over to Glenn, as we discussed at Investors Day, we are excited about the future of LabCorp and our strong financial outlook.

Speaker 2

On a CAGR basis through 2026, we expect overall enterprise revenue growth of 5% to 8%, including 1.5% to 2.5% from acquisitions. For Diagnostic Laboratories, we expect organic growth of 2.5% to 4.5%. We expect biopharma laboratory services to grow organically between 4.5% to 7.5%. We are focusing on 2 significant drivers of near term growth and differentiation as we move towards those target ranges. The first is to be the partner of choice for health systems and local or regional laboratories.

Speaker 2

And the second It's a developed, the license and ultimately to scale specialty testing including companion diagnostics. I mentioned the momentum that we have in our health system strategy earlier. We've announced 5 new agreements this year. Additionally, especially testing, we are focused on 4 primary areas, oncology, women's health, Autoimmune disease and neurology, which we anticipate will outpace the growth of other therapeutic areas. The development of specialty tests and companion diagnostics makes us attractive partners to health systems and Biopharma as they continue to develop more therapies at higher specialty areas.

Speaker 2

Our scale and our geographic presence We'll be differentiators for both growth initiatives. We are also well positioned for long term success in cell and gene therapy, expanding into the consumer market and international growth through our innovative specialty testing and Biopharma Business. All of this will culminate in top line performance that we expect will exceed $14,000,000,000 by the end of 2026. To close, our team of over 60,000 global employees is executing LabCorp's global strategy at scale and at an exceptional pace. As we close 2023, we will continue to capitalize on the momentum that we've created and drive further value creation for our shareholders.

Speaker 2

This year has been transformational for LabCorp. We are focused on our growth strategy And we plan to finish strong as we pursue our mission to improve health and to improve lives. With that, I'll turn the call over to Glenn.

Speaker 3

Thank you, Adam. I'm going to start my comments with a review of our Q3 results followed by a discussion of our performance in each segment and conclude with an update on our full year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3,100,000,000 an increase of 6.6% compared to last year, primarily due to organic base business growth and the impact from acquisitions, partially offset by lower COVID testing. The base business grew 14 compared to the base business last year, while COVID testing revenue was down 87%.

Speaker 3

Organically in constant currency, the base business grew 10.8 benefiting from the Ascension Lab Management agreement, which contributed approximately 4% of the organic growth. As a reminder, the outreach business that we acquired from Ascension is treated as an acquisition, while the lab management agreement is treated as organic growth. Ascension annualized on September 30. Operating income for the quarter was $252,000,000 or 8.3 percent of revenue. During the quarter, we had $56,000,000 of amortization and $116,000,000 of restructuring charges and special items due to the spin of Fortria, COVID, acquisitions and LaunchPad initiatives.

Speaker 3

Excluding these items, adjusted operating income in the quarter was $424,000,000 or 13.9 percent of revenue compared to $491,000,000 or 17.1 percent last year. The decrease in adjusted operating income was due to lower COVID testing. The margin decline was also negatively affected by the mix impact from the Ascension Lab Management agreement. Excluding these items, margins The tax rate for the quarter was 23.1%. The adjusted tax rate for the quarter was 24% compared to 19.4% last year.

Speaker 3

The increase in the adjusted rate was primarily due to higher R and D tax credits realized last year. We continue to expect the 4th quarter and full year adjusted tax rate to be approximately 24%. Net earnings for the quarter from continuing operations were $184,000,000 or $2.11 per diluted share. Adjusted EPS were $3.38 in the quarter, down 16% from last year due to lower COVID testing earnings as base business adjusted EPS was up approximately 10%. Operating cash flow from continuing operations was $276,000,000 in the quarter, which was burdened by approximately $56,000,000 of spin related items.

Speaker 3

Operating cash flow of $276,000,000 is up from $253,000,000 a year ago due to higher cash earnings. Capital expenditures totaled $105,000,000 up from $83,000,000 last year. For the full year, we continue to expect that capital expenditures will be approximately 3.5 percent of base business revenue. Free cash flow from continuing operations for the quarter was $171,000,000 which was burdened by approximately $56,000,000 of spin related items. The company invested $380,000,000 in acquisitions, paid out $64,000,000 in dividends and paid out $64,000,000 in dividends and used $1,000,000,000 for an accelerated share repurchase program that we expect will be completed by year end.

Speaker 3

At quarter end, we had around $725,000,000 in cash, While debt was $5,400,000,000 our leverage was 2.7 times gross debt to trailing 12 months adjusted EBITDA. Now I'll review our segment performance beginning with Diagnostics Laboratories. Revenue for the quarter was $2,300,000,000 an increase of 6 2% compared to last year, driven primarily by organic growth of 3.4% and acquisitions of 3%. The base business grew organically by 12.8% compared to the base business last year, while COVID testing revenue was down 87%. The Ascension Lab Management agreement contributed approximately 6% of the growth.

Speaker 3

Total volume increased 2.3% compared to last year as acquisitions volume grew 3.4 percent primarily offset by organic volume of minus 1.1% due to COVID testing. Base business volume grew 7.2% compared to the base business last year as organic increased 3.6% per volume, while acquisitions also contributed 3.6%. Price mix increased 3.9% versus last year, primarily due to an organic base business increase partially offset by lower COVID testing. Base business organic price miss was up 9.2% Compared to base business last year benefiting from the Ascension Lab Management agreement of approximately 6%. Diagnostics Laboratories adjusted operating income for the quarter was $386,000,000 or 16.5 percent of revenue compared to $440,000,000 or 19.9 percent last year.

Speaker 3

The decrease in adjusted operating income was due to a reduction in COVID-nineteen testing, while the margin was also affected by the mix impact from Ascension. Base business margin excluding the mix impact of Ascension was up approximately 30 basis points As the benefit of organic growth and LaunchPad savings were partially offset by higher personnel expense. Now I'll review our segment performance of Biopharma Laboratory Services. Revenue for the quarter was $719,000,000 an increase of 7.9% compared to last year, primarily due to an increase in organic revenue of 4.9% and foreign currency of 3.3%. The 7.9% revenue growth was driven by continued strength in Central Labs, which was up 9%, while early development was up 5.7%.

Speaker 3

While early development is no longer constrained by NHP availability, It has experienced higher than normal cancellations and lower orders primarily due to small biotech funding. Biopharma Laboratory Services adjusted operating income for the quarter was $109,000,000 or 15.2 percent of revenue compared to $105,000,000 or 15.8 percent last year. The decrease in adjusted operating margin was due to stranded costs as a result of the spinoffortria, which is timing related. Excluding stranded costs, margins were up in the 3rd quarter as the benefit of top line growth and LaunchPad savings were partially offset by higher personnel costs. We expect margins in the 4th quarter to be up We ended the quarter with a backlog of $7,800,000,000 and we expect approximately $2,400,000,000 of this backlog to convert into revenue over the next 12 months.

Speaker 3

Trailing 12 months book to bill was 1.12. Now I'll discuss our 2023 full year guidance, which assumes foreign exchange rates effective as of September 30, 2023 for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted for acquisitions, share repurchases and dividends. In addition, the guidance includes the impact from the $1,000,000,000 accelerated share repurchase program, which was funded with proceeds from the spin. With regard to our 2023 full year guidance, We've narrowed the ranges, but have maintained the same midpoint from our prior guidance for enterprise revenue, earnings and cash flow.

Speaker 3

We expect enterprise revenue to grow 1.9% to 2.7% compared to 2022. This increase reflects the base business growing 11.5% to 12 point 2%, while COVID testing is expected to decline 85% to 86%. We expect Diagnostics Laboratories revenue to be up 1.5% to 2% compared to 2022. This guidance includes the expectation that the base business will grow 14.1 percent, which includes approximately 5% growth from Ascension. The base business has improved from our prior guidance As acquisition related revenue that was forecasted at the enterprise level is now reflected in the segment as we've closed those transactions.

Speaker 3

We continue to expect Diagnostics Laboratories based business margin to be up slightly in 2023 versus 2022, including the unfavorable mix impact from Ascension. We expect biopharma laboratory revenue to grow 3.1% to 4% compared to 2022. Excluding the change in currency translation of negative 20 basis points, The midpoint of the guidance range remains unchanged from our prior guidance. We expect the revenue growth rate to continue to improve in the 4th quarter. In addition, we expect margins for the full year to be flat to slightly up, while the 4th quarter is expected to see both sequential and year over year improvement.

Speaker 3

Our guidance range for adjusted EPS is $13.25 to $13.75 Unchanged at the midpoint from our prior guidance, free cash flow from continuing operations excluding spin related items is expected to be between $850,000,000 to $950,000,000 also unchanged from our prior guidance at the midpoint. In summary, we expect to drive continued profitable growth in our base business. We expect to continue to use our free cash flow generation for acquisitions That supplement our organic growth, while also returning capital to shareholders through our share repurchase program and dividends. Operator, we'll now take questions.

Operator

One moment for our first question. And our first question comes from the line of Kevin Caliendo from UBS. Your question please.

Speaker 4

Sure. I guess I want to go into the book to bill and the sequential, meaning the commentary about biopharma and cancellation. When did you start to see that? How meaningful is it? Is it across multiple Customers, any more color around what's happening with the orders in the biopharma Business cancellations, as much color as you can provide would be super helpful.

Speaker 2

Sure. Good morning, Kevin. Yes. So if you look at the 3rd quarter book to bill, it was a bit light versus the prior quarter. It was mostly due to small and emerging biotech and it was mostly due to those customers in our early development research laboratories.

Speaker 2

Large pharma, middle sized biotech, which is the majority of our customers in our central laboratories, which is the largest part of our biopharma segment remains strong. And as I look at 4th quarter, I expect the book to bill in 4th quarter to be better than it was in the 3rd quarter. If you look at the trailing 12 months, it was 1.12 and to me that still remains pretty healthy. If you remember last I mentioned that with the clinical development business now being a separate company, you would expect the book to bill to be lower. In particular because in early development most of those trials are very short term.

Speaker 2

It could be 1 month, 3 months. They usually start and end in the same year that you have them. So that's why I feel confident that we'll continue to see progress. I feel that the largest part of our business Central Laboratories remains very strong in RFPs book to bill And we just have to continue to try to find a way to change our mix a bit in early development. I'd like to move early development to work more with The mid sized biotech maybe some of the pharma companies versus having too much reliance on the smaller emerging biotech companies.

Speaker 2

If you look at the revenue, I felt very good about the revenue in the biopharma business with 8% revenue growth in the segment for the quarter We expect to see continued strength in revenue growth.

Speaker 4

And just the confidence that it gets better next Quarter, is that visibility? Is that just basically writing off some of the stuff that the cancellations are going to improve? Like what gives you that sense? Obviously, you can see more than we can. I'm just wondering what that is that we can sort of rely on?

Speaker 2

Yes. So again, I'm just looking at the number of RFPs coming through, our run rate and so forth. And based upon what I see as I sit here today, I expect us to have a better quarter and 4th quarter for book to bill in the 3rd quarter. And sometimes book to bill is timing related. You think you might get a trial in the 3rd quarter and ends up falling to the 4th.

Speaker 2

I've always said to be careful to look at any one quarter when it comes to book to bill and that's why we also provide the trailing 12 months. Yes.

Speaker 4

Fair enough. Thanks so much. Super helpful.

Speaker 2

Sure.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Lisa Gill from JPMorgan. Your question please.

Speaker 5

Thanks very much. Good morning. Just going to the other side of the business. Good morning. When I think about the Diagnostics side of the business and the strong core growth, Just two questions there.

Speaker 5

One, can you talk about where you are on managed care contracting and helping them in the Shifting side of care going to lower cost of lab services like LabCorp versus inpatient, etcetera. And then secondly, as we think about routine testing, are you seeing an increase in metabolic testing, specifically like A1C as we think about The GLP-one, please.

Speaker 2

Sure, Lisa. First of all, we're very pleased with the performance in the Diagnostics sector, Not just when you look at overall revenue, which includes Ascension, but when you look at the base business volume, if you look at that, the base business volume was up 7.2 And about 3.6% was from acquisitions. So it just tells you that the organic base business remains very strong. Our managed care contracting, we're in very good position. We've either finalized or close to finalizing all of the contracts that were Large and need to be renewed.

Speaker 2

And I would say they'll be basically flat to slightly positive, which is a good place for us to be as we move into next year. So I feel very good about that. We look at metabolic testing And we look at all the different types of routine testing and we haven't we see that growing but it's growing at consistent rates as it's grown before And we still see our esoteric testing growing a little bit faster, but almost about the same as our routine testing. If you look at like our metabolic testing and so forth, we don't really see acceleration there. And a lot of the metabolic testing is done in panels and it's done with other tests and so forth.

Speaker 2

So I wouldn't expect to see a significant change necessarily with the GLP-1s moving forward. But the growth is very broad based. It's across geographies. It's across routine and esoteric testing. It's across all the different types of testing that we have.

Speaker 2

So the underlying dynamics are very strong.

Speaker 5

Thanks. That's very helpful.

Speaker 2

Sure.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Patrick Donnelly from Citi. Your question please.

Speaker 6

Hey guys, thanks for taking the questions. Hey, good morning. Good morning. Just a follow-up on the early development side, interesting to hear Maybe shifting towards a little bit newer of a customer base more towards the midsize. Does that I guess what does that entail?

Speaker 6

Do you just have to cater the offering a little bit more towards that customer base and is there a little bit of disruption as that happens? Maybe just talk through how you think about moving the portfolio more towards that client base?

Speaker 2

Yes, absolutely. One of the things, Patrick, we're trying to do is to focus more on the specialty testing and also Thinking about how to expand internationally on things like companion diagnostics. When you think about a mid to large pharma company as they develop more personalized medicine, They're going to want to have some type of diagnostic tool or companion diagnostic that they can use to develop to identify which patients are most apt to respond to the medicine but also have it available ultimately in the marketplace. So where we're trying to go is to show pharma As they work with us early, we can help them develop their diagnostic tests. We have very strong capabilities in companion diagnostics and developing specialty diagnostic tests.

Speaker 2

We can help them do their clinical trials to our central laboratories and do all the companion diagnostic testing and specialty testing. And ultimately, we want to be able to offer to them that we can launch that test not only in the United States, but we can help them bring those specialty and companion diagnostic tests to other parts of the world. I think it will be a very compelling discussion to have with Pharma and we're having some of those discussions as we speak.

Speaker 6

Understood. Thanks. And then maybe just on the margin piece, obviously, you guys gave pretty detailed guidance at the Analyst Day. Maybe just near term, if you could talk through the moving pieces, it sounds like pricing relatively stable, but just the moving parts as we work away into the end of the year and then 'twenty four, I think high level about the margin piece.

Speaker 2

Thank you. Yes. High level, I'll ask Glenn to jump in as well. I'd say the largest impact to margins as I think about 2024 is PAMA. And we've built in about $80,000,000 almost $80,000,000 of downside into our base case assuming That comes next year.

Speaker 2

We're still trying to see working with our trade group if there's a way to get the salsa Regulation approved. We have bipartisan support, but we had that last year. So it's very hard to get things approved right now. We're also going to see if there's a way to delay for another year the implementation. But for our base case, we're assuming that there's about an $80,000,000 impact That would negatively impact the margins next year.

Speaker 2

That's why when we gave the long term guidance and we said it's 100 basis points to 150 basis point Increase over the time period, we said most of that will be after 2024 because in 2024 we have to overcome PAMA. Let's wait and see. If PAMA doesn't come or if it's delayed, then we'll have some upside there for sure.

Speaker 3

Yes, Patrick. Just I guess as you look to the 2 businesses, we feel good about where we are with the margins. They continue to improve on a base business level. As we think about going into the Q4, we commented that within the biopharma side, we expect margins to be up in the Q4 year on year, Such that for the full year, they'll be flat to slightly up. In Diagnostics, obviously, we have seasonality that impacts margins.

Speaker 3

So 4th Sequentially, margins will be down, but they'll still be up year over year, so that we expect Diagnostics margins for the full year to be up slightly even after absorbing the negative impact from the Ascension mix. As Adam commented in the 100 to Call it 150 basis point margin improvement that we expect over the next 3 years. We commented that the 1st year margins would be relatively flat. We have around a 70 basis point headwind, if you will, between the combination of lower COVID testing as well as the PAMA headwind that Adam commented, but That's reflected still in the 3 year expectation that margins would grow that 100 basis points to 150 basis points.

Speaker 6

Understood. Thanks guys.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Jack Meehan from Research. Your question please.

Speaker 2

Good morning, Jack.

Speaker 7

Good morning. I wanted to stick with the macro environment on the diagnostic lab side. Adam, are you seeing any recessionary signals at all in terms of the testing getting ordered? And then maybe on the flip side, Hearing any change in the tenor of your hospital conversations around consolidation opportunities?

Speaker 2

Yes, Jack. When you look at the macro dynamics, I would say for testing it remains strong. And when you look at the volume that we're seeing it remains very strong as well. And it's broad based across the country in esoteric and routine testing. If you go back to historical recessionary periods, The diagnostic business tends to continue to do well through those periods.

Speaker 2

So I feel pretty confident that we're going to continue to see strength there. When it comes to hospitals, I've talked about how the hospital health system, but also local and regional laboratory Acquisition possibilities remain extraordinarily strong. I think it's because they're struggling in the economic environment with reimbursement, with wages And other things and they're looking for ways that they can get some capital, but also look for people that are like experts in hiring the types of jobs that we hire for managing The type of people that we manage. So I think the macro environment for the health systems and for these local smaller regional laboratories It's very strong for us to continue to find ways to do business development and find additional partnerships. So it's actually a good environment for us to compete.

Speaker 2

But obviously, we want our hospital systems to remain solvent and they have a lot of things that they have to do to continue to be successful.

Speaker 7

Great. And Glenn, at the Analyst Day for 2024, you laid out some initial thinking It will be slightly below the 8.5% to 11% EPS CAGR range. Just curious if anything In terms of the orders on the biopharma lab side or just anything else changes the way you're thinking about that? Thanks.

Speaker 3

Yes. No, Jack, again, when we basically reaffirmed kind of our outlook for this year as well as our 3 year when we were at the Analyst Day, We knew there was some softness we had experienced within early development earlier, so that continues. But as Adam said, kind of offset by the strength that we're seeing with on the central lab side. So for biopharma and for diagnostic segments, we feel very good. So if you look at call it that 8.5% to 11.5% EPS target over the next 3 years, the CAGR, we still feel very good about that, Realizing that for 2024 because again of the headwinds from less COVID testing and PAMA, you'd have around an 800 basis point headwind to EPS in 2024.

Speaker 3

So still positive EPS growth year on year even with those headwinds, but lower than, if you will, the range that we had. But again, That 3 year range includes that expectation for 2024.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Eric Coldwell from Baird. Your question please.

Speaker 2

Good morning, Eric.

Speaker 8

Good morning. Thank you. I have 2. The first one may be a bit confusing, so bear with me. Your largest competitor in early developments given some interesting color around their cancellations and Talked about how majority of those cancellations they've experienced were predicated on awards that were made A year ago, 2 years ago, stuff that was, clients pre booking stuff when they were concerned about capacity and access in the future.

Speaker 8

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

Speaker 2

Thanks for that Clarification, we're seeing a similar thing that primarily with NHP trials that were when there was Supply issues, people started to get in line much earlier than they typically would to ensure that they could run their trials as fast as they could. Now that we have supply and so forth as those clients studies are ready to go, they're not necessarily ready to go or they're thinking about their pipeline and Other priorities and so forth because they booked these spots so far ago. So that's the primary reason that we believe we're seeing these cancellations in early development.

Speaker 8

And then could you talk at all about gross awards in early development? Was that book to bill above 1 or below 1 this quarter?

Speaker 2

So if you look overall, if you just look at the quarter, it would have been below 1. But as and again with early development, I don't think book to bill is really a good way to look at that business because when it comes to early development, they're 1 month trials, 3 months Trials maybe 6 month trial. So you can burn through those in the same year very quickly. I look at the book to bill Because I think it's a historical way to look at the business, but ED is very small compared to central laboratory. I mean the vast majority of our So laboratory work remains very strong.

Speaker 2

So that's why I feel confident as I look at the numbers for the future because of the size of our central laboratory, The mix of customers in Central Laboratory is more towards pharma and big biotech and the book to bill there remains pretty good.

Speaker 8

Okay. Thank you for that, Adam. And I was just hoping you could talk a bit about the FDA's LDT proposal here and Maybe help us with some quantification of what your LDT mix looks like by revenue or volume or any color commentary on What you see progressing with the proposed rule at the FDA? Thank you.

Speaker 2

Yes, absolutely, Eric. So we were supportive of legislation called VALID last That would have given FDA oversight for laboratory developed tests and it was unfortunate that it didn't get past this year. Had bipartisan support, we were supportive. It's disappointing that that legislation didn't go through. So we're supportive of working With the FDA to find ways for them to give appropriate oversight, we think that our science, our innovation, our Technology capabilities actually differentiate us.

Speaker 2

And if you look at the rigor that we go through with our laboratory developed test, We think we do the vast majority of what they would be asking for anyway. Working with ACLA, our trade organization, What we're worried about is if you take legislation that had an intended purpose for one thing and then you try to apply it to another thing, you have to be very thoughtful about that. The good news is the FDA has asked for comment and we're going to provide comments and thoughts. And at the end of the day, if it's fairly Done meaning that all laboratory developed tests have to do the same thing across big labs, small labs and everything else As long as they can get the filings done quickly so that people have access to new innovations in a timely manner like they do today, We believe that it will be minimal impact to us in terms of the amount of money you are spent because we do a lot of that work anyway. With that said, it's less than 10% of our volume.

Speaker 2

So laboratory developed tests are not a significant portion of our volume. But Sometimes they are the most important test for new specialty areas and trying to get those to patients quickly is what's most important for them.

Speaker 8

Adam, with less than 10% of volume, I would assume the revenue contribution would be higher because they are, as you just stated, a bit unique, The testing, so could you talk about the

Speaker 2

Yes, it's less than 10% of the dollars too. When I say less than 10%, the volume is, it's less than 5% frankly and then the dollar is less than 10%.

Speaker 8

Perfect. Thank you so much.

Speaker 2

Sure.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Tim Daley from Wells Fargo. Your question please.

Speaker 2

Good morning,

Speaker 9

Tim. So first one on diagnostics. So I think organic based business price mix excluding Ascension was Roughly 3 20 bps, if I just kind of back out the numbers. Could you break that out from like like for like Price versus mix impact for us in the quarter and how is standalone price been trending First, last quarter last year, any help there would be great?

Speaker 3

Sure. Hey, Tim, this is Glenn. That's right. We would agree that your $320,000,000 is in line with the call it the organic price mix favorability excluding the impact that we would get from Ascension. From a pricing standpoint, we continue to say pricing is kind of flat, maybe a little bit of a headwind.

Speaker 3

You heard Adam earlier in the future with the renewals of the managed care contracts That actually is a positive for us. But most of the time, the favorability in our price mix continues to be on the mix side. Yes, we continue to see favorability in our test per session, whether it be payer mix, test mix, but a lot of things esoteric relative to routine. So We continue to experience good favorable price mix, but more on the mix side.

Speaker 2

All

Speaker 9

right. Appreciate that. And then my second question is on direct to consumer. So good to see a continued Meduent expansion this quarter with the announcement. Just Can you update us on the revenue mix within consumer?

Speaker 9

Where was it this quarter? What are you expecting as a piece of that 2023 guidance? Thank you.

Speaker 2

Yes. No problem. So our direct to consumer advertising remains an important way for us to enable consumers to Monitor and take care of the health. If you look at the dollar volume, especially if you take out the testing for COVID, it's still very small and it's not worth, it's not material enough Actually break out the numbers, we see it growing very substantially, but it's not necessarily at a point where we would break it out and give specific numbers for it. I think when it comes to consumer testing, we're going to see a lot more growth as we go through the years.

Speaker 2

At some point if it reaches that material threshold, Tim, we'll certainly Start to break it out.

Speaker 9

Got it. Appreciate the time. Thank you.

Speaker 2

Yes. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Erin Wright from Morgan Stanley. Your question please.

Speaker 3

Good morning, Erin.

Speaker 10

Hi, thanks. Hi, good morning. I know you mentioned the base margin improvement Sequentially in the Q4, but are you seeing the need, and one of your competitors was mentioning this, but stepped up investments in labor And just the current utilization environment, maybe that's some of the seasonality you were talking about in the Q4, but how are you just thinking about the labor environment right now? Thanks.

Speaker 2

Yes. Thanks, Aaron. So labor environment is tough across industries, across countries. I mean, there's no doubt. The good news is, I look at our retention rates.

Speaker 2

And if you look at retention from 2019, we saw a significant Loss of people and our actual turnover rate was up substantially in 2021 2022. If we now look at 2023, we've seen those rates come down. In our biopharma business, they've come down almost to the 2019 levels. If you look at our diagnostic business, they're not yet at our 2019 levels, but they're getting closer. And we expect there to be continued progress there.

Speaker 2

But we have had to pay a bit more in certain areas. We've had to be competitive in the marketplace. It does impact the margins, But at the same time, that's why we've been so aggressive with LaunchPad and we're on track to deliver the $350,000,000 of LaunchPad savings that we discussed in the past. We also at Investor Day talked about a $100,000,000 to $125,000,000 year reduction through LaunchPad. And we also mentioned that we have a increase in our margins over the 'twenty three to 'twenty six period of 100 basis points to 150 basis points, Mostly coming after the PAMA year in 2024, so most of that in 2025 and 2026.

Speaker 2

So at the end of the day, we realized we've got to find ways to reduce costs So we can offset some of the pressure that we're facing when it comes to the wages and so forth.

Speaker 10

Okay. Thanks. That's helpful. And then on the early development business, just in light of the environment and some of the volatility you've seen there and what you've been talking about in terms of the bio But has anything changed in terms of your commitment to the business at this point? Is that an area that you'll continue to evaluate?

Speaker 10

Thanks.

Speaker 2

Yes. Thanks, Aaron. And again, it is a very small part of our business. I mean, if you look at the business as a percent of LabCorp, It's very small. It's less than 10% frankly.

Speaker 2

And if you look at it as a percent of the biopharma business, it's maybe 30% or So at the end of the day, it's really Central Laboratory that drives our success in biopharma. At the same time with the Strategic things that we're trying to do with companion diagnostics and work with pharma earlier, bring those companion diagnostics to our central laboratories And then ultimately bring them to the marketplace strategically, I still think it makes sense and I still think that we could do a lot of Other things with our early development that helps us in the broader bigger business that we have and we continue to evaluate all things.

Speaker 10

Thank you.

Speaker 2

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Pito Chickering from Deutsche Bank. Your question please.

Speaker 2

Good morning, Pito.

Speaker 11

Hi there. You've got Kieran Ryan on for Pito. Thanks for taking the question. Just a quick one here. I Just wanted to see how you guys are tracking on taking out some of the stranded costs after the spin.

Speaker 11

I believe you were Talking about targeting $25,000,000 of the $45,000,000 at the Investor Day. So just wanted to see if there's any update there?

Speaker 2

Yes. No, Ryan. So we're on target. We said we have the $25,000,000 by the end of this year. So the run rate next year that will be taken out.

Speaker 2

I think the most important piece is that that's not enough. And we're going to do that plus we have to do more. So as I said, we're on track for $350,000,000 Launchpad initiative and we've committed to $100,000,000 to $125,000,000 per year in the outer years as we look at our long term forecast. That includes $25,000,000 of stranded costs, which just tells you we've got to do a lot more.

Speaker 11

Got it. Thank you. And then just real quick on the biopharma side. I just wanted to check, is there as we head into Is there any seasonality that we should be aware of there? And does that change at all after the spin versus pre spin or Not too much to call out.

Speaker 11

Thanks.

Speaker 2

Yes. I'll let Glenn answer that question. In general, I don't see that there'll be a significant shift In terms of we've always had some seasonality and if you look at like Central Labs for example, Times are a little slower as Europe comes back after vacation, but net net there shouldn't be any significant changes to what we've seen in the past.

Speaker 3

Yes, that's right. And the numbers that we've provided historically have been restated for the company we are today. So you can look at our Enhanced disclosures that we have that you'll see some historical numbers. But the other interesting thing is the seasonality of

Speaker 11

Thanks so much.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Derik De Bruin from Bank of America. Your question please.

Speaker 2

Good morning, Derek.

Speaker 12

Good morning. This is John on for Derek. I wanted to revisit the PAMA issue. I recognize that your guidance is assuming the PAMA impact as a base case and You've talked about the 70 basis points of headwind between PAMA and COVID. But in the case of a delay, Would you allocate that $80,000,000 benefit that would turn into a benefit now between maybe letting it trickle down to margins versus investments?

Speaker 12

Down to margins versus investments?

Speaker 2

Yes. We're going to push for the vast majority of it to come down to Margin, I mean there might be some incremental minor investments, but we've built almost $80,000,000 into the plan and I would expect the vast majority of that to come down.

Speaker 12

Got you. Appreciate it. And then, with the ATN profile, could you comment on What sort of reimbursements you've been able to negotiate with the payers versus what you're getting from the CMS? And I know Earlier you talked about the LVTE test as a volume, it's less than 5% and the sales, it's less than 10%. But Still curious, if you plan on taking it for the FDA approval or if there's going to be any sort of disruption there?

Speaker 12

Thank you.

Speaker 2

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

Speaker 2

It's still relatively new test. We're still I have physicians learning about the panel and so forth. So it will take time, but over time we expect it to be reimbursed well.

Speaker 12

Thank you. That's all.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Brian Tanquilut from Jefferies, your question please.

Speaker 3

Hey, good morning guys. Good morning.

Speaker 13

Good morning. I guess I'll start, Adam, as I think about a comment that your Just curious what you're seeing on your side in terms of contracting with the payers and You kind of like rate trend there as we think about upcoming re ups and contracts.

Speaker 2

Yes, absolutely, Brian. So Yes, we've renegotiated the majority of our contracts were really really finished and really close And one last one, but they ended up being very good negotiations, very good discussions. We think that ultimately it will be flat to maybe Slightly positive, so I feel really good about that.

Speaker 13

Got it. And then Glenn, you talked about a 3 year kind of like margin goals of 100 to 150 basis As we think about the moving parts between labor, Launchpad, and I think we're getting questions from people asking, when do we see the flow All that and improvement in volumes to the margin line, how should we be thinking about that?

Speaker 3

Well, again, a lot of the expectation is that we're looking at good top line growth. So we would expect to leverage off of that Launchpad Savings that we've identified as well and then being offset by labor and potentially continued inflationary environment. For us, we talk a lot about labor because it represents around 50% of our cost structure. So we're very focused on it. And As Adam said, we are seeing some improvement in the attrition levels, but it's still higher than where it's been in the past and there's a cost of that, Let alone just the labor wage rate inflation, if you will, but all that's been factored in.

Speaker 3

So to the extent we can continue to drive the top line that we feel confident about And realize the LaunchPad savings, which we feel confident about, we equally expect to see that margin improvement.

Speaker 2

Awesome. Thank you.

Operator

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

Speaker 2

Thank you. Thank you all for joining us today. Hope you can tell that we remain very optimistic about the prospects for LabCorp As we continue to execute and we execute well on our strategy and that we believe our strategy is going to continue to drive substantial shareholder value. Hope everybody has a good rest of the day.

Operator

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

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