Laboratory Co. of America Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Thank you for standing by, and welcome to the Laboratory Corporation of America Holdings Third Quarter 2023 Earnings Conference Call. [Operator Instructions]

And now I'd like to introduce your host for today's program, Christin O'Donnell, Vice President, Investor Relations. Please go ahead.

[Christin O'Donnell, Vice President of Investor Relations at Laboratory Co. of America]

Thank you, operator. Good morning, and welcome to Labcorp's third quarter 2023 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and Internet. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call.

Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2023 guidance and the related assumptions, the impact of various factors on the company's businesses, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and general economic and market conditions; future business strategies, expected savings and synergies, including from the 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 on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change.

Now I'll turn the call over to Adam Schechter.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Thank you, Christin. Good morning, everyone. Today, I'll cover our third quarter performance, and I'll discuss our strategy, which we reviewed at our recent Investor Day. In the third quarter, Labcorp delivered strong year-over-year growth across the enterprise with acceleration in our Diagnostic Laboratories and Biopharma Laboratory service businesses. Our growth is fueled by our ability to execute well and to deliver greater value for our customers through our leadership in science, innovation and technology. We see strength in our businesses. We have enhanced financial flexibility and a clear strategic focus all of which enable us to end the year with significant momentum.

Labcorp will continue to drive growth by expanding our base business, finalizing and integrating our hospital and health system in our local and regional laboratory transactions and by advancing our leadership in high-growth strategic areas, including specialty testing. Moving to our third quarter results. In the third quarter, revenue of $3.1 billion, adjusted earnings per share was $3.38 and free cash flow from continuing operations excluding spin-related items, was $227 million. Enterprise revenue increased 7% compared to the prior year. Diagnostics laboratory-based business revenue continued exceptional year-over-year growth with a 16% increase, driven by organic growth and progress in our hospital and health system strategy including Biopharma Laboratory Services had a strong growth in the third quarter of 8%.

Enterprise base business margin was down 50 basis points compared to the prior year, primarily due to the mix impact of Ascension. We continue to expect full year base business margins to be flat to slightly up versus prior year, implying an increase in fourth quarter margins year-over-year. Glenn will provide more detail on our quarterly results as well as our 2023 outlook in just a moment. Turning now to our enterprise strategy in the third quarter. We have significant momentum in our health system and local and regional laboratory partnership strategy.

I believe the momentum is due to our leadership in science and technology and our dedication to patients and in our commitment to quality and efficiency. With the most recent partnership announcement, we strengthened our presence and scale in the Northeast and West Coast. In the Northeast, we advanced three partnerships during the quarter. In July, we finalized our strategic relationship with Jefferson Health, one of the largest and most prominent health systems serving the Greater Philadelphia area and Southern New Jersey. reports 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. 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, where we'll 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 app and the breadth of opportunity and the quality of our pipeline is robust, and we are optimistic about continued expansion. These partnerships meet our financial criteria, including being accretive in the first year and return your cost of capital within three years. While the first 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 first company to broadly offer an ATN profile, a blood-based test that combines three well research blood biomarkers to identify and to assess biological changes associated with Alzheimer's disease.

Amyloid plates, calpangals [Phonetic] and neurodegeneration, targeted for patients who are being evaluated from mild dementia. This new test builds on Labcorp's leadership in neurodegenerative testing options and gives physicians an easily accessible and 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 two 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 Investor Day, we are excited about the future of Labcorp and our strong financial outlook. On a CAGR basis through 2026, we expect overall enterprise revenue growth of 5% to 8%, including 1.5% to 2.5% from acquisitions. For Diagnostics 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 two significant drivers of near-term growth and differentiation as we move towards those target ranges.

The first is to be the partner of choice for health systems and local or regional laboratories. And the second is to develop to license and ultimately, to scale specialty testing, including companion diagnostics. I mentioned the momentum that we have in our health system strategy earlier. We've announced five new agreements this year. Additionally, specialty testing, we are focused on four primary areas: oncology, women's health, autoimmune disease and neurology, which we anticipate will outpace the growth of other therapeutic areas. The development of specialty tests and companion diagnostics makes us attractive partners to health Systems and Biopharma as they continue to develop more therapies and higher specialty areas.

Our scale and our geographic presence will be differentiators for both growth initiatives. We are also well positioned for long-term success in cell and gene study, expanding into the consumer market and international growth through our innovative speciality testing and Biopharma business. All of this will culminate the top line performance that we expect will exceed $14 billion by the end of 2026. To close, our team of over 60,000 global employees is executing Labcorp's global strategy at scale and on an exceptional pace.

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

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

Thank you, Adam. I'm going to start my comments with a review of our third quarter results, followed by a discussion of our performance in each segment and conclude with an update on our full year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter were $3.1 billion, an increase of 6.6% compared to last year, primarily due to organic base business growth and the impact of acquisitions, partially offset by lower COVID testing. The base business grew 14% compared to the base business last year, while COVID testing revenue was down 87%.

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

Excluding these items, adjusted operating income in the quarter was $424 million or 13.9% of revenue compared to $491 million or 17.1% last year. The decrease in adjusted operating income was due to lower COVID testing. The margin decline was also negatively affected by the mix impact from the Ascension lab management agreement. Excluding these items, margins would have been flat as the benefit of demand and LaunchPad savings were offset by higher personnel expense. Our LaunchPad initiative continues to be on track to deliver $350 million of savings over the three-year period ending 2024. The tax rate for the quarter was 23.1%. The adjusted tax rate for the quarter was 24% compared to 19.4% last year.

The increase in the adjusted rate was primarily due to higher R&D tax credits realized last year. We continue to expect the fourth quarter and full year adjusted tax rate to be approximately 24%. Net earnings for the quarter from continuing operations were $184 million or $2.11 per diluted share. Adjusted EPS were $3.38 in the quarter, down 16% from last year due to lower COVID testing earnings as base business adjusted EPS was up approximately 10%. Operating cash flow from continuing operations was $276 million in the quarter, which was burdened by approximately $56 million of spin-related items. Operating cash flow of $276 million is up from $253 million a year ago due to higher cash earnings. Capital expenditures totaled $105 million, up from $83 million last year.

For the full year, we continue to expect that capital expenditures will be approximately 3.5% of base business revenue. Free cash flow from continuing operations for the quarter was $171 million, which was burdened by approximately $56 million of spin-related items. The company invested $380 million in acquisitions, paid out $64 million in dividends and used $1 billion for an accelerated share repurchase program that we expect will be completed by year-end. At quarter end, we had around $725 million in cash while debt was $5.4 billion. Our leverage was 2.7 times gross debt to trailing 12 months adjusted EBITDA.

Now I'll review our segment performance, beginning with Diagnostics Laboratories. Revenue for the quarter was $2.3 billion, 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. Total volume increased 2.3% compared to last year as acquisition volume grew 3.4%, 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% for volume, while acquisitions also contributed 3.6%. Price/mix increased 3.9% versus last year, primarily due to an organic base business increase partially offset by lower COVID testing. Base business organic price/mix was up 9.2% compared to base business last year, benefiting from the Ascension lab management agreement of approximately 6%. Diagnostics Laboratories adjusted operating income for the quarter was $386 million, or 16.5% of revenue compared to $440 million or 19.9% last year. The decrease in adjusted operating income was due to a reduction in COVID-19 testing, while the margin was also affected by the mix impact from Ascension.

Base business margin, excluding the mix impact of Ascension was up approximately 30 basis points as the benefit of organic growth and LaunchPad savings were partially offset by higher personnel expense. Now I'll review our segment performance of Biopharma laboratory services. Revenue for the quarter was $719 million, an increase of 7.9% compared to last year, primarily due to an increase in organic revenue of 4.9% and foreign currency of 3.3%. The 7.9% revenue growth was driven by continued strength in Central Labs, which was up 9%, while early development was up 5.7%.

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 million or 15.2% of revenue compared to $105 million or 15.8% last year. The decrease in adjusted operating margin was due to stranded costs as a result of the spin of Fortia, which is timing related. Excluding stranded costs, margins were up in the third quarter, as the benefit of top line growth and LaunchPad savings were partially offset by higher personnel costs. We expect margins in the fourth quarter to be up sequentially and year-over-year.

We ended the quarter with a backlog of $7.8 billion, and we expect approximately $2.4 billion of this backlog to convert into revenue over the next 12 months. Trailing 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 billion 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. We expect Enterprise revenue to grow 1.9% to 2.7% compared to 2022. This increase reflects the base business growing 11.5% to 12.2%, 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% to 14.6%, which includes approximately 5% growth from Ascension. The base business has improved from our prior guidance as acquisition-related revenue that was forecasted at the enterprise level is now reflected in the segment as we've closed those transactions.

We continue to expect Diagnostics Laboratories based business margin to be up slightly in 2023 versus 2022, including the unfavorable mix impact from Ascension. We expect Biopharma laboratory services revenue to grow 3.1% to 4% compared to 2022. Excluding the change in currency translation of negative 20 basis points, the midpoint of the guidance range remains unchanged from our prior guidance. We expect the revenue growth rate to continue to improve in the fourth quarter. In addition, we expect margins for the full year to be flat to slightly up, while the fourth quarter is expected to see both sequential and year-over-year improvement. Our guidance range for adjusted EPS is $13.25 to $13.75, unchanged at the midpoint from our prior guidance.

Free cash flow from continuing operations, excluding spin-related items, is expected to be between $850 million to $950 million, also unchanged from our prior guidance at the midpoint. In summary, we expect to drive continued profitable growth in our base business. We expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth, while also returning capital to shareholders through our share repurchase program and dividends.

Operator, we will now take questions.

Questions and Answers

[Operator]

Certainly. [Operator Instructions] And our first question comes from the line of Kevin Caliendo from UBS. Your question please.

[Kevin Caliendo, Analyst at UBS Group]

Sure. I guess I want to go into the book-to-bill and the sequential -- the commentary about Biopharma and cancellations. When do 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.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Sure. Good morning, Kevin.

[Kevin Caliendo, Analyst at UBS Group]

Good morning.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

So if you look at the third quarter book-to-bill, it was a bit light versus the prior quarter. And it was mostly due to small and emerging biotech and it was mostly due to those customers in our early development research laboratories. Large pharma mega size biotech, which is the majority of our customers in our Central Laboratories, which is the largest part of our Biopharma segment remains strong. And as I look at fourth quarter, I expect the book-to-bill in fourth quarter to be better than it was in the third quarter.

If you look at the trailing 12 months, it was 1.12. And to me, that still remains pretty healthy. If you remember last quarter, I mentioned that with the clinical development business now being a separate company, you would expect the book-to-bill to be lower. In particular, because in early development, most of those trials are very short term. They could be one month, three 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 midsized biotech, maybe some of the pharma companies versus having too much reliance on the smaller or merge biotech companies.

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, and we expect to see continued strength in revenue growth.

[Kevin Caliendo, Analyst at UBS Group]

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?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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 fourth quarter for book-to-bill in the third quarter. And sometimes book-to-bill is timing related. You think you might get a trial in the third quarter, and it's up falling to the fourth. 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.

[Kevin Caliendo, Analyst at UBS Group]

Fair enough. Thanks so much. Super helpful.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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.

[Lisa Gill, Analyst at JPMorgan Chase & Co.]

Hi. Thanks very much. Good morning.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Lisa.

[Lisa Gill, Analyst at JPMorgan Chase & Co.]

Good morning. Just looking at the other side of the business, when I think about the diagnostics side of the business and the strong core growth, just two questions there. One, can you talk about where you are on managed care contracting and helping them and the shift in site of care going to lower-cost, lab services like Labcorp versus inpatient, etc? And then secondly, as we think about routine testing, are you seeing an increase in metabolic testing, specifically like A1c as you think about the GLP-1 phase?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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 a very good position.

We've either finalized or close to finalizing all of the contracts that were large and need to be renewed. And I would say they will 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 have -- we see that growing, but it's growing at consistent rates as it's grown before.

And we still see our esoteric testing growing a little bit faster, but almost about the same as our routine testing. And if you look at like our metabolic testing and so forth, we don't really see an acceleration there. And a lot of the metabolic testing is done in panels and it's done with other tests and so forth. So I wouldn't expect to see a significant change necessarily with the 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. So the underlying dynamics are very strong.

[Lisa Gill, Analyst at JPMorgan Chase & Co.]

Thanks. That's very helpful.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Hey, guys. Thanks for taking the questions.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yes. Thank you. Good morning.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Good morning. Just to follow up on the early development side. Interesting to hear kind of maybe shifting towards a little bit newer of a customer base more towards the midsize. Does that -- I guess what does that entail? Do you just have to cater the offering a little bit more towards that customer base? And is there a little bit of disruption as that happens, talk through how you think about moving the portfolio more towards that client base?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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, 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 that they work with us fully. We can help them develop their diagnostic tests. We have very strong capabilities in companion diagnostics and developing specialty diagnostic tests. 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.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

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 2024 at just a high level about the margin piece. Thank you.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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 million -- almost $80 million of downside into our base case, assuming that PAMA comes next year. We're still trying to see working with our trade group, if there's a way to get -- the SALSA legislation approved.

We have bipartisan support, but we had that last year. So it's very hard to get things approved right now. We're also going to see if there's a way to delay for another year, the implementation. But for our base case, we're assuming that there's about an $80 million impact that would negatively impact the margins next year. That's why we gave the long-term guidance, and we said it's 100 to 150 basis point increase over the time period. We said most of that will be a because in 2024, we have to overcome PAMA. Let's wait and see. If PAMA doesn't become or if it's delayed, then we'll have some upside there for sure.

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

Yes, Patrick. Just, I guess, as you look to the two businesses, we feel good about where we are with the margins. They continue to improve on a base business level. As we think about going into the fourth quarter, we commented that with the Biopharma side, we expect margins to be up in the fourth quarter and year-on-year, such that for the full year, that will be flat to slightly up. In Diagnostics, obviously, we have seasonality that impacts margins.

So fourth quarter sequentially, margins will be down, but they'll still be up year-over-year, so that we expect Diagnostics margins for the full year to be up slightly even after absorbing the negative impact from the Ascension mix. As Adam commented in the 100 to -- call it, 150 basis point margin improvement that we expect over the next three years, we commented that the first year margins would be relatively flat. 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 three-year expectation that margins would grow that 100 to 150 basis points.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Understood. Thanks guys.

[Operator]

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

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Jack.

[Jack Meehan, Analyst at Nephron Research]

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?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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

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 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 tax of jobs that we hire for managing the type of people that we manage.

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

[Jack Meehan, Analyst at Nephron Research]

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.

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

Yes. No, Jack, again, when we basically reaffirmed kind of our outlook for this year as well as our three-year when we were at the Analyst Day. We knew there was some softness we had experienced with in 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 three 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. 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 three-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.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Eric.

[Eric Coldwell, Analyst at Robert W. Baird]

Good morning. Thank you. I have two. 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 a majority of those cancellations they've experienced were predicated on awards that were made a year ago, two years ago, stuff that was clients prebooking stuff when they were concerned about capacity and access in the future.

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

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yes. 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 client studies were 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.

[Eric Coldwell, Analyst at Robert W. Baird]

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

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

So if you look overall, if you just look at the quarter, it would have been below one. But as -- and again, with early development, I don't think book-to-bill is really a good way to look at that business. Because when it comes to development, they're one-month trial, three-month trials, maybe a six-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 Central Laboratory work remains very strong. So that's why I feel confident as I look at the numbers of the future because of the size of our Central Laboratory, the mix of customers in Central Laboratories, more towards pharma and big biotech, and the book-to-bill there remains pretty good.

[Eric Coldwell, Analyst at Robert W. Baird]

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.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yes, absolutely, Eric. So we were supportive of legislation called last year that would have given FDA oversight for laboratory developed tests. And it was unfortunate that it didn't get passed last year had bipartisan support. We were supportive. 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. 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 comments, 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 a minimal impact to us in terms of the amount of money or spend because we do a lot of that work anyway. With that said, it's less than 10% of our volume. So laboratory evolve 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.

[Eric Coldwell, Analyst at Robert W. Baird]

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 in the testing. So -- could you talk --

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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%.

[Eric Coldwell, Analyst at Robert W. Baird]

Perfect. Thank you so much.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Sure.

[Operator]

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

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Morning, Tim.

[Tim Daley, Analyst at Wells Fargo & Company]

So first one on Diagnostics. So I think organic base business, price/mix, excluding Ascension was roughly 320 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 stand-alone price been trending versus last quarter or last year? Any help there would be great.

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

Sure. Tim, this is Glenn. That's right. We would agree that your 320 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. 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. We continue to see favorability in our test per session, whether it be payer mix, test mix, a lot of things, esoteric relative to routine. So we continue to experience good favorable price/mix, but more on the mix side.

[Tim Daley, Analyst at Wells Fargo & Company]

All right. Appreciate that. And then my second question is on direct to consumer. So good to see continued menu expansion this quarter with the announcement. Just -- can you update us on the revenue mix within consumer? Where was it this quarter? What are you expecting as a piece of that 2023 guidance? Thank you.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

No, 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 to actually break out the numbers. We see it growing very substantially, but it's not necessarily at a point where we would break it out and give specific numbers for it. I think when it comes to consumer testing, we're going to see a lot more growth as we go through the years. At some point, if it reaches that material threshold, Tim, we'll certainly to break it out.

[Tim Daley, Analyst at Wells Fargo & Company]

Got it. Appreciate you time. Thank you.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Erin.

[Erin Wright, Analyst at Morgan Stanley]

Hey, thanks. Hi. Good morning I know you mentioned the base margin improvement sequentially in the fourth quarter, but are you seeing the need in one of your competitors was mentioning this, but stepped up investments in the labor in just the current utilization environment, maybe that some of the seasonality you were talking about in the fourth quarter, but how are you just thinking about the labor environment right now? Thanks.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yes. Thanks, Erin. 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. And if you look at retention, from 2019 we saw a significant loss of people and our actual turnover rate was up substantially in 2021 and 2022. If we now look at 2023, we've seen those rates come down.

In our Biopharma business, they've come down almost to the 2019 levels. If you look at our Diagnostics business, they're not yet at our 2019 levels, but they're getting closer. And we expect there to be continued progress there. But we have had to pay a bit more in certain areas. We've had to be competitive in the marketplace. It does impact the margins. But at the same time, that's what we've been so aggressive with LaunchPad. And we're on track to deliver the $350 million of LaunchPad savings that we discussed in the past.

We also, at Investor Day, talked about $100 million to $125 million year reduction through LaunchPad. And we also mentioned that we have a increase in our margins over the 2023 to 2026 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. So at the end of the day, we realized we've got to find ways to reduce costs so that we can offset some of the pressure that we're facing when it comes to the wages and so forth.

[Erin Wright, Analyst at Morgan Stanley]

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 Biopharma landscape. 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? Thanks.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yes. Thanks, Erin. 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. And if you look at it as a percent of the Biopharma business, it's maybe 30% or so. So at the end of the day, it's really Central Laboratory that drives our success in Biopharma.

At the same time, with the strategic things that we're trying to do with companion Diagnostics and work with pharma earlier, bring those Companion Diagnostics or 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.

[Erin Wright, Analyst at Morgan Stanley]

Okay. Thank you.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Pito.

[Kieran Ryan, Analyst at Deutsche Bank Aktiengesellschaft]

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

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yes. No, Ryan. So we're on target. We said we have the $25 million by the end of this year. So it's a run rate next year, that would be taken out. But I think the most important piece is that, that's not enough. We're going to do that, plus we have to do more. So as I said, we're on track for our $350 million LaunchPad initiative. And we've committed to $100 million to $125 million per year in the outer years as we look at our long-term forecast. That includes $25 million of stranded costs, which just tells you we've got to do a lot more.

[Kieran Ryan, Analyst at Deutsche Bank Aktiengesellschaft]

Got it. Thank you. And then just real quick on the Biopharma side. I just wanted to check. Is there -- as we head into 2024, 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? Thanks.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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, they always start off a little bit slower in the first quarter because a lot of pharma are starting to get their studies running in third quarter, sometimes a little slower as Europe comes back after vacation. But net-net, there shouldn't be any significant changes to what we've seen in the past.

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

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 the two segments are a little bit counter to each other. So actually, when you look at it from an enterprise level mutes the seasonalities for each of the businesses.

[Kieran Ryan, Analyst at Deutsche Bank Aktiengesellschaft]

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.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Derik.

[John, Analyst at Bank of America]

Good morning. Good morning. This is John [Phonetic] on for Derik. I wanted to revisit the PAMA issue. There 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, what would you allocate that $80 million benefit that would turn into a benefit now between -- maybe letting it trickle down to margins versus investments?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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 million into the plan, and I would expect the vast majority of that to come down.

[John, Analyst at Bank of America]

Got you. I 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 LVT Tessa volume. It's less than 5%. And a SALSA, it's less than 10%, but still curious if you plan on taking it for the FDA approval or if there's going to be any sort of disruption there?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yes. So at this point, we don't think there'll be any disruption to the ATN profile. We've launched it into the marketplace. Some managed care organizations are starting to reimburse. Others were 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. It's still a relatively new test. We're still have physicians learning about the panel and so forth. So it will take time. But over time, we expect it to be reimbursed well.

[John, Analyst at Bank of America]

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

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Hi, good morning.

[Brian Tanquilut, Analyst at Jefferies Financial Group]

Good morning. Good morning. I guess I'll start, Adam, as I think about a comment that your competitor made yesterday by contract renewables, just curious what 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 on contracts?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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

[Brian Tanquilut, Analyst at Jefferies Financial Group]

Got it. And then, Glenn, you talked about a three-year kind of margin goal of 100 to 150 basis point improvement. As we think about the moving parts between LaunchPad. And I think we're getting questions from people asking when do we see the flow-through of all that and proven volumes to the margin line. How should we be thinking about that?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

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. 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.

[Brian Tanquilut, Analyst at Jefferies Financial Group]

Aweaome. 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.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Thank you. Thank you all for joining us today. I 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 that our strategy is going to continue to drive substantial shareholder value. I hope everybody has a good rest of the day.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Christin O'Donnell, Vice President of Investor Relations
• Adam H. Schechter, Chairman, President and Chief Executive Officer
• Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer

Analysts

• Kevin Caliendo, UBS Group AG
• Lisa Gill, JPMorgan Chase & Co.
• Patrick Donnelly, Smith Barney Citigroup
• Jack Meehan, Nephron Research
• Eric Coldwell, Robert W. Baird
• Tim Daley, Wells Fargo & Company
• Erin Wright, Morgan Stanley
• Kieran Ryan, Deutsche Bank Aktiengesellschaft
• John, Bank of America Co.
• Brian Tanquilut, Jefferies Financial Group Inc.