The operator introduces the Laboratory Corporation of America Holdings Third Quarter 2023 Earnings Conference Call and explains the format of the call. The host, Christin O'Donnell, introduces the speakers, Adam Schechter and Glenn Eisenberg. The company has posted a press release and an investor relations presentation on their website, which includes information on their business and operations. The speakers will be discussing forward-looking statements and the impact of various factors on the company's financial results.

The second paragraph provides more information about the company's performance in the third quarter and their strategic focus. The company saw strong growth in their diagnostic laboratories and biopharma laboratory services, and they have a clear strategy to drive further growth. The company also reported their revenue, adjusted earnings per share, and free cash flow for the quarter. They plan to continue expanding their base business and advancing their leadership in high growth areas.

The enterprise based business margin was down compared to the prior year due to the mixed impact of retention. The company expects margins to increase in the fourth quarter. The company has seen significant momentum in their health system and laboratory partnerships. They have recently announced partnerships with Jefferson Health, Tufts Medicine, and Baystate Health in the Northeast, and with Legacy Health in the Northwest. These partnerships will allow for improved access to standardized laboratory testing and management of inpatient hospital laboratories.

In September, Labcorp acquired Providence, Oregon's outreach laboratory business and is optimistic about continued expansion. Labcorp also launched an innovative blood test for Alzheimer's disease and a new consumer offering for menopause. The Biopharma Laboratory services team opened two new facilities in China. Labcorp expects overall enterprise revenue growth of 5% to 8% and organic growth of 2.5% to 4.5% by 2026.

Biopharma Laboratory services are expected to grow between 4.5% to 7.5% through two main drivers: becoming the preferred partner for health systems and developing specialty testing and companion diagnostics. The company has seen momentum in its health system strategy and has announced five new agreements this year. They are also focusing on four primary areas for specialty testing that are expected to outpace the growth of other therapeutic areas. Labcorp's scale and geographic presence are differentiators for both growth initiatives. They are also well positioned for long-term success in Cell & Gene Therapy, expanding into consumer markets, and international growth. The company expects to exceed $14 billion in revenue by the end of 2026. Labcorp's global team of over 60,000 employees is executing their growth strategy and driving value for shareholders. The company plans to finish strong and continue its mission to improve health and lives.

The company's third quarter results showed a 6.6% increase in revenue, driven by organic growth and acquisitions, but offset by lower COVID testing. The base business grew 14% and organically grew 10.8%, with the Ascension lab management agreement contributing 4% of the growth. Operating income was $252 million, or 8.3% of revenue, with $56 million in amortization and $116 million in special charges. Excluding these items, adjusted operating income was $424 million, or 13.9% of revenue, compared to $491 million last year. The decrease in adjusted operating income was due to lower COVID testing, and margins were negatively affected by the mixed impact of the Ascension lab management agreement. The Launchpad initiative is on track to deliver $350 million in savings by 2024. The tax rate for the quarter was 23.1%.

The adjusted tax rate for the quarter was 24%, an increase from last year due to higher R&D tax credits. Net earnings from continuing operations were $184 million, with adjusted EPS at $3.38, down 16% due to lower COVID testing earnings. Operating cash flow was $276 million, up from last year, and capital expenditures were $105 million. Free cash flow was $171 million, with the company investing in acquisitions, dividends, and a share repurchase program. The company had $725 million in cash and $5.4 billion in debt, with a leverage of 2.7 times gross debt to adjusted EBITDA. Diagnostics laboratories had revenue of $2.3 billion, with organic growth of 3.4% and acquisitions of 3%. The base business grew organically by 12.8%, while COVID testing revenue was down 87%. The Ascension lab management agreement contributed 6% of the growth.

In the third quarter, total volume increased by 2.3% compared to last year, with organic volume decreasing by 1.1% due to COVID testing. Base business volume grew by 7.2%, driven by both organic growth and acquisitions. Price mix also increased by 3.9%, with base business organic price mix up by 9.2%, benefiting from the Ascension lab management agreement. Diagnostics laboratories' adjusted operating income decreased to $386 million, or 16.5% of revenue, due to a reduction in COVID testing and mix impact from Ascension. Biopharma Laboratory Services saw a revenue increase of 7.9%, driven by strong performance in Central Labs and early development. Adjusted operating income for this segment was $109 million, or 15.2% of revenue, with a decrease in margin due to stranded costs from the spin of Fortrea. Excluding stranded costs, margins were up in the third quarter.

In the fourth quarter, the company expects margins to increase year-over-year despite higher personnel costs. They have a backlog of $7.8 billion, with $2.4 billion expected to convert into revenue over the next 12 months. The 2023 full year guidance has been narrowed, with the same midpoint as prior guidance for Enterprise revenue, earnings, and cash flow. Enterprise revenue is expected to grow 1.9% to 2.7% compared to 2022, with the base business growing 11.5% to 12.2%. COVID testing is expected to decline by 85% to 86%. Diagnostics Laboratories revenue is expected to be up 1.5% to 2%, with the base business growing 14.1% to 14.6%. Biopharma Laboratory Services revenue is expected to grow 3.1% to 4% compared to 2022.

The company's guidance for the fourth quarter remains unchanged, with expected improvements in revenue growth and margins. The book-to-bill ratio for the third quarter was lower due to cancellations from small and emerging biotech customers in the early development and research labs. However, the larger customers in central laboratories, which make up the majority of the biopharma segment, continue to show strength.

In the fourth quarter, the book-to-bill is expected to improve compared to the third quarter, with a healthy trailing 12 months of 1.12. The clinical development business being a separate company may result in a lower book-to-bill, but the Central Laboratories segment remains strong. The focus is on changing the mix in early development to work with midsize biotech and pharma companies. Revenue in the bio pharma business grew by 8% in the quarter and is expected to continue to grow. The confidence for improvement in the next quarter is based on the number of RFPs and the current run rate. Sometimes book-to-bill is affected by timing.

The speaker discusses the performance of the diagnostic sector, noting a 7.2% increase in base business volume. They also mention that managed care contracting is in a good position and will likely be flat to slightly positive next year. The speaker also mentions that metabolic testing and routine testing are both growing at consistent rates, with esoteric testing growing slightly faster.

Quest Diagnostics is seeing strong growth in its metabolic testing and other types of testing. This growth is broad-based across geographies and types of testing. The company is also shifting its focus towards mid-sized pharma companies and expanding internationally in areas such as companion diagnostics. By working with these companies early, Quest can help them develop their diagnostic tests and has strong capabilities in this area.

The company is discussing their ability to help pharmaceutical companies with clinical trials and diagnostic testing. They hope to launch these tests globally and have already had discussions with some companies. The margin piece is affected by PAMA, with an estimated $80 million impact next year. The company is working on potential solutions and has given long-term guidance for a 100-150 basis point increase in margins after 2024.

In the paragraph, Glenn Eisenberg and Patrick Donnelly discuss the company's margins and expectations for the fourth quarter. They mention that margins are expected to be up year-on-year in the biopharma side and down sequentially in the diagnostics side. They also mention a 100-150 basis point margin improvement over the next three years, despite a 70-basis point headwind from lower COVID testing and the PAMA headwind. In response to a question, Adam Schechter says that the macro environment for testing remains strong and there are no signs of recessionary signals. He also mentions that there has been no change in the conversations about consolidation opportunities with hospitals.

The speaker is confident that the diagnostic business will continue to do well during recessionary periods. They also believe that the hospital and health system market is strong, and there are opportunities for business development and partnerships. The speaker also mentions their previous outlook for 2024, which may be slightly below their initial expectations due to some softness in the early development sector. However, they are still optimistic about the Biopharma and Diagnostic segments.

The speaker discusses the recent cancellations in early development and clarifies that they are primarily due to clients pre-booking spots when there were supply issues. These cancellations are mostly from NHP trials and are now being affected by the clients' changing priorities and pipeline considerations.

Eric Coldwell asks Adam Schechter about the gross awards in early development and whether the book-to-bill was above or below one this quarter. Schechter explains that while the overall book-to-bill may have been below one, it is not a good way to measure the early development business because of the short trial periods. He also mentions that the Central Laboratory work remains strong and the book-to-bill is good. Coldwell then asks about the FDA's proposed LDT rule and Schechter expresses support for it, stating that they are working with the FDA to find ways to provide appropriate oversight. He also notes that their science, innovation, and technology capabilities differentiate them.

In the paragraph, the speaker discusses the impact of legislation on laboratory developed tests and how it will affect the company's revenue. They mention that they already go through rigorous processes with their tests and that they are working with their trade organization to provide comments and thoughts to the FDA. They also mention that laboratory developed tests make up less than 10% of their volume and less than 5% of their revenue. The speaker then answers a question about the organic growth rate and attributes it to price and mix, excluding the impact of a recent acquisition.

Glenn Eisenberg and Tim Daley discuss the trend of standalone prices compared to last quarter and last year. Glenn mentions that the pricing has been flat but with a slight headwind, while Adam mentions that the renewals of managed care contracts will have a positive impact. Tim also asks about the revenue mix within direct-to-consumer advertising, to which Adam responds that it is still small and not worth breaking out, but they expect it to grow substantially in the future.

The speaker discusses the current labor environment and how it is impacting the company's margins. They mention that they have had to pay more in certain areas to remain competitive, but are also implementing cost-saving measures through their Launchpad program. They expect to see an increase in margins in the coming years, mostly after 2024.

Erin Wright asks about Labcorp's commitment to their early development business, given the recent volatility in the biopharma landscape. CEO Adam Schechter responds that the business is a small part of Labcorp's overall business and they continue to evaluate all options. He also mentions their strategic focus on companion diagnostics and working with pharma earlier in the development process. In regards to cost reduction, they are on target to eliminate $25 million in stranded costs by the end of the year, but acknowledge that more needs to be done.

The company is on track for a $350 million Launchpad initiative and has committed to investing $100-125 million per year in the outer years. There may be some seasonality in the Biopharma segment, but it should not significantly impact overall performance. The PAMA issue is expected to have a 70 basis point impact on the company's performance, but this is already factored into the company's guidance.

Adam Schechter, CEO of the company, states that in the case of a delay, they will allocate the $80 million benefit towards margin. He also mentions that they have launched the ATN profile into the marketplace and are in discussions with managed care organizations for reimbursement. He expects good reimbursement from providers and health systems over time. In response to a question about contract renewals, Schechter says they are seeing positive trends and expect good reimbursement from payers.

In the paragraph, Brian and Glenn discuss their recent contract negotiations and the expected impact on their margins. They also mention their three-year margin goals and the factors that will contribute to achieving them, such as top line growth, Launchpad savings, and labor costs. They express confidence in their ability to improve margins with these strategies.

The speaker expresses optimism for Labcorp's future and believes their strategy will bring value to shareholders. They conclude the conference and thank the participants for their participation.

This summary was generated with AI and may contain some inaccuracies.