The operator welcomes listeners to the Laboratory Corporation of America Holdings Fourth Quarter and Full Year 2023 Earnings Conference Call. The call will include a presentation and a question-and-answer session. The call will be recorded and a replay will be available. The speakers include the CEO, CFO, and Vice President of Investor Relations. The company has posted a press release and investor relations presentation on their website. Forward-looking statements will be made regarding the company's estimated 2023 guidance, the recently completed spinoff of Fortrea Holdings Inc., and other factors affecting the company's business and financial results.

Labcorp had a successful fourth quarter in 2023, with strong revenue growth in both diagnostics and biopharma. They also completed several strategic initiatives, including the integration of Ascension's lab operations and the spin-off of Fortrea. Labcorp plans to continue driving growth through acquisitions, partnerships, and innovation in key areas. In the fourth quarter, they saw revenue of $3 billion, adjusted earnings per share of $3.30, and free cash flow of $422 million.

In the fourth quarter of 2022, enterprise revenue increased by 4%, with strong growth in diagnostics and biopharma. Despite constraints from recently closed hospital partnerships, the enterprise-based business margin remained flat. For 2024, the company expects continued growth in revenue and margins, with an adjusted EPS of $14.30 to $15.40 and a growth rate of 10%. Labcorp has seen positive momentum in their health system and regional local lab partnership strategy and has recently announced new partnerships and acquisitions. The company's M&A pipeline is strong and they remain focused on expanding their partnerships.

Labcorp's partnerships are beneficial and profitable, with margins expanding over time. The company has made progress in science, technology, and innovation, including offering fertility and family building benefits, launching a new blood-based test for Alzheimer's disease, and collaborating with Hawthorne Effect to improve decentralized clinical trial capabilities. They have also introduced a new sample testing application for Central Laboratory customers. In the year ahead, Labcorp plans to focus on their growth drivers and remain a partner of choice for health systems and regional laboratories, as well as developing and scaling specialty testing.

In the fourth quarter, Labcorp saw a 3.5% increase in revenue due to organic growth and acquisitions, but this was partially offset by a decrease in COVID testing. The base business grew 7.4%, while COVID testing revenue was down 73%. The company also experienced an operating loss of $123 million due to an impairment charge related to their early development research laboratory's business.

The company had $125 million in special charges and a decrease in adjusted operating income due to lower COVID testing. However, base business margins were in line with last year and cost reduction initiatives delivered savings. The adjusted tax rate was lower and fully diluted EPS was a loss of $1.95 due to an impairment charge. Adjusted EPS increased by 8% and cash flow decreased due to lower COVID testing. Capital expenditures were 3.7% of revenue for the year and the company plans to reduce this to 3.5% in 2024. Free cash flow was $414 million and the company invested in acquisitions and paid dividends, but did not use cash for share repurchases.

The company had $530 million remaining in share repurchase authorization at the end of the year. Free cash flow from continuing operations was $888 million, with $672 million invested in acquisitions, $254 million paid in dividends, $1 billion spent on stock repurchases, and $300 million used to pay down debt. The company has a strong pipeline of potential acquisitions and believes in the importance of their share repurchase program. The company had $537 million in cash and a debt of $5.1 billion, with a leverage of 2.5 times gross debt to adjusted EBITDA. The Diagnostics Laboratories segment had a revenue increase of 2.6%, with organic growth of 0.8% and acquisitions contributing 1.8%. Total volume increased by 2.4%, with organic volume growing by 0.3% and acquisitions contributing 2.1%. Price mix increased by 0.2%, and adjusted operating income was $354 million, or 15.1% of revenue, compared to $387 million, or 16.9% last year, due to a decrease in COVID testing.

The base business operating income for Biopharma Laboratory Services increased due to higher demand, acquisitions, and cost savings. However, there was a decrease in margin due to reduced COVID testing and mixed impact from recent hospital partnerships. Revenue for the quarter also increased by 7.1%, with Central Labs showing the strongest growth. Adjusted operating income and margin also increased, but were partially offset by higher costs. The backlog for the quarter was $8.2 billion, with $2.5 billion expected to convert into revenue over the next 12 months. The company has also provided 2024 full year guidance, which includes expected revenue growth and capital allocation plans.

The company expects to offset the impact of lower COVID testing with the annualization of acquisitions completed in 2023. They anticipate growth in biopharma revenue and margins, and have provided guidance for adjusted EPS and free cash flow. The company plans to continue driving profitable growth and generating strong cash flow, using it for acquisitions and returning capital to shareholders. The first question from an analyst is about potential larger deals in the independent lab or health system space, and the company's bandwidth and cash flow.

The company's pipeline for mergers and acquisitions remains strong, with potential deals from various health systems. The company expects to see 1.5% to 2.5% growth from inorganic means and is committed to its dividend. They prioritize partnerships with local and regional laboratories, followed by strategic deals and share buybacks. The company also expects to generate $1 billion to $1.15 billion in free cash flow and has a strong balance sheet with a targeted debt-to-EBITDA range of 2.5 to 3.

The speaker discusses the company's financial flexibility and potential opportunities for mergers and acquisitions. They also address questions about margins and unit prices in the diagnostic business, stating that margins are expected to increase in both the diagnostics and biopharma divisions. They are committed to reducing costs and have seen significant growth in volume.

The company expects growth in the biopharma sector to improve margins, despite the lingering impact of COVID in 2024. Mix and volume are expected to drive this growth, with favourable mix and relatively flat unit prices. The Biopharma laboratory service business is a leader in both Central Laboratory and early development.

The Central Laboratory segment performed well in the fourth quarter and is expected to continue growing at a rate of 5.5% to 7.5% in 2024. The early development segment is also expected to improve and grow at a similar rate as the overall biopharma guidance. There have been some cancellations in early development, but they are expected to normalize in 2024. Overall, both segments are seeing positive RFPs and win rates, with Big Pharma sending a lot of RFPs. Margins are expected to be up year-over-year for both segments, with the strongest improvement in the first half of 2024.

Adam Schechter, in response to a follow-up question, discusses the outlook for NHP pricing and supply reliability. He states that supply is currently not an issue and that they have multiple suppliers. He also mentions that they have seen a decrease in pricing, which will benefit their margins. In terms of overall volume trends, Schechter notes that the company came into 2024 with significant momentum, with 8% growth in diagnostics and 7.1% growth in biopharma in the fourth quarter. He provides guidance for both businesses, with expected growth and margin improvement.

The company expects to see a negative impact from weather on their Diagnostics business in the first quarter, which will be the hardest quarter of 2024. However, demand and utilization for Diagnostics are positive and volume levels are up compared to pre-pandemic levels. The weather in January had a $25 million impact on revenue and the company estimates a $0.10 to $0.15 impact on earnings. The regulatory environment, including LBT, PAMA, and SALSA, is uncertain and PAMA may continue to be delayed.

The speaker discusses the company's support for the SALSA legislation and their optimism for its passage. They also mention potential delays and the impact of PAMA on their guidance. They do not support the FDA's current plans for oversight of laboratory-developed tests and believe that legislation specifically for the diagnostic industry is the best path forward. The speaker then addresses the company's strong growth in the diagnostics market, attributing it to the extension deal and a lower margin profile compared to their largest peer. They express surprise at the level of profitability compared to their peer.

Adam Schechter, CEO of LabCorp, discusses the company's momentum in the diagnostics business, driven by their focus on four therapeutic categories and partnerships with hospitals and local laboratories. They have raised their guidance for inorganic growth and have recently announced a digital capability in women's health through a partnership with Ovia. This will offer a fertility and family building benefit to customers and can be accessed directly by patients.

The speaker discusses the company's strong performance in the fourth quarter, particularly in the biopharma segment. They mention a book-to-bill ratio of $1.26 billion, which is an improvement from the previous quarter. The company expects to continue this trend and reach their target of $1.05 billion to $1.1 billion in the coming year. They also note that their Central Laboratory business is performing well, with strong RFPs, book-to-bill, and win rates, and fewer cancellations due to their focus on larger pharma clients.

The speaker discusses the current state of the company's early development business, noting that while there have been some cancellations, they are not as significant as those seen in early development. They are confident in the strength of their RFPs and win rate, but acknowledge that there have been cancellations due to factors such as NHP pricing and financial pressures for smaller biotech companies. The speaker also mentions a shift towards more business from larger pharma in early development, which they believe will lead to a stronger book-to-bill ratio. Overall, they remain confident in both the early development and central lab businesses, with a projected growth rate of 5.5% to 7.5% for the year. However, due to the cancellations, early development growth is expected to be stronger in the second half of the year compared to the first.

The company expects to see continued improvement in its financials due to a strong backlog, with margins in the diagnostics business expected to be slightly up despite a $130 million headwind from COVID. The interest expense for 2024 is expected to be higher due to refinancing of $1 billion in debt, but the company plans to maintain its current debt load.

The company's leverage is within its targeted range but they may use additional debt for potential opportunities. The cost of sales and G&A outpaced revenue growth in Q4 but the company is still targeting margin improvement. The labor market is still tight but improving and the company's Launchpad initiative is in place to offset inflationary pressure. The company expects a 3-4% increase in labor costs, which would be over $100 million, but they aim to offset this with their $100-125 million annual target for Launchpad.

The company expects things to level off and for the Launchpad initiative to help offset inflationary costs. They have not disclosed how much of their free cash flow will go towards share buybacks, M&A, and dividends. The guidance for 2024 indicates margin improvement for the diagnostic business, with a focus on both organic and acquisition-based growth. In the fourth quarter, revenue grew by 8% but margin was down slightly compared to the previous year.

The increase in healthcare costs and hospital deals drove the decline in margins in the previous year. However, the company is confident in margin accretion this year due to delayed PAMA regulations, strong volume increases, continued improvement from hospital deals, and cost reduction efforts. Despite the impact of COVID, the company expects to see margin improvement in the diagnostic business.

The hospital partnerships and acquisitions are important for the company's growth, but the margins may be constrained due to the in-hospital lab management agreements. The recent increase in early stage trial cancellations was due to various reasons such as supply issues and funding difficulties for smaller biotech companies. However, the company expects these cancellations to normalize in the future. The company plans to drive margins through top line growth, cost controls, and business process improvement initiatives.

The company is experiencing a shift towards working with mid-size to larger pharmaceutical companies in their early development business due to cancellations from smaller biotech companies. This has been a strategic goal for the company for some time and they are seeing progress, but there is still work to be done. The increase in revenue in their BLS business is also due to cost improvements, but there may not be many more cost-saving opportunities in the future.

In Paragraph 26, Glenn Eisenberg and Elizabeth Anderson discuss the cost opportunities and growth potential for BLS. Eisenberg mentions stranded costs that are being taken out and the launchpad initiative, which is expected to result in $100-125 million in savings each year. They also mention excess capacity in the early development side of the business but anticipate growth in that area. Anderson asks about the expected 2024 tax rate, to which Eisenberg responds that they expect a 23% adjusted tax rate due to the company's higher percentage of earnings in lower tax rate jurisdictions and higher percentage of R&D. The company's profile gives them confidence that this rate is sustainable going forward. The next question comes from Eric Coldwell, who greets the group and asks a question.

The speaker asks about the impact of R&D tax credit on the company's fourth quarter results and its sustainability. The CFO explains that the company's focus on oncology and other R&D-driven areas has led to increased investments and tax deductions. He also mentions pending tax laws and the potential impact of global minimum taxes, but believes that the current tax rate of 23% is sustainable. He also notes that international growth could potentially lead to a more favorable tax structure.

Eric Coldwell asks Glenn Eisenberg about the distribution of R&D tax credits within Labcorp, and Eisenberg explains that they are present across the company, with a focus on diagnostics. Coldwell also asks about the impact of stranded costs on Labcorp, and Eisenberg clarifies that they have already achieved their target of reducing $25 million of stranded costs this year, with more to come. The TSA support for Fortrea is a pass-through, with Labcorp providing services and receiving payment.

The company expects to see a decrease in costs once the transition to TSAs is complete, with a goal of completing all TSAs within two years. The company is making good progress and expects to see the TSAs expire earlier than planned. The guidance range for the company's financials is wide, with the lower end potentially impacted by volume and mix, while the upper end could be driven by diagnostic volume. There are no major contract expirations in the coming year.

The weather has had a small impact on Labcorp's business, but the volume remains strong. The integration of hospital deals will help, and there is less volatility due to COVID. The company's EPS range has been narrowed. The biopharma services business has strong momentum, but they are watching for cancellations to return to normal. With the spin-off of the clinical development business, there is less variability and the guidance ranges are tighter. A question was asked about the growth of esoteric testing, which had a good performance in the fourth quarter.

In the future, the company expects high single digit, low double digit growth in esoteric testing and routine testing. Esoteric testing is expected to grow slightly faster in both volume and dollars. The company expects flat pricing in 2024 and an improvement in margins for both diagnostics and biopharma. The fourth quarter was impacted by hospital integrations, but the company expects this to improve in the coming year.

Labcorp's CEO, Adam Schechter, discussed the company's financial outlook for the next year during a conference call. He mentioned that there is still a $130 million impact from COVID in their diagnostic business, but they expect to see some margin improvement despite this. He thanked the company's team for their dedication to serving patients and improving health, and expressed a desire to share more updates in the future. The conference call has now concluded.

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