Labcorp Holdings Inc.

Good day and thank you for standing by. Welcome to the Laboratory Corporation of America Holdings First Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kristin O'Donnell, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning and welcome to LabCorp's First Quarter 2024 Conference Call. As detailed in today's press release, there will be a replay of this conference call available via telephone and 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 .labcorp.com, we posted both our press release and Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures, both of which are discussed 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 2024 guidance and the related assumptions, the recently completed spinoff of Fortria Holdings Inc., 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 global economic and market conditions, future business strategies, expected savings, benefits and synergies from the LaunchPad Initiative and from acquisitions and other strategic transactions and partnerships, the plan holding company reorganization 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 SEC. We have no obligation to provide any update to these forward-looking statements, even if our expectations change. Now I'll turn the call over to Adam Schechter.

All right, thank you, Kristen. Good morning, everyone. It's a pleasure to be here with you today. We look forward to sharing our first quarter 2024 results and progress on our strategy. But before I do that, I wanna address the recent announcement that LabCorp was selected as a winning bidder for select assets of NVTA. This transaction will advance our strategy to launch and scale specialty testing in areas such as oncology and rare diseases. These are strong assets and important to these areas, and they fit strategically with our focus on specialty testing. NVTA has strong science, a great MGS platform, and strong talent. Upon completion of the transaction, LabCorp expects approximately $275 to $300 million in annual revenue, with the vast majority in specialty areas such as oncology and rare diseases. The purchase price for the transaction is $239 million. We expect the transaction to be dilutive to adjusted earnings by approximately 2% to 3% in the first full year. We expect the transaction to be accretive in year two and to exceed our cost of capital in year three. Now I'll move to the quarter. LabCorp delivered strong top-line performance in the first quarter, driven by growth in both of our businesses, diagnostic laboratories and biopharma laboratory services. We continue to execute well on our strategic priorities through being a partner of choice for health systems and regional local laboratories, through launching key new tests in important therapeutic areas, and by harnessing science, technology and innovation to bring new tests, services and capabilities to our customers around the world. Let's turn now to our first quarter financial results. In the first quarter, revenue totaled $3.2 billion and adjusted earnings per share was $3.68. Enterprise revenue for the quarter increased 5% compared to the first quarter of 2023, with diagnostics revenue of 4% and biopharma revenue of 8%. Biopharma's growth was driven by strength in central laboratories, partially offset by early development research laboratories. Enterprise-based business margins are up compared to the prior year. Higher margins in biopharma were partially offset by diagnostics margins. We expect margins in both businesses to be up for the full year. The overall strength in our business enabled us to narrow the range and raise the midpoint of our EPS full year guidance to $14.90, despite a negative impact from currency. Glenn will provide more details on our results and 2024 outlook in just a moment. In the first quarter, LabCorp advanced key growth initiatives that support our strategy. We began 2024 with positive momentum, reinforcing our position as a partner of choice for health systems and regional local laboratories. We continue to be active on the acquisition front. We closed three transactions in March, including health system agreements with Baystate Health in Massachusetts and Providence in California, and a regional lab acquisition in California. In March, we also entered into an agreement to acquire select assets of bioreferenced health diagnostic business. This transaction will increase access to LabCorp's high quality clinical laboratory services. These new assets are focused on clinical diagnostics and reproductive and women's health. Our business development pipeline remains strong. Building on the success of our acquisitions and strategic partnerships, we continue to incorporate the power of science, technology, and innovation across the organization. This commitment is demonstrated by how we've expanded our test menu this quarter. We advanced our leadership in neurodegenerative disease with the launch of our PTAL-217 blood-based biomarker test that aids in the diagnosis of Alzheimer's disease and the monitoring of patients undergoing treatment for new therapies. It's also available to be used in clinical trials. In addition, earlier this month, we announced the launch of a GFAT blood biomarker test for the early detection of neurodegenerative diseases and neurological injuries. Following the launch of our ATN profile last fall, these two significant advances in the company's testing portfolio extend our leadership in a rapidly accelerating field of blood-based biomarkers for neurodegenerative diseases. We continue to accelerate our leadership in oncology. We launched LabCorp Plasma Detect, the first clinically validated whole genome sequencing MRD solution for early stage colon cancer to identify patients at increased risk of recurrence after surgery or adjuvant chemotherapy. LabCorp Plasma Detect, developed by our PGDX laboratory, is a significant achievement that enhances our liquid biopsy portfolio and strengthens our position at the forefront of driving better patient outcomes in oncology. We introduced a weight loss management test portfolio in the quarter, a suite of tests that supports individuals and physicians with accessible and convenient testing options to guide weight loss management decisions and treatment, including lifestyle modifications, GLP-1 medications, or bariatric surgery. LabCorp On Demand introduced a magnesium test and a micronutrient test to measure key vitamin and mineral levels to support individual wellness. We also announced an STI test for Mgen. Mgen can be as widespread as Plymedia and gonorrhea. This test includes a reflex to identify resistance to macrolide, a commonly used treatment addressing high antibiotic resistance and treatment failures associated with the infection. In April, we received emergency use authorization from the FDA for our MPOPS PCR test, a home collection kit. The test is the first at-home collection kit authorized by the FDA to aid in the diagnosis of infection with MPOPS. Physicians can order for patients 18 years of age or older who are suspected of MPOPS infection. In addition, we launched our electronic requisition digital capability to help biopharma customers and investigator sites improve protocol compliance by reducing errors, queries, holds, and data revisions. Earlier this month, we released our latest Corporate Responsibility Report, which highlights the significant progress that we're making as we pursue our mission to improve health and to improve lives in a sustainable way. We invite you to take some time to review the report that can be found on our Investor Relations website. As part of our earnings release this morning, we also announced our intention to create a new holding company named LabCorp Holdings, Inc. to more closely align with our brand and better position us as a global organization. I'd like to thank our team of more than 67,000 employees around the world. Their ongoing commitment has once again earned us recognition of Fortune's and Hold's most admired companies, Les. We're extremely proud of this recognition. In summary, we continue to make progress against our strategy and to achieving both near-term and longer-term goals. We remain focused on our position as leaders in science, technology, and innovation, and driving further value for our customers, our shareholders, and our employees. With that, I'll turn the call over to Glenn.

Thank you, Adam. I'm going to start my comments with a review of our first quarter results followed by a discussion of our performance in each segment, and conclude with an update on our full year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.2 billion, an increase of .6% compared to last year, primarily due to organic-based business growth and the impact from acquisitions, partially offset by lower COVID testing. The base business grew .7% compared to the base business last year, while COVID testing revenue was down 70%. Organically in constant currency, the base business grew 4.3%. Operating income for the quarter was $321 million, .1% of revenue, or .3% on an adjusted basis. During the quarter, we had $49 million of restructuring charges and special items, primarily related to acquisitions and launchpad initiatives. In addition, we had $22 million of expense for transition service agreements related to the spin of Fortria, with the corresponding income recorded in other income. Excluding these items, an amortization of $60 million suggested operating income in the quarter was $453 million, or .3% of revenue, compared to $448 million, or .7% last year. The margin decline was due to lower COVID testing. Base business margins were up, as the benefit of demand and launchpad savings were partially offset by higher personnel costs. Our launchpad initiative continues to be on track to deliver 100 to $125 million of savings this year, consistent with our long-term target. The adjusted tax rate for the quarter was 23%, compared to .1% last year. The higher adjusted tax rate was primarily due to a stock-based compensation benefit in the prior year. We continue to expect the full year adjusted tax rate to be approximately 23%. Net earnings from continuing operations for the quarter were $228 million, or $2.69 per diluted share. Adjusted EPS were $3.68 in the quarter, up 7% from last year. Operating cash flow from continuing operations was a use of $30 million in the quarter, compared to $186 million generated a year ago. The reduction in cash flow was due to lower cash earnings, primarily related to deferred taxes, and the timing of working capital requirements. Capital expenditures totaled $134 million in the quarter, or .2% of revenue. This compares to 78 million, or .6% in the prior year, which was impacted by the then-pending spin of Petria. For the full year, we continue to expect capital expenditures to be approximately .5% of revenue. Free cash flow from continuing operations for the quarter was a use of $164 million. The first quarter is seasonally the company's lowest quarter for free cash flow. We continue to expect free cash flow for the full year to be between one to $1.15 billion. During the quarter, the company invested $259 million in acquisitions and paid out $62 million in dividends. At quarter end, we had $99 million in cash, while debt was $5.1 billion. Our leverage was 2.5 times gross debt to trailing 12 months adjusted EBITDA. Now review our segment performance, beginning with diagnostics laboratories. Revenue for the quarter was $2.5 billion, an increase of .1% compared to last year, with organic growth of .8% and acquisitions, net of divestiture is contributing 2.2%. The base business grew .8% compared to the base business last year, while COVID testing revenue was down 70%. Organically in constant currency, the base business grew 4.4%. Total volume increased .4% compared to last year. Base business volume grew .9% compared to the base business last year, as organic volume increased 2.7%, while acquisitions contributed 2.2%. Price mix increased .6% versus last year, due to an organic base business increase that was partially offset by lower COVID testing. Base business organic price mix was up .7% compared to the base business last year. Diagnostics adjusted operating end for the quarter was $418 million or .9% of revenue compared to 442 million or .5% last year. The decrease in adjusted operating income was due to a reduction in COVID testing, while base business income was up as the benefit of demand and launchpad savings were partially offset by higher personnel costs. The decrease in adjusted operating income margin was due to the reduction in COVID testing, the negative impact from weather, and the mixed impact from lab management agreements, which we expect to improve over time. Now I'll review the segment performance of biopharma laboratory services. Revenue for the quarter was $711 million, an increase of .5% compared to last year, due to an increase in organic revenue of .1% and foreign currency translation of 2.4%. The revenue growth was driven by continued strength in central labs, which was up 13%, while early development was down 4% due to continued higher than normal cancellations and lower orders. While cancellations are higher than normal, we have seen a sequential improvement from last quarter. Biopharma adjusted operating income for the quarter was $100 million or .1% of revenue compared to 74 million or .1% last year. Adjusted operating income and margin increased due to organic growth and launchpad savings, partially offset by higher personnel costs. We ended the quarter with a backlog of $7.9 billion, and we expect approximately $2.5 billion of this backlog to convert into revenue over the next 12 months. The trailing 12 months book to bill was 1.00, which we expect to increase throughout the year. Now I'll discuss our updated 2024 full year guidance, which assumes foreign exchange rates effective as of March 31, 2024 for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation with free cashflow targeted for acquisitions, share repurchases and dividends. We expect enterprise revenue to grow 4.8 to .4% compared to 2023. Compared to prior guidance, this is a narrowing of the range with the same midpoint despite a 50 basis point headwind from currency. We continue to perform well in diagnostics and are narrowing the full year guidance range and increasing the midpoint. We expect diagnostics revenue to be up 4.8 to 6% compared to 2023. This is an increase at the midpoint from our prior guidance of 140 basis points, primarily due to stronger base business demand, as well as acquisition revenue that is now forecasted in the segment where it was previously only included in the enterprise guidance prior to the closing of the transactions. We expect biofarmer revenue to grow 3.7 to .7% compared to 2023. The decrease at the midpoint from our prior guidance of 180 basis points is due to currency. This guidance includes the year over year positive impact from foreign currency translation of 40 basis points versus 220 basis points in the prior guidance. An improvement in the outlook for central labs is expected to be offset by early development. We continue to expect margins in diagnostics and biofarmer to be up in 2024 versus 2023, driven by top line growth and launch pad savings. Our guidance range for adjusted EPS is $14.45 to $15.35. We have narrowed the range and increased the midpoint of guidance by 5 cents, driven by improvement in diagnostics, partially offset by the change in currency. The free cash flow guidance range is $1 to $1.15 billion unchanged from prior guidance. In summary, we expect to drive continued profitable growth and strong free cash flow generation that'll be used for acquisitions that support our strategy and supplement our organic growth while also returning capital to shareholders through our share repurchase program and dividends. Operator, we will now take questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from Jack Meehan of Nefron Research. Your line is open.

Morning, Jack.

Good morning. So wanted to focus on the in-vit ideal here. Let's start with Adam. Can you talk about the strategic value of these assets, why you're excited to acquire them out of bankruptcy, and how does the oncology business complement what you're doing already internally?

Yep, hi, Jack. So they're strong assets. And we've always said that oncology is one of our core therapeutic areas, and they have a very big hereditary oncology business, much bigger than the business that we have in that area. So it certainly augments what we're doing, and it accelerates it in a fairly significant way. They also have quite a bit of rare disease work that they've done, and that augments our focus on specialty testing. They have a very good NGS platform. We have a platform, but we're gonna look to see what we can use that they have, and use what we have, and get the best platform we can possibly get. They have very good talent, and I think we were able to do it at a reasonable deal. It's a company that people have looked at for years and years, but their valuation, you could never get past. But the science was always very good. Their capabilities were always very good. So strategic that field fits very well for us.

Yeah, that makes a ton of sense. And then, second one for Glenn. Can you just talk about the strategy to work down the dilution? Prior to the bankruptcy, I think NBTI was targeting burn of over $200 million. Some of that's related to things you're not acquiring, but your target you laid out calls for maybe 30 to 50 million of burn was my math. Can you just talk about the confidence it won't be worse than that, and then the action steps to get to accretion in year two?

Yeah, hi Jack. So again, as Adam commented, we're very excited about the acquisition. And frankly, going out of acquiring the select assets through bankruptcy from a purchase price, obviously, relative to other deals that we see of similar focus in our therapeutic areas is quite attractive. As we think about long-term value creation, you heard in the opening comments that we expect this to exceed our cost of capital in year three and have a very attractive overall return on our investment. But to your point, in the near term, it will be dilutive. This is a business that has a high cost structure. And from our perspective, like other acquisitions that we've done of similar ilk, we'll be able to leverage the cost structure within LabCorp to leverage. It's a business that has a very high gross margin, which is again, very attractive to us. Obviously, we'll continue to instill launch pad disciplines that we have, which will benefit them as well. But the big opportunity to improve their profitability is on the cost side. They spend a fair amount in R&D, which we would expect to continue, obviously, the value of what we're acquiring. But from sales, marketing, and especially general administrative costs, where we can leverage our infrastructure, we'll be able to get it profitable, as Adam said, within the first year. So it's all about integration. We'll do it on a very disciplined and timely manner, but we expect it to ultimately be accretive in the second full year of our ownership.

So, sounds good, thanks, guys.

Thank you, one moment for our next question. And our next question comes from Erin Wright of Morgan Stanley, your line is open. Morning Erin. Hey,

thanks, good morning. Could we talk a little bit about what's embedded in guidance as it relates to the acquisition contribution versus organic growth and base business strength in the diagnostics segment? I just wanna make sure, can you remind us what's embedded in the enterprise level guidance versus the segment level guidance as well, thanks.

Yeah, hi, Erin. When we talk about the three acquisitions that we announced in the quarter, that's adding, obviously, to the change in the guidance we did for diagnostics. So when you look at the change, just use the midpoint of our guidance. It improved 140 basis points. Assume roughly half of that is from those three acquisitions. And again, those were already incorporated in our enterprise guidance, but not until the segment, until the deals were closed. So half of it is due to the acquisitions, and then the other half of the growth is demand. The strength that we saw in the first quarter that we also expect to see continued through the year.

Okay, that's helpful. And then switching to the biopharma segment, what are you expecting for the balance of the year at this point? What are you seeing in terms of RFP flow and cancellations, and how would you just characterize the underlying health, particularly across that early development business? Thanks.

Yeah, so I'll start overall, and then I'll answer early development specifically. So overall, biopharma laboratory services grew 8%, and central labs had very strong growth at 13%. Now, realizing central labs had a relatively easy compare versus first quarter of last year, you probably remember first quarter of last year, there were a lot of personnel issues and investigator sites. If you look at the ED growth, it's coming back slower than we anticipated, but it's being offset by the strength in our central lab business. If you look at RFP flow, for central lab, everything looks normal, everything looks really strong. That business is very healthy. If you look at early development, we still continue to have good RFP flow. The RIN rates are good. The cancellations still remain higher than what we would expect. The first quarter was a bit better than fourth quarter of last year, but still higher than what we anticipate. So as we go through the rest of the year, we were able to maintain the revenue guidance for BLS if you just adjust only for foreign exchange, where central labs is gonna continue to outperform, and we expect it's gonna take a bit longer for the early development business to fully come back.

Thank you. Thank you, one moment for our next question.

And our next

question comes from Patrick Donnelly of Citi. Your line is open.

Morning, Patrick. Hey, good morning, guys. I wanted to pick up kind of right where you left off there on the Bio Pharma piece. Can you just dive a little bit deeper into early development? Obviously, again, the booked bill softened a little bit there on the BLS side. There's a lot of focus on the early development piece. Can you just talk about the visibility on that front? And again, the expectations as we work our way through the year, maybe both on orders and the revenue side would be helpful.

Sure, so I'll start with the booked bill. So the booked bill was 1.0. That's lower than we would typically like. However, we've got insight to the booked bill for second quarter already and insight to the rest of the year. And I expect the booked bill to continue to grow starting next quarter throughout the rest of the year. The health of the booked bill still looks good across the business. It's the early development part of the booked bill, which frankly is a little bit less relevant because early development, a lot of the studies start in the year and finish in the year. Typically with the booked bill, you look for things that go more than a year or over time. So as I look at the early development booked bill, it's not where we would like it at the moment, but the RFPs are good, the win rate looks good. It's the cancellations that are driving the majority of the issues. But that can correct itself faster typically because the burn rate is so much quicker. As we go through the rest of the year, we expect that the early development business starting in the second half will begin to be stronger than the first half.

Yeah, the only thing I'd add to Patrick is when you put the size of the business in perspective, obviously it's less than 10% of the company, but even within Bio Pharma, you have two thirds of the segment, let's say Central Lab, and that's really where the backlog, if you will, in the booked bill is probably more applicable because the backlog that we have in Central Lab is effectively supporting most of the revenues over the next 12 months. So to your point on visibility, with early development, we have less visibility because it's a much lower percentage of the backlog with that business and much shorter lead times. So it just puts in a little bit more volatility, if you will, but on the positive side, as we ultimately see the rebound in that business, we'll be able to get those revenues and bring them into revenues on a quicker basis than we could have within Central Labs.

Thank you. One moment for our next question. And our next question comes from Michael Cherney of Learing Partners. Your line is open.

Morning, Michael. Morning, and thank you so much for taking the question. Maybe just one quick clarification on Invitae. You talked about the financial impact in the first full year post-close. Is there any financial impact currently embedded in the guidance?

So, Michael, this is Glenn. When you look at the guidance that we've given, and we always kind of say the midpoint of a range is what our expectation is, and then there's always gonna be pluses and minuses, which is why we put a range. So at the midpoint of our guidance, the answer is Invitae is not in those numbers. But when you look at the guidance range, so relative to the revenues of Invitae for the potential dilution in the first year, that would be incorporated, if you will, sizing it within the range we've given. So I guess the answer is it's not in the explicit guidance, but it's captured within the range that we've provided. We're looking to close this, and it'll obviously depend when we do, but let's say it's in the third quarter. Obviously, when we have our announcement or quarterly call, we will update our guidance to reflect, obviously, a half a year left, but obviously acquisitions that would have been completed as well, which again, we may see Invitae over that timeframe.

Okay, that's helpful, Glenn. And then maybe just on price and -per-rec, can you just give a sense on how it tracked over the quarter relative to your expectations in terms of the base business guidance increase for the diagnostic laboratories business? How much of that is the difference between improvements in volume versus improvements in price?

Yeah, so overall, we normally talk about our growth weighted to volume versus price mix in kind of a three to one kind of ratio, if you will. Obviously, it was a little different during the quarter, but strength, frankly, on both volume and on price mix. The price mix, frankly, is mix-related. We would normally say unit price is relatively flat, but the improvement that we saw in the quarter from a mix standpoint was the live management agreements, was our test per session. We continue to see favorable movement, and we're seeing a higher percent of our growth coming from our esoteric business versus routine. So all those three kind of improved our mix, but clearly the growth we expect to see is driven off of demand, which is volume.

Got it, thank you.

Thank you, one moment for our next question. And

our

next question comes from Anne Hines of Mizuho Securities. Your line is open.

Good morning, Anne. Good morning, thank you. How are you? So I just want to talk about just the volume, and obviously the diagnostic segment is very strong, and it's in line with what your largest peer just reported. And I'm trying to figure out how much is driven by volume by underlining demand, which is strong, but also how much is driven by maybe the national companies taking market share. And if you are taking market share, who are you taking it from?

Yes, and I'll give you a broad speaking and then maybe connect that some details. But broadly speaking, if you look at the hospital deals that we're doing, there's a significant number of them that we had last year at the end of the quarter, going into this year. And when you do those, those are by definition, getting some market share. And then when you think about what's happening in the marketplace around those hospitals, you expect that you'll pick up some market share there as well. So I think a lot of it is that the market is strong, you're seeing a lot more people getting procedures and so forth. But in addition to that, I think there is some share gains that you're seeing because of what we're doing and the strength that we have in the hospital market sector.

Yeah, no, the only thing I'd add is just that, we had a good quarter and we took our full year outlook up. So reflecting the stronger demand than we've been seeing. We also look back to pre pandemics and we're tracking well within the range that we would normally expect to be. So some of the year over year improvement, arguably has driven a bit about a not fully recovered year, the prior year, but to see that kind of growth, we feel very good about and expect that to continue.

All right, and then secondly, heading into the final LDT rule from the FDA, what is LabCorp looking, like what are the key things you should look for that you want changed in the final rule?

Yeah, so the first thing I'd say is that the LabCorp was supportive of the valid act, which we thought was the right way to provide oversight of the FDA of LDTs. It was legislation, it was fit for purpose for our industry. We're not supportive of the current rule, but we haven't seen the final rule. We still have to see that and we'll hold judgment until we see exactly what's in there. What I worry about most, and we have great quality organization, we have terrific scientists, and we do so much research and need to test that we put in the marketplace. What I worry about is speed to market of LDTs. And patients that need these LDTs, they're typically smaller groups of patients. Other people aren't necessarily developing tests for them, and they need the test as quickly as possible. So the real question to me is gonna be how fast the FDA will be able to review the new LDTs and get them into the marketplace.

Great, thanks.

Thank you, one moment for our next question.

And our

next question comes from Elizabeth Anderson of Evercore ISI, your line is open.

Hi guys, good morning. Thanks so much for the question. I was wondering if you could comment on the pacing of the lab management deal integrations. Anything to pick up on proceeding as sort of direct, as you guys thought, any learnings you would say in terms of other issues? As you continue on that path?

Yeah, so we've gotten quite good at being able to efficiently and effectively run the lab management agreements that we have. When you do 100 hospitals with one organization quickly, you become an expert pretty fast. So what I would say is we take our time, because the most important thing is to ensure that there's no patient disruption. The second thing is we make sure that the physicians are very satisfied with the way in which they can order and the speed in which they get their results. And then over time we find ways to use our size, our scale and our abilities to synergize to reduce cost. And we've learned that the most important thing is to do it really well. And although the margins never get to our average margins, they start off low and they increase over time. I think you've seen with the announcement of several deals closing in the first quarter, multiple deals closing at the end of last year, there's a slight impact on our margin in the beginning, but over time the margin is gonna improve. And that's why we believe our diagnostics margin will increase when you look at the totality of 24 versus 23.

Got it, that's helpful. Anything you can comment to in the early development business about sort of non-NHP growth, because I just wanted to sort that out in terms of the impact on the revenues in the quarter, thank you.

So what I would say is that there's no longer a supply issue with NHP. The only thing that we're seeing with NHPs is a bit of a revenue drag because the cost of NHPs when there was a supply issue were much higher. We were charging the higher price, but we weren't making a margin on that higher price. So now that the prices have come down, the actual revenue for those studies come down with the price. So you're seeing less revenue growth in that area, which I would say is probably a bit artificial because of the price of the NHPs coming down.

Yeah, that makes sense. I just wanted to sort of understand that versus the dynamics in the non-NHP portion of the business.

Yeah, I would say that in the non-NHP portion, you're seeing growth rates that would be a bit higher than the NHP. But again, that's more, they're both less than what we have seen historically because of what's happening in the biotech world. We are beginning to see signs of recovery in the biotech world. So both of those parts of the business should recover over time.

Got it, thanks so much. Thank you, one moment for our next question.

And

our next question comes from Kevin Caliendo of UBS. Your line is open.

Morning, Kevin.

Good morning. I want to talk a little bit or ask a little bit about it. Kevin, we can't hear you. You're breaking up pretty significantly. Oh, I'm sorry, it's better. No. I'm sorry, I'm sorry. I'm sorry, I'm sorry. Well, I'll try to ask you, but we wanted to talk a little bit about margins, expectations in the DX segment, specifically around your expectation of labor, trends, and absolute margins in the DX business going forward, like using the first quarter as a jumping off point. Yeah, are you talking margins in CLS or diagnostics? I couldn't tell. Diagnostics, sorry. Okay, in diagnostics. What I would say is that if you look at the diagnostic business, the business performed very well. We had basically 7% growth in the base business and volume was good at almost 5%. The margin was down versus prior year, it was driven by three things. It was driven by COVID, there was some impact from weather. And as I previously mentioned, there was some impact from the lab management agreements as we begin to roll those out in the fourth quarter of last year, some in the first quarter, we'll see the margins get better as we go through the year. Overall, we expect the diagnostic margins in 24 to be higher than the margins in 23.

Yeah, and the only thing I'd add too is, as Adam said, margins up even despite COVID and weather and lab management agreements for the full year margins to be up slightly, but also to see that expected beginning in the second quarter, where you'll see nice growth year over year, we'll have the normal seasonality. So when you look at the absolute margins, they'll fluctuate based on seasonality, but the year over year improvement, you'll see pick up nicely beginning in the second quarter that gives us the confidence that the margins will be up for the full year.

Thank you, one moment for our next question.

Thank you.

And our next question comes from Andrew Brackman of William Blair, your line is open.

Morning, Andrew. Morning, thanks for taking the questions. Maybe just to piggyback off some of those margin questions on the diagnostics front, but more specifically on the specialty diagnostic side of things. I guess, how should we be thinking about moving the moving pieces there, moving forward? Obviously, you gave some color around in V-tape, but just as that entire specialty business grows, how are you thinking about its impact on total segment margins here? Thanks.

Yes, so the first thing I would say is as we look at the businesses, they're both strong right now, our routine testing, as well as our specialty testing. We are seeing the specialty testing grow at a slightly accelerated rate versus the routine testing, but routine testing is still the vast majority of the business that we do. A big part of the reason that specialty testing is important is number one, they're typically very serious diseases. Number two, when people get specialty testing, they get a lot of routine tests around those specialty tests as well. And then third of all, they typically show how strong you are in science and innovation, and it's got a good kind of overhang of the company because we are a scientifically-based organization. So for those three reasons, you'll see specialty testing growing faster than routine testing, but routine tends to go with the specialty testing to some degree.

Okay, that's helpful. And then I guess maybe a little bit unrelated, but as it relates to your Alzheimer's portfolio more specifically, can you maybe just give us a sense of the current scale for that business today? And I guess I just think in longer term here, just can you talk about the market opportunity that you see in that segment moving forward? Thank you.

Yeah, what I would say right now, it's not a large part of our business. It's just a very small part of our business, but it's an important part because there are new therapies that we believe will be coming available over time. It's such an important disease, and it's growing in the United States and around the world. So we wanna have the broadest portfolio for physicians to use to help with the diagnosis and monitoring of Alzheimer's patients. But once again, many of those patients not only need these Alzheimer's tests, but they'll use a lot of routine tests as they learn to diagnose those patients and monitor them over time. I would expect over time that market will grow, those tests will grow, but I think it'll be to some degree commensurate with how fast the overall prescription drug market grows, because when diagnosed, the physicians also wanna know, what can I do about that and what should I do about that?

Okay,

thanks Adam.

Sure.

Thank you, one moment for our next question. And our next question comes from Eric Caldwell of Baird. Your line is open.

Good morning, Eric. Good morning. You know it's gonna be an embarrassing question when you're afraid to ask it, but on the NHP and the pricing comments, I'm curious if you could give us any more detail on where your pricing is today, what it looks like going forward versus the recent past. One of your smaller competitors recently shared with The Street that it saw pricing down about 18% versus last quarter. I'm curious if you could frame it for you. And then I believe at the top of the market, the NHP was about half of your early development work in total. I'm curious if you could give us a sense on what that mix looks like today. Thank you.

Yeah, hey Eric. With regard to NHP pricing, we've not given what the step down in the pricing has been, and obviously it impacts the mix and where we get the primates from and where they're used in the studies. What we've commented is that it's been a nice reduction in the price from when we were capacity constrained, and obviously the prices were significantly higher. And I think Adam referenced this earlier as well, that from our perspective, while it impacts our revenues, it's really not impacting our profitability because most of the step down in the price of NHPs were passed through. So the positive is, is it shows us a lower cost for our customers to get their studies done, so they're seeing the benefit of it without a negative impact from us overall. To your point, roughly half of the studies that we do are NHP based with the other half that are not. That mix really hasn't changed very much.

Thanks, Glenn, I appreciate that. Just maybe another macro question. The HLM deals come in at a lower margin, as you've always said, and you've done a flurry of them here recently, and then the very big deal with Ascension. I know you're talking about improvements as you integrate and get those onboarded over the next year each time, but could you give us an update on where Ascension is at this point, kind of the journey on that contract from the beginning to the present and how it's stacking up on a margin profile and possibly also a revenue profile versus your original expectations?

Yeah, I'll let Glenn answer that question, but before he does, I think it's important to note that no two hospital deals are exactly the same, and it really is three pieces to them, right? There's the lab management part where you run the hospital's labs, there's the outreach business, and there's the referral business. Ascension was kind of an outlier to most of the deals that we do because so much of it was the lab management part of the business, and that has by far the lowest margin that starts out low and proves over time. Most of the deals that we do, they start out with a lower margin, but overall with the kind of portfolio of the three types of business, they get to about our average margins over time. So that's the typical deal. Ascension's a bit of an outlier, but maybe you can talk about Ascension, Glenn.

Yeah, no, I think that's right, especially given the size of the transaction overall, let alone the percentage that was lab management, but we normally, and Ascension was a good example, let's say would be start in a -single-digit kind of margin, so obviously mixing us down, that we've talked about, and then we normally see the margin step up over the years. With that one, while we're expecting to see a step up, probably not as strong in just the second year of ownership as relative to others as we continue to share on a value-based basis, if you will. Some of the synergies and the savings that we get, we're obviously passing on to our large partner there, and thereafter starting to see the step up. So positive direction, but we'll see more of an incremental improvement next year.

And the revenue for that looks very strong. It's slightly above what we had guided to originally,

Eric. Okay, thanks very much, guys.

Yeah, thank you.

Thank you. One moment for our next question.

And our

next question comes from Michael Riskin of Bank of America. Your line is open.

Good morning, Michael. Hello, good morning. This is John Kim on floor, Mike. Good morning, John. Morning. So you've done a lot of deals. You have NVTA, bio-reference, and the three health system agreements that you closed in the first quarter. And Glenn, you talked about how, given the range, that NVTA would be included in the top end of the guidance. So could you just update us on your thoughts on the deal funnel and your capital allocation priority? Are there any other larger deals in dependent labs or health systems that are still coming our way?

Yes, so when you think about, to your point, the transactions that we've done this year, and as we've commented, embedded in our guidance is the assumption that we'll use our free cash flow for acquisitions, dividends, and share repurchases. We have been, this has been a good year for M&A. We've always talked about that we've had a strong pipeline of deals, and we're seeing them come to fruition this year. But between the three deals that we closed in the first quarter, the announcement of bio-reference and NVTA, you're looking from an M&A standpoint over $700 million of capital allocated to M&A this year. And then you've put that with the dividends, you're getting closer to a billion. So on the positive side, we have a strong balance sheet. So another 100 million of call it free cash flow-ish that'll be used between M&A and share repurchases. But we're currently leveraged at around two and a half times debt to trailing 12 months EBITDA. And we're at the low end at two and a half times, and we give a targeted range of two and a half to three. So within that, call it half a point on a, call it a $2 billion plus EBITDA basis. Yeah, we have another billion dollars of capacity. So we'll still have a lot of financial flexibility to do share repurchases, to do tuck-in acquisitions that we feel are strategic, but we feel very good about the deals that we've announced this year. Obviously, we'll spend a lot of time integrating them into the company, but we have the, obviously the financial flexibility as well is still a good pipeline of potential opportunities on the deal front going forward.

Got it, appreciate that. And if I could ask one on the biopharma early development. So you talked about the cancellations coming down, still a little high, but I wanted to ask, you've previously talked about targeting perhaps medium-sized clients. Any, has there been any shift or, your win rates are good, at least in the central lab, has there been any shift in that direction in terms of garnering attention or RFPs from the medium-sized clients?

Yeah, so we're trying to improve our mix to more larger to medium-sized clients. It takes some time because many of those clients have master service agreements, and you have to wait for those to expire or find ways to be part of those. But over time, I'm confident that we'll continue to shift the mix more towards the medium to larger-sized pharma.

Got it, appreciate that, thank you. Thank you.

Thank you, one moment for our next question. And our next question comes from Brian Tranquillot of Jeffreys, your line is open.

Morning Brian. Good morning. I guess my question for you guys, in the past as we thought about hospital lab acquisitions and outsourcing contracts, the distress in the space or the pressures in the hospitals was one of the driving factors. So as we're seeing broad utilization pick up in the hospital industry, health seems to be improving. Adam, have the conversations changed or what does that pipeline look like today? And yeah, just curious what those dynamics are and how they're playing into future deals and agreements with hospitals.

Yeah, no, it's a good question, Brian. And it's good news that the systems are doing better and that the hospitals are performing better. I think that's good for all of healthcare, frankly. So I'm pleased that they are beginning to rebound and do better. The interesting thing was before the issues with the health systems, a lot of the discussion was, can you do it and can you do it well? And should we take the risk that things aren't gonna go well? Because we've done so many in so many large institutions, I don't think people have that question anymore. They realize that we're really good at this, that we can manage it better than they probably can by themselves, that we'll have no physician interruption or patient interruption of note. So therefore, they're willing to look and talk to us about continuing to do these deals. Now, I think there was a sense of urgency that caused these deals to move quicker in the past. So I'm not quite sure the sense of urgency is there as much as it was before, but the number of discussions and the types of discussions we're having remain very good.

Awesome,

thank you. Yeah, thank you.

Thank you, one moment for our next question.

And

our next question comes from Pito Chickering of Deutsche Bank, your line is open.

Good morning, Pito.

Hi there, you've got Kieran Ryan on for Pito. Thanks for taking the questions. Sure, good morning. I noticed you didn't touch on labor when discussing the diagnostic margin drivers. So I'm wondering if you could talk about that. I think one of your peers cited some modest improvement in the environment. So can you just give us an update on what you're seeing on labor as it relates to things like wage growth and turnover?

Yeah, so I'll start with turnover and I'll give a sense overall across lab for our turnover is better now than it was last year or the year before that. In our bio-pharma business, I'd say it's back to pre-COVID levels, maybe even a little bit better. So the turnover there is really improved. In our diagnostics, we see in certain areas, there's still a higher turnover than what we would have seen prior to the pandemic, particularly in frontline employees where they have not only other choices in healthcare, but in other industries. But even there, we start to see less turnover than what we've seen in the past. There's been a significant inflation of cost due to retaining employees in the past. As we go forward, I think it'll move back more towards the level of inflation of about 3% or so.

Got it, thanks. And then just a quick follow-up. The prior question was kind of talking about the strong demand that hospitals and some providers are seeing now. I was just wondering, does the top line guide and diagnostics at all contemplate a normalization in kind of broader utilization or are you just really not seeing anything outside of what you'd expect at this point? Thanks.

Yeah, I would say that we're seeing what we would expect at this point. It's slightly higher, we give a range because there's a range of different things that may or may not occur. But overall, we think that the environment is healthy.

Yeah, when you look at the also, Peter, I guess our implied guidance, so you're looking at a stronger top line growth than what we did in the first quarter with our guidance, but that's just really driven off of COVID becoming less of an issue. It was a bigger issue in the first quarter, decline year on year, plus that's where we had the adverse impact from weather. So really, when you adjust for that, as Adam's commented, the demand that we're seeing, which came in a little bit stronger than we expected, we expect that to be similar demand going forward throughout the rest of the year.

Thank you. One moment for our next question. And our next question comes from Stephanie Davis of Barclays. Your line is open.

Morning, Stephanie.

Hey, guys. Good morning.

Thanks for taking my question. Sure. I feel bad asking about early development because I said we're all focusing on this. That's a really small part of your business. But I have to ask because you did start talk about some risk of potential share shifts when I saw you in March. So I think about the cut, is this more a function of a higher for longer environment that could be impacting biotech funding? Is it something defensive early on just in case maybe there are some potential share shifts? And how do we think about the underlying assumptions in terms of how they may have changed in use on cancellations and biotech funding in order to kind of ensure new numbers?

Yeah, so as I think about the early development business, I don't think that it's a share shift thing. I think our share is remaining consistent within the parts of the market that we compete. We don't compete in all aspects of the market. We don't have a contract manufacturing organization, for example. But in the areas that we compete, our win rates look good, our RFPs look good. So I believe that our market share is being maintained. I think we're seeing more that there's still a higher level of cancellations than what we've seen in the past. And in some instances, it's taking a bit longer for the companies to make their final decisions because they're still managing what I would say is a rather restricted budget, even with the funding being better than it has been before. So the good news is Central Laboratory, which is by far the largest part of that business, remains very strong. And we continue to expect it to be strong. And it's offsetting the weakness that we continue to see in ED that could go on for a bit longer. But even if it does, we feel that the strength that we're seeing in the largest part of the business offsets that.

Thank you for your helpful, thank you.

Thank you. I'd now like to turn it back to Adam Schecter for closing remarks.

I wanna thank you all for joining us today. And hopefully you can see we continue to advance our strategy and make significant progress. And we're gonna continue our mission to improve health and to improve lives around the world. Hope everybody has a good day.

This concludes today's conference call. Thank you for participating and you may now disconnect.