Labcorp Holdings Inc.

Welcome to the LabCorp Holdings, Inc. second 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 of Investor Relations. Please go ahead.

Kristin O'Donnell Thank you, operator. Good morning and welcome to LabCorp's second quarter 2024 conference call. As detailed in today's press release, there will be a replay of this conference call available 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 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 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 completed 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 the FCC. 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.

Thank you, Kristen, and good morning, everyone. It's really a pleasure to be here with you today. We look forward to sharing our strong results for the quarter, our updated 2024 outlook, and progress on our strategy. Let's turn now to our financial results. In the second quarter, revenue totaled $3.2 billion. Adjusted earnings per share was $3.94. And free cash flow from continuing operations was $433 million. Enterprise revenue increased 6% compared to the second quarter of 2023. Diagnostics revenue was up 8% driven by strong organic growth and acquisitions. Central laboratories growth was strong at 9 percent, partially offset by decline in early development of 15 percent, resulting in biofarmer laboratory services up 1 percent. The book-to-bill for early development was strong, with higher orders and lower cancellations, and we expect the business to be back to growth towards the end of the year. Adjusted EPS were up 15%, and enterprise margins were up slightly. Margins in biopharma increased, while margins in diagnostics were flat, which reflects the impact of a cyber event that affected a large partner. We continued to execute well on our strategic priorities through the following. Being a partner of choice for health systems and regional and local laboratories, harnessing science and innovation to develop and launch new tests in important therapeutic areas, and by utilizing data and technology to bring important services and capabilities to our customers. We are confident in the success of LabCorp in the months and quarters ahead, with strong growth in diagnostics and biopharma laboratory services. Glenn will provide more details on our results in 2024 outlook in just a moment. The 2024 outlook reflects the anticipated close of Invitae next week. In the second quarter, LabCorp continued to advance in our strategic growth areas. First, we continued to maintain a leadership position as a partner of choice for health systems and regional local laboratories. Following the quarter end, LabCorp entered into a comprehensive strategic collaboration with Naples Comprehensive Healthcare, located in Florida, to manage its inpatient lab operations and to serve as a primary lab later this summer. We're also on track to close the previously announced acquisition of select assets of bioreference health diagnostics business by the end of the third quarter. We continue to have a very strong business development pipeline, and we look forward to sharing more of those details in the future. We also announced the acquisition of select assets of Invitae, a leading medical genetics company. We're excited about Invitae's complimentary cutting-edge science, genetic testing solutions, and technology, which aligns strategically with our focus on specialty testing and oncology. Together, we will work with our customers to utilize genetic insights to develop new treatments and to deliver personalized care in oncology and in select rare diseases. Upon closing the transaction, we anticipate the first 12 months will provide revenue of $275 to $300 million. And the first year will be diluted by approximately 3%. We've included $120 million of revenue in 2024 and the vast majority of dilution in 2024. We expect it to be a credo for 2025 with top-line growth of more than 10% per year. We have a very strong integration team in place with members from both LabCorp and Invitae. We will move quickly and thoughtfully to reduce costs without impacting the great science and a great customer experience that Invitae provides today. Also, we anticipate Invitae will benefit from the full scale and breadth of Labcorp's platform as a global leader in laboratory services. We have great respect for Invitae's capabilities and team, and we look forward to welcoming our new colleagues to Labcorp. As we advance our growth strategy, we continue to make great strides in expanding our testing solutions. In April, LabCorp received FDA approval as a humanitarian use device for its companion diagnostic to determine patient eligibility for treatment with Pfizer's gene therapy for hemophilia B. This is expected to expand LabCorp's leadership in precision medicine and in gene therapy. We introduced a first trimester screening test to assess preeclampsia risk during pregnancy. It is the only test of its kind available in the United States, available for order by physicians for their patients, including those with a low to average risk for preeclampsia or first-time pregnancies. Roughly one in 25 pregnancies in the United States is affected by the condition. And with this test, LabCorp is the only lab that can detect preeclampsia risk across all trimesters of pregnancy. We announced several new strategic service offerings with our precision oncology portfolio, extending our leadership in oncology. Our comprehensive genomic profiling service, LabCorp Tissue Complete, is now available through our laboratory network centers in Geneva and Shanghai to support global clinical trials. We've also added OmniSeq Insight circulating tumor DNA to our portfolio of comprehensive genomic profiling services. Together, these solutions support customers as they advance their therapeutic development programs. Lastly, we continue to expand LabCorp OnDemand, our consumer-initiated testing offering, with the launch of several new tests in May and June, including standard drug, complete drug, comprehensive testosterone, HIV, and complete heart health. We also continue to focus on creating easy-to-use digital technology solutions for our customers. In the quarter, we launched a suite of solutions referred to as Global Trial Connect, aimed at increasing the speed and efficiency of clinical trials. The solution differentiates LabCorp in the market and has been well received by our customers. In closing, I'd like to thank our team of more than 65,000 employees around the world. Together, we are focused on our customers, achieving our financial commitments, and making meaningful progress on our strategy. We have strong momentum and significant growth opportunities ahead of us. 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 second 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 6.2% compared to last year, primarily due to organic-based business growth and the impact from acquisitions, partially offset by lower COVID testing and foreign exchange. The base business grew 6.9% compared to the base business last year, driven primarily by organic growth of 4.5%. Operating income for the quarter was $295 million, or 9.2% of revenue, or 14.9% on an adjusted basis. During the quarter, we had $100 million of restructuring charges and special items, primarily related to acquisitions and launchpad initiatives, In addition, we have $23 million of expense for the transition service agreements related to the SPINIFER TRIA with the corresponding income recorded in other income. Excluding these items, an amortization of $62 million adjusted operating income in the quarter was $480 million or 14.9% of revenue compared to $448 million or 14.8% last year. The increase in operating income and margin was due to the benefit of demand and Launch Pad savings that were partially offset by higher personnel expenses. Our Launch Pad 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 23.9% last year. The lower adjusted tax rate was primarily due to the geographic mix of earnings and additional R&D tax credits. We continue to expect the full year adjusted tax rate to be approximately 23%. Net earnings from continuing operations for the quarter were $206 million or $2.43 for diluted share. Adjusted EPS were $3.94 in the quarter, up 15% from last year. Operating cash flow from continuing operations was $561 million in the quarter compared to $162 million a year ago. The increase in cash flow was due to cash earnings and working capital. Capital expenditures totaled $128 million in the quarter or 4% of revenue. This compares to $103 million or 3.4% in the prior year. For the full year, we continue to expect capital expenditures to be approximately 3.5% of revenue. Free cash flow from continuing operations for the quarter was $433 million. During the quarter, the company invested $34 million in acquisitions, paid out $60 million in dividends, and repurchased $100 million of stock. The Board of Directors has approved an increase in its share repurchase authorization by $1 billion to a total of $1.4 billion. At quarter end, we had $265 million in cash, while debt was $5.1 billion. Our leverage was 2.4 times gross debt to trailing 12 months adjusted EBITDA. We have $2 billion of debt maturing over the next 12 months, and we expect to refinance it later this year. Now I'll review our segment performance, beginning with diagnostics laboratories. Revenue for the quarter was $2.5 billion, an increase of 7.9% compared to last year, with organic growth of 4.7%, and acquisitions net of divestitures contributing 3.2%, partially offset by foreign currency translation of 0.1%. The base business grew 8.9% compared to the base business last year, driven primarily by organic growth of 5.7%. Total volume increased 5.7% compared to last year. Base business volume grew 6.3% compared to the base business last year, as organic volume increased 3.5% while acquisitions contributed 2.9%. Price mix increased 2.1% 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 2.2% compared to the base business last year. Diagnostics adjusted operating income for the quarter was $442 million, or 17.5% of revenue, compared to $410 million, or 17.5% last year. Adjusted operating income was up due to organic demand, acquisitions, and launchpad savings, partially offset by higher personnel costs. Operating margins were flat, but would have been up approximately 20 basis points were it not for the impact of a cyber event that affected a large partner. Now I'll review the segment performance in biopharma laboratory services. Revenue for the quarter was $707 million, an increase of 1.1% compared to last year, due to an increase in organic revenue of 1.2%, partially offset by foreign currency translation of 0.1%. The revenue growth was driven by continued strength in central labs, which was up 9%, while early development was down 15%, due to the higher than normal cancellations and lower orders in prior periods. However, we did see a sequential improvement in early development gross orders and cancellations, which we expect will lead to higher revenues in the second half of the year and deliver year-over-year growth beginning in the fourth quarter. BioPharma adjusted operating income for the quarter was $107 million, or 15.2% of revenue, compared to $105 million, or 15% last year. Adjusted operating income and margin increased due to organic growth and launch pad 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 held at 1.00 compared to last quarter and is expected to increase in the second half. Now I'll discuss our updated 2024 full year guidance, which assumes foreign exchange rates effective as of June 30, 2024 for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted for acquisition, share repurchases, and dividends. The acquisition of select assets of Invitae, which is expected to close next week, is now included in our guidance for 2024. For the remainder of the year, we expect Invitae to add approximately $120 million in revenue, lower adjusted earnings per share by approximately 40 cents, and reduce cash flow by approximately $150 million, primarily due to one-time costs related to retention, severance, and integration, as well as an increase in working capital. We expect enterprise revenue to grow 6.4% to 7.5% compared to 2023. Versus prior guidance, we are increasing the midpoint 135 basis points with Invitae contributing approximately 100 basis points of the growth. We continue to perform well in diagnostics. We expect diagnostics revenue to be up 6.9 to 7.9% compared to 2023. This is an increase at the midpoint from our prior guidance of 200 basis points due to stronger base business demand and Invitae which is expected to contribute around 130 basis points of the growth. We expect biopharma revenue to grow 3.7% to 5% compared to 2023. The decrease at the midpoint from our prior guidance of 35 basis points is due to early development, partially offset by continued strength in central labs. We expect early development to have a slower recovery than previously anticipated, but with year-over-year growth still expected to begin in the fourth quarter. We expect enterprise margins to be flat versus the prior year despite the negative impact from Invitae of approximately 40 basis points. Diagnostics margins are now expected to be down due to the inclusion of Invitae of approximately 60 basis points. We continue to expect margins in biopharma to be up year over year. Our guidance range for adjusted EPS is $14.30 to $14.90. We have decreased the midpoint of guidance by 30 cents driven by the expected dilution from Invitae of approximately $0.40, partially offset by a $0.10 increase in the underlying business. The free cash flow guidance range is now $850 million to $1 billion and includes approximately $150 million of a cash use from Invitae, which is primarily due to one-time costs. Excluding Invitae, the free cash flow guidance range is unchanged from prior guidance. In summary, LabCorp is well positioned for profitable growth, both organically as well as through acquisitions. We're excited about the acquisition of Invitae from both a strategic and financial perspective. Strategically, this strengthens our position in key long-term specialty testing growth areas of oncology and select rare diseases. From a financial perspective, while it's dilutive in 2024, we expect it to be accretive in 2025 and deliver a very attractive return on investment. as we profitably grow the business. In addition, LabCorp continues to generate strong free cash flow that will be used for acquisitions while returning capital to shareholders through our dividend and share repurchase program. Operator, we'll now take questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question comes from Michael Cherney of Learing Partners. Your line is open.

Good morning, and thank you for taking the question. I'm going to ask kind of two- Good morning, Michael. Morning. I'm going to ask two questions in one, just to make things easier. First, can you give a little more color on what you're seeing in terms of the new awards and early development and how we should think about, at least from a category disease state perspective, where this should translate into the better growth in the back half of the year? And then just quickly on the Invitae accretion estimate for 2025, I think that's a little faster than anticipated. Can you just give us some of the qualitative dynamics behind what you're doing to get that to be such a strong EPS contributor next year?

Yep, sure. So first of all, if you look at the business in terms of biopharma laboratory services, we had very strong growth in our central laboratories of about 9%, and early development declined 15%. Both of those businesses are leaders in their respective markets. We believe we've reached the trough for early development, and that's based upon the cancellations that we've spoke about in the past. If you look at the book to build for the quarter, it was strong, and it was strong for several reasons. Number one, because the orders were strong. But importantly, number two, because there were significantly less cancellations than what we've seen in prior quarters. So that's what gives us the confidence for the improved performance that we expect in the early development as we go throughout the year. With regard to VTA accretion 2025, You know, we said from the beginning that we were going to use calendar months because we didn't know the exact timing of closing. And we said it would be dilutive in the first 12 months and accretive in the second 12 months. It's closing a bit faster than we originally anticipated, which is good because we'll be able to move quicker. That's why you see a bit more dilution in 2024 than you may have anticipated. But that's also why it becomes accretive in 2025.

Great, thanks so much.

Thank you. Our next question comes from Andrew Brackman of William Blair. Your line is open.

Good morning. Good morning, Adam, Glenn, Kristin. Maybe just sticking on Invitae here for a minute. Adam, in your prepared remarks, I think you said that you expected to benefit from your breadth and scale. So anything that you can share about customer or account overlap there, which sort of drives that confidence, just trying to get a sense of that opportunity.

Yeah, absolutely. You know, it's an exciting time, and we've spent a lot of time with our colleagues that will be coming over from Evita. And first and foremost, the sales organization is very excited. They're excited because they now have a broader portfolio of products. It's one thing to go into an office and talk about inherited products It's another thing to say, but you can also test for all the other things that you may want to test that patient for. And ultimately, we're going to try to bring that all together so the physician can order directly through one tool and get whatever they need for the patients. So the sales organization is very excited about the breadth of what they'll bring into those customers. In addition to that, we have such strong partnerships that are broad at LabCorp. We're hoping to be able to use those partnerships and have discussions with them about our new offering through Invitae. So although we've not built in significant upside for the future with the new customers we may be able to bring additional tests to, we believe that this market's gonna grow significantly faster than other markets that we compete in. And we believe that there'll be more than 10% growth in this market versus other markets as we go forward. We think it's a very exciting opportunity as we go forward. We're excited about welcoming our new colleagues. They're excited about being part of LabCorp. And we're going to move extraordinarily fast but thoughtful.

Perfect. And then, Glenn, maybe one for you on the balance sheet. Thanks for the reminder on the $2 billion maturing here over the next 12 months. Anything that you can share as it relates to your expectations for the potential rate increases there or even any other alternatives that might be out there to potentially lower that

increase thanks yeah Andrew yeah it's our expectation that we will refinance all of the debt we're not going to look to pay it down we have around a billion of it due between now and in the end of the year starting actually in September and then a billion that's due in February we expect to refinance all of that this year obviously the markets have improved nicely so we'll have that done For modeling purposes, if you wanted to look at kind of the net interest expense line, we will refinance, obviously, at a higher rate than what's maturing. Our net interest expense this year directionally will come in at around $210 million. And then, obviously, once it's annualized for next year, that'll tick up to maybe around $240. Again, we'll see ultimately when we go into the markets. But right now, the markets look pretty attractive.

Perfect. I'll leave it there.

Thanks, guys.

Thank you. Our next question comes from Eric Caldwell of Baird. Your line is open.

Good morning, Eric. Good morning, guys. Thank you. So two questions. First one should be pretty quick here. Early development, positive to hear about the order flow and the lower cancels. And I can see your revenue guidance for the fourth quarter if you're expecting growth. That one is pretty easy to get to. But I am curious, what is the ramp or the phasing of the ramp from 2Q to 4Q? Is it split the difference between 213 plus in the fourth quarter and what you did here in the second quarter? Or is it more of a hockey stick into the fourth? Maybe just, you know, I don't know if you could parse out your revenue expectation between early development and central lab for the full year. That might be another way of doing this. And then I'll come back on my second. Thanks.

Hey, Eric. It's Glenn. I'll take a first cut. But overall, again, we feel good about how we're positioned now within the biopharma group. And Central clearly has had a very strong first half, and we expect that to continue. What's interesting is the growth rate that we had in the first half benefited a little bit based upon the comp we had a year ago, given some softness in the investigator sites with some labor constraints. But a solid first half, and we expect a more normalized growth rate within the central lab in the second half. The flip side is within ED, again, we are seeing a little bit of a slower recovery, but based upon, in Adam's remarks, with a stronger order book in the quarter, with cancellations coming back down to more normal, we feel confident that we'll see sequential improvement in the revenues of ED in both the third and the fourth, so not kind of the hockey stick, but a continued progression, but that in the fourth quarter, we'll now start to see favorable comps year on year, so an improved outlook in the third, but still down year on year for ED, but in the fourth, an improved revenues with positive comps.

Okay, great. And then just a quick one. I almost am reluctant to bring it up since you didn't bring it up, but your competitor had a bit of an update on the employer market drug testing and well-being testing for employers. You did not call that out today, but I am curious if you could give any additional comments on your business, maybe a little bit of sizing data and what you're seeing in those respective markets on the employer side.

Yes, Eric, we've seen a decrease in employer side, but it's not that big or material to us that it was something we would call out. But there's no doubt that you're seeing, as some employers haven't fully come back to work, They don't have the, you know, events that they used to have for wellness. Sometimes they're not doing the vaccinations that they used to do in office spaces. But it's less than 5% of our business, so it's not material to us.

Okay. Thank you very much.

Thank you. Our next question comes from Elizabeth Anderson of Evercore ISI. Your line is open. Good morning, Elizabeth.

Hi, guys. Good morning. Thanks so much for the question. I have one question about sort of each part of your business. If we think about the, you know, be in the corner, maybe it might be slightly different than some of your internal assumptions, and you kind of flowed through the core non-invitae EPS by 10 cents for the full year guidance. Can you talk about sort of the factors, like maybe is there like a little bit of conservatism? Obviously, there's like the crowd strike and stuff in the third quarter. So just sort of your confidence maybe on that versus the guidance raised. And then secondarily, obviously, nice to see the early development business improving. Can you comment on pricing in early development and any kind of shifts you've seen in that over the last quarter or so?

Yeah, Elizabeth, I'll take the second question first, and I'll ask Glenn to comment a bit about the first question. You know, it's good to see the orders coming back and the cancellations being reduced in early development. That's what's giving us confidence in revenue growth as we go throughout the year. I would say the biggest difference in pricing that we've seen is the price of the NHBs. They were much more expensive last year than they are this year. When the price went up, that was largely passed through to the customers, so we weren't making margin on that business. Now that the price is lower, it actually helps with the margin a bit. But that's the biggest difference.

So the core – oh, sorry.

Go ahead.

Go ahead, Elizabeth. I was going to say the core –

development pricing X NHPs is sort of stable. Is that what you're saying? I just want to make sure I understood what you were saying.

Yeah, I would say it's relatively stable. I mean, it's always under pressure. There's always pressure there, but I'd say continued pressure, relatively stable.

Great. Thank you.

And then Elizabeth on the first part. So when you look at, again, excluding Invitae, the underlying business, we've increased the outlook at the top line. So overall at the midpoint, we're up around 135 basis points, 100 of it from Invitae. So the underlying business is up both upon the performance in the second quarter as well as an improved outlook for the remainder of the year. The growth, as we commented earlier, and the outlook improvement is an increase in our outlook for diagnostics organically, for central labs organically, and partially offset by a little lower outlook within the early development business. But the strength of the higher top line growth is obviously what's translating down to the bottom line, which causes us to have the underlying business excluding in VTAE where we would have increased the midpoint of our EPS guidance range by 10 cents.

Got it. Thank you.

Thank you. Our next question comes from Jack Meehan of Nefron Research. Your line is open.

Morning, Jack.

Good morning. So I wanted to follow up on the InVitae deal. So with the transaction about to close, how are you feeling about integration and retention of the business? Obviously, they went bankrupt, so your revenue assumptions here are unchanged. I just wanted to hear your confidence around potential leakage that might have taken place over the last few months, just your views on that.

Sure, Jack. You know, first of all, when we first made the announcement, we very quickly put an integration team together of very competent, qualified people across all parts of LabCorp, and we matched them with equally competent people across all parts of Invitae. So we've had an integration team that has been working really hard to ensure that we have a very smooth transition. I feel very good about the work that they've done. As we look at their monthly sales, they're relatively stable, and we feel good about the way in which they've managed their business through what I would say is some pretty difficult turmoil. And their team has done, I think, an extraordinary job of trying to hang on to customers and hang on to business. So the question I'm asking the integration team is, where do we see upside? What else can we go after with the new portfolio that they'll have, the increased relationships and partnerships that we have? So I'm actually... less concerned about the leakage, and I'm more focused on where the growth opportunities are.

Awesome. And then I'm sorry if I missed this, but maybe for Glenn, just was wondering if it was possible to call out the magnitude of the impact of the Ascension cyber event that took place during the quarter and just any issue related to CrowdStrike in July. Thanks.

Yeah. Hey, Jack. So on the Our partner that had a cyber event, again, did not affect LabCorp, but did affect our partner. We commented that it was around a 20 basis point headwind during the quarter from the margin of diagnostics. That's roughly around $5 million of called operating income that would have been foregone. A little bit of some timing delay in cash as well that we'll get. That just delayed from the second quarter to the third, but obviously we had a very strong free cash flow number. overall for the quarter in any event. We didn't comment on the CrowdStrike or, frankly, even the hurricane impact in our results. Obviously, it happened after the second quarter. So when you think about the magnitude of those, you're also looking probably around a $0.05 a share impact earnings. So when you look at the change in our guide other than Invitae, where we took the underlying business guide up $0.10, that's even after absorbing the impact from that IT outage event and the weather impact.

Awesome. Thanks, Lynn.

Thank you. Our next question comes from Kevin Caliendo of UPS. Your line is open.

Good morning, Kevin. Good morning, guys. Thanks for taking my question. The diagnostic revenue wreck, the mix, the organic growth in general was better than we had modeled. And I'm just wondering if you can talk through if there's any changing dynamics or anything that was surprising there, that if there's something happening in the market that's affecting mix in a positive way, or are you guys taking share, or are you seeing volumes coming from a different place? Because they have been strong. The revenue wreck was better. I just would love to understand what's actually happening in the marketplace there.

Sure, Kevin. So if you look at the revenue, it was $2.5 billion for diagnostics, and it increased by about 8%. If you break down that 8%, it was about 6% up from volume, and price mix was up about 2%. So as you say, it was very good, strong performance. I think there's a couple things that are driving it. First of all, the team is doing a really good job executing in the marketplace. Number two, the hospital and local regional laboratory deals that we're doing They're very good deals in themselves, but there is certainly some spillover that occurs in the geographies that are surrounding those areas. We are seeing continued strength in the number of tests per accession, which is helpful. And we continue to see a slight shift in mix when it comes to specialty testing or esoteric testing versus routine testing. I think all those things together are giving us the uplift that we're seeing And as we look at the rest of the year, we expect to see, you know, continued strength of about the same type of momentum.

Is this specialty tests and the additional tests per rec, is that a LabCorp specific? Like, are you guys increasing your capabilities to be able to do that? Or is that something that's just happening in the marketplace and that's the way the market's moving and you guys are benefiting from it?

You know, we've talked about the importance of tests in four areas, specifically women's health, oncology, neurology, and autoimmune disease. And we've been really focused on launching new tests in those areas, ensuring that we're having discussions with opinion leaders. We've increased our scientific wherewithal in the marketplace in those areas. And those areas, the reason we're focused on is they grow faster than the other parts of diagnostic testing. Now, when you run 650 million tests a year, Even if you're seeing a shift in mix, it's hard to see that in market share. I mean, you can do the math on what market share point is. But we're certainly starting to see some growth in those specialty areas. And I think it's partially due to the market, and it's also partially due to our focus.

Yeah, also, Kevin, just to kind of reinforce what Adam had said, that when you look at the volume growth that we're now experiencing, and again, organically, our base business was up 3.5%. Obviously, it's higher than what our historical growth is, and we attribute that in part, as Adam said, to some of the share growth around the hospital outreach labs that we've acquired as we penetrate those markets even stronger than maybe they had as well. But overall, when we look at the comps now to 2019, the CAGRs are stronger than historical averages. So where last year we saw some of the improved growth rates really more a function of a softer comp year over year, We actually think now we're comping to a more normal period a year ago and that the growth rates are now more sustainable. And as Adam said, as we give our guidance and what's implied is that we will continue to see, we expect that strong level of both volume growth, but also favorable mix along the lines that Adam had commented on.

That's helpful. Can I ask a quick follow-up to that? Does that... The Launchpad savings you talked about are hitting targets. And one thing I think investors love to see with the higher organic growth is an expectation that margins can expand. I'm just wondering, is Launchpad able to keep up with the other inflationary pressures around labor, wages, churn, that kind of thing? And has that gotten better or worse, different? Any color around that would be super, super helpful.

Yeah, no, overall, you know, we continue to be very pleased with the launch pad activities. You know, we talk about around 100 to 125 million per year of savings. We comment that that's what we look to do to help offset the inflationary expenses, primarily related to personnel, which would fall within that call of 100 to 125 million dollar level. So we are able to offset that. We do normally expect to see good leverage on the incremental volume and revenues that we have and Obviously, you saw in the case of biopharma, good leverage on modest top line growth with margins that were up, benefiting from Launchpad. And even within diagnostics, while margins were flat during the quarter, we commented about the cyber event. We're still dealing with a little bit of a headwind from lower COVID as well. But as we think about the full year, the leverage, you know, ideally we'd leverage it around a gross profit margin for the business that we're approaching that level. for the full year when you take out the unusual items or the discrete items that could be a headwind. So we think, as Adam commented earlier, the business is performing well from a top-line standpoint and from an operational standpoint.

Thank you guys so much.

Thank you. Our next question comes from Lisa Gill of J.P. Morgan. Your line is open.

Good morning, Lisa.

Good morning. Thank you for taking my question. Just quickly, can you maybe just comment on the LDT rule? You know, it came out since you last reported. Any impact? How are you thinking about that for your business? I understand that the industry overall is in some way disputing it, but I just want to hear your thoughts around it.

Yeah, absolutely, Lisa. So, you know, we continue to believe that the right path forward is through improvements to and to enact the Valid Act, frankly. And that was legislation that was developed specifically for laboratory diagnostics, including LDTs. That had broad bipartisan support, and we think that's the right way forward. As you said, our trade organization, ACLA, did file a lawsuit, and they're challenging the FDA's final rule, and we're supportive of ACLA doing that. In the meantime, of course, we're going to be prepared to adhere to the LDT ruling, and You know, when you look at the science, we do the vast majority of that science. I mean, we submit all, most if not all, of our LDTs to New York State already. But at the same time, there's some things that we have to be prepared for in terms of monitoring and reporting requirements and so forth. And we have a team in place. I don't ensure that we're ready for that to occur as soon as the LDT rule is final. At the same time, it's not going to have a significant impact to our revenue or to our expenses. I think the bigger impact is going to be to patients. And these LDTs are typically for people with rare diseases or smaller patient populations. And the question is, will the FDA even have the ability to approve these quick enough so that all patients have access to these important tests as quickly as possible? So to me, It's more of a patient access and important for patients than it is any type of impact to LabCorp, frankly.

Adam, you know, just as I think about DC and any updated thoughts from your side on either Panama or SALSA or the opportunity for SALSA to finally pass?

Yeah, you know, so we continue to strongly support the SALSA legislation. And I've been saying this for, I think, four years now. And it has strong bipartisan support. And I've been saying that for four years now. So it's kind of remarkable to me that it is not passed yet. And it continues to have strong support. We continue to, you know, be very supportive of it ourselves. But it's really hard to know if it will be passed again this year, even though we're going to try to push for it to be passed. What I would say is that if it is not passed this year, I do believe that there's a likelihood that it will be delayed again. And if it's delayed again, that would be $80 million that we would not see as a downside next year. And a lot of that would fall to the bottom line. So let's wait to see how the year plays out. When we give guidance in February next year, we'll know what's happened and where we are. But in the meantime, we're going to continue to push for SALSA as best we can.

Great. Thanks for the comments.

Sure. Thank you.

Thank you.

Our next question comes from Aaron Wright of Morgan Stanley. Your line is open.

Morning, Aaron.

Thanks. Hi, good morning. So I'm going to be really early with this question, but just as we head into 2025, excluding Invitae and some of the dynamics there, can you just point us to some of those key headwinds, tailwinds that you're thinking about or that we should be thinking about heading into 2025? And it sounds like you remain a little bit more confident on the underlying utilization trends and mixed dynamics as we head into 2025, how sustainable those can be. And I guess I'm mostly speaking to the diagnostic segment, but I guess I'll throw in biopharma as well if there's anything to call out there. Thanks.

Yeah, so what I'd say, Erin, is that, you know, we're obviously not giving 2025 guidance today. But as I look at the trends and I look at the things that I am considering as we go into 2025, the market dynamics continue to be strong. And what's interesting about the diagnostics business in particular is that regardless of Republican presidents, Democrat presidents, recessions, non-recessions, the business is very durable and has shown its durability over time. So I feel very good about our diagnostics business, the underlying performance. I would say the biggest headwind slash tailwind is going to be what we just talked about, which is does PAMA occur or does it not occur? to think about the biopharma laboratory businesses. We have momentum. We have strength. I feel good about our orders and our order book as we go into the end of this year. And I expect that our book to build is going to continue to improve even from where it is today, which is strong as we go through the rest of this year. And that would bode well as we go into 2025. And again, the biggest headwinds tailwinds there is just what happens with the smaller biotech companies in the marketplace. as well as pharma and what they decide to do based upon their environment.

Okay, great. Thank you. Thank you.

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

Good morning, Michael. Hey, good morning. This is John Kim on for Mike.

Good morning.

Good morning. Speaking of the small biotechs and pharmas, has there been any improvement in the client mix or, sorry, not the improvement, but rather a shift in the client mix? I think you talked about targeting the midsize pharmas as well. And I guess, is that why there's a confidence in that the early development business growing further in the second half? I know you mentioned the cancellations have lowered, the bookings are improving, but also just interested to know if there's been any trend there.

Yeah, so if you look at the mix of business, it's a very different mix if you look at the central laboratory business versus the early development business. And I'm just going to give you some rough numbers. I assume it's about 70% larger pharma, large biotech, in central laboratory and maybe 30% of the small biotech. And it's the opposite when you look at early development. The vast majority is in the smaller early biotechnology companies, less than the big pharma. We'd like to see that mix shift over time, but I don't want to see the shift mix because the small pharma comes down so far and so fast. We haven't seen a lot more orders necessarily from large pharma, but we've actually seen that the smaller biotech market seems to be doing a bit better as we look at the improvement in book-to-bill for the quarter.

Got it. Thank you for that. And then in terms of margins, I hear you on the top line doing well and the teams executing well. What about in terms of the employee turnover? Has the labor cost inflation tracked within expectations?

Yeah, so again, overall, we feel good about the margins that we're having today. We talked about the big drivers of it being from top line growth in our launch pad, but the headwinds obviously continue to be personnel costs. That's half of our cost structure. The labor market has improved. We assume roughly 3% plus or minus cost inflation, if you will, for personnel costs, which again, launch pad is helping offset. Overall, for the biopharma business, our attrition rates are where we would expect it to be, the labor count. For diagnostics, it's improved a lot. It's probably still a little bit higher than call it pre-pandemic levels, but in a lot of areas now it's more normalized, so it's really only in certain select areas that we see a little bit more turnover than normal. But overall, we feel positive on the labor situation. I appreciate it.

Thank you. Our next question comes from Stephanie Davis of Barclays. Your line is open.

Good morning, Stephanie.

Hey, guys.

Good morning. Thank you for taking my question. Congrats on the quarter. We have seen M&A become such a bigger part of you and your large competitors' growth algorithm. And, Glenn, you even called out in your prepared remarks that acquisitions are going to be a priority for your free cash flow. So what has changed in the deal environment that's causing this acceleration? How can we think about the sustainability of this dynamic? And given the incredibly different profile of Invitae compared to some of your more recent deals, how should we think about what you're looking for in the M&A pipeline? I know that's a many-parter, so thank you in advance.

Sure. So, Stephanie, when we look at the environment, I'm going to start off first with the hospitals, local, regional laboratories. I think during COVID they realized quickly, particularly the hospital systems, that the laboratories weren't necessarily fully up to date with their equipment, that the cost for capital was very expensive and high, and they realized that they could take that money and use it for other things in a hospital versus running a laboratory. Historically, I think people were worried, you know, could LabCorp run their laboratory without having impact to the patient care or the physicians getting the test as quickly as they wanted to. But when you do as many deals as we've done recently, there's so much proof that we can do these extraordinarily well and that we can actually run the hospital laboratories extraordinarily well without interrupting patient care, actually giving them better data, analytics, better tools, better equipment. And I think that that's kind of reached a plateau where most hospital systems don't argue anymore on that point. They also appreciate getting some capital and they can use that capital by selling the laboratory or selling the outreach business to us. And I think that they look to do that. I would say that as hospital systems were struggling more right after COVID, I think they were looking to move quicker than they are today. But at the same time today, our pipeline remains very, very strong for those hospital deals The local regional laboratories, I think, are struggling a bit after COVID, and therefore there's an opportunity there that we'll continue to look after. I would say Invitae is not our typical deal. Our typical deal, we want to be accretive in the first year, return this cost of capital in two or three years, and be something that we readily integrate all the time. Invitae, I feel good about our ability to integrate it, but obviously it wasn't accretive in the first year. It'll be accretive in the second year. That was a strategic decision for us. Because we believe the inherited cancer area and the other areas that they're working on in terms of smaller disease areas will grow so much faster in the future, and we've already begun to focus on those areas, we believe that this could be an important add to our portfolio. And I think of it more as a strategic acquisition than the routine acquisitions that we typically do.

Yeah, Stephanie, the only thing I'd add to that is And as Adam said, the predominance of the dollars that we invest are in the more traditional deals, the hospital systems, independent labs, even specialty tests. But the oncology ones, I think we've done now maybe three transactions that in the first year, if you will, were diluted, but all specialty oncology focused. But even from that, from a financial return, so after meeting the strategic focus, all of those deals, including Invitae, have a very attractive long-term financial profile. These businesses tend to grow, I think we commented, at a double-digit top-line growth rate versus our call at mid-single digit for our underlying business. So, you know, we think while it's near-term dilutive, it's a very attractive profile longer term. Having said that, you should continue to expect that the majority of the deals we do fit within the ones that Adam commented about that would even be accretive, initially fully burdened by our incremental borrowing costs. that the deals will be accretive to earnings and cash in year one.

So shifting gears a bit then to more of the hospital business, I know you've given some color on the immediate margin and cash flow impacts of the extension cyber attack, but have you thought about any follow-on impacts to that business, such as volume slipping to another player in the region or maybe the need to shore up some of their offerings?

No, I feel good about where we are. They're a great partner. We work side-by-side with them. We work side-by-side with them through cyber events. So I feel good about our business there, and I think that there will be continued success.

Awesome. Thank you much.

Thank you.

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

Good morning, Patrick. Good morning, Patrick. Hi, good morning.

How are you? I was wondering, you know, in terms of the utilization trends, you know, how you guys are thinking about the rest of the year or how things trended throughout the quarter, maybe, you know, June and July as well. It was helpful to hear about the employer testing piece. But just curious, you know, how things trended during the quarter and then the expectations for the rest of the year on utilization.

Hey, Patrick. So obviously for the quarter, we feel very good. We commented a little bit earlier that when you think about it from an organic standpoint, our volume base-to-base business was up 3.5%. And Adam went through kind of some of the reasons why we feel that we've seen some improved growth there in share. That's actually been pretty consistent in that volume growth supplemented, if you will, by a favorable mix as we're growing our esoteric business and the benefit of some of those hospital deals or TSAs as well as the test per session. When you look at the implied outlook for the year, you get to that diagnostics revenues are still looking from a top line at around 9%. So obviously in the second half, we expect to see continued growth. With now Invitae and part of that guidance for diagnostics, you're still looking at an implied call at organic growth in the second half. of around 5% and then 4% aided by M&A. And of that 5%, we continue to expect to see a similar mix with utilization being the higher part of that growth. So we're kind of averaging, call it maybe a trend of 3 to 1 from the benefit of organic volume versus the favorability from mix that aids there. So we do expect this trend in utilization to continue.

Okay, that's helpful. And then, Glenn, maybe one for you. You talked a little bit about the margins and launchpad and VPEG. Can you just talk about, obviously, a few moving pieces as we work our way through 2H and into 25? Can you just talk about the puts and takes there with the dilution, the launchpad piece? Again, labor sounds like it's maybe plateaued and it's stable, but just the cadence for the rest of the year, and then, again, the right jumping-off point into next year. Thank you, guys.

Sure. Just, again, from an overall standpoint, Margins for the year, as you think about LabCorp, we've now commented all in, including the impact of Invitae. Our margins should be flat this year, year over year, in that the impact of Invitae will be around 40 basis points. So forgetting even other headwinds, we expected for the company to see a nice 40 basis point plus margin improvement. When you look at diagnostics, we commented that prior to Invitae, that margins for the year would be flat to slightly up. even absorbing the impact of less COVID business, if you will. Obviously, with now Invitae, it'll have around a 60 basis point headwind to diagnostics. So expect that in the second half of the year, diagnostics margins will be down year over year. Again, excluding Invitae, second half margins in diagnostics would have been up year over year. So positive leverage within the diagnostics business. And again, we've commented that the margins within The biopharma side, our expectation for the year is for margins to be up and that the margins in the second half for biopharma will be higher than what it is for the first half. Year over year, there'll be some differences, but overall, assume a higher second half margin profile for BLS than the first half. So again, we feel we're getting good top line. We feel we're leveraging it well. Launchpad is an integral part of helping our margins help offset some of those inflationary costs. and then obviously we're adding on top of that just the near-term dilutive impact from nvta when you think about 2025 the only thing i'll comment really on the nvta is that you know assuming the close later on or call it next week even with nvta you know we'll still have the the headwind in the first half with margin impact being negative from nvta in the first and second quarters but What's interesting is as you move to, once it's annualized, you'll obviously start to see favorable contributions from margins from Invitae because we're now comping off of positive and growing margins versus the first half of this year with negative margins.

Very helpful.

Thank you.

Thank you. This concludes the question and answer session. At this time, I'd like to hand it back to Adam Schefter for closing remarks.

Thank you. Thanks, everybody, for joining us today. We're going to continue to focus on our customers, our business, shareholders, employees as we move forward, and we look forward to sharing our progress with you next quarter. Have a great day.

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