Labcorp Holdings Inc.

Good day and thank you for standing by. Welcome to the Q1 2025 Labcorp Holdings Earnings 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 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kristen O'Donnell, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to LabCorp's first quarter 2025 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 Julia Wong, 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 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. Please see the Use of Adjusted Measures section in our press release and investor relations presentation for more information regarding our use of non-GAAP financial measures. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2025 guidance and the related assumptions, the projected impact of various factors on the company's businesses, operating and financial results, cash flows and or financial conditions, including 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 SEC. We have no obligation to provide any updates to these forward-looking statements, even if our expectations change. Now I'll turn the call over to Adam Schechter.

Thank you, Kristen, and good morning, everyone. We appreciate you joining us today to discuss our first quarter 2025 financial results and progress towards advancing our strategic priorities. Performance in the first quarter was solid with 5% revenue growth or 6% on a constant currency basis across the enterprise. The performance was driven by 6% growth in our diagnostics laboratories business where there was a strong rebound in volume in March after impact from weather in January and February. Our strong managed care access and our payer contracts continue to serve us well in the marketplace. Adjusting for Invitae and weather, the margin in a diagnostics business improved 50 basis points. Invitae continues to perform very well and remains on track to achieve 10% revenue growth and to be slightly accretive to earnings for the full year. Our biopharma laboratory services segment grew 3%, excluding currency. Margin for BLS was strong, improving 80 basis points, and the quarter book to bill was also strong at 1.13, with a trailing 12 month of 1.07. Adjusted earnings per share of $3.84 were up 4% year over year. It is certainly a very dynamic environment, and our team is closely evaluating the ongoing shifts in the macroeconomic and regulatory landscapes. We are pleased with the outcome of the court's decision in the challenge of the LDT rule. We believe it's in the best interest of bringing new innovative tests to patients as quickly as possible. We are also contingency planning for various tariff and regulatory scenarios. We have developed duplicative flexible supply chains, and we're in communications with our customers and suppliers. While we do anticipate some impact, our guidance range includes what we believe to be the most likely scenarios at this time. The essential nature of our work has enabled us to be successful through many different economic cycles over time. And we will continue to focus on serving the needs of our customers and driving growth, all while delivering value for shareholders as we advance our mission to improve health and to improve lives. Based upon our performance and outlook, we have reaffirmed our revenue and free cash flow guidance while increasing the midpoint of our EPS guidance by 5 cents per share, with implied growth at the midpoint of approximately 10 percent for the year. We also continue to expect margin expansion in each segment for the full year. Julia will provide more details on our results and the 2025 outlook in just a moment. We continue to execute well on our strategic priorities of being a partner of choice for health systems and regional local laboratories, by launching new tests in important high-growth therapeutic areas, and by harnessing science, innovation, and advanced technology to bring valuable services and capabilities to our customers while improving operational efficiency. In the first quarter, LabCorp became the partner of choice for several health systems and regional local labs. These partnerships enable us to accelerate growth and to expand into important geographies and therapeutic areas. In January, we announced a strategic collaboration with New Jersey-based Inspira Health to manage the operations of the health system's hospital laboratories and to serve as the primary lab for the physician network. we announced an agreement to acquire select assets of bioreference health oncology and related clinical testing services. This transaction will extend our leadership in oncology. We also completed the acquisition of select assets of North Mississippi Health Services ambulatory outreach laboratory business, and we became a referral lab for its seven hospitals and clinical laboratories. Looking ahead, we have a strong business development pipeline, and we look forward to sharing additional growth opportunities with you in the coming quarters. We also continue to incorporate the power of science, of innovation, and of advanced technology across the organization. We're focused on bringing new tests into four strategic areas, oncology, women's health, autoimmune disease, and neurology. These areas have significant unmet needs for patients and are expected to grow up to three times faster than other therapeutic areas, and they are proving to do so. Having the latest innovative tests in these areas enables us to successfully capture more volume across testing for those patients. For example, in the quarter, we introduced LabCorp Plasma Complete, a groundbreaking liquid biopsy test to aid in personalized cancer treatment decisions. This advancement significantly expands LabCorp's extensive ecology portfolio. We made significant strides bringing Invitae's genetic testing solutions to our customers by launching patient affordability and access tools, and by introducing two additional genetic risk panel tests. LabCorp On Demand launched several new consumer-initiated tests, including electrolytes, GGT, hepatitis A, and total testosterone for women. Subsequent to the quarter, we introduced HPV and STI self-collection options in LabCorp patient service centers and physician offices. These solutions helped overcome barriers to essential health screening by providing convenient private testing options. And in April, we launched our p-tau beta amyloid ratio test, a powerful new blood-based biomarker test to aid in the diagnosis of Alzheimer's disease. This first-of-its-kind immunoassay further expands our leading portfolio for Alzheimer's disease and dementia. Launching tests in these important areas will enable us to outpace the growth in the overall market over time. We're also using AI and technology to enhance our customer experience and to bring forward new operational efficiencies to improve our margins. For example, earlier this month, LabCorp received a Modern Healthcare 2025 Innovators Award for LabCorp Diagnostic Assistant, a digital solution integrated into electronic health records that supports providers with real-time access to comprehensive laboratory data, insights, and self-service capabilities. This award recognizes us as a leader in driving innovation that improves care and achieves measurable results. We also launched eClaim Assist, a next-generation digital platform that introduces smarter workflows to improve efficiencies in billing payer alignment and denials. We will continue to find operational efficiencies through technology in all aspects of our business. Lastly, we released the LabCorp corporate responsibility report, which highlights our significant progress in key areas such as reduced water withdrawal and improved fuel efficiency. We invite you to review the report on our investor relations website. In summary, our business continues to perform well, and we are making strong progress against our strategy. We believe that LabCorp will continue to be successful and will lead the way with our relentless focus on science, innovation, and advanced technology. We remain committed to providing value to our customers and our shareholders alike. With that, I'll turn the call over to Julia.

Thank you, Adam. Let me start with a review of our Q1 financials. Revenue for the quarter was $3.3 billion, an increase of 5.3% compared to last year, driven by organic growth of 2.1% and the impact from net acquisitions of 3.7%, partially offset by foreign currency translation of 0.5%. Operating income for the quarter was $326 million, or 9.7% of revenue, which is 14% on an adjusted basis. During the quarter, we had $73 million of restructuring charges and special items, primarily related to acquisitions and launchpad savings. Excluding these items in the amortization of $70 million, Adjusted operating income in the quarter was $469 million, or 14% of revenue, compared to $463 million, or 14.3% of revenue last year. The increase in adjusted operating income was primarily due to demand and launchpad savings, partially offset by higher personnel costs. The 20 basis point decline in adjusted operating margin included headwinds from invitee and weather, excluding which enterprise margins would have been up 60 basis points. The adjusted tax rate for the quarter was 22.5% compared to 23% last year. We continue to expect our adjusted tax rate for full year 2025 to be approximately 23%. Net earnings for the quarter were $213 million, or $2.52 per diluted share. Adjusted EPS was $3.84 in the quarter, up 4% from last year. Operating cash flow was $19 million in the quarter, compared to a use of $30 million a year ago. The increase in cash flow was primarily due to the timing of working capital. Capital expenditures totaled $126 million in the quarter. For the full year, we continue to expect the capital expenditure to be approximately 3.8% revenue. Free cash flow for the quarter was the use of $108 million compared to a use of $164 million last year. The first quarter is typically the company's lowest quarter for free cash flow. We continue to expect the free cash flow for the full year to be $1.1 billion to $1.25 billion. During the quarter, the company invested $211 million in acquisitions and partnerships, and paid out $62 million in dividends. At the quarter end, we had $369 million in cash, while total debt was $5.6 billion. Our debt leverage as of quarter end was 2.5 times growth debt to trading 12-month adjusted EBITDA at the low end of our targeted leverage of 2.5 times to 3 times. Now I will review our segment performance beginning with diagnostics laboratories. Revenue for the quarter was $2.6 billion, an increase of 6% compared to last year. with organic growth of 1.6% and net acquisitions of 4.7%, partially offset by foreign currency translation of 0.3%. Organic growth was impacted by approximately 190 basis points from weather and one fewer revenue day, which is timing-related within the year. Total volume increased 3% compared to last year, as organic volume contributed 0.9%, while acquisitions net of divestitures contributed 2.1%. Organic volume also includes the negative impact from weather and one fewer revenue day. Price mix increased 3% versus last year due to organic growth of 0.7% and acquisitions net of divestitures of 2.6%. partially offset by foreign currency translation of 0.3%. Organic price mix was up due to mix, as we benefited from an increase in tax per accession and net management agreements. Diagnostics adjusted operating income for the quarter was $428 million, or 16.3% of revenue. compared to $418 million, or 16.9% of revenue last year. Adjusted operating margin was down 60 basis points due to invading weather. Excluding this item, adjusted operating margin would have been up approximately 50 basis points, as the benefit of organic demand and launchpad savings was partially offset by higher personnel costs. Unity remains on track to be slightly accretive for full year 2025. Now I will review the segment performance of Biopharma Laboratory Services, or BLS. Revenue for the quarter was $721 million, an increase of 1.5% compared to last year due to an increase in organic revenue of 2.6%. partially offset by foreign currency translation of 1.1%. Excluding currency, early development revenue growth was approximately 5%, while Central Labs revenue growth was approximately 2%. As expected, the Central Labs growth rate was low in Q1 2025, as we had a large amount of COVID vaccine and therapeutic revenue in Q1 of 2024. Our segment quarterly book-to-bail was strong at 1.13, bringing the trading 12-month book-to-bail to 1.07. BLS adjusted opening income for the quarter was $107 million, or 14.8% of revenue, compared to $100 million, or 14.1% of revenue last year. Adjusted opening income and margin increased due to organic demand and launchpad savings, partially offset by higher personnel costs. We ended the quarter with a backlog of $8.2 billion, and we expect approximately $2.6 billion of this backlog to convert into revenue over the next 12 months. Now I will discuss our updated 2025 four-year guidance. which assumes foreign exchange rates effective as of March 31, 2025 for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation utilizing free cash flow for acquisitions, share repurchases, and dividends. We are operating in a dynamic macro environment and there are a series of regulatory developments that we continue to monitor closely. Our guidance has taken into account various scenarios of the ever-changing tariff and regulatory landscape. Based on what we believe to be the most likely scenarios at this time and the resilience of our businesses, we are reaffirming our enterprise revenue and free cash flow guidance while raising the midpoint of adjusted EPS. Enterprise revenue growth guidance remains 6.7% to 8% compared to 2024. Diagnostics continues to perform well. Consistent with prior guidance, we expect the diagnostics revenue to be up 6.5% to 7.7% compared to 2024. We still expect BLS revenue to grow 3% to 5% compared to 2024. This includes the negative impact of 30 basis points from foreign currency. Prior guidance included a negative impact of 140 basis points. We continue to expect enterprise margins to be up. with margins improving in both diagnostics and BLS in 2025 versus 2024, driven by top-line growth and launchpad savings. Our guidance range for just the EPS is $15.70 to $16.40, with an implied growth rate at the midpoint of 10%. As compared to prior guidance, we have narrowed the range and raised the midpoint by 5 cents. Our free cash flow guidance range is $1.1 billion to $1.25 billion, unchanged from prior guidance. And due to normal seasonality, we expect it to be weighted towards the second half of the year. In summary, we had a solid first quarter with a dynamic macro environment. We expect to drive continued profitable growth and strong cash flow generation that will 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 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 Lering Partners. Your line is open.

Good morning, Michael. Morning, Adam. Thank you so much for taking the question. Maybe just, I'll just have one here and it's tied to the BLS segment on both Central Lab and early development. Obviously there's a lot of noise and volatility tied to the changing administration, tied to changes of the FDA. As you progress through the quarter and as you think about what's embedded in your guidance now, how much variability versus what you'd expect to be normalized demand is incorporated there and are you seeing any feedback on either central lab or early development, any pushback relative to awards to starts based on the uncertainty that's clearly been created by the current administration?

Yeah, no, thank you for the question, Michael. And what I start off with, if you look at the BLS business, we had about 3% growth overall, and it was about 2% in CLS and about 5% in early development. And what we saw was continued strength in the book-to-bill. So the book-to-bill actually was a 1.13 for the quarter, and the trailing 12-month increased to 1.07. So we feel good about where we are right now. When you look at the range that we gave for the revenue, we gave 3% to 5%, with a midpoint of 4%. You could have said, well, with exchange, why did you not increase the range? The reason we didn't increase the range is because there is some unknowns in the landscape to which you acknowledged and brought up. So we wanted to give ourselves room within the range. If foreign exchange stayed right where it is today and we didn't see any additional impact from some of the things in the macro environment, we'd end up at the high end of the range, the highest end. If we see some of these other things like a delay in study starts due to getting regulatory information in a timely way, well then that could bring us more towards the midpoint of the range or maybe below the midpoint of the range. So we feel like with the range that we gave, it takes into account the various different things that could occur within the landscape with the midpoint being what we think is most likely. So I really believe that we have room within the range for things that could occur. As we sit here today, we have not seen study delays. We have not seen studies that have not progressed. We saw one larger cancellation for a COVID trial in our book to bill. But you can see from our strength of our book to bill, we more than overcame that one trial. But other than that, it seems to be steady as we go at the moment. but we'll continue to monitor it. It is a very fast-moving environment, but I feel good about where we are and what the range is.

Thank you. And our next question comes from Anne Hines of Mizuho. Your line is open.

Morning, Anne.

Hi. Good morning. So you were saying that you have tariffs now embedded in guidance, which I don't believe was an original guidance. Can you let us know how much tariffs now are embedded in guidance? And I'm assuming that implies the underlining operations are doing better than your initial expectations.

Yeah, thank you. So as I think about the tariffs, first I say we are well positioned and we expect to continue to deliver on the commitments that we put forward. First and foremost, we've built duplicative and flexible supply chains that I think really helps and improves our resiliency. There will be some impact from the tariffs, but our guidance range includes what we think are the most likely scenarios. But just to give you some context, Ann, so the vast majority of our vendor spend is from U.S. companies where we're not the importer of record. If you look at our contractual arrangements with secure pricing, it represents more than 80% of our spend. Many of these deals are multi-year contracts. So, you know, some of them come up every year for renewal. We're going to work on a supplier community. We're going to negotiate hard and accordingly. If you look at like items that we buy directly from countries like China, they're mostly like plastics, consumables, supplies, stuff like that, but it's minimal today. And we are looking to shift to more favorable countries as best we can. And I think we have a pretty good path forward for that. If you look at, biopharma, and you look at central labs in particular, there is some impact from kits moving in and out of the United States, but a lot of that's transportation, and a lot of those costs can be typically put through pass-throughs, which is going to help us manage it. So, you know, as I look at the range of different possibilities within what we think are most likely scenarios through continued expense focus, continued focus on our operations, we think we'll be able to offset the impacts from the tariffs. And that's why we felt comfortable with the guidance that we gave for revenue of 6.7% to 8% with a midpoint of 7.5% and holding to that. And we felt comfortable and actually raised the bottom end of our adjusted EPS based upon that strength.

Great. Thanks. Thank you. And our next question comes from Aaron Wright of Morgan Stanley. Your line is open.

Good morning, Aaron.

Good morning. Could you break down a little bit in terms of your expectations on underlying organic growth across the diagnostic business for the balance of the year? How much is from acquisitions versus organic and has anything changed in terms of your expectations there in terms of underlying utilization trends and If I could also ask more of a housekeeping one, but how did that weather impact of 10 cents you previously alluded to actually shake out relative to your expectations?

Thanks. Yeah, no, thanks, Erin. So in general, we still expect about half to come from organic and inorganic. If you look at the first quarter, organic growth was 1.6%. But if you just adjusted for weather and the revenue day, it would have been 3.5%. And therefore, I think it would be more of what you would expect typically. Julie, if you want to provide some additional context there.

Absolutely. Good morning, Aaron. So we were pleased with our results for the diagnostic business in the first quarter. As you've seen our release, we grew revenue about 6% in the quarter versus a year ago, which was supported by strong volume growth of 3% and favorable price-mix impact of 3%. As Adam just shared, If you were to neutralize the unfearable impact of additional weather, as well as the one less revenue day, the organic revenue in the quarter would have grown about 3.5%, which was in line with our historical trend, as well as our expectation going forward for 2025. If you just anchor ourselves against the organic revenue growth reporting in the quarter of 1.6%, Organic volume was 0.9% of growth. Once again, that was impacted by one less revenue day and weather. The organic price mix was up 0.7%, primarily due to higher test per session and increased lab management agreements. If you neutralize the impact of weather as well as the one less revenue day, the volume to price mix growth contribution would be approximately 3 to 1 ratio, once again, in line with our historical trend. Now, looking forward, we are pleased about the trajectory of the emitting integration. Once again, as Adam shared in the prepared remarks, we continue to expect that business to be slightly accretive in earnings for full year 2025. And we have reaffirmed the revenue guidance for the full year for diagnostics to be between 6.5% to 7.7%. And we look forward to expanding the margin for the business as well versus 2024, which will contribute to an expectation that we will look to expand the enterprise margin for 2025 versus 2024 as well.

Great. And if I could ask a follow-up on the policy front and regulatory front, we obviously got the LBT. favorable rule there, but on PAMA versus PAMA reform, what are your latest thoughts in terms of timing and magnitude? Obviously, this is degrees of positive from the original PAMA methodology, but how big of a difference will that be?

Yeah, so first of all, we were very pleased with the court ruling regarding LDTs. As I said before, it wasn't a significant impact to us in terms of revenue nor expense because we were doing a lot of the work by submitting to New York State already. But I felt that it would really impact innovation in getting tests to patients as quickly as possible. So I think that we ended up in a good place there, and I think it'll enable us to meet patients' needs in the marketplace. As I look at PAMA, for the last five years, we've been trying to get legislation in place that makes more sense than the current legislation. And we have support from Republicans and Democrats, and we've had that for five years now. But unfortunately, we haven't gotten legislation through, which has led to each year a delay. We'll work with our trade group, ACLA, to continue to see if there's better legislation that can be passed. We'll continue to work hard to see if that can be done. At the same time, we'll try to find ways to look for additional delays. But I continue to put in our base case that each year, the next year, PAMA will come. So I assume in January of next year, there'll be an impact from PAMA. that that impact would be around $100 million for the full year. And we'll build a plan that makes us successful despite that. If you look at our three-year guidance that we provided a bit ago, that included an impact from PAMA. So we have always anticipated that in our base case that it would be coming and planning around that. So we'll continue to do so, but we'll do everything in our means to get better legislation passed or to get another delay.

Okay, great. Thank you.

Thank you. And our next question comes from Elizabeth Anderson of Evercore ISI. Your line is open.

Good morning, Elizabeth.

Good morning, Adam. Thanks so much for the question. I noticed you guys mentioned a couple of times higher personnel costs in the quarter. And I just wanted to clarify, is that something that you're sort of seeing overall, or was that specifically a function of the revenue sort of day and cost day impact in the quarter? And any one-timers just to point out on the 2Q that you would call out right now? Thank you.

Yeah, no, thanks, Elizabeth. So when we talk about higher personnel costs, it's just the inflation of personnel, which we expect every year to be 3% to 3.5%. and we work hard with our Launchpad initiative to offset that. So nothing other than what would be typical in the normal range of higher personnel costs due to inflation.

Okay, that's super helpful. And any one-time items you would call out so far, particularly impacting the 2Q outlook or, you know, so far that seems to be on track? Okay, perfect.

Yes, it seems on track. Nothing to call out. Great, thanks.

Thank you.

And our diagnostic volume continues to perform well into April, which continues the strength of what we saw in March. So we are very encouraged by that.

Okay, great. Thank you.

And our next question comes from Lisa Gill of JP Morgan. Your line is open.

Good morning, Lisa.

Good morning, Adam and Julia. Thanks for taking my question. Adam, I just want to go back to your earlier comments when we think about potential changes on the FDA side. You know, there's been some talk on the early development side of the business around animal testing. Can you maybe just remind us, you know, in early development, how much of the business is today with animal testing, and if that were to change, what the potential impact would be?

Yeah, so I'll start with some context, Lisa, and then I'll provide some additional information. So, you know, as we look at non-animal testing, We've always said that as soon as the market can move to that, we'll be very supportive. In fact, we have about 90 PhDs or MDs that are working all day every day to try to find non-animal models to move forward with. As we think about that, that will become a bigger business over time, and we want to be part of that business over time. Of course, we'll continue to work with regulators, and we're committed to complying with all regulatory compliance guidelines in the research that we conduct. There's currently no full replacement for animal models in research and development that we're aware of, but we're going to continue to work to find ways to do that. So, there's no doubt that any new guidance would have to be implemented over time, of which we'll collaborate and work with the folks over time. When you look specifically about the animal testing that they were looking at impacting the monoclonal antibodies in the beginning, That's roughly 10 to 15% of our total revenue, so it's not a big piece of our BLS business. And I think for other parts to move to non-animal models, it's just going to take a lot longer. So I would summarize it to say we don't expect any significant impact this year. We're going to work on non-animal models with regulators. As soon as they're ready, we're ready. We want to be part of that business into the future. And if monoclonal antibodies were the first place to move, then it would not be that big of an impact of our total business.

So just so I understand that, so it would be 10% to 15% of the operating profit of BLS? And so if I think about it for the total enterprise, it would be single digits, right? Is that the way to think about it?

Well, so that's of revenue, and operating profits would be less than that. And then it would be very small, very, very small in terms of the total revenue for the company.

Perfect. Thank you so much.

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

Good morning, Jack.

Good morning. I hope you're doing well. I wanted to follow up on your comments around in vitai traction toward getting to accretive, slightly accretive for the year. In the quarter, I think the math you laid out implied between in vitai and weather, it was about a 30 million EBIT impact to the DX segment. I was wondering, could Invitae have been around 20 million? And then maybe just talk about how do you get that to be a positive number later in the year?

So I think it's less than that, but I'll have Julia talk about that specifically. I just want to give some context to Invitae. The integration is going very well. In fact, I'd argue it's going better than what I had even anticipated. And we continue to make a lot of progress. As we think about the full year, we still expect the revenue growth is going to be over 10%. And we've said that we believe women's health, autoimmune disease, oncology, and neurology represents opportunities to have outpaced growth versus the overall diagnostic market. We believe that this is a piece of that. And this is another proof point to show that when you're in women's health or in oncology, you can get faster growth. So I feel very good about the revenue, I feel very good about the integration. We remain on track to have Invitae accretive for the full year. And when you look at the way in which we've gone after the expenses, we've been very methodical. We've taken the best of the best approach. We take the best science, the best customer interactions from either LabBook and Invitae, and then we apply it across the organization. So it's taken us a little bit longer to get the cost out than we typically would see. But it's going very well, and that's why I'm confident to reiterate that we believe it will be accretive for the full year.

Yeah, the only additional comment I would add is as it relates to the impact in the quarter. So what we shared was if you look at our enterprise AOI in the quarter, you saw a 20 basis point decline versus a year ago, and the major drivers were a combination of inlating and weather. When you exclude those two items, the enterprise margins would have been up about 60 basis points. Now, as Adam reiterated earlier, our expectations as we progress throughout 2025, you'll start to see inlating shifting from a loss to an accretion, particularly in the second half, so much that for the full year, we expect Unite to be slightly accretive. That's the impact of Unite.

Okay, thank you. And then maybe as a follow-up, just on Lab M&A, how do you characterize the environment right now? And you have leverage at two and a half times. You're integrating a lot of deals you've done over the last year. just how should we expect kind of the pace of activity, you know, throughout the rest of the year? Thank you.

So I would say the pipeline remains very strong. And I would say with some tariff implications to hospital systems, as well as some of the other things they could be facing in the macroeconomic landscape, we're actually seeing more outreach to us to actually have discussions. As you recall, some of these discussions take a very long time. Some of them go in a shorter time than others, but over time, the pipeline looks really good. And I would expect we'll have more to share with you as we go through each quarter this year.

Okay. Thank you, guys.

Thank you. And our next question comes from Luke Sergot of Barclays. Your line is open.

Good morning, Luke. Good morning. Thank you. Just want to dig in a little bit on the diagnostic operating margin expansion, just kind of laid out there from Invitae. But I was hoping you can dig in there a little bit on kind of the puts and takes or bucket out the individual components for which driving that OMX for the year. So you talked a little bit about Invitae, but if you could talk about like how the recent M&A contributes, maybe some of the tariffs or tariff offsets. you know, the core improvements from the e-claims, your pricing mix, just kind of the underlying assumptions based on that OMX assumption?

Yes, I'll start with, you know, if you look at the operating margin for diagnostics, it was down 60 basis points. That was due to VTA weather. If you adjust for that, it would have been up 50 basis points. We still expect margins to actually be up this year versus last year when you look across the year. So that tells you we see strength in the diagnostic business margins as we go through the year. A lot of that is the overlap of Invitae. Once we overlap that and it becomes accretive, it actually helps us with the margins overall. The second thing is we continue to focus on our launch pad initiatives where we take out between $125 million, and a lot of that still comes out of the diagnostic business, so we continue to see benefit there. And we're continuing to see some benefit from MIPS in terms of esoteric testing as well. All those things give us reason that we expect the margins to increase and get better as we go through the year.

Great. Just to follow up here and go back to the BLS booking strength, there's the overhang or the thought from pharma tariffs coming on that could initiate another round of restructurings. Just interested in what you guys are hearing from your various customer bases across biotech, large pharma, how they're thinking about the tariff, and if you think that there's more pipeline rationalization or R&D cuts coming you know, that are still, you know, that could be on the come?

So as I look at that, I look at our central laboratory business first. And I look at our central laboratory, most of that is phase two, phase three trials. And I think that's the last place pharma would ever go to reduce costs because the phase two, phase three is the future growth, the future pipeline. So I feel good about the pipeline as I look at the CLS and I look at the book to build. We continue to have good RFPs in early development. Our win rate continues to do well. And the book to fill continues to look good. But that's an area we'll have to continue to watch closely because I think that could be impacted more by some of the things that you mentioned over time. But we have and we continue to work towards getting a larger mix of business and early development from mid to larger size pharma. And I think as we shift that mix, it'll serve us well over time as well.

Great, thanks.

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

Morning, Kevin. Morning, Adam. Good morning, Julia. Thanks for taking my question. I want to talk a little bit about the margin and diagnostics again, just a little bit further. I know you've touched on it a bit here. If we think about the first quarter, 60 basis points net of uh in vitae being better 60 basis points net of invitae net of weather is the weather number a net number or just the number for the quarter because presumably there was weather in one q 24 as well right that it's a it's a net number yeah it's a net number kevin yes fantastic that's super helpful so then if i think about what's going on and the fact that march the strength in march goes into april as julia mentioned And we think about the improvement in margin year over year for 2Q, because I don't think there was any weather comp or anything else in 2Q. Should we be thinking about a year over year margin improvement with Invitae getting a little bit better that maybe you could, you know, is that 60 basis points sort of the baseline on a year over year basis that we'd be thinking about for 2Q? And is that like a progression over the year? Is that how we should think about it, MetNet?

Yes, so thank you for the question. We don't guide to the quarter. But directionally, your thought process is reasonable. Typically, you see Q2 being a strong quarter, definitely from a top line standpoint. And then to your point, as we continue to make progress towards shifting in to be accretive, obviously that would have the overall margin for the diagnostic business in particular. So the thought process, once again, is reasonable.

Fantastic. Thank you very much.

Thank you. And our next question comes from Michael Riskin of Bank of America. Your line is open.

Morning, Michael. Morning. Thanks for the question, Adam. Just want to go back to your BLS comments earlier a little bit, you know, the reduction in FX headwinds. but you're sort of absorbing that given some of the macro uncertainty. I think that certainly makes sense. But just you haven't seen anything yet, obviously. You know, you talked about the strong book to bill in the first quarter. It doesn't seem outside of that COVID contract that you called out that you've seen any weakness. Sort of how did you approach that reset and guide? Is it anything that's come up in conversations with customers? And I guess sort of what are you monitoring as you go through the year to assess the health of that end market? Is it Is it the evolution of tariffs? Is it something on the policy front? Is it biotech funding? Just sort of walk us through what you see as the leading indicators there.

Thanks for the question. I want to provide some context to the BLS business, in particular with the central laboratory business. We had expected that the first quarter would be the lowest growth rate when we compared to the remainder of the year. And the reason that was is because we saw strength in the first quarter of last year. If you go back to the first quarter of 2023, we saw some, or 2024, we saw some real strength. Within that strength was about $18 million of COVID vaccine and therapeutic rest. That was about the same, frankly, as the first quarter of 2023. So first quarter of 2024 was about the same as first quarter of 2023. In 2025, we had virtually zero COVID-related work. So it's not a big delta when you compare that to the broader CLS business, but it gives you a sense of the underlying growth rate and impact. So as I look at the BLS business, the first quarter we expect it to be the toughest compared to last year. As I look at the rest of the year, we continue to expect the business to grow better, and that's why we feel confident in the 3% to 5% guidance range. The reason we didn't raise that range based upon current FAR-X is for multiple reasons that we can see pushes and pulls. What I'm looking for is, do the trials start on time that we expect the trials to start? They have up until now, but we've heard some noise about how fast people are getting regulatory input to some of their trials. And we want to make sure that the trials start on time that they get the input that they need in order to start those trials in time. So we're going to watch that very carefully. We'll watch the impact of tariffs and do people change where they're running some of these trials in different parts of the world and do we have to make some adjustments. So we'll watch that as well. And then we'll continue to watch our early development business where up until now the signs are strong, but we're going to watch that for biotech funding and so forth. So the reason we didn't change the range is because I believe that if Forex stayed where it was today and everything continued to go well, we'd be at the highest end of that range. If things get a little bumpy in terms of timing of trial starts, I don't think it's going to impact whether the trials go on or not, but it could impact the timing. Well, then it could bring you back more towards the midpoint. Foreign exchange could change. We've seen it be very dynamic in the marketplace. So we didn't want to make a change based upon FAR-X that we've seen kind of bumping up and down so fast in the marketplace. So for all those reasons, we felt confident to confirm the 3% to 5% guidance range with the 4% midpoint.

Okay, that's really helpful. Appreciate that, Kohler. Just a quick follow-up on that. Any change in your expectations on pricing? Or have you had any early conversations on maybe customers being a little bit more price-sensitive?

You know, the customers are always going to be price sensitive. I think with some of the issues that everybody's facing, we're all more price sensitive than we are today. We're being harder on our suppliers than we typically can, and I would expect that our customers will be hard on us as well. But with all that said, as we sit here today, most of our business is a backlog-driven business with a Studies are already under contract and so forth. So I feel pretty good about where we are as we go through this year. And then we'll continue to look for ways to reduce costs and to offset any pressure that we face. And that's why I feel confident not only in the guidance that we've provided, but the fact that we expect that margins will improve this year. in both the biopharma laboratory business and diagnostic business versus last year, because we'll continue to find ways to offset any of those pricing headwinds with additional cost reductions and other things.

Great. Thank you.

Thanks. Thank you. And our next question comes from Patrick Donnelly of Citi. Your line is open.

Hi, Patrick.

Good morning. Hey Adam, how are you? Um, thanks for taking the question. Maybe, uh, maybe one, I know you just talked about BLS pricing a little bit on the, on the lab side. Can you talk about the conversations there? I know pricing has been a little bit more firm, uh, on your, on your guy's side. Do the tariffs change anything? Are you guys having different pricing conversations looking to pass anything on? I'm just curious what those conversations have looked like recently.

Yeah. So, so, you know, the, A lot of our business is contracted, but every year there's new contracts that open up. Most of the contracts are multi-year contracts in the diagnostic business. But even the ones that are opening up, we're still having very good constructive dialogue. Price has been relatively flat for us. What we're looking for is to improve our volume, which we've seen organic volume growth, and we're going to continue to focus on that volume growth. But I would say we have very good – payer access. We have very good managed care access. We have very constructive dialogues with the payers. So as I sit here today, I feel very good about where we are and the discussions that we're having and the strength of the business overall.

Okay. And then just a quick follow up on Mike's question there on the kind of pacing of BLS. I know Central Lab, you know, basically a backlog business as you look at this year. So in terms of your answer, it sounds like it's just a matter of when these trials take off, they're all in the backlog, do some of them slip or not, is going to be the delta in terms of the guidance range. Is that the right way to think about it?

Yeah, that's a big part of what we're watching. Like I said, there was one trial that was canceled. It was a COVID-related trial, but that's in our book to bill, and you can see the strength of our book to bill. It would have been even stronger if that didn't get delayed. So I think COVID trials we've seen a little bit different than other trials to be Frank, but we don't have many of those in our book to build any longer. It's all non-COVID-related work. So the question to me is more of a timing issue. Do the sponsors get the information they need from the regulatory agencies in order to feel comfortable that their protocols will suffice in order to get approval of the product? It's not whether they'll get the comments. It's how quickly and will it be on time. At this point, we've not seen any issues, but it's something we'll watch.

Thank you, guys.

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

Good morning, Eric. Thanks. Good morning. Just a couple of clarifications or add-ons here to other Q&A that's happened. On the central lab COVID comp in Q1, are there additional COVID comps throughout 2025 that we should be aware of?

Yeah, no, that's a great question, Kevin. I'm sorry, Eric. And I want to start off, Eric, by saying that, you know, when I think about the COVID vaccine-related works, in general, it's not a big number. It's about $18 million. We did $18 million last year. We did $18 million the first quarter of the year before. This year, we did virtually zero. So it's just in the context of the growth rate, we thought it was good to point that out. But in terms of $18 million on a base of 500 and some odd millions, it's not a huge number. As I look at the rest of this year, if I assume I have zero for the rest of this year, I had about $18 million for the whole rest of last year. So it was $18 million in the first quarter last year, and then the next three quarters was $18 million. So you figure for the rest of this year, if it's zero versus $18 million spread out over three quarters last year, just to give you that context.

Perfect. That's helpful. And then, um, I know you've mentioned a few times the COVID cancel and central lab, uh, and you've talked about the book to bill would have actually been better absent that of course, would you care to quantify that cancellation?

Um, so, so we don't typically get numbers, but I would say, you know, it was, it was, um, I mean, it was larger, it was slightly larger than about a hundred million dollars. So just give you a round number of where it was about.

So a very strong book to bill excluding that.

Yes.

Yeah. Okay. And then last one, thank you for all this. You've done a lot of discussion on tariffs and how you're planning to offset and absorb them, which is very encouraging. I am curious if you'd be willing to give us a ballpark gross estimate of what kind of headwind you need to absorb. Is it a 1% enterprise revenue kind of impact, 2%, something less than that? I'm just trying to get a sense on how much you actually think you need to absorb at this point.

Yes, I don't want to give a specific number because we have a whole range of scenarios, to be honest with you. And what I've done with my team, I've looked at the low end, I've looked at the high end of kind of the most likely scenarios. I mean, there's crazy scenarios that could take you down a path one way or the other that we don't think are likely. But within that likely scenario, what we're doing is I'm planning for the worst of the most likely scenarios. and I'm hoping for the best, and it gives me a little bit of breathing room. So what I would tell you versus others in other industries, ours is a relatively small impact because when you think about 80% of our spend being under contract and you think about the majority of our spend coming from the U.S., you can get to a number that's relatively manageable under all those scenarios.

Very good. Thanks again. I appreciate it. Sure. Thanks, Eric.

Thank you. And our next question comes from Pito Chickering of Deutsche Bank. Your line is open.

Morning, Pito.

Hi there. Hi there. You've got Kieran Ryan on for Pito. Thanks for answering our questions. Morning. I don't have much left here, but I know it's still pretty limited disability, but I was just wondering if you have any thoughts or comments around any potential impacts to your business from some of the changes to Medicaid or the ACA exchange subsidies that are being discussed. I know Medicaid and Medicare are only, I think, 10% of your diagnostic revenues, so not very large, but any comments you have would be helpful. Thank you.

Yeah, what I would say is that, you know, together they're about 10%. As I think about the business there, we've seen switching between so many different parts of the healthcare system, whether it be Medicare to managed Medicaid to Medicare, and we've seen lots of movement. Under those scenarios, we continue to do well. Where I worry would be if there was a significant number of uninsured people that had to pay out of their pocket. Now, I don't think that's likely. I don't think that would be tenable for the states, nor for the federal government. But that's where I'd be more worried than seeing a shift between Medicaid, Medicare, managed Medicaid, or going into private plans. I think all those other things are manageable. And they have different pushes or pulls. Some of you have more tests per session. Some of you have a higher price per test. So I think the pushes and pulls offset themselves to some degree. As long as people have insurance or coverage, I think that in those scenarios we do really well.

Thank you. Thank you. This concludes the question and answer session. I would now like to turn it back to Adam Schechter for closing remarks.

Well, thank you all for joining us today. We look forward to discussing the business with you in the future. Hopefully you walk away realizing that our diagnostic business remains very strong, our BLS business remains strong as well, and that we are committed to our patients and to our shareholders alike. So I hope you have a great day, and we'll talk to you all soon.

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