Good day, and welcome to Labcorp's Q4 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. As a reminder, this call is being recorded. I would now like to turn the call over to Chas Cook, Vice President, Investor Relations. You may begin.

Thank you, operator. Good morning, and welcome to Labcorp’s Fourth Quarter 2021 Conference Call. As detailed in today’s press release, there will be a replay of this conference call available via telephone and Internet. With me today are Adam Schechter, Chairman and Chief Executive Officer, and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures 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 2022 guidance as well as the longer-term outlook and the related assumptions of each, the impact of various factors on the company's business, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and general economic and market conditions, our responses to the COVID-19 pandemic, future business strategies, expected savings and synergies and opportunities for future growth. Each of the forward-looking statements are 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.

Thank you, Chas. Good morning, everyone. It's a pleasure to be with you today. Labcorp is carrying on our mission to improve health and improve lives by harnessing the power of science, technology and innovation. In doing so, we're able to execute against our strategy, to deliver strong results for stakeholders and to effectively respond to global challenges like the pandemic. Our company rounded out a historic 2021 with another strong quarter that sets the stage for further success in 2022 and beyond. In the fourth quarter, revenue totaled $4.1 billion, adjusted earnings per share reached $6.77, and free cash flow was $548 million. For the full year, revenue was $16.1 billion, adjusted EPS totaled $28.52, and free cash flow reached $2.6 billion. Our Base Business continued its progress during the quarter, with Diagnostics and Drug Development revenue growing 8.8% and 8.2%, respectively. In Diagnostics, Base Business organic volume increased as esoteric and routine procedures continued their year-over-year growth. Drug Development ended the year with a solid trailing 12-month net book-to-bill of 1.25 and a strong backlog of $15 billion, representing a $579 million increase in the third quarter. Also, decentralized clinical trial awards were up 62% over the prior year. Moving to the pandemic. Our ongoing response remains an example of how innovation can drive success. For nearly two years, Labcorp has dedicated significant resources to stemming the spread of the virus. We are proud of the progress we've made thus far, though the rise of variants like Omicron and surges in infection rates make it clear that our work is not over. We continue to leverage Labcorp's comprehensive capabilities to expand testing access, to identify and monitor new variants and to advance vaccine and therapy development. In the fourth quarter, COVID testing volumes were greater than anticipated. We have performed over 74 million tests for COVID to date, of which approximately 8.6 million were in the fourth quarter. This heightened demand continued into the New Year, although volume is significantly less now than in December or in January. Time to results for COVID PCR tests remained one to two days on average even during the latest surge. As we've done throughout the pandemic, we are keeping capacity levels high to quickly respond to spikes and testing needs. We are continuing to invest in equipment, elevated staffing levels, and our supply chain. In addition, we remain prepared and staffed to support additional drug development work for vaccines, including boosters, or additional therapies. The company's COVID-related innovations in the quarter included the rollout of observed self-collection for COVID PCR testing at over 1,000 patient service centers. And at the start of the fourth quarter, we announced the receipt of FDA Emergency Use Authorization for a combined COVID and flu at-home collection kit. These offerings are reflective of our work to make COVID testing faster, easier, and more accessible. I'll now turn to our enterprise strategy, where we made significant progress in 2021. I'll provide a few highlights that will give you a sense of our growth and our forward momentum. In oncology, we made significant strides in fortifying our position as a leader by expanding diagnostic offerings and clinical trial opportunities. At the same time, we followed through on our commitment to improve cancer care access. Last year, we formed our Oncology business unit, and we introduced our Enterprise Oncology offering. Genomic profiling of tumors is key to identifying the best-targeted therapy for oncology patients. In December, we announced our agreement to acquire Personal Genome Diagnostics, or PGDx. The company has a strong portfolio of innovative liquid biopsy and tissue-based products, which complement our existing capabilities. Through PGDx-kitted solutions, we can provide oncologists access to tumor profiling at the hospitals where the patients are treated or centralized to one of our laboratories. These solutions may also enable us to expand tumor profiling globally to help our pharmaceutical sponsors find the right novel treatment for patients. We expect the transaction to close in the first quarter of this year. Other exciting expansions of our oncology test menu included clonoSEQ, the first and only FDA-cleared test for monitoring residual blood cancer; and OmniSeq INSIGHT, a pan-cancer tissue-based sequencing test for people with late-stage solid tumors. All of these offerings can help physicians make more informed decisions about treatments for their patients and help bring new medicines to market for cancer. In 2021, we intensified our customer focus and embedded technology and data throughout our business. This included improvements to the patient experience in our service centers. These upgrades focused on creating a seamless journey from appointment scheduling to service center visits to easier access to results. Our acquisition of Ovia Health enhanced our position as an important source of information for women's health, which we support through diagnostics, genetic and specialty testing expertise as well as clinical trials. We will continue to identify opportunities to enhance Ovia Health's innovative platform that provides family planning, pregnancy, and parenting support. Additionally, we began to deploy Labcorp Diagnostics Assistant. This new tool delivers a detailed view of a patient's lab history along with clinical insights directly to the point of care to inform diagnostic decisions. We opened an automated kit production line in Belgium in the spring. And in the fourth quarter, we opened an integrated laboratory in Singapore, which strengthens our bioanalytical services in the Asia Pacific region. And just this month, we announced the launch of Labcorp OnDemand, which builds on the success of Pixel by LabCorp. This suite of health tests and services offers easy and convenient access to a wide variety of trusted tests. It's another way that Labcorp is meeting people where they are and offering more options for people to stay healthy. We pursued numerous opportunities throughout the year that have long-term and high-growth potential. We did tuck-in deals and strategic acquisitions, including OmniSeq, Ovia Health, PGDx, and Myriad Autoimmune’s Vectra Test, which analyzes biomarkers to measure rheumatoid arthritis. Yesterday, we announced a comprehensive strategic agreement with Ascension, one of the largest health systems in the United States. Through our new long-term relationship with Ascension, we will manage its hospital-based laboratories in 10 states, and we will purchase select assets of its outreach laboratory business for approximately $400 million. We expect the first-year annualized revenues to be between $550 million and $600 million from the combined hospital business and lab asset acquisition. While operating margins are expected to be less than segment margins initially, they are expected to improve each year. The transaction is expected to be accretive to our earnings and cash flow in year one and should return its cost of capital by year two. This is a notable opportunity for us and one of the most significant deals of its kind in the sector. It expands our clinical services in several states across the country, and it builds on our strong track record of building similar relationships. The deal with Ascension also underscores our ability to help health systems manage industry-wide shifts. As part of the collaboration, we will explore clinical trial and oncology opportunities that enhance patient access. We look forward to this new partnership and ultimately to welcoming new colleagues to Labcorp. We also reached agreements with other hospitals and hospital systems, including Minnesota-based North Memorial Health. We continue to be excited about our robust M&A pipeline and expect more activity in the coming months. In 2021, we provided the highest-quality service to customers and patients, and we made meaningful investments in our people. In fact, Labcorp has consistently been recognized for the impact of our work and for the value we place on our employees. We were recently named again to Fortune Magazine's list of the World's Most Admired Companies. And for the fifth consecutive year, the Human Rights Campaign Foundation designated Labcorp as the best place to work for LGBTQ+ Equality. We were also named one of America's Most Responsible Companies for 2022 by Newsweek. Importantly, in 2021, management and the Board of Directors worked with outside advisors, thoroughly reviewed our structure and capital allocation. As part of the comprehensive review of our structure, we had extensive discussions with third parties, and the Board considered a wide range of options, including significant acquisitions, divestitures, spinning off businesses as well as spinning and merging those businesses with strategic partners. The Board unanimously concluded that the company's existing structure is in the best interest of all stakeholders at this time. That said, we continue to believe that Labcorp shares are not fully valued in the marketplace. To that end, we announced several actions designed to further enhance shareholder value. Among them are the initiation of a dividend starting in the second quarter of 2022 as well as a $2.5 billion share repurchase program, $1 billion of which is being repurchased on an accelerated basis. We are also implementing a new LaunchPad business process improvement initiative that targets $350 million in savings over the next three years. And today, in addition to giving 2022 guidance, we will also share a longer-term outlook. And beginning with first quarter results, we will provide additional business insights through enhanced disclosures. Moving forward, we are committed to profitable growth through investments in science, innovation, and new technology. As we execute on our strategy, management and the Board will continue to evaluate all avenues for enhancing shareholder value. In conclusion, our strong Base Business performance, coupled with formidable progress against our strategic priorities in 2021, sets us up for long-term success. This gives us great confidence in our longer-term growth-oriented bright outlook, which Glenn will take you through, along with our 2022 guidance. I am proud of what the team at Labcorp accomplished together in 2021, and I am excited for all that is to come this year and into the future as we continue to deliver for all of our stakeholders. Now I'll turn it over to Glenn.

Thank you, Adam. I'm going to start my comments with a review of our fourth quarter results, followed by a discussion of our performance in each segment, our 2022 full-year guidance, and then conclude with our longer-term outlook through 2024. Revenue for the quarter was $4.1 billion, a decrease of 9.7% compared to last year, due to declines in organic revenue of 10.3% and divestitures of 0.1%, partially offset by acquisitions of 0.6% and favorable foreign currency translation of 10 basis points. The 10.3% decline in organic revenue was driven by a 15.3% decrease in COVID testing, partially offset by a 5% increase in the company's organic base business. Operating income for the quarter was $731 million, or 18% of revenue. During the quarter, we had $93 million of amortization and $79 million of restructuring charges and special items. Excluding these items, adjusted operating income in the quarter was $902 million or 22.2% of revenue compared to $1.4 billion or 31.8% last year. The decrease in adjusted operating income and margin was due to a reduction in COVID testing. Excluding COVID testing, the Base Business compared to the Base Business last year experienced higher adjusted operating income and margins due to organic growth and LaunchPad savings, partially offset by higher personnel costs. The tax rate for the quarter was 19.3%. The adjusted tax rate, excluding restructuring charges, special items, and amortization, was 24.6% compared to 24.8% last year. Going forward, we continue to expect the adjusted tax rate to be approximately 25%, excluding any impact from potential tax reform. Net earnings for the quarter were $553 million or $5.75 per diluted share. Adjusted EPS, which exclude amortization, restructuring charges, and special items, were $6.77 in the quarter, down from $10.56 last year. Operating cash flow was $698 million in the quarter compared to $775 million a year ago. The decrease in operating cash flow was due to lower cash earnings, partially offset by favorable working capital. Capital expenditures totaled $150 million compared to $99 million last year. As a result, free cash flow was $548 million in the quarter compared to $675 million last year. During the quarter, we used $1 billion of our cash flow for our accelerated share repurchase program and invested $171 million on acquisitions. Now I'll review our segment performance, beginning with Diagnostics. Revenue for the quarter was $2.6 billion, a decrease of 16.9% compared to last year due to organic revenue being down 17.8%, partially offset by acquisitions of 0.7% and favorable foreign currency translation of 20 basis points. The decrease in organic revenue was due to a 21.8% reduction from COVID testing, partially offset by a 4.1% increase in the Base Business. Relative to the fourth quarter of 2019, the compound annual growth rate for the Base Business revenue was 5%, primarily due to organic growth. Total volume decreased 8.7% compared to last year as organic volume decreased by 8.9%, partially offset by acquisition volume of 0.3%. The decrease in organic volume was due to a 14.6% decline in COVID testing, partially offset by a 5.7% increase in the Base Business. Price/mix decreased 8.2% versus last year due to lower COVID testing of 7.2% and lower Base Business of 1.6%, partially offset by acquisitions of 0.5% and currency of 0.2%. Diagnostics organic base business revenue growth was 7.2% compared to its Base Business last year, with 8.1% coming from volume, partially offset by a 1% decline from price/mix. The price/mix decline was primarily due to the recovery of our Canadian business, which carries a lower average requisition price. Diagnostics adjusted operating income for the quarter was $776 million or 29.6% of revenue compared to $1.2 billion or 39.1% last year. The decrease in adjusted operating income and margin was due to a reduction in COVID testing. COVID testing margins were down compared to last year, primarily due to a volume decline of approximately 50% while the company continued to maintain capacity. Base Business margins were higher compared to last year due to organic Base Business growth and LaunchPad savings, partially offset by higher personnel costs. Diagnostics achieved its goal to deliver approximately $200 million of net savings from its three-year LaunchPad initiative. Now I'll review the performance of Drug Development. Revenue for the quarter was $1.5 billion, an increase of 3.9% compared to last year due to organic base business growth of 7.9% and acquisitions of 0.3%, partially offset by lower COVID testing performed through its centralized business of 4% and divestitures of 0.3%. Relative to the fourth quarter of 2019, the compound annual growth rate for Base Business revenue was 9.9%, primarily driven by organic growth. Adjusted operating income for the segment was $206 million, or 14.2% of revenue compared to $248 million, or 17.8% last year. The decrease in adjusted operating income and margin was primarily due to lower COVID testing. In the Base Business, higher personnel and other inflationary costs as well as investments in oncology capabilities were partially offset by organic growth and LaunchPad savings. We continue to exclude the enterprise component of Drug Development bonus expense, which is reflected in corporate unallocated and totaled $11 million for the quarter. While margins were down in the quarter, they were up for the full year compared to 2020, and we expect margins to continue to increase in 2022. For the trailing 12 months, net orders and net book-to-bill remained strong at $7.3 billion and 1.25, respectively. Backlog at the end of the quarter was $15 billion, an increase of 8.7% compared to last year. We expect approximately $5 billion of this backlog to convert into revenue over the next 12 months. Now I'll discuss our 2022 guidance, which assumes foreign exchange rates effective as of December 31, 2021, for the full year. In addition, the guidance includes the softness we experienced in January due to Omicron, which we expect will rebound through the rest of the quarter. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted to acquisitions, share repurchases, and dividends, which we will initiate in the second quarter. We expect enterprise revenue to decline 1.5% to 6.5% compared to 2021. This guidance range includes the expectation that the Base Business will grow 7.5% to 10%, while COVID testing is expected to decline 60% to 75%. We expect Diagnostics revenue to decline 11.5% to 17.5% compared to 2021. This guidance range includes the expectation that the Base Business will grow 3.5% to 6%. COVID testing revenue is expected to decline 60% to 75%. At the midpoint of our Base Business guidance range, the compound annual growth rate compared to 2019 would be 4.4%, primarily driven by organic growth in both volume and price mix. We expect Drug Development revenue to grow 7% to 9.5% compared to 2021. This guidance includes the negative impact from foreign currency translation of 40 basis points. This guidance range also includes the expectation that the Base Business will grow 7.5% to 10% compared to 2021. Given the amount of capacity we have within Diagnostics, we've assumed that no COVID testing will be performed in Drug Development central lab business in 2022. We expect to benefit from broad-based growth in all three businesses, helping drive continued margin improvement in the segment. At the midpoint of our Base Business guidance range, the compound annual growth rate compared to 2019 would be 11.3%. Our adjusted EPS guidance is $17.25 to $21.25 compared to 2021 adjusted EPS of $28.52. The adjusted EPS guidance reflects the expectation of lower COVID testing in 2022, while the Base Business continues to profitably grow. Free cash flow is expected to be between $1.7 billion and $1.9 billion compared to $2.6 billion in 2021. Now I’ll discuss our longer-term outlook, which reflects our current view of the business from 2022 to 2024. We expect enterprise Base Business organic revenue to grow at a compound annual growth rate of 4% to 7% compared to 2021. We also expect revenue growth from acquisitions to represent additional annual growth of 2% to 3%. We expect Diagnostics Base Business organic revenue to grow at a 2.5% to 4.5% CAGR compared to 2021. This outlook is higher than historical growth driven by a continued recovery in our Base Business relative to 2021, broad-based growth, including hospitals and health systems, and the lower incremental impact of PAMA in the outlook period. We expect Drug Development Base Business organic revenue to grow at a 7% to 10% CAGR compared to 2021. This outlook is higher than our historical growth, and we have added capacity and inorganic investments in the last few years in our faster-growing early development and late-stage clinical businesses. As we continue to emphasize profitable growth, we expect enterprise margin expansion of 30 to 50 basis points on average annually through the outlook period compared to 2021, which was approximately 14.5%. This margin expansion is due in part to the company's LaunchPad initiative, which is expected to deliver $350 million of cost savings over the time period to help offset inflationary costs. Finally, we expect adjusted EPS to grow at an 11% to 14% CAGR compared to 2019 adjusted EPS of $11.32. We continue to use 2019 as the base year comparison for earnings growth to better reflect the earnings power of the company, excluding COVID testing. The adjusted EPS outlook reflects the expectation that both base businesses will continue to profitably grow organically. In addition, we expect to benefit from capital allocation directed towards accretive acquisitions and share repurchases while keeping within our targeted gross debt leverage of 2.5 to 3 times. For additional comparison purposes, we've also included in the supplemental deck on our Investor Relations website a view of 2021 fourth quarter and full year results, 2022 guidance and our longer-term outlook. In summary, the company had another quarter of strong performance. We remain focused on performing a critical role in response to the global pandemic while also growing our Base Business. For 2022, we expect to drive continued profitable growth in our Base Business, while COVID testing volumes are expected to decline through the year. In addition, our longer-term outlook is expected to deliver double-digit adjusted EPS growth driven by top-line growth, margin improvement, and capital allocation.

Our first question comes from Jack Meehan with Nephron Research. Your line is open.

Wanted to start and ask about the long-term outlook. So in the 11% to 14% adjusted EPS CAGR versus 2019, can you talk about what your assumption is related to diagnostics pricing and maybe the return of PAMA in 2023? And also just what you're assuming in terms of any ongoing COVID benefit beyond 2022?

Yes. Good morning, Jack. Yes, a couple of things. So first of all, if you look at diagnostics pricing, I'll start with PAMA. There is obviously no impact of PAMA this year. Working through ACLA, which is the trade organization, we're going to continue to fight for a more rational way to think about PAMA in the future. But for our base case, we're assuming that in 2023, there'd be about $100 million impact. And in 2024, it'd be about half of that. So that's kind of what we're thinking for PAMA. In terms of other pricing, we don't see any acceleration of pricing decline. We're going to try to see if there's any way to increase pricing in certain areas. That's not easy. I don't think I would build a lot into the plan for that. But we're also looking at other things like Labcorp OnDemand, where you might have a different type of pricing as you go directly to consumers and so forth. So in general, I would think about the overall pricing pressure continuing, the PAMA pressure being less as we go into the 2024 time frame, and that the underlying base business is where we'll continue to see strong performance. And hopefully, what you can see is that we have a strong commitment to the Base Business in Diagnostics. If you think about COVID, we don't have much built in, if any, frankly, as you start to get into 2024 and beyond, we'll see how that turns out. But it really is all about the Base Business, it's about our ability to continue to grow in our geographies where we're strong. You heard about our deal today with Ascension. It's about doing more of those types of deals. So we think that the future is very bright for Diagnostics and our ability to grow, but it's not through pricing, and there will continue to be pricing pressure. It's more through geographic expansion, hospital deals, and continued growth in the segment itself.

Yes, Jack, the only thing I'd add to the discussion was just that when you look at the guidance that we provided or the outlook for the longer-term, what you see is obviously good top-line growth across the businesses, supplemented by obviously acquisitions from capital allocation, but that we do expect to see margin improvement over this period of time and net margin improvement coming from both businesses. So to your point, helping offset some of the inflationary costs as well as PAMA, at least that's in, call it, 2023 and potentially beyond that. And that it's really also then utilizing our balance sheet and our free cash flow. So we expect to be back within our targeted leverage of that 2.5 times to three times over that period of time. So using that cash flow to support acquisitions that, again, will be targeted at least 2% to 3% and then dividends, and then obviously, with the remainder going back to returning capital through our share repurchase program.

Great. And then as a follow-up, I wanted to talk about the Ascension deal. Was hoping for just some more color on what brought that together, how long you had been working toward this. And I ask because there's been a lot of focus on some of the challenges in the lab industry as it pertains to labor. I was curious how much that might have weighed into this. And then finally, can you just stack up Ascension versus some of the other things you might be looking at your pipeline at the moment?

Yes, so, we've had a very good discussion in partnership with the team at Ascension. It's been really a pleasure to work with them. We've been talking to them for quite some time, frankly. And these are the types of deals that they're long-term, strategic in nature. So it takes time. You have to make sure that the cultures are a fit, that the organizations have the same types of culture, and you get to know each other. And that's what these deals tend to take a while before they come to fruition. So we've been talking to our partners there for quite some time now. And what I would say is once we realize the cultural fit, that we could work together well, that there's a focus on patient care and ensuring that the patients get the services that they need, to ensure that the physicians and the hospitals are able to get the test that they want, to ensure that as new colleagues move over into Labcorp over time, that they would have a good experience, that's when we began to get even more serious about the partnership and discussions. This is a very large deal. Typically, they're not near as large as this. But again, it's one of many hospital systems that we're talking to, and we continue to feel good about the pipeline.

Our next question comes from A.J. Rice with Credit Suisse. Your line is open.

Maybe I'll just ask about the COVID assumptions for 2022. Obviously, the range you're giving, I think, equates to about $690 million at the low end, $1.1 billion at the high end. Does the high end assume additional surges, some testing in the fourth quarter around cough, cold and flu? Is the low end pretty much what you've already almost seen in the first quarter? Just give us some flavor on that. And have you assumed - so how it progresses over the course of the year? And any change in relevant pricing assumptions versus where you're at now with the PAG and all?

Sure. Good morning, A.J. So I'll give you some context, and I'll give you a sense of how we think about it. So we did 74 million tests for COVID to date, and about 8.5 million, 8.6 million of those in the fourth quarter. So that gives you about 83,000 tests per day in the fourth quarter. If you look at the end of the fourth quarter last year, you actually saw significantly higher than the average of 83,000. And in the beginning of January, we actually saw more than at the end of December. So we saw a real peak in the first couple of weeks throughout most of January. If we look at where we are right now, we're actually closer to where we were in the average back in December and back in the fourth quarter. So you've already seen a significant decline in COVID testing. The reason we gave you a range of minus 60% to minus 75% is because there's a multitude of ways to be within that range. One could be that there's another variant, and therefore, you have increase in volume. We don't know when that would happen. Last year, I never would have expected anything to happen in the summer. And we saw something in the summer, and we also saw another surge in the wintertime. As we go through this year, we don't know if there'll be another variant and/or another surge. But the other thing that could be is that the price stays where it is, and there's not a surge, and you could get to our range through that. If there is a price decrease, if the emergency is not declared again after April, you could see another surge that would offset a price increase if the emergency situation is released. So as I think about it, I think we're going to continue to see a decline in testing. I personally believe that the emergency situation will be hit through this year, which would keep price relatively consistent. There'll always be pressure on the price. But the range of 60% to 75% would be within multiple different things happening. So it's hard to give you an exact number, A.J., because as we did last year, we gave you our best estimate and each quarter, we changed it based on new information and new data we have. We'll continue to break it out separately so we can inform you of what we're seeing and what we think. But that's the best information we have at this time.

Yes. A.J., the only thing I would add just additionally for your modeling purposes, as you would expect, that we expect the strongest period to be in the first quarter and then obviously going on as the year unfolds. But wide range of outcomes, but the trend clearly to be lower, call it, in the second half than what we would expect in the first half at this time.

Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is open.

So when we think about the long-term guidance of 11% to 14% of 2019, what is - how should we think about sort of the right 2022 EPS base line that we should apply? Because based on kind of like your results, right, 2021 grew faster than 11% to 14%. So how should we think about that right baseline EPS base to calculate off? And also, in the long-term guide, what are your underlying assumptions for labor and supply cost inflation?

Yes. Thank you, Ricky. And we spent a lot of time obviously trying to give you the best information we could because the baselines are a bit tricky as you think about everything that's happened with COVID. So I'll have Glenn give you some additional specifics there. Labor and supply, there's no doubt that we're getting hit with significant inflation. Labor and supply is not something we take lightly. We're watching it very closely, and we're seeing wage increases and supply increases. That's where we put in place the $350 million LaunchPad initiative to help offset that. The issue that occurs, Ricky, is that you get hit with the labor and supply and the wage issues right away, and then it takes you time to get the cost out. So we've given you our guidance over time, and we've given our averages over time. But for example, I think that the first quarter of this year will be harder than by the time we get to the fourth quarter this year because you get hit with all the wage inflation, and we had some weather and with the Omicron variant and so forth. And it takes us some time to get the cost out, which we're working very hard on. That's why we feel confident to give you the 30 million to 50 million basis point improvement on average per year because we feel confident we can do that. But the timing is going to be a little bit different because you get hit hard with the wage and the supply inflation, and then it takes you time to get the cost out. But we assume there will be continued pressure on wages and supply as we go through the long-term outlook. We don't think it's something that's temporary, and that's where we have to continue to find ways reduce costs where we can. And maybe, Glenn, you can give some Phase 5 discussion.

Yes. Hi, Ricky. The reason why, obviously, we chose to do a growth rate off of 2019 was to get to a pre-pandemic level and that we expect that by the end of the, call it, the long-term horizon, COVID will be de minimis into that number. So that was kind of the double-digit growth rate that we would expect at the 11% to 14% CAGR. We did comment because on revenue, we can go off of a 21% base, because we distinguish between COVID revenue and Base Business revenue. But when we were talking about margins, just to show that we do expect to see margin improvement over the time, we did comment that you would get to roughly around a 14.5% margin in 2021 from the Base Business. And again, the reason why we say that's an estimate is because there's a lot of shared resources that are supporting both the COVID business and the Base Business, but it's a proxy. And if you just took that further down and set as a proxy, that 14.5% on your Base Business margin would get you to roughly, call it, around a $14 a share number from an adjusted EPS from the Base Business. So either you use the base estimate in, call it, 2021 of earnings and growing double-digits or the base of 2019, which is a clean number for our Base Business, you still get to roughly the same trend in that 22% from a base business and beyond. We do expect double-digit growth in each of the periods going forward within that outlook horizon.

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

Thanks for taking the questions. Maybe one on the Drug Development side. Obviously, with the 7% to 10% guide, you're expecting pretty healthy fundamentals there. Can you just talk about the funding backdrop? And we get a lot of questions out just the biotech environment in general. Obviously, it's been pretty volatile, not too many in terms of the equity capital markets, not too much action. So how are you guys thinking about that? Is what you're seeing in terms of the balance sheets on the biotech and pharma side sufficient to kind of support healthy growth? Obviously, you feel that way. And then secondarily, similar on the Drug Development side, would love just your perspective on China given some of the news this week in terms of the unverified list, any of that activity change, how you think about that region or how you think about the business overall? Thank you.

Hi, Patrick. Good morning. So our RFPs continue to be very strong, and we continue to get a significant number of RFPs. Discussions with pharma and biotech clients is that they have strong pipelines, and there's a lot that they still need to do to be funded. If you look at our net orders, I mean, we had $7.3 billion in net orders. And our trailing 12-month book-to-bill is still above 1.2, which is what we look to be, and it was very strong for the quarter itself. You look at our backlog, it's $15 billion, so it's almost a 9% increase versus last year. And about $5 billion of that backlog we expect to convert into revenue over the next 12 months. So every indication we have is that the RFPs, the funding remains strong for us to be within the range of growth that we expect to be in the long-term outlook that we gave to you. In terms of China, China remains a very important market for pharma. I believe that they will continue to be an important growth market. So therefore, we have a significant presence there. We're able to perform studies there. We built significant organic in terms of people and capabilities in the country, and I think it was the right thing to do, and it will show that it will continue to be the right thing to do over time.

Our next question comes from Eric Coldwell from Baird. Your line is open.

Thanks very much. A lot of questions on Ascension. I think first, just if you could share with us the total lab revenue of Ascension or the percentage that you're initially taking over here. Any outlook for expansion potential down the road? Number two, could you give us how many hospitals you're actually taking over? Ascension has 142. I think you're getting 10 of 20 states that they're operating in. And then finally, I was curious if you could give us the mix of the hospital lab management versus the outreach revenue that you're assuming in the $550 million to $600 million estimate? Thanks very much.

And I'll give you some context, and I'll ask Glenn to jump in with some numbers as well. So first of all, we're excited about this opportunity, and we think that it is a great opportunity for not just the patients that Ascension serves and a long-term relationship that we'll have with them. But we expect the first-year annualized revenues to be between $550 million and $600 million from their hospital business and the lab asset acquisition. What I would say is we work with them on what they wanted to do at the time in terms of the size and the scale of the partnership. And we believe there will be opportunities for us to work together in many different ways as we go into the future, not just with hospital work, by the way. And we're going to explore clinical trial work together, oncology opportunities that enhance patient access. So there's lots of opportunities for us as we go into the future. I don't want to speak too much about them and their percent of revenue. So for, I think that's something you would need to ask Ascension. But what we can tell you is that we believe that this long-term partnership is going to be very, very fruitful for both organizations. Glenn, do you want to give a little further context?

Yes. No, I agree. And Eric, what we did put in the release was that the assets that we're acquiring, the Outreach Labs, would have had year revenue of approximately $150 million and that by putting in the full year annualized revenues, as Adam said, the $550 million to $600 million, that, that $150 million, we're taking on some compression with it but then growth from it as well. Would size up what we got within the outreach business versus the strategic partnership of managing the in-hospital labs being the difference.

Our next question comes from Brian Tanquilut with Jefferies. Your line is open.

Good morning guys and congrats on the quarter. I guess my question, Glenn, as I think about the long-term guidance again, right, I mean, 2.5% to 4.5% of the base lab, kind of like revenue or growth assumption. How are you thinking about kind of like what the drivers are of that being above? And then maybe like the timing, is that more front-end loaded given some easier comps? And then how do I think about the capabilities that you've added over the last few years as being contributing to that above-average growth? Thanks.

So first, to your point, the growth rate is a little bit higher than our historical organic growth within the business. But a lot of that is with the investments that we've made and the growth and the focus of the strategic growth, such as the hospital systems and so forth, where we continue to find opportunities to see additional growth. Those CAGRs, if you will, are based upon 2021, which again would not have been, call it, a fully recovered year. So we get some of the benefits of that growth. The recent acquisitions that we've done that have been already, call it, in the base, so not new acquisitions but ones that have done, not necessarily been fully annualized. We continue to get some additional growth from that. The fact that our expectation for PAMA that in the outlook period's less impactful than what it had been historically for us continues that. And just the overall efficiencies, LaunchPad that supports the topline growth as well. So we think we're on a good cadence and good momentum to be able to hit those numbers over the planning horizon.

Our next question comes from Kevin Caliendo with UBS. Your line is open.

Thanks for taking my call. I just wanted to highlight a little bit that you still say when it comes to the strategic alternatives sort of at this time, and I'm wondering if anything has changed. Obviously, you enter a whole process here, then you did a nice acquisition. You have this big Ascension deal. What would need to change for you to go back and rethink the potential for something more strategic with regards to the strategic alternatives? Is it a willing partner? Is it the market conditions? Can you just sort of take us through what would need to change or what might prompt a revisit of the very strategic alternatives?

Thank you, Kevin. Good morning. When we went through the strategic review, we looked at everything, and we were very thorough. I mean we spent almost a year evaluating all the alternatives, talking to people externally, making sure that we looked at not just structure but capital allocation. And after that entire process, the Board unanimously agreed that at this time, the structure is right. But we also realized and believed that our shares are not still fully valued in the marketplace. And we're doing a lot of things in terms of capital allocation and additional disclosures and long-term guidance, which we think will help with shareholder return. We believe that this should help more fully value the shares in the marketplace. But we also agree as a management and Board that we should always be looking at alternative scenarios, and we should always be open if there's other things over time that makes sense. So it's another way of us acknowledging that it's not a one-and-done type of analysis. It's an analysis that you continually do, you continually refresh, you continually look at where you are, how you're performing, how things in the marketplace are evolving. So that's all you're hearing at the moment. We're going to continue to look at our options as anybody would expect you to do.

Fair enough. And if I could do a really quick follow-up. Just on the cadence for the year. You did say you expect COVID to be higher. Is there any other inputs that could affect what might normally be a regular cadence for the company? Is there any costs associated with Ascension upfront? Any timing issues that we should be thinking about as we model out the year?

The only thing I would say, Kevin, as I mentioned, in January, you had a lot of weather. You had a lot of Omicron where even some of our employees weren't able to get in to open up service centers. And with Drug Development, we had - you have to charge for people when they work, but if people aren't working because they're ill - we faced issues that you saw in almost every business in the United States. So, first quarter is going to be probably one of the tougher quarters versus the other quarters in the year. But all that's been taken into full evaluation. And as we provided our guidance for 2022 and longer-term, we've looked at all of that. So other than that, I think things look strong, and we continue to be optimistic about the guidance and where we are.

Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Thanks for taking my question. My question here is on the long-term outlook of 30 to 50 basis points of margin expansion. Did I understand that you're modeling 2023 EBIT margins in Diagnostics increasing in 2023 despite the $100 million of PAMA impact? And I think you did talk about a lot of pressures here on labor and supply costs. Can you give us some more details on how LaunchPad can offset those impacted? It seems like there's a lot of headwinds coming from inflation in PAMA, and your sales were guiding to margins increasing. I just want to understand some more details of how you guys are going to achieve that. Thanks a lot.

Yes. So I'll start off with, there's no doubt that we're seeing inflation and we're seeing wage inflation, but also material costs going up and those things. But that's why we put in place the $350 million of cost savings. And it's not going to be $100 million, $100 million, $100 million over three years. We're going to try to get as much as we can out in the first year and then do more in the following years. The timing, as I mentioned earlier, will be a little bit different. The pressure hits you right away, but you take out the costs as you go through the year. And to give you a sense, the type of things that we're looking at, for example, are in our diagnostic area. Right now, you might assess a sample, meaning log it into the system in one area. And then you might have to fly it to another lab in a different part of the country. And then there might be another test that you have to do in another lab. We're looking at ways to streamline that so you get the results faster, but you wouldn't have the sample moving around as often. It's good for your ESG goals, but it also is good for patients and ultimately could reduce cost. So we're looking at those types of initiatives, which ultimately could reduce costs, but doesn't happen in a matter of days. It takes a little bit of time to kind of reshuffle and reorganize what you're trying to do. But we have a lot of initiatives like that, that we're putting things like our automated propel system that we're going to put in additional laboratories can reduce costs. It's less wage pressure because it doesn't take as many people necessary to run but also you can get better quality, faster results at times. So we're looking for things to fundamentally change some of our business processes, and that's why it takes a little bit longer. But that's also why we're confident that we can deliver on the 30 to 50 basis point improvement in margin over time if you look at it on average.

Our next question comes from Derik De Bruin with Bank of America. Your line is open.

Thank you for taking my question. So could you just come in a little bit more detail on the long-term outlook for the Drug Development business? And specifically, are you willing to sort of give us some additional color on what your assumptions are for early-stage Central Lab and late-stage, just to sort of give us a better kind of view on the mix of the business and what's going on there? You're obviously seeing a much bigger - you're seeing acceleration in that business relative to historical trends and just like a little bit more underlying drivers on the segments? Thank you very much.

Sure, Derik. I'll give you a little bit. Glenn can jump in. The first thing I'd tell you, Derik, is that we're going to give some additional disclosures when we report our first quarter earnings in April. So I think that will be helpful. We do that at that time. But clearly, when you look at the growth, I mean a lot of the growth is coming from the later-stage clinical trial business. We see great opportunities there. We've invested in there with things like GlobalCare as well as snapIOT to give us good capabilities in terms of decentralized clinical trials, which are becoming more and more important. We've built our presence in Japan and in China in that business. So you'll see - and we believe that's an area that we can get very significant growth and also margin improvement. And then if you look at the Central laboratory business, we're a leader there, and we continue to feel strong in that business. But because you're a leader, the ability to grow isn't necessarily as easy as the ability to grow in an area like clinical trials, where we're not yet where we want to be in terms of leadership. And then the last thing I'd say is that our early-stage business is a smaller business. I mean we're still able to compete. We have the ability to compete effectively in that business, but it's not the size or the magnitude of the other two businesses. We do expect strong growth in that business but at a scale that's smaller than the first two businesses.

The only thing I'd add is that when you look at the components of the businesses, to your point, early development and the late-stage clinical businesses have historically been higher-growth businesses than the Central Lab business. And so we've made a lot of investments in capacity to continue to be able to fuel that growth in those two areas in particular. The acquisitions that we've done, whether it's Toxicon, GlobalCare, snapIOT have been targeted in the higher-growth areas within ED and Central Lab or in late-stage, rather. So just the mix of our business continues to be more weighted towards the faster-growing parts that we've made. So overall, we've always said kind of mid- to high single-digits was kind of the aspirational growth. We've made a lot of investments that the long-term growth rate targets that we have are reinforcing that what we've been doing should enable us to get into that range.

Our next question comes from Matt Larew with William Blair. Your line is open.

This is Madeline Mollman on for Matt Larew. We were just wondering, you said decentralized clinical trial awards were up 62%. Can you contextualize that a little bit? Can you tell us like from what they were growing? And then what do you anticipate that will be in 2022? And what's your win rate there versus standard clinical trials?

Yes. So that's a good question. And the growth rate is still off a relatively small base. So if you look at fully decentralized clinical trials, it's still in the single digits in terms of the total trials that we have going right now. But as you look at new trial RFPs, most of them actually include some component that is virtual or hybrid. So we believe that over time, you're going to continue to see that percent increase, albeit for last year and this year, it's not a very significant amount of the total trials that we're running. I would say, more take a look at the five-year outlook, and then it starts to become more significant in terms of the total mix of trials that you have ongoing, particularly if you're looking for fully decentralized clinical trials.

Our next question comes from Tycho Peterson with JPMorgan. Your line is open.

A follow-up to Derik's question on Drug Development. I appreciate your comments on kind of the long-range plan, but are you able to talk if there's anything that came out of the strategic review in terms of how you might run the business differently, where you may be reinvesting more? I'm just curious what kind of the learnings of the review were. And then also on the long-range plan, the 7% to 10% growth is impressive. A number of the CRO peers are kind of less in 10%-plus growth. So do you see upside to that long-range plan as well?

Yes. Good morning, Tycho. First thing I'd say is that when you look at the Drug Development business, we're going to provide additional insights in the second quarter, I think, it would be helpful because you have to look at the mix of the business when you try to compare across different CROs. Our mix of business is different than most because we have a very big central laboratory business. And the central laboratory in general isn't as fast growth as the later-stage clinical trials with an earlier stage. So it's a little bit hard to make those comparisons. When we break apart our businesses and when we look at our competitors, we believe that the long-term guidance that we're providing is very strong. And we also believe when you look at the guidance we're giving is accelerated versus what we've observed in the past because we believe that we're starting to see the success from some of the investments that we've made in the past. But at the same time, as I said earlier, we continue and we will continue to look at all of our avenues for growth, all of our avenues to meet both shareholder returns but also the needs of our customers as we move forward, and we're committed to continuing to do that. I don't know Glenn if there's any additional context you provide.

Yes. No, I think when you say you run differently, I think the point that we've made a lot of investments, again, targeted organically and our oncology focus within the business, really we believe that over time, those organic investments plus if you will, the PGDx, the Toxikon, the other acquisitions that we have will continue to help fuel the growth in our faster-growing parts of our business.

Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

And then one quick follow-up on oncology. Just why was PGDx the right asset in liquid biopsy? Obviously, there are a number of emerging players in that market. Was it because it got a kitted approach? What kind of stood out from your perspective?

Yes. No, that's an important question. And first of all, we have internal capabilities for liquid biopsy. So using our internal experts, we were able to look at what the available assets were out there to decide what we thought would be a good match for what we are developing internally. I think having a kitted solution and having the first one approved by the FDA was important, particularly as we start to think about clinical trials. Kitted solutions might be very helpful in clinical trials. But also as we start to think about taking tests like this globally, which we haven't done before, frankly, but we think there might be the ability for us to globally launch a specialty test like a liquid biopsy. Having the ability to both do a kitted solution and a central laboratory solution was important to us, and PGDx actually has capabilities in both of those areas. So we think it's good for clinical trials. We think it's good for patient care if you can do the test closer to a patient, but it also could enable us to more easily go globally with this type of test. So, are there any last question Chas or that's the end of the questions?

That's going to be, it.

Okay. So I want to thank everybody for joining us today and hopefully, you can see that our considerable progress last year coupled with what we have in store for 2022 actually lays a great groundwork for promising not only short-term but also long-term growth. And I just want to say none of it will be possible if it wasn't for all of our colleagues around the world. Our 75,000 employees around the world and each of them play a role in ensuring our company delivers on our mission to improve health and improve lives. We look forward to continuing to have dialogue with you. And please continue to be safe, and we'll see you soon. Thank you.

This concludes the program. You may now disconnect. Everyone have a great day.