Hello, and thank you for joining us. Welcome to Labcorp's Q1 2023 Earnings Conference Call. I will now pass the conference to Chas Cook. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Labcorp’s first quarter 2023 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 2023 guidance and the related assumptions, the proposed spin-off of the clinical development business, the impact of various factors on the company’s businesses, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and general economic and market conditions, future business strategies, expected savings and synergies, including from the LaunchPad initiative, acquisitions, and other transactions and opportunities for future growth. Each of the forward-looking statements are subject to change based on 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, Chas. Good morning, everyone. It is great to be with you today to discuss the start of 2023 and the progress that we’re making. Our first quarter results set the foundation for a strong 2023. Performance this quarter was driven by very strong momentum across our diagnostic business, continued industry leadership in central laboratories, solid fundamentals and staffing improvements, and early development and a mixed quarter for clinical development. For drug development, we expected the first half of 2023 to be more challenging than the second as the first half continues to be impacted by NHP shortages, the previously noted loss of an FSP contract and lower COVID-related work. We are on track to complete the spin of our clinical development business mid-year, and we anticipate the business to accelerate in the second half of 2023, once Fortrea is officially launched. Customers have been positive about the transaction and our progress with some short-term customer delays as well as a slightly slower backlog burn rate compared to previous years. Sometimes they are waiting until after the transaction is complete to award new business, but our dialogue remains encouraging as we approach the close, as evidenced by a renewal of an FSP contract with a large pharma customer this quarter. In the first quarter, revenue totaled $3.8 billion, adjusted earnings per share was $3.82, and free cash flow was $27 million. Overall, our base business is performing well. Excluding COVID testing revenue, enterprise-based business revenue grew 10% in the first quarter versus the same period of the prior year. Since 2019, prior to COVID, both diagnostics and drug development-based businesses have grown revenue at approximately 7% CAGR. The Diagnostics Base Business revenue grew 20% year-over-year in the quarter. This strong top-line performance continues to be driven by both routine and esoteric testing as well as a benefit from hospital deals, including our Ascension partnership. For Drug Development, first quarter revenue declined 4% versus the prior year. Drug Development ended the quarter with a trailing 12-month book-to-bill of 1.27. Enterprise Base Business margins were lower than the prior year. However, we still anticipate slight margin expansion for 2023. As we continue the Ascension integration, we overcome NHP supply issues, and we realize benefits from the LaunchPad initiative. We are continuing to implement cost controls across both businesses to offset inflationary pressures. Finally, COVID PCR testing volumes declined during the quarter, more than expected, totaling more than 870,000 tests performed and averaging 10,000 tests per day. We expect COVID testing to continue to decline. Glenn will provide additional detail on our quarterly results as well as our 2023 outlook in just a moment. Moving now to an update on the planned spin of our Clinical Development Business, we are on track to complete the spin midyear, subject to the regulatory approval process. We have confidence in the foundation that has been established despite short-term pressures. Fortrea will benefit from the leadership of Tom Pike as CEO. We plan to announce the leadership team and the Fortrea Board of Directors in the near future. We encourage you to visit fortrea.com to learn more. Upon completion, we’ll create two strong independent companies through a tax-free transaction. Both Labcorp and Fortrea will emerge from a transaction with their ability to better meet customer needs, to drive sustainable and profitable growth, and to deliver attractive shareholder returns. I’ll now move to our enterprise strategy. We are laying the groundwork for the future by executing against our strategic initiatives. We continue to integrate Ascension assets and operations in the first quarter. Labcorp is now managing laboratories in nearly 100 Ascension hospitals. Ascension health system laboratories and other deals, including our previously announced strategic relationship with RWJ Barnabus Health, are strong proof points of our ability to generate growth through future healthcare system partnerships. Health systems are adapting to financial pressures, inflation, labor shortages, and other challenges, and they’re seeking the right laboratory partner amidst these headwinds. We are working with our health system partners to develop tailored, innovative, and cost-effective solutions that meet the unique needs of their patients and providers. Last month, we entered into an agreement with Enzo Biochem to acquire the assets of its clinical laboratory division. Today, we are in active discussions to expand relationships and execute new engagements with other partners. The pipeline for hospital and local lab acquisition and investment is robust. And we look forward to updating you on existing and new partnerships throughout the year. Turning to oncology, we partnered with ImmunoGen on an Immunohistochemistry sponsored testing program to increase access for patients with ovarian cancer. Additionally, Labcorp added HER2 low reporting to the IHC test for breast cancer. This test is the only FDA-approved companion diagnostic of HER2 low status for patients with metastatic breast cancer, impacting patient eligibility for treatments and therapies that can improve outcomes. Labcorp also entered into a strategic collaboration with VieCure to provide clinicians greater access to precision oncology decision support. This collaboration builds on our capabilities to improve access to high-quality care for cancer patients and their community cancer care providers. We continue to expand our digital health platform Labcorp OnDemand. We launched three new tests in the first quarter, including a PSA prostate cancer screening test, a hepatitis B immunity test, and a fatigue test for people with chronic fatigue systems including post-COVID fatigue. Before I wrap up, we are looking forward to two upcoming events that will provide investors more color on our near to mid-term future. We have Fortrea Investor Day tentatively scheduled for June 6 in which we’ll discuss the exciting opportunities ahead. We expect the Form 10 to be available in advance of the meeting. Additionally, we are planning a Labcorp Investor Day, which is tentatively scheduled for September. Labcorp is strong today and will emerge from the completion of the upcoming spin even stronger. Our diagnostics laboratory, early development research laboratory, and central laboratory businesses are market leaders with solid fundamentals. We’re executing against our long-term strategy that will position these businesses for continued growth in the future. I want to take a moment to thank our team for their continued contributions to Labcorp and our customers. The team is generating strong base business performance while preparing for transformational transactions mid-year. At more than 80,000 strong, our team works every day to find new ways to harness science, innovation, and technology for the betterment of our stakeholders. Labcorp is well-positioned to progress our mission to improve health and improve lives while generating attractive returns for shareholders. With that, I’ll turn the call over to Glenn.

Thank you, Adam. I’m going to start my comments with a review of first quarter results followed by a discussion of our performance in each segment, and conclude with an update on our full-year guidance. For reference, we have also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.8 billion, a decrease of 3.1% compared to last year due to lower COVID testing and the negative impact from foreign currency. This was partially offset by organic-based business growth and the impact from acquisitions. COVID testing revenue was down 84% compared to COVID testing last year, while the base business grew 9.8% compared to the base business last year. Organically in constant currency, the base business grew 9.2%, benefiting from the Ascension lab management agreement, which contributed approximately 4% of the organic growth. As a reminder, the outreach business that we acquired from Ascension is treated as an acquisition while the lab management agreement is treated as organic growth. Operating income for the quarter was $341 million or 9% of revenue. During the quarter, we had $69 million of amortization and $83 million of restructuring charges and special items, primarily related acquisitions, LaunchPad initiatives, and the proposed spin of Fortrea. Excluding these items, adjusted operating income in the quarter was $494 million or 13.1% of revenue compared to $794 million or 20.4% last year. The decrease in adjusted operating income was due to lower COVID testing demand. The margin decline was also negatively affected by the mixed impact from the Ascension TSA and NHP related constraints. Excluding these items, margins would’ve been up slightly as the benefit of demand and LaunchPad savings were partially offset by higher personnel expense, inflationary costs, and increased R&D investments in oncology. Our LaunchPad initiative continues to be on track to deliver $350 million of savings over the three-year period ending 2024. The tax rate for the quarter was 23.2%. The adjusted tax rate for the quarter was 22.9% compared to 23.4% last year. The lower adjusted tax rate was primarily due to the benefit from increased R&D tax credits. We continue to expect our full-year adjusted tax rate to be approximately 24%. Net earnings for the quarter were $213 million or $2.39 per diluted share. Adjusted EPS were $3.82 in the quarter, down 37% from last year due to lower COVID testing earnings as base business adjusted EPS was up 10%. Operating cash flow was $121 million in the quarter compared to $356 million a year ago. The decrease in operating cash flow was due to lower COVID testing earnings and spin-related costs, partially offset by higher base business earnings. Capital expenditures totaled $94 million down from $117 million last year. For the full year, we continue to expect that capital expenditures will be approximately 3.5% of base business revenue. Free cash flow for the quarter was $27 million, and the company paid out $64 million in dividends. The first quarter is generally the company’s softest quarter for free cash flow. We continue to expect our full-year free cash flow to be between $1 billion to $1.2 billion. Now review our segment performance beginning with diagnostics. Revenue for the quarter was $2.4 billion, a decrease of 2.9% compared to last year, driven by organic revenue being down 4.7%, which was due to COVID testing, partially offset by acquisitions of 2%. COVID testing revenue was down 84% compared to COVID testing last year, while the base business grew organically by 17.5% compared to the base business last year. The Ascension lab management agreement contributed approximately 7% of the growth, while the impact of weather and revenue days benefited growth by approximately 2%. Total volume decreased 3.3% compared to last year, as organic volume decreased by 5.6%, partially offset by acquisition volume of 2.3%. The decline in volume was due to COVID testing. Base business volume grew 11% compared to last year, including the benefit from acquisitions of 2.6% and favorable weather and revenue days of approximately 2%. The strong year-over-year growth rate was also impacted by lower than normal volume in the first quarter of 2022, due to Omicron. Price mix increased 0.4% versus last year as the base business improved 6.6% and was partially offset by lower COVID testing of 5.7%, currency of 0.3% and acquisitions of 0.2%. Base business price mix was up 8.8% compared to the base business last year, benefiting from the Ascension lab management agreement of approximately 7%. Diagnostics adjusted operating income for the quarter was $442 million or 18.5% of revenue compared to $683 million or 27.8% last year. The decrease in adjusted operating income and margin was due to a reduction in COVID testing, which carried a margin of approximately 50% for the quarter. Going forward, we expect a lower margin for COVID testing, but still above the segment average. Base business margin was up approximately 80 basis points driven by organic growth and LaunchPad savings, partially offset by higher personnel expense and the mix impact from the Ascension TSA. Now review the performance of drug development. Revenue for the quarter was $1.4 billion, a decrease of 4% compared to last year, primarily due to decreased organic revenue of 2.4% and foreign currency of 1.5%. The decrease in adjusted organic revenue was negatively impacted by approximately 8% due to NHP related constraints, reduced COVID vaccine and therapeutic work, and the previously mentioned FSP contract loss. The early development business was the most constrained by these items. Excluding these impacts, organic base business revenue for the segment grew approximately 6% with early development up 17%, central lab up 6% and clinical development up 3%. Reported first quarter drug development revenues on a compounded annual basis grew 6.9% compared to the first quarter of 2019. Adjusted operating income for the segment was $124 million or 8.8% of revenue compared to $169 million or 11.6% last year. The decrease in adjusted operating income and margin was due to NHP-related constraints, reduced COVID vaccine and therapeutic work, and the FSP contract loss, which negatively impacted margins by approximately 350 basis points. Excluding these items, margins would have increased primarily due to demand and LaunchPad savings being partially offset by higher personnel expense, inflationary costs, and a write-off of receivables related to small biotech customers. We ended the quarter with a backlog of $16.6 billion, and we expect approximately $4.9 billion of this backlog to convert into revenue over the next 12 months. Now I’ll discuss our updated 2023 full-year guidance, which assumes foreign exchange rates effective as of March 31, 2023, for the full year. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases, and dividends. Also, our guidance assumes that Fortrea will be part of Labcorp for the full year. Following its spin currently anticipated in the middle of the year, we expect to provide updated guidance. We expect Enterprise revenue to grow 1.5% to 4% compared to 2022. This is an increase at the midpoint from our prior guidance of 25 basis points. This increase reflects the base business range increasing to 9.5% to 11%, while COVID testing guidance range has been lowered to minus 80% to 90%. We continue to perform well in diagnostics and are taking up our full-year guidance range. We expect diagnostics revenue to be down 0.5% to up 2% compared to 2022, this is an increase at the midpoint from our prior guidance of 100 basis points, primarily due to stronger base business volume. This guidance includes the expectation that the Base Business will now grow 12.5% to 14%, which has approximately 5% growth due to Ascension. We expect Diagnostics Base Business margin to be up in 2023 versus 2022, including the unfavorable mix impact from Ascension. We expect drug development revenue to grow 3.5% to 5.5% compared to 2022. This is a decrease at the midpoint from our prior guidance of 150 basis points due to slower-than-expected backlog conversion, primarily due to investigator site constraints and lower-than-expected first-quarter orders. This guidance includes the positive impact from foreign currency of 60 basis points. At the midpoint of our guidance, the compound annual growth rate compared to 2019 is 6.8%, primarily due to organic growth. We also continue to expect that the drug development margin will increase slightly in 2023 compared to 2022. Our guidance range for adjusted EPS is $16.25 to $17.75. This is a tightening of the range from our prior guidance, while the midpoint is unchanged. This guidance reflects lower earnings from COVID testing; while Base Business adjusted EPS is expected to increase 15% at the midpoint. Free cash flow guidance is $1 billion to $1.2 billion, unchanged from our prior guidance. In summary, we expect to drive continued profitable growth in our Base Business, while COVID testing volumes are expected to continue to decline through the year. We expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth, while also returning capital to shareholders through a share repurchase program and dividends.

Thank you. Our first question comes from Ann Hynes with Mizuho Group. Your line is open.

Hi. Good morning.

Good morning, Ann.

Good morning. Can you just provide some more color on the NHP issue? I think you said in your prepared remarks, you think it would get better in the second half or maybe the CRO in general improvement in the second half. Maybe what gives you that confidence? And when do you think we get some type of resolve with this NHP issue? And if it doesn’t resolve by year-end, when do you think it could impact maybe late-stage business? Thanks.

Yes. Thank you, Ann, and good morning. So I’ll give you some additional context on NHPs and where we stand. If you look at the first quarter, the NHP impact on early development was approximately $50 million to $60 million. But it’s important to note that does not leverage well because we’re continuing to hire people, and we’re continuing to keep people because we now have enough supply that we feel confident in the second half of the year, and we feel confident as we go into next year. If you look at the underlying demand of the early development business, excluding that impact, it looks good. It actually grew 15% to 17%. So we feel good about the second half of the year for that reason. We said that the first quarter would have the highest impact of NHPs and there’ll still be some impact in the second quarter. In the second quarter, we expect the impact to be between $30 million to $40 million. The reason why is, as we get supply in, it still takes time to acclimate and to train and to be ready for the new study starts. So we feel good about our supply situation. We feel good about the second half of the year. We feel good about going into next year. The first quarter was certainly the biggest impact of $50 million to $60 million. The second quarter would be less of an impact of $30 million to $40 million. But most importantly, the underlying early development business would have grown 15% to 17% had it not been for the NHPs.

Great. Thank you.

Thank you. Our next question comes from Jack Meehan with Nephron Research. Your line is open.

Good morning, Jack.

Good morning. So my questions are going to be focused on the diagnostics business. The first one is, if I look at base sales in the first quarter, sequentially they were up 7% which is really strong versus what we’ve seen historically. So I heard calendar days and weather were favorable, I’m guessing the Medicare drop view was probably helpful there, too. Is there anything else you would call out to explain sort of the sequential pickup?

Yes. So Jack, first of all, I’d say we’re very pleased with the performance in diagnostics. Every which way you look at it whether you look at esoteric, routine, look at our hospital, ex-hospital, if you look at our mix, we’re looking very, very strong in the diagnostic business, and that enabled us to up the guidance range for that base business. If you look at volumes, specifically, the base business last year compared to this year, we’re up 11% this year versus last year. About 2.5% of that was acquisitions, and then it was favorable weather and revenue days that was about 2%, but also remember comparing to last year where Omicron was impacting our business. So when you look, it’s still very, very strong but it’s a little bit more typical to what you would expect. As we look at the sequential difference, I feel really good about where we are with Ascension and things that are happening with not just the TSA, but also the acquisition part of Ascension in the business that we bought. But I’ll see if Glenn wants to add some additional color.

No. I think that hits it in. I think anytime you look especially in the diagnostics business, we’ve talked about the seasonality of the business. So looking at sequential, you do have to factor in those issues of days, if you will, obviously the impact of acquisitions that are annualizing as well as the – I guess, the fundamental issue that Adam spoke to is just we continue to see strong demand as we go forward. And the year-over-year comps look good, and sequentially, similarly we expect the growth to continue throughout the year.

Great. And then on the margin front in the Diagnostics segment, can you share like what was the Ascension business margin in the first quarter? How is that trending? And can you quantify how big the TSA is?

Yes. So I’ll give some context and Glenn, if you could jump in as well. But we always said that the beginning when we first were doing the integration, the margin will be at the lowest point, which will be in the low-single digits. We’re actually saying getting closer to the mid-single digits now, although not quite there. Over time, the margin will continue to improve. It will never reach the average margin of our current business. But we have already started to see some margin improvement, and we expect that that’s going to continue as we go through this year into next year.

Yes. Just, and it speaks a little to the earlier question about the sequential. We continue to see revenues within Ascension continue to grow. So it grew sequentially. We’re still, as you’ll recall when we announced the transaction, expected around $550 million to $600 million in revenue based upon our current guidance, our revenue would be at the upper end, or maybe even slightly above it. It’s going to contribute around 5% of our growth this year, and as you know, it will annualize after the third quarter. So the fourth quarter comp will have it in both periods. So we’re seeing good growth. Obviously, it impacted our revenue in the first quarter, call it around 7.5% year-on-year. So the revenues are coming in nicely. And as Adam said, while we talked about mid-to – we’re low-to-mid-single digit margins, we’re kind of at the upper end of that range right now with the expectation that margin growth or improvement will continue as we go forward through the year, but especially beyond that.

Thank you, Glenn.

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

Good morning, Kevin.

Good morning, guys. Thanks for taking my question. I guess I want to understand the margin progression on the CRO business. I understand sort of what you’re guiding for year-over-year margin expansion a little bit. How do we get there? What’s the cadence of that? Like what drives that? Can you just talk through sort of the execution of how we get the year-over-year margin expansion in that segment of the business?

Yes, glad to. And I’ll first start off by saying that if you look at early development, as I said before, excluding the NHP constraints, the underlying business is strong. Same thing, I mean, if you look at our central laboratory business, that looks very strong. And especially when you look at it in the CAGR, you can see strength in that business as well. It was a mixed quarter for the clinical development business, which I can talk about. But there are three things that impacted our margin significantly in the quarter that we think as we go through the year; at least two of them will start to look much better. The first one is NHP revenue. I already stated that was a $50 million to $60 million impact in the first quarter. We expect it to be $30 million to $40 million in the second quarter. That loss falls to the bottom line. It doesn’t leverage well because we’re continuing to hire people, and we’re continuing to run that business like we didn’t have the constraints. It’s been hard to find people. It takes time to train people. It was one of the issues we faced last year. So we purposely decided to manage that business differently. Even though the revenue was down for the NHP constraints, we continue to hire people, and we continue to run the margins at a very low rate for that reason. The second thing is there was a write-down of bad debt for a small biotech company. It was one small company that actually went bankrupt and we had a write-off was about $10 million to $12 million. And then the third thing is we are seeing a bit of a lower burn rate in clinical. It’s not surprising overly because we’ve seen kits coming back, not where they were prior to 2019. We think that’s now flowing through a bit to the clinical business. But those three things we expect will get better, the first two certainly. The third one we think will continue to improve as we go through the year.

Yes. I’d say the other thing too, Kevin, if you look at the first quarter, and again, it goes back a little bit to the seasonality question; first quarter margins for drug development are historically the lowest. And if you looked at what we did last year, we did around 11.6% in margin. But for the full year, we delivered 14% margins. When you look at this year, obviously, we have a low first-quarter margin. But our expectation is that it will be slightly above next year, in part, the constraints that I have said, but the top-line growth that we expect in the business that’s implied in our revenue guidance would get you roughly around 7.5% for the remaining nine months. So, top-line growth, LaunchPad savings, not having the constraints will drive the margin improvement.

Thanks. That’s helpful. Can I ask a quick follow-up just on the clinical backlog? How has that changed by segment maybe year-over-year or the like? I’m not trying to ask for any forward look on the Form 10 and what the backlogs are going to look between the two businesses. But maybe if you can describe how the backlog has changed in terms of customer or type or even duration? Any color on that year-over-year or even sequentially, would be really helpful.

Yes, I would say, in general, if you look at early development, we do much more of our backlog in small to medium biotech business, less as a percent in pharma. If you look at our clinical business, we do more in pharma, less in small biotech than we do in our fully development business. And then if you look at our Central Laboratory, it’s pretty evenly split, but it’s much more – I mean it’s in between the two, but it’s more towards large pharma than it is to small, medium-sized biotech. So I would say large pharma, middle-sized pharma is the majority of our book-to-bill in the clinical business as well as the central lab business. And it’s much more skewed to small to medium-sized biotech in the early development business. Overall, the book-to-bill was 1.27 for the trailing 12 months.

When I say the mix, that hasn’t changed at all like that backlog or the book-to-bill between the clinical stage and the early stage, has that migrated in any way over the last 12 months, meaning is there more in clinical now less in early stage or vice versa?

Yes, we don’t really break it out that way. Obviously, as we get closer to spin, we will be breaking it out differently than we do today. But at this time, we really haven’t broken it out by the different business segments.

I appreciate that, thanks guys.

Yes, thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Brian Tanquilut with Jefferies.

Good morning, Brian.

Hey, good morning. Good morning guys. Maybe just to follow-up on Kevin’s question from earlier, as I think of your comment, Glenn, in the prepared remarks about book-to-bill conversion being a little slower than you expected, maybe what gives you the confidence and the visibility to the improvement as we think about the back half of the year on book-to-bill? Thanks.

So no, we have seen the trend go down. If you look at the fourth quarter, we were rounding around 30% backlog conversion where this quarter, we’re kind of at the 29.5%. So we have seen kind of the trend down. We’d assume that this level going forward. So when you look at the call down in our revenue outlook for the year, that effectively was half of the reason for the decline with the other being a little bit of softer orders that we had in the first quarter that, as you know, we still need roughly around 20% of current year revenues to come from new orders as we did see a little bit of softness there. But overall, we’re looking at the backlog, we’re looking at the contracts that we have, the burn rate that we currently see from those contracts, and we feel comfortable with the current expectation. Frankly, there’s always a range that you can say that we can see it pick up a bit. There were a couple of large contracts in particular that caused the conversion to come a little bit lower. So once those burn through a little bit or the mix improves, hopefully, we’ll see a little bit of a pickup. But for right now, that kind of 29.5-ish kind of percent conversion is what we’re assuming.

Awesome, thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Patrick Donnelly with Citi. Your line is open.

Good morning, Patrick.

Hey, good morning. Thank you guys for taking the questions. Maybe one on the Diagnostics business, just on the price mix that continues to be a pretty nice story for you guys. Can you just give a bit more color there in terms of how we should expect that to trend the remainder of the year? Any change to the tone with payers? I know things have improved a bit there, but would love to kind of give a bit more color in terms of payer conversations? Any change there? And again, what we should be thinking for the rest of the year on that front?

Yes, hi Patrick, I’ll start, and I’ll ask Glenn to give some specifics. But in terms of payers, we have very good conversations with the payers, very constructive. I feel good about our access and the continued access that we will have. You continue to see price pressure in every single part of health care. But at the same time, we’re not seeing any significant changes to the trends of what’s happened in the past. So I feel good about price and price mix as we go through this year to next year. Maybe you can give some specifics, Glenn.

Sure, Patrick. When you look at the – we talked about the 7.5% kind of growth this year organically in diagnostics. The price mix benefit from that was a little over 9%, 9.2%. We commented that extension the TSA we treat as all price. So that was 7.5%, if you will. So we did around, call it 1.7% in price mix, which is not too dissimilar when you back out the ascension to where we’ve done – where we’ve been. We continue to track well. When you look at even our guidance for the full year, which will help kind of convey what we continue to expect, at the midpoint of our revenue guidance, we have around 13.25% growth. We’re picking up around close to 5% from Ascension as well as probably around 1.5 points from M&A. So overall, call it, that midpoint, excluding Ascension and acquisitions, we’d be up around 7%. So we’re tracking similarly. We expect roughly around 6% of it from volume, 1% of it from price, again, now that it doesn’t include the Ascension. So historically, we would have said organic revenue or volume of, call it, around 2%. You pick up a point from a price mix of 3%. So where we see price right now continues to be pretty consistent with that. And as Adam said, the payer mix has helped. We continue to see a positive trend in our tests per Ascension. We continue to see a positive trend with our esoteric growing faster than routine. We also picked up a little bit on the draw fee, but we continue to do headwinds from unit pricing. So the fact that we continue to see price mixed favorable is really the mix impact of our business more than offsetting any pricing headwinds.

Yes. No, that’s helpful. And then maybe a quick one just on the drug discovery side. You mentioned to write down one biotech contract. Can you just talk about any change in tone from those early biotech customers as the quarter progressed? Obviously had a little bit of the banking fallout mid quarter. Just wondering if you sensed the change in tone, a change in appetite for spend from that customer base as the quarter progressed? Thank you, guys.

Yes. What I would say there is overall, they represent a smaller part of our business, obviously than the mid to large size pharma and biotech. Some small companies are struggling a bit right now with cash, and you hear that a little bit, but it hasn’t really impacted the flow of our RFPs or the dollar amount of our RFPs at the moment. But that’s something that we’re watching very closely. And obviously in the market environment that we’re in, it’s harder for these very small startup companies which represent a pretty small amount of our business frankly.

Yes. The only thing, I’d add too is which to your point, so the large or the small but biotech customer that went bankrupt was around $5 million of the $12 million that we put in place. So we built up reserves just given the current environment to make sure that if there were any other issues that we would have that we feel that we’re adequately reserved for. But as Adam said, small part of the business we’re just being hopefully prudent in establishing the reserve for the potential that some other smaller players could have some issues.

Okay. That’s helpful. Thank you, guys.

Yes.

Thank you. Please stand by for our next question. Our next question comes from the line of Derek DeBruin with Bank of America. Your line is open.

Good morning, Derek.

Hey, good morning. Thank you for taking my question. Hey, just want to follow-up on Patrick’s question there. You talked about 6% volume, 1% price this year, historically 2%, 1%. How do we think about that in going forward? Does it revert back to historical levels? Is the 6% volume – is that a high – is that just off of the easier comps? Just sort of like some color on how to think about it going forward?

So Derek, I guess in February of this year, we kind of gave our longer-term outlook of what we felt for diagnostics that we’d see kind of 2.5% to 4.5%. So little bit better than what we’ve done historically, again in that 3%-ish range. So to your point, the fact that we had such a strong quarter. In the first quarter, to some extent, we had a soft quarter of a year ago because of Omicron. So we would expect volumes to be higher. But frankly, one of the reasons we talked about what our full year guidance is that we’re tracking really well, we continue to see that favorable kind of 6%-ish number throughout this year as a base volume. But I think at this stage, when you look at the call it the CAGR to 2019 let’s say how are we tracking we’re doing around a 7% CAGR in diagnostics revenue compared to 2019 that’s at the call the midpoint of our guidance. Ascension this year is going to benefit us around a couple of points, and we always have around a point for acquisition. So from a revenue standpoint, this year compared to pre-pandemic, we’re growing at around 4%. So again, call it the middle to upper end of our targeted range. So again, part of the issues on a year-on-year comparison is that last year in diagnostics, given all the issues with COVID was softer than we expect. So now as we’re coming through the recovery, we would expect the stronger growth rate, which is what we’re experiencing.

And the only thing I would add to that is with the health systems that we’re winning and the pipeline that we have, I do believe that there’s spillover that occurs in the surrounding geographies when you win those health systems. It’s very hard to quantify. But I believe that it helps with our underlying demand.

Great. That’s really helpful. And just this one quick follow-up. Have you seen any business shifts in the NHP – given that you’ve got some NHP supply from the back half of the year and your main competitors still sort of a question mark, have you seen any sort of like contracts moving over any business moving over?

At this point, we have not, but we’re in a lot of discussions.

Thank you. Please stand by for our next question. Our next question comes from the line of Tim Daley with Wells Fargo. Your line is open.

Good morning, Tim.

Hey, thank you. Just quickly on their class question there, the supply NHP potential share gains. Are you guys seeing any customers pushing back? I know that supply was probably, I think it was domestically bred and probably at elevated levels. Is pricing still an issue or is we in the situation where supply being available is overcoming any price headwinds for price concerns on the customer angle?

Yes. I mean, the customers want to get their studies done, and they understand the pricing issues that we’re all facing. So they continue to fill the pipeline with studies that they want to complete, even though there are pricing issues that we’re all facing.

All right. No, appreciate that. And then just the obligatory SALSA question here. With the noise in Washington, not really looking to calm down anytime soon. How can you give us an update of PAMA, SALSA progress there? That’d be great.

Yes. So I was very happy about the one year of PAMA reprieve. I wish we would’ve had legislation passed at the end of last year. SALSA certainly has bipartisan support and I’m glad it continues to have bipartisan support. So anybody I talk to, anybody that you give them the understanding of SALSA, I haven’t read into anybody that doesn’t understand the issues and isn’t supportive. So I feel like we still have a good chance to get SALSA approved. I know our trade group, ACLA is working very hard to make sure that we continue to have our voice heard. And although I continue to put in our base case that PAMA will impact us next year, I continue to be cautiously optimistic that we’ll find a way to get some type of legislation approved as we go through this year. But I agree with you. It’s not easy in the current environment.

All right. Thank you.

Yes. Thank you.

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

Thank you, and good morning. I want to hit first on the bio – small biotech bad debt write-down. I have to say, however, many decades of watching this space. It’s pretty rare to see a small client get talked about as a $10 million plus write-down. I’m just curious how did the receivables expand to that level in this case? And what kind of an outlook is there for other clients that might be similarly exposed?

Yes. This is I think we commented on – I believe on the last question or two, the $12 million that we took was both a write-down of a receivable from a customer that went bankrupt as well as a buildup of reserves. So the $5 million exposure we did have to a small biotech customer that obviously had gone on for a while before they obviously went bankrupt. And so that was the write-off. The other $7 million again, which is unusual to your point, we normally don’t speak about bad debt with regard to our drug development business, but in the current environment, we felt it was appropriate to build up an additional reserve just given what’s going on rather than just do it once and then if something occurs later, we do it again. So we feel we’re adequately reserved in the current environment, but again, which is unusual, but that’s the – extent is the $12 million is a total and the $5 million is unique to that one customer.

And Eric, I don’t think this is a new trend.

Thanks. Yes.

No problem.

So the – I had a couple of quick follow ups, hopefully. First on COVID PCR, you mentioned the adjusted margin around 50% in Q1 I believe, and again signaled it would be lower the rest of the year. Can you give us a sense on directionally where you’re thinking this COVID margin plays out in LCD? And is there any phasing we should be aware of 2Q maybe better than 3Q given make quarter timing on PHE, et cetera. I’m just curious if you could give us a bigger ballpark of what you think a sustainable COVID operating margin might be particularly in the back half of the year when everything’s perhaps more normal on the reimbursement front.

Yes. So overall, we talked about the CMS reimbursement at around a $100 and obviously our average is probably in the low to mid-80s overall. But we’ve talked about that post-public health emergency that we expect that the CMS reimbursement rate will call it drop in half. So ultimately, that’s where we’re coming down on pricing. And then the volumes we spoke to, we did around 10,000 PCR tests per day in the quarter. Really, we’re currently at a rate that’s closer to 5,000 and that’s really our expectation going forward. So you’re looking at relatively low volumes at kind of half of the pricing. So it’s going to come off of the 50% that’s benefiting from full pricing and stronger volume. But we do believe that the overall margin, if you look at the base businesses in the high teens, you should – we currently expect that COVID margins will at least start with the two. So it’ll be greater than the margins that we have for the overall segment, but again, at lower volumes.

Okay. That’s helpful. And then last one for me, I know there’s – it’s been hit on a few times, but could you be more specific on clinical development net book-to-bill in Q1? Just – was it above one? Was it significantly below the overall average? Just trying to get a sense on what kind of a hole it might be digging out of if you progressed towards the spend.

Yes. So when we provided the book-to-bill, yes, we normally focus on the trailing 12, which as Adam said was a 1.27. We do in our supplemental information provide the quarterly, which was at a 1.18. So overall, the orders or the book-to-bill continues to be what we feel healthy overall, again, focusing more on the trailing 12. We did comment on the – in Adam’s remarks that we did have the benefit of an FSP renewal contract in the quarter. So, which again, periodically comes up. But overall, the backlog looks good, the conversion’s a little bit lower, but we also spoke to that in the first quarter we saw orders come in softer than what we expected. And to your point, it’s really all driven on our clinical business, which again, in part is the issue with spending all this time on the spin. Adam commented that some of the customers are waiting before giving us orders until after the spin is up and running independent and very focused going forward. But the overall, book-to-bill, we always try to shoot for a 1.2 to be able to support mid to high single digit growth rates. And currently, even for the quarter, we’re at a 1.18, but again, benefiting with a renewal of an FSP.

Yes. The only thing I would add, Eric, is that the customers I’ve spoken to are pleased with the work we’re doing. They’re actually excited about the increased focus that will occur after the spin. It’s temporary. They’re just saying, you’ve said the spin is mid-year, get that done and then come back. So I think there’s this short-term issue that we’re facing. I don’t get any sense that there’s anything other than a short-term issue. In fact, the customers are excited about overall the spin.

Okay. Thank you very much.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Erin Wright with Morgan Stanley. Your line is open.

Good morning, Erin.

Great. Good morning. On the M&A pipeline in core diagnostics, how is that shaping up relative to maybe what you were seeing a year ago or how would you characterize the M&A pipeline now?

Thank you, Erin, for the question. I mean, the pipeline is robust. I would say it’s better today than it was a year ago. I mean, there’s not too many deals the size of Ascension. But when you look at the number of deals and the number of health systems that we’re talking to, I’m very pleased with where we are. We’ll have more to announce as we move forward this year, so stay tuned. But it’s a very robust pipeline of health systems and local laboratories that we’re looking at.

Okay, great. And a quick one on the CRO side, can you describe a little bit more of the nature of the – I think you mentioned a new business win in large pharma on the CRO side of the business. Was this an FSP contract or was this something else or anything that you can describe on that front in terms of the nature of that new business win? Thanks.

Yes. It was a renewal of a large pharma FSP. And the reason I think it’s important is because as we’re going through the spin, I mentioned that some customers are excited about the spin, but they’ve said, let’s wait until after the spin, we’ll talk about more business. This large pharma company said, no, we’re so pleased with the work that you’ve done that we want to renew that FSP now. So it just gives you a sense that we are continuing to have good momentum as we go into the spin and through the spin, despite some short-term pressures there.

Okay. Got it. Thank you.

Thank you.

Well, thank you for joining us today. We’re continuing to drive performance across our businesses while we’re making great progress towards completing the planned mid-year spin of clinical development. We look forward to updating you further at our upcoming Fortrea Investor Day in June. And I can’t wait to provide you with additional information about Labcorp and the bright future, I believe we have in September. Talk to you soon. Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.