Welcome to the Laboratory Corporation of America Holdings Third Quarter 2023 Earnings Conference Call. All participants are currently in listen-only mode. Following the speaker's presentation, there will be a question-and-answer session. Today's program is being recorded. Now, I would like to introduce your host for today's program, Christin O'Donnell, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning and welcome to Labcorp’s third 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 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 is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company’s other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I’ll turn the call over to Adam Schechter.

Thank you, Christin. Good morning, everyone. Today, I'll cover our third quarter performance, and I'll discuss strategy which we reviewed at a recent investor day. In the third quarter, Labcorp delivered strong year-over-year growth across the enterprise with acceleration in our diagnostic laboratories and biopharma laboratory service businesses. Our growth is fueled by our ability to execute well and to deliver greater value for our customers, through our leadership in science, innovation and technology. We see strength in our businesses. We have enhanced financial flexibility, and a clear strategic focus, all of which enable us to end the year with significant momentum. Labcorp will continue to drive growth by expanding our base business, finalizing and integrating our hospital and health system and our local and regional laboratory transactions. And by advancing our leadership in high growth strategic areas, including specialty testing. Moving to our third quarter results, revenue totaled $3.1 billion. Adjusted earnings per share was $3.38. And free cash flow from continuing operations, excluding spin-related items was $227 million. Enterprise revenue increased 7% compared to the prior year. Diagnostics laboratories based business revenue continued exceptional year-over-year growth with a 16% increase driven by organic growth and progress in our hospital and health system strategy, including retention. Biopharma Laboratory Services had strong growth in the third quarter of 8%. Enterprise based business margin was down 50 basis points compared to the prior year, primarily due to the mixed impact of retention. We continue to expect full-year base business margins to be flat to slightly up versus prior year, implying an increase in fourth quarter margins year-over-year. Then we'll provide more detail on our quarterly results, as well as a 2023 outlook in just a moment. Turning now to our Enterprise Strategy in the third quarter, we have significant momentum in our health system, and local and regional laboratory partnership strategy. I believe this momentum is due to our leadership in science and technology, our dedication to patients, and our commitment to quality and efficiency. With the most recent partnership announcement, we strengthened our presence and scale in the Northeast and West Coast. In the Northeast, we advanced three partnerships during the quarter. In July, we finalized a strategic relationship with Jefferson Health, one of the largest and most prominent health systems serving the greater Philadelphia area and southern New Jersey. In August, we forged a strategic partnership with Tufts Medicine, a leading health system in Massachusetts; patients and providers of Tufts Medicine now have improved access to standardized laboratory testing throughout the Tufts Medicine system. We recently finalized our initial agreement with Tufts Medicine and reached an agreement to expand the relationship to manage Tufts Medicine inpatient hospital laboratories later this year. And earlier this month, we announced a strategic relationship with Baystate Health, in which we would acquire its outreach laboratory business and select operating assets, including laboratory service centers operated throughout Western Massachusetts. On the Northwest, we announced a comprehensive lab relationship with Legacy Health in Portland; we will acquire select assets of its outreach laboratory business and manage its inpatient hospital laboratories. We also finalized our acquisition of Providence, Oregon's outreach laboratory business in September. The depth and the breadth of opportunity and the quality of our pipeline is robust, and we are optimistic about continued expansion. The partnerships meet our financial criteria, including being accretive in the first year, and return on cost of capital within three years. While the first-year margins are typically lower than Labcorp’s historical margin levels, there was a clear path to improvement. Turning now to our advancements in innovation in technology. In late September, Labcorp became the first company to broadly offer an ATN profile, a blood-based test that combines three well-researched blood biomarkers to identify and assess biological changes associated with Alzheimer's disease, including amyloid-tau Alzheimer's and neurodegeneration, targeting patients who are being evaluated for mild dementia. This new test enhances Labcorp’s leadership in new neurodegenerative testing options, and gives physicians an easily accessible and interpretable blood test to assess pathologies associated with Alzheimer's disease and other neurodegenerative conditions. Turning to women's health, we announced a new consumer offering for menopause in the quarter. Labcorp’s on-demand menopause test aims to help women understand symptoms and hormonal factors related to menopause to have more informed conversations with their providers. Finally, our Biopharma Laboratory Services team opened two new international facilities in China: a new kit production facility, and an immunology and immune toxicology laboratory. Before I turn the call over to Glenn, as we discussed at Investor Day, we are excited about the future of Labcorp and our strong financial outlook on a CAGR basis to 2026. We expect overall enterprise revenue growth of 5% to 8%, including 1.5% to 2.5% from acquisitions. For Diagnostic Laboratories, we expect organic growth of 2.5% to 4.5%. We expect Biopharma Laboratory Services to grow organically between 4.5% to 7.5%. We're focusing on two significant drivers of near-term growth and differentiation as we move towards those target ranges. The first is to be the partner of choice for health systems, and local or regional laboratories. And the second is to develop, license, and ultimately scale specialty testing, including companion diagnostics. I mentioned the momentum that we have in our health system strategy earlier. We've announced five new agreements this year. Additionally, specialty testing, we are focused on four primary areas: oncology, women's health, autoimmune disease, and neurology, which we anticipate will outpace the growth of other therapeutic areas. The development of specialty tests and companion diagnostics makes us attractive partners to health systems and biopharma as they continue to develop more therapies in the highest specialty areas. Our scale and geographic presence will be differentiators for both growth initiatives. We're also well-positioned for long-term success in cell and gene therapy, expanding into consumer markets, and international growth through our innovative specialty testing and biopharma business. All this will culminate in the top line performance that we expect will exceed $14 billion by the end of 2026. To close, our team of over 60,000 global employees is executing Labcorp’s global strategy at scale and at an exceptional pace. As we close 2023, we will continue to capitalize on the momentum that we've created and drive further value creation for our shareholders. This year has been transformational for Labcorp. We're focused on our growth strategy, and we plan to finish strong as we pursue our mission to improve health and to improve lives. With that, I'll turn the call over to Glenn.

Thank you, Adam. I'm going to start my comments with a review of our third quarter results, followed by a discussion of our performance in each segment, and conclude with an update on our full year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.1 billion, an increase of 6.6% compared to last year, primarily due to organic based business growth and the impact from acquisitions, partially offset by lower COVID testing. The base business grew 14% compared to the base business last year, while COVID testing revenue was down 87%. Organically, in constant currency, the base business grew 10.8%, 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, Ascension annualized on September 30th. Operating income for the quarter was $252 million, or 8.3% of revenue. During the quarter, we had $56 million of amortization and $116 million of restructuring charges and special items due to the spin of Fortrea, COVID acquisitions, and Launchpad initiatives. Excluding these items, adjusted operating income in the quarter was $424 million, or 13.9% of revenue, compared to $491 million, or 17.1% last year. The decrease in adjusted operating income was due to lower COVID testing. The margin decline was also negatively affected by the mixed impact from the Ascension lab management agreement. Excluding these items, margins would have been flat as the benefit of demand and Launchpad savings were offset by higher personnel expense. 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 23.1%. The adjusted tax rate for the quarter was 24% compared to 19.4% last year. The increase in the adjusted rate was primarily due to higher R&D tax credits realized last year. We continue to expect the fourth quarter and full year adjusted tax rate to be approximately 24%. Net earnings for the quarter from continuing operations were $184 million, or $2.11 per diluted share; adjusted EPS were $3.38 in the quarter, down 16% from last year due to lower COVID testing earnings, as base business adjusted EPS was up approximately 10%. Operating cash flow from continuing operations was $276 million in the quarter, which was burdened by approximately $56 million of spin-related items. Operating cash flow of $276 million is up from $253 million a year ago due to higher cash earnings. Capital expenditures totaled $105 million, up from $83 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 from continuing operations for the quarter was $171 million, which was burdened by approximately $56 million of spin-related items. The company invested $380 million in acquisitions, paid out $64 million in dividends, and used $1 billion for an accelerated share repurchase program that we expect will be completed by year-end. At quarter-end, we had around $725 million in cash, while debt was $5.4 billion. Our leverage was 2.7 times gross debt to trailing 12 months adjusted EBITDA. Now review our segment performance, beginning with diagnostics laboratories. Revenue for the quarter was $2.3 billion, an increase of 6.2% compared to last year, driven primarily by organic growth of 3.4% and acquisitions of 3%. The base business grew organically by 12.8% compared to the base business last year, while COVID testing revenue was down 87%. The Ascension lab management agreement contributed approximately 6% of the growth. Total volume increased 2.3% compared to last year, as acquisition volume grew 3.4%, primarily offset by organic volume of minus 1.1% due to COVID testing. Base business volume grew 7.2% compared to the base business last year, as organic increased 3.6% for volume, while acquisitions also contributed 3.6%. Price mix increased 3.9% versus last year, primarily due to an organic base business increase partially offset by lower COVID testing. Base business organic price mix was up 9.2% compared to base business last year, benefiting from the Ascension lab management agreement of approximately 6%. Diagnostics laboratories adjusted operating income for the quarter was $386 million, or 16.5% of revenue compared to $440 million or 19.9% last year. The decrease in adjusted operating income was due to a reduction in COVID-19 testing. While the margin was also affected by the mix impact from Ascension. Base business margin excluding the mix impact of Ascension was up approximately 30 basis points, as the benefit of organic growth and Launchpad savings were partially offset by higher personnel expense. Now review our segment performance of Biopharma Laboratory Services. Revenue for the quarter was $719 million, an increase of 7.9% compared to last year, primarily due to an increase in organic revenue of 4.9% and foreign currency of 3.3%. The 7.9% revenue growth was driven by continued strength in Central Labs which was up 9%, while early development was up 5.7%. While early development is no longer constrained by NHP availability, it has experienced higher than normal cancellations and lower orders, primarily due to small biotech funding. Biopharma Laboratory Services adjusted operating income for the quarter was $109 million, or 15.2% of revenue, compared to $105 million, or 15.8% last year. The decrease in adjusted operating margin was due to stranded costs as a result of the spin of Fortrea, which is timing-related. Excluding stranded costs, margins were up in the third quarter, as the benefit of top line growth and Launchpad savings were partially offset by higher personnel costs. We expect margins in the fourth quarter to be up sequentially and year-over-year. We ended the quarter with a backlog of $7.8 billion, and we expect approximately $2.4 billion of this backlog to convert into revenue over the next 12 months. Trailing 12 months book-to-bill was 1.12. Now discuss our 2023 full year guidance which assumes foreign exchange rates effective as of September 30, 2023 for the remainder of the year. The Enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases, and dividends. In addition, the guidance includes the impact from the $1 billion accelerated share repurchase program, which was funded with proceeds from the spin. With regard to our 2023 full year guidance, we've narrowed the ranges but have maintained the same midpoint from our prior guidance for Enterprise revenue, earnings, and cash flow. We expect Enterprise revenue to grow 1.9% to 2.7% compared to 2022. This increase reflects the base business growing 11.5% to 12.2%, while COVID testing is expected to decline 85% to 86%. We expect Diagnostics Laboratories revenue to be up 1.5% to 2% compared to 2022. This guidance includes the expectation that the base business will grow 14.1% to 14.6%, which includes approximately 5% growth from Ascension. The base business has improved from our prior guidance, as acquisition-related revenue that was forecasted at the enterprise level is now reflected in the segment as we've closed those transactions. We continue to expect Diagnostics Laboratories base business margin to be up slightly in 2023 versus 2022, including the unfavorable mix impact from Ascension. We expect Biopharma Laboratory Services revenue to grow 3.1% to 4% compared to 2022. Excluding the change in currency translation at negative 20 basis points, the midpoint of the guidance range remains unchanged from our prior guidance; we expect the revenue growth rate to continue to improve in the fourth quarter. In addition, we expect margins for the full year to be flat to slightly up, while the fourth quarter is expected to see both sequential and year-over-year improvement. Our guidance range for adjusted EPS is $13.25 to $13.75, unchanged at the midpoint from our prior guidance. Free cash flow from continuing operations, excluding spin-related items is expected to be between $850 to $950 million. Also unchanged from our prior guidance at the midpoint. In summary, we expect to drive continued profitable growth in our base business; 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 our share repurchase program and dividends.

Our first question comes from Kevin Caliendo from UBS. Please go ahead with your question.

I would like to discuss the book-to-bill in the sequential context, particularly regarding Biopharma and any cancellations. When did you first notice this? How significant is it? Is it occurring with multiple customers? Any additional insight you can provide about the orders in the Biopharma sector, especially related to cancellations, would be very helpful.

Sure, good morning, Kevin. So, if you look at the third quarter book-to-bill, it was a bit light versus the prior quarter. And it was mostly due to small and emerging biotech. And it was mostly due to those customers in our early development research laboratories. Large pharma and mid-sized biotech, which is the majority of our customers in our central laboratories, remain strong. And as I look at the fourth quarter, I expect the book-to-bill in the fourth quarter to be better than it was in the third quarter. If you look at the trailing 12 months, it was 1.12, and to me, that still remains pretty healthy. If you remember, last quarter, I mentioned that with a clinical development business now being a separate company, you would expect the book-to-bill to be lower, in particular because in early development, most of those trials are very short-term; they can be one month, three months, they usually start and end in the same year that you have them. So, that's why I feel confident that we'll continue to see progress. I feel that the largest part of our business, Central Laboratories, remains very strong in RFPs, book-to-bill, and we just have to continue to try to find a way to change our mix a bit in early development. I'd like to move early development to work more with mid-size biotech, maybe some of the pharma companies versus having too much reliance on smaller emerging biotech companies. If you look at the revenue, I felt very good about the revenue in the biopharma business with 8% revenue growth in the segment for the quarter. And we expect to see continued strength in revenue growth.

And just the confidence that it gets better next quarter, is that visibility? Is that just basically writing off some of the stuff that the cancellations are going to improve? Like what gives you that sense? Obviously, you can see more than we can, I'm just wondering what that is, that we can sort of rely on?

So, again, I'm just looking at the number of RFPs coming through our run rate, and so forth. And based upon what I see, as I sit here today, I expect us to have a better quarter and fourth quarter for book-to-bill in the third quarter. And sometimes book-to-bill is timing-related; you think you might get a trial, the third quarter ends up falling to the fourth. I've always said to be careful to look at any one quarter when it comes to book-to-bill; and that's why we also provide the trailing 12 months.

Thanks so much. Super helpful.

And our next question comes from the line of Lisa Gill from JPMorgan, your question please.

Thanks very much. Good morning. The other side of the business. Good morning, when I think about the diagnostic side of business and the strong core growth. Just two questions there: one, can you talk about where you are on managed care contracting and, you know, in helping them and the shift inside of care going into lower cost lab services like Labcorp versus, you know, inpatient, etc. And then secondly, as we think about routine testing, are you seeing an increase in metabolic testing specifically like A1C, as you think about the GLP, one praise?

Sure, this first one, you know, we're very pleased with the performance in the diagnostic sector, not just when you look at overall revenue, which includes Ascension. But when you look at base business volume, if you look at that the base business volume was up 7.2%. And about 3.6% was from acquisition. So, it just tells you that the organic base business remains very strong. Our managed care contracting, we're in very good position. We've finalized or are close to finalizing all of the contracts that were large and need to be renewed. And I would say, you know, there’ll be basically flat to slightly positive, which is a good place for us to be as we move into next year. So, I feel very good about that. You know, we look at metabolic testing. And then we look at all the different types of routine testing. And we haven't, yet we see that growing, but it's growing at consistent rates as it's grown before. And we still see our esoteric testing growing a little bit faster, but almost about the same as our routine testing. And if you look at metabolic testing, and so forth, we don't really see an acceleration there. A lot of the metabolic testing is done in panels and is done with other tests, and so forth. So, I wouldn't expect to see a significant change necessarily, with the GLP ones moving forward. But the growth is very broad-based. It's across geographies, across routine and esoteric testing. It's across all the different types of testing that we have. So, the underlying dynamics are very strong.

It’s very helpful.

And our next question comes from the line of Patrick Donnelly from Citi. Your question, please.

Hey, guys, thanks for taking the questions. Good morning, just a follow-up on the early development side, you know, interesting to hear kind of maybe shifting towards a little bit newer of a customer base more towards the midsized. Does that, I guess, what does that entail? You just have to cater the offering a little bit more towards that customer base? And is there a little bit of disruption as that happens? Maybe just talk through how you think about moving the portfolio more towards that client base?

Yeah, absolutely. One of the things, Patrick, we're trying to do is to focus more on specialty testing, and also thinking about how to expand internationally on things like companion diagnostics. When you think about a mid- to large-pharma company, as they develop more personalized medicines, they're going to want to have some type of diagnostic tool or companion diagnostic that they can use to develop to identify which patients are most apt to respond to the medicine, but also have it available ultimately, in the marketplace. So, where we're trying to go is to show pharma that they work with us early; we can help them develop their diagnostic tests. We have very strong capabilities and companion diagnostics, and developing specialty diagnostic tests. We can help them do their clinical trials through our Central Laboratories, and do all the companion diagnostic testing, and specialty testing. And ultimately, we want to be able to offer to them, that we can launch that test not only in the United States, but we can help them bring those specialty and companion diagnostic tests to other parts of the world. I think it'd be a very compelling discussion to have with pharma. And we're having some of those discussions as we speak.

Understood, thanks. And then maybe just on the margin piece, you know, obviously, you guys gave a pretty detailed guidance at the Analyst Day, maybe just near term, if you could talk through the moving pieces that sounds like, you know, pricing is relatively stable, but just the moving parts as we work our way into the end of the year, and then ‘24. And then just think high level about the margin piece. Thank you.

Thank you. Yeah, I'll ask them to jump in as well. I'd say the largest impact on margins, as I think about 2024, is PAMA. And we've built in about $80 million, almost $80 million of downside into our base case, assuming that PAMA comes next year. We're still trying to see, working with our trade group, if there's a way to get the SALSA legislation approved. We have bipartisan support, but we had that last year. So, it's very hard to get things approved right now. We're also going to see if there's a way to delay for another year the implementation, but for our base case, we're assuming that there's about an $80 million impact that would negatively impact the margins next year. That's why we gave the long-term guidance. And we said it's 100 to 150 basis point increase over the time period. We said most of that will be after 2024, because in 2024, we have to overcome PAMA. Let's wait and see if PAMA doesn't come or if it's delayed, then we'll have some upside there for sure.

Yeah, Patrick, just I guess, as you look to the two businesses, we feel good about where we are with the margins; they continue to improve on a base business level. As we think about going into the fourth quarter, we commented that within the biopharma side, we expect margins to be up in the fourth quarter and year-on-year, such that for the full year, there will be flat to slightly up. In diagnostics, obviously, we have seasonality that impacts margins of fourth quarter sequentially; margins will be down, but they'll still be up year-over-year. So, that we expect diagnostics margins for the full year to be up slightly, even after absorbing the negative impact from the Ascension mix. As Adam commented in the 100 to call it 150 basis point margin improvement that we expect over the next three years. We commented that the first-year margins would be relatively flat; we have around a 70-basis point headwind, if you will, between the combination of lower COVID testing, as well as the PAMA headwind that Adam commented, but that's reflected still in the three-year expectation that margins would grow that 100 basis points to 150 basis points.

Understood. Thanks, guys.

And our next question comes from the line of Jack Meehan from Nephron Research. Your question please.

Good morning, want to stick with the macro environment on the diagnostic lab side, Adam, are you seeing any recessionary signals at all in terms of the testing getting ordered? And then maybe on the flip side, hearing any change in the tenor of your hospital conversations around consolidation opportunities?

Yeah, Jack. So, you know, when you look at the macro dynamics, I would say for testing, it remains strong. And when you look at the volume that we're seeing, it remains very strong as well. And it's broad-based across the country in esoteric and routine testing. If you go back to historical recessionary periods, the diagnostic business tends to continue to do well through those periods. So, I feel pretty confident that we're going to continue to see strength there. When it comes to hospitals, you know, I've talked about how the hospital health system but also local and regional laboratory acquisition possibilities remain extraordinarily strong. And I think it's because they're struggling in the economic environment with reimbursement with wages, and other things. And they're looking for ways that they can get some capital, but also look for people that are like experts in hiring, the types of jobs that we hire for managing the type of people that we manage. So, I think the macro environment for the health systems and for these local smaller regional laboratories is very strong for us to continue to find ways to do business development and find visual partnerships. So, it's actually a good environment for us to compete. But obviously, we want our hospital systems to remain solvent, and you know, they have a lot of things that they have to do to continue to be successful.

Great. And, Glenn, at the Analyst Day for 2024, you laid out some initial thinking it would be slightly below the 8.5% to 11%. EPS CAGR range. Just curious if anything, you know, in terms of the orders on the biopharma lab side or just anything else changes the way you're thinking about that? Thanks.

Yeah, no, Jack. Again, when we basically reaffirmed kind of our outlook for this year as well as our three years when we were at the Analyst Day, we knew there was some softness we had experienced within early development earlier. So, that continues, but as Adam said, kind of offset by the strength that we're seeing with on the Central lab side. So, for Biopharma and for Diagnostic segments, we feel very good. So, if you look at call it that 8.5% to 11.5% EPS target over the next three years, the CAGR, we still feel very good about that, realizing that for 2024, because again of the headwinds from less COVID testing and PAMA, you'd have around 800 basis point headwind to EPS in 2024. So, still positive EPS growth year-on-year even with those headwinds, but lower than if you will, the range that we had; but again, that three-year range includes that expectation for 2024.

And our next question comes from the line of Eric Coldwell from Baird, your question please.

Good morning. Thank you. I have two questions. The first one might be a little confusing, so please bear with me. Your biggest competitor in early developments shared some insights regarding their cancellations, noting that many of these were based on awards granted one or two years ago, during a time when clients were pre-booking due to concerns about future capacity and access. You seem to be referring to smaller clients, and it appears that this might be more recent activity. I'm interested in knowing more about the timeline of the cancellations. How long ago were these awards issued? Is this situation more related to current circumstances or could it just be a cleanup of unusual past client activity?

Thanks for that clarification; we're seeing a similar thing that primarily with NHP trials that were, when there were supply issues, people started to get in line much earlier than they typically would to ensure that they could run their trials as fast as they could. Now that we have supply and so forth, as those clients' studies are ready to go, they're not necessarily ready to go. Or they're thinking about their pipeline and other priorities, and so forth, because they booked these spots so far ago. So, that's the primary reason that we believe we're seeing these cancellations in early development.

And then can you talk at all about gross awards in early development; was that book-to-bill above one or below one this quarter?

So, if you look overall, if you just look at the quarter, it would have been below one. But as again, with early development, I don't think book-to-bill is really a good way to look at that business. Because when it comes to early development, they're one month trial, three-month trials, maybe six-month trials, so you can burn through those in the same year very quickly. I look at the book-to-bill, you know, because I think it's a historical way to look at the business. But EPS is very small compared to Central Laboratory, and the vast majority of our Central laboratory work remains very strong. So, that's why I feel confident, as I look at the numbers of the future, because of the size of our Central Laboratory, the mix of customers, and Central Laboratories more towards pharma, and big biotech, and the book-to-bill remains pretty good.

And our next question comes from the line of Tim Daley from Wells Fargo, your question please.

So, first one on diagnostics, I think organic bass, this price mix, excluding Ascension was roughly 320 bits, if I just kind of back out the numbers. You know, if you break that out from like like-for-like price versus mix impact for us in the quarter? And how is standalone price been trending versus last quarter last year? I mean, healthcare would be great.

Sure. Hey Tim, this is Glenn. That's right, we would agree that your 320 is in line with the, call it, the organic price mix favorability excluding the impact that we would get from Ascension. You know, from a pricing standpoint, we continue to say pricing is kind of flat, maybe a little bit of a headwind. You heard Adam earlier in the future with the renewals of the managed care contracts, you know, that actually is a positive for us. But most of the time that favorability in our price mix continues to be on the mix side; we continue to see favorability in our tests per session, you know, whether it be payer mix or test mix with a lot of things esoteric relative to routine. So, we continue to experience good favorable price mix, but more on the mix side.

Appreciate that. And then my second question is on the direct consumer, so good to see a continued menu and expansion. This quarter with the announcement, just can you update us on the revenue mix within consumer? Where was it this quarter? What are you expecting as a piece of that ‘23 guidance? Thank you.

Yeah, no problem, Tim. So, direct to consumer advertising remains important. Wait for us to enable consumers to monitor and take care of their health. If you look at the dollar volume, especially if you take out the testing for COVID, it's still very small, and it's not worth it's not material enough to actually break out the numbers. We see it growing very substantially. But it's not necessarily at a point where we would break it out and give specific numbers for it. I think when it comes to consumer testing, we're going to see a lot more rope as we go through the years. At some point, if it reaches that material threshold, Tim, we'll certainly start to break it out.

Yeah, I appreciate the time. Thank you.

And our next question comes from the line of Erin Wright from Morgan Stanley, your question, please.

Thanks. Hi, good morning. I know you mentioned the base margin improvement sequentially in the fourth quarter. But are you seeing the need in one of your competitors, as mentioned in that mentioning this, but stepped-up investments in labor? And just the current utilization environment? Maybe that some of the seasonality you were talking about in the fourth quarter, but how are you just thinking about the labor environment right now? Thanks.

Yeah, thanks, Erin. So, the labor environment is tough across industries, across countries. I mean, there's no doubt that the good news is, you know, I look at our retention rates. And if you look at retention from 2019, we saw a significant loss of people and our actual turnover rate was up substantially in 2021 and 2022. If we now look at 2023, we've seen those rates come down in our biopharma business; they've come down almost to the 2019 levels. If you look at our diagnostic business, they're not yet at our 2019 levels, but they're getting closer. And you know, we expect there to be continued progress there. But we have had to pay a bit more in certain areas; we've had to be competitive in the marketplace. It does impact the margins. But at the same time, that's why we've been so aggressive with Launchpad. And we're on track to deliver the $350 million of Launchpad savings that we discussed in the past. We also at Investor Day talked about a $100 million to $125 million year reduction through Launchpad. And we mentioned that we have an increase in our margins over the ‘23 to ‘26 period of 100 to 150 basis points, mostly coming after the PAMA year in 2024. So, most of that in ‘25 and ‘26. So, at the end of the day, we realized we've got to find ways to reduce costs so that we can offset some of the pressure that we're facing when it comes to, you know, the wages and so forth.

Okay, thanks. That's helpful. And then on the early development business, just to enlighten the environment in some of the volatility you've been there. And what you've been talking about in terms of the biopharma landscape, but you know, has anything changed in terms of your commitment to the business at this point? Is that an area that you'll continue to evaluate? Thanks?

Yeah, thanks, Erin. Again, it is a very small part of our business. I mean, if you look at the business as a percent of Labcorp, it's very small; it's less than 10%. And if you look at it as a percent of the biopharma business, it's maybe 30% or so. So, at the end of the day, it's really Central Laboratory that drives our success in Biopharma. At the same time, with the strategic things that we're trying to do with companion diagnostics. And work with pharma earlier, bringing those companion diagnostics to Central Laboratories, and then ultimately bring them to the marketplace. Strategically, I still think it makes sense. And I still think that we could do a lot of other things with our early development that help us in the broader, bigger business that we have. And we continue to evaluate all things.

And our next question comes from the line of Kieran Ryan from Deutsche Bank. Your question please.

You've got Kieran Ryan on for Pito. Thanks for taking the question. Just a quick one here. I just wanted to see how you guys are tracking on taking out some of the stranded costs after the spin, I believe you were talking about targeting 25 million of the 45 million at the industry rate. So just wanted to see if there's any update there?

Yeah, all right. So, we're on target; we said we have this 25 million by the end of this year. So, the runway next year, that would be taken out. But I think the most important piece is that that's not enough. And if we're going to do that, plus, we have to do more. So, as I said, we're on track for a $350 million Launchpad initiative. And we've committed to $100 million to $125 million per year, in the outer years, as we look at a long-term forecast that includes $25 million of stranded costs, but it just tells you we've got to do a lot more.

Got it. Thank you. And then just real quick on the Biopharma side, just wanted to check, as we head into ‘24, is there any seasonality that we should be aware of there? And does that change at all after the spin versus pre-spin or not? Not too much call out? Thanks.

Yeah, I like to that answer question. In general, I don't see that there'll be a significant shift in terms of we've always had some seasonality. And if you look at like Central labs, for example, they always start off a little bit slower in the first quarter, because a lot of pharma are starting to get their studies running in the third quarter, sometimes a little slower as Europe comes back after vacation. But net-net, you know, there shouldn't be any significant changes to what we've seen in the past.

Yeah, that's right. And the numbers that we've provided historically have been restated for the company we are today. So, you can look at our enhanced disclosures that we have that you'll see some historical numbers. But the other interesting thing is, the seasonality of the two segments are a little bit counter to each other. So, it actually when you look at it from an enterprise level, mutes the seasonality for each of the businesses.

And our next question comes from the line of Derik de Bruin from Bank of America, your question, please.

Good morning. This is John on for Derek. Wanted to revisit the PAMA issue there. I recognize that your guidance is assuming the PAMA impact as a base case, and you've talked about the 70 basis points of headwind between PAMA and COVID. But in the case of a delay, would you allocate that 80 million benefit that will turn into a benefit now between maybe letting it trickle down to margins versus investments?

Yeah, we're going to push for the vast majority of it to come down to margin. I mean, there might be some incremental minor investments, but we've got almost $80 million into the plan, and I would expect the vast majority of that to come down.

Appreciate it. And then with the ATN profile, could you comment on? What sort of reimbursement you've been able to negotiate with the payers versus what you're getting from the CMS? And I know, earlier, you talked about the LBT tests as a volume, it's less than 5% and a sale that's less than 10%. But still curious if you plan on taking it for the FDA approval, or if there's going to be any sort of disruption there. Thank you.

Yep, absolutely. So, at this point, we don't think there'll be any disruption to the ATN profile; we've launched it into the marketplace. Some managed care organizations are starting to reimburse, others we're in discussions with, but a lot of the reimbursement in that area is from providers and the health systems and so forth. So, we expect we'll have good reimbursement from those areas as we go forward. It's still a relatively new task; we’re still having physicians learn about the panel and so forth. So, it will take time, but over time, we expect it to be reimbursed well.

Thank you. That's all.

And our next question comes from the line of Brian Tanquilut from Jefferies. Your question, please.

Good morning. I guess I'll start, Adam, as I think about a comment that your competitor made yesterday, like contract renewals. Just curious what you're seeing on your side in terms of contracting with payers, and your kind of like rate trends there as we think about upcoming rehabs and contracts?

Yeah, absolutely. Brian. So, you know, we've renegotiated the majority of our contracts; we're really, really finished, and really close on one last one. But they ended up being very good negotiations, very good discussions; we think that ultimately, it will be flat, maybe slightly positive. So, I feel really good about that.

Got it. And then Glenn, you've talked about a three-year kind of like margin goals of 100 basis points to 150 basis point improvement, as we think about the moving parts between labor Launchpad. And I think we're getting questions from people asking, you know, when do we see the flow through of all that, and improving it in volumes to the margin line? How should we be thinking about that?

Well, again, a lot of the expectation is that we're looking at good top line growth. So we would expect to leverage off of that Launchpad savings that we've identified as well, and then being offset by labor and potentially continued inflationary environment. You know, for us, we talk a lot about labor because it represents around 50% of our cost structure. So, we're very focused on it. And as Adam said, we are seeing some improvement in the attrition levels, but it's still higher than where it's been in the past. And there's a cost to that, let alone just the labor wage rates inflation, if you will, but all that's been factored in. So, to the extent we can continue to drive the top line that we feel confident about, and realize the Launchpad savings, which we feel confident about, we equally expect to see that margin improvement.

Awesome. Thank you.

Thank you. This does conclude the question-and-answer session of today's program; I'd like to hand the program back to Adam Schechter for any further remarks.

Thank you. Thank you all for joining us today. Hope you can tell that we remain very optimistic about the prospects for Labcorp as we continue to execute, and we execute well on our strategy, and that we believe our strategy is going to continue to drive substantial shareholder value. Hope everybody has a good rest of the day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.