Good day, and thank you for standing by. Welcome to the Labcorp Holdings Inc. Second Quarter 2024 Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Christin O’Donnell, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Labcorp’s Second Quarter 2024 Conference Call. As detailed in today’s press release, there will be a replay of this conference call available. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business operations, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures both of which are discussed during today’s call. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2024 guidance and the related assumptions, the spin-off of Fortrea Holdings, Inc., the impact of various factors on the company’s businesses, operating and financial results, cash flows and/or financial condition including the COVID-19 pandemic and global economic and market conditions, future business strategies, expected savings, benefits and synergies from the LaunchPad initiative and from acquisitions and other strategic transactions and partnerships, the completed holding company reorganization and opportunities for future growth. Each of the forward-looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company’s other filings with the 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, and good morning, everyone. It’s really a pleasure to be here with you today. We look forward to sharing our strong results for the quarter, our updated 2024 outlook and progress on our strategy. Let’s turn now to our financial results. In the second quarter, revenue totaled $3.2 billion. Adjusted earnings per share was $3.94 and free cash flow from continuing operations was $433 million. Enterprise revenue increased 6% compared to the second quarter of 2023. Diagnostics revenue was up 8%, driven by strong organic growth and acquisitions. Central Laboratories growth was strong at 9%, partially offset by a decline in early development of 15%, resulting in biopharma laboratory services up 1%. The book-to-bill for early development was strong, with higher orders and lower cancellations, and we expect the business to be back to growth towards the end of the year. Adjusted EPS were up 15% and enterprise margins were up slightly. Margins in biopharma increased, while margins in Diagnostics were flat which reflects the impact of a cyber event that affected a large partner. We continue to execute well on our strategic priorities through the following: Being a partner of choice for health systems and regional local laboratories, harnessing science and innovation to develop and launch new tests in important therapeutic areas, and by utilizing data and technology to bring important services and capabilities to our customers. We are confident in the success of Labcorp in the months and quarters ahead with strong growth in diagnostics and biopharma laboratory services. Glenn will provide more details on our results and 2024 outlook in just a moment. The 2024 outlook reflects the anticipated close of Invite next week. In the second quarter, Labcorp continued to advance in our strategic growth areas. First, we continue to maintain a leadership position as a partner of choice for health systems and regional local laboratories. Following the quarter end, Labcorp entered into a comprehensive strategic collaboration with Naples Comprehensive Healthcare located in Florida to manage its inpatient lab operations and to serve as the primary lab later this summer. We’re also on track to close the previously announced acquisition of select assets of BioReference Health Diagnostics business by the end of the third quarter. We continue to have a very strong business development pipeline, and we look forward to sharing more of those details in the future. We also announced the acquisition of select assets of Invitae, a leading medical genetics company. We’re excited about Invitae’s complementary cutting-edge science genetic testing solutions and technology, which aligns strategically with our focus on specialty testing and oncology. Together, we will work with our customers to utilize genetic insights to develop new treatments and to deliver personalized care in oncology and in select rare diseases. Upon closing the transaction, we anticipate the first 12 months will provide revenue of $275 million to $300 million, and the first year will be dilutive by approximately 3%. We’ve included $120 million of revenue in 2024 and the vast majority of dilution in 2024. We expect it to be accretive for 2025 with top line growth of more than 10% per year. We have a very strong integration team in place with members from both Labcorp and Invitae. We will move quickly and thoughtfully to reduce costs without impacting the great science and the great customer experience that Invitae provides today. Also, we anticipate Invitae will benefit from the full scale and breadth of Labcorp’s platform as a global leader in laboratory services. We have great respect for Invitae’s capabilities and team, and we look forward to welcoming our new colleagues to Labcorp. As we advance our growth strategy, we continue to make great strides in expanding our testing solutions. In April, Labcorp received FDA approval as the humanitarian-use device for its companion diagnostic to determine patient eligibility for treatment with Pfizer’s gene therapy for hemophilia B. This is expected to expand Labcorp’s leadership in personalized medicine and in gene therapy. We introduced the first trimester screening test to assess preeclampsia risk during pregnancy. It is the only test of its kind available in the United States, available for order by physicians for their patients, including those with a low to average risk for preeclampsia or first-time pregnancies. Roughly 1 in 25 pregnancies in the United States is affected by the condition. And with this test, Labcorp is the only lab that can detect preeclampsia risk across all trimesters of pregnancy. We announced several new strategic service offerings with our precision oncology portfolio, extending our leadership in oncology. Our comprehensive genomic profiling service, Labcorp Tissue Complete is now available through our laboratory network centers in Geneva and Shanghai to support global PINNACLE trials. We’ve also added OmniSeq Insight circulating tumor DNA to a portfolio of comprehensive genomic profiling services. Together, these solutions support customers as they advance therapeutic development programs. Lastly, we continue to expand Labcorp on-demand, our consumer-initiated testing offering with the launch of several new tests in May and June, including standard drug, comprehensive testosterone, HIV, and complete heart health. We also continue to focus on creating easy-to-use digital technology solutions for our customers. In the quarter, we launched a suite of solutions referred to as Global Trial Connect, aimed at increasing the speed and efficiency of clinical trials. This solution differentiates Labcorp in the market and has been well received by our customers. In closing, I’d like to thank our team of more than 65,000 employees around the world. Together, we are focused on our customers achieving our financial commitments and making meaningful progress on our strategy, we have strong momentum and significant growth opportunities ahead of us. With that, I’ll turn the call over to Glenn.

Thank you, Adam. I’m going to start my comments with a review of our second-quarter results, followed by a discussion of our performance in each segment and conclude with an update on our full year guidance. For reference, we’ve also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.2 billion, an increase of 6.2% compared to last year, primarily due to organic base business growth and the impact from acquisitions, partially offset by lower COVID testing and foreign exchange. The base business grew 6.9% compared to the base business last year, driven primarily by organic growth of 4.5%. Operating income for the quarter was $295 million or 9.2% of revenue or 14.9% on an adjusted basis. During the quarter, we had $100 million of restructuring charges and special items, primarily related to acquisitions and LaunchPad initiatives. In addition, we had $23 million of expense for the transition service agreements related to the spin of Fortrea with the corresponding income recorded in other income. Excluding these items and amortization of $62 million, adjusted operating income in the quarter was $480 million or 14.9% of revenue compared to $448 million or 14.8% last year. The increase in operating income and margin was due to the benefit of demand and LaunchPad savings that were partially offset by higher personnel expenses. Our LaunchPad initiative continues to be on track to deliver $100 million to $125 million of savings this year, consistent with our long-term target. The adjusted tax rate for the quarter was 23% compared to 23.9% last year. The lower adjusted tax rate was primarily due to the geographic mix of earnings and additional R&D tax credits. We continue to expect the full year adjusted tax rate to be approximately 23%. Net earnings from continuing operations for the quarter were $206 million or $2.43 per diluted share. Adjusted EPS were $3.94 in the quarter, up 15% from last year. Operating cash flow from continuing operations was $561 million in the quarter compared to $162 million a year ago. The increase in cash flow was due to cash earnings and working capital. Capital expenditures totaled $128 million in the quarter or 4% of revenue. This compares to $103 million or 3.4% in the prior year. For the full year, we continue to expect capital expenditures to be approximately 3.5% of revenue. Free cash flow from continuing operations for the quarter was $433 million. During the quarter, the company invested $34 million in acquisitions, paid out $60 million in dividends, and repurchased $100 million of stock. The Board of Directors has approved an increase in its share repurchase authorization by $1 billion to a total of $1.4 billion. At quarter end, we had $265 million in cash, while debt was $5.1 billion. Our leverage was 2.4x gross debt to trailing 12 months adjusted EBITDA. We have $2 billion of debt maturing over the next 12 months, and we expect to refinance it later this year. Now I’ll review our segment performance, beginning with Diagnostics Laboratories. Revenue for the quarter was $2.5 billion, an increase of 7.9% compared to last year, with organic growth of 4.7% and acquisitions net of divestitures contributing 3.2% and partially offset by foreign currency translation of 0.1%. The base business grew 8.9% compared to the base business last year, driven primarily by organic growth of 5.7%. Total volume increased 5.7% compared to last year. Base business volume grew 6.3% compared to the base business last year as organic volume increased 3.5% while acquisitions contributed 2.9%. Price mix increased 2.1% versus last year due to an organic base business increase that was partially offset by lower COVID testing. Base business organic price/mix was up 2.2% compared to the base business last year. Diagnostics adjusted operating income for the quarter was $442 million or 17.5% of revenue compared to $410 million or 17.5% last year. Adjusted operating income was up due to organic demand, acquisitions, and LaunchPad savings, partially offset by higher personnel costs. Operating margins were flat but would have been up approximately 20 basis points were it not for the impact of a cyber event that affected a large partner. Now I’ll review the segment performance in biopharma laboratory services. Revenue for the quarter was $707 million, an increase of 1.1% compared to last year due to an increase in organic revenue of 1.2%, partially offset by foreign currency translation of 0.1%. The revenue growth was driven by continued strength in Central Labs, which was up 9%, while early development was down 15% due to the higher than normal cancellations and lower orders in prior periods. However, we did see a sequential improvement in early development, gross orders, and cancellations, which we expect will lead to higher revenues in the second half of the year and deliver year-over-year growth beginning in the fourth quarter. Biopharma adjusted operating income for the quarter was $107 million or 15.2% of revenue compared to $105 million or 15% last year. Adjusted operating income and margin increased due to organic growth and LaunchPad savings, partially offset by higher personnel costs. We ended the quarter with a backlog of $7.9 billion and we expect approximately $2.5 billion of this backlog to convert into revenue over the next 12 months. The trailing 12 months book-to-bill held at 1.00 compared to last quarter and is expected to increase in the second half. Now I’ll discuss our updated 2024 full year guidance, which assumes foreign exchange rates effective as of June 30, 2024, for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases, and dividends. The acquisition of select assets of Invitae, which is expected to close next week, is now included in our guidance for 2024. For the remainder of the year, we expect Invitae to add approximately $120 million in revenue, lower adjusted earnings per share by approximately $0.40 and reduced cash flow by approximately $150 million, primarily due to onetime costs related to retention, severance, and integration as well as an increase in working capital. We expect Enterprise revenue to grow 6.4% to 7.5% compared to 2023 versus prior guidance; we are increasing the midpoint 135 basis points with Invitae contributing approximately 100 basis points of the growth. We continue to perform well in Diagnostics. We expect Diagnostics revenue to be up 6.9% to 7.9% compared to 2023. This is an increase at the midpoint from our prior guidance of 200 basis points due to stronger base business demand and Invitae, which is expected to contribute around 130 basis points of the growth. We expect Biopharma revenue to grow 3.7% to 5% compared to 2023. The decrease at the midpoint from our prior guidance of 35 basis points is due to early development, partially offset by continued strength in central labs. We expect early development to have a slower recovery than previously anticipated, but with year-over-year growth still expected to begin in the fourth quarter. We expect enterprise margins to be flat versus the prior year despite the negative impact from Invitae of approximately 40 basis points. Diagnostics margins are now expected to be down due to the inclusion of Invitae of approximately 60 basis points. We continue to expect margins in biopharma to be up year-over-year. Our guidance range for adjusted EPS is $14.30 to $14.90. We have decreased the midpoint of guidance by $0.30, driven by the expected dilution from Invitae of approximately $0.40 and partially offset by a $0.10 increase in the underlying business. The free cash flow guidance range is now $850 million to $1 billion and includes approximately $150 million of cash use from Invitae, which is primarily due to onetime costs. Excluding Invitae, the free cash flow guidance range is unchanged from prior guidance. In summary, LabCorp is well positioned for profitable growth, both organically as well as through acquisitions. We’re excited about the acquisition of Invitae from both a strategic and financial perspective. Strategically, this strengthens our position in key long-term specialty testing growth areas of oncology and select rare diseases. From a financial perspective, while it’s dilutive in 2024, we expect it to be accretive in 2025 and deliver a very attractive return on investment as we profitably grow the business. In addition, Labcorp continues to generate strong free cash flow that will be used for acquisitions while returning capital to shareholders through our dividend and share repurchase program.

Our first question comes from Michael Cherny of Leerink Partners.

I’m going to ask 2 questions in one, just to make things easier. First, can you give a little more color on what you’re seeing in terms of the new awards and early development and how you should think about at least from a category disease state perspective, where they should translate into better growth in the back half of the year? And then just quickly on the Invitae accretion estimate for ’25, I think that’s a little faster than anticipated. Can you just give us some of the qualitative dynamics behind what you’re doing to get that to be such a strong EPS contributor next year?

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

Our next question comes from Andrew Brackmann of William Blair.

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

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

Perfect. And then, Glenn, maybe 1 for you on the balance sheet. Thanks for the reminder on the $2 billion maturing here over the next 12 months. Anything that you can share as it relates to your expectations for the potential rate increases there or even any other alternatives that might be out there to potentially lower that increase?

Yes, Andrew. Yes, it’s our expectation that we will refinance all of the debt. We’re not going to look to pay it down. We have around $1 billion of it due between now and the end of the year, starting actually in September and then $1 billion that’s due in February. We expect to refinance all of that this year. Obviously, the markets have improved nicely. So we’ll have that done. For modeling purposes, if you wanted to look at kind of the net interest expense line, we will refinance, obviously, at a slightly higher rate than what’s maturing. Our net interest expense this year directionally will come in at around $210 million. And then obviously, once it’s annualized for next year, that will tick up to maybe around $240 million. Again, we’ll see ultimately when we go into the markets. But right now, the markets look pretty attractive.

Our next question comes from Eric Coldwell of Baird.

I have two questions. The first should be quick. It's encouraging to hear about the order flow and the lower cancellations, and I see your revenue guidance for the fourth quarter suggests growth, which seems reasonable. However, I want to know about the ramp-up from the second quarter to the fourth quarter. Is it a gradual increase from the second quarter's performance to a figure in the fourth quarter exceeding 213? Or do you expect a sharper increase as we approach the fourth quarter? Additionally, it would be helpful if you could break down your revenue expectations for the full year between early development and Central Lab. I will return with my second question.

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

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

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

Our next question comes from Elizabeth Anderson of Evercore ISI.

I have 1 question about sort of each part of your business. But if we think about the beat in the quarter, it may be slightly different than some of your internal assumptions and you kind of flowed through the core non-Invitae EPS by $0.10 for the full year guidance. Can you talk about sort of the factors like maybe is there like a little bit of conservatism. Obviously, there’s like the crowd striking stuff in the third quarter. So just sort of your confidence maybe on that versus the guidance raise. And then secondarily, obviously, nice to see the early development business improving. Can you comment on pricing in early development and any kind of shift you’ve seen in that over the last quarter or so?

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

So the core, please continue.

Go ahead, Elizabeth.

Is the pricing of core early development, excluding NHPs, stable? I just want to confirm that I understood what you were saying.

Yes, I would say it’s relatively stable. I mean it’s always under pressure. There’s always pressure there. But I’d say continued pressure is relatively stable.

And then Elizabeth, on the first part. So when you look at, again, excluding Invitae, the underlying business, we’ve increased the outlook at the top line. Overall, at the midpoint, we’re up around 135 basis points, 100 of it from Invitae. So the underlying business is up, both upon the performance in the second quarter as well as an improved outlook for the remainder of the year. The growth, as we commented earlier, and the outlook improvement is an increase in our outlook for Diagnostics organically, for Central Labs organically and partially offset by a little lower outlook within the early development business. But the strength of the higher top-line growth is obviously what’s translating down to the bottom line, which causes us to have the underlying business, excluding Invitae, where we would have increased the midpoint of our EPS guidance range by $0.10.

Our next question comes from Jack Meehan of Nephron Research.

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

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

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

Jack, regarding our partner that experienced a cyber incident, it did not impact Labcorp but did affect our partner. We noted that it resulted in about a 20 basis point headwind during the quarter for our diagnostics margin, amounting to approximately $5 million in operating income that was lost. There was also a slight timing delay in cash that shifted from the second quarter to the third. Nonetheless, our free cash flow was very strong for the quarter. We didn’t address the CrowdStrike situation or the hurricane's effects in our results since they occurred after the second quarter. Considering these events, you might expect around a $0.05 per share impact on earnings. When reviewing our updated guidance, aside from Invitae, we raised our underlying business guidance by $0.10, even after factoring in the effects of the IT outage and the weather-related impacts.

Our next question comes from Kevin Caliendo of UBS.

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

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

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

We’ve talked about the importance of tests in 4 areas, specifically women’s health, oncology, neurology, and autoimmune disease. We’ve been really focused on launching new tests in those areas ensuring that we’re having discussions with opinion leaders. We’ve increased our scientific wherewithal in the marketplace in those areas. These areas, the reason we’re focused on is they grow faster than the other parts of diagnostic testing. Now when you run 650 million tests a year, even if you’re seeing a shift in mix, it’s hard to see that in market share. I mean, you can do the math on what the market share point is. But we’re certainly starting to see some growth in the specialty areas. I think it’s partially due to the market, and it’s also partially due to our focus.

Yes, Kevin, to emphasize what Adam mentioned, we are currently seeing volume growth. Our base business grew organically by 3.5%, which is above our historical growth rates. This increase can be partly attributed, as Adam noted, to the growth in the hospital outreach labs we have acquired as we strengthen our presence in those markets. When comparing to 2019, the compound annual growth rates are better than our historical averages. Last year, we experienced improved growth rates mainly due to a softer comparison year. Now, we are comparing to a more typical year and believe that the current growth rates are more sustainable. As Adam indicated, our guidance suggests we will continue to experience strong volume growth and a favorable mix, as he commented.

That's helpful. Can I ask a quick follow-up to that? Are the LaunchPad savings you mentioned meeting targets? I believe investors appreciate seeing that higher organic growth comes with the expectation of margin expansion. I'm curious if LaunchPad can keep pace with inflationary pressures related to labor and wages, and whether that situation has improved or worsened. Any insight on that would be very helpful.

Yes. Overall, we continue to be very pleased with the LaunchPad activities. We talk about around $100 million to $125 million per year of savings. We comment that, that’s what we look to do to help offset the inflationary expenses primarily related to personnel, which would fall within that, call it, $100 million to $125 million level. So we are able to offset that. We do normally expect to see good leverage on the incremental volume and revenues that we have. And obviously, you saw in the case of biopharma, good leverage on modest top-line growth with margins that were up, benefiting from LaunchPad. And even within Diagnostics, while margins were flat during the quarter, we commented about the cyber event. We’re still dealing with a little bit of a headwind from lower COVID as well. But as we think about the full year, the leverage, ideally, we’d leverage at around a gross profit margin for the business that we’re approaching that level for the full year when you take out the unusual items or the discrete items that could be a headwind. So we think, as Adam commented earlier, the business is performing well from a top-line standpoint and from an operational standpoint.

Our next question comes from Lisa Gill of JPMorgan.

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

Yes, Lisa, we firmly believe that the best way forward is to implement improvements and support the valid act, which was specifically designed for laboratory diagnostics, including LDTs. This legislation received broad bipartisan backing, and we see it as the right approach. As you mentioned, our trade organization, ACLA, has filed a lawsuit challenging the FDA's final rule, and we fully support ACLA in this effort. In the meantime, we are prepared to comply with the LDT ruling. We conduct most of the necessary scientific work and submit nearly all of our LDTs to New York state. However, we are also ready to handle the forthcoming monitoring and reporting requirements. We have a team dedicated to ensuring we are prepared for the implementation of the final LDT rule. Nonetheless, we don't anticipate a significant impact on our revenue or expenses. The more critical consideration is the effect on patients. These LDTs often serve individuals with rare diseases or smaller patient populations. The concern is whether the FDA will be able to approve these tests quickly enough to ensure that all patients can access them as needed. To me, this is fundamentally about patient access rather than any substantial impact on Labcorp itself.

Adam, just as I think about D.C., any updated thoughts from your side on either PAMA or SALSA or the opportunity for SALSA to primary pass?

Yes. We continue to strongly support the SALSA legislation. And I’ve been saying this for, I think, 4 years now. It has strong bipartisan support, and I’ve been saying that for 4 years now. It’s kind of remarkable to me that it has not passed yet. It continues to have strong support. We continue to be very supportive of it ourselves. But it’s really hard to know if it will be passed again this year even though we’re going to try to push for it to be passed. What I would say is that if it is not past this year, I do believe that there’s a likelihood that it will be delayed again. If it’s delayed again, that would be $80 million that we would not see as a downside next year, and a lot of that would fall to the bottom line. So let’s wait to see how the year plays out. When we give guidance in February next year, we’ll know what’s happened and where we are. But in the meantime, we’re going to continue to push for SALSA as best we can.

Our next question comes from Erin Wright of Morgan Stanley.

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

Yes. What I’d say, Erin, is that we’re obviously not giving 2025 guidance today. But as I look at the trends, and I look at the things that I am considering as we go into 2025, the market dynamics continue to be strong. What’s interesting about the Diagnostics business in particular is that regardless of Republican President, Democratic President, recessions, non-recessions, the business is very durable and has shown its durability over time. So I feel very good about our Diagnostics business, the underlying performance. I would say the biggest headwind/tailwind is going to be what we just talked about, which is does PAMA occur or does it not occur. As I think about the Biopharma Laboratory businesses, we have momentum, we have strength. I feel good about our orders and our order book as we go to the end of this year. I expect that our book-to-bill is going to continue to improve even from where it is today, which is strong as we go through the rest of this year, and that would bode well as we go into 2025. Again, the biggest headwinds/tailwinds there is just what happens with the smaller biotech companies in the marketplace as well as pharma and what they decide to do based upon their environment.

Our next question comes from Michael Ryskin of Bank of America.

This is John Kim standing in for Mike. Regarding the small biotechs and pharmaceuticals, has there been a shift in the client mix? I believe you mentioned targeting midsized pharmaceutical companies as well. Is that the reason for your confidence in the early development business progressing in the second half? I know you stated that cancellations have decreased and bookings are improving, but I'm also curious if there have been any noticeable trends in that area.

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

Got it. And then in terms of margins, I hear you on the top line doing well and the team is executing well. What about in terms of the employee turnover, do labor cost inflation track within expectations?

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

Our next question comes from Stephanie Davis of Barclays.

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

Sure. So Stephanie, when we look at the environment. I’m going to start off first with the hospitals and local regional laboratories. I think during COVID, they realized quickly, particularly the hospital systems that the laboratories weren’t necessarily fully up-to-date with their equipment, that the cost for capital was very expensive and high. They realized that they can take that money and use it for other things in a hospital versus running a laboratory. Historically, I think people were worried could Labcorp bundle a laboratory without having an impact on patient care or the physicians getting the test as quickly as they wanted to. But when you do as many deals as we’ve done recently, there’s so much proof that we can do these extraordinarily well and then we can actually run the hospital laboratories extraordinarily well without interrupting patient care, actually giving them better data analytics, better tools, better equipment. I think that reached a plateau where most hospital systems don’t argue anymore on that point. They also appreciate getting some capital, and they can use that capital by selling a laboratory or selling the outreach business to us. I would say that as hospital systems were struggling more right after COVID, I think they were looking to move quicker than they are today. But at the same time, today, our pipeline remains very, very strong for those hospital deals. The local regional laboratories, I think, are struggling a bit after COVID. There’s an opportunity there that we’ll continue to look after. I would say Invitae is not our typical deal. Our typical deal, we want to be accretive in the first year, return this cost of capital in 2 or 3 years and be something that we readily integrate all the time. Invitae, I feel good about our ability to integrate it, but obviously, it wasn’t accretive in the first year. It will be accretive in the second year. That was a strategic decision for us because we believe the inherited cancer area and the other areas they’re working on in terms of smaller disease areas will grow so much faster in the future. We’ve already begun to focus on those areas. We believe this could be an important add to our portfolio. I think of it more as a strategic acquisition than the routine acquisitions that we typically do.

Yes, Stephanie, I would like to add that, as Adam mentioned, most of our investments are in traditional deals such as hospital systems, independent labs, and specialty tests. We have completed about three oncology transactions, which have been more dilutive in the first year, but they are all focused on specialty oncology. From a financial return perspective, these deals, including Invitae, present a strong long-term financial profile and tend to experience growth. We have observed a double-digit growth rate compared to our mid-single-digit growth for the overall business. While these investments may dilute our earnings in the short term, we believe they have a very attractive long-term potential. Nonetheless, we still expect that most of our deals will be accretive initially, even considering the added costs of our borrowing, and will contribute positively to earnings and cash flow in their first year.

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

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

Our next question comes from Patrick Donnelly of Citi.

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

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

Okay. That’s helpful. And then, Glenn, maybe one for you. Just you talked a little bit about the margins and LaunchPad and Invitae. Can you just talk about, obviously, a few moving pieces as we work our way through 2H and into ‘25, can you just talk about the puts and takes there with the dilution, the LaunchPad piece, again, labor sounds like it’s maybe plateaued and is stable. But just the cadence for the rest of the year and then again the right jumping off point into next year.

Sure. From an overall perspective, Labcorp's margins for the year are expected to be flat compared to last year, with the impact of Invitae accounting for approximately 40 basis points. Outside of other challenges, we anticipated a margin improvement of more than 40 basis points for the company. In Diagnostics, we indicated that margins would be flat to slightly increased even with the reduced COVID business prior to Invitae's inclusion. However, Invitae will introduce a headwind of about 60 basis points to Diagnostics. As a result, we expect diagnostics margins to decline year-over-year in the second half, although they would have increased without Invitae. We see positive leverage in the Diagnostics business. Regarding the Biopharma segment, we anticipate an increase in margins for the year, with second half margins expected to surpass those of the first half. While there may be year-over-year variations, we foresee a stronger margin profile for Biopharma in the second half. Overall, we're optimistic about our top-line growth and believe we are leveraging it effectively. LaunchPad plays a crucial role in supporting our margins against some inflationary pressures, though we are also factoring in its near-term dilutive effect. Looking ahead to 2025, if the Invitae acquisition closes, we expect to face margin headwinds in the first half due to Invitae's influence during the first two quarters. However, once the effects are annualized, we anticipate positive contributions to margins from Invitae, as we will be comparing against growing margins instead of negative ones from the first half of this year.

This concludes the question-and-answer session. At this time, I’d like to hand it back to Adam Schechter for closing remarks.

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

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