Labcorp Holdings, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Strategic Priorities: Maintained partnership with health systems (e.g., acquired Ballad Health assets, collaborated with Naples Comprehensive Healthcare), supported regional/local labs (e.g., acquired Lab Works assets, closed BioReference acquisition), advanced science/tech (e.g., acquired Invitae assets, launched PGDx elio test, expanded Labcorp OnDemand, improved customer experience with order tracking and Ovia Health expansion).
• Compliance and Inclusion: Earned Ethisphere’s Compliance Leader Verification and Best Place to Work for Disability Inclusion. PAMA implementation delayed, removing a $80 million revenue headwind in 2025, with ongoing efforts for a permanent fix.

Segment Performance

• Diagnostics Laboratories: Revenue for the quarter was $2.6 billion, an increase of 8.9% compared to last year. Organic growth was 5%, with acquisitions contributing 4%. Base business grew 9.8% y-o-y, driven by organic growth of 5.8%. Total volume increased 5.1%, with base business volume up 5.6% (organic volume up 2.7% offset by ~40 basis points from weather, acquisitions contributed 2.9%). Price mix increased 3.8% due to organic base business growth and acquisitions, partially offset by lower COVID testing. Adjusted operating income was $387 million, 15.2% of revenue, down 130 basis points due to Invitae and weather, but excluding those, margins would have been up around 80 basis points.
• Biopharma Laboratory Services: Revenue was $738 million, up 2.6% compared to last year due to organic revenue growth of 2% and foreign currency translation of 0.6%. Central labs grew 9%, while early development was down 11% but saw sequential growth from Q2 and is expected to grow year-over-year in Q4. Adjusted operating income was $121 million, 16.4% of revenue, up due to organic demand and LaunchPad savings, partially offset by higher personnel costs. Backlog was $8.1 billion, with ~$2.6 billion expected to convert to revenue over the next 12 months. Trailing 12-month book-to-bill was 1.02.

Guidance

• Enterprise Revenue: Expected to grow 6.6%-7.3% y-o-y. Diagnostics revenue expected to grow 7.2%-7.8% y-o-y (midpoint up 10 basis points from prior guidance, benefiting from BioReference acquisition 30 basis points, offset by weather 30 basis points). Biopharma revenue expected to grow 4.7%-5.6% y-o-y (midpoint up 80 basis points, favorable foreign currency 100 basis points offset by slower early development recovery 20 basis points).
• Margins: Enterprise margins slightly down year-over-year, with diagnostics constrained by Invitae and weather, and biopharma margins up. Adjusted EPS guidance $14.30-$14.70 (midpoint down $0.10 due to weather impact). Free cash flow guidance $850 million-$980 million.

Risks

• Forward-Looking Statements: Subject to change based on factors beyond control, including COVID-19, economic conditions, acquisitions, etc.
• PAMA Implementation: Delayed but seeking a permanent fix, with potential impact if not resolved.
• Invitae Integration: Initial margin impact, but expected to be slightly accretive to earnings in 2025.

Q: Ann Hynes from Mizuho asked about 2025 headwinds/tailwinds and central lab impact.

A: Adam Schechter responded that they feel good about momentum in 2025, central lab has strong growth based on better compares vs last year.

Q: Lisa Gill of JPMorgan followed up on Invitae margin progression and diagnostics mix.

A: Adam Schechter said Invitae integration is going well, expected to be slightly accretive in 2025; Glenn Eisenberg discussed price mix in diagnostics driven by in-hospital lab management agreements, test per session growth, and esoteric business growth.

Q: Michael Cherny of Leerink Partners asked about margin expansion sources and LaunchPad savings.

A: Glenn Eisenberg talked about underlying business performance and LaunchPad savings on track to offset wage inflation; Adam Schechter mentioned continuous improvement via technology and AI for cost reduction.

Q: Patrick Donnelly of Citi asked about diagnostics utilization trends and 2025 outlook.

A: Adam Schechter said they expect continued strong momentum in diagnostics with organic revenue growth 2.5%-4.5% and inorganic growth 1.5%-2.5%.

Q: Erin Wright of Morgan Stanley asked about payer relationships and early development progression.

A: Adam Schechter discussed positive managed care discussions and expected growth in early development with sequential improvement from Q2 to Q3 and expected growth in Q4.

Q: David Westenberg of Piper Sandler asked about LRP and industry surprises.

A: Adam Schechter and Glenn Eisenberg discussed confidence in LRP ranges, benefits from PAMA delay, and strategic deals like Invitae being a factor but overall positive outlook.

Q: Jack Meehan of Nephron Research asked about Invitae M&A contribution and hereditary market share.

A: Glenn Eisenberg said Invitae contribution in Q3 was in line with expectations; Adam Schechter noted they are well-positioned in the hereditary market with positive customer reception.

Q: Pito Chickering of Deutsche Bank asked about managed care contract movements.

A: Adam Schechter said managed care position is strong with open contracts avoiding price erosion, expecting momentum to continue.

Q: Andrew Brackmann of William Blair asked about oncology test trends.

A: Adam Schechter discussed broad oncology portfolio growth, with esoteric testing growing faster than routine, and focus on full portfolio offerings.

Q: Kevin Caliendo of UBS asked about margin details and LaunchPad vs inflation.

A: Glenn Eisenberg explained margin components including days and payroll impact, and LaunchPad savings offsetting wage inflation; Adam Schechter mentioned LaunchPad tracking well to meet targets.

Q: Elizabeth Anderson of Evercore ISI asked about consumer business and margins.

A: Adam Schechter said Labcorp OnDemand is growing with added tests, but not material enough to break out; Glenn Eisenberg noted it has minimal impact on overall margins.

Q: Eric Coldwell of Baird asked about Walgreens store closures and employer testing.

A: Adam Schechter and Glenn Eisenberg discussed good relationship with Walgreens and minimal impact from employer testing, which is a small part of the business.

Q: Stephanie Davis of Barclays asked about BLS pricing and book-to-bill.

A: Adam Schechter discussed book-to-bill health (1.02 trailing 12-month) and pricing pressures in early development due to capacity, but Central Labs strong with long-term contracts; Glenn Eisenberg added on pricing in early development and Central Labs.

Q: John Kim of Bank of America asked about M&A priorities and LaunchPad wage impact.

A: Adam Schechter said focus on hospital, regional, local lab deals; Glenn Eisenberg discussed LaunchPad offsetting wage inflation and progress in managing frontline labor costs.

Q: Unidentified Analyst from Jefferies asked about M&A pipeline in 2025.

A: Adam Schechter mentioned increased confidence in M&A pipeline, with focus on hospital and regional/local lab deals, and raised inorganic growth expectation to 1.5%-2.5%.