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Edited Transcript of LH earnings conference call or presentation 24-Oct-19 1:00pm GMT

Q3 2019 Laboratory Corporation of America Holdings Earnings Call

BURLINGTON Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Laboratory Corporation of America Holdings earnings conference call or presentation Thursday, October 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clarissa Willett

Laboratory Corporation of America Holdings - VP of IR

* David P. King

Laboratory Corporation of America Holdings - Chairman, CEO & President

* Glenn A. Eisenberg

Laboratory Corporation of America Holdings - CFO & Executive VP

* John D. Ratliff

Laboratory Corporation of America Holdings - CEO of Covance Drug Development

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Conference Call Participants

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* Derik De Bruin

BofA Merrill Lynch, Research Division - MD of Equity Research

* Donald Houghton Hooker

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Eric White Coldwell

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Erin Elizabeth Wilson Wright

Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst

* Jack Meehan

Barclays Bank PLC, Research Division - VP & Senior Research Analyst

* Kevin Caliendo

UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution

* Kevin Kim Ellich

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Lisa Christine Gill

JP Morgan Chase & Co, Research Division - Senior Publishing Analyst

* Mark Anthony Massaro

Canaccord Genuity Corp., Research Division - Senior Analyst

* Matthew Richard Larew

William Blair & Company L.L.C., Research Division - Analyst

* Ralph Giacobbe

Citigroup Inc, Research Division - Director

* Rivka Regina Goldwasser

Morgan Stanley, Research Division - MD

* William Robert Quirk

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 LabCorp Holdings Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I would now like to hand the conference over to your speaker, Clarissa Willett, VP of Investor Relations. Please, go ahead.

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Clarissa Willett, Laboratory Corporation of America Holdings - VP of IR [2]

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Good morning, and welcome to LabCorp's Third Quarter 2019 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 Dave King, Chairman and Chief Executive Officer; Glenn Eisenberg, Executive Vice President and Chief Financial Officer; and John Ratliff, CEO of Covance Drug Development.

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 estimated 2019 guidance and the related assumptions, the impact of various factors on operating and financial results, expected savings and synergies and the opportunities for future growth.

Each of the forward-looking statements is based upon current expectations and is subject to change based upon various factors that could affect our financial results. Some of these factors are set forth in detail in our 2018 Form 10-K and subsequent Forms 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 Dave King.

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [3]

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Thank you, Clarissa, and good morning, everyone. LabCorp delivered another excellent quarter, again demonstrating the power of our combined capabilities. We saw strong market demand across both businesses, which, with the benefit of strategic acquisitions, delivered solid top-line growth.

We also continued to manage expenses aggressively and execute our LaunchPad initiatives.

As a result, revenue grew 3.4% in spite of a year-over-year headwind of 1.3% due to divestitures.

Adjusted earnings per share grew 6% despite the impact of PAMA and the opening of managed care contracts in Diagnostics, and we generated $363 million in free cash flow.

We continued our disciplined capital allocation program, repurchasing $100 million of shares and successfully executing several tuck-in acquisitions.

We have a robust acquisition pipeline and remain focused on strategic, value-creating acquisitions in both of our business units.

Covance excelled across all measures. Constant currency revenue growth increased by more than 9%, we realized 270 basis points of margin expansion, backlog increased by over $400 million sequentially to $10.7 billion, and our trailing twelve-month book-to-bill stands at an impressive 1.28.

Despite the market headwinds we are experiencing, Diagnostics turned in another strong performance. Normalizing the performance for the impact of PAMA and managed care changes, we grew revenue (excluding divestitures) by 4%, increasing revenue per requisition by 2.3% and volume by 1.7%, solidly within our performance expectations for this business.

At the enterprise level, we are successfully weaving Diagnostics and Drug Development together into a unified whole, creating value by focusing on consistent execution of our strategy to deliver world-class diagnostics, bring innovative medicines to patients faster, and use technology to improve the delivery of care.

Among the recent examples of the power of the combined Health Systems continue to express interest in our ability to both reduce their lab testing costs and bring them meaningful clinical research opportunities. Today, we have 16 Covance site partnerships with U.S.-based health systems and have offered these health systems some 200 meaningful trial enrollment opportunities. This two-pronged value proposition continues to gain traction with health system partners.

We continue to win in the marketplace by using data as a differentiator. In the quarter and year-to-date, we have achieved broad-based customer success. For example, by combining LabCorp patient population data with Covance's unique site location tools and protocol design insights, we delivered a truly integrated patient-centric approach to recruitment. This approach enabled us to win nine studies this year, principally focused on oncology from a single sizable customer, doubling our win rate and our program value.

Companion diagnostics also continued to show strong growth. Revenue from all aspects of companion diagnostics grew nearly 20% year-over-year. As we sharpen the focus on excelling in oncology in both of our businesses, the ability to develop, support approval for, and commercialize companion diagnostics will provide a sustainable competitive advantage.

Now, I will discuss this quarter's Diagnostics highlights.

Our managed care portfolio continued to perform well - a testament to our teams in the field who have done an exceptional job retaining our customers.

The opening of the managed care contracts led to a net reduction in volume of 1%, stable since the last quarter and we continue to see volume and revenue growth across the rest of the managed care business.

We finalized several new partnerships with health systems in the quarter.

We acquired the clinical diagnostics business of South Bend Medical Foundation, enhancing the scope of services that LabCorp offers to hospitals, physicians and patients across the region, concurrently partnering with the health system to offer expanded pathology services.

We also partnered with the New Jersey Primary Care Association (NJPCA), which represents 23 community health centers.

By using our Care Intelligence platform, we and NJPCA will provide physicians with accessible, comprehensive and secure integrated lab and clinical data, focusing on improving outcomes for patients with chronic conditions. This partnership will help NJPCA achieve key value-based care objectives.

As we have stated, we are proud to be included in UnitedHealthcare's Preferred Lab Network. Concurrently with the PLN, in 2019, UnitedHealthcare made the decision not to renew the BeaconLBS pilot in Florida. Nonetheless, UnitedHealthcare will continue with BeaconLBS for their national molecular contract beginning in September. This reflects UnitedHealthcare's approach to offer programs and networks, including the PLN, to consumers on a national basis.

Although the non-renewal of the Florida pilot will have a near-term negative impact on revenue and margin in the fourth quarter and next year, we are optimistic about growth opportunities with the PLN, and in addition to the UnitedHealthcare national molecular contract, BeaconLBS has multiple other opportunities for revenue growth.

On the consumer front, we continued to expand accessibility, transparency, and convenience so that consumers may engage LabCorp when and where they want to. Through our LabCorp at Walgreens partnership, we continue to expand patient access in the retail healthcare setting. We now have 58 locations open in nine states, and more than 75 other locations in progress toward our agreed goal of 600 by the end of 2022.

In addition, we are pursuing other collaboration opportunities focused on our shared goals of enhancing tools available for clinical research, supporting the shift to value-based care, and expanding in health-related services available to consumers in the retail environment.

We significantly expanded our Pixel by LabCorp platform to include sample collection by phlebotomists in our Patient Service Centers.

Pixel by LabCorp enables consumers to shop and pay online for many lab tests directly. The menu now includes 28 test packages, comprised of more than 100 analytes. We've been pleased with the initial response and continue to add offerings to the platform each month, including Measles and MMR immunity testing.

Our relentless customer focus drives our LaunchPad II initiatives, which are designed to digitize the business, automate processes, improve productivity, and create an exceptional experience for all of our customers and our employees.

We remain on track to deliver a total of $200 million of net savings by the end of 2021.

Now, I will discuss this quarter's Covance highlights.

Covance's strong performance is a result of building on our unique capabilities with strategic acquisitions, the creation of highly targeted offerings, enhanced therapeutic expertise and focused geographic expansion.

The result is added value across multiple dimensions of the Covance business, resulting in strong growth across all lines of business and customer segments.

One of our key strengths is that Covance is the only CRO to offer comprehensive R&D services from early development through commercial solutions around the globe.

Our strength across the spectrum allows us to fully support our partners' portfolios.

The best evidence of success in the market is our solid track record of moving molecules from early development into clinical services, which continues to gain momentum with our customers.

Our newly-opened R&D Center in Shanghai establishes Covance as the only CRO to offer comprehensive R&D services from early development through commercial solutions in China. This expanded presence as well as our more than 1,000 colleagues in China was a critical factor in winning a large oncology study with a China-based biotech.

Covance also continues to strengthen its capabilities in the exciting area of cell and gene therapy, supporting sponsors focused on developing treatments for debilitating and life-threatening diseases. Covance offers superior capabilities across early development, early clinical, central labs and late-stage clinical to deliver unique solutions in these complex therapeutic areas.

We have already seen significant opportunities and growth across the enterprise from preclinical to clinical development. Those opportunities span our entire geographic footprint, including China, where adoptive T-cell therapies are a major focus for oncology.

We also continue to execute the key priorities in our Covance LaunchPad initiative and are on track to deliver $150 million of net savings through these initiatives by the end of 2020. We are also on track to deliver $10 million of net cost synergies from the integration of Envigo by the end of 2021.

In short, Covance continues to deliver results and validate our decision to become a global life sciences player.

In closing, I am grateful to our terrific leadership team and our 61,000 colleagues around the globe for their consistently outstanding efforts in support of our mission to improve health and improve lives.

Those efforts are reflected, once again, and still in our strong third quarter performance and will continue to be reflected in LabCorp's performance in the years ahead.

Now, I'll turn the call over to Glenn.

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Glenn A. Eisenberg, Laboratory Corporation of America Holdings - CFO & Executive VP [4]

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Thank you, Dave. 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 2019 guidance.

Revenue for the quarter was $2.9 billion, an increase of 3.4% over last year. The increase was primarily due to acquisitions of 2.8% and organic revenue growth of 2.2%, partially offset by divestitures of 1.3% and foreign currency translation of 30 basis points.

Excluding the negative impact from PAMA of 90 basis points, organic revenue grew 3.2%.

Operating income for the quarter was $340 million, or 11.6% of revenue, compared to $343 million, or 12.1% last year.

During the quarter, we had $29 million of restructuring charges and special items, primarily related to LaunchPad initiatives, acquisition integration and the previously announced vendor data breach, partially offset by the release of a contingent consideration accrual for a prior acquisition.

Adjusted operating income, which excludes amortization of $62 million as well as restructuring charges and special items, was $431 million or 14.7% of revenue compared to $429 million, or 15.2% last year.

Adjusted operating income benefited from organic growth, acquisitions and LaunchPad savings that were essentially offset by the impact from PAMA of $27 million and higher personnel costs.

Excluding the 80 basis point reduction from PAMA, margins would have increased 40 basis points.

The tax rate for the quarter was 24.1% compared to 36.2% last year. The adjusted tax rate, and excluding special charges and amortization, was 23.9% compared to 25% last year.

The lower adjusted tax rate was primarily due to a favorable change in the Swiss tax rate. We expect the Company's adjusted tax rate for the full year to be approximately 25% implying a fourth quarter tax rate of approximately 24%.

Net earnings for the quarter were $221 million, or $2.25 per diluted share. Adjusted EPS, which exclude amortization, restructuring charges and other special items, were $2.90 in the quarter, up 6% compared to last year.

Adjusted earnings in the quarter benefited by $0.02 from three unusual items, a $0.06 benefit from the favorable change in the Swiss tax rate, a $0.02 unfavorable impact from Hurricane Dorian, and a $0.02 reduction due to the non-renewal of the BeaconLBS UnitedHealthcare contract pertaining to the Florida market.

Operating cash flow was $456 million in the quarter, compared to $252 million a year ago. The increase in operating cash flow was due to higher cash earnings and favorable working capital.

Capital expenditures totaled $93 million, or 3.2% of revenue, compared to $98 million, or 3.5% last year.

As a result, free cash flow was $363 million in the quarter, compared to $154 million last year.

We remained active throughout the quarter in terms of capital allocation. During the quarter, we invested $149 million in acquisitions and repurchased $100 million of stock. As of September 30th, we had $950 million of authorization remaining under our share repurchase program.

At quarter end, our cash balance was $361 million, up from $265 million at the end of the second quarter. Total debt at quarter end was $6.6 billion and our leverage was 3.3x gross debt to last twelve months' EBITDA.

Now, I'll review our segment performance, beginning with LabCorp Diagnostics.

Revenue for the quarter was $1.8 billion, an increase of 0.4% compared to last year due to organic growth of 0.9% and acquisitions of 0.8%, partially offset by divestitures of 1.3%.

Excluding the negative impact from PAMA of 1.5%, organic revenue increased 2.5%.

Total volume, excluding divestitures, increased by 0.7% over last year, of which acquisition volume was 0.5% and organic volume was 0.3%. Organic volume was reduced by approximately 1% from the managed care contract changes.

Excluding managed care contract changes, organic volume was up 1.3%.

As a reminder, we do not include hospital lab management agreements in our volume, which would have added approximately 1.9% to our volume growth.

Revenue per requisition, excluding the impact from divestitures, increased by 1% due to favorable mix and acquisitions.

Revenue per requisition was negatively impacted by 150 basis points from PAMA and 50 basis points from the non-renewal of the BeaconLBS UnitedHealthcare contract.

Given the nature of the BeaconLBS business, the unfavorable impact from the non-renewal of the contract is entirely reflected in revenue per requisition.

As such, we expect an unfavorable impact from BeaconLBS on revenue per requisition of approximately 150 basis points in the fourth quarter due to the full quarter impact.

LabCorp Diagnostics' adjusted operating income for the quarter was $296 million or 16.8% of revenue, compared to $332 million, or 18.9% last year.

The $35 million decline in adjusted operating income and 210 basis point decline in margin were primarily due to the negative impact of PAMA of $27 million, and one additional payroll day in the quarter, which was an offset to the payroll day benefit that we discussed in the first quarter.

In addition, organic growth and LaunchPad savings were partially offset by higher personnel costs, primarily consisting of the annual merit increase.

We remain on track to deliver $200 million of net savings by the end of 2021 from our Diagnostics LaunchPad initiative.

Now, I will review the performance of Covance Drug Development.

Revenue for the quarter was $1.2 billion, an increase of 8.7% compared to last year due to organic growth of 4.7% and acquisitions of 6.0%, partially offset by a 1.2% reduction due to the divestiture of our research products business as part of the Envigo transaction, and foreign currency translation of 80 basis points.

Excluding lower pass-throughs, organic revenue continued to grow in the mid-to-high single digits.

Adjusted operating income for the segment was $175 million or 14.9% of revenue, compared to $131 million, or 12.1% last year.

The $44 million increase in adjusted operating income and 270 basis point improvement in margins were primarily due to organic demand, acquisitions and LaunchPad savings, partially offset by higher personnel costs to support growth.

We remain on track to deliver $150 million of net savings by the end of 2020 from Covance's LaunchPad initiative.

For the trailing twelve months, net orders and net book-to-bill remained strong at $5.7 billion and 1.28, respectively. Backlog at the end of the quarter was $10.7 billion, an increase of approximately $400 million from last quarter.

We expect approximately $4.2 billion of this backlog to convert into revenue over the next twelve months.

Now, I will discuss our 2019 guidance, which assumes foreign exchange rates as of September 30th for the remainder of the year and includes the impact from currently anticipated capital allocation toward acquisitions, share repurchases and debt repayment.

We expect revenue growth of 1.5% to 2.0% over 2018 revenue of $11.3 billion. This is an increase over our prior guidance of 1.0% to 2.0%. This guidance includes the negative impact from divestitures of approximately 1.5% and foreign currency translation of 60 basis points.

We expect LabCorp Diagnostics revenue to decline 1.5% to down 0.5% as compared to 2018 revenue of $7.0 billion. This is an increase over our prior guidance of down 3.0% to down 2.0%, primarily due to acquisitions and organic growth, partially offset by the non-renewal of the BeaconLBS UnitedHealthcare contract. This guidance includes the negative impact from divestitures of approximately 2% and foreign currency translation of 10 basis points.

We expect Covance Drug Development revenue growth of 5.5% to 7.5% over 2018 revenue of $4.3 billion, a reduction from our prior guidance of 5.5% to 8.5%. The reduction of the midpoint of guidance is due to the 40-basis-point unfavorable change in currency translation, bringing the full year negative impact from foreign currency translation to 130 basis points. Organic revenue growth, excluding pass-throughs, is also expected to be 5.5% to 7.5% over 2018.

Our adjusted EPS guidance is $11.20 to $11.30, which is an increase of 2% to 3% over 2018 adjusted EPS of $11.02, and a narrowing of the range as compared to our prior guidance of $11.10 to $11.40. We are holding to the midpoint of our guidance as the benefit from acquisitions and organic growth is being offset by the previously mentioned unusual items.

For clarity, although we do not provide quarterly guidance, with only one quarter left in 2019, our narrowed guidance implies a fourth quarter adjusted EPS range of $2.75 to $2.85, that includes the negative impact from the non-renewal of the BeaconLBS contract.

Free cash flow is expected to be $950 million to $1.05 billion, which is an increase of 3% to 13% over 2018, and unchanged from our prior guidance.

This concludes our formal remarks, and we will now take questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Lisa Gill with JPMorgan.

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Lisa Christine Gill, JP Morgan Chase & Co, Research Division - Senior Publishing Analyst [2]

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I just really wanted to follow up on what's going on in the margin side. Glenn, you gave a good amount of detail, but as we think about BeaconLBS and tightening the fourth quarter and then probably having some impact on 2020, how do we start to think about margins going into 2020? Any framework you can give us around thinking about the puts and takes on the margin side? Can you expand margins, hold margins steady as we think about 2020? And then anything else that you can give us just kind of just an early framework around 2020 would be really helpful.

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Glenn A. Eisenberg, Laboratory Corporation of America Holdings - CFO & Executive VP [3]

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Sure, Lisa. First of all, we're, obviously, saying we are going to provide our guidance just in general on 2020 when we report our fourth quarter results as we do in a normal course, but to your question, with the BeaconLBS nonrenewal, the contract, obviously, is a headwind that we'll have going into the next year.

We've given kind of the impact, if you will, on the fourth quarter. So obviously, you can annualize that, you have the sense of the headwind that we'll have to overcome through either the additional businesses that Dave commented on earlier within Beacon as well as just the group in our overall business but as a general rule, directionally, and I think we've shared this with you and the others as a preliminary view of 2020, that overall for the Diagnostics business, with another year of PAMA ahead, the good news is we now have the managed care impact essentially in the numbers. Obviously, it just started within the first couple of months, but essentially, relatively flat year-on-year. Now with the Beacon nonrenewal, we would expect that Diagnostics plus or minus would be flat to down in margins as we look in the 2020 but, again, having Covance's expectation in Drug Development to see improved margins next year as well.

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [4]

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Lisa, it's Dave. I would just say flat to slightly down. I want to be clear on, flat to slightly down for 2020 in Diagnostics.

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Lisa Christine Gill, JP Morgan Chase & Co, Research Division - Senior Publishing Analyst [5]

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And so as we think about that comment, Dave, of flat to slightly down, I think also, you talked about some acquisitions this quarter. Do we start to see some of the accretion come in for 2020? Is it cost cutting? What are some of the drivers that we should think about to offset whether it's BeaconLBS or PAMA or some of the other headwinds that you have in the Diagnostics business?

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [6]

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Lisa, it's Dave. I think, you're correct. Obviously, the acquisitions come in at a lower margin, so as the synergies are realized, that will improve margins. We also have the continued impact both carried over and then the additional initiatives within the LaunchPad II program. And so those will offset some of the margin pressure that we're experiencing. And as Glenn said, we annualize the managed care contract changes, basically, in January, February.

So there are puts and takes, but at the end of the day, we feel confident that flat to slightly down is a very realistic view of 2020 margins in Diagnostics.

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Glenn A. Eisenberg, Laboratory Corporation of America Holdings - CFO & Executive VP [7]

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Lisa, just to add to the end of that program, we'll have the annualization of acquisitions of Diagnostics, which do mix up the margins. We continue to see a good pipeline for Diagnostics. So as we look to redeploy capital in 2020 with the strong cash flow that we expect an opportunity to see additional benefits from that.

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Operator [8]

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And our next question comes from Jack Meehan with Barclays.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [9]

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So I wanted to continue on the Diagnostics side, and I was hoping you could walk us through some of the moving parts for the fourth quarter.

So you've reached the full year outlook for Diagnostics, but that also includes the headwinds from BeaconLBS. They're just -- versus the model what's going better? Is there any other headwinds or tailwinds we should be thinking about in the fourth quarter?

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Glenn A. Eisenberg, Laboratory Corporation of America Holdings - CFO & Executive VP [10]

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Yes, Jack, this is Glenn. I'll take the first cut. As you see with the implied guidance, first on the revenue side, we're looking at a positive quarter in the fourth quarter. So we're benefiting, if you will, from the acquisitions that we've done, that will have a full quarter's worth, if you will. We've also, as you know, been experiencing the headwind from the divestitures that we've had, that essentially have annualized in the third quarter so we'll get the benefit of that. And then just normal, call it, organic demand growth within the business. As we commented earlier in the fourth quarter, we'll actually get the benefit of a revenue day that would've been the offset to the headwind from a revenue day that we experienced in the first half of the year. And then, again, to your point, we do have the headwind in Beacon, but as we look across the spectrum in the fourth quarter, we do expect to see some good topline growth. And while we do expect margins to be down in the first quarter year-on-year, we expected to be down the least amount that we would have experienced throughout any quarter this year based upon the topline growth, but also based upon the continuation of Diagnostics LaunchPad initiative.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [11]

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Great. That's all helpful. Then, can't help but asking a couple of questions on 2020 as well. I'm just curious, as we sit here today, how meaningful you think the PLN could be to growth. And then also in terms of some of the recent contracting on the managed care side, how are you feeling about just unit pricing for the lab business?

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [12]

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Jack, it's Dave. So in terms of the PLN, obviously, being included in it, one of the small number of laboratories is terrific opportunity.

United is -- Unitedhealthcare is undertaking some initiatives that we are very supportive of, such as $0 copays for some of their offerings, and they are outselling the PLN to ASO employers right now in this selling season.

So we'll know a lot more about the long-term opportunity when we see what the uptake is among employers but we feel very optimistic that the PLN is an opportunity to move share away from the higher cost providers to us as a high-quality and lower-cost provider.

I also want to point out, just reiterate that, in entering the PLN, there was no downward pricing adjustment with United. So our price remained what we have previously agreed to when we were selected to be part of PLN network.

In terms of unit price, what we always say is unit price is basically, as it is everywhere in healthcare services, a flat-to-slightly-down proposition.

So I think, in a typical year, you would expect to see unit price at 0 to negative 50 basis points.

The positives that we reported in revenue per requisition, as you know, are driven by test mix and utilization.

So as we see growth in higher-value testing, as we see growth in Accenture testing, that improves the reported revenue per requisition, but it doesn't change the basic nature ex-PAMA, which is a singular event of unit price being sort of flat to 50 basis points down. And that's how we think about unit price year in, year out, 2020 not been any different.

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Operator [13]

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And our following question comes from the line of Kevin Caliendo with UBS.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [14]

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I just wanted to go through this Beacon thing a little bit more, I want to make sure the math that we're doing here is right. Because if I'm looking at your guidance for the fourth quarter, it assumes that the Diagnostic margin would fall to about 13%, and that's for the full quarter of Beacon. Our math at 150 basis points in a revenue per requisition is around $25 million impact. Is that all falling? Should we just assume it all falls to the EBIT line? And that's maybe how we would want to think about it for the first 3 quarters of 2020?

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Glenn A. Eisenberg, Laboratory Corporation of America Holdings - CFO & Executive VP [15]

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Yes, no...

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [16]

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I'm sorry. That's Diagnostics. My bad. That's Covance at 13%. Diagnostics is higher than that, I apologize.

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Glenn A. Eisenberg, Laboratory Corporation of America Holdings - CFO & Executive VP [17]

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Yes, no. The Beacon part, using what the 1.5% impact on rev rec would get into, call it, the $25 million in revenue that you're speaking to. But obviously, there's a margin associated with that, that then would fall to the operating income. And as we talk about Beacon was an attractive business so with margins that were higher than the Diagnostics overall, but that's a shortfall to earnings that, again, we'll have to make up.

So annualizing that is a fair proxy to start, and again, we'll look to make up some of that through additional business, through the business, and again, LaunchPad savings and the growth overall in the business. But year margin declined at, or at least the margin that you're saying in the fourth quarter, as we said earlier while margins will be down in the fourth quarter, again, in part, because of the impact of Beacon, it'll all be down less than that it's been down all year. So we actually do see some favorable mix coming in. And when you look at our margin a year ago, I think, we were 16.5%, so you can count the factor in that, the margin will we better than what you're expecting.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [18]

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Got it. And then just helpful. And just one quick one on Covance. The M&A contribution was bigger than we have thought. You talked about some pass-through revenue weakness. I just -- question is excluding the pass-through, what was Covance organic revenue growth? And at what point should we cycle-pass the pass-through weakness we've seen in the Covance segment?

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John D. Ratliff, Laboratory Corporation of America Holdings - CEO of Covance Drug Development [19]

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Yes. I think that, as we said in the press release and then Glenn just stated that pass-throughs -- without excluding the pass-throughs, we expect to grow mid- to high single digitand then from the standpoint, variety of factors include -- influence the pass-throughs and study life cycle, geographic mix, business mix. Right now, I think once we get through 2019, you'll see as we see the early development, the labs, the content of FSP mix versus programmatic. You will see a little bit of the volatility, but 2020 will be a more natural year, is what I'll call it.

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Operator [20]

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And our next question comes from the line of Kevin Ellich with Craig-Hallum.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [21]

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I guess, Dave, wanted to go back to your comment in the prepared remarks about the nine studies that you won from a single customer in oncology. Can you give us a bit more color as to what's driving that? Who the customer was? And if you have other opportunities like that?

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John D. Ratliff, Laboratory Corporation of America Holdings - CEO of Covance Drug Development [22]

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Yes. Kevin, this is John. We wanted to invite these specific customers, but clearly, with it, large pharma customer, they've seen the value of the data, they've seen the value of the patient recruitment strategy through the voice of the customer and the specific inclusion/exclusion criteria that they can manage trials in a much quicker manner and more efficiently and effectively.

And so that has been upped our win rate significantly, doubling it, as well as in magnitude of dollars then from that, principally in the oncology area, but also in the NASH area, respiratory. But we've seen our strategies, our data capabilities work and work very effectively, and obviously, broadening that out to the entire oncology therapeutic areas as well as our other therapeutic areas that we support.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [23]

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Great. So, Dave, I don't know if this is your last call, but just wanted to say happy retirement, and it's been great working with you.

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [24]

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Thank you, Kevin, appreciate it.

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Operator [25]

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Our next question comes from the line of Ralph Giacobbe with Citi.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [26]

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Dave, I did want to go back to your comments on some of the unit price commentary being sort of flat to slightly down. I think you made a comment that likely it is in healthcare. I just wanted to clarify that because I think as we look across sort of the healthcare spectrum, managed care being in, specifically, has pointed to unit price being sort of the overly significant driver of, call it, a 6% high trend. So I guess I'm still unclear and don't understand how you can't get at least a CPI, if not more, increase from commercial, especially given sort of a value proposition that you present, which obviously, has been evident by the open network and open contracting?

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [27]

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Yes, we could spend a lot of time on this, Ralph. But I think, at a higher level, I would summarize by saying that, first of all, just realized that from a structural perspective, the market, particularly with hospital acquisition of physicians and their ability to direct work into the hospital laboratory, creates a competitive disadvantage for us that does affect pricing, right? Because they get paid more, they have a, in many markets, a dominant market position, and now they can dictate to the physicians to that -- the lab or has to be sent there. So that's one sort of structural impediment to this idea that we should be able to get -- we should be able to get market -- sort of market rate increases every year.

The second thing is, I think, your 6% unit price statistic is distorted when you think about the laboratory business, because if you think about, for example, pharma where you may get 10% price increase on a drug that costs 50 times a typical lab encounter. That's going to heavily skew your overall assessment of price.

If I look at healthcare services broadly, think about distributors, think about pharmacies, think about laboratories, think about home health, think about durable medical equipment, you're not seeing price increases. You're seeing price being flat to down. You are seeing contract negotiations leading to down pricing in a typical case. So I'm actually very proud of what we've accomplished in unit pricing over this year and over the last several years, but particularly this year with the contracts opening.

And then the last comment I would make, for better or worse, is when you're seen as offering a service that is readily replaceable by somebody else, it's just difficult to go in and say, well, we should get a price increase when others can be switched in. All that said, I will say, we negotiate in our contracts for cost-of-living increases, call it, type increases. We don't give them every year, but their part of our contracting strategy. And that's part of the reason that we are able to keep price -- unit price relatively flat over time. So I hope that's helpful, and obviously, it's a very complicated topic, but those are some of the market dynamics that, I think, explain why it's not just a simple proposition of we get our price increased.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [28]

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. Okay. Alright. Yes, fair enough. I guess, just my quick follow-up here. The other income, one, I know it's a nuanced question, but it did have a fairly sizable swing in the quarter. What was that related to? And can you help on sort of the annual run rate of that line item you may be moving forward?

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [29]

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Ralph, were you at other income? Is that what you said?

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [30]

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Yes, the other income, the other -- I think, went from an extra negative $10 million expense to couple of million dollars favorable or positive?

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [31]

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Yes. No. The -- when you look at, call it, a year ago period of $209 million, you will see this kind of in the reconciliation of our GAAP versus adjusted, that was essentially the gain on the divestiture of our Food Solutions business. And that even in the third quarter of this year, we had, again, in that reconciliation charge, you will see the same. There was a net impact of around $2.7 million gain due to the benefit of primarily gain from our venture fund, that $2.7 million as well as the call it, the $209 million or both excluded from our as adjusted results. So other income/net is, plus or minus, relatively flat.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [32]

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Okay. Maybe we can follow-up offline, because I thought I saw an even sequentially that change. But we can follow up on that offline.

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Operator [33]

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And our following question comes from Bill Quirk with Piper Jaffray.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [34]

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So, I guess -- So I appreciate the comments around the ongoing revenue synergies for Covance that are being helped or augmented by the LabCorp Diagnostics business. Dave, I was wondering, thinking about revenue synergies, going the other direction i.e. leveraging Covance's access to clinical trials in terms of directing that to win Diagnostics business, any thoughts there?

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [35]

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Yes, Bill. As I mentioned in the prepared comments, the Covance site partnerships provide benefits in both directions. So the opportunity to offer clinical trials to health systems is seen as a positive because it gives us more than just we can help you manage your lab cost, we can help you reduce your lab cost. It gives us we can help you reduce your lab costs and manage your [interests]. We can also bring you revenue opportunities. And so I think the Covance business supports the Diagnostics business in a very clear way in that instance.

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John D. Ratliff, Laboratory Corporation of America Holdings - CEO of Covance Drug Development [36]

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I'd also say, and it's John, when you give into the capabilities of the hybrid virtual trials, the Diagnostics capabilities with patient service centers coupled with the Covance central lab analytics, the market access areas of clinical side as well as the CRO side allow you to do those hybrid virtual trials in a much more efficient manner. And so that's another way of utilization of multiple parts of the enterprise.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [37]

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Understood. And then, I guess, as a follow up, I just -- is there any way to -- historically, you quantified, periodically, the Covance's impact from LabCorp. Could we maybe talk a little bit about, again, the LabCorp benefit from Covance? And then secondly, just on the PLNs, and broadly speaking, there's a lot of chatter on others beyond United following suit, any update there?

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [38]

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Well, yes, I think, what you -- I think the best way to quantify the benefits to the businesses is topline growth. And Covance have grown to 9% this quarter in constant currency and the enterprise, when you adjust for the divestitures, it grows -- grew almost 5%. So I think it's pretty clear that the topline growth is strong as a result of the combination of the businesses.

On the P&L, we continue to have conversations with other payers. Nobody has rolled out something similar.

I think there is great interest in what United is doing, and if it successful, we'll see followers.

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Operator [39]

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And our next question comes from the line of Eric Wright with Crédit Suisse.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [40]

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I had a broader question just on underlying demand trends across the CRO segment and Covance. And where are you seeing better demand trends in foodservice or FSP or large pharma versus smaller bio-pharma? And have there been any sort of meaningful changes in outsourcing demand trends in your view? Or any sort of changes that you've seen in the nature of the new business wins that you had in the quarter?

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John D. Ratliff, Laboratory Corporation of America Holdings - CEO of Covance Drug Development [41]

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Had a great quarter in terms of business wins, and they were broad-based. And so it was broad based in terms of early development labs as well as clinical. With respect to segmenting that, the significance of the biotech sector, within our wins has been increasing, and that's where the vast majority of the portfolio development is in terms of pharma. And so we see that within our order rates. And then with respect to the FSP versus the programmatic, we do see strength on both sides. We do see strength in terms of the programmatic win as well as the FSP. I think if you look at market data, the FSP might be slightly higher. But from the standpoint of -- in terms of the way we look at the business and the way that is flowing the early development business, of course, is a quicker burn business. But in the central labs and the clinical business or seeing broad-based positive, and our penetration in that, obviously, with a 1.28 last twelve is very good result.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [42]

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And then can you give us an update on the relationship with Walgreens towards the invent terms of both the lab side of the business as well as from the CRO perspective, too?

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [43]

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Yes, Erin. It's Dave. As we mentioned in the prepared remarks, from a diagnostic side, the Walgreens, we continue to roll out the Walgreens. We continue to get very positive commentary around the patient experience from the kind of integrated side, integrating patient data, recruitment, virtual trials, where we continue to discuss the rollout of what we call the beyond PSC aspects of the Walgreens relationship, and we expect to have an update on that as we move into 2020.

So we are at 10 minutes before the hour. We still have six questioners in the queue. We'd like to get to everybody. So let's please one question and one follow-up, and also if your questions has been asked, please don't ask it again. Thank you.

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Operator [44]

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Our next question comes from Eric Coldwell with Baird.

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Eric White Coldwell, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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David, you made it easy for me, because therein it hit on my topic, so I'll leave it to the next questioner. Just wanted to say good luck in your future endeavors.

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [46]

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Thank you, Eric. It's been a pleasure.

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Operator [47]

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Our next question comes from Donald Hooker with KeyBanc.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [48]

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And so you guys have talked a couple -- this quarter and last quarter about increasing pass-through from the preclinical to clinical trial work at Covance. I guess you've had those two businesses as Covance for many years. Is there some reason why I guess you're seeing more pass-through now versus in prior years? Is there something going on in there in the science or in what you are doing?

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John D. Ratliff, Laboratory Corporation of America Holdings - CEO of Covance Drug Development [49]

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Yes, Donald, this is John. So we are -- whenever you have a large content of biotech within the early development then that movement in terms of the later stage or early-late stage then moves in a much greater penetration. I'd also say that there is a level of science and organization that we put within the early development to enhance that capability as we brand cross the bridge, whether that's on the pure clinical side or on the regulatory side, whether that moves to our BioA areas or whether that moves into the first demand within the Phase I area.

So clearly, that push forward up the ladder is tremendous. We have over 100 opportunities there, right now.

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [50]

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And I have to say, Don, it's Dave, that, historically, I think prior to John coming, Covance was a much more silent organization or early development kind of thought about early development, and then thought about lab. And under John and Paul's leadership, we've really expanded the scope of the organization.

In my mind, worked through some of the silos. So the Covance organization is much more integrated in thinking about and tracking these opportunities to pull them across, and that's part of the reason for success.

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Operator [51]

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And our next question comes from the line of Mark Massaro with Canaccord.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [52]

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I might be splitting hairs here, but the managed care impact from volumes was about 100 basis points, first couple of quarters was about 70 basis points. Recognizing that, that's a small difference, I'm more asking about your expectations on seeing a trend potentially getting better or maybe becoming a little more challenge as we think about 2020, because your large competitor talked about its confidence in continuing to add lives from United. So any feedback there would be helpful.

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [53]

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Yes, Mark, it's Dave. I think it's based it up in 70, 90, 90, 100, which in my mind is flat. I mean, we know it was 70 in the first quarter because the changeover actually looked like it started more in February than January, and then it's been 90, 90, 100. So I definitely can say the trend is stable. We're not losing share. Our participation rates were you know United and Horizon have been quite steady.

And in terms of the future, we have the same growth opportunities. We are in the same networks that our competitor talks about.

And so it's one of the reasons I feel very optimistic in our -- that there are number of markets forces, the demographics, the aging population, the greater utilization of lab tests as people age, the introduction of new tests and technologies, all of those things support long-term growth as well as the things like the Preferred Lab Network that are innovating in favor of the highest-quality, lowest-cost providers.

So we feel great about what we've done this year in the managed care contracting. The team, the boots on the ground and field have done on a terrific job, and we're really proud of that.

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Operator [54]

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And our next question comes from Matt Larew with William Blair.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [55]

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Dave, you just mentioned some of the broader dynamics driving the laboratory in the next several years. Just wanted to know if whether you are really in footprint with Walgreens in terms of whether you're reshaping up your footprint to more of the retail setting, could be a long-term driver or share that something with that the providers of scale can't be replicated by someone like a hospital level competitors? And then second, if you think this is sort of in a second year PAMA, whether you're starting to see a sort of a step change in the willingness or interest of hospital and average labs to partner with you?

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [56]

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Sure. So second question first. Yes, I think the dynamics of PAMA are being -- becoming much more well-recognized the marketplace.

It is affecting the industry, and we've talk about some of the ways with the challenges, the smaller providers or smaller labs are facing.

I am going to say, again, as I've said all along, it's not a good thing for patients. Patient access is being limited, nursing home patients are being left without regular services. It's a very unfortunate situation, and we continue to work very hard through the layback and through the lawsuit to reverse the misguided way in which this has been implemented by CMS.

In terms of the Walgreens opportunity and thinking about offerings more opportunity in the retail setting, I think if Walgreens is being more complementary to our footprint that replacing a lot of the existing footprint, patients are still going to want to come to patient service centers in the doctor's office or, near the doctor's offices. At the same time, there are a lot of patients who are not fast or who want to come in the afternoon, who are going to be able to make use of Walgreens, they have to make a trip to the drugstore. Most people leave the doctor's office with a prescription and pick out the lab slip, we provide them the opportunity to fill the prescription and get their labs done there.

So I think -- I also think as Walgreens and other retailers start partnering more broadly in offering broader healthcare services so urgent care is in the retail, clinics in the retail, we work with CBS and then in clinic and all of these things are going to lead to further growth opportunities for us, and that's why we had so much focus on the consumer and on meeting the patient where they want to be met.

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Operator [57]

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And our following question comes from the line of Derik De Bruin with Bank of America.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [58]

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Just going back and thinking about the fourth quarter of last year, and there was, obviously, a number of headwinds and from the DTC volumes and potentially insourcing from other hospitals and it a contract shift whether, I'm just trying to impact -- I'm just trying to understand the impact when you sort of think about normalizing the outlook for 4Q this time and then compare it to last year? So what's better, what's worse, when you look at this? And I'm just trying to figure out where we are at the various headwinds? And where what's going to get annualized in this? And I mean, obviously, something's got a better, and now we've got the full impact of United contract switch, but this sort of comparing contrast on the quarter would be great. That's my only question.

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Glenn A. Eisenberg, Laboratory Corporation of America Holdings - CFO & Executive VP [59]

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Derik, this is Glenn. I'll take the first cut. To you point, we did have a softness in the fourth quarter of last year. But when you really think about from this year's standpoint, we have good organic volume growth again with offset being opening up to the managed care contract. We have a full year impact of our LaunchPad initiative. We will have a benefit of a revenue day. The acquisitions that we've done are additive, call it, the annualization of our divestiture, that would've been there in the fourth quarter of last year. That's not going to be in the fourth quarter of this year. So it's just done -- fair amount of pluses and minuses, but from our perspective, we expect to see good growth, good margins albeit still down even from a year ago, but that's all driven off of PAMA. But again, the least of margin decline that we would've seen year-on-year for this year, setting us up well as we move into the next year.

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [60]

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Derik, it's Dave. I think the two major factor that we spoke about the last year in the fourth quarter were also the hospital volumes and the direct-to-consumer genetic testing. And we haven't seen any impact or any unusual change in hospital volumes this year so far, at any point, the way that we did last year in the fourth quarter. And as we've said, continued to say this, we modeled the direct-to-consumer business as basically flat to down.

So those are the status, if you will, of the headwinds that we call out last year and in 4Q as being the headwinds.

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Operator [61]

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And our next question comes from the line of Ricky Goldwasser with Morgan Stanley.

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [62]

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So Dave, going back to some of your prepared comments when you talked about BeaconLBS, you highlighted that there are multiple opportunities for growth with other payors. So maybe you can share with us, what type of discussions you're involved with? And also from a payor perspective, what's this value add? But also, when -- if payors need to kind of like decide to what do we want to do, do we want to adopt BeaconLBS versus a Preferred Lab Network? What do you think is easier from a payor perspective? And then the follow up question that I have is your comments around margins for next year for Diagnostic being flat to slightly down, in line with what you said when we last met back in September in our conference, and we viewed them as very, very bullish. So my question -- my follow up question on that is, back in September, did you factor in that the exit of Beacon already into your comments or have other things transpired since that help offset that in -- help you maintain that positive outlook into next year?

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [63]

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I will start first of all, in the prepared comments, I've said BeaconLBS has multiple other opportunities for revenue growth. I didn't specifically talk about payors.

There are some opportunities with payors, but there are multiple other opportunities with ACOs, with health systems that want to manage utilization internally with large multi-disciplinary physicians, especially the practices they want to adhere to clinical guidelines for testings. So the value proposition is, and by the way, I will say from my perspective, BeaconLBS was a huge success in Florida.

Certainly there were some market pushback about utilization management but there were significant savings realized, there was a much higher level of network adherence from physicians. So the service works. And in my view, the decision that United made was, as I said in the prepared comments, it was a strategic decision on their part to offer programs and networks, including the PLN and BeaconLBS to consumers on a national basis.

So I think of the opportunity for any payor or provider or health systems looking at BeaconLBS as it's an opportunity to enhance testing utilization pursuant to evidence based guidelines, it's an opportunity to manage the use of high cost testing particularly by non-network providers. And it's an opportunity to engage directly with the physician about test selection of the point of service to educate them about when they're choosing the right test and what is going to cost the patients to have their tests performed. So that -- I think why we're optimistic about the revenue opportunities for BeaconLBS despite the nonrenewal in Florida.

In terms of the margin, Glenn, you want to comment on that one?

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Glenn A. Eisenberg, Laboratory Corporation of America Holdings - CFO & Executive VP [64]

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Yes. And, Ricky, obviously, when we're together in September, and we did talk kind of a flat to slightly down our margin outlook for next year, which again we'll provide more color as we go into 2020. It's just, obviously, a wide range of outcomes. Obviously, at that time, we knew the potential for the nonrenewal, the contract is one of the factors that have come in, which is why we're giving you little bit of bandwidth relative to our margin expectations.

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Operator [65]

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Thank you. And I'm not showing any further questions at this time. I'll now turn the call back over to your speakers for any further remarks.

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David P. King, Laboratory Corporation of America Holdings - Chairman, CEO & President [66]

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Thank you. Well, I get a chance to do a little valedictory here. So what I want to talk about is that on October 6, we celebrated the 50th anniversary of LabCorp's company. It's pretty amazing when you think about it. In 50 years of history here, one thing we've learned is that when we begin an amazing journey and pursuant with preparation and passion, there's no telling where it could end.

And I'm at the end of an amazing journey. I have been enormously privileged to play a part in an incredible process of growth and transformation at this company. And I want to thank all of you for your encouragement and your support along the way. I am leaving the company in great hands. We have outstanding leaders, succeeding in terms of Adam Schechter and John, Paul and Glenn who we know and the entire LabCorp and Covance leadership team, and of course, our 61,000 dedicated colleagues around the world. I couldn't feel better about the long-term opportunities of this business and the long-term validity and prudent success of our strategy.

So I know that the LabCorp flame will burn brightly while the torch is in the keeping of our next-generation of leaders. I wish every one of you good luck and godspeed. Thank you, and good day.

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Operator [67]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.