Labcorp Holdings Inc (LH) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q1 2015 Laboratory Corporation of America Holdings earnings conference call. My name is Latoya and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. However, to maximize time, please limit your questions to one and one follow-up. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host, Mr. Paul Surdez, Vice President of Investor Relations. Please proceed, sir.

Good morning and welcome to LabCorp's first-quarter 2015 conference call. With me today are Dave King, Chairman and Chief Executive Officer; Glenn Eisenberg, Executive Vice President and Chief Financial Officer; Jay Boyle, Chief Executive Officer of LabCorp Diagnostics; and Joe Herring, Chief Executive Officer of Covance Drug Development.

Before we get started, I would like to point out that there will be a replay of this conference call available via telephone and Internet. Please refer to today's press release for replay information.

This morning, in addition to our press release, we filed a Form 8-K that included additional information on our business and operations, both of which are available on our website at www.labcorp.com. Please refer to today's press release for a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. These non-GAAP measures include adjusted EPS, free cash flow and adjusted operating income.

Finally, we are making forward-looking statements during this conference call. These forward-looking statements include, among others, statements about our expected financial results, the implementation of our business strategy and the ongoing benefits from acquisitions. These statements are based upon current expectations and are subject to change based upon various factors that could affect our financial results. Some of these factors are set forth in detail in our 2014 10-K and in our subsequent filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I will turn it over to Dave King.

Thank you, Paul. When we announced the acquisition of Covance, we said that the timing was excellent because the lab business was showing strength after a couple of very challenging years from a regulatory and reimbursement perspective. The acquisition would provide us with new opportunities in an industry that is closely adjacent to ours and the combined capabilities of our businesses would provide exciting new opportunities for long-term revenue and profit growth. Our operating performance in the first quarter in my judgment demonstrates the wisdom of our decision to make this transformational move.

First, LabCorp Diagnostics delivered an exceptional quarter. Pro forma net revenue increased 4.9% over last year to $1.5 billion despite a $30 million loss due to weather during the quarter. Organic volume was a very strong 5.2%. Pricing was relatively stable with revenue per requisition declining a modest 60 basis points, mostly attributable to mix.

LabCorp Diagnostics' strong revenue growth leveraged into operating income growth. Pro forma adjusted operating income, now excluding amortization, increased 150 basis points over the first quarter of 2014 to 20.2% of net revenue, or 18.9%, including amortization. The business benefited from excellent expense control and improvement in productivity driven largely by Project LaunchPad, which includes a number of projects that target procurement, bad debt, service delivery at our patient service centers and revenue cycle management to improve the experience of everyone involved in our clinical diagnostics value chain. LaunchPad is progressing well and we are on track to deliver $50 million of net savings in 2015.

Second, the Covance Drug Development segment reported strong full-quarter net orders of $855 million generating a very impressive book-to-bill ratio of 1.37. Revenue growth for the full quarter on a constant currency basis increased 2.2% over last year with strong performance from the early development business, partially offset by unfavorable mix in central labs. Although our growth rate was lower than expected, we achieved record orders for the quarter, positioning us for improved revenue performance over time. In addition, Covance Drug Development is on track to deliver cost synergies in 2015 of approximately $35 million.

Third, we continue to see examples of clients coming to LabCorp for the power of our combined businesses. As a reminder, we expect to drive more than $300 million in incremental annual revenue by 2018 through accelerated clinical trial enrollment, end-to-end capabilities in companion diagnostics and combined infrastructure that will improve real-world trials. Clients continue to express interest in the utility of our unique patient data to deliver fast and efficient patient enrollment, as well as enhanced study and feasibility plans.

We gave a specific example of the power of our data to help win a new clinical study on our fourth-quarter call. Since then, we have had several examples of using LabCorp data to assist us in winning business. One example I would like to highlight is a request for proposal from a biotechnology company to conduct a late-stage trial with an experimental antibiotic in patients with serious, life-threatening staph infections, including MRSA. These infections are increasingly resistant to established treatments. If successful, the results will be submitted to the US FDA for accelerated approval of the antibiotic under new guidelines designed to strengthen the country's stockpile of effective antibiotic and antimicrobial agents.

Using our combined data set, we were able to generate a geographic heat map that visually depicted where we had a match to the trial criteria. The client awarded the project to Covance and the trial will be enrolling for the next 18 months. The data will be used to target known areas with an increased prevalence of the underlying infection, which can go a long way in speeding study startup, one of the most time-intensive aspects of running a clinical trial. If the study is successful, Covance and LabCorp will have helped a client get a new treatment against deadly infections to doctors and patients sooner, meeting an important medical need and vividly demonstrating how, only months after the merger, we are already capitalizing on the promise of our combined company.

Furthermore, several customers of LabCorp's legacy bioanalytical laboratory, Tandem, recently awarded multiple components of early R&D projects to us rather than their past practice of using separate CROs for bioanalytical, toxicology and other chemistry services. The broader, more comprehensive platform that we have as a result of the acquisition provides our customers a one-stop shop in their efforts to improve efficiency and reduce the cost of drug development. These are examples of the opportunities for revenue and profit growth that we are uniquely positioned to deliver as the world's leading healthcare diagnostics company.

I would now like to provide an update on recent regulatory and reimbursement developments. First, the passage of the Medicare Access and CHIP Reauthorization Act of 2015 removes the overhang from potential payment reductions that have been implemented in prior years to pay for the legislative decision to suspend the impact of the sustainable growth rate adjustment to the physician fee schedule, also known as the doc fix. This is a positive development for the clinical laboratory industry and we commend Congress and the Administration for a constructive solution to a problem that has vexed the Medicare system and those of us who provide care to the nation's elderly patients for many years.

Second, we await CMS's preliminary rule on its methodology underlying the market-wide survey proposed in the PAMA legislation. The Congressional intent was clear that this analysis should encompass independent and hospital laboratories to appropriately determine market rates. We have met on multiple occasions with CMS to discuss a practical approach to gathering the survey data and we appreciate CMS's thoughtful consideration of this extremely complex task.

Third, we continue to express our disagreement with FDA's draft guidance on laboratory-developed tests. This unnecessary regulatory burden will increase costs and slow innovation in laboratory medicine and will be terribly harmful to patient care. As always, we are engaged in dialogue with CMS, the FDA, members of Congress, ACLA and other stakeholders on all of these matters. Our goal is to protect patient interests, secure reimbursement of medically necessary tests and enable innovation in laboratory medicine.

Finally, I am pleased to update you on our progress in expanding our capabilities to change the way care is delivered. We are doing this through the development and commercialization of technology-enabled solutions and we now have two services in-flight. The BeaconLBS team achieved its goal of full implementation earlier this month. BeaconLBS's technology-enabled solutions are modernizing healthcare by conveniently incorporating laboratory decision support into provider workflow and we will continue to enhance LBS over time to provide broader physician decision support, as well as timely feedback to physicians about their test-ordering patterns and patient compliance with the tests they have ordered. This innovation promotes the use of the appropriate test for the appropriate patient at the appropriate time to enhance care and improve outcomes. I want to commend the entire BeaconLBS team on their unstinting efforts to introduce this innovation into clinical practice.

Enlighten Health is expanding by combining our informatics and analytics capabilities to support our revenue growth opportunities. Enlighten Health is the second cornerstone of our strategy to create technology-enabled solutions for our customers, which will add to our extensive suite of services in both clinical diagnostics and drug development. We are enthusiastic about the opportunities that lie ahead for both of these businesses.

This is an exciting time for our Company and our 48,000 employees around the world. I deeply appreciate their hard work in growing the business and executing flawlessly through the closing of the Covance acquisition and fulfilling our mission of improving lives and improving health. We remain confident in the long-term opportunities for our Company and expect to continue to deliver profitable growth and create value for shareholders for many years to come. Now I will turn the call over to Glenn.

Thank you, Dave. I'm going to start my comments with a review of our consolidated first-quarter results followed by a discussion of our LabCorp Diagnostics and Covance Drug Development segments and conclude with an update on our 2015 guidance. The following consolidated results include Covance as of February 19, 2015. Revenue for the quarter was $1.8 billion, an increase of 24% over last year. The acquisition of Covance contributed $267 million from the date of closing driving 19% year-over-year revenue growth with the other 5% primarily due to strong organic volume across both core and esoteric testing.

Gross profit for the quarter was $596 million, or 33.6% of revenue. This compares to $517 million, or 36.1% last year. Excluding $33 million of one-time acquisition-related costs, gross profit was $629 million, or 35.5% of revenue. The increase in gross profit dollars was due primarily to the acquisition of Covance, as well as organic volume and productivity. Excluding Covance, gross margin would have been 36.9%, an increase of 80 basis points over last year.

SG&A for the quarter was $415 million, or 23.4% of revenue, compared to $285 million, or 19.9% last year. Excluding special charges of $87 million related to the acquisition of Covance and Project LaunchPad, SG&A in the quarter was $328 million, or 18.5% of revenue, a 140 basis point reduction versus last year. The increase in SG&A was due primarily to the acquisition of Covance and labor inflation. The reduction in SG&A as a percentage of revenue was due to the impact of the Covance acquisition, as well as tight expense controls and a reduction in our bad debt rate. Excluding Covance, SG&A as a percentage of revenue would have been 19.3%, an improvement of 60 basis points over last year.

During the quarter, we recorded $139 million of restructuring charges and special items primarily relating to the Covance acquisition. Amortization expense for the quarter was $31 million, up from $21 million a year ago due to the acquisition. Operating income for the quarter was $130 million, or 7.3% of revenue, compared to $203 million, or 14.2% last year. Excluding amortization, restructuring and special items of $170 million, adjusted operating income was $300 million, or 16.9% of revenue compared to $232 million, or 16.2% last year.

Beginning with this quarter, we are excluding amortization from adjusted operating income to be consistent with our calculation of adjusted EPS. The exclusion of amortization benefitted operating income margin in the quarter by 1.8% compared to 1.5% last year.

Interest expense for the quarter was $104 million compared to $26 million last year. The increase was primarily driven by nonrecurring acquisition-related items of $53 million and higher debt balances to fund the acquisition. The tax rate for the quarter was 96.7%, higher than last year's 39.5% rate due to the tax treatment of one-time acquisition-related charges. Excluding these charges, the effective tax rate for the quarter was 35.8%. The decline in the tax rate from a year ago was driven by the mix impact of Covance, which has a greater percentage of its earnings from lower tax rate foreign jurisdictions than our base business.

Net earnings for the quarter were negatively impacted by restructuring and special items of $141 million after-tax. As a result, net earnings for the quarter were $1 million, or $0.01 per diluted share, compared to $113 million, or $1.31 per diluted share last year. Excluding amortization, restructuring and other special items, adjusted EPS were $1.73 in the quarter, up 15% from $1.51 last year.

During the quarter, operating cash flow was negative $87 million compared to $142 million last year as we incurred approximately $154 million of one-time charges relating to the acquisition of Covance. Excluding these items, operating cash flow was $67 million. The decline in cash flow was due to Covance's seasonal use of cash, partially offset by improved earnings and working capital in our base business. Capital expenditures totaled $34 million compared to $56 million last year. As a result, free cash flow was negative $121 million compared to $86 million last year. Excluding acquisition-related nonrecurring items, free cash flow for the quarter was $33 million.

At quarter-end, our cash balance was $446 million. During the quarter, we raised $3.9 billion in debt to fund the Covance acquisition at a blended interest rate of approximately 3.2% with a weighted average maturity of approximately 12 years. Total debt at quarter-end was approximately $6.9 billion. Our liquidity at the end of the quarter was approximately $1.3 billion consisting of cash and unutilized credit.

We now manage and report as two operating segments, LabCorp Diagnostics and Covance Drug Development. Segment results are presented on a pro forma basis for all periods as if the acquisition of Covance closed on January 1, 2014 and exclude amortization, restructuring, special items and unallocated corporate expenses. Segment definitions and reconciliations of segment results to historically reported results are included in today's press release and the current report filed today on Form 8-K.

First, I will review the performance of LabCorp Diagnostics. Pro forma revenue for the quarter was $1.5 billion, an increase of 4.9% over last year. The increase in revenue was the result of volume, measured by requisitions and tuck-in acquisitions partially offset by price, mix and currency. The increase in net revenue of 4.9% includes unfavorable foreign currency translation of 0.7% and a decrease in revenue per requisition of 0.6%. Total volume measured by requisitions increased by 6%, of which organic volume was 5.2% and acquisition volume was 0.8%.

LabCorp Diagnostics' pro forma adjusted operating income for the quarter was $300 million, or 20.2% of revenue, compared to $265 million, or 18.7% of revenue last year. Including amortization, margins would have been 18.9% versus 17.3% last year. The increase was primarily due to strong volume growth and productivity, partially offset by price and mix. Improvement in productivity was driven by labor efficiency and our Project LaunchPad initiative, which delivered approximately $10 million in savings in the quarter. These benefits included procurement savings, bad debt rate reduction and headcount. We remain on track to deliver approximately $50 million of LaunchPad savings in 2015.

Now I will discuss the performance of Covance Drug Development. Pro forma revenue for the quarter was $625 million, a decrease of 1.9% from $637 million last year. The strengthening US dollar negatively impacted revenue growth by approximately 410 basis points. On a constant currency basis, revenue increased 2.2% over last year on increased volume partially offset by business mix.

Pro forma adjusted operating income was $72 million, or 11.6% of revenue, compared to $77 million, or 12.1% last year. The decline in operating margin reflects the impact of currency and unfavorable mix partially offset by increased volume. Changes in mix resulted from stronger growth in the early development business and lower revenue per kit in the central lab business. Operating income benefited from approximately $5 million of cost synergies relating to the integration of Covance. We are on track to deliver cost synergies in 2015 of approximately $35 million.

Net orders during the quarter were $855 million, representing a net book-to-bill of 1.37. Backlog at the end of the quarter was $6.4 billion. This figure reflects a change in methodology from how Covance accounted for its backlog historically. We have excluded committed minimum volume backlog that is not yet associated with specific project awards. In addition, we've adjusted the backlog to reflect the segment's current configuration. A reconciliation of beginning to ending backlog is included in our current report filed today on Form 8-K.

Now I will comment on our 2015 guidance. We expect revenue growth of 39% to 42%, inclusive of Covance as of February 19 after the impact of approximately 230 basis points of negative currency. We have assumed that the foreign exchange rates stay at March 31, 2015 levels for the remainder of the year, resulting in an additional 70 basis point headwind versus our previous guidance, which use rates as of January 31.

We expect LabCorp Diagnostics to grow 3% to 5% in 2015 after the impact of approximately 70 basis points of negative currency. Covance Drug Development is expected to grow 0% to 2% versus full-year 2014 after the impact of approximately 440 basis points of negative currency. The lower guidance for Covance reflects an additional 110 basis point headwind from currency versus prior guidance, as well as unfavorable mix in the central lab business and lower-than-expected revenue conversion in the clinical business.

We expect 2015 adjusted EPS of $7.55 to $7.90 compared to $6.80 last year. We estimate approximately 100 million total weighted average diluted shares outstanding for 2015. Operating cash flow in 2015 is expected to be $1.045 billion to $1.07 billion; capital expenditures of $325 million to $350 million and free cash flow of $695 million to $745 million. Operating and free cash flow estimates are reduced by approximately $120 million of net nonrecurring items related to the Covance acquisition. These items include advisory fees, the makewhole payment on Covance's notes and change in control payments partially offset by paying only one of the semi-annual interest payments on the acquisition debt in 2015.

The $30 million reduction in operating and free cash flow from prior guidance is due to a reclassification, which increased acquisition-related charges and decreased the acquisition cash purchase price. Excluding the net nonrecurring items, we expect free cash flow to be $815 million to $865 million, unchanged from our prior guidance. This concludes our formal remarks and we will now take questions. Operator.

Robert Willoughby, Bank of America.

The one-time cash needs for Covance for the year of about $30 million from the initial estimate, what drove that?

Yes, Robert. This is Glenn. It is effectively a reclassification. What we had assumed at the time we announced our deal and provided the guidance, as you know, was kind of a day after closing was we had to assume how much was going to be the purchase price in cash for the value of the business and in the subsequent events of one-time deal-related advisory, CIC and so forth. $30 million that we assumed would be part of the purchase price based upon accounting would now be treated as cash from operating activities. So effectively what we have done is we have decreased cash from operating activities by that $30 million, decreased the purchase price cash that we paid for the acquisition, so from a cash standpoint there is no change. So when you look at free cash flow though, we obviously have to negate that $30 million, but again effectively when you exclude the deal-related, our free cash flow excluding one-time deal-related is the same as what we provided as guidance when we established it back in February.

Okay. And we have Project LaunchPad costs and what you're going to spend to achieve the Covance deal synergies. Do you have a target for the other restructuring expense for the year that was still tracking a higher level?

For the most part, all the, call it, deal-related charges were done in the first quarter. The only difference will be some additional CIC payments that would be paid out as people would potentially exit the Company if they were part of the synergies. The other restructuring, if you will, will continue to be as we execute and implement our Project LaunchPad. Primarily there are still some advisory fees in that, but that will start to go away and then it really will be just the costs associated with executing on those programs. So whether it be facility rationalization, headcount reduction, and so forth, there will be some additional one-time charges.

As we've told you before, what we have also done is when we provide savings from effectively whether it's Covance synergies or LaunchPad savings, we do it on a net basis relative to ongoing costs that would be needed to support those savings. So for example, if we implement a new system to support a LaunchPad initiative, the ongoing depreciation or additional costs would be netted out of those savings.

That's great. Thank you.

Lisa Gill, JPMorgan.

As I look at the guidance for Covance going forward, it looks like the expectation is from here that the trend is going to get better. So one, Glenn, am I looking at that correctly? And then secondly, Dave, when you talked about the most recent biotech opportunity, last quarter, if I remember correctly, Joe had quantified the size of it. Are you comfortable quantifying the size of what you talked about today?

Unfortunately, I don't have the size of the opportunity. I just got the information shortly before the call this morning, so let us reflect on that and then we can deal with it after the call.

The only thing I would add, Lisa, too, and ask Joe if he wants to add color to it, is that Covance is expected to see continued improvement as it progresses sequentially throughout the year. Again, the only caveat obviously would be the potential impact of currency. We are assuming that that is flat and not only do we expect to see improved revenue growth sequentially throughout the year in the business, but with the benefit of the synergy capture that we expect, we should be able to leverage those incremental sales very well.

The revenue opportunity is in the range of $10 million.

In a range of $10 million, okay. And then just lastly, as we look at this and we look at the results, incredibly strong, Dave, as you talked about in LabCorp, but can you give us any more color around that 5% organic? I know you said both core and esoteric growing, but can you talk about maybe what some of the key trends were around that growth in the quarter and obviously substantially better than what we are seeing across the industry?

Yes, I'm going to -- I'll make a couple comments and then I will ask Jay, who runs the business, if he wants to add anything. First of all, obviously, it's one of the strongest quarters we've had in recent years and so I want to give credit to our senior operating team, our leadership and every one of the 36,000 up-and-down from top to bottom who have made it possible. It's just a tremendous effort in maintaining the quality of service and the quality of our work as the volume increases. So kudos to the entire leadership team.

We won some business last year. We won a couple of significant contracts and those absolutely have helped us in terms of volume growth. And just to focus expectations for the latter part of the year, those will be annualizing by the end of the second quarter. So obviously we will see -- once those annualize, you will see a little bit different volume growth characteristics, but 5.2% organic volume is just an outstanding performance and very proud of the team for that. Jay?

Thank you, Dave and thank you, Lisa, for noting that. Dave kind of hit on some of the things that I would've talked about. He talked about our people and I think it really does start there. We have an outstanding salesforce. We have outstanding senior leadership and the thing that I am pleased about is, as you can imagine, there's a lot of excitement around this business right now and the opportunities that we have in front of us with the acquisition of Covance. And it was important that our people stay focused on growing the business, which is what they have done.

In addition to that, we have some outstanding relationships with our managed care partners and we are seeing growth across the board in both the esoteric and the core business, but particularly in our managed care sector and our hospital reference business because of the contracts and the awards that we won that Dave alluded to earlier. So we are really pleased and as Dave mentioned, we're going to continue, we expect to continue to grow our volume. We'll have tougher comps as we head through the back half of this year, but we look forward to continued good performances and thank you for noticing.

Great. Congratulations on the first quarter as a combined company, Dave.

Gary Lieberman, Wells Fargo.

Is it possible for you to quantify the impact of the new business as it annualizes in the second quarter and the rest of the year on organic volume growth?

Generally, as you know, we don't break out specific contributions to volume and revenue growth other than at a high level as we have with volume growth, price impact and currency. So I would say the answer to your question is no. It is possible, but we are not going to do it.

Okay. Did the organic volume growth benefit in any way from Covance? I thought you might have mentioned that there were some testing that shifted over to LabCorp.

No, I would say, by definition, organically, we've excluded all acquisition-related volume from that. We have said, and as I guess Dave alluded to earlier, that the organic growth was 5.2% in the diagnostic side. We did share with you that acquisitions contributed an additional 0.8% from the volume that we would've gotten from those acquisitions, but organic is excluding it.

Okay. And then maybe going back to the comments on the biotech win, you mentioned that you created a heat map to figure out geographically where the patients were. What is the dynamic in terms of reaching the physician who can then reach out to the patient, or is that not appropriate in this case?

No, obviously, one of the ways that we support trial recruitment is for patients who have a direct relationship with us. We can reach out to them and for patients who we don't have a direct relationship with, that is they haven't signed up for the patient portal or given us an email address or other ways in which we can contact them directly, then we go to the physician and we highlight to the physician the opportunity that they have patients who are trial-eligible and would they like to recruit the patients in the trial. Obviously, given the acuity of these types of infections, one would expect the physician response rate and the patient response rate to be fairly high.

I would like to just add how unique this asset is in the combined company. Keep in mind that Covance is directly connected to 50% of all clinical trial patients in the world and when you add that, the longitudinal database of 75 million of LabCorp, when you can query both of those extensive databases and use informatics capabilities and data display to show the sponsors where the patients are and then following the appropriate HIPPA guidelines to be able to either contact them directly or through a physician is really an unmatched asset on this planet. And we have a couple of wins in a very short amount of time and we are highly motivated to automate that capability and use it as a real competitive advantage. Ultimately that means sponsors get their drugs to market faster, which benefits them and ultimately patients get new life-saving medications like the one Dave mentioned that attacks, among other infections, MRSA, which is very resistant to current therapy. So it's really a win for everybody.

Okay, great. Thanks for taking my question.

Bill Bonello, Craig-Hallum.

Looked like a very strong quarter. I wanted to just focus on the CRO revenue piece and just have you maybe give us a little bit more color besides currency what changed in your thinking in terms of the CRO revenue guidance or the Covance revenue guidance and kind of how that relates or contrasts with the very strong book-to-bill and which numbers are more important to read into.

I'm going to make a couple preliminary comments and then let Joe give you more detail. The first thing I want to highlight is, if you adjust for the impact of currency, we are still guiding to 4.4% to 6.4% revenue growth, so that, in my view, is very strong growth guidance on a year-over-year constant currency basis. As we indicated in the prepared comments, the major impacts were strong growth in early development, which mixes us down and reimbursement or price per kit in central labs, which also mixes us down from a revenue growth perspective. But the orders and the book-to-bill are extremely impressive and so we feel terrific about the long-term revenue growth opportunity. And as has been previously mentioned, obviously, the guidance implies that revenue growth increases later in the year. So with that, my perspective is we have got a lot of currency headwind, but the base business, the base Covance business is performing very well and with that, I will turn it over to Joe for further comments.

First of all, for the second consecutive quarter, Covance reported record new orders. If you followed us historically, we had 12 consecutive quarters where net orders started with a 7 and we've pushed through $800 million in the fourth quarter and then $855 million in the first quarter and that is right in the middle of announcing the combination of our companies and trying to keep people on track and keeping them focused. So to have record order quarters is pretty impressive. In fact, they were so impressive, we did an independent market research project where it was blinded and clients said they were actually more inclined to include Covance in their bid list and to consider Covance as combined with LabCorp than even Covance on its own.

When you think about the $855 million in net orders, that is overwhelmingly in both central labs and clinical; that's where our orders come. And those don't start producing revenue generally for 6 to 9, more like 9 to 12 months, so there's a little bit of a delayed reaction.

In terms of the revenue softness, being softer than what we expected, it is overwhelmingly related to central labs and it is personally frustrating for me and the whole Covance team because record orders -- in the first quarter, we had record kits going out the door and so the engine is stoked, but for the vagaries of central lab, not as many kits have come in so far and the ones that have come in either have revenue per test or geographic or therapeutic mix, which is less than what we were expecting.

Keep in mind that, for the past 10 years, whether you look at a 3, a 5 or a 10-year CAGR, Covance central labs grows 10% and that's what we have projected for the year and last year, it was much higher than that and this year so far it is much lower. But we are projecting much stronger kits in the second half of the year and that's what you see in our revenue guidance.

Secondary to that was slower-than-expected conversion of clinical studies. Again, that happens from time to time, but clinical also had good orders. And then that married off against really strong performances in early development, our market access business and early clinical. So that thrown in a blender with the FX headwind and that's where we are. But, again, we are optimistic looking forward.

That was an awesome explanation and makes us feel much better about the lookout, or the outlook I guess. Just if I can ask one completely unrelated question, Dave, can you give us any thoughts on when BeaconLBS will be expanded to either other payers beyond United or to other markets beyond Florida?

Bill, it is our goal to expand BeaconLBS both to additional markets and to additional payers. And that is a -- we've had a number of discussions with additional payers. Obviously, we have been live for a relatively short period of time. We've got to get some experience under our belt, and we will look forward to updating you on progress and when those expansions will occur over time.

Great. Thanks so much.

Michael Cherny, Evercore.

Good morning, guys. Congratulations on a nice quarter. So I just want to dive in a little bit more. Joe, you mentioned some of the book-to-bill numbers. You've seen the really strong trends last couple of quarters. As you think about how you make those discussions with some of these biotechs, using maybe the one as an example in terms of the trial that you were pleased with, how are you going to get the proof points out? Will you be able to provide interim data in terms of the way that some of these enrollment processes are going on these trials where you can go out and further prove just how successful it has been on an early basis?

Or I guess given that you won't have the proof points of how successful these trials are early on, is it still just the promise of what you can deliver verses maybe necessarily having actual results for how successful this will be?

First of all, all of our relationships with clients as well as specific study data is contractually confidential. And if you look at the history of our company and frankly our competitors, we really only make specific comments along those lines when the customer wants to publish the data. And it would not surprise me if these first two studies, if they perform as we thought, the clients may want to say something about that. Because I think they are very excited about being able to actually see where the patients are, which makes them much more confident that a CRO can enroll the trial on time or faster. But again, it's the client's decision on that, not ours.

Got it. And then you talked about central lab, you talked a bit about late stage. Can you just give us a little bit more color, as well on early stage and some of the underlying performance there and what you are seeing from both the strengths and potential challenges perspective?

Well, our fundamental canary in the coal mine is biotech funding and it has been at a very, very high level and those clients basically help build the capacity for Covance and our major competitors. Secondly, a number of pharma companies are, as you well know, starting to have better productivity from their pipeline and they are more enthusiastic about investing in R&D and knowing that they're going to get a return on their R&D investment, so some of those are coming back to [pour]. That [didn't] really happen in the first quarter, but new wins and the forward outlook anticipates pharma sort of getting back to work, I guess, I would say. But the strength of the early development business in the industry in total is very encouraging after the last four or five years of less-than-expected performance.

Great. Thanks for the color.

Glen Santangelo, Credit Suisse.

Dave, wanted to follow up on the Covance margins. If I hear what you are saying correctly on the revenue side, it kind of sounds like there was unfavorable mix and the central lab as being one of the big contributors to the lower-than-expected revenues and is that primarily what explains maybe the slightly weaker-than-expected margins? And if we assume that the trend in central labs reverses itself throughout the balance of the year, should we see that positively impact the margin line in the balance of the year as well?

Let me take a first cut and Dave and Joe may want to step in. But to your point, during the quarter, obviously margins came down, but principally due to the impact of currency, but also the mix of the business. So the benefit was obviously we got some volume benefit, as well as the synergy savings. As we project out in the business going forward, we do have a more positive outlook. Volume is going to continue to improve. Hopefully the mix will start to improve and we know we are going to get the synergies to continue to grow. So our expectation for the business will be again continued top-line growth as we go throughout the year subject to the currency impact, obviously, but especially leveraging those sales well.

Okay. Maybe if I can just follow up with one question on the diagnostics side. The pricing, the rev per requisition was down 60 basis points, which seems like another small sequential improvement from where we were trending in fiscal 2014. Dave, maybe could you update us what is going on there and sort of your outlook on lab pricing for the balance of the year?

Yes, sure, Glen. Obviously, the 60 basis points is both a sequential improvement and a significant year-over-year improvement and basically the big driver of the 60 basis points in reported decline is just payer mix. So we continue to see uninsured patients moving to exchange or managed Medicaid products and that has a downward impact on revenue per requisition. And so I think we are actually looping our way through that as ACA enrollment completes and stabilizes, but that to me is kind of the primary reason and as I say, we feel pretty good about it because unit price is not going down. What we are seeing is mix-driven price impact.

Okay, thank you.

Amanda Murphy, William Blair.

Just had a follow-up on the guidance. I think you said 100 million in share count that you expected -- diluted share count -- for this year and maybe that was a slight reduction in what you had said last quarter. I don't know if I am reading too much into that.

No, Amanda, that is correct. On a fully diluted weighted average share count, we expect -- and our guidance is predicated on an assumption of 100 million shares for the full year.

So then the right way to think about that is $0.20 of increase roughly, $0.15 of that is the share count and so then the base business maybe added $0.05 or more given the increased currency effect, is that fair?

That is correct.

Okay. And then just another one on the book-to-bill. So I realize it's early and you have made a few comments on this already, and especially some anecdotal evidence of wins, but is there a way to tease out at this point the strong book-to-bill, how much of that is the legacy Covance business and markets doing better, vis-a-vis, any benefits from having the combined company together at this point?

I would say it is overwhelmingly legacy Covance at this time, but again high client interest in talking with us and exploring the assets of the combined company.

And Amanda, just a quick exclamation point on that. I think Joe made a very important point, which is you are going through an acquisition, an integration, a closing and you have another quarter of record orders and very strong book-to-bill. So I think the important thing to think about is yes, it is, I agree, it is mostly legacy Covance, but we didn't have a distraction factor in either of the businesses and very pleased about that.

Got it. And did you give a cancellation rate on the backlog?

No, we did not.

Okay. All right, thanks very much.

Keep in mind that we report net orders, so it's net of cancellations. We normally don't comment on cancellations. That's not a part of our thing. I would say though they were the lower end of the historical range.

Isaac Ro, Goldman Sachs.

Just a follow-up on the early-stage business. Hoping that you could maybe put a little more color on the specific constant currency growth rate you saw there and maybe give us an apples-to-apples view on how that trended versus 4Q.

Let me at least start and again Joe may want to provide color. As we have now moved to kind of the new segmentation at the Company, we are really providing the details, if you will, as the two segments. We are glad to provide color as far as the direction that the businesses that comprise those segments, but we are not providing detailed numbers and growth rates and so forth.

Yes, I think generally what you would say is that early development was higher than the Company average of 2.2, clinical phase 1 to 4 was sort of in that average and central labs was basically flat, so ballparkish.

On a constant currency basis.

Right. Thanks, everybody. Appreciate all that incremental. And then just a follow-up on the general environment. I think if we look at the numbers for the biotech industry, first-quarter funding on the equity side was by far a record quarter, a huge amount of money raised. So if we take in context what is going on with the funding side versus what you guys are seeing book-to-bill, maybe help us reconcile the timing around which we might see any of those bolus dollars kind of flowing through to your business. Appreciate it is going to be company-specific and maybe not directly correlated, but I would assume that it's at least a positive correlation between the amount of money being raised and the amount of money being spent on CROs.

There is a positive correlation. It's usually a six to nine-month lag between what you see in terms of funding and revenue coming into the CRO industry.

Got it. Fair enough. Thanks so much, guys.

Jack Meehan, Barclays.

I just wanted to follow up on the PAMA commentary and just see if you had an update in terms of when you -- timing for when you expect we will get a formal update and I know, Dave, you mentioned the complexity of collecting data and just thoughts around the hospital labs submitting the data -- they already submit cost reports, so just what is some of the thinking there?

I think this is a -- it is a quite complex task and I think CMS is making a real good faith effort to listen to the constituencies and try to understand what they should be looking for. It is true that hospitals submit cost reports, but, as you know, the hospital -- what we are looking at here is not DRG payments, it is not outpatient prospective payments; it is just fee for service payments and so it's a subset of payments and it's a subset of payers because it is nongovernment payers that the government is interested in looking at to determine market.

So it is a pretty complicated task. You don't want to overburden either the hospitals or frankly the independent labs. If you think about the number of acquisitions that we have done and the number of tax ID numbers that we have, you don't want an independent lab to have to report their data with 55 different tax IDs. That would be enormously time-consuming and complex. So I think CMS is making an effort to listen to the constituencies and deal with the complexity and come out with a rule and we don't have any update on the timeline, but we know they are working hard and we are trying to be constructive and supportive in that effort.

Got it. Thanks. That's helpful. And then just trying to tease out between the routine and the esoteric growth in the quarter. Is there any -- was there anything noticeable on the esoteric side in terms of individual products that were driving the growth, or do you think it is just more broad-based -- the market is doing better and the segment is doing better?

I think it is broad-based market doing better and segments doing better. I wouldn't point to or highlight any specific test or group of tests. Obviously, we continue to do nicely with women's health. That has been a strong point for us. We continue to do nicely with genetics. Those are a couple of good areas within esoteric.

Got it. Thank you.

Ricky Goldwasser, Morgan Stanley.

Good morning and congrats on the quarter. Dave, you responded to Glen's question that coverage expansion is impacting the price mix and it sounds like it's coming from Medicaid. So are you seeing any pullthrough volume from coverage expansion, excluding Medicaid, and are you factoring in any benefit from expansion or pick up there in your guidance for the second half?

The challenge in determining what is ACA-driven other than managed Medicaid where it is pretty obvious is that when a patient shows up with an insurance card, we don't know if it is an exchange patient or if it is a standard commercial patient. We don't have any way of determining that. So it's a little hard to say are we seeing pullthrough business from coverage expansion or are we not. Again, I think we saw very strong organic volume growth, which suggests to me that we are seeing the benefit of the business that we won last year and there clearly is some pullthrough coming from that business.

In terms of what is factored in for the second half of the year, or actually the next three quarters of the year, we haven't finished the first half of the year, we are not factoring in any significant increase in enrollment for the balance of the year. We are simply factoring in the diagnostics business, continuing to do a very nice job in the market in terms of selling and execution and that's what drives the top-line revenue growth guidance.

Okay. And then one follow-up on the Covance business. Can you share with us how you think about the Covance portfolio, especially kind of like the early development, but really preclinical within it? Obviously, demand is high and it seems from results that Covance is growing top line, but how does the segment fit with your long-term strategy?

Well, one of the reasons that we liked Covance as an acquisition opportunity is the complete platform and the broad scope of services. So I mentioned in the prepared remarks how the bioanalytical business was cross-selling into toxicology, was cross-selling into chemistry, so right now, we like the way all the businesses fit together and we are enthusiastic about the opportunity to grow. Early development, obviously, as Joe mentioned, had some challenges for a couple years, but right now the business is growing strongly. It is an integral part of the complete one-stop platform that we built and so we are excited about it.

Okay. Thanks.

A.J. Rice, UBS.

Maybe two quick questions here. First of all, I know one area in the lab testing that you have highlighted the last two years has been the molecular diagnostic area and some of the travails of trying to get approval out of some Medicaid programs as well as TRICARE. Any update on that?

We continue to work hard at that. I wouldn't expect any significant impact in the run rate either of the where MoPath is not being paid for or of collections. We have collected, based on appeals and payer policy changes, we have collected some against the outstanding receivables, but the run rate is about the same. Obviously, we are looking now at accounts and opportunities where we know that there's an account, where there's a large amount of MoPath business that we are not getting paid for and opportunities to manage better with that. And, Jay, if you have any further comments on that, you can --.

I believe you have covered it.

Yes, okay. And then just the other one is you had mentioned in the prepared remarks about the lab-developed tests and the FDA review there and commentary. Any sense of how that is going to unfold timing-wise and when we might actually get some resolution on this?

I think the FDA comment period closed. I think there were a very large number of comments, so it is really going to be determined by the FDA in terms of when they respond to the comments and obviously there's some legislative activity going on as well and we are doing our best to be engaged in all of the conversations.

Okay. All right, thanks a lot.

David Clair, Piper Jaffray.

I had a couple quick questions on the diagnostics side of the business here. So the first one, just on the recently issued next-generation sequencing, CPT codes, just curious if LabCorp is billing under these new codes currently and is this impacting collections at all. And then can you give us an update on BRAC and IPT testing?

I will start with next-gen and then Jay will talk about the BRCA and the NIPT. So the next-gen sequencing codes, I want to be clear that next-gen sequencing is a methodology, so it is not like we are doing new testing or different testing; it is simply there's a different methodology being used. And so, at this point, the coding has not had an impact -- first of all, it is not a significant component of the business at this point, although it will grow, but the coding has not had an impact on either revenue or collections. And I will turn it over to Jay in terms of the BRCA and the NIPT.

On the BRCA, David, we see it obviously as a growth opportunity. However, given the size, it is not substantial in terms of, or it is not material, in terms of our entire book of business and it is one of the many tests that we go ahead and offer.

And on NIPT, obviously, we are -- we have transitioned to offering our own [test and forma seek] and pleased with the volume and revenue there and continue to see it, as I mentioned, as a growth opportunity around women's health.

Thank you.

So we are right at the top of the hour. We have a couple more people in the queue. I will ask you to keep the questions short, please, so we can get everybody in and also not ask questions that have been previously responded to.

Darren Lehrich, Deutsche Bank.

Just a brief question I had about companion diagnostics and just wondering if you can frame at this point the backlog in terms of how the trials are with companion diagnostics as a component of that and where you think that might be going. I think you've laid that out as a strategy, so that's the question.

Yes, we don't break down the backlog by type of trial. Companion diagnostics, as you know, particularly oncology, about 40% of the trials involve some kind of an associated biomarker or companion diagnostic and so it is a very nice, long-term opportunity for us. As I think we mentioned early on, there were 16 companion diagnostics 10 years ago. Now there's 116 and that number grows every year. We have a work team that is specifically focused on capitalizing on the companion diagnostics opportunity and integrating all of our services to be the desired partner in companion diagnostics and we are very pleased with the progress there.

Okay, great. Thanks.

Bryan Brokmeier, Maxim Group.

You talked about providing a heat map of where patients are located to the biotech company whose business you won in the quarter. It sounds a bit more detailed of an analysis than you provided to the customer in the prior quarter. Are you still improving your understanding of how to present your offering to customers and while you have won a few contracts already, which is impressive, should we anticipate an inflection point later this year when customers start to award you with many more contracts?

Well, it's hard to say what is going to happen in the back half of the year. All I can say is that we have tried to target places where this data would make the biggest impact on the client. And so far, we are excited about what is going on. We have a lot of work ahead of us in terms of making the process easier and more efficient and having the right display tools and that type of thing. So I would say we will continue to talk about this in coming quarters, but we are pleased with the start -- actually faster than what we would have projected.

I agree with Joe's comments. I think that, as he said, automating this process and making it simple from our perspective and from the client's perspective will only lead to greater opportunity in the long run. But as you mentioned, Bryan, the idea of being able to provide a heat map with potential patients for a condition as acute as this one I think is a real competitive differentiator and just shows you what the long-term opportunity is here in terms of our first stated priority, which is to improve the speed of trial recruitment and reduce the cost of trials.

Okay. Thanks a lot.

I would now turn the call over to Mr. Dave King for closing remarks.

Once again, we would like to thank you all for participating in our first-quarter conference call. Very pleased with the quarter and with the performance, both from the diagnostics and the drug development business and we look forward to updating you on our performance in the future. Have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect. Have a great day.