Labcorp Holdings Inc (LH) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 LabCorp Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Scott Frommer, Vice President of Investor Relations. Sir, you may begin.

Good morning, and welcome to LabCorp's Fourth Quarter 2017 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; Gary Huff, CEO of LabCorp Diagnostics; and John Ratliff, CEO of Covance Drug Development.

In addition to our press release, we also filed a Form 8-K this morning that includes additional financial information. Both are available in the Investor Relations section of our website at www.labcorp.com and include a reconciliation of non-GAAP financial measures discussed during today's call to GAAP.

Finally, we are making forward-looking statements during today's call. These forward-looking statements include, but are not limited to, statements with respect to 2018 guidance and the related assumptions, the impact of various factors on operating and financial results and the opportunities for future growth. 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 2016 Form 10-K, 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.

Thank you, Scott, and good morning. By every measure, LabCorp excelled in 2017. Revenue over $10 billion, adjusted EPS at the top of our guidance range and free cash flow in excess of $1.1 billion. We invested approximately $2 billion in strategic acquisitions across both businesses and returned approximately $350 million to shareholders, keeping our leverage at around 3x debt to EBITDA.

Our performance in the fourth quarter demonstrated our multi-faceted platform for growth as organic initiatives, contributions from acquisitions and margin improvement in Diagnostics and Drug Development translated into double-digit increases in revenue and EPS and outstanding free cash flow.

Our platform positions us for another year of strong growth in 2018. Our guidance, despite the negative impact from PAMA, contemplates continued increases in revenue and EPS, producing significant cash flow that we plan to deploy to support growth, create opportunities for our people and deliver shareholder value.

To achieve our guidance in 2018, we are relentlessly focused on execution across our key priorities, driving profitable growth, integrating key acquisitions and optimizing enterprise margins. Our focus on profitable growth starts with our enterprise-wide commitment to quality, service and innovation. These qualities are critical to retaining existing customers and attracting new ones.

In Diagnostics, they provide the foundation for new and deeper collaborations with health systems, large physician groups and managed care partners. They also create growth opportunities in women's health, medical drug monitoring, genetics and oncology testing as well as in critical collaborations such as Walgreens and 23andMe.

In Drug Development, these qualities are the foundation of our strength in book-to-bill and net orders and will drive 2018 revenue conversion. Our ongoing strategic investments in precision medicine, therapeutic expertise, FSP solutions and biologic drug development capabilities continue to increase our win rate with existing partners and strengthen our value proposition that is winning new customers.

Our second priority for 2018 is integrating key acquisitions flawlessly. The integration of Chiltern is proceeding at a robust pace. We've incorporated key talent into our Drug Development leadership team and introduced new branding that underscores our commitment to Chiltern's legacy customers and businesses. Our clinical drug and medical device development offerings now have greater scale and capabilities, benefiting customers of Covance and Chiltern alike.

In Diagnostics, our partnerships with Mount Sinai and PAML's former owners, Providence and Catholic Health, continue to expand as we integrate these premier businesses. We expect these 3 transactions, benefiting from a full year of ownership and growth, to generate approximately $500 million in incremental profitable revenue in 2018, and we look forward to updating you on these integrations during the year.

To optimize enterprise margins, we combined profitable revenue growth and acquisition integration with our LaunchPad business process improvement initiative. LaunchPad is a long-term reengineering of our business to streamline the delivery of services through the use of innovative tools and technology. Covance LaunchPad is a multiyear undertaking that will align people and capabilities with client and business demand, utilize automation and new IT platforms to create efficiencies and enhance our customers' experience with Covance through investments in commercial and operational processes. We expect, having achieved $20 million in savings in 2017, to achieve additional net savings of $130 million through the 3-year period ending in 2020, significantly increasing our Drug Development margins. We expect that driving profitable growth, integrating acquisitions and optimizing our enterprise margins will lead to strong revenue and earnings growth in 2018 despite the headwind we face from PAMA. The combination of diagnostics and drug development capabilities is a powerful creator of shareholder value in the near term.

At the same time, we must think about how we can expand LabCorp's role over time in the rapidly evolving health care system. We are focused on 3 strategic initiatives to broaden our role in the health care system of the future. First, we will support our customers' transition to value-based care. Second, we will streamline the drug development process. Third, we will create a broad consumer engagement platform that integrates diagnostics, devices and therapeutics.

I will now discuss our thinking in each of these areas. In value-based care, our combination of world-class diagnostic and drug development capabilities is critical in accelerating progress toward more precise and personalized health care. From helping to choose the right test for the right patient at the right time, to offering innovative molecular and genetic tests, to delivering the next generation of lifesaving drugs, LabCorp is a critical player in enabling targeted, tailored, high-value care. Our quality, scale, IT expertise, standardized platforms, and payer and provider collaboration support our goal of bringing differentiated value to value-based care.

In Drug Development, our end-to-end capabilities, industry leadership in companion diagnostics and investments in real-world evidence capabilities and market access solutions enable customers to demonstrate the value of a treatment to all health care stakeholders.

Our second strategic initiative focuses on enhancing the drug development process. Client demand for data-driven study designs, scalable tools and access to relevant biomarkers and tests is at an all-time high as clinical studies are increasingly complex, costly and facing increased competition for patients and investigators. We offer comprehensive and differentiated solutions to these challenges, underpinned by our scientific and therapeutic expertise. Furthermore, we continue to invest in tools and technology to capitalize on the competitive advantage conferred by our comprehensive patient data, our extensive site and investigator performance data and our industry leadership in concurrent development of therapeutics and companion diagnostics.

We also continue to utilize the combined capabilities of our enterprises for innovative trial designs. For example, we've recently completed our second virtual, real-world evidence study in which our Covance market access team enrolled patients and monitored their progression through its call center. Our LabCorp Diagnostics patient service centers performed blood draws and biometric measurements, and our Covance central lab performed the associated testing. This site-less approach improves the speed and lowers the cost of studies, and we expect to expand this highly attractive offering in 2018.

Our third strategic initiative is to develop a broader platform to deepen our consumer relationships. We have made strong progress improving the user experience of our services and continue to roll out new tools and technology, including LabCorp Express, LabCorp PreCheck and LabCorp Patient. We will release a mobile app version of LabCorp Patient later this quarter for added consumer convenience as an additional option to the currently available patient portal.

Consumer engagement supports growth in both of our businesses. Our database of patients who have provided consent to learn about relevant clinical trials exceeds 200,000 participants, and we expect to drive this figure significantly higher in 2018. New channels of care delivery such as LabCorp at Walgreens and the launch of our new self-collection offering for home use later this year significantly expand our reach and engagement with consumers. For example, in the LabCorp at Walgreens sites in Denver, 28% of the patients are new to LabCorp, demonstrating our success in meeting consumers where they want to be met and supporting expansion of this initiative into new markets.

As a reminder, we will provide an in-depth view of our business and key initiatives on February 27 at our Investor and Analyst Day event. We hope that you will join us for or listen to the webcast of this event.

In closing, I'm proud that we made meaningful advances in 2017 on our mission to improve health and improve lives. I am deeply grateful to our 57,000 mission-driven colleagues around the world for their passion, commitment and hard work. We are intently focused on delivering another strong year in 2018. At the same time, as a global leader in life sciences, we will continue to focus on expanding our critical role in the health care system of the future by broadening our capabilities, increasing our reach and relevance, and delivering innovative solutions that only LabCorp can offer. Through these initiatives, LabCorp will benefit consumers, customers, employees and shareholders in 2018 and beyond.

Now I'll turn the call over to Glenn.

Thank you, Dave. I'm going to start my comments with a review of our fourth quarter results, followed by a discussion of our LabCorp Diagnostics and Covance Drug Development segments and conclude with our 2018 guidance.

Revenue for the quarter was $2.7 billion, an increase of 13.2% over last year as acquisitions added 10%, organic revenue increased 2.6% and we benefited from foreign currency translation of 60 basis points. Operating income for the quarter was $354 million or 13.1% of revenue compared to $323 million or 13.5% last year. During the quarter, we had $39 million of restructuring charges and special items, primarily related to the LaunchPad initiative as well as the acquisition and integration of Chiltern. Adjusted operating income, which excludes amortization of $63 million, restructuring charges and special items, was $456 million or 16.9% of revenue compared to $388 million or 16.2% last year. The $68 million increase in adjusted operating income and 70 basis point improvement in margin were primarily due to acquisitions, organic volume, price, mix and LaunchPad savings.

Income taxes for the quarter were impacted by a $519 million one-time benefit from tax reform in the United States. This benefit included the favorable revaluation of deferred taxes, partially offset by the deemed repatriation tax. Excluding this net benefit, other special charges and amortization, adjusted tax rate was 34.5% compared to 33% last year. This increase was primarily due to the mix of domestic versus foreign taxes. We expect the company's adjusted tax rate for 2018 to be approximately 25% compared to 33.4% in 2017, benefiting from the lower U.S. tax rate.

Net earnings for the quarter were $707 million or $6.81 per diluted share, including the benefit from tax reform. Adjusted EPS, which excludes tax reform, amortization, restructuring charges and other special items, were $2.45 in the quarter, up 14% over last year.

Operating cash flow was $564 million in the quarter compared with $449 million a year ago. The strong level of operating cash flow was higher than our guidance due to improved working capital, which was driven by accelerated cash collections across our businesses as a result of our LaunchPad initiatives. Capital expenditures totaled $96 million or 3.6% of revenue compared to $74 million or 3.1% last year. As a result, free cash flow was $468 million in the quarter compared to $375 million last year.

During the quarter, we invested $83 million in acquisitions, paid down $443 million of debt and repurchased $40 million of stock. As of December 31, we had $407 million of authorization remaining under our share repurchase program. Our cash balance at year-end was $317 million, down from $409 million at the end of the third quarter, and total debt was $6.8 billion, down from $7.2 billion last quarter. The company's leverage decreased during the quarter to 3.2x gross debt to last 12 months pro forma EBITDA as of December 31.

Now I'll review our segment performance, beginning with LabCorp Diagnostics. Revenue for the quarter was $1.8 billion, an increase of 8.6% over last year. The increase in revenue was driven by acquisitions, organic volume, measured by requisitions, and the benefit from currency translation of approximately 30 basis points. Revenue per requisition increased 1.8% due to acquisitions. Total volume increased 6.6%, of which organic volume was 2.9%. Acquisition volume was 3.7%, led by the PAML and Mount Sinai transactions.

LabCorp Diagnostics adjusted operating income for the quarter was $357 million or 19.6% of revenue compared to $318 million or 19% last year. The $39 million increase in adjusted operating income and 60 basis point improvement in margins were primarily due to strong revenue growth, inclusive of acquisitions, and LaunchPad savings.

Now I'll review the performance of Covance Drug Development. Revenue for the quarter was $886 million, an increase of 24% over last year, led by the acquisition of Chiltern as well as organic growth and the benefit from 140 basis points of foreign currency translation. Adjusted operating income for the segment was $135 million or 15.2% of revenue compared to $106 million or 14.9% last year. The increase in operating income and margin were primarily due to the acquisition of Chiltern, organic revenue growth and LaunchPad savings, partially offset by higher personnel costs. During the quarter, Drug Development revenue and operating margin increased sequentially and year-on-year, both organically and including Chiltern. In addition, the company remains on track to deliver cost synergies from the integration of Chiltern of $30 million within 3 years of the acquisition.

We also continue to benefit from our Covance LaunchPad initiative, which began in July 2017. In addition to the $20 million of savings realized in 2017, we expect this initiative to deliver another $130 million of savings through the 3-year period ending in 2020, with one-time costs of approximately $50 million, of which approximately half was incurred in 2017. We expect the savings to come from labor productivity, including global organizational design and the rightsizing actions implemented in 2017 as well as from integration of new tools and technology and process improvements.

Drug Development delivered another strong quarter of net orders and book-to-bill. For the trailing 12 months, net orders were $4.1 billion, producing an improved net book-to-bill of 1.36. Backlog at the end of the quarter increased to $7.1 billion, and we expect approximately $2.8 billion of this backlog to convert into revenue over the next 12 months.

Now I'll discuss our 2018 guidance, which includes adoption of the new revenue recognition standard as of January 1, 2018. To evaluate our year-on-year performance on a consistent basis, we apply the expected revenue recognition changes to our 2017 results, which we refer to as restated revenue and can be found in our press release. This restatement will be finalized when we report our first quarter results. In LabCorp Diagnostics, the impact of this accounting change will reduce revenue and increase margins as bad debt will be treated as a reduction in revenue rather than SG&A expense. In Covance Drug Development, the impact of this accounting change will increase revenue and cost of revenue due to the inclusion of investigator fees and other pass-through expenses in both categories, which will result in lower margins. For the enterprise, we estimate that the impact of the new revenue recognition standard would have increased revenue and adjusted operating income in 2017 by $213 million and $3 million, respectively, and would have lowered adjusted operating margin by approximately 40 basis points.

In addition to revenue recognition, our 2018 guidance includes the implementation of tax reform in the United States, foreign exchange rate as of December 31, 2017, for the remainder of the year and the impact from currently anticipated deployment of free cash flow towards acquisitions, share repurchases and debt repayment. Taking these assumptions into consideration, I'll now provide our guidance for 2018. We expect revenue growth of 9.5% to 11.5% over 2017 restated revenue of $10.4 billion, which includes the benefit of approximately 60 basis points of currency translation.

We expect LabCorp Diagnostics revenue growth of 3% to 5% over 2017 restated revenue of $6.9 billion. This growth includes the negative impact from the implementation of PAMA legislation of approximately 1% as well as the benefit of approximately 20 basis points of currency translation.

We expect Covance Drug Development revenue growth of 20% to 24% over 2017 restated revenue of $3.6 billion, which includes the benefit of approximately 140 basis points of currency translation. The acquisition of Chiltern closed on September 1, 2017, and we expect that it will be the largest driver of growth in 2018. On an organic basis, we expect the business to grow revenue at its historical growth rate of mid- to high single digits.

Our adjusted EPS guidance is $11.30 to $11.70, an increase of 18% to 22% over $9.60 in 2017. We expect the quarterly distribution of earnings to approximate the distribution last year. However, the first quarter will be further negatively impacted by the more severe weather experienced this year.

The benefit from the lower tax rate is expected to contribute approximately $1.30 to adjusted EPS in 2018, while the negative impact from implementation of the PAMA legislation is expected to reduce adjusted EPS by approximately $0.50. Excluding the impact from these two changes, we would've expected adjusted EPS to increase double digits.

Our free cash flow guidance is $1.1 billion to $1.2 billion compared to $1.1 billion last year. The expected lower tax rate of approximately 25% in 2018 will result in an increase in our cash flow. We expect to invest a portion of this increase in our people and infrastructure, with the remainder deployed in a manner consistent with our long-standing approach to capital allocation.

In 2018, we expect capital expenditures to be approximately 3.5% of revenue, driven by accelerated investments in facilities, technology and automation.

In summary, we're enthusiastic about our prospects for 2018. We expect another year of strong top line growth and business process improvement initiatives to translate into attractive earnings and significant free cash flow. In addition, we expect to deploy our free cash flow to strategic acquisitions, the return of capital to shareholders and debt reduction, which will continue to build long-term shareholder value.

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

(Operator Instructions) And our first question comes from the line of Jack Meehan with Barclays.

So I want to focus on Covance. The outlook there is better than we are looking for. In your view, what's driven the improvement in book-to-bill the last few quarters? And was there anything noteworthy on the cancellation front just in the fourth quarter to keep in mind?

Yes, I guess, Dave, I'll start very briefly and then turn it over to John. John made a comment to me yesterday, which I think is the most succinct explanation that I've heard of, which is we're winning in the marketplace. And with that -- and by the way, I want to add as a testament to John's terrific leadership and the quality of the leadership team at Covance today. So with that, I'm going to turn it over to John for more detail.

I think we, Jack, continue to benefit from the strategic investments in the team, technology and our capabilities, the solutions that we're bringing forward, companion diagnostics being one example of that. I do think that it is -- well, it is broad-based, so it is in early development. It is in labs. It is in clinical. We've gotten a benefit in terms of clinical with, obviously, the acquisition of Chiltern but book-to-bill, even without Chiltern, would be consistent with what our last 12 months are. And so strength across the board and the cancellations are in line with historicals. So there's been no abnormalities at all in terms of the cancellation within the quarter.

Great. And as you think about the 3 businesses within Covance just in the context of the strategy, and don't want to get too far ahead of ourselves, but how do you think early development fits? And what's the plan to accelerate growth within that piece of Covance?

Jack, it's Dave again to start. Obviously, we've responded to this question a number of times over time, and we continue to say the same thing, which is the early development business right now is performing extremely well. As mentioned in our prepared comments, the value of the end-to-end capabilities of Covance seems to become more and more clear as we win business across segments. And so strategically, at this moment, early development is a very sound fit for what we're trying to accomplish in value-based care and in the streamlining of the drug development process. I think there will come a point later this year and some of it is reflected in the reinvestment of some of the tax benefit in the capital expense -- expenditures, then we will need to make some investments in capabilities for the business, particularly in facilities, but that's a determination that we'll make a little bit further down the road. John, anything further?

No. I'd say that the early development, we're seeing flow-through business, whether that be in the toxicology area and, obviously, within the large molecule and immuno-oncology being a large percentage of our oncology platform, and then in the BioA area and the significant flow-through into our clinical business. So it's a little bit additive to what they have said.

And our next question comes from the line of Ross Muken with Evercore ISI.

This is Suzie Yoon on for Ross. Our channel check suggests that you've been gaining share across the CRO, particularly in small to mid-cap biopharma. What areas did you see particular strength in the quarter?

Well, this is John. We saw strength really broadly. We did see strength in terms of the small, medium. Obviously, we benefited from the strength of Chiltern and the fact that they had a large penetration in that category, but at the same time, we have big penetration within our early development in terms of the small, medium areas as well. But I would say large pharma and services, mid-tier and small medium, if you look at our win rates, they were even brought against that spectrum. So strength across all -- you can see more of the penetration in the large and in the central labs, in the mid-tier and the small, medium in terms of their early development as well as the clinical business. Strength across the board.

Got it. And just one other follow-up, wondering if you can give us some details on the composition of the diagnostic beat and what product areas you're seeing particular strength in there?

Sure. The primary strengths were in women's health, in particular, our single NuSwab testing, medical drug monitoring within our toxicology and wellness business and oncology and genetics within our molecular testing. I think those would be the particular areas where we saw strong both year-on-year and growth over the quarter. We also had good strength -- we continue to have good strength in 23andMe, although its relative contribution as a percentage of the organic growth was actually less than the prior quarter. Gary, anything further to add?

No. I think that covers it.

Our next question comes from the line of Lisa Gill with JPMorgan.

Dave, I think I heard in your prepared comments talking about value-based care. Clearly, there's a lot of opportunities here in the marketplace. I just want to understand, specific to that comment that you're well positioned, are you seeing, one, a change in contracting? Or two, are you talking about now that we have PAMA in place, you can see incremental opportunities with hospitals and others as we change from a fee-for-service environment to more value-based care? I just want a little more color as we think about that progression for LabCorp. And then, secondly, just a point of clarification, Glenn, I just want to understand, there's no share repurchase in the guidance. Is that correct?

Good morning Lisa, it's Dave. My understanding is that capital deployment is included in the guidance, but Glenn will verify that. In terms of the value-based care, the way I would characterize it is we are seeing a shift in terms of how payers and providers are thinking about reimbursement. And obviously, payers -- value is in the eye of the beholder and everybody has a different perspective on what is value generally. Generally, value is what causes me to have more and the other guy to have less. So we have to think about it in the context of as 3% of the spend driving 80% of the decisions, how do we enhance the value proposition beyond simply the delivery of lab results. And that's why the precision medicine, the companion diagnostics, the ability to not only deliver the right test to the right patient at the right time but also to deliver things like our chronic kidney disease solution, our kidney stone recurrent solution to actually help providers deliver care in accordance with guidelines adds to value. That's why Covance adds to value with being able to bring to health systems and large physician groups the opportunity to participate in trials and get their acutely ill patients access to cutting-edge medications. There's a whole range of capabilities around the combination of our enterprise that, in our view, position us better than anybody else to deliver in the value-based care environment. So hopefully, that helps clarify the perspective on why we think we are well positioned and why we continue to invest, not only in the individual capabilities of the businesses but in the combined capabilities of the enterprise that are going to be so critical to differentiate ourselves when people look at us vis-à-vis others and say, well, how do you contribute to value?

I would assume you're going to talk more about this at the Analyst Day, Dave, but I guess, for me, the question really is, do we see a changing business model as the way? So the way that you get paid today -- you talked about shifting away from just the lab test and being part of the bigger solution. So as we think about your changing and evolving business model, is it that we're going to see payment mechanisms change as well? And again, I would assume we're going to probably talk more about this in the next couple of weeks.

We will, yes. I mean, I do think, over time, payment mechanisms will change. Again, when you talk to the payers, they will tell you that they have x percent of their providers on some sort of value-based contract. Now granted there may be different value-based metrics, there may be different definitions of what's value, but over time, I do think we're going to see an evolution away from traditional fewer fee-for-service contracting to contracting that, for example, is going to look more like systems outside the U.S. where there has to be a demonstration of efficacy for a drug or there has to be a demonstration of value for a -- for reimbursement for a test. And these are things that we need to anticipate because although they will be slower to develop than we think they are, I do think they are the long-term future of how providers like us are going to get paid.

Okay, helpful. I'm sorry Glenn, go ahead.

Just on your other question on the share repo in the guidance. What we do say is that the guidance range that we have provided for our free cash flow that our guidance does assume that we will fully redeploy that. And we said that the combination expected -- but it's in our guidance, expect that there will be a combination of M&A kind of tuck-ins, if you will, share repurchases and debt reduction. We ended the year at 3.2x leverage in'17, so we would expect to bring down the leverage a bit, but we also expect to use a fair amount of that free cash flow to both M&A and share repurchases.

And our next question comes from the line of Nicholas Jansen with Raymond James & Associates.

Just wanted to talk a bit about the components of margin expansion as we think about '18 and beyond. Certainly, the CRO, with accelerating revenue growth and LaunchPad, probably has some opportunities for improvement versus the diagnostic asset, which you're already exiting under the 3-year LaunchPad pace. You have the pricing reductions from PAMA. So maybe just how we should be thinking about holistically the margins of the segment and how that rolls up to the enterprise in the near term.

This is Glenn. I'll be happy to take, at least, the first cut of it. Your observation is pretty good. If you look it by business within the Drug Development side, we expect to see improving margins, both due to the strength of the demand that we're seeing and expect to see in '18 and beyond as well as now embracing kind of the LaunchPad initiative where we talked about kind of the incremental $130 million of net savings that we expect over the next 3 years. So we are expecting to see good margin improvement. And as John has commented before, relative to where we were against some of our competitors, there was also some room to see that pick up as well. So we're very encouraged there. The flip side obviously on the Diagnostics is that we enjoy very strong operating margins. We've benefited from the LaunchPad initiative, frankly, over the last 3 years that are reflected in the margin. But as you know, in 2018, we begin to get the headwinds of the PAMA legislation that will be constraining our margins. So we do expect that Diagnostics' margins will be down kind of '18, and then, obviously, based upon what ultimately occurs with PAMA over the next few years, there'll be additional headwinds going beyond. So as we stir it all as an enterprise, though, we're looking at over time to continue to see some margin improvement. The first year in '18 will be difficult given the quickness of the PAMA, starting without the long-term benefit of the LaunchPad initiative kicking in, but were it not for the PAMA headwind, we would've expected even in '18 for enterprise margins to be up. And frankly, even with the new revenue recognition (inaudible) come in place, that will be a little bit of a constraint on the margin even though we restated the prior period because of the acquisition of Chiltern we'll have on for a full year in '18. But overall, we continue to look for ways to maximize our operating margins as we go forward. And while we talk about the LaunchPad initiative within Covance, from our perspective, there is still an ongoing initiative within Drug Development to continue to improve operating margins.

Great. That's helpful. And as my follow-up, this may be for you, Dave, in terms of the consumer strategy that you guys have been pursuing over the last 12 to 24 months, certainly things like the Walgreen relationship, certainly things like 23andMe. Maybe just look at holistically where those stand today relative to where you think its -- in terms of contributors in '18, '19 and beyond. Where are we in terms of the process of seeing further acceleration in organic growth that these platforms become more bigger parts of the pie?

Obviously, with 23andMe, we have a long-standing collaboration, and their growth in volume has been quite significant. So we're obviously very pleased that their volume is growing. What we're talking to them now about is other things that can be added to complement that collaboration such as offering routine testing to consumers through a combination of our capabilities. Their -- people ordering genetic tests or have ordered genetic tests from them now have the opportunity to do direct ordering of routine testing. We have a whole variety of things that we're talking about as ideas that we would like to pursue for expanding our reach to the consumer. With Walgreens, obviously, we're in the very early innings with 7 stores open. We have a plan for significant expansion next year. But we also want to think about Walgreens as not just we want to expand the patient service center footprint of being more convenient spaces, but we want to expand the constellation of capabilities around the combination of drug and -- drug store and lab, which, again, is why we always have insisted that we wanted our consumer channel to be in the health care setting. So how do we help the pharmacists practice at the top of the license with things like medication therapy management and even test ordering in some states? How do we introduce the Covance piece into Walgreens as a patient engagement and patient recruitment tool? How do we use the LabCorp patient database in terms of demographics and diagnoses with the Walgreens patient database in terms of medication that the patient is taking? There are a lot of opportunities there, so we not only think about scaling the footprint but we think about scaling the collaboration and think about other retail settings where that's potentially an opportunity for us. In summary, our consumer strategy is focused on not telling the consumer you have to come see us where we are but meeting the consumer where they want to be met. And you'll see us increasingly pursue that through mobile, through digital, through footprint in the years ahead.

And our next question comes from the line of Patrick Donnelly with Goldman Sachs.

Obviously, healthy book-to-bill in the quarter, so I'm curious how we should think about revenue conversion given the moving parts of the backlog with Chiltern coming in. How would that pace out in '18? And then I know you talked about cancellations being stable, so how comfortable are you with the security in the backlog? I mean, are you expecting the same level of cancellations going forward as we've seen in historical numbers?

This is John, Patrick. And so we have, within the '18 guidance, basically organic revenue growth of the mid- to high single digits and then, obviously, the acceleration of the Chiltern. The backlog is based on contracted -- on a contracted basis. So it's as clean as you can possibly get in terms of the rigid discipline that goes into that backlog. Obviously, anytime you have penetration more and more in the small, medium category, you do get a little bit higher cancellation rate, but at the same time, you get a higher level of growth. 75% of the molecules are there. They have a higher level of R&D funding, and that increase is actually higher than the small and medium. But backlog, very stable and strong underneath growth from the conversion. I think you're also seeing that just in terms of 2017. With the cancellations that we had at the very end of '16, you went through the first half trough to basically slightly positive in Q3 and then to the mid -- low to mid-single-digit growth in fourth, plus we had outstanding fourth quarter of orders where we picked up the last 12 months the 1.36 from the 1.33 or the 1.23 or the 1.15 earlier. You're just seeing the resonation of the strategic investments in the team, the technology, capabilities, utilizing LabCorp patient data to win awards and then the solutions that come from that to companion diagnostics.

And maybe just a quick one on the deal pipeline. I mean, should we expect you guys to focus more on the lab business or CRO? I mean, I presume valuations in the labs are pulled back maybe around PAMA, but curious as to your take there.

Patrick, it's Dave. We evaluate a lot of deals, and we evaluate every one based on strategic and business fit. So we have said with regard to the CRO that the flawless integration of Chiltern is the top priority and it remains the top priority. Nonetheless, we'll look at every deal that comes along and see what's the best fit for the business given the needs.

And our next question comes from the line of Dan Leonard with Deutsche Bank.

I was hoping you could elaborate on the organic revenue growth expectation for LabCorp Diagnostics in 2018.

This is Gary. Yes, we're really pleased with the organic growth that we achieved in the fourth quarter as well as for the year. We have a focus on that. We've been focusing on organic growth, and the growth was very broad-based. And as Dave mentioned earlier, it wasn't in just a few segments or the several segments but also across all geographies. We will continue to drive our organic growth into 2018. We were happy with it in 2017, but we're not satisfied. And you will continue to see us have more of an intense focus on organic growth.

And Dan, it's Dave. I think you should remember in terms of organic growth that revenue was going to be constrained by about that 1% for PAMA that we mentioned, so whatever that top line revenue growth would be, we actually have about a 1% headwind going in. I would expect organic volume growth to be relatively consistent with this year. So that hopefully gives you some framework.

Okay. That's helpful. And just a quick housekeeping follow-up. Possibly, you could be specific on the Chiltern revenue contribution in the fourth quarter?

I think we gave you $550 million for Chiltern for the full year. And so that should give you an indication in terms of the fourth quarter. We're not getting into this segment-by-segment guidance and/or delineation, but that should give you a guide.

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

This is actually Hong on for Erin. Just one quick one for us on the CRO business. I know you guys disclosed that you expect roughly $2.8 billion will be backlog to be converted over the next 12 months, and that would imply roughly 70% backlog coverage for the year. What visibility do you have into bookings or sort of the remaining revenues that currently -- aren't currently booked? Or just more generally, how are they shaping up into the quarter or 2018?

This is John. And so I think from the standpoint of -- we're seeing continued momentum within the order rate. If you have -- with having early development, central labs, clinical development, you do have that mix of the business that converts backlog into revenue faster within the early development into another degree in terms of the labs. So that $2.9 billion is consistent with the prior quarter attainment, and so there's stability there. But more so on the order rate in 2018, we're seeing the continued momentum across the businesses, whether that's Chiltern accelerating a clinical -- legacy clinical Covance, whether that's the strength of the labs, I think you're seeing that in the second half of even '17, and then early development even, and that's across the board, whether that's in BioA, CMC or in the safety assessment, metabolic, lead optimization areas. So good visibility, good momentum in terms of the balance of what bookings need to be in terms of attaining the guidance that we give.

Okay. Great. That makes a lot of sense. And then just one follow-up. Where do we sit now in terms of sort of your ability to better monetize that lab deal for the (inaudible)?

I'm going to ask you -- Erin (sic) [Hong], I'm going to ask you to jump back in. That's your third question. We've got -- we saw a number of people on the queue.

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

I was hoping you can give a little more detail on how much reimbursement you've taken from tax reform. It looked like you pulled the majority of the benefit down to the bottom line. But I think in your prepared remarks, you talked about reinvestment in people and infrastructure, so hoping you can split that out for us. And then maybe expectation of any incremental labor cost pressure going forward just given the backdrop and what your estimate is of wage cost growth going ahead.

Sure. It's Dave. So without specifically detailing the use of the tax benefit, one, as you saw in the guidance, we are accelerating some capital investments in the business, and that's IT, that's infrastructure, that's patient engagement capabilities. There's a whole variety of investments to support future growth. The second thing, we talked about investing in our people, so that would be in the context of a one-time bonus to all of our non-bonus eligible employees that will be paid this year based on length of service, and that will be formally detailed at the time that we actually pay it, which will be in March. So those are the ways, Ralph, in which we intend to deploy the investments in the business and the people from tax reform. The wage costs now, obviously, we're in a tight labor market at the same time. We -- as we look at this bonus based on length of service, the number of people who are long-serving employees in our business among our 57,000 colleagues is actually very, very significant, and so we have a lot of stability in the workforce. We think about wage rate inflation as sort of being in the 3% range, and that's how we sketch it out for the future.

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

This is Per Ostlund on for Kevin today. I wanted to follow up to -- I think it was Patrick's question earlier regarding M&A. And Dave, I can appreciate you're looking at opportunities across your business. But to the extent that you're looking at labs specifically, does the sort of ongoing uncertainty with PAMA kind of keep those discussions in the holding pattern? Or sort of how would you characterize those discussions that you're having today? And then I guess, related to that, what is your current viewpoint on the litigation that's going on with CMS and/or any potential legislative relief that the industry is pursuing? Thanks.

Sure. So the pipeline continues to be robust. At the same time, I'm not sure that the impact of PAMA has been fully realized, particularly in -- I was with a large health system CEO last week, and without getting to a lot of detail, I don't think the impact of PAMA on the laboratory operations of the large health system has necessarily been fully felt yet in the executive suites. So I think that we're going to continue to be thoughtful about how we deploy capital toward our acquisitions across the board, and whether PAMA has an impact on that deal pipeline, I think will emerge throughout the year. On the litigation, we have a briefing schedule that would call for all of the papers to be filed with the court in April -- by mid-April. The case has been assigned to Judge Sullivan in the U.S. District Court for the District of Columbia. Many, many years ago, I appeared in front of him. He's an excellent judge, and I think he will give us a very thoughtful evaluation. And I would just say, we continue to feel that we have a very persuasive case that CMS in the data collection process -- sorry, in the process of promulgating a rule that led to the data collection did not comply with the specific language of the PAMA statute. So obviously, we're optimistic that, one, we'll have a decision by sort of the June time frame; and two, that we'll win the case. We continue to seek a legislative solution as well and to engage with CMS, and we'll see how it develops.

And our next question comes from the line of Amanda Murphy with William Blair.

Just a super quick one. I know one, you can ask a lot as well. But any updates on the United situation just in terms of when we might hear kind of what's going on there?

Amanda, it's Dave. We've had an accelerated pace of engagement with United over the last 1.5 months. The teams are very much engaged at my level, at Gary's level and also at the negotiating team level. And I'm optimistic that we will reach an understanding in a reasonably short time frame now.

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

Just a couple of follow-up questions. First of all, Dave, just to clarify on United. So you're talking about accelerated conversation, so should we assume that there is no RFP that's going to be issued? That's one. And second one, if you can just kind of talk a little bit about the benefit that you're seeing from the flu season, if that's incorporated into your guidance and how it impacted the quarter.

Sure. Obviously, we're a partner with United, but we don't dictate their process, so I can't comment on what their process may or may not entail. I can just say that we've had accelerated pace of discussions, in my mind, very constructive discussions, and I'm hoping that, as I said, we'll reach some sort of a resolution in a relatively short time frame. In terms of the flu, as everybody noted, we are experiencing an unusually (inaudible) flu season. On the other hand, most of the flu testing that's done is actually point-of-service testing or near-patient testing. It's not reference testing. We did see an increase in flu testing referred to us, but it is not significant enough to have any impact on our results.

Our next question comes from the line of Bill Quirk with Piper Jaffray.

Just a quick follow-up, Dave, on that last question from Ricky. And I guess, certainly recognizing that you guys don't see a lot of direct business, as you pointed out, it's often at the point of service, is there any metrics you can talk about because the hospital -- the associate hospital admission rates have been up affiliated with the flu? And just curious if you're seeing any sort of ancillary benefits to LabCorp Dx from that. Thanks..

It's Dave. I think it would be hard for us to identify any ancillary benefit. Obviously, everybody has read about the increase in hospital admission rates and the pressure around emergency rooms from flu. But it's very unlikely that that's going to generate any material amount of reference testing for us.

And our next question comes from the line of Tim Evans with Wells Fargo Securities.

Just a quick follow-up for me, too. I understand you don't want to give the specific Chiltern contribution in the quarter. But just to help us triangulate a little bit, on the $550 million that you did this year, the run rate on that would be just right below 140 on a quarterly basis. Just trying to triangulate. Looks like you probably did better than that, call it, 140 run rate in Q4. Is that a fair assumption?

Tim, this is Glenn. I mean, I think how John characterized it is fair, is that we are tracking to roughly that annualized number, maybe slightly ahead of it but comparable. So if you're trying to back into kind of the organic growth rate, just by taking that as a proxy for the quarter will get you to kind of a mid-kind of organic growth rate for the business and, again, accelerating as we get into 2018.

Did you say mid-single-digit organic growth rate? Is that what you just said, I'm sorry?

That's right. With the benefit of the currency translation, you'll be able to back into the number. But what we've commented about for the quarter organically, again, based upon as John characterized it, by backing up the Chiltern pro rata for the time we've owned it, would get you to roughly a mid-single-digit number with the benefit of currency translation, and then that's increasing as we go into '18.

And our next question comes from the line of Donald Hooker with KeyBanc.

Just one for me. So I guess when I think about the sort of Project LaunchPad at Covance over the next 3 years producing, I think you said, $130 million of efficiencies, how much of that is kind of investments in digital capabilities around clinical trials like developing your own tools? There are obviously tools around enrollments, but sort of adding new tools around monitoring, adaptive studies and things of that nature. Is that on sort of the horizon to drive margin expansion for you guys? Or are you going to rely on third-party vendors?

It's Dave. So as we said, LaunchPad -- and by the way, it's $130 million incrementals, so it's $150 million total over the time frame. But LaunchPad is both rightsizing and reengineering, and we did basically the bulk of the rightsizing last year. The reengineering is investment in tools and technologies. It's expanding our Xcellerate platform. It's endpoint. It's PharmAcuity. It's a number of the other tools that we have developed that are proprietary tools for study start-up or site monitoring or medical monitoring, for a whole variety of start-up and trial management capabilities. And we are going to continue to invest in those and enhance them and expand our capabilities in digital. And obviously, some of it will be with partners and some of it will be our own internal efforts. But Covance LaunchPad is about it fits into our long-term strategy that we talked about our second point, which is streamlining and optimizing the drug development process.

(Operator Instructions) And our next question comes from the line of Mark Massaro with Canaccord Genuity.

Dave, you called out organic volumes were driven in part by women's health. Can you just speak to the NIPT franchise and how Sequenom is doing? And then maybe any expectations you might have on average risk prenatal testing volumes later this year.

Yes, Sequenom is doing terrific. Obviously, it's in the run rate now. We're continuing to see very steady growth. We are continuing to add capabilities to the testing platform, which was one of the reasons why we thought Sequenom was such an attractive opportunity for us. And we are winning business in the OB/GYN office because of our one-stop capabilities. In terms of average risk, that's obviously a controversial area in terms of coverage. So there's been some improvement in payer recognition of the value of NIPT for average risk. And we continue to advocate for NIPT in average risk -- in the average risk population as obviously do others. So we're hopeful that we'll continue to make progress, but at the same time, it is an area in which the payers are concerned about the escalation of the expense, and they want to be very thoughtful as they make their coverage decisions.

Great. And just as a follow-up, can you speak to your interest level on liquid biopsies? Obviously, there's a lot of buzz in the industry on the diagnostics side, but in particular, related to therapy selection in late-stage use in oncology.

Yes. So we have a number of liquid biopsy projects ongoing. We have a liquid biopsy project ongoing that's actually part of trials at Covance. There was some liquid biopsy development that was ongoing at Sequenom, some R&D that we revitalized to look at opportunities there. Long term, I think liquid biopsy is a great opportunity for our industry for exactly the same reason that NIPT was, which is it takes a procedure that is costly, that involves an invasive procedure and that involves some risk to the patient as well as risk that you're going to miss the critical things you're looking for, which is if you do a prostate punch biopsy, you may miss the cancer in the prostate. You can get the right cells and charge it into something that looks for cancer cells in a noninvasive way with a high degree of certainty that we're actually capturing what we're looking for. So it took -- I remember the first time we were presented with the idea of the fetal cell sorting, which became NIPT, it was in the early 2000s, and it took over 10 years for the technology to be perfected. And we see liquid biopsy as the same type of opportunity, long term, game changing; near term, definitely something to be looking at.

I'm showing no further questions. I'd now like to turn the call back to Mr. Dave King for closing remarks.

And seeing no further questions, once again, I'd like to reiterate my pride in this organization for the achievements of 2017, my personal gratitude not only to the leadership team but to the 57,000 colleagues around the world who make it happen every single day and our commitment to continuing our strength in 2018 and to the greatness of LabCorp, LabCorp Diagnostics and Covance in the future. Thank you for joining us this morning, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.