Labcorp Holdings Inc (LH) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LabCorp Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded. I would now like to turn the conference over to Scott Frommer, Vice President, Investor Relations. You may begin.

Good morning, and welcome to LabCorp's Second Quarter 2018 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 furnished 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 2017 Form 10-K and subsequent Forms 10-Q and in the company's 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. LabCorp delivered another outstanding quarter across our integrated enterprise. The combination of strong organic revenue growth, acquisition contributions, our LaunchPad initiative and the benefits from tax reform powered top line growth of 13% and adjusted EPS growth of 23%. We created value as well through our disciplined deployment of our robust free cash flow. In the quarter, we enhanced Covance's offering through the Sciformix acquisition, returned capital to shareholders through share repurchase and reduced our leverage to its lowest level since 2015 through debt paydown.

In addition, we continued to enhance the focus of our portfolio by agreeing to divest our Food Solutions business at a very attractive valuation. This transaction is expected to close in the third quarter, providing additional proceeds to support value creation.

Our strong financial performance results from execution on our key strategic initiatives, which, in turn, leads to profitable growth and stable enterprise margins. I will now update you on our progress on each.

Our first strategic objective is to support our customers' transition to value-based care. In the quarter, we announced significant multi-year agreements with UnitedHealthcare and Aetna. In both instances, our proven track record of delivering convenient, high-quality and cost-effective services translated into expanded opportunities and fair reimbursement rates. Furthermore, these partnerships incorporate a broad range of innovative value-based arrangements.

We have multiple initiatives underway with our customers to retain United business and capitalize on our growth opportunity with Aetna. As we have said, given the relative size of each company's insured population, we expect the net result to negatively impact revenue and profit next year. Nonetheless, these partnerships reinforce our strong competitive position in the fragmented clinical laboratory market. They also highlight LabCorp's increasingly important role in delivering targeted care to patients through our leadership in population health tools and personalized medicine capabilities.

In the quarter, we continued to expand those tools and capabilities through, among other activities, our digital pathology partnership with Philips and the commercial launch of OmniSeq Advance, a precision medicine tool that includes key immunotherapy biomarkers.

Our second strategic objective is to enhance the drug development process. We continue to deliver high-quality performance on one of the largest backlogs in the industry, demonstrate the value of our differentiated beyond-lab, beyond-CRO offering to sponsors and invest in expanded solutions to increase trial efficiency and improve the patient experience.

During the quarter, we were selected by a top-40 biopharma sponsor with whom we had not collaborated in the past for a dual-source strategic partnership. One of the primary reasons the sponsor selected Covance was our strong data and study feasibility solutions. We will provide clinical development and central laboratory services across all therapeutic areas for this customer.

Our Early Development business won a competitive process to become a primary provider strategic partner with a top-10 pharma sponsor. We expect toxicology awards from this sponsor to eventually double from current levels, with new awards beginning at the end of this year. These partnerships will ramp over time. Neither benefited net orders or book-to-bill in the quarter.

In companion diagnostics, we delivered record quarterly revenue and signed a new commercial partnership with Unilabs that will facilitate greater availability of companion diagnostics throughout Europe. Companion diagnostics is a global opportunity, and the partnership with Unilabs is the first step in extending our unique companion Dx offering worldwide.

We also continue to invest in the CRO of the future. These investments begin with LaunchPad, which is progressing at a rapid pace and contributed to Covance's 80 basis point margin improvement in the quarter. The global service delivery model we discussed last quarter is up and running, improving quality and optimizing our utilization of resources and infrastructure.

At the same time, we added global preferred site partnerships, incorporated mobile health technologies into traditional studies and enhanced our virtual clinical trial capabilities, highlighted by another key customer adoption of the Xcellerate suite of technology tools. Each of these opportunities, along with our patient and investigator performance data, represents progress toward better trial design, site selection, patient recruitment and patient experience.

Our third strategic objective is to create a leading consumer engagement platform. We continue to enhance patient convenience and engagement, broaden our channel to market and build brand loyalty. We also continued to improve the consumer-friendly tools in our patient service centers and on mobile apps.

Our strategic collaboration with Walgreens has expanded to 16 stores with the addition of sites in Florida. We plan to expand this partnership into additional markets this year and are actively discussing ways that we can expand and integrate our combined services.

Our consumer platform focuses on meeting consumers where they want to be met, and our next innovation will let us reach them at home. We have made significant progress on the validation of our innovative self-collection device, showing strong concordance between test results collected with our device and traditional venous blood draws. The device is currently in beta testing, and we remain on track to make it available commercially later this year.

Before I turn the call over to Glenn, I want to address the recent ransomware event at LabCorp. When our IT team detected suspicious activity on our network, we promptly took certain systems offline. That action was designed, first and foremost, to protect the private information of the patients we serve. This decision was the right one, although it led to a disruption in service, which required approximately 1 week for recovery. Operations have now returned to normal. Our investigation, which has included highly-respected independent forensic IT experts, has found no evidence of theft or misuse of data.

We are still assessing the full financial impact of this event. We have incurred costs related to remediation efforts. It is too early to determine the volume impact at this time. We believe the financial impact will not be significant, and the company has cyber insurance coverage. As a result, this event does not cause a change in our full year guidance range.

Although we have a host of tools to guard against and mitigate this sort of attack, the critical component to recovery was our people. They worked long hours with little rest. They demonstrated amazing teamwork to get problems solved. They stayed calm in the face of great adversity. They went the extra mile to help patients and clients in need, and they were attentive and responsive to doctors, consumers and partners who needed more information. They did these things because we are here to serve the patients who need us as we have been and always will be.

When people ask what makes me proud of LabCorp, I always say it's the passion of my colleagues for what we do. In our nearly 50 years of existence, that passion has never been more certain and focused than during this incident. Every one of my colleagues stood tall in a time of great challenge, and I thank each of them from the bottom of my heart. Because of their commitment to and passion for our mission to improve health and improve lives, LabCorp continues to prosper and to deliver value to everyone who depends on us.

Now I'll turn the call over to Glenn.

Thank you, Dave. I'm going to start my comments with a review of our second quarter results followed by a discussion of our performance in each segment and conclude with commentary on our full year outlook. As a reminder, on January 1, 2018, we adopted ASC 606 using the full retrospective method, meaning that we restated our 2017 financial results to better enable a valuation of our 2018 performance and guidance. In the press release, our prepared remarks and the Q&A session to follow, all references to our 2017 results are to the restated numbers, unless we specifically note otherwise.

Revenue for the quarter was $2.9 billion, an increase of 13.4% over last year as acquisitions added 10.5%, organic revenue increased 2.1% and we benefited from foreign currency translation of 80 basis points.

Operating income for the quarter was $369 million or 12.9% of revenue compared to $330 million or 13% last year. During the quarter, we had $36 million of restructuring charges and special items, primarily related to acquisitions, integration, our LaunchPad business process improvement initiative and the planned divestiture of the Food Solutions business.

Adjusted operating income, which excludes amortization of $59 million, restructuring charges, and special items was $463 million or 16.2% of revenue compared to $431 million or 17.1% last year. The $32 million increase in adjusted operating income was primarily due to acquisitions, organic revenue growth and savings from our LaunchPad initiative, partially offset by lower Medicare pricing as a result of the implementation of PAMA and personnel costs. The 90 basis point decline in operating margins was due to the implementation of PAMA and the mix impact from the acquisition of Chiltern, which was not in the prior year's results.

The tax rate for the quarter was 25.1% compared to 33.7% last year. The adjusted tax rate, excluding special charges and amortization, was 24.5%, down from 33.6% last year. This lower rate was primarily due to the implementation of tax reform in the U.S. We continue to expect the full year 2018 adjusted tax rate to be approximately 25%.

Strong operational performance and the benefit of tax reform translated into net earnings for the quarter of $234 million or $2.27 per diluted share. Adjusted EPS, which exclude amortization, restructuring charges and other special items, were $2.98 in the quarter, up 23% over last year.

Operating cash flow was $367 million in the quarter, up from $311 million a year ago. The increase was due to higher cash earnings and favorable working capital. Capital expenditures totaled $87 million or 3% of revenue compared to $69 million or 2.7% last year. As a result, free cash flow was $280 million in the quarter, up from $241 million last year.

We remained active throughout the quarter in terms of capital allocation. At quarter end, our cash balance was $221 million, down from $362 million at the end of the first quarter. During the quarter, we invested $79 million in acquisitions and repurchased $75 million of stock. As of June 30, we had $994 million of authorization remaining under our share repurchase program. During the quarter, we also paid down $310 million of the company's variable-rate term loan. This brought our total debt to $6.5 billion at quarter end, reducing our leverage to 3.1x gross debt to last 12 months EBITDA, at the top end of our target leverage ratio of 2.5 to 3x.

Now I'll review our segment performance, beginning with LabCorp Diagnostics. Revenue for the quarter was $1.8 billion, an increase of 5.4% over last year. The increase in revenue was primarily driven by acquisitions, organic volume measured by requisitions and the benefit from currency translation of approximately 30 basis points. These favorable items were partially offset by the negative impact from PAMA. Revenue per requisition decreased 0.7%, primarily due to the impact of PAMA, partially offset by acquisitions. Total volume increased 5.8%, of which organic volume was 2.8% and acquisition volume was 3%. Note that our acquisitions of Mount Sinai's outreach business and PAML, excluding certain related joint ventures, annualized in May.

LabCorp Diagnostics adjusted operating income for the quarter was $376 million or 20.7% of revenue compared to $376 million or 21.8% last year. Operating income benefited from organic volume growth and acquisitions, which were essentially offset by the negative impact from PAMA and personnel costs. The decline in operating margin was primarily due to the negative impact from PAMA.

Now I'll review the performance of Covance Drug Development. Revenue for the quarter was $1.1 billion, an increase of approximately 31% over last year due to acquisitions, organic growth and the benefit from 180 basis points of foreign currency translation. Adjusted operating income for the segment was $123 million or 11.7% of revenue compared to $89 million or 11% last year. The $35 million increase in operating income and 80 basis point improvement in margins were primarily due to organic demand, LaunchPad savings and acquisitions partially offset by personnel costs. We are on track to deliver $150 million of net savings from Covance LaunchPad by the end of 2020 and $30 million of cost synergies from the integration of Chiltern by the end of 2019.

For the trailing 12 months, net orders were $4.9 billion and net book-to-bill was 1.22. Backlog at the end of the quarter was $9 billion, a decrease of approximately $200 million from last quarter, primarily due to foreign currency translation relating to the stronger U.S. dollar. We expect approximately $3.7 billion of this backlog to converge into revenue over the next 12 months.

Now I'll discuss our 2018 guidance, which assumes foreign exchange rates as of June 30 for the remainder of the year and includes the impact from currently anticipated deployment of free cash flow toward acquisitions, share repurchases and debt repayment. In addition, this guidance includes the expected financial impact related to the previously announced divestiture of the Food Solutions business in the third quarter. We expect revenue growth of 10.5% to 11.5% over 2017 revenue of $10.3 billion, which includes the benefit of approximately 50 basis points of currency translation. This is a narrowing of the range as compared to our prior guidance of 10% to 12% as the increased revenue outlook in Covance Drug Development is offset by the planned divestiture of the Food Solutions business.

We expect LabCorp Diagnostics revenue growth of 3% to 4.5% over 2017 revenue of $6.9 billion, which includes the benefit of approximately 20 basis points of currency transaction. This is a decrease from our prior guidance of 3.5% to 5.5% due to the planned divestiture of the Food Solutions business. For modeling purposes, the Food Solutions business generated revenue of approximately $150 million in 2017 at margins in line with the diagnostic segment overall, but at a significantly higher revenue per requisition.

We expect Covance Drug Development revenue growth of 23% to 26% over 2017 revenue of $3.5 billion, which includes the benefit of approximately 110 basis points of currency translation. This is an increase over our prior guidance of 21% to 25% due to higher-than-expected investigator fees and other pass-through expenses for which the company will be reimbursed, partially offset by the 120 basis point change in foreign currency translation due to the stronger U.S. dollar. We remain on track to deliver mid- to high single-digit organic growth in 2018.

Our adjusted EPS guidance is $11.35 to $11.65, a narrowing of the range as compared to our prior guidance of $11.30 to $11.70.

Finally, we expect free cash flow to be between $1.1 billion and $1.2 billion, unchanged from our prior guidance.

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

(Operator Instructions) Our first question comes from the line of Jack Meehan of Barclays.

Dave, can you help us put some ranges around what you think the net-net impact of the new UnitedHealth and Aetna relationships will be in 2019? And also, what are some of the investments you're going to put in place to try and drive share gains with other payers during this period?

I'll make a couple comments on this and then ask if Gary has anything further. I think it's not appropriate to talk about ranges of outcomes with United and Aetna because we're not guiding toward 2019 now. I will say that as we have said from the beginning, given the number of covered lives in each of those plans, it is highly likely that you will lose more in United than we'll pick up in Aetna. That's not anything against United or against Aetna. It's just the reality is there are more covered lives under United, and we have a larger percentage of that market. So that will have a negative impact on revenue and obviously, on profit. And as we always do, we'll look at what are the opportunities to tweak the cost structure to accommodate those changes. In terms of tools for share gains, I think one of the most critical things that we're doing and that we've talked about is all the work we're doing around data and data integration. So the population health tools that we've mentioned, the integration with the Covance data, the data and analytics that we're working on to overlap with Walgreens, for example, with their patient population and the combination of capabilities. And I think the -- as we talk with large customers, I saw a couple of them last week, they want to know not only how are my patients doing, where are my gaps in care, what are the opportunities that I have to treat better so that I can receive bonus payments and improve star ratings. They also want to know in a health system, for example, how is my patient cohort performing against comparable patient cohorts? How are my physicians performing against comparable physicians, both internally and externally? So we are really focused on how we use the data tools to enhance our offerings. In conjunction with that, the whole digital opportunity, so the mobile app, the increasing reach to consumers, the self check-in in patient service centers, the real-time email feedback on the patient experience, which allows us to not only do net promoter calculations but also to do literally contemporaneous improvements of the patient experience and again, thinking about how we integrate those opportunities and experiences with our partners during the check-in process at Walgreens, for example, or using the Walgreens mobile app, the LabCorp app. These are all things that we're talking about, working toward as we think about how can we enhance our opportunities to create brand identification and gain share with the consumer, with the health system, with the physician beyond our traditional sales mechanisms. Gary, anything you would like to add to that?

Well, I would like to say that, first of all, we look at the Aetna and UnitedHealthcare as an opportunity for us, and it really comes down to organizational execution of a plan. I would like to say that we have an extensive plan. We are mobilized, and we're prepared to execute on that plan.

That's great. And Dave, a lot of your color, it's a good lead-in to the question I had for you and John, which is just can you update us on any progress you've made rolling out in the check-in tool and getting patients to opt in for Covance? And just related to that, some of the progress you made in the expanded strategic relationships, do they have any impact on the timing of bookings in the quarter?

Well, I'll start with the check-in tool. So a couple of things on that. One is that the database of patients who have opted in to be contacted continues to grow. I think more important, after consideration and review of how we engage with patients, we have a significant opportunity to engage with patients through the collection of e-mail addresses at self check-in, the billing process. So we have a very, very large database of e-mail addresses, and we will be using those as well to communicate with patients about their interest in trial opportunities and to solicit their consent for opt-in. So the number of patients who are coming and checking in is just a subset of the people that we'll be communicating with about how can they opt into trials. And we're actually enthused about that opportunity for a lot of reasons, not only because, look, trial criteria tend to be quite narrow, and it's not even patients who are interested or not always eligible. But when you think about the number of patients who come and see us and whose e-mail addresses we collect and who pay our bills, we have an enormous opportunity to capitalize on what we've talked about as sort of next-generation trials, so virtual trial, virtual control arms, observational studies, our market access business, all simply through the LabCorp data that we have and the ability to communicate with those customers on behalf of Covance. So that's where we are on the opt-in and the database. And we continue to see very strong progress there, and I'll turn it over to John in terms of the impact of data on the bookings.

As the integration into drug development has matured, we're looking at data capability as really an important factor necessary to be successful. We now see this $1 billion in awards, where data capabilities have facilitated the selection of Covance. We expect to exceed the cumulative revenue of $150 million through 2018, higher than our initial estimate at the time of the acquisition. We now have demonstrated, as we did even on the Investor and Analyst Day, case studies that showcase the real-time demonstrations of the really actionable nature of these unique assets. I'm sure we'll get into the bookings of the quarter. But clearly, the strategic partnerships, and as Dave even noted, the clinical partnership was enabled through our data capabilities in the clinical stage to a top-40 sponsor. And then finally, in terms of data, we've been able to demonstrate through our central lab data on how we have compared to the industry on the timing of oncology studies, as an example, where we finish our oncology studies anywhere from 3 to 5 months earlier than our competition. So clearly, data and our capability there is facilitating a winning environment for Covance.

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

I just wanted to follow up with some of your comments around what's happening in the managed care market today. As we think about this, I understand that, clearly, United is bigger than Aetna, but how do we think about the shift to the large national players like yourselves and Quest? One, how do you think you're differentiated from Quest? And two, within the new contracts, is there an even bigger opportunity to continue to move market share away from the regional labs? And as we think about that, and you talked a lot about data and analytics population help tools, how do we think about value-based care and how you potentially can be paid around value-based offerings and enhancements to the current contracts around any kind of value-based initiatives?

So both the United contract and the Aetna contract contain value-based care initiatives and some value-based care commitments. And without going into an enormous amount of detail, suffice it to say there is opportunity for us in revenue and if we can redirect work away from higher-cost providers. I will say the reality is we cannot do that ourselves. There are many reasons why lab work goes to higher-cost providers. Many health systems are very insistent that the doctors send their work to their own captive laboratories. They do things like telling the doctor -- telling us that we can't have an interface to return results electronically, so everything has to go back on a fax, which is inconvenient for the doctor in terms of putting that information in the medical records. So there are structural obstacles, but there are things that we and our managed care partners are working on, including things like benefit design to redirect work from out-of-network to in-network laboratories and other initiatives that will help support our -- are benefiting from value-based care initiatives. In terms of the overall market and market opportunity for large nationals versus regionals and health systems, it's still a highly fragmented market. We have a strong competitive position, which is founded on convenience, quality, service and cost-effectiveness. And we continue to build out that infrastructure with initiatives like the LabCorp at Walgreens and other -- the home testing and other ways in which we engage with and reach the consumer where the consumer wants to be met. So we feel that we're extremely well positioned in the market competitively, and we're going to continue to work on ways that we can not only provide value to the health system and provide value to the physician, but gain the identification with the consumer as a trusted provider of more than numbers on a piece of paper but a trusted provider of knowledge about my health condition and how I can manage it better.

And how do we think about your competitive position against the other national provider? Is there something that you feel that you have differentiated in the marketplace? Or is this just more of we believe there's 2 big national providers who are fairly comparable and the real opportunity is to move it away from the regional players that you just talked about?

I think if you look at performance, the market clearly sees differentiation. That's why we are gaining organic volume. That's why we're moving forward with key initiatives. That's why we're leading in innovation. I think if you compare the tools that are being offered to the patient, our tools are measurably better. They're measurably more convenient. Take -- if you look at the population of health tools that we're offering to health systems and physicians and the kinds of collaboration that we're doing, we see ourselves as differentiated, and my view is the market is telling us the same thing.

And I don't want to beat this to death, but if we look at their organic growth and this quarter versus yours, are you saying that you believe that the market is saying with your organic growth nearly 2x what theirs were in the quarter, that's the market showing the difference between LabCorp and Quest? Or is it your customer mix? I just want to understand this as we think about going into 2019 and some of the shifts in the contracting.

Well, I never say that we're gaining share because it's so difficult to determine, and I just don't think there's a reliable measure for it. Our organic volume speaks for itself. It was very strong in the quarter again. It was strong across all lines of testing and all areas of testing. And so the market is telling us what the market is telling us, and I leave it to others to interpret what that means. Again, Lisa, and I appreciate the detail or the persistence on the topic, but one of the important things to remember as you think about '19 is we are the network that is opening to our competitor, which is United, has more covered lives than the network that's opening to us, which is Aetna. So the impact, invariably, is we will lose more with United than we will gain with Aetna, and that will have an impact on revenue and profitability for us. So I don't -- all of the positives are there, and the market is telling us that the positives are working. But when you think about 2019, you have to realize that the numbers say what they say, which is we'll bear a greater burden in terms of share loss than our competitor will just because of covered lives in the contracts.

Our next question comes from the line of Eric Coldwell of Baird.

The first one is I was just hoping I could get the CRO's true growth, the organic constant currency growth. Or maybe stated differently, if you could give us the M&A contribution because I think we already have FX.

Yes. We have mid to high single-digit growth on the organic side, Eric, in terms of the CRO and are on track to have that on the full year with respect to the legacy "Covance."

Got it. And can I get the M&A dollars, please?

We're not delineating that out in terms of the segments, Eric.

Okay. And then on the book-to-bill, I realize there's a big FX adjustment in here. Can you talk about what the book-to-bill would have been on a constant-currency basis? And also I know in your 8-K you talk about the ASC 605 and book-to-bill on a trailing 12-month basis. I don't think we have all of the pieces to pull together what the -- or not book-to-bill, but what the trailing 12 month is. I don't think we can do the quarter because we don't have ASC 605 basis revenue, but I was hoping you could give that to us as well.

We delineated out in the 8-K the 605 versus 606. Why don't I take the opportunity here to address the bookings pipeline at the same time and then, hopefully, that gives you at least some granularity being a little proactive and talk about even some of the segments, fair enough? Well, we had with respect to the pipeline, very strong pipeline of opportunities. We still see that. It's actually the highest level that I've seen since my time at Covance in the central labs and early development. Even the clinical side is up versus last quarter. As Dave talked about, the competition, strategic partnerships, the dual-source or with top-40 biopharma sponsor was really in part due to our data capabilities on the clinical side, selecting in the early development. He also chatted about -- a little bit about the primary provider that we were selected as with current top-10 pharma, where we should double the awards over time. And then finally, we then had and agreed to an extension of the sole-source central lab award with the top-10 pharma sponsors that actually took an award that we had from 3 years with an optional 2 to 5 years with an optional 2. 7-year sole-source deals are a beautiful thing as probably (inaudible) to anyone. But we're seeing no bookings from those partnerships now ramp over the next year. Plus some bookings did shift from Q2 to Q3. That's not uncommon. That's why we focus on really the trailing 12-month period. And speaking from about 15 years of experience in this piece of business, 1.24 on a 605 basis or 1.22 on a 606 basis trailing 12 months, especially when you have an Early Development business, is a strong result. So in terms of the clarity on the book-to-bills and hopefully between what I stated as well as what's in the 8-K that you can get to the math on what you're trying to get to.

Yes, it truly sounds encouraging. I mean, you guys sound upbeat in your prepared remarks as well as here. You've given us a lot of good anecdotes about future awards, but just when you go from a 1.34 to a 1.24...

Yes, I like my business. I like my industry. The industry, in general, based on the FDA approvals, based on the biotech funding, based on now with Chiltern acquisition participating in that segment, all those are positives in my evaluation. And even -- I know that there's some debate on internal versus external. I've seen that over in a decade here in terms of the ins and outs. But bottom line is we're seeing penetration to the CRO business increasing, and there's plenty of surveys out there to demonstrate that.

Yes, I really appreciate all the comments. Just my -- I guess my point is what I'm trying to get to is the quarter itself was a weak quarter for bookings, it looks like. Some of that was currency adjustment, which we appreciate. We factored that in. But when your trailing 12-month book-to-bill goes from a 1.34 to a 1.24, that's a 0.4 impact from the quarter alone compared to the trailing 12-month average the prior quarter. So I just want to know what was weak this quarter. I can fully appreciate the comments on what's going to drive the future.

From the standpoint of the performance, it was pretty consistent across businesses, Early Development, high-level strength. And then on the clinical and central lab side, we saw clearly some level of shifting from a Q2 to a Q3. Not uncommon, but it did happen within those segments.

Our next question comes from the line of Ross Muken of Evercore ISI.

I maybe just want to follow up on that quickly with just a qualifier. So normally, when you sort of go through the process of resigning a larger strategic relationship, et cetera, is it possible you see some delay relative to that? Or possibly in a given Q, awards may not come around a certain strategic, whereas they may be lumpy in a later part of the year, which is, I think, what you're kind of suggesting around 3Q? I just want to sort of understand that because it seems like if there was a key partner you renewed with, that would sort of be a relevant explanation.

It is. But at the same time, we're on a contract basis. So when we get these big strategic partnerships, we're not taking those into bookings until the program underneath that partnership actually gets transacted in a contract. So you'll see that through time. You'll see that in terms of moving to start-up and then into full recruitment.

And it's Dave. Just to add a little color to that. As I mentioned in my prepared remarks, the 2 major things we talked about are significant accomplishments, but the awards won't start to ramp until next year. So you will see those in future awards. You're not seeing them now. The other thing is, to Eric's point, when you think about a trailing 12, obviously, it's not just the current quarter that has the impact. If a strong earlier quarter falls off and you have a less strong current quarter, you're going to see a kind of a double whammy in terms of the trailing 12. So I think it's important to recognize that it's not all a 1-quarter impact when you're looking at a trailing 12-month number.

That's helpful, Dave. And maybe just quickly on the lab business. You've had a boost from consumer genomics for a while. That was sort of an interesting announcement this morning with GSK and 23andMe. It seems to be sort of expanding that profile. I guess what are your sort of thoughts on where that business is going and kind of your play there. It seems like it's been a nice additive to your growth overall in the lab.

Absolutely. We have a terrific collaboration with 23andMe. We think of them as important strategic collaborators. We spent a lot of time with them talking about, just as we do with our other partners, about other things that we can do together. And they continue to be a nice component of our organic growth, but also a thought partner for what we do with data, how we better engage consumers, how we build that brand association.

Our next question comes from the line of Erin Wright of Crédit Suisse.

I'm curious kind of how you view your sort of position now in Covance within some of the faster-growing areas of the CRO market, whether it be FSP or real-world evidence now, how are you positioned with Chiltern as well as I think you did a recent bolt-on acquisition in the late-stage post-approval area. I guess, should these bolt-on deals continue in the CRO space? And I noticed you did expedite that Chiltern synergy capture. I guess could you elaborate on the impetus for that?

Sure. I -- we feel good about our positions with respect to the FSP, the real-world evidence, the biotech late-stage areas. The Chiltern acquisition, we did move up. We are in the very, very final stages of that integration. Organization's done. Leadership's picked. The best of the best. That all has actually happened. They -- we have now intertwined the organization with respect to the processes, et cetera, the only thing truly the long poles in the tent, if you want to call it that, or system integration of -- that actually are flowing through now, July, August. So we see that as materially complete. That has added real strength in terms of the FSP areas. We had significant monitoring skill on the legacy Covance clinical. And now with the biometric skill of the Chiltern organization, that now allows us to go to enterprise and bid on the enterprise and got involved in terms of whipping those opportunities now through the second half. Clearly, on the biotech stage, that has enhanced our capabilities. Ever since I've been here, the -- Covance has ticked up from the high teens in terms of the 16% to kind of 18% levels to now 30% of our revenue is from the biotech areas. So real strength there that came from the Chiltern acquisition. Obviously, on the data side, we talked a bit about that earlier, building out that post-marketing, real-world evidence areas. We believe in our data solution, and that's strengthened our later-stage capabilities so a little bit about our position.

Okay, great. And then a quick follow-up. How is Walgreens progressing? And would you say it's progressing according to plan? And when do you think we'll get meaningful contribution from that effort? And then taking that a step further, how could you potentially leverage the Walgreens relationship across Covance as well with potentially a greater focus on virtual trials?

Yes, I think -- it's Dave. And obviously, we continue to expand the footprint. We will be opening more stores and entering new locations throughout this year. We see the Walgreens partnership as a valuable new channel for reaching consumers, and we have collected quite a bit of data showing that not only are these -- are many of these patients new to LabCorp, but there are also patients who don't typically shop at Walgreens. We also have data showing that many of the patients are filling a prescription at the same time they're getting their lab work done. So the thesis on which we went into this, which is we want to be in retail, we want to create engagement with the consumer, and we want to be in a health care environment are all valid. In terms of integration of capabilities with Covance, I think I mentioned that earlier in the comments in response to Jack's question. But the creation of large databases of patients, knowing their disease condition and their -- what drugs they're taking is very valuable in terms of virtual trials. It also can be valuable in terms of virtual control arms for trials, where patients are following one course of treatment as opposed to being in the trial course of treatment. There's a substantial amount of opportunity to benefit both the enterprise and the individual businesses from Walgreens, and we have continuing and in-depth and extensive conversations with them about what our key priorities are and how we can accelerate.

Our next question comes from the line of Patrick Donnelly of Goldman Sachs.

Maybe just one on the lab side. Looking at the revenue per requisition trends, obviously, the first decline there in a while. Certainly understand PAMA as a headwind, but can you just talk through the dynamics there and then also your confidence level and drivers for improvement moving forward?

Yes, it's Dave. So I think you broke up a little bit, but I think your question was revenue per requisition. And so let me start by saying that the PAMA impact on revenue per requisition more than accounted for the total decline, okay? So if we take PAMA out, revenue per requisition would have been up. The other factors that have an impact on revenue per requisition are acquisitions, obviously, test mix. And inside the test mix, as we have said a number of times, 23andMe is a highly valuable strategic collaboration for us. It is at a lower price point than our average price point, and therefore, it mixes us down even though it contributes to volume. So I will say also that pricing on the managed care front from our perspective is stable. We're not seeing pricing headwinds for managed care. And obviously, the pricing impact of United and Aetna, which we've already -- which we've talked about previously, wouldn't take effect until the 1st of next year, so that would not have any impact on price. So to recap, and then I'll ask Glenn if he has any further comments, but to recap, if you back PAMA out of the equation, price would have been up.

No, I think you've covered it, Dave.

Okay. And then maybe just one on capital allocation. The M&A consolidation story on the lab industry side may have been a bit slower to develop than anticipated. So can you just talk through the pipeline there? Any acceleration in conversations with hospitals as PAMA squeezes margins a bit more as the year progresses?

Sure. So the M&A pipeline is robust and healthy, and there are a number of interesting opportunities. Obviously, we evaluate every opportunity based on our key metrics, which are accretion, recovering our cost of capital in 3 years, return on invested capital, strategic fit, so all of the factors that we've enumerated before. In terms of hospitals and health systems, we take the view that we are interested in broad strategic partnerships with key anchor systems, so Providence St. Joes, Novant, Mount Sinai, PAML. I mean, these are deals that take time to materialize, but they're more than just we take over a lab and manage the laboratory. There are deals that include data, that include pathology, that include reference testing, that include a whole range of services. And we have a significant number of health system opportunities on the table in front of us. But again, it's difficult to predict what the timing is. I will say I think they're earlier in the year. As we commented on in the first quarter call, there was some -- everybody in the -- everybody was kind of getting used to the impact of PAMA and what was it going to mean. And I think we're seeing that people are seeing the consequences, and they are thinking about what their strategic options might be with their lab assets.

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

I joined a little bit late, so apologies if you did go through these. But Quest yesterday specifically called out pressure in hep C, vitamin D and drug monitoring. Dave, I guess, based on your commentary earlier, it sounded like you said the organic growth was strong across all categories. So one, I just wanted to sort of call out and see if you saw any of these pressures within those categories. And then they specifically cited policy changes and higher denials that sounded sort of more macro than company-specific. Again, are you just sort of not seeing it? Or can you give us any color within those categories?

Thanks, Ralph. So even though we're getting close to the top of the hour, I do want to spend a couple of minutes on this because I think it's created some uncertainty across the industry, which I don't think is (inaudible). So first of all, I think it's important that we distinguish between volume and revenue. So policy changes and denials do not affect volume. They affect revenue. Now I can say, with respect to all 3 of those test categories, hepatitis C, vitamin D and medical drug monitoring, that our volume for each of those 3 categories of tests was up in the quarter. And medical drug monitoring was up substantially in the quarter. So that's volume. Now revenue, we are seeing, as we have seen for years, more and more limited coverage policies, restrictive payment policies, preauthorization policies implemented by payers in an effort to control their lab spend. We don't agree with those policies. Many of those policies, particularly in medical drug monitoring, are aimed at curbing fraud and abuse, but they're using blunt instruments that affect compliant players like us and Quest just as much as they affect the non-compliant players. So we are seeing more denials, and those denials affect revenue. And so they slow revenue growth. And obviously, they also have an impact on write-offs and bad debt. But we did not see volume declines in any of those areas. And in fact, we saw volume increases in all 3. I will say specifically with the comment on hepatitis C genotyping, yes, we did see a decline in hepatitis C genotyping, but hepatitis C genotyping is a very small fraction of our total hepatitis C portfolio. And it's not something that would have a significant impact on our volume overall. And to recapitulate, total hepatitis C volume was up in the quarter in any event. So I hope that helps in terms of clarification, Ralph, with how we saw those tests performing.

Yes, that's helpful. And then just one more quick one with the Walgreen relationship. It sounds like you've been pretty happy with the relationship to this point. Is there sort of a gating factor of sort of a much broader and kind of wider expansion?

No. The gating factor -- the only gating factor is store selection and build-out, and we are far down the road in the process of talking about a significant expansion of the partnership.

Our next question comes from the line of Dan Leonard of Deutsche.

Another product-specific question on the lab side. Can you update us on the trends in your NIPT business, the sizing of that and how you're thinking about the potential for expansion of average risk coverage?

Yes, I'll start, and then Gary is probably closer to it. NIPT is growing nicely. The Sequenom acquisition was a terrific complement to our NIPT portfolio, and we continue to see strong volume growth there as well as across women's health. In terms of average risk, I think there was some optimism that the physician groups would come out with a stronger statement in favor of average risk screening, which I think did not happen at their last meeting. But I think the support of the physician groups for noninvasive prenatal testing of the average risk patients is growing. And over time, we expect to see better payer coverage of that test or that utilization of the test. Gary, anything further to add there?

I will just say that one thing in regards to the NIPT testing, we are seeing good growth there. And it is a great complement to our women's health -- industry-leading women's health portfolio. So as we continue to leverage and drive our women's health growth, it's a key component, and we see the reimbursement landscape becoming more promising.

Our next question comes from the line of Ricky Goldwasser of Morgan Stanley.

Our next question is Kevin Ellich of Craig-Hallum.

Just 2 quick questions. The last has been talked about. Organic growth was pretty strong. Did you guys quantify how much contribution came from 23andMe?

We did not quantify how much came from 23andMe. I would say, obviously, it's a strong contributor. Quarter-over-quarter, it was less of a contributor to organic growth than the prior quarter. So sequentially, it was less meaningful to the organic growth than 1Q.

Understood. And then Glenn, capital expenditures, we saw a little increase. Free cash flow guidance was maintained. Just wondering how we should think about CapEx going forward. Are there any big things we should be looking for?

I think that we're pretty much tracking where we thought. When we gave our original guidance, we talked around a 3.5% of revenue spend this year, which would be higher than the past years as we see good opportunities to invest for the growth of the business. But we're tracking pretty much on that, which is why we're maintaining our guidance range.

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

Great. So one question kind of maybe at a high level. Curious as you're kind of a few years into the Covance acquisition now, are you seeing any pull-through from the Early Development business at Covance to the late-stage business? And is there -- kind of what are your thoughts around the synergy of owning both of those businesses?

This is John. In terms of we are seeing pull-through, we are seeing pull-through in terms of from the tox business, the BioA business into our clin pharm Phase I areas. That's what we're actually tracking. We have seen that increase. We're actually trying -- well, we are and have put in place an organization to actually move that from the early development stage into the Phase I clin pharm areas, and then move that then up into the 2, 3, 4. Obviously, in terms of -- there's some falloff in terms of this is clinical research. Products do get rejected in that early development stage. But we have a group now of scientists that actually do a level of due diligence in terms of the early development on how that should then be pushed into either our BioA, CMC areas, our clin pharm areas, and we are seeing upticks in terms of those businesses. It is a clear differentiator. We are the only CRO that actually does all 3.

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

2 quick ones for me. Dave, just speaking to the structural obstacles that -- to move more lab business in-network, can you talk a little bit about how long you see before that happens? And presumably, this is some sort of step function over several years. And then I have a quick follow-up.

Sure. One of the structural obstacles is plans that have an out-of-network benefit. So if I'm an employer and I have a plan that pays 50% of billed charges or 70% of usual and customary per out-of-network, then there's -- and you have non-compliant behavior by out-of-network labs, where they're willing to write off patient responsibility, they can do pretty well at 50% of billed charges and writing off the balance. And until we have changes in benefit design, there's really nothing that we or Quest or anybody else can do to bring that work into the network. So this is not something that's going to happen overnight, Bill. It's a great question, and it's going to require a sustained effort on the part of the managed care industry, employers and health care providers to encourage compliant behavior and to encourage benefit design and structural set-ups that reward patients for bringing their work into the network.

Okay, got it. And then just a quick clarification. Appreciate that rev/req was up excluding PAMA. Can you separate specifically what PAMA was in terms of the negative effect on rev/req?

Bill, this is Glenn. What we've said is that the impact from PAMA for the full year will be around $70 million, and that would be pretty pro rata over the period of time. So I think you can get to that, whereas Dave said, you get to roughly around, call it, 100 basis points, so up to 70 basis point decline. The negative impact from PAMA really accounted for more than the decline year-over-year.

Our next question comes from the line of Amanda Murphy of William Blair.

This is actually Max on for Amanda. Just a few quick ones for me. Just a quick one on 23andMe. So I was wondering if you're seeing any slowdown in terms of volume now that we've moved past the holiday season and to the back half of the year.

I think that's a question better directed to 23andMe than it is to us. It's not our position to kind of comment on their volume trends.

Got it. Appreciate that color. And then moving to Covance and a little bit about their -- your updated guidance. I was wondering, we talked a little bit about the shift towards the late-stage. I was wondering how much of that increase in guidance was just kind of pull-through of the existing backlog as maybe opposed to an increase in sales.

It's -- truly, Max, it would be in the clinical late-stage, but it was more so because of an uptick in the pass-through investigator fees, a little bit offset by currency. But it would be in that clinical stage, but it was much more so in the pass-through investigator fees.

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

So Dave, I wanted to go back to a comment that you made when you talked about revenue per requisition. And specifically, you said that the pricing impact from United and Aetna will not take effect until next year. So on the impact from United and Aetna, we get a lot of questions from investors on how should we think about the pricing component of these relationships. So when you talk about 2019 and about the financial impact, can you just clarify whether this is earlier reflection of your expectations for volumes? Or is price a factor as well?

So as we said at the time of the renewal, we were very pleased with the pricing of both. And as we also said, we had discussed during the negotiations that if the United contract opened up, that we would expect a price increase. And we said we were very pleased with the outcome of the discussion. So I'll leave you to draw the inference. I'll leave you to draw your own conclusions from that. With respect to how we see the impact next year, the impact will be lost volume, and that will be the revenue and the profitability impact. We're not factoring price as a contributor to how we balance out the United loss versus the gain.

Okay, great. That's very helpful. And then just a follow-up there. In terms of the volume, can you maybe give us -- I know that you're saying that it's too early to talk about the volume cadence in 2019. But maybe you can give us some perspective to go back to 2007. How long did it take you to pick up share back then? And what might be different or not this time around that's just going to help us with that framework?

I think you and I may be the only ones around in 2007, Ricky, so we have the only memories. So first of all, let me just say, in 2007, a different situation because we were both in-network with United prior to the change in January of 2007. So in 4Q of 2006, LabCorp was in-network. Quest was in-network. But United had made the announcement in October that the contract would be switching over. We saw a very significant movement of volume in the fourth quarter of 2006 leading into the first quarter of 2007. So the impact was pretty substantial in 4Q 2006, pretty substantial in 1Q 2007, and then it tapered off. This time, our competitor is not in the network in 4Q of 2018. So consequently, we don't expect volume to shift in 4Q 2018 because if it does shift, what will happen is, first of all, United will see an increase because of the out-of-network rates. Second of all, patients will see an increase in patient responsibility. So that will put the patient in the middle, and that's obviously not, I think, anybody's goal here. So we don't expect a significant movement in the fourth quarter of '18, which means that what's going to move will probably largely move in the first quarter of '19 and then somewhat in the second quarter. But we certainly expect the bulk of the impact to be in the first half of 2019.

Thank you. That is all the time we have for questions. I'd like to hand the call back over to Dave King for any closing remarks.

Well, again, we're very pleased with the performance of the quarter. Very appreciative again to our colleagues for the outstanding performance in our ransomware situation, and appreciate your joining us for the call this morning. Wish you a good day.

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