Ladies and gentlemen, thank you for standing by and welcome to the Q3 2019 Labcorp Holdings Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. With the interest of time, we ask you please limit yourself to one question and one follow-up. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker, Clarissa Willett, VP of Investor Relations. Please go ahead.
Good morning, and welcome to Labcorp's third quarter 2019 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and internet. With me today are Dave King, Chairman and Chief Executive Officer, Glenn Eisenberg, Executive Vice President and Chief Financial Officer, and John Ratliff, CEO of Covance Drug Development. This morning, in the investor relations section of our website at labcorp.com, we posted both our press release and an investor relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call. Additionally, we are making forward-looking statements.
These forward-looking statements include, but are not limited to, statements with respect to estimated 2019 guidance and the related assumptions, the impact of various factors on operating and financial results, expected savings and synergies, and the opportunities for future growth. Each of the forward-looking statements is based upon current expectations and is subject to change based upon various factors that could affect our financial results. Some of these factors are set forth in detail in our 2018 Form 10-K and subsequent Form 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. I'll turn the call over to Dave King.
Thank you, Clarissa. Good morning, everyone. Labcorp delivered another excellent quarter, again demonstrating the power of our combined capabilities. We saw strong market demand across both businesses, which with the benefit of strategic acquisitions, delivered solid top-line growth. We also continued to manage expenses aggressively and execute our LaunchPad initiatives. As a result, revenue grew 3.4% in spite of a year-over-year headwind of 1.3% due to divestitures. Adjusted earnings per share grew 6% despite the impact of PAMA and the opening of managed care contracts in diagnostics. We generated $363 million in free cash flow. We continued our disciplined capital allocation program, repurchasing $100 million of shares and successfully executing several tuck-in acquisitions. We have a robust acquisition pipeline and remain focused on strategic value-creating acquisitions in both of our business units. Covance excelled across all measures. Constant currency revenue growth increased by more than 9%.
We realized 270 basis points of margin expansion. Backlog increased by over $400 million sequentially to $10.7 billion, and our trailing 12-month book-to-bill stands at an impressive 1.28. Despite the market headwinds we are experiencing, diagnostics turned in another strong performance. Normalizing the performance for the impact of PAMA and managed care changes, we grew revenue excluding divestitures by 4%, increasing revenue per requisition by 2.3% and volume by 1.7%, solidly within our performance expectations for this business. At the enterprise level, we are successfully weaving diagnostics and drug development together into a unified whole, creating value by focusing on consistent execution of our strategy to deliver world-class diagnostics, bringing innovative medicines to patients faster, and use technology to improve the delivery of care.
Among the recent examples of the power of the combined, health systems continue to express interest in our ability to both reduce their Labcorp testing costs and bring them meaningful clinical research opportunities. Today, we have 16 Covance site partnerships with U.S.-based health systems and have offered these health systems some 200 meaningful trial enrollment opportunities. This two-pronged value proposition continues to gain traction with health system partners. We continue to win in the marketplace by using data as a differentiator. In the quarter and year to date, we have achieved broad-based customer success. For example, by combining Labcorp patient population data with Covance's unique site location tools and protocol design insights, we deliver a truly integrated, patient-centric approach to recruitment. This approach enabled us to win nine studies, principally focused on oncology, from a single sizable customer, doubling our win rate and our program value.
Companion diagnostics also continued to show strong growth. Revenue from all aspects of companion diagnostics grew nearly 20% year-over-year. As we sharpen the focus on excelling in oncology in both of our businesses, the ability to develop, support approval for, and commercialize companion diagnostics will prove a sustainable competitive advantage. Now I will discuss this quarter's diagnostics highlights. Our managed care portfolio continued to perform well, a testament to our teams in the field who have done an exceptional job retaining our customers. The opening of the managed care contracts led to a net reduction in volume of 1%, stable since the last quarter, and we continue to see volume and revenue growth across the rest of the managed care business. We finalized several new partnerships with health systems in the quarter.
We acquired the clinical diagnostics business of South Bend Medical Foundation, enhancing the scope of services that Labcorp offers to hospitals, physicians, and patients across the region, concurrently partnering with the health system to offer expanded pathology services. We also partnered with the New Jersey Primary Care Association, which represents 23 community health centers. By using our Care Intelligence platform, we and NJPCA will provide physicians with accessible, comprehensive, and secure integrated lab and clinical data, focusing on improving outcomes for patients with chronic conditions. This partnership will help NJPCA achieve key value-based care objectives. As we have stated, we are proud to be included in UnitedHealthcare's Preferred Laboratory Network. Concurrently with the PLN, in 2019, UnitedHealthcare made the decision not to renew the BeaconLBS pilot in Florida. Nonetheless, UnitedHealthcare continued with the BeaconLBS for their national molecular contract beginning in September.
This reflects UnitedHealthcare's approach to offer programs and networks, including the PLN, to consumers on a national basis. Although the non-renewal of the Florida pilot will have near-term negative impact on revenue and margin in the fourth quarter and next year, we are optimistic about growth opportunities with the PLN. In addition to the UnitedHealthcare national molecular contract, BeaconLBS has multiple other opportunities for revenue growth. On the consumer front, we continue to expand accessibility, transparency, and convenience so that consumers may engage Labcorp when and where they want to. Through our Labcorp-Walgreens partnership, we continue to expand patient access in the retail healthcare setting. We now have 58 locations open in nine states and more than 75 other locations in progress toward our agreed goal of 600 by the end of 2022.
In addition, we are pursuing other collaboration opportunities focused on our shared goals of enhancing tools available for clinical research, supporting the shift to value-based care, and expanding health-related services available to consumers in the retail environment. We significantly expanded our Pixel by Labcorp platform to include sample collection by phlebotomists in our patient service centers. Pixel by Labcorp enables consumers to shop and pay online for many lab tests directly. The menu now includes 28 test packages comprised of more than 100 analytes. We've been pleased with the initial response and continue to add offerings to the platform each month, including measles and MMR immunity testing. Our relentless customer focus drives our LaunchPad Two initiatives, which are designed to digitize the business, automate processes, improve productivity, and create an exceptional experience for all of our customers and our employees.
We remain on track to deliver a total of $200 million of net savings by the end of 2021. Now I will discuss this quarter's Covance highlights. Covance's strong performance is a result of building on our unique capabilities with strategic acquisitions, the creation of highly targeted offerings, enhanced therapeutic expertise, and focused geographic expansion. The result is added value across multiple dimensions of the Covance business, resulting in strong growth across all lines of business and customer segments. One of our key strengths is that Covance is the only CRO to offer comprehensive R&D services from early development through commercial solutions around the globe. Our strength across the spectrum allows us to fully support our partners' portfolios. The best evidence of success in the market is our solid track record of moving molecules from early development into clinical services, which continues to gain momentum with our customers.
Our newly opened R&D center in Shanghai establishes Covance as the only CRO to offer comprehensive R&D services from early development through commercial solutions in China. This expanded presence, as well as our more than 1,000 colleagues in China, was a critical factor in winning a large oncology study with a China-based biotech. Covance also continues to strengthen its capabilities in the exciting area of cell and gene therapy, supporting sponsors focused on developing treatments for debilitating and life-threatening diseases. Covance offers superior capabilities across early development, early clinical, central labs, and late-stage clinical to deliver unique solutions in these complex therapeutic areas. We have already seen significant opportunities and growth across the enterprise from pre-clinical to clinical development. Those opportunities span our entire geographic footprint, including China, where adoptive T-cell therapies are a major focus for oncology.
We also continue to execute the key priorities in our Covance LaunchPad initiative and are on track to deliver $150 million of net savings through these initiatives by the end of 2020. We are also on track to deliver $10 million of net cost synergies from the integration of Envigo by the end of 2021. In short, Covance continues to deliver results and validate our decision to become a global life sciences player. In closing, I'm grateful to our terrific leadership team and our 61,000 colleagues around the globe for their consistently outstanding efforts in support of our mission to improve health and improve lives. Those efforts are reflected once again and still in our strong third quarter performance and will continue to be reflected in Labcorp's performance in the years ahead. Now, I'll turn the call over to Glenn.
Thank you, Dave. I'm going to start my comments with a review of our third quarter results, followed by a discussion of our performance in each segment, and conclude with an update on our 2019 guidance. Revenue for the quarter was $2.9 billion, an increase of 3.4% over last year. The increase was primarily due to acquisitions of 2.8% and organic revenue growth of 2.2%, partially offset by divestitures of 1.3% and foreign currency translation of 30 basis points. Excluding the negative impact from PAMA of 90 basis points, organic revenue grew 3.2%. Operating income for the quarter was $340 million, or 11.6% of revenue, compared to $343 million, or 12.1% last year.
During the quarter, we had $29 million of restructuring charges and special items, primarily related to LaunchPad initiatives, acquisition integration, and the previously announced vendor data breach, partially offset by the release of a contingent consideration accrual for a prior acquisition. Adjusted operating income, which excludes amortization of $62 million, as well as restructuring charges and special items, was $431 million or 14.7% of revenue, compared to $429 million or 15.2% last year. Adjusted operating income benefited from organic growth, acquisitions, and LaunchPad savings that were essentially offset by the impact from PAMA of $27 million and higher personnel costs. Excluding the 80 basis point reduction from PAMA, margins would have increased 40 basis points. The tax rate for the quarter was 24.1% compared to 36.2% last year. The adjusted tax rate, excluding special charges and amortization, was 23.9% compared to 25% last year.
The lower adjusted tax rate was primarily due to a favorable change in the Swiss tax rate. We expect the company's adjusted tax rate for the full year to be approximately 25%, implying a fourth quarter tax rate of approximately 24%. Net earnings for the quarter were $221 million, or $2.25 per diluted share. Adjusted EPS, which exclude amortization, restructuring charges, and other special items, were $2.90 in the quarter, up 6% compared to last year. Adjusted earnings in the quarter benefited by $0.02 from three unusual items, a $0.06 benefit from the favorable change in the Swiss tax rate, a $0.02 unfavorable impact from Hurricane Dorian, and a $0.02 reduction due to the non-renewal of the BeaconLBS UnitedHealthcare contract pertaining to the Florida market. Operating cash flow was $456 million in the quarter, compared to $252 million a year ago.
The increase in operating cash flow was due to higher cash earnings and favorable working capital. Capital expenditures totaled $93 million, or 3.2% of revenue, compared to $98 million or 3.5% last year. As a result, free cash flow was $363 million in the quarter, compared to $154 million last year. We remained active throughout the quarter in terms of capital allocation. During the quarter, we invested $149 million in acquisitions and repurchased $100 million of stock. As of September 30th, we had $950 million of authorization remaining under our share repurchase program. At quarter end, our cash balance was $361 million, up from $265 million at the end of the second quarter. Total debt at the quarter end was $6.6 billion, and our leverage was 3.3 times gross debt to last 12 months EBITDA. Now review our segment performance, beginning with Labcorp Diagnostics.
Revenue for the quarter was $1.8 billion, an increase of 0.4% compared to last year, due to organic growth of 0.9% and acquisitions of 0.8%, partially offset by divestitures of 1.3%. Excluding the negative impact from PAMA of 1.5%, organic revenue increased 2.5%. Total volume, excluding divestitures, increased by 0.7% over last year, of which acquisition volume was 0.5% and organic volume was 0.3%. Organic volume was reduced by approximately 1% from the managed care contract changes. Excluding managed care contract changes, organic volume was up 1.3%. As a reminder, we do not include hospital lab management agreements in our volume, which would have added approximately 1.9% to our volume growth. Revenue per requisition, excluding the impact from divestitures, increased by 1% due to favorable mix and acquisitions.
Revenue per requisition was negatively impacted by 150 basis points from PAMA and 50 basis points from the non-renewal of the BeaconLBS UnitedHealthcare contract. Given the nature of the BeaconLBS business, the unfavorable impact from the non-renewal of the contract is entirely reflected in revenue per requisition. As such, we expect an unfavorable impact from BeaconLBS on revenue per requisition of approximately 150 basis points in the fourth quarter due to the full quarter impact. Labcorp Diagnostics adjusted operating income for the quarter was $296 million, or 16.8% of revenue, compared to $332 million, or 18.9% last year. The $35 million decline in adjusted operating income and 210 basis point decline in margin were primarily due to the negative impact of PAMA of $27 million and one additional payroll day in the quarter, which was an offset from the payroll day benefit that we discussed in the first quarter.
In addition, organic growth and LaunchPad savings were partially offset by higher personnel costs, primarily consisting of the annual merit increase. We remain on track to deliver $200 million of net savings by the end of 2021 from our Diagnostics LaunchPad initiative. I'll review the performance of Covance Drug Development. Revenue for the quarter was $1.2 billion, an increase of 8.7% compared to last year due to organic growth of 4.7% and acquisitions of 6%, partially offset by a 1.2% reduction due to the divestiture of our research products business as part of the Envigo transaction, and foreign currency translation of 80 basis points. Excluding lower passthroughs, organic revenue continued to grow in the mid to high single digits. Adjusted operating income for the segment was $175 million, or 14.9% of revenue, compared to $131 million, or 12.1% last year.
The $44 million increase in adjusted operating income and 270 basis point improvement in margins were primarily due to organic demand, acquisitions, and LaunchPad savings, partially offset by higher personnel costs to support growth. We remain on track to deliver $150 million of net savings by the end of 2020 from Covance's LaunchPad initiative. For the trailing 12 months, net orders and net book-to-bill remained strong at $5.7 billion and 1.28, respectively. Backlog at the end of the quarter was $10.7 billion, an increase of approximately $400 million from last quarter. We expect approximately $4.2 billion of this backlog to convert into revenue over the next 12 months. Now I'll discuss our 2019 guidance, which assumes foreign exchange rates as of September 30th for the remainder of the year and includes the impact from currently anticipated capital allocation towards acquisitions, share repurchases, and debt repayment.
We expect revenue growth of 1.5% to 2% over 2018 revenue of $11.3 billion. This is an increase over our prior guidance of 1% to 2%. This guidance includes the negative impact from divestitures of approximately 1.5% and foreign currency translation of 60 basis points. We expect Labcorp Diagnostics revenue to decline 1.5% to down 0.5% as compared to 2018 revenue of $7 billion. This is an increase over our prior guidance of down 3% to down 2%, primarily due to acquisitions and organic growth, partially offset by the non-renewal of the BeaconLBS UnitedHealthcare contract. This guidance includes the negative impact from divestitures of approximately 2% and foreign currency translation of 10 basis points. We expect Covance Drug Development revenue growth of 5.5% to 7.5% over 2018 revenue of $4.3 billion, a reduction from our prior guidance of 5.5% to 8.5%.
The reduction of the midpoint of guidance is due to the 40 basis point unfavorable change in currency translation, bringing the full-year negative impact from foreign currency translation to 130 basis points. Organic revenue growth, excluding passthroughs, is also expected to be 5.5% to 7.5% over 2018. Our adjusted EPS guidance is $11.20 to $11.30, which is an increase of 2% to 3% over 2018 adjusted EPS of $11.02, and a narrowing of the range as compared to our prior guidance of $11.10 to $11.40. We are holding to the midpoint of our guidance as the benefit from acquisitions and organic growth is being offset by the previously mentioned unusual items. For clarity, although we do not provide quarterly guidance, with only one quarter left in 2019, our narrow guidance implies a fourth quarter adjusted EPS range of $2.75 to $2.85.
That includes the negative impact from the non-renewal of the BeaconLBS contract. Free cash flow is expected to be $950 million-$1.05 billion, which is an increase of 3%-13% over 2018 and unchanged from our prior guidance. This concludes our formal remarks, and we'll now take questions. Operator?
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. With the interest of time, we ask that you please limit yourselves to one question and one follow-up. Our first question comes from Lisa Gill with J.P. Morgan.
Good morning. I just really wanted to follow up on what's going on on the margin side. Glenn, you gave a good amount of detail, but as we think about BeaconLBS impacting the fourth quarter and then probably having some impact on 2020, how do we start to think about margins going into 2020? Any framework you can give us around thinking about the puts and takes on the margin side? Can you expand margins, hold margins steady as we think about 2020? Anything else that you can give us as kind of just an early framework around 2020 would be really helpful.
Sure, Lisa. First of all, we're obviously saying, we're going to provide our guidance just in general on 2020 when we report our fourth quarter results as we do in the normal course. To your question, with the BeaconLBS non-renewal of the contract, obviously it is a headwind that we'll have going into next year. We've given the impact, if you will, on the fourth quarter, so obviously you can annualize that, and you'll have a sense of the headwind that we'll look to overcome through either additional business, as Dave commented earlier, within Beacon as well as just the growth in our overall business.
As a general rule, directionally, and I think we've shared this with you and the others as a preliminary view of 2020, that overall for the diagnostics business with another year of PAMA ahead, the good news is we now have had the managed care impact essentially in the numbers. Obviously, it just started within the first couple of months, but essentially relatively flat year-on-year. Now with the Beacon non-renewal, we would expect that diagnostics plus or minus would be flat to down margins as we look into 2020. Again, having Covance's expectation and drug development to see improved margins next year as well.
Lisa, it's Dave. I would just say flat to slightly down. I want to be clear on that. Flat to slightly down for 2020 in diagnostics.
As we think about that comment, Dave, of flat to slightly down, I think also you talked about some acquisitions this quarter. Do we start to see some of the accretion come in for 2020? Is it cost-cutting? What are some of the drivers that we should think about to offset whether it's BeaconLBS or PAMA or some of the other headwinds that you have in the diagnostics business?
Lisa, it's Dave. I think you're correct. Obviously, the acquisitions come in at a lower margin, and so as the synergies are realized, that will improve margins. We also have the continued impact, both the carryover and then the additional initiatives within the LaunchPad Two program. Those will offset some of the margin pressure that we're experiencing. As Glenn said, we annualize the managed care contract changes basically in January, February. There are puts and takes, but at the end of the day, we feel confident that flat to slightly down is a very realistic view of 2020 margins in Diagnostics.
That's very helpful. Thank you.
Lisa, just to add to the end of it, while we'll have the annualization of acquisitions and diagnostics, which do mix up the margins, we continue to see a good pipeline for diagnostics. As we look to redeploy capital in 2020 with the strong cash flow that we expect, an opportunity to see additional benefits from that.
Okay. Thank you.
Thank you. Our next question comes from Jack Meehan with Barclays. Your line is open.
Thank you. Good morning. I wanted to continue on the Diagnostics side, and I was hoping you could walk us through some of the moving parts for the fourth quarter. You've raised the full year outlook for Diagnostics, but that also includes the headwind from BeaconLBS. Just versus the model, what's coming in better? Is there any other headwinds or tailwinds we should be thinking about for the fourth quarter?
Jack, this is Glenn. I'll take the first cut, as you see with the implied guidance, first on the revenue side, we're looking at a positive quarter in the fourth quarter. We're benefiting, if you will, from the acquisitions that we've done that will have a full quarter's worth, if you will. We've also, as you know, been experiencing the headwind from the divestitures that we've had that essentially have annualized in the third quarter, we'll get the benefit of that. Just normal, call it organic demand growth within the business. As we've commented earlier, in the fourth quarter, we'll actually get the benefit of a revenue day that would've been the offset to the headwind from a revenue day that we experienced in the first half of the year. Again, to your point, we do have the headwind in Beacon.
As we look across the spectrum of the fourth quarter, we do expect to see some good top-line growth. While we do expect margins to be down in the first quarter year-on-year, we expect it to be down the least amount that we would have experienced throughout any quarter this year based upon that top-line growth, but also based upon the continuation of Diagnostics LaunchPad initiative.
Great. That's all helpful. Can't help but asking a couple of questions on 2020 as well. I'm just curious, as we sit here today, how meaningful you think the PLN could be to growth? Also, in terms of some of the recent contracting on the managed care side, how you're feeling about just unit pricing for the lab business?
Jack, it's Dave. In terms of the PLN, obviously, being included in it, one of a small number of laboratories is a terrific opportunity. UnitedHealthcare is undertaking some initiatives that we are very supportive of, such as $0 copays, for some of their offerings. They're out selling the PLN to ASO employers right now in this selling season. We'll know a lot more about the long-term opportunity when we see what the uptake is among employers. We feel very optimistic that the PLN is an opportunity to move share away from the higher-cost providers to us as a high-quality and lower-cost provider.
I also want to point out, just reiterate that in entering the PLN, there was no downward pricing adjustment with United. Our price remained what we had previously agreed to when we were selected to be part of the PLN network. In terms of unit price, what we always say is unit price is basically, as it is everywhere in healthcare services, a flat to slightly down proposition. I think in a typical year, you would expect to see unit price at zero to negative 50 basis points. The positives that we report in revenue per requisition, as you know, are driven by test mix and utilization.
As we see growth in higher value testing, as we see growth in esoteric testing, that improves the reported revenue per requisition, but it doesn't change the basic nature ex PAMA, which is a singular event, of unit price being sort of flat to 50 basis points down. That's how we think about unit price year in, year out 2020 not being any different.
Great. Thank you, Dave.
Thank you. Our following question comes from the line of Kevin Caliendo with UBS. Your line is open.
Hey, guys. I just want to go through this Beacon a little bit more. I want to make sure the math that we're doing here is right, because if I'm looking at your guidance for the fourth quarter, it assumes that the diagnostic margin would fall to about 13%, and that's with a full quarter of Beacon. Our math at 150 basis points on a revenue per requisition is around $25 million impact. Should we just assume that all falls to the EBIT line, and that's maybe how we would want to think about it for the first three quarters of 2020?
Yes.
Oh, I'm sorry. Not diagnostic. My bad. That's Covance at 13%. Diagnostics is higher than that. I apologize.
Yeah, no. The BeaconLBS part, using what the 1.5% impact on revenue recognition would get you to call it the $25 million in revenue that you're speaking to. Obviously, there's a margin associated with that that then would fall to the operating income. We've talked about BeaconLBS was an attractive business with margins that were higher than the diagnostics overall, that's a shortfall to earnings that, again, we'll have to make up. Annualizing that is a fair proxy to start, and again, we'll look to make up some of that through additional business through the business, again, LaunchPad savings and the growth overall in the business.
Your margin decline that, or at least the margin that you're saying in the fourth quarter, as we said earlier, while margins will be down in the fourth quarter, again, in part, because of the impact of BeaconLBS, they'll be down less than it's been down all year. We actually do see some favorableness coming in. When you look at our margin a year ago, I think we were 16.5. You can factor in that the margin will be better than what you're expecting.
Got it. Okay, that is helpful. Just one quick one on Covance. The M&A contribution was bigger than we had thought, and you talked about some pass-through revenue weakness. I just question, excluding the pass-through, what was Covance organic revenue growth, and at what point should we cycle past the pass-through weakness we've seen in the Covance segment.
Yeah, I think that, as we said in the press release, Glenn just stated that excluding the pass-throughs, we expect to grow mid to high single digits. From the standpoint, variety of factors influence the pass-throughs and study life cycle, geographic mix, business mix. Right now, I think once we get through 2019, you'll see as we see the early development, the labs, the content of FSP mix versus programmatic, you will see a little bit of the volatility, but 2020 will be a more natural year, as I'll call it.
Great. That's very helpful. Thanks, guys.
Thank you. Our next question comes from the line of Kevin Ellich with Craig-Hallum. Your line is open.
Good morning. Thanks for taking the questions. I guess, Dave, wanted to go back to your comment in the prepared remarks about the nine studies that you won from a single customer in oncology. Can you give us a little bit more color as to what's driving that, who the customer was, and if you have other opportunities like that?
Yeah. Kevin, this is John. We don't identify the specific customers, but clearly, with this large pharma customer, they've seen the value of the data. They've seen the value of the patient recruitment strategies through the voice of the customer and the specific inclusion/exclusion criteria that they can manage the trials in a much quicker manner and more efficiently and effectively. That has then upped our win rate significantly, doubling it as well as then magnitude of $ then from that. It's principally in the oncology area, but also in the NASH area, respiratory. We've seen our strategies, our data capabilities work and work very effectively and obviously broadening that out to the entire oncology therapeutic area, as well as our other therapeutic areas that we support.
Great. Thanks, John. Dave, I don't know if this is your last call, but just wanted to say happy retirement, and it's been great working with you.
Thank you, Kevin. Appreciate it.
Thank you. Our next question comes from the line of Ralph Giacobbe with Citi. Your line is open.
Thanks. Good morning. Dave, I did want to go back to your comments on sort of the unit price commentary being sort of flat to slightly down. I think you made a comment that, like it is in healthcare. I just want to clarify that because I think as we look across the healthcare spectrum, Medicare even specifically has pointed to unit price being sort of the overly significant driver of call it a 6% type trend. I guess I'm still unclear and don't understand how you can't get at least a CPI, if not more, increase from commercial, especially given sort of the value proposition that you present, which obviously has been evident by the open network and open contracting.
Yeah, we could spend a lot of time on this, Ralph, but I think, at a high level, I would summarize by saying that, first of all, just realize that from a structural perspective, the market, particularly with hospital acquisition of physicians and their ability to direct work into the hospital laboratory, creates a competitive disadvantage for us that does affect pricing. Right? Because they get paid more. They have, in many markets, a dominant market position, and now they can dictate to the physicians that the lab work has to be sent there. That's one sort of structural impediment to this idea that we should be able to get sort of market rate increases every year. The second thing is, I think your 6% unit price statistic is distorted when you think about the laboratory business.
Because if you think about, for example, pharma, where you may get a 10% price increase on a drug that costs 50 times the typical lab encounter, that's going to heavily skew your overall assessment of price. If I look at healthcare services broadly, think about distributors, think about pharmacies, think about laboratories, think about home health, think about durable medical equipment. You're not seeing price increases. You're seeing price being flat to down. You're seeing contract negotiations leading to down pricing in the typical case. So I'm actually very proud of what we've accomplished in unit pricing, over this year and over the last several years, but particularly this year with the contracts opening.
The last comment I would make, for better or worse, is when you're seen as offering a service that is readily replaceable by somebody else, it's just difficult to go in and say, "Well, we should get a price increase," when others can be switched in. All that said, I will say we negotiate on our contracts for cost of living increases, COLA type increases. We don't get them every year, but they are part of our contracting strategy, and that's part of the reason that we are able to keep unit price relatively flat over time. I hope that's helpful, and obviously it's a very complicated topic, but those are some of the market dynamics that I think explain why it's not just a simple proposition of we get a price increase.
Okay. All right. Yeah, fair enough. I guess just my quick follow-up here. The other income line, I know it's a nuanced question, but it did have a fairly sizable swing in the quarter. What was that related to? Can you help on sort of the annual run rate of that line item and maybe moving forward? Thanks.
Ricky, were you at other income? Is that what you said?
Yeah, the other income, the other net, I think went from an expense negative $10 million expense to a couple million dollars favorable or positive.
Yeah, no, when you look at the, call it the year ago period, the $209 million, you'll see this kind of in the reconciliation of our GAAP versus adjusted. That was essentially the gain on the divestiture of our food solutions business. That even in the third quarter of this year, we had, again, in that reconciliation chart, you'll see the same. There was a net impact of around a $2.7 million gain, due to the benefit of primarily a gain from our venture fund. That two seven as well as the, call it the two nine are both excluded from our as-adjusted results. Other income/net is plus or minus, relatively flat.
Okay. Maybe we can follow up offline because I thought I saw even sequentially that change, but we can follow up on that offline. Thank you.
Okay. Thank you.
Thank you. Our following question comes from Bill Quirk with Piper Jaffray. Your line is open.
Great. Thanks. Good morning, everybody. I certainly appreciate the comments around the ongoing revenue synergies for Covance that are being helped or augmented by the Labcorp Diagnostics business. Dave, I was wondering, thinking about revenue synergies going the other direction, i.e., leveraging Covance's access to clinical trials in terms of directing that to win diagnostics business. Any thoughts there?
Yeah, Bill. Good morning. As I mentioned in the prepared comments, the Covance site partnerships provide benefits in both directions. The opportunity to offer clinical trials to health systems is seen as a positive because it gives us more than just, "We can help you manage your lab costs, we can help you reduce your lab costs." It gives us, "We can help you reduce your lab costs and manage your lab costs. We can also bring you revenue opportunities." I think the Covance business supports the diagnostics business in a very clear way in that instance.
I'd also say, and this is John, when you get into the capabilities of the hybrid virtual trials, the diagnostics capabilities with the patient service centers, coupled with the Covance central lab analytics, the market access areas of the clinical side, as well as the CRO side, allow you to do those hybrid virtual trials in a much more efficient manner. That's another way of utilization of multiple parts of the enterprise.
Understood. I guess as a follow-up, historically, you've quantified periodically the Covance impact from Labcorp. Can we maybe talk a little bit about, again, the Labcorp benefit from Covance? Secondly, just on the PLNs and broadly speaking, there's a lot of chatter around others beyond UnitedHealthcare following suit. Any update there? Thanks, guys.
I think the best way to quantify the benefits of the businesses is top-line growth, and Covance is growing at 9% this quarter in constant currency. The enterprise, when you adjust for the divestitures, grew almost 5%. I think it's pretty clear that the top-line growth is strong as a result of the combination of the businesses. On the PLN, we continue to have conversations with other payers. Nobody has rolled out something similar. I think there's great interest in what UnitedHealthcare is doing, and if it's successful, we'll see followers.
Thank you. Our next question comes from the line of Erin Wright with Credit Suisse. Your line is now open.
Great. Thanks. I had a broader question just on underlying demand trends across the CRO segment and Covance. Where are you seeing better demand trends in full service or FSP or large pharma versus smaller biopharma? Have there been any sort of meaningful changes in outsourcing demand trends in your view, or any sort of changes that you've seen in the nature of the new business wins that you had in the quarter? Thanks.
Had a great quarter in terms of business wins, and they were broad-based. It was broad-based in terms of early development labs as well as clinical. With respect to segmenting that, the significance of the biotech sector within our wins has been increasing, and that's where the vast majority of the portfolio development is in terms of pharma. We see that within our order rates. With respect to the FSP versus the programmatic, we do see strength on both sides. We do see strength in terms of the programmatic wins as well as the FSP. I think if you look at market data, the FSP might be slightly higher, but from the standpoint of in terms of the way we look at the business and the way that it's flowing, the early development business, of course, is a quicker burn business.
The central labs and the clinical business are seeing broad-based positive and our penetration in that. Obviously, with a 1.28 last 12 is a very good result.
Okay, great. Thanks. Can you give us an update on the relationship with Walgreens, where it stands in terms of both the lab side of the business as well as from a CRO perspective, too? Thanks.
Yeah, Erin, it's Dave. As we mentioned in the prepared remarks, from the diagnostic side, we continue to roll out the Walgreens. We continue to get very positive commentary around the patient experience from the integrated side of integrating patient data, recruitment, virtual trials, where we continue to discuss the rollout of what we call the beyond PSC aspects of the Walgreens relationship, and we expect to have an update on that as we move into 2020.
Okay, thank you.
We're at 10 minutes before the hour. We still have six questioners in the queue. We'd like to get to everybody, let's please, one question and one follow-up. Also, if your question has been asked, please don't ask it again. Thank you.
Thank you. Our next question comes from Eric Coldwell with Baird. Your line is open.
Hey, thanks, David. You made it easy for me because Erin actually hit on my topic, so I'll leave it to the next questioner. I just want to say good luck in your future endeavors. Thanks so much.
Thank you, Eric. It's been a pleasure.
Thank you. Our next question comes from Donald Hooker with KeyBank. Your line is open.
Hey, Craig. Good morning. You guys have talked a couple this quarter and last quarter about increasing pass-through from preclinical to clinical trial work at Covance. I guess you've had those two businesses at Covance for many years. Is there some reason why, I guess you're seeing more pass-through now versus in prior years? Is there something going on there in the science or in what you're doing?
Yes, Donald, this is John. Whenever you have a large content of biotech within the early development, that movement in terms of the later stage or early late stage, moves in a much greater penetration. I'd also say that there is a level of science and organization that we've put within the early development to enhance that capability as we bring across the bridge, whether that's on the pure clinical side or on the regulatory side, whether that moves to our BioA areas or whether that moves into the first in man within the phase I area. Clearly, that push forward up the ladder is tremendous. We have over 100 opportunities there right now.
I'll just say, Don, it's Dave, that historically, I think, prior to John coming, Covance was a much more siloed organization. Early development kind of thought about early development, and lab thought about lab. Under John and Paul's leadership, we've really expanded the scope of the organization, in my mind, worked through some of those silos so that the Covance organization is much more integrated in thinking about and tracking these opportunities to pull them across, and that's part of the reason for the success.
Thank you.
Thank you. Our next question comes from the line of Mark Massaro with Canaccord. Your line is open.
Hey, guys. Thank you for the question. I might be splitting hairs here, the managed care impact from volumes was about 100 basis points. First couple quarters was about 70 basis points. Recognizing that that's a small difference, I'm more asking about your expectations on seeing a trend potentially getting better or maybe becoming a little more challenged as we think about 2020, because your large competitor talked about its confidence in continuing to add lives from UnitedHealthcare. Any feedback there would be helpful.
Yeah, Mark, it's Dave. I think its base would have been 70, 90, 100, which in my mind is flat. We know it was 70 in the first quarter because the changeover actually looked like it started more in February than January, then it's been 90, 100. I definitively can say, the trend is stable. We are not losing share. Our participation rates from UnitedHealthcare and Horizon have been quite steady. In terms of the future, we have the same growth opportunities. We're in the same networks that our competitor talks about. It's one of the reasons I feel very optimistic. There are a number of market forces, the demographics, the aging population, the greater utilization of lab tests as people age, the introduction of new tests and technologies.
All of those things support long-term growth, as well as the things like the Preferred Laboratory Network that are innovating in favor of the highest quality, lowest cost providers. We feel great about what we've done this year in the managed care contracting. The team, the boots on the ground, and the field done a terrific job, and we're really proud of that.
Thank you. Our next question comes from Matt Larew with William Blair. Your line is open.
Hi, good morning. Thanks for taking my question. Dave, you just mentioned some of the broader dynamics driving the lab industry in the next several years. I just want to know if whether you are early enough with Walgreens, in terms of whether you're reshaping up your footprint into more of a retail setting could be a long-term driver of share. That's something with the providers of scale that can't be replicated by some of your hospital lab competitors. Second, if you think this is sort of in the second year of PAMA, whether you're starting to see a step change in the willingness or interest of hospital and outreach labs to partner with you.
Thanks.
Sure. Second question first. Yes, I think, the dynamics of PAMA are becoming much more well recognized in the marketplace. It is affecting the industry. We've talked about some of the ways with the challenges that smaller providers or smaller labs are facing. I'm going to say again, as I've said all along, it's not a good thing for patients. Patient access is being limited. Nursing home patients are being left without regular services. It's a very unfortunate situation, and we continue to work very hard through the LAB Act and through the lawsuit to reverse the misguided way in which this has been implemented by CMS. In terms of the Walgreens opportunity and thinking about offering more opportunity in the retail setting, I think of Walgreens as being more complementary to our footprint than replacing a lot of the existing footprint.
Patients are still going to want to come to patient service centers in the doctor's office or near the doctor's office. At the same time, there are a lot of patients who are not fasting or who want to come in the afternoon, who are going to be able to make use of Walgreens. They have to make a trip to the drugstore. Most people leave the doctor's office with a prescription to pick up and a lab slip, and we provide them the opportunity to fill the prescription and get their labs done there. I also think as Walgreens, and other retailers start partnering more broadly in offering broader healthcare services, so, urgent care is in the retail, clinics in the retail.
We work with CVS and MinuteClinic. All of these things are going to lead to further growth opportunities for us. That's why we've had so much focus on the consumer and on meeting the patient where they want to be met.
Thank you.
Thank you. Our following question comes from the line of Derik de Bruin with Bank of America. Your line is open.
Hi, good morning, thanks for the question. I'm just going back and thinking about the fourth quarter of last year. There was obviously a number of headwinds and from the DTC volumes and potential insourcing from other hospitals and earlier center contract shifts. Weather. I'm just trying to understand the impact when you think about normalizing the outlook for 4Q this time and then comparing it to last year. Like, what's better, what's worse when you look at this? I'm just trying to figure out where we are with the various headwinds and what's going to get annualized in this. I mean, obviously, some things have gotten better. Now they got the full impact of the UnitedHealthcare contract switch, just sort of compare and contrast on the quarter would be great. Thanks. That's my only question.
Derik, this is Glenn. I'll take a first cut. To your point, we did have a softness in the fourth quarter last year. When you really think about from this year's standpoint, we have good organic volume growth again, with the offset being the opening up of the managed care contract. We have a full year impact of our LaunchPad initiative. We will have the benefit of a revenue day. The acquisitions that we've done are additive. Call it the annualization of our divestiture that would have been there in the fourth quarter of last year, that's not going to be in the fourth quarter of this year. As you stir all, fair amount of pluses and minuses, but from our perspective, we expect to see good growth, good margins, albeit still down even from a year ago, but that's all driven off of PAMA.
Again, the least amount of margin decline that we would have seen year-over-year for this year, setting us up well as we move into next year.
Derik, it's Dave. I think the two major factors that we spoke about last year in the fourth quarter were the hospital volumes and the direct-to-consumer genetic testing. We haven't seen any impact or any unusual change in hospital volumes this year so far at any point, the way that we did last year in the fourth quarter. As we've said and continue to say that we modeled the direct-to-consumer business as basically flat to down. Those are the status, if you will, of the items that we call out last year in Q4 as being the headwinds.
Thank you. Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Your line is open.
Yeah. Hi, good morning. Dave, going back to some of your prepared comments when you talked about BeaconLBS, you highlighted that there are multiple opportunities for growth with other payers. Maybe you can share with us what type of discussions you're involved with. Also, from a payer perspective, what's the value add? Also if payers need to kind of decide, do we want to adopt BeaconLBS versus a preferred lab network, what do you think is easier from a payer perspective? The follow-up question that I have is, your comments around margin for next year for diagnostics being flat to slightly down are in line with what you said, when we last met back in September in our conference, and we view them as very, very bullish.
My follow-up question on that is, back in September, did you factor in the exit of Beacon already into your comments, or have other things transpired since that help offset that and help you maintain that positive outlook into next year?
Good morning, Ricky. I will start. First of all, in the prepared comments, I said BeaconLBS has multiple other opportunities for revenue growth. I didn't specifically talk about payers. There are some opportunities with payers, but there are multiple other opportunities with ACOs, with health systems that want to manage utilization internally, with large multidisciplinary physicians, specialty practices that want to adhere to clinical guidelines for testing. By the way, I will say from my perspective, BeaconLBS was a huge success in Florida. Certainly, there was some market pushback about utilization management, but there were significant savings realized. There was a much higher level of network adherence from physicians. The service works.
In my view, the decision that United made was, as I said in the prepared comments, it was a strategic decision on their part to offer programs and networks, including the PLN and BeaconLBS, to consumers on a national basis. I think of the opportunity for any payer or provider or health system that's looking at BeaconLBS as it's an opportunity to enhance testing utilization pursuant to evidence-based guidelines. It's an opportunity to manage the use of high-cost testing, particularly by non-network providers. It's an opportunity to engage directly with the physician about test selection at the point of service to educate them about whether they're choosing the right test and what it's going to cost the patient to have the test performed. That's, I think, why we're optimistic about the revenue opportunities for BeaconLBS despite the non-renewal in Florida.
In terms of the margins, Glenn, you want to comment on that one?
Yes. Ricky, obviously, when we were together in September and we did talk kind of the flat to slightly down, our margin outlet for next year, which again, we'll provide more color as we go into 2020, is just obviously a wide range of outcomes. Obviously, at that time, we knew the potential for the non-renewal of the contract as one of the factors that have come in, which is why we're giving you a little bit of bandwidth relative to our margin expectations.
Thank you. I'm not showing any further questions at this time. I will now turn the call back over to your speakers for any further remarks.
Thank you. I get a chance to do a little valedictory here. What I want to talk about is that on October 6th, we celebrated the 50th anniversary of Labcorp as a company, which is pretty amazing when you think about it. In 50 years of history here, one thing we've learned is that when we begin an amazing journey and pursue it with preparation and passion, there's no telling where it could end. I'm at the end of an amazing journey. I've been enormously privileged to play a part in an incredible process of growth and transformation at this company, and I want to thank all of you for your encouragement and your support along the way. I am leaving the company in great hands.
We have outstanding leaders succeeding in terms of Adam Schechter and John, Paul, and Glenn, who you know, and the entire Labcorp and Covance leadership team, and of course, our 61,000 dedicated colleagues around the world. I couldn't feel better about the long-term opportunities for this business, and the long-term validity and proven success of our strategy. I know that the Labcorp flame will burn brightly while the torch is in the keeping of our next generation of leaders. I wish every one of you good luck and Godspeed. Thank you and good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.