Good day, ladies and gentlemen, and welcome to the first quarter 2019 Labcorp Holdings earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session and instructions will follow at that time. If anyone should require operator assistance, please press star then zero on your touch-tone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Clarissa Willett, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to Labcorp's first quarter 2019 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and internet. With me today are Dave King, Chairman and Chief Executive Officer, Glenn Eisenberg, Executive Vice President and Chief Financial Officer, and John Ratliff, CEO of Covance Drug Development. This morning, in the investor relations section of our website at www.labcorp.com, we posted both our press release and an investor relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call. Historically, in connection with our earnings call, we have also furnished our investor relations slide deck on Form 8-K.
Going forward, it is our expectation that we will only be posting these presentations on our website and not furnishing them on Form 8-K. We encourage investors to monitor and regularly check the investor relations portion of our website for business and financial information about the company. 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 estimated 2019 guidance and the related assumptions, the impact of various factors on operating and financial results, expected savings and synergies, and the opportunity 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.
Now I'll turn the call over to Dave King.
Thank you, Clarissa, and good morning. I'll begin by discussing financial highlights of the first quarter. We are off to a very strong start in 2019, with first quarter revenue of $2.8 billion and adjusted EPS of $2.62. Our results were driven by strong underlying performance and organic revenue growth across both businesses and were the result of solid execution of our three foundational strategies: delivering world-class diagnostics, bringing new medicines to patients faster, and using technology to change the way care is delivered. Our diagnostics business grew organically during the quarter in both revenue and volume, despite additional price reductions due to PAMA and the loss of exclusivity in two of our largest managed care contracts.
Organic volume was broad-based and increased by 80 basis points, with some benefit from Aetna growth and weather, partially offset by the negative impact of the loss of exclusivity in the United and Horizon contracts and of one fewer revenue day than last year. As a reminder, we do not count requisitions from our hospital lab management agreements in our volume due to a lack of similarity to our core business in terms of testing frequency. Had we included lab management requisitions in our volume calculation, organic volume growth would have been approximately 2.8%. I am very proud of the outstanding effort of every colleague in our diagnostics business, from sales reps to couriers to phlebotomists to lab techs, that enabled us to grow volume organically given the impact of the managed care changes. Covance continued to grow strongly.
Excluding the negative impact of reduced pass-throughs, the business grew organically, consistent with our guidance of 5%-9% full-year revenue growth. We are also pleased with the impressive 280 basis points of margin expansion. Consistent with our guidance, we deployed $100 million of capital to share repurchase, executed several tuck-in acquisitions, and finalized the highly strategic Envigo transaction. We are pleased with our first quarter performance, which exceeded our internal expectations, and are accordingly increasing our full-year EPS guidance range to $11.05-$11.45. Now I'll review the quarter's performance highlights. I'll start with enterprise-wide activities that demonstrate the power of our combined scale, breadth of services, integration of capabilities and data, and patient centricity. Labcorp was awarded a virtual trial by a top 20 pharma client focused on a long-term follow-up safety study for an oncology gene therapy drug.
This trial will utilize diagnostics Patient Service Centers, the Covance market access call center, Covance project management, study design, and electronic data capture to reduce the patient burden. This is another example of pharma sponsors' growing interest in innovative solutions that make trials faster, cheaper, and more patient-friendly. We continue to advance our leadership position in companion diagnostics and precision medicine. We bring up companion diagnostics through our dedicated companion diagnostics laboratory, validate their clinical utility in Covance trials, and commercialize them through the diagnostics sales force. Revenue from all aspects of companion diagnostics grew more than 30% across the enterprise in the first quarter versus last year. In January, we announced an agreement with GENFIT that makes an innovative NASH liver diagnostic test available to the clinical research market. Covance is a recognized leader in NASH clinical trials and is currently supporting the phase III NASH trial for GENFIT.
Diagnostics and Covance have been involved in the commercialization of NASH testing options for more than 10 years, seeking to move from invasive liver biopsies to blood-based testing. GENFIT cited Labcorp's enterprise-wide expertise in this important therapeutic area as an important value-add in selecting us for this partnership. In short, our enterprise-wide offering uses our combined capabilities to deliver industry-leading solutions focused on innovation, quality, efficiency, and service. In Diagnostics, January marked the official opening of the United, Horizon, and Aetna exclusives, putting us in network with all major national plans. Although we saw expected volume decline in January, we are pleased with our performance and our ability to generate organic volume growth despite losing exclusivity with two major plans. As we projected, United and Horizon volumes declined in January, partially offset by Aetna gains, but were stable throughout the rest of the quarter.
We are also pleased that Labcorp and all of its specialty branded laboratories were selected to be UnitedHealthcare Preferred Lab Network providers. Labcorp's selection reflects a long and deep partnership with United that has delivered industry-changing innovations and value in laboratory services while delivering outstanding quality, access, and convenience to patients and providers. We look forward to working closely with United to fully deliver on the promise of the Preferred Lab Network. The financial fundamentals of our Diagnostics business remain strong, and patients and providers increasingly see benefits to choosing Labcorp. We continue our strategy of meeting patients where they want to be served. Our Labcorp at Walgreens partnership is on track to have at least 125 sites by the end of this year, including locations in several new states and major metropolitan markets.
We are also on track to achieve our target of at least 600 locations by 2022. We continue to discuss a broader collaboration with Walgreens on patient engagement, health and wellness offerings, and the creation of a next-generation CRO. During the second quarter, we will add consumer-initiated phlebotomy-based testing to Pixel by Labcorp. This new offering will expand the number of testing options available to consumers and will enable access and convenience, and will enhance access and convenience by giving them the option to use an at-home kit for sample collection or visit one of Labcorp Patient Service Centers or Labcorp at Walgreens locations in states where Pixel by Labcorp is available. We also continue investing in tools and technology focused on consumer convenience to create an improved experience with Labcorp.
Our new mobile-optimized Labcorp PreCheck, combined with the convenience of Labcorp Express in our PSCs, has been well-received by patients, with 88% positive responses to point-of-service surveys overall and 94% positive when checking in with a reservation. Labcorp Express is also standard in all Labcorp at Walgreens locations. During the quarter, we further enhanced our value to our customers by acquiring MMG Diagnostics, a recognized leader in next-generation sequencing and complex testing for neurology. We also expanded our collaboration with and investment in OmniSeq, which positions us for a major push into growing the combined assets of Covance and Diagnostics in the increasingly important oncology therapeutic area. We made significant progress in the quarter on our LaunchPad Phase Two initiatives.
We are on track to deliver a total of $200 million of net savings by the end of 2021 through initiatives focused on data analytics, digitizing the enterprise, process automation, and improving overall productivity of the diagnostics operating model. Covance's operating performance continues to validate our rationale for the acquisition. Investments in leadership, end-to-end capabilities, therapeutic expertise, and global infrastructure have translated into $10 billion of backlog, a 1.24 book-to-bill over the last 12 months, and mid to high single-digit organic revenue growth, excluding passthroughs, plus margin expansion of 280 basis points. Our data capabilities, a critical asset for patient recruitment and site selection strategies, are much copied but nowhere near equal. We are the industry leader in companion diagnostics and are now seeing tremendous growth in other solutions, such as cell and gene therapy, immunology, immunotoxicology, and genomic testing.
During the quarter, we continued to enhance Covance's offerings through strategic acquisitions. We acquired MI Bioresearch, which brings specialized preclinical capabilities in cell and gene therapy and oncology testing. This acquisition adds depth in an exciting and rapidly growing area of drug discovery today and creates the opportunity for more work to move from preclinical to clinical development. We also agreed to acquire Regulatory and Clinical Research Institute, or RCRI, a device-focused CRO with strong regulatory consulting expertise. In April, we announced an innovative business swap transaction with Envigo. The transaction provides Covance with enhanced global nonclinical research capabilities while maintaining access to Envigo's research models and services through a multi-year renewable supply agreement. This unique collaborative approach to early-stage research demonstrates our commitment to providing clients with innovative end-to-end solutions.
All of these acquisitions demonstrate how we are investing in Covance to enhance its capabilities and grow its market opportunities. We were recently awarded a phase III cardiovascular study building on the work we did on the phase II study supporting the same molecule. We were also awarded a molecule development program to provide strategic consulting to design the customer's clinical development program, oversee the development process, and conduct the clinical trials once designed. This win in particular is an example of the growing demand for Covance's biotech solutions, which take advantage of our comprehensive capabilities and the design-around-you approach adopted as part of selecting the best of the best in the Chiltern integration. Our medical device and diagnostics trial group recently earned its largest-ever medical device study win, due largely to our end-to-end device business.
Our device CRO now includes the Chiltern device capabilities, preclinical medical device innovation, a preclinical device CRO we acquired last year, RCRI, and our legacy Covance therapeutic expertise. It is a powerful combination for customers who have long been asking us for device trial capability. We continue to execute on key priorities in our Covance LaunchPad initiative and are on track to deliver $150 million of net savings by the end of 2020. We are also on track to realize $30 million in cost synergies from the integration of Chiltern by the end of 2019. Our global service delivery model increasingly enables us to be more competitive in winning and delivering studies. Our Chiltern and Sciformix acquisitions added to our global footprint and brought Covance enhanced robotic process automation and artificial intelligence capabilities. The GSDM improves the efficiency of our operations, reducing costs, and enhancing quality and speed for clients.
In closing, these are challenging times for the laboratory industry, but our global life sciences capabilities give us the tools we need to succeed despite the headwinds. As these remarks demonstrate, we possess unique and differentiated capabilities that our competitors cannot replicate. In October, we will celebrate our 50th anniversary as a company, an amazing milestone and a great tribute to the visionary leaders who came before us. We are mindful that their inspired leadership and our relentless dedication to exceptional quality, service, value, and innovation have been foundational to our success over these five decades. With those ideals and the daily commitment of our now 61,000 dedicated colleagues around the globe, we are well-positioned to succeed in the next 50 years as well. Now, I'll turn the call over to Glenn.
Thank you, Dave. My comments today will focus on the company's first quarter results as well as provide an update on our 2019 guidance. I'll conclude with additional commentary on our recently announced transaction with Envigo. Revenue for the quarter was $2.8 billion, a decrease of 2% compared to last year. This decline was due to the impact from divestitures of 1.8% and unfavorable foreign currency translation of 0.9%. Acquisitions added 0.5% of growth while the organic revenue grew at 0.2%. Excluding the negative impact from PAMA of 90 basis points, organic revenue grew 1.1%. Operating income for the quarter was $318 million, or 11.4% of revenue, compared to $305 million or 10.7% last year. During the quarter, we had $36 million of restructuring charges and special items, primarily related to LaunchPad initiatives and acquisition integration.
Adjusted operating income, which excludes amortization of $57 million, as well as restructuring charges and special items, was $411 million or 14.7% of revenue, compared to $436 million or 15.3% last year. The decline in adjusted operating income and margin was primarily due to lower pricing as a result of PAMA and higher personnel costs, partially offset by demand and LaunchPad savings. The tax rate for the quarter was 27%, compared to 28.6% last year. The adjusted tax rate, excluding special charges and amortization, was 26.3%, compared to 22.9% last year. The higher adjusted tax rate was primarily due to the tax impact from stock-based compensation. We continue to expect the company's adjusted tax rate for the full year to be between 25% and 26%. Net earnings for the quarter were $186 million, or $1.86 per diluted share.
Adjusted EPS, which exclude amortization, restructuring charges, and other special items, were $2.62 in the quarter, down 6% compared to last year. Operating cash flow was $166 million in the quarter compared to $180 million a year ago. The decrease in operating cash flow was primarily due to lower cash earnings, partially offset by favorable working capital. Capital expenditures totaled $94 million, or 3.4% of revenue, compared to $73 million or 2.5% last year. The increase in capital expenditures was primarily due to investments in facility expansion, technology, and automation to support increased demand and to optimize margins. As a result, free cash flow was $72 million in the quarter compared to $107 million a year ago. We remained active throughout the quarter in terms of capital allocation.
During the quarter, we invested $47 million in acquisitions and repurchased $100 million of stock. As of March 31st, we had $1.25 billion of authorization remaining under our share repurchase program. At quarter end, our cash balance was $349 million, down from $427 million at the end of 2018. Total debt at quarter end was $6 billion, and our leverage was three times gross debt to last 12 months EBITDA. I'll review our segment performance, beginning with Labcorp Diagnostics. Revenue for the quarter was $1.7 billion, a decrease of 2.7% compared to last year. The decline was due to divestitures of 2.9% and foreign currency translation of approximately 30 basis points. Acquisitions added 0.1%, while organic revenue grew 0.4%. Excluding the negative impact from PAMA of 150 basis points, organic revenue increased by 1.9%.
Organic volume increased 0.8% over last year and was constrained by managed care contract changes, which negatively impacted volume by approximately 70 basis points. Additionally, volume includes the unfavorable impact of one less revenue day of 1%, partially offset by favorable weather of 0.8%. Revenue per requisition, excluding the impact from divestitures, decreased by 0.4%. Revenue per requisition was negatively impacted by 150 basis points due to PAMA. Excluding divestitures in PAMA, revenue per requisition increased by 1.1% due to favorable mix. Labcorp Diagnostics adjusted operating income for the quarter was $310 million or 18% of revenue, compared to $364 million or 20.6% last year. The decline in adjusted operating income and margin was primarily due to the negative impact from PAMA of approximately $27 million, divestitures, personnel costs, and cybersecurity expenses, partially offset by LaunchPad savings.
The negative impact of one less revenue day in the quarter, along with not having the one-time benefit of the legal settlement realized last year, was partially offset by favorable weather and one less payroll day this quarter. While margins year-over-year are expected to decline throughout the year, primarily due to PAMA, they are expected to decline less each quarter as we benefit from increasing LaunchPad savings throughout the year. We remain on track to deliver $200 million of net savings from the three-year LaunchPad initiative by the end of 2021. I'll review the performance of Covance Drug Development. Revenue for the quarter was $1.1 billion, a decrease of 0.4% compared to last year, due to the impact of unfavorable currency translation of 210 basis points. On a constant currency basis, revenue increased by 1.7%, as acquisitions added 1.2% and organic growth contributed 0.5%.
We noted on our fourth quarter earnings call, we expected Covance's first quarter revenue growth rate to be below our full year guidance range, primarily due to timing and the negative impact of foreign currency translation. Pass-throughs, which were down in the quarter, negatively impacted organic volume growth. A variety of factors influence pass-throughs, including study life cycle, client preferences, geographic mix, and business mix. Excluding pass-throughs, organic revenue growth in the quarter was in line with the company's full year guidance range of 5%-9%. Adjusted operating income for the segment was $138 million, or 12.8% of revenue, compared to $108 million or 10% last year. The $30 million increase in adjusted operating income and 280 basis point improvement in margins was primarily due to organic demand, LaunchPad savings, acquisitions, and currency translation, partially offset by higher personnel costs.
While currency translation negatively impacted revenue, earnings and margin benefited slightly during the quarter, given the origin of our cost structure relative to our revenue. We remain on track to deliver $150 million of net savings from Covance's three-year LaunchPad initiative by the end of 2020. For the trailing 12 months, net order and net book-to-bill remained strong at $5.3 billion and $1.24, respectively. Backlog at the end of the quarter was $9.9 billion, an increase of approximately $185 million from last quarter. We expect approximately $3.9 billion of this backlog to convert into revenue over the next 12 months. I'll discuss our 2019 guidance, which assumes foreign exchange rates as of March 31st, 2019, for the remainder of the year, and includes the impact from capital allocation, with free cash flow being used for share repurchases and acquisitions.
We expect revenue growth of 0.5% to 2.5% over 2018 revenue of $11.3 billion, unchanged from our prior guidance. This guidance includes the negative impact from 2018 divestitures of 1.2% and the negative impact from currency translation of 50 basis points. We expect Labcorp Diagnostics revenue to be down 2% to 4% as compared to 2018 revenue of $7 billion, unchanged from our prior guidance. This guidance includes the negative impact from 2018 divestitures of approximately 2% and the negative impact from currency translation of 20 basis points. We expect Covance Drug Development revenue growth of 5% to 9% over 2018 revenue of $4.3 billion, unchanged from our prior guidance. This guidance includes the negative impact of currency translation of approximately 90 basis points, which is 30 basis points unfavorable compared to our prior guidance. Organic revenue growth excluding pass-throughs is also expected to be up 5% to 9% over 2018.
Our adjusted EPS guidance is $11.05 to $11.45, an increase of 0% to 4% compared to $11.02 in 2018. This is an increase over our prior guidance of $11 to $11.40. Our free cash flow guidance is $950 million to $1.05 billion, compared to $926 million last year, unchanged from our prior guidance. I'll provide some additional commentary on our recently announced transaction with Envigo. As Dave noted, the Envigo transaction is both strategically and financially attractive. In this transaction, we will purchase Envigo's non-clinical contract research service business while selling them our research models and service business. The transaction's net purchase price of $485 million is comprised of Labcorp paying $595 million in cash and receiving $110 million in the form of a three-year note.
The Envigo transaction meets our stated financial criteria as we expect it to be accretive to earnings and cash flow in year one and to exceed our cost of capital by year three. The company expects to deliver over $10 million of net cost synergies during the first two years. The transaction, which is expected to close mid-year, will be financed through cash on hand and bank debt. This concludes our formal remarks. We will now take questions. Operator?
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We ask that you please limit yourself to one question and one follow-up question. To avoid any background noise, please place your line on mute once your question has been stated. Our first question comes from the line of Lisa Gill with JPMorgan. Your line is now open.
Good morning. Thank you. Glenn, can we just start with Envigo? If you expect it to close mid-year, is there anything included in the updated guidance for the transaction?
Yes, Lisa. We have in, obviously, the enterprise, but obviously also in Covance's guidance range of total revenue growth of 5%-9% includes what we expect to be roughly half a year's worth of the Envigo revenues. Similarly, in the earnings EPS guidance range, if you will, the benefits of the accretion is there. As you know, as we've talked about earlier when we first established our guidance, that we expected to use the $1 billion at the midpoint of our expected free cash flow guidance to be used for a combination of share repurchases and acquisitions, with no debt looking to be paid down under that scenario. We had factored in M&A. In the case of Envigo, we had been working on it well in advance of providing our guidance for the full year when we gave it initially.
The benefit of that was reflected, as is our other capital allocation, which included the share repurchases and tuck-ins that we did in the first quarter, as well as still an additional, call it, $350 million plus of additional capital allocations still to be realized through the remainder of the year.
Great. Just as a follow-up, Dave, I didn't hear you talk a lot about PAMA being a big driver to drive consolidation, and your closest competitor talked about that on the earnings call last week. Are you seeing that, where we're starting to see that play out here in 2019? As we think about allocating capital, how do you think about potential acquisitions now that PAMA is really being felt by those hospital outreach and other smaller labs?
Yeah. Obviously, the impact of PAMA is significant, and it's more significant on smaller lab providers than on us. There is a very robust pipeline, Lisa, of potential acquisitions that we continue to look at. We evaluate every acquisition based on strategic fit and our stated financial criteria. As you saw in the quarter, we mentioned MMG, we mentioned RCRI, we mentioned the investment in OmniSeq, and we mentioned Envigo. We allocate capital where the best strategic fit is and where we see the best opportunity to meet our stated financial criteria. The only other comment I would make on PAMA, which I think it's important to underline, is regardless of how you feel about consolidation, PAMA overall is not a good thing for the lab industry or for patients. We know that the largest nursing home lab provider filed for bankruptcy.
That's now going to be an unserved population. The impact on smaller labs and even on us in terms of continued cuts, access points, and services, is not going to be a positive for Medicare beneficiaries. Even as we talk about the potential positives, we also have to remember that there are significant negatives to PAMA beyond just reductions in our price.
I appreciate that. Thank you.
Thank you. Our next question comes from the line of Kevin Caliendo with UBS. Your line is now open.
Great. Thanks for the call. On Envigo, just to get some details around the cross-sell opportunities there. Also any overlap that might exist with existing customers. If you can also maybe talk a little bit about Envigo's historical growth or expected growth profile and also their margin profile, especially compared to Covance's.
Sure. This is John. I'll take that. The overlap is minimal in terms of the customer side. They're much more concentrated on the biotech. Even though my early development area has a great percentage of that as well, if you look, the customer side, not a lot of overlap. We actually look at that as a positive in the sense that they have a level of capacity, and we're tight on capacity. We look at more of the revenue upside. I know you mentioned cross-sell, but at the same time, there's cross-selling opportunities, there's also capacity upticks. Their margin is higher than the Covance margin and higher than the early development. Because of the way that we did the deal, we did not take on any of the corporate overheads, quote unquote. Profitability-wise, it will be a profitable area for the early development.
Glenn gave you in terms of the revenues for the full year. Obviously, gives you a feel for the guidance for a half year.
Got it. Great. Just one question, just thinking about the organic growth numbers that you provided on the diagnostic side. If I'm backing into it correctly, it looks like about 1.5%. I was a little bit surprised that the headwind from the managed care contracts was only around 70 basis points. If we back into that number, it's smaller than what we had anticipated. How should we think about it between United and Aetna? I guess my main point here is if we look at sort of what Quest talked about and sort of what you talked about in terms of these managed care contracts, it would imply that there's some share that's being taken, not from each other, but from other smaller existing in-network labs. Is that a fair assessment?
Yeah. I don't know what Quest talked about. I know what we talk about. I agree with you. I think Glenn gave you the number, was a net impact of 70 basis points. We were very pleased with the retention of the United business, and our team, as I mentioned in my prepared remarks, did an absolutely outstanding job in getting in front of our customers and continuing to demonstrate the value that Labcorp brings to retain that business. We are very pleased with the retention of the Horizon business and our team, particularly in the Northeast division, again, an outstanding job from top to bottom, everybody in that division in retaining the business. The Aetna growth was strong and actually has continued to increase throughout the quarter. It's hard for me to hypothesize about where the volumes are coming from.
I would say, we are very pleased with where we are, and particularly with the fact that we exited the quarter with the situation stable, and with the overall broad-based organic growth in areas like women's health, infectious disease, genetics, oncology. From our perspective, in diagnostics, just a very strong quarter in terms of demand, which we're pleased about.
Great. Thanks so much.
Thank you. Our next question comes from the line of Jack Meehan with Barclays. Your line is now open.
Thanks. Good morning. Dave, you mentioned the promise of the Preferred Lab Network. Be curious, what do you think happens on July 1st versus January 1st? How strong do you think some of the economic incentives are going to be for physicians and patients to choose a Preferred Lab Network?
Well, the Preferred Lab Network is initiating, obviously, in the middle of a year. The likelihood that there will be any significant impact in year, I think, is minimal. We haven't built anything into volumes or guidance that would anticipate a significant impact there. I think, as we go through the managed care selling cycle this summer and fall, as we see the implementation on January 1st, Jack, a lot of it's going to depend on how the Preferred Lab Network is tied into benefit design. What are the out-of-network benefits? What are the benefits for employers of pushing their employees to the Preferred Lab Network? If benefit design and the Preferred Lab Network are well tied together, in the long term, it's a significant opportunity for us.
Mm-hmm. Great. On the Covance side, just to nitpick a little bit, the bookings were a little lighter than what we were looking for. Can you talk about the health of the funding environment? Was there anything that maybe got pushed out a little bit, anything notable on the cancellation front?
This is John, Jack. The health of the funding environment's still strong. Approvals up, biotech environment still strong. No measurable difference in the cancellations. If you look, I know we ticked down a bit in terms of the 1.26 to the 1.24. I tend to look at things 80% half full. We do lose a strong compare last year, when you're looking at the last 12 months. In terms of certain bookings did rotate out of the quarter in terms of into the second, but that's kind of a normal phenomenon. We look to win more and bookings still very healthy environment and healthy across all of our areas, early development, our labs and in the clinical. Still positive about the environment.
Great. Thanks, John.
Thank you. Our next question comes from the line of Ross Muken with Evercore ISI. Your line is now open.
Good morning, guys. Just getting back to the Covance business, obviously both in Q4 and this quarter, you had great margin progression. Seems like LaunchPad sort of really building its momentum. I guess, as you think about sort of in this quarter, obviously a little hard to tease out some of the benefit that probably came from the lower pass-through, but the underlying still feels very good. Where are we in sort of that progress in terms of ramping LaunchPad? Then as you think about layering on the infrastructure of Envigo, where historically these type of transactions in early phase have led to pretty good synergy capture or at least being able to leverage the new facility, how are you thinking about that as kind of outside just a mix kind of margin enhancement and how it fits into kind of the LaunchPad plan?
Yeah, I think, in terms of the LaunchPad, we had an objective of $150 million over the three years. We're well on our way into that. We don't break that out by year, but obviously our margins are up. I know in terms of, you mentioned on the lower pass-throughs, I invite you to do the math. Even if you had $30 million more in revenue, you'd still be up 250 basis points. If you had $60 million more in revenue, you'd be up 220 basis points. The bottom line is that margins are up. We expect margins to be up for the full year. Envigo will weight us up in terms of the profitability. Finally, long-term, we're looking to be at peer-level margins.
Helpful. Then, just on the lab side, probably for the better, there really wasn't any comment on sort of DTC genomics, or at least anything of consequence, I guess. Any updated thoughts there? Obviously, that market's been pretty volatile, and we've seen a bit of instability there, obviously you had forecasted for a decline just in terms of how that fits into sort of where your full year expectation is.
Yeah, Ross, it's Dave. There was a slight benefit in the quarter from the direct consumer genomics business. We continue to forecast for the full year it'll be flat to slightly down, we don't anticipate that it will be a significant benefit to organic growth throughout the year.
Great. That's helpful. Thanks, Dave.
Thank you. Our next question comes from the line of Dan Leonard with Deutsche Bank. Your line is now open.
Thank you. Just a couple of clarifications. First off, on Covance. Glenn, you mentioned that the total revenue guide's five to nine, the organic revenue guide is five to nine, which would suggest M&A is about 100 bps. I would've thought Envigo would be a little bit more than that by itself, and you did some other deals as well. Can you help bridge that for me?
Sure. Dan, you're right. If you just took the expected or half a year's worth of the, call it 2018 pro forma Envigo, that gets you around $80 million of revenues rounded, which would be around 1.9% growth. The issue that you're having is we're providing a range. We're gonna be benefiting from the M&A that we have done in Covance, including Envigo. We're gonna benefit in the underlying organic growth of our business. The headwind, if you will, you have currency as well as some of the pass-through that occurred in the first quarter. Still strong underlying organic growth in the business added by acquisitions and then the headwinds that we talked about.
Okay. Thank you. My follow-up. I'm trying to bridge to the $0.05 increase in EPS guide after you beat by $0.09. Did you pull anything back out of future periods in terms of pacing of share repurchase or anything like that?
I think it's, Dan, that as Dave commented in his remarks, we performed well across both businesses. We did better, frankly, on the managed care side than expected in the original guidance, at least that we had. The reflection of the improvement in our earnings guidance range is really a reflection of that we did well in the first quarter, and that our outlook for the remainder of the year remains unchanged.
Okay. Thank you.
Thank you. Our next question comes from the line of Erin Wright with Credit Suisse. Your line is now open.
Great. On the Covance side, what was the quarterly book-to-bill trend on an ASC 606 basis? How would you characterize RFP flow and demand trends across both large and small biopharma and just the broader nature of new business wins in the quarter? Thanks.
The RFP flow was good in all the segments. In terms of kind of nice record levels in terms of early development, upticks in clinical, nice, strong on RFP flow on the lab side.
We're not publishing the quarterly, but if you look 1.26 on the last 12 months, 1.24 in terms of this quarter, you can see that that's in line. That strength was across the different business segments.
Okay, great. Then on the lab side, how should we be thinking about the quarterly progression of the underlying organic volume trends here, particularly as it relates to United and the roll-off and the 70 basis point impact that you were speaking to as well? It seems to be a more measured rate than your initial internal expectations, if that's correct. Then also, should we be assuming here that the United Preferred Lab Network and pricing thereon was all contemplated in your previous guidance? Thanks.
Erin, it's Dave. There was no price adjustment in terms of the United Preferred Lab Network. The price that we have with United and had negotiated as part of the contract renewal remained the same. There's no further price adjustment. In terms of the progression of organic volume, I don't expect there to be any significant change in that progression. I think that, as we said, we came out of the quarter in terms of United and Horizon stable. We actually started again to see some growth at the end of the quarter in Aetna. I think what you've seen in the first quarter is probably pretty representative of what you'll see during the year.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Your line is now open.
Yeah. Hi, good morning. Dave, just going back to the trends on the lab side in the quarter. I know that in the past you said that you expect most of the managed care share movement to happen earlier in the year. Your comments on the call suggested that the retention or the share shifts that you're seeing are even more muted than you expected. On the other hand, your competitor said last week on the call that they anticipate the share move to pick up in the second half. What gives you confidence? What are you seeing in the marketplace that would suggest that we've seen the most of it or that the changes aren't going to be normalized versus accelerating later in the year?
Yeah. Good morning, Ricky. As I said, I don't know what our competitor says. I just know what the numbers tell me, and what the numbers tell me is we monitor the United, Horizon, and Aetna exceptions every single day all across the country, and we see the progression based on where we were last year on a normalized basis to account for seasonality and holidays. What we saw exactly as we projected was that the major drop-off in the contracts that were opening came in early January, and by the time we came out of January through February and March, we were at a very stable run rate. In terms of Aetna, we probably started a little more slowly than I would have liked. That volume progressed over the quarter and we saw a nice increasing trend throughout.
I'm just looking at numbers and trends, and that's what gives me confidence for where we are and where I think we'll be for the balance of the year.
Just a follow-up question on the relationship with Walgreens. I think you said that you're going to be at 125 sites by the end of the year. As you open these sites, are you, in conjunction, going to close standalone Labcorp drawing centers? If that's the case, should we think about it as part of the LaunchPad savings, or is this a separate cost-saving opportunity that we should think about for later in the year but also through 2022?
We don't think about closing Patient Service Centers as part of opening the Walgreens locations. We look at our Patient Service Center network based on demand. How many people are showing up based on wait times, based on staffing. I would say that there may be some Patient Service Centers that close in some areas based on part of our Walgreens strategy is looking at an isolated geographic area and seeing, do we do better when we move volume from standalone PSCs into Walgreens. As a general proposition, think about this as 125 more access points rather than swapping them out. In terms of cost savings, even if we closed 125 standalones and moved them to Walgreens, there's no cost savings there. It's basically just a cost swap. You shouldn't consider cost savings to be part of the equation on either side.
Understood. Thank you.
Thank you. Our next question comes from the line of Stephen Baxter with Wolfe Research. Your line is now open.
Hi, thanks for the question. I was hoping to get a little more detail on the Envigo transaction. Can you help us understand how the multiple compares to what you paid for Chiltern? We estimated it was pretty comparable. Maybe then quantify the accretion expectations and what type of financing assumptions embedded in the commentary. The split between cash and debt would be helpful. We were estimating that the multiple is similar to Chiltern, would've probably added at least $0.05 to the guidance. Trying to square all the moving parts on the Covance side. Thanks.
Yes, Stephen, this is Glenn. Let me take the first cut. Couple things. One, the market multiple is comparable to deals in the drug development space. Obviously, we've provided revenues, and we've provided, obviously, the net purchase price on the combined transaction, but John also noted that the business has very strong margins, stronger than or higher than what we have in our early development or our total segment basis. From even an earnings multiple standpoint, you would see that it came out very much in line. The accretion, we would agree as well. We talked about that this deal meets our financial criteria, so it'll be accretive to our earnings this year. It is reflected in the guidance, as is all the $1 billion that we said that we would deploy our free cash flow at the midpoint.
We expect all of that billion to be accretive, that was obviously already into the guidance that we had already. The financing of it, I think, which is the last part of your question, was, at this stage, we'll use cash on hand and bank debt as we generate, obviously, the bulk of our free cash flow later in the year. Obviously, we'll have the cash that would enable us to pay down any of the debt that we would use to finance the transaction. In total, the net transaction is $45. $595, though, will be cash. $595 arguably of the free cash flow, in addition to, call it the $150-ish that we did in the first quarter, still leaves some additional free cash flow for the rest of the year for continued capital deployment.
Great. Thank you.
Thank you. Our next question comes from the line of Patrick Donnelly with Goldman Sachs. Your line is now open.
Great, thanks. Dave, maybe one for you. Just on the hospital referral trends, obviously a little bit of noise there late last year. It seemed transitory in nature, can you just give us an update how 1Q trended on that front and the visibility going forward?
Yeah, Patrick. I agree with you. I think it was a transitory event that we saw in October, November last year. We actually saw a pickup in December and continued stability throughout the quarter.
Okay, great. Maybe just an update on the commercial pricing environment outside of PAMA and the commercial contract shifts. It seems stable just by looking at the margins, can you just update us on some of the conversations you've had recently on the commercial side outside of those external factors?
Sure. Obviously, the big commercial deals are essentially completed. I would say yes, the pricing environment on commercial contracts is generally stable. Again, as we remind our commercial partners, demands for reduced pricing are a double-edged sword because although there are price reductions for them, that's going to roll through into the next data collection for PAMA, which obviously we're in the process of trying to delay, it's going to roll through into the next data collection. In the long run, as I mentioned before, more price cuts across the board lead to reduced access for patients and Medicare beneficiaries. I think the commercial pricing environment is stable, and we're very comfortable with where we're coming out in the contract discussions.
Great. Appreciate it.
Thank you. Our next question comes from the line of Bill Quirk with Piper Jaffray. Your line is now open.
Great. Thanks. Good morning, everyone. First off, I guess Dave or John, would you mind elaborating on, Dave, you had some comments about a potential next-gen CRO that you mentioned with your Walgreens comments. Just some additional details, timing, things like that.
Sure, Bill. This is obviously a topic that we're discussing with Walgreens. I don't want to spend a lot of time on it because it's in the genesis. The idea is the ability of our two companies to combine prescription data, laboratory data, global data, global site locations, particularly their significant overseas network, all to facilitate the things that we've talked about in terms of improving trial performance, which is speed, quality, and reduced cost. Conceptually, this is something that we think that there's substantial opportunity on given our combined global size and scale. It's early stages in terms of the discussions.
Understood. Just as a follow-up, your comments about the recent build-out of medical device capabilities at Covance, what else do you need at this point to look at capturing some additional share within that segment of the CRO space? Thanks.
We think we're in good shape based on that. If you look at the end-to-end capabilities of what we've now put together, PMI has pre-clinical. The Chiltern capabilities had the core of the later stage, if you want to call it, device CROs. We added to that RCRI with respect to the regulatory consulting side, as well as that core
Device capability. Finally, we had in Covance, the legacy Covance, strong therapeutic expertise. Cardiovascular is an example. Putting that all together really strengthened our hand and now has an end-to-end capability that is unmatched in the industry.
Got it. Thank you.
Thank you. Our next question comes from the line of Brian Tanquilut with Jefferies. Your line is now open.
No, all my questions were answered. Thank you.
Thank you.
Our next question comes from the line of Matt Larew with William Blair. Your line is now open.
Hey, good morning, guys. This is Dan Waller on for Matt Larew. Thanks for taking my questions. I wanted to ask you guys about your in-home strategy and Pixel. What are the key targets that you guys have in mind for this year, and how are you measuring success there? Thanks.
Morning, Dan. It's Dave. Pixel is a screening and a wellness tool, and over time, our goal is to expand the test menu and to have the potential with collaborators, to reach patients in the home. I think in the long run, it's going to be an important tool, especially when you think about, for example, our hospital partners that are at risk, and increasing their health system partners that are taking risk for some sort of the patient population, some set of the patient population or our health plan partners that have their own managed care plans. As a result, we're going to be acutely aware of the needs and the conditions of homebound patients.
Again, we're playing the long game with Pixel and with how we reach patients in the home, but we think it's a very important part of our strategy, which we referred to in the opening comments about meeting the patients where they want and where they need to be served.
Great. Thank you.
Thank you. Our next question comes from the line of Donald Hooker with KeyBanc. Your line is now open.
Hey. Great. Good morning. I guess most of my questions have been answered.
Hey, Don. Don, you're gonna have to dial back in. There's a lot of static on the line. We'll take your question. You may want to try disconnecting and dialing back in.
All right, I'll try. Can you hear me now?
No.
All right. I'm sorry. I'll drop off.
Our next question comes from the line of Kevin Ellich with Craig-Hallum. Your line is now open.
Hey, Dave, can you hear me? It's Kevin.
Yes.
Okay.
How are you, Kevin?
Thanks. I know the call is a little bit long here.
Just want to comment, we are at the top of the hour. We have three people in the queue, plus, in fairness, we got to let Don back in if he dials back in.
Yep.
If your question's been answered, let's please try and keep it short.
Sure. PAMA, and again, I hopped on late, sorry for that. Can you talk about any indirect impact on Medicaid or private contracts that you're seeing from PAMA?
Yeah. As we said last quarter when we gave the guidance, our estimate for PAMA is all in, and it includes the impact of the fee for service and managed Medicaid plans, as well as whatever impact there is for Medicare Advantage. The impact that we have identified in the call-out is the all-in impact, both in terms of impact on revenue and the dollar amount.
Okay, thanks.
Thank you. Our next question comes from the line of Ralph Giacobbe with Citi. Your line is now open.
Thanks. Good morning. I think there's some questions around ability to pay commissions to sales reps going forward. I know there's been some debate on whether or not that'll actually take hold or whether there'll be repercussions about that. Dave, would love just your thoughts on that and sort of your comfort level there. Thanks.
Yeah. The changes that were made in the SUPPORT Act last year, we continue to believe were misguided and unintentional on Congress's part. As I understand it, there was some floor language that was adopted, that was aimed at what was perceived to be abusive tactics by some testing related to toxicology and pain management. We have been working with the legislative leadership and the Department of Justice. There has been legislative amendment language submitted to the congressional committees of jurisdiction. It is being evaluated by the Department of Justice to make sure that the fix that would address the over-inclusiveness of the language that was added would be acceptable to DOJ, as well as to the legislative sponsors. We continue to be optimistic that we're gonna get this resolved, Ralph. We don't have a good estimate on the timing.
Okay. No problem. Thank you.
Thank you. Our next question comes from the line of Derik de Bruin with Bank of America. Your line is now open.
Hi, this is Aizong for Derik today. Just a couple of quick ones. Thank you for taking a question. Just want to confirm if last year's organic revenue growth on the CRO side included the pass-through that we talked about. If the growth from CRO benefited from pass-through last year, just want to get some clarity on what the CRO revenue growth guide looks like, including the pass-through. Basically just trying to see if the growth is apples to apples in terms of coins. Just as a follow-up, wanted to see if you can provide any color on the incremental EBITDA from Envigo. Thank you.
This is Glenn. I'll take the first cut. The impact of the pass-throughs were included in last year's numbers. When we adopted the new accounting standards, ASC 606, we took a full retrospective method that we'd have it in prior periods for comparative purposes, so they're included. With regard to the EBITDA of Envigo, the only thing we would share with you at this time is that, again, we expect to close kind of mid-year and that the adjusted operating income margins, but would also play to the EBITDA, would be greater than the margins of the segment. To give you some perspective, they're pretty attractive margins, and obviously upon closure you'll start to see the benefit of that margin, as John alluded to earlier, reflected in the segment margins.
Sorry, just one follow-up.
No, you asked one and one. I'm sorry, we're past the time.
All right, great. Thank you.
Thank you.
Thank you. We have no further questions in the queue at this time. I would now like to turn the call back to Dave King for any further remarks.
Thank you very much. We appreciate your joining us for the call this morning. I want to reemphasize how proud I am of the effort of both of our businesses this quarter. In a challenging environment, I'm pleased and extremely proud of the performance of our 61,000 people around the world. Thank you very much and have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.