Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 LabCorp's Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the conference over to Scott Frommer, Vice President of Investor Relations.
You may begin.
Good morning, and welcome to LabCorp's Q3 2018 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and Internet. With me today are Dave King, Chairman and Chief Executive Officer Glenn Eisenberg, Executive Vice President and Chief Financial Officer and John Ratliff, CEO of Covance Drug Development. In addition to our press release, we also furnished Form 8 ks this morning that includes additional financial information. Both are available in the Investor Relations section of our website at www.labcorp.com and include a reconciliation of non GAAP financial measures discussed during today's call to GAAP.
Finally, we are making forward looking statements during today's call. These forward looking statements include, but are not limited to, statements with respect to 2018 guidance and the related assumptions, the impact of various factors on operating and financial results and the opportunities for future growth. These statements are based upon current expectations and are subject to change based upon various factors that could affect our financial results. Some of these factors are set forth in detail in our 2017 Form 10 ks and subsequent Forms 10 Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward looking statements even if our expectations change.
Now I'll turn the call over to Dave King.
Thank you, Scott, and good morning. BioCore's results in the quarter were highlighted by year over year revenue growth of 8 percent and adjusted EPS growth of 16%. Our performance was driven by strong results in our Covance business this quarter with increased net orders, a 1.41 book to bill, organic revenue growth of over 7% and 130 basis points are combining to deliver results in the market. Are combining to deliver results in the market. In Diagnostics, excluding the impact from a ransomware attack in July and Hurricane Florence, we delivered 1.4% organic revenue and 1.9% organic volume growth.
Nonetheless, this outcome was below our expectations with margin performance particularly disappointing, and we are taking strong action as a result. 1st, we are making organizational changes to strengthen our leadership and operational performance. 2nd, we are launching the next phase of diagnostics launch pad, which will result in multiyear cost savings of a similar magnitude to the LaunchPad Phase 1. Applying the same principles as before, process reengineering, automation, integration of new tools and technology and facility optimization, this phase of LaunchPad will build on our prior work and lead to an even more streamlined and efficient diagnostics business. We will provide additional detail about the size and scope of LaunchPad Phase 2 on our next earnings call.
During the quarter, we continued to be good stewards of capital. We sharpened our Life Sciences focus by divesting our Food Solutions business at a very attractive valuation. As a result of the business divestiture, we exited the quarter in a strong cash position. We continue to develop our acquisition pipeline and increase share repurchases to $150,000,000 We are committed to supporting near and long term value creation through capital deployment, including share repurchases, internal capital investments, strategic acquisitions and debt pay down. As Glenn will explain, we expect to deploy more capital in the Q4 and in 2019 for share repurchases, which we will complement with financially sound acquisitions as we continue to create shareholder value.
I'll now update you on our progress on key strategic initiatives. The first strategic objective is to create a leading and differentiated consumer experience. We continue to enhance patient convenience and engagement, broadened our channel to market and build brand loyalty. Earlier this month, following positive results and very high net promoter scores at our initial 17 sites, we announced an agreement to significantly expand our LabCorp Walgreens collaboration to at least 600 locations. Consumers, health care providers and managed care plans have expressed strong interest in this innovative partnership.
LabCorp and Walgreens complementary health care expertise underpins the LabCorp and Walgreens channel, which is uniquely situated to deliver a wide range personalized, integrated consumer facing services over time. Examples of additional collaboration opportunities under discussion include novel approaches to clinical research and supporting the ongoing transition to value based care. We will begin announcing the newest LabCorp at Walgreens locations later this year. Our consumer strategy also involves integrating new tools and technology into our offering. Toward this end, we are preparing for the commercial launch of our convenient wellness testing with sample collection anywhere and personalized online results.
This platform will extend consumer access to our high quality trusted lab testing into additional settings. Most immediate of these is reaching patients in the home, which is critical to designing care for high need patients that small cohort with complex needs who represent the greatest usage of the health care system. Our initial offering will include a limited menu of tests focusing on wellness and chronic metabolic illness, and we will expand the offering over time. This offering will also have application to our Covance business as we support trials with convenient, accurate testing outside the physician office. We also continued our rollout of patient self-service tools, including self check-in, improved insurance card recognition technology using machine learning, enhanced mobile applications and upgraded online bill payment.
Our multifaceted consumer engagement strategy is advancing at a rapid pace, further differentiating our offering from competitors and creating new opportunities for long term profitable growth. Our second strategic objective is to streamline the drug development process. We continue to execute on our $9,400,000,000 backlog, one of the largest in the industry, expand our customer base, win new awards through our integrated Covance and Children offering and make investments that increase efficiency in drug development. Our investments encompass capabilities that support top line growth as well as enhance operational performance. Our Covance LaunchPad initiative includes over 90 projects and has had a clear impact on Covance's margins, which improved by 130 basis points year on year.
The global service delivery model is well underway and will expand over the next 2 years. Other initiatives include the integration of new tools and technology into existing processes such as utilizing robotic software process automation to enhance efficiency and quality. Technology is a critical component of streamlining trials, and we continue to see broad sponsor interest in our powerful investigator performance data, real world evidence insights and Accelerate platform. In the future, we expect to see increasing adoption of mobile health technology and virtual trials by sponsors. These offerings individually or in combination can speed patient recruitment and site selection, improve trial design and data quality and thereby decrease study duration, costs and the patient burden of participating in clinical research.
Our third strategic objective is to support our customers' transition to value based care. As discussed last quarter, our proven track record of delivering convenient, high quality and cost effective services translated into expanded opportunities and favorable reimbursement rates with UnitedHealthcare and Aetna. In anticipation of changes to each planned laboratory provider network next year, our commercial and leadership teams continue to execute our provider engagement strategy. We are also developing an employer focused offering to help self insured businesses better manage both lab and drug spend. The transition to value based care is also relevant to providers.
Last week, we announced a comprehensive laboratory collaboration with Baptist Health, the largest not for profit system in Kentucky. As part of this collaboration, we will utilize our fully standardized laboratory solutions, operational expertise and comprehensive test menu to support the delivery of care across 8 hospital based labs. The expansion of this long standing partnership provides another example of hospitals and health systems turning to LabCorp's high value offering to help them achieve their strategic and financial goals. We have an active pipeline of opportunities in this evolving market and look forward to providing you with updates in the future. Before I turn the call over to Glenn, I will briefly comment about our outlook for 2019.
Next year will be challenging due to the ongoing impact from PAMA and contractual changes in Managed Care. At the same time, we expect another year of revenue growth and margin expansion in Covance, cost savings in both businesses from the LaunchPad initiatives and strong free cash flow underpinned by a solid balance sheet. In sum, although the headwinds facing our company will be at their stiffest next year, we expect to deliver modest growth in adjusted EPS in 2019 and to establish a solid foundation for accelerating growth in 2020 beyond. Particularly in light of the challenges we faced this quarter from the ransomware attack, Hurricane Florence and Typhoon MangCut, I want to recognize and commend the dedication of our 60,000 colleagues around the world. Their countless acts of individual and collective heroism to take care of patients and of each other during these events, maybe once again enormously proud to lead this great company.
Now I'll turn the call over to Glad.
Thank you, Dave. I'm going to start my comments with a review of our 3rd quarter results followed by a discussion of our performance in each segment and include with commentary on our full year outlook. As a reminder, on January 1, 2018, we adopted ASC 606 using the full retrospective method, meaning that we restated our 2017 financial results to better enable evaluation of our 2018 performance and guidance. In the press release, our prepared remarks and the Q and A session to follow, all references to our 2017 results are to the restated numbers unless we specifically note otherwise. During the quarter, there were 2 unusual events: the ransomware attack in July and Hurricane Florence in September.
First, the ransomware attack impacted revenue by approximately $10,000,000 and operating income by approximately 23,000,000 dollars Of the $23,000,000 total impact to operating income, dollars 13,000,000 has been classified as discrete expenses related to recovery efforts, including directly identifiable overtime consultant and contractor expenses. These discrete expenses have been excluded from the company's adjusted operating income. The remaining $11,000,000 reduced the company's adjusted operating income, primarily due to lower volume caused by our decision to temporarily take certain systems offline to contain and remediate the ransomware attack as well as higher labor expense incurred to expedite processing of the built up backlog. These metrics do not include any benefit from insurance recovery, which we are pursuing. 2nd, Hurricane Florence impacted revenue by approximately $4,000,000 and adjusted operating income by approximately $3,000,000 also due to lower volume.
Together, these two unusual events negatively impacted adjusted EPS by $0.10 For the remainder of my remarks, I will refer to these two events together as business disruptions. Revenue for the quarter was $2,800,000,000 an increase of 8% over last year, with acquisition growth of 6.5 percent and organic growth of 2.8%. This was partially offset by divestitures of 1.1% and unfavorable foreign currency translation of 30 basis points. Revenue growth was constrained by around 50 basis points due to business disruptions. Operating income for the quarter was $343,000,000 or 12.1 percent of revenue compared to $327,000,000 or 12.5 percent last year.
During the quarter, we had $31,000,000 of restructuring charges and special items, of which $13,000,000 was due to discrete expenses related to recovery efforts following the ransomware attack. And the remaining $18,000,000 was primarily related to our LaunchPad business process improvement initiative and acquisition integration. Adjusted operating income, which excludes amortization and restructuring charges and special items, was $429,000,000 or 15.2 percent of revenue compared to $432,000,000 or 16.5 percent last year. Adjusted operating income in the quarter was negatively impacted by approximately $13,000,000 due to business disruptions. Excluding business disruptions, the $10,000,000 increase was due to organic revenue growth, acquisitions and savings from our LaunchPad initiative, partially offset by lower Medicare pricing as a result of the implementation of PAMA, divestitures and personnel costs.
The 130 basis point decline in adjusted operating margin was due to the implementation of PAMA, the negative impact from business disruptions and the mix impact from the acquisition of Chiltern. The tax rate for the quarter was 36.2% compared to 34.7% last year. The adjusted tax rate, excluding special charges, amortization and the net gain on divestitures, was 25%, down from 33.6% last year. The slower rate was primarily due to the implementation of tax reform in the U. S.
We expect the full year 2018 adjusted tax rate to be approximately 24.5%, implying a 4th quarter tax rate of 25%. Net earnings for the quarter were $319,000,000 or $3.10 per diluted share, which includes the net gain on divestitures of $125,000,000 or $1.22 per share. Adjusted EPS, which excludes amortization, restructuring charges, special items and the net gain on divestitures, were $2.74 in the quarter, up 16% over last year. Adjusted earnings in the quarter were negatively impacted by approximately $0.10 per diluted share from business disruptions. Operating cash flow was $252,000,000 in the quarter compared to $351,000,000 a year ago.
The benefit of increased cash earnings was more than offset by an increase in working capital, a discretionary pension contribution and the impact from business disruptions. The increase in working capital was used to support the company's growth, but was also negatively impacted by timing that will benefit the Q4. We made the discretionary pension contribution to take advantage of the change in tax rates from tax reform. Capital expenditures totaled $98,000,000 or 3.5 percent of revenue compared to 75,000,000 dollars or 2.9 percent last year. As a result, free cash flow was $154,000,000 in the quarter compared to $275,000,000 last year.
During the quarter, we repurchased $150,000,000 of stock. As of September 30, we had $844,000,000 of authorization remaining under our share repurchase program. Total debt at quarter end was $6,500,000,000 and our leverage was 3.1 times gross debt to last 12 months EBITDA compared to our target leverage ratio of 2.5x to 3x. At quarter end, our cash balance was $893,000,000 up from $221,000,000 at the end of the second quarter, primarily due to cash proceeds from the divestiture of the Food Solutions business. Between using excess cash on hand and free cash flow expected in the 4th quarter, we plan to deploy approximately $1,000,000,000 in cash in the 4th quarter after capital expenditures.
We will spend around half of this amount on the repayment This leaves around $500,000,000 available in the 4th quarter, primarily for increased share repurchases as well as strategic acquisitions. Now I'll review our segment performance beginning with LabCorp Diagnostics. Revenue in the quarter was $1,800,000,000 a decrease of 0.2% compared to last year. The benefit from acquisitions and organic volume, measured by requisitions was offset by the implementation of PAMA, the impact from business disruptions as well as divestitures. Foreign currency translation lowered revenue by approximately 20 basis points.
The impact from unfavorable weather in the Q3 of last year was offset by the effect of approximately 1 less revenue day this quarter. As a result, organic revenue growth on a constant currency basis was 0.6%, which was lower than expected but included the negative impact from business disruptions of approximately 80 basis points. Revenue per requisition decreased by 40 basis points, excluding the impact from divestitures. This decline was driven by the impact of PAMA of 100 basis points as well as the impact from the ransomware attack of 20 basis points. On a similar basis, total volume increased 2%, of which organic volume was 1.3% and acquisition volume was 0.8%.
We achieved this volume growth despite the negative impact of approximately 60 basis points from business disruptions. LabCorp Diagnostics adjusted operating income for the quarter was $332,000,000 or 18.9 percent of revenue compared to $374,000,000 or 21.3 percent last year. The benefit from acquisitions and organic volume growth was more than offset by the negative impact from PAMA, business disruptions, divestitures and personnel costs. As Dave mentioned, given the outlook for 2019, we launched the next phase of our LabCorp Diagnostics LaunchPad initiative as we position the business for growth in 2020 beyond. We'll provide details of this program on our year end earnings call.
Now I'll review the performance of Covance Drug Development. Revenue for the quarter was $1,100,000,000 an increase of 25% over last year due to growth from acquisitions of 18% and organic growth of 7%, partially offset by 50 basis points on unfavorable foreign currency translation. Adjusted operating income for the segment was $131,000,000 or 12.1 percent of revenue compared to $94,000,000 or 10.8 percent last year. The $37,000,000 increase in operating income and 130 basis point improvement in margins were primarily due to organic demand, LaunchPad savings and acquisitions, partially offset by personnel costs. We remain on track to deliver $150,000,000 of net savings Covance LaunchPad by the end of 2020 $30,000,000 of cost synergies from the integration of Chiltern by the end of 2019.
Net orders during the quarter were $1,500,000,000 up 35% from last year, contributing to a net book to bill for quarter of 1.41 compared to 1.30 a year ago. For the trailing 12 months, net orders were $5,300,000,000 and net book to bill increased to 1.25 from 1.22 last quarter. Backlog at the end of the quarter was 9 point $4,000,000,000 an increase of approximately $400,000,000 from last quarter. We expect approximately $3,800,000,000 of this backlog to get burned into revenue over the next 12 months. Now I'll discuss our 2018 guidance, which assumes foreign exchange rates as of September 30 for the remainder of the year.
Our guidance also includes capital allocation from the proceeds of divestitures and free cash flow in the Q4 toward an increase in our share repurchase program, acquisitions and debt repayment. We expect revenue growth of 10.5% to 11% over 2017 revenue of $10,300,000,000 which includes the benefit of approximately 40 basis points of currency translation. This is a narrowing of our prior guidance range of 10.5% to 11 point 5% and now includes the impact from business disruptions of 10 basis points as well as the 10 basis point unfavorable change in currency translation. We expect LabCorp Diagnostics revenue growth of 3% to 3.5% over 2017 revenue of 6,900,000,000 dollars which includes a benefit of approximately 10 basis points of currency translation. This is a narrowing of our prior guidance range of 3% to 4.5%, primarily due to the impact from business disruptions of 20 basis points, lower volume and the 10 basis point unfavorable change in currency translation.
We expect Covance Drug Development revenue growth of 24% to 26% over 2017 revenue of $3,500,000,000 which includes the benefit of approximately 110 basis points of currency translation. This is a narrowing of our prior guidance range of 23% to 26%. We remain on track to deliver mid- to high single digit organic growth in 2018. Our adjusted EPS guidance is $11.25 to $11.45 which is lower than the prior guidance of $11.35 to $11.65 primarily due to the negative impact of $0.10 per share from business disruptions as well as the performance in the Q3. Finally, we expect free cash flow to be between 975,000,000 dollars 1 $025,000,000 This is lower than the prior guidance of $1,100,000,000 to $1,200,000,000 due to the upcoming tax payment of approximately $125,000,000 related to the divestiture of the Food Solutions business, which was not included in our prior guidance.
This concludes our formal remarks, and we'll now take questions. Operator?
Thank you. You. Our first question comes from Ross Muken of Evercore. Your line is now open.
Good morning, gentlemen. So maybe let's start on Covance. I think relative to the prior quarter across the board, the results were materially better and obviously the bookings piece was probably the highlight and core growth was good as well. Maybe just give us a feel for kind of coming off of that sort of disappointment last quarter, what you saw change? How much of the stuff that sort of impacted you last year was kind of temporal and you saw relief on it?
And then on the margin side, it also felt like as well you got some of that drop through on the better revenue, but also you're getting some momentum on the cost side?
Sure. Thank you, Ross. This is John. In terms of the stronger book to bill, that was across all of our areas, early development labs, clinical. It's driven by, yes, healthy market fundamentals in terms of the funding environment, the approvals, FDA, high interest in the drug development innovation from ourselves.
We do have a strong pipeline of opportunities across the board in terms of proposals and continued success with our differentiation whether that's with the data or the stronger FSP offerings or the solutions in terms of companion diagnostics or biomarkers. But clearly strength across the units, yes, 2nd quarter, temporal. And I think you see why we lean toward more of a last 12 months versus the clearly a quarter by quarter basis. And on the margin side, that's going to be a heavy lift in terms of on both the LaunchPad initiatives, as well as the revenue. But you're seeing that leverage come through and you're seeing that sequential leverage show up.
In terms of the margin side, what we see continued upside in terms of the margin. We know we need to get to peer level margins and work to do in terms of early development in clinical. And note that both on the revenue and margin side, we're looking for continued progress there.
Thanks, John. And maybe, Dave, just sort of philosophically here, obviously, a lot of moving parts in the lab business and I'm sure you're not thrilled with some of the near term pieces, albeit obviously a lot of it's out of your control. As you think about all of the capital you have now, plus the food divestiture and some of the activity picking up in the market and also having opportunity to deploy on the CRO side. I guess how are you thinking about into next year? I know you talked about a pretty good return of capital in Q4, but it seems like you also have plenty of firepower on the M and A side to continue to supplement.
How are you thinking about the opportunity set that's out there?
As we've said, we think about every opportunity that's presented to us individually and collectively. So individually, does it meet our strategic objectives? Does it meet our financial objectives? And what is the value to the total enterprise? And then collectively, how do we want to deploy our capital for growth.
And so what I would say is, there's no predisposition toward deploying capital toward one business or another when it comes to acquisitions. We're going to look at every one individually. I will say that assuming that the 2nd round of PAMA is implemented as planned, I think there will be acquisition opportunities on the lab side. I think there'll be collaboration opportunities on the health system side as you've seen in our broadened relationship with Baptist. And so we have, in my mind done a very good job of reducing our leverage and returning capital to shareholders and we're going to continue to tighten up that target leverage and at the same time maintain the flexibility of the balance sheet so that we can do the best deals that come along.
Thanks so much.
Thank you. Our next question comes from Lisa Gill of JPMorgan. Your line is now open.
Great. Thanks and good morning. First, congratulations on the great numbers on the Covance side. Dave, I'm going to ask about the diagnostic side. So as I think about your expectations in the quarter versus what was delivered, you talked about organic being lower than expected.
Your chief competitor reported yesterday talked about patient concessions as well as some reimbursement issues. Can you just walk us through, are you seeing similar things or are there different things that you're seeing for LabCorp versus Quest? Just want to understand the expectation versus what you delivered in the quarter and then also understand if there is a bad debt issue here.
Sure. Thanks for the nice comments about Covance. We're very pleased with that performance. Our bad debt year over year is basically flat and our as a percentage. Now to be clear, as revenue grows, obviously, if you apply the same percentage, the dollars of Van Dyck get higher.
But as a percentage of revenue, and I realize we account for it differently, but let's talk about the way we used to talk about it in the old days. As a percentage of revenue, bad debt is basically flat. And in fact, in the year, from 1Q to 3Q, bad debt has sequentially declined each quarter. So we're not experiencing that headwind. And I think just make the comment that we do this internally.
Our revenue cycle management team has done a fantastic job. We do see higher patient responsibility across the board in the business, but our team has done a fantastic job addressing and managing that through a lot of innovative tools, including front end collections in the patient service center and our pricing transparency tool. So bad debt has not been a headwind. On the specific call outs in terms of individual tests and payment denials, medical drug monitoring continues to grow although the growth rate is trending down. Some of that has been fewer scripts being written because of constraints on opioid prescriptions.
Some of it is physicians in sourcing the lab work because they can bill forward directly and get paid as opposed to sending it out to labs. And some of it has been denial policies. Now again, I want to come back to it grew, it just didn't grow at the rate that it has grown over prior quarters. The hepatitis C and vitamin D, there's nothing materially different from what we've seen historically what we have seen in prior quarters there. The one thing I would call out in terms of slowing the incremental growth is 23andme was slower this quarter than it was in 2Q.
And so that's where you saw some of the decline in organic growth. As we've said, that is a contributor to our organic growth. We expect that to increase sequentially in the 4th quarter. And so that would probably be the one thing I would point out as a detractor in terms of organic growth rate. That said, the fact that 23andme's volume growth rate slowed is part of the reason that you see our price because again, it's mix, it's not unit price, but our price improvement because as we've said, our profitability on 23andme is fine, but it is a lower per encounter price than our average requisition.
And you wouldn't say there's any changes on anything else from a managed care perspective or contracting when we think about the sequential diagnostic business?
No, not at all.
Okay, great. Thank you.
Thank you. Our next question comes from Patrick Donnelly of Goldman Sachs. Your line is now open.
Great. Thanks guys. Maybe just on the retail strategy with the Walgreens expansion, can you just kind of talk through what made you comfortable expanding that so significantly? I guess what encouraged you about the initial locations? How should we think about the economics of that versus some stand alone patient centers?
Sure. It's Dave. Start with the economics. So the economics that we have worked out with Walgreens, we're pleased with in that they're essentially comparable to the economics of our standalone patient service centers. And the reason that we like the retail strategy is it's very difficult to identify are you getting incremental volume.
But in the patient feedback that we're the real time patient feedback we're getting from those stores, we see a fairly significant number of patients who say either that they are new to LabCorp or that they haven't been to LabCorp in more than a year. And so we think it is increasing patient float versus the standalone patient service centers. The other thing that's very attractive about it is the opportunity to provide broader health services to the patients. So whether it's biometric screening, whether it's drug monitoring and management through the collaboration of the pharmacist, whether it's presenting the patient with the opportunity to share their drug information, their pharmacy information and combine it with their lab information or whether it's the clinical trials piece, we get a more a much more in-depth and robust engagement with the consumer in the Walgreens centers. And so that's why strategically we think it's very important as part of the consumer platform and increasing our ability to capitalize on the power of our data.
That's helpful. And then maybe just looking forward, I know you're not going to guide for 2019 by any means, but think increasingly focus is shifting there. And I think the headwinds on profitability are pretty well understood at this point. But maybe just help us think about some levers to offset some of those headwinds, whether fundamental underlying trends, pull through on new launch pad initiatives. It would be helpful just to hear your perspective on 2019.
Yes. Let me just say, I mean, I said in the prepared remarks, the headwinds in 2019 will be the stiffest and they will. But let's do 2 things. Number 1, in the near term, obviously, we'll get some savings on both sides of the business from LaunchPad. Number 2, the growth in Covance and the opportunity in Covance will significantly offset the impact for us of what's going to happen with PAMA, for example, in the Diagnostics business.
Number 3, we have significant amount of capital that we can deploy toward growth of the business, whether through share repurchase or through acquisitions. But I also want to just take a step further back and say from a broader perspective, we need to reemphasize to the community and to our investors. When you think about health care and think about what are the key elements of health care, you're seeing all sorts of innovation around whether it's digital and bricks and mortar, whether it's providers who are not physicians, whether it's emergency rooms that aren't part of hospitals. But one thing that is fundamental about health care is that the front line of diagnosis is in the laboratory. And it's inconceivable that there's going to be any health care system ever without the clinical laboratory.
So as we think about where we are, we have capital to deploy. We're a scale business. The market trends are moving in our direction whether it's sales of assets, whether it's hospitals, hospital collaborations, whether it's hospital outsourcing. And also think about the demographics of 10,000 people a day turning 65 and becoming eligible for Medicare and increasing coverage under whatever structure we're going to have for the insurance markets. So for the long term, our perspective is we're in a great business.
The scale is there. The leverage is there. It generates a ton of cash flow. And I look at 2019 as a year in which, yes, there are going to be some challenges. But in the long term, we're building for a significant opportunity grow the business on the Covance side, on the lab side in the out years and we feel very optimistic about where we are.
Understood. Thank you very much.
Thank you. Our next question comes from Jack Meehan of Barclays. Your line is now open.
Thanks. Good morning. Dave, I wanted to continue on that line. So and I really appreciate all the commentary on 2019. I think PAMA and LaunchPad are pretty quantifiable, but is there any additional visibility you can provide on the impact of the national payer changes, whether it be on the both the volume impact and on the pricing side?
That would be helpful.
Jack. The volume side is very difficult to estimate or quantify. And so I'm not going to try to do that. On the pricing side, with United, we said that our position in the negotiations was that if they were going to open the contract that we thought we were entitled to an increase in price unit price. And we said at the time that the contract negotiation concluded that we were very pleased with the outcome.
So I think you can draw your conclusion there in terms of what the pricing is going to be. With Aetna, all in, we view the pricing that we received as relatively flat. And so I don't see significant price downs in the transition of the managed care from going out of network with that into going in or from the United contract change. Now at the risk of being accused of talking down the year, which I'm not, but I'm just doing simple math for you, I will say, as I said in the last call, the math tells you that with United being having the larger membership and Aetna having the smaller membership that the contract transition will be a net headwind for us. But it's not going to be a net headwind because of price downs.
In my view, it's going to be a net headwind just because the math says, if each national lab loses the same percentage of customers that they had in the prior exclusive arrangement, we will lose more than our competitor.
That's fair.
Glenn or Dave, I have one follow-up on the operating income in the Diagnostics I'm estimating PAMA is about $17,000,000 You I'm estimating PAMA is about $17,000,000 You also had the Eurofin sale. Is there anything else to call out in terms of the segment earnings this quarter, whether it be a positive or a negative just year over year?
Yes. The positives obviously would be the organic volume that we did have as well as acquisitions. To your point, we gave up some of that with the divestitures. And the other is really just the we talked about the personnel costs that while volumes were up, they were down a little bit from where we had expected it. Our cost structure was kind of supporting the higher levels and part of LaunchPad and part of what we expect to be an improvement as we go into the Q4.
We'll be taking down those costs to more right size with the current level of demand.
Great. Thanks, Glenn.
Thank you. Our next question comes from Kevin Ellich of Craig Hallum. Your line is now open.
Hey guys, thanks for taking the questions. I guess Dave, wanted to go back to your prepared remarks. I think you made comments about organizational changes. Was there any more details you can provide? Or was that already covered?
Good morning, Kevin. We will provide more details of it. But basically, the organizational changes are just to, as we said, streamline organizational leadership and improve our focus. The volume growth, when you take out all the puts and takes, we were satisfied within the quarter. But the margin and as Glenn said, the level of expense was a frustration.
And we're going to manage that better and that's basically what the structural changes are designed to do.
Got it. Got it. Okay. And then just going back to your comments on the national payer change transition, even with United having more members than Aetna, I mean, are you just taking a more conservative stance here? Or because I guess we thought that more of the volume shift between the 2 largest labs would come from some of the smaller labs versus each other.
I guess, can you help us understand that dynamic?
Yes. I think the my sense from the market, Kevin, is that our competitor has been aggressively targeting our accounts where we have United Business. And so certainly, there'll be some volume shifting from Regional Labs. But it's no secret that we're the 2 largest. And so if you're looking to gain volume with a contract change, where are you going to go?
You're going to go to the largest target. And we have the largest share of United Business. So it certainly seems natural to me that our competitors is targeting our accounts. So I agree with you there'll be some shifting from the regionals. But if you just think about who has the largest single share of the United business, that would be us.
Where's the greatest opportunity for Quest to gain share? That would be from us. And that's why we expect that there'll be some there'll be volume loss for us and volume gain for them.
Got it. Okay. Thanks, Dave.
Thank you. And our next question comes from Ralph Giacobbe of Citi. Your line is now open.
Thanks. Good morning. I just want to go back to 2019. And again, I know you don't want exclusively guide, but hope and David you can give a little more on your definition of modest growth. Is that sort of low single, mid single, high single?
Thanks. Yes. We'll give our guidance in when we do the 4Q call, Ralph. So modest means modest. And until we put a number on it, modest is going to be what it is.
Modest EPS growth includes capital deployment. So it includes share repurchase acquisitions, all of the components. And we're not going to say anything about margins other than as a result of the Covance LaunchPad process, as John said, we expect to see margin improvement there. Diagnostics margins, because of the impact of PAMA, will likely be flat to down. But again, we don't guide generally to margins.
So that's probably about all that I can say.
Okay. All right. Fair enough. And then I did want to go to the organic volume. It was positive, but again, it did slow.
And I know you mentioned some of the business disruption impact. But anything you're seeing from the UNH book of business, specifically in terms of maybe early share shift away from you that you can comment on? Thanks.
No. We're not seeing anything significant in terms of early share shift. And remember to that end that we are still the sole exclusive national provider for United up through the end of the year. So any early share shift would mean moving from an in network provider, if they're going to our competitor to an out of network provider. And that's not something that is good for patients.
It's not good for the system. So we're not seeing much, and my expectation is we're not going to see much until the first of the year.
Okay. Thank you.
Thank you. Our next question comes from Erin Wright of Credit Suisse. Your line is now
It was a nice book to bill trend in the CRO business. And were there any outsized business wins on the CRO side? I guess how broad based was it? And I'm curious if you could comment on your win rates overall when leveraging the combined data across both the Covance and LabCorp side of the business? Thanks.
Great. Erin, this is John. And there was no outsized wins. There was nothing above 10% of the bookings, the $1,500,000,000 So it's pretty broad based, nice wins in terms of in aggregate on the ED early development, the lab side and clinical. And then your second question was again sorry, apologize.
That was data rate.
Okay. We're leveraging
the data assets.
Clearly, that is our differentiation. We're seeing clearly a vast majority of our trials and the proposals using the data, we're up to around 2 thirds and moving to 3 quarters of the use of the data in all of our wins and all of our proposals and looking to move that then to 100% of the trials. So we are using it in accordance with the high interest from our drug development partners and clearly making us stronger in terms of our pipeline of opportunities.
Okay, great. And a quick follow-up on the Walgreens relationship here. I guess, can you comment a little bit more on timing, magnitude, when this sort of will really materialize here and how you're kind of balancing that with your needs for your own patient service centers. And I know you commented on that before, but I guess, does your do your thoughts embed some sort of way to productively rationalize some of the footprint here in a capital efficient manner?
Erin, it's Dave. You're going to see a pretty substantial acceleration through the balance of this year and into next year in terms of the opening of new stores. Obviously, there's a build out in many of the stores required, and that's sort of the gating factor. When we originally started the project, it was we did not anticipate that we would be relocating patient service centers. We view this as another channel.
But what we've seen is really nice traffic coming from existing patient service centers into Walgreens. So we'll be looking at the existing patient service center structure to determine whether there are opportunities to essentially either move them to Walgreens or combine them with the Walgreens capabilities.
Okay, great. Thank you.
Thank you. Our next question comes from Ricky Goldwasser of Morgan Stanley. Your line is now open.
Yes, good morning. So first of all, just following up on this last comment. So when we think about 2019, you're saying you're building out woven facilities, but you haven't made a decision yet on how to rationalize existing infrastructure. Should we assume in our models some duplicate cost structure?
No. Ricky, no, it's Dave. Sorry, I didn't understand the key word there. No, you should not assume duplicate to cost structure. Whatever we do with Walgreens will be sequenced with the patient service center infrastructure.
Okay, great. And then Dave in your prepared remarks when you talked about 2019, you also highlighted that 2020 you're going to see a return to growth. So just to clarify, we're going to see another PAMA step down in 2020. So are you basically saying that taking into account that PAMA step down, you can return to top line growth in 2020?
Yes. I think we can, Ricky. And I'm not by the way, I'm not saying we won't have top line growth in 2019. I still think there'll be top line growth because we're expecting obviously growth in Covance. But once we annualize the impact of the managed care contract changes, which will be at the end of 2019, then in my view, absolutely 2020, yes, we have incremental PAMA impact, assuming that we don't get any relief on that.
And we're proceeding under that assumption, but still working very hard to get relief. But assuming we get we don't get relief, we still will have the opportunity to return to top line and stronger earnings growth.
Thank you.
Thank you. Our next question comes from Derik Seabruin of Bank of America. Your line is now open.
Hi, good morning. A couple of questions. So on the Covance business, could you just give any color in terms of what the growth rates were in split was between the early and late stage businesses? And then as a follow-up on that, I know if my memory serves, Covance was a strategic partner for Bayer and I know they've discussed increasing some of their outsourcing going forward. I'm just curious in terms of is that a chance of getting some incremental business from there?
Are you you still tight with them?
This is John, Derek. And so we don't really break out the actual segments. All I will do in terms of color was the early development versus labs versus the clinical side, all areas grew. And in terms of the revenue growth, early development led Parete. So nice growth from that segment, but growth across the board.
And then on Bayer very specifically, we don't really talk customers specifically. They've been a great partner to us and continue to be so.
Okay. And I'll do one lab follow-up. Are you still expecting when you're modeling the contract changes for the bulk of that to be in the first half of next year?
Yes.
Okay. That's it. Thanks.
Thank you. Our next question comes from Brian Tanquilut of Jefferies. Your line is now open.
Hey, good morning guys. Just a quick question, Dave. In your prepared remarks, you talked about physicians doing more in office testing. Is that a structural trend that we should be worried about? And then just broadly speaking, as you think about overall demand, am I right in interpreting your comments that you don't have any worries, it's just that
you have these one off situations as fast Q3? Yes. Good morning, Brian. I don't think in my prepared remarks that I said there was more physician in office testing. I think what I said was that in terms of the Covance business and the new platform that we're launching that we thought we had the opportunity to provide self collection outside the physician office that could be relevant to trial.
So maybe I wasn't as clear on
that should. Sorry. I meant on
the prescription drug monitoring business, I think. Okay.
Got it.
So that was
yes, that's really specifically an issue in prescription drug monitoring at the moment. And the historically, what happens is when there's an area of testing that is growing rapidly, you may remember if you covered the space years ago, there was all the in sourcing of pathology and there were all these shell labs set up to do pathology testing. And there's typically a pretty strong regulatory response when physicians start doing significant in sourcing simply because it leads to significant increases in utilization, which are not necessarily, again, either in the best interest of the patient or the system. So I see this as a near term trend in one specific area of the business. I wouldn't characterize it as a long term trend.
And in office physician testing as a total percentage of the lab market has basically been in the low single digits throughout certainly throughout my career in the industry. So no, don't see that as a particularly alarming trend, more as a temporal issue. In terms of 3rd quarter incidents being 1 offs, obviously, the weather is a constant. It's just an unpredictable constant. The ransomware, we certainly hope is a one off, but let's be realistic.
I mean every business today and certainly health care businesses among them is constantly being attacked. And so I think our team did a phenomenal job responding. I think our security is high and we continue to increase our investment in IT security, but you can never it certainly isn't going to be a continuing issue and we're not seeing continuing implications of it. So I would say these are sort of singular events and not things that we need to be thinking are going to persist in the long run.
I appreciate it. And just one quick follow-up for John. As I think about Covance and with LaunchPad and Chiltern synergies coming in, where do you think we can take margins to? I mean, like 18% is that a reasonable number to be thinking about over time?
I know we'll do on the next call our 2019 guidance, so we'll talk more tactically about that. But we're looking at peer level margins. And so you can look at the industry and then know that we have work to do in terms of the clinical and then on the early development. So we see opportunity there. But we'll give more details on the next quarterly call.
Our next question comes from Bill Quirk of Piper Jaffray. Your line is now open.
Great. Thank you and good morning everyone. Two questions. I guess first off, I want to go back to one of the earlier Walgreens questions. Dave, you referenced additional services that you can provide, which presumably over time would lead to higher volumes.
Is this something that you're seeing now in the pilot program or should we be thinking about this as a future opportunity to help drive, call it, same store sales or higher volume growth in that segment? And then secondly, John, any comment on pricing? You obviously referenced the healthy market on several occasions. So curious about your thoughts there and then just overall industry capacity.
Bill, it's Dave. On Walgreens, what we've done in the initial 17 service centers is basically set up the capability of providing the draws in the lab services. In many of our patient service centers now, we do have additional capabilities to do things like biometric screening for employers or indeed for our own employees, and we'll be migrating those into the Walgreens stores. The other thing to think about is in the kind of the prototype of these Walgreens stores is there are other health related activities there. There's a pharmacy.
There might be audiology. There might be vision. There might be an urgent care. So all of these things will combine to give a broader opportunity for the patient to have a comprehensive health care experience. In some of these cases even almost a quasi primary care experience and for us to capitalize on a more robust engagement with the consumer around the data, around the biometrics, around information that would be really helpful for us to have that in many cases, because of the because we don't see the patient in person, we don't collect.
And I'll ask John the Covance pricing question that you asked.
Early development capacities are tight. Pricing is good. The labs pricing will always be under pressure, but that's the need to be more efficient and effective and kind of best in class margins there. And then on clinical, the FSP model pricing is a lot of pressure. But again, that forces you though into the automation technology tools process work that we're doing in order to better those margins.
And on the programmatic side, from the standpoint of pricing, kind of a normal environment, we're moving a lot more to milestone pricing and same deal in terms of looking for margin upside in that environment to offset even the pressure on the pricing.
Great. Thank you.
Thank you. Our next question comes from Mark Massaro of Canaccord Genuity. Your line is now open.
Hey, thank you. Dave, it seems like the market is pricing in certainly PAMA here to stay and you're managing the business for Phase 2 of PAMA to be implemented on January 1. But can you just speak to any actions that a CLA is making now in terms of legal options and lobbying Congress? And can you give us any sense of substance or timing as it relates to any further actions?
Sure. Good morning, Mark. Start with the legal actions. So the district court decision was disappointing. Putting on my long abandoned lawyer hat, I can say that the judge decided the case on very narrow procedural grounds.
And although she noted that there were significant questions presented on the merits, she didn't reach them. She didn't reach one of the key arguments that ACLA made, which was that the regulations were beyond CMS's authority because they were directly contradictory to the statute. But a CLA after a board discussion and I think correctly is decided to appeal and file the notice of appeal. We'll ask for an expedited schedule, but the reality is the likelihood of getting a decision before the middle to end of 2019 is pretty low from the court of appeal. So we'll continue to press on the legal front, but the process now will play itself out.
On the regulatory and legislative front, we are very active with Congress. There is, if I could characterize a general sense of within the key committees and staff and among members that this was not what was intended, that it was not expected, that 70% to 80% of the data points were going to come from LabCorp and Quest, and this was going to be kind of a cherry picked market analysis that would just pick the lowest price for everything. And so they're looking at potential fixes. ACLA has submitted some language that has been sent for scoring that would provide a near term fix. So there's a considerable amount of activity in the congressional front.
And then we continue to meet and discuss with CMS what administrative options there may be as well. As you saw on the physician fee schedule, a proposed rule, CMS asked about ways in which they could include more hospital data, and we've been meeting with them recently and have made a number of proposals. One of the initial objections from hospitals was the amount of resources that would be required to report the data. And so we've provided some proposals to CMS around things like aggregate data reporting as and statistically significant surveys that would allow them to look at that market without the enormous burden of reporting. So there is a lot of activity on every front and I'm still optimistic that common sense is going to prevail here in terms of what PAMA was meant to do and how it's going to be implemented.
But as you say, we're planning as though PAMA is going to be fully implemented and we're running the business that way.
Great. And historically, you've called out areas like women's health and NIPT as strong growth areas. Is that still the case? And then in terms of next gen sequencing based tools like liquid biopsies, can you comment on the degree of importance that is both in your diagnostics and your CRO business? And are there ways that you can advance those offerings?
Well, women's health and NIPT continue to be strong areas of growth for us. Next gen sequencing is a part of the lab business in both LabCorp and Covance, mostly in terms of moving existing genetic testing or genomic testing onto that platform as opposed SNP arrays or other prior methodologies. And innovations like liquid biopsy and other technologies are certainly things that we're considering in both businesses. We actually have a pilot program running within Covance on liquid biopsy. So these are going to be things the technology and the tools continue to change and we're going to continue to adopt them as they make sense, as they provide improved patient care and obviously as we see reimbursement trends.
Thank you.
Thank you. And this does conclude our question and answer session. I would now like to turn the call back over to Dave King for any closing remarks.
Thank you. Well, thank you for joining us this morning. I hope we've given you not only clear insight into the Q3, but also into the long term view that we have in the business and the success of our strategic execution. We look forward to speaking to you on the Q4 call and wish you a great day.