Labcorp Holdings - Earnings Call - Q4 2016

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Labcorp Fourth Quarter 2016 earnings conference call. At this time, all participants are on a listen-only mode, so if anyone should require assistance during the call, please press star then zero on your touch-tone telephone to reach an operator. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Scott Frommer, Vice President of Investor Relations. Sir, please go ahead.

Scott Frommer (VP of Investor Relations)

Good morning, and welcome to Labcorp's Fourth Quarter and Full Year 2016 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 filed a Form 8-K this morning that includes additional financial information. Both are available in the Investor Relations section of our website at www.labcorp.com and include a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. Finally, we are making forward-looking statements during today's call. These forward-looking statements include, among others, statements about our expected financial results, the implementation of our business strategy, and the ongoing benefits from acquisitions.

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 2015 Form 10-K. 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.

Dave King (Chairman and CEO)

Thank you, Scott, and good morning. Labcorp had a strong finish to an outstanding year. We delivered record revenue of $9.4 billion, record earnings per share of $8.83, and record free cash flow of $900 million, while driving margin improvement in both segments. We also reinitiated our share repurchase program, buying back $50 million worth of shares in the fourth quarter. Our 2017 guidance contemplates another year of strong revenue and EPS growth, as well as margin expansion, producing record free cash flow, which we will continue to deploy for return of capital to shareholders, strategic acquisitions, and debt reduction. We continue to drive these strong financial results through a combination of operational improvements and long-term strategic initiatives. I will highlight key activities in these areas in turn.

In 2016, we made significant progress on a number of initiatives designed to enhance quality of care, improve our patient and customer experience, and increase efficiency. Through process re-engineering, the integration of new tools and technology, and facility consolidations, our Launch Pad program continues to deliver long-term quality and margin improvement to our diagnostic segment. The Launch Pad portfolio currently includes over 100 projects at various stages of implementation. At Launch Pad's inception, we established a goal of sustainably reducing $150 million of expense from the business during the three years ending in 2017. Heading into year three, we remain on track to achieve this objective, and our Launch Pad initiatives will generate additional savings extending into 2018 and beyond. Let me review a few of these activities now. Project Phoenix involves deployment of new revenue cycle management technology.

Our nationwide insurance eligibility verification tool has improved our ability to capture accurate patient information at the time of service in our patient service centers. We also recently introduced in several markets a patient responsibility estimator, which provides patients with an advanced estimate of what they will pay for our services. We plan to introduce this offering to our entire PSC network throughout 2017, improving pricing transparency and point of service collections, and reducing surprises for our patients when they receive their bills. Project Horizon consists of multiple activities to improve the patient service center experience. As part of this project, we will provide new self-service registration options at select sites later this year, improve the PSC selection and appointment scheduling experience, and incorporate advancements in technology to allow patients to access these tools seamlessly from multiple mobile devices.

We also implemented a workflow and workforce optimization tool as part of Project Lift-Off, enabling us to implement schedule adjustments and process changes on a site-by-site basis for our contact centers and PSCs. These improvements, along with new employee shift options, will provide greater certainty for employees about their schedules and enhance the customer and patient experience by deploying staff based on the real-time needs of our sites. Our initial pilot is underway, and we will deploy this technology in other functional areas in the future. In addition to Launch Pad, we continue to benefit from the ongoing implementation of lab automation, such as our proprietary Propel robot. The Propel robot enhances quality and efficiency and reduces waste by replacing the manual pre-analytical splitting and sorting processes with automated precision.

At the end of 2016, the Propel robot was operational at five sites, including our recent implementation in Birmingham, and we plan to deploy additional systems in our major laboratories during 2017 and 2018. In our drug development business, we completed the integration of our central lab facilities in Singapore and China, and are on track for mid-2017 site consolidations in the U.S. and Europe. These consolidations are an integral part of the $100 million of cost synergies in the Covance drug development business that we are on track to achieve during the three-year period ending in 2017. Our commitment to continuous operating improvement drives a steady focus on quality, efficiency, and margin improvement. Concurrently, to deliver long-term revenue and profit growth, we are pursuing several major strategic initiatives, which I will now discuss.

We are focused on the complete organizational integration of Covance and Labcorp to build on our successes in the use of data, companion diagnostics, and specialized disease state expertise. Through the combination of Labcorp patient data and global Covance physician investigator data, we continue to win new orders and increase our win rate across multiple therapeutic categories. In companion diagnostics, we worked on over 60 programs supporting over 145 clinical protocols in 2016, and we grew revenue 35% in this area since 2014. In the innovative area of immuno-oncology drug development, we doubled the number of study awards from 2015 to 2016 and also performed thousands of PD-L1 tests through our diagnostic and drug development segments. We are the clear industry leader in these areas and see great opportunity for growth in the years ahead.

As part of our ongoing data integration, we are focused on expanding our capabilities to support innovative applications. For example, we have amassed a growing database of approximately 100,000 patients who have provided consent through our patient portal to be contacted about future clinical trials. We are also developing a cloud-based application that leverages public and proprietary data sources to help sponsors thoughtfully plan their clinical trial strategy. In addition, our data assets provide capabilities for conducting real-world evidence studies and providing hospitals, health systems, and large provider groups with greater access to clinical trials and unmatched value proposition. Another area of strategic emphasis is the implementation of our health system data and analytics platform and cultivating long-term comprehensive partnerships with Anchor Health Systems. Last month, we entered into a significant transaction with Mount Sinai Health System in New York City.

In addition to providing broad laboratory testing solutions and enhanced data analytics, we are incorporating Covance's drug development expertise into these relationships. Over time, these anchor health systems will also become research hubs, improving their access to trials, as well as Covance's site activation and investigator and patient recruitment capabilities. Our pipeline for these deals is stronger than ever, and we expect to continue to add health system partnerships this year and in the years ahead. We likewise continue to invest in innovative solutions for our industry-leading portfolio of managed care partnerships. We bring several strategic differentiators to these important relationships, providing support for the healthcare system's transition to a value-based payment environment. Beacon LBS is a front-end platform that improves the quality of patient care, lowers patient and system costs, and provides guidance on lab and test selection.

The Litholink Clinical Decision Support Platform uses proprietary algorithms to tailor reports for chronic diseases, including kidney stone, chronic kidney disease, osteoporosis, diabetes, and cardiovascular, driving improved adherence to evidence-based guidelines and increased patient and provider engagement. These capabilities are only available through Labcorp, and we will continue to expand them, as well as enhance them via machine learning, as we integrate more deeply into the delivery of care. As these comments demonstrate, we are ramping up innovation in our combined organization, capitalizing on our unique capabilities. We are also focused on the expansion of our capabilities to alternate sites and methods of service delivery. In diagnostics, we continue to introduce and commercialize new tests and technologies, redesign our patient-facing applications, expand our food safety and integrity business, and advance our consumer engagement and price transparency initiatives.

In drug development, we continue to build on our accelerated informatics technology-enabled platform and leverage our unique market position as an end-to-end provider of drug development capabilities, from preclinical service all the way through to market-access expertise. We will also extend the availability of our services to new settings, enabling greater patient access and convenience. We continue to explore the opportunity to co-locate patient service centers within retail pharmacies where consumers are accustomed to seeking healthcare. In addition, we are working to integrate our lab testing solutions into telemedicine partnerships, reaching more patients and making it easier for them to access our services. Both of these markets represent new channels for long-term organic growth. Finally, we are committed to returning capital to shareholders while making disciplined capital investments in our business and strategic acquisitions.

As noted earlier, we resumed share repurchases in the fourth quarter and plan to deploy our capital flexibly to continue to maximize long-term shareholder value. In closing, we expect 2017 to be another year of significant innovation as we continue to reposition ourselves to meet the needs of a rapidly changing healthcare system. We occupy a unique market position as a global life sciences company, presenting us opportunities to play an essential role in delivering high-quality, high-value patient care, unlocking long-term profitable growth, and increasing long-term shareholder value. Supported and inspired by the shared focus and commitment of more than 50,000 colleagues worldwide to improve health and improve lives, I have great enthusiasm for the years ahead. Now I'll turn the call over to Glenn.

Glenn Eisenberg (EVP and CFO)

Thank you, Dave.

I'm going to start my comments with a review of our Fourth Quarter results, followed by a discussion of our Labcorp Diagnostics and Covance's drug development segments, and conclude with our 2017 guidance. Revenue for the Quarter was $2.4 billion, an increase of 6.3% over last year due to the strong organic growth across both segments, as well as acquisitions, partially offset by unfavorable currency translation of 60 basis points. Organic revenue growth in the Quarter on a constant currency basis was 4.3%. Gross profit for the quarter was $788 million, or 33% of revenue, compared to $741 million, or 33% last year. The increase in gross profit was primarily due to demand, price mix acquisition, and our Launch Pad and Covance's cost synergy initiatives, partially offset by personnel costs. SG&A for the QQarter was $406 million, or 17% of revenue, compared to $406 million, or 18.1% last year.

Special charges in the quarter were $5 million, primarily related to the integration of acquisitions and executive transition costs, compared to $32 million a year ago. Excluding special charges, SG&A in the quarter was $401 million, or 16.8% of revenue, compared to $374 million, or 16.7% a year ago. The increase in SG&A was primarily due to acquisitions. During the Quarter, we reported $10 million in restructuring charges, primarily related to the ongoing consolidation of our drug development operations and associated severance. Operating income for the Quarter was $323 million, or 13.5% of revenue, compared to $237 million, or 10.5% last year. Excluding amortization, restructuring charges, and special items of $64 million, adjusted operating income was $388 million, or 16.2% of revenue, compared to $367 million, or 16.4% last year.

The increase in adjusted operating income was primarily due to price mix acquisitions and our Launch Pad and cost synergy initiatives. The decline in adjusted operating margin was due to the mixed impact from the acquisition of Sequenom. Excluding Sequenom, margins would have increased 10 basis points over last year. Interest expense for the Quarter was $53 million, down from $57 million a year ago due to lower debt balances. The tax rate for the Quarter was 33.3%, compared to 38.5% last year. Excluding special charges and amortization, the adjusted tax rate was 33%, down from 33.9% last year, primarily due to lower foreign tax rates. For the full year, the adjusted tax rate was approximately 34%, in line with our prior expectations. We expect the rate in 2017 to also be approximately 34%, which assumes no major regulatory changes to the U.S. corporate tax code.

Net earnings for the Quarter were $184 million, or $1.75 per diluted share. Excluding amortization, restructuring charges, and other special items, adjusted EPS were $2.15 in the quarter, up 9% over last year. Operating cash flow was $449 million in the Quarter, an increase of $64 million over last year, primarily due to higher earnings and improved cash collections. Capital expenditures totaled $74 million, or 3.1% of revenue, down from $85 million, or 3.8% last year. As a result, free cash flow was $375 million in the Quarter, an improvement from $300 million last year. At Quarter end, our cash balance was $434 million, down from $568 million at the end of the third quarter. Total debt was approximately $5.8 billion. During the Quarter, we invested $152 million in acquisitions, paid down $302 million of debt, and reinitiated our share buyback program, repurchasing $50 million of stock.

As a result, we had $740 million of authorization remaining under our share repurchase program at year-end. The company's leverage at year-end was 3.1 times gross debt to last 12 months EBITDA, down from 3.3 times at the end of the Third Quarter. Now I'll review our segment performance, beginning with Labcorp Diagnostics. Revenue for the Quarter was $1.7 billion, an increase of 7.8% over last year. The increase in revenue was driven by acquisitions, price mix, and organic volume measured by requisitions. Revenue per requisition increased 5.2%, benefiting from price mix and the Sequenom acquisition. In addition, esoteric testing grew at a faster rate than core testing. Total volume increased 2.7%, of which organic volume was 0.6% and acquisition volume was 2.1%. Labcorp Diagnostics' adjusted operating income for the Quarter was $318 million, or 19% of revenue, compared to $292 million, or 18.8% last year.

The increase in operating income was primarily due to price mix acquisition and our Launch Pad initiative. Operating margins were up 20 basis points despite the negative impact of 50 basis points from the Sequenom acquisition, which we continue to expect to be accretive to earnings during our first year of ownership. Now I'll review the performance of Covance drug development. Revenue for the Quarter was $716 million, an increase of 3.5% over last year, excluding the impact from approximately 160 basis points of negative currency and the expiration of the Sanofi site support agreement, which annualized at the end of October. Revenue increased 6.1% over last year. The revenue growth was primarily due to increased demand in our clinical and early development businesses, as well as favorable mix in central labs.

Adjusted operating income was $106 million, or 14.9% of revenue, compared to $110 million, or 16% last year. The decline in operating income and margin from last year's record performance was primarily due to investments in the sales force and CRAs to support ongoing growth, partially offset by favorable demand mix and cost synergies. On a sequential basis, margins increased 130 basis points over the third quarter, primarily due to improved clinical efficiency. Beginning this Quarter, we are reporting net orders and backlog on a fully executed contract basis, as opposed to the industry practice of recognizing orders and backlog based on non-contracted written awards. We are also providing our expectation of the contracted backlog that will convert into revenue over the next 12 months. Beginning next Quarter, we will report net orders and book the bill on a trailing 12-month basis only.

We adopted this approach as we believe this methodology creates a more conservative threshold for including awards in the backlog, and with our new disclosure, we'll provide greater visibility into revenue conversion from the backlog. Using this methodology, net orders and net book to bill during the quarter were $849 million and $1.19 respectively, compared to $887 million and $1.24 under the prior methodology. These strong results were negatively impacted by the cancellation of two large clinical studies late in the year, for which we provided central laboratory services. During the trailing 12 months, using this methodology, net orders and net book to bill were $3.1 billion and $1.11 respectively, compared to $3.3 billion and $1.16 under the prior methodology. Backlog at the end of the year was $4.9 billion, and we expect approximately $2 billion of this backlog to convert into revenue over the next 12 months.

This change in methodology resulted in the removal of $2.2 billion of non-contracted written awards from the backlog, a substantial portion of which will be contracted and added to the backlog in 2017. Now I'll provide our 2017 guidance, which uses foreign exchange rates as of December 31, 2016, and includes the impact of anticipated capital allocation, including acquisitions, share repurchases, and debt repayment. We expect reported revenue growth of 4.5-6.5% after adjusting for the negative impact from approximately 60 basis points of foreign currency translation. We expect Labcorp Diagnostics' reported revenue growth of 4.5-6.5% after adjusting for the negative impact from approximately 10 basis points of foreign currency translation. We expect Covance's drug development reported revenue growth of 3.5-5.5% after adjusting for the negative impact from approximately 180 basis points of foreign currency translation.

Covance's revenue growth in 2017 is lessened by approximately 100 basis points due to the cancellation of two large clinical studies late in 2016, for which we provided central laboratory services. Our 2017 adjusted EPS guidance is $9.35-$9.75, an increase of 6%-10% over 2016, including the negative impact of foreign currency translation. We expect free cash flow to be between $925 million and $975 million, up from $897 million in 2016, and expect our capital expenditures to be approximately 3% of net revenue, consistent with 2016. From a timing perspective, all of our guidance is expected to be impacted by seasonality. One fewer day this year as a result of leap year in 2016 and other factors referenced in our comments. As a result, we expect first-half results to be lower than second-half results. In summary, we're enthusiastic about our prospects for 2017.

We expect strong top-line growth and margin improvement to translate into attractive earnings per share growth. In addition, we expect to deploy our strong free cash flow to strategic acquisitions, returning capital to shareholders, and debt reduction, which will continue to build long-term shareholder value. This concludes our formal remarks, and we'll now take questions. Operator.

Operator (participant)

Ladies and gentlemen, if you'd like to ask a question at this time, please press the star and then the number one key on your touch-tone telephone. In the interest of time, we ask that you limit yourself to one question and one follow-up. Your first question comes from Jack Meehan with Barclays.

Jack Meehan (Stock Analyst)

Hi, thanks. Good morning, guys. Morning, Jack. I wanted to start, Dave, you talked about the pipeline on the hospital side. Really good to see the Mount Sinai deal this Quarter.

I'm curious, as you look at the funnel, what do you think is driving the conversations, and do you think reimbursement is part of the equation with some of the changes coming in 2018?

I think that part of the conversation is in anticipation of the potential impact of PAMA. I think part of the conversation is some uncertainty around generally regulatory reform, how much of the bundled payment demonstrations and other things that CMS has been doing are going to continue and what form they'll take. Yes, to your specific question, I think as we talk with our managed care partners, there is more and more of a push toward what they broadly characterize as value-based payment. Value-based payment includes bundled payments. It includes paper outcomes. It includes pay for adherence to metrics.

I think a lot of hospitals and health systems are focused on what are our core competencies in delivering value-based care and where can we partner to gain those competencies elsewhere. I think in diagnostics, laboratory services, and drug development, obviously our competencies and capabilities are industry-leading. I think it is a combination of things, but I do think the environment obviously is changing, and that is to our benefit. A lot of it is the long-term planning that we have been doing about how these partnerships take shape and what the value is over the long term.

That makes sense. Just as a follow-up for Glenn, you mentioned that the guidance assumes some level of capital deployment from here.

Can you just be a little bit more explicit in terms of share repurchase, what the expectation is, or what the share count you're using for guidance is? Thank you.

Glenn Eisenberg (EVP and CFO)

Yeah, Jack, I'd say overall, what we're saying is that the free cash flow, which obviously we guide to, we're going to fully redeploy in 2017, and that is reflected in the guidance range that we have. It will be inclusive of share repurchases, which again, we reinitiated in December of last year. It'll include M&A, obviously announced deal that we've already had, but also a pretty good pipeline, as well as debt repayment. At this point, we're not commenting specifically on how much of that free cash flow will apply to each other than we expected within that range to encompass all three.

That makes sense. Thank you.

Operator (participant)

Your next question comes from Robert Willoughby with Credit Suisse.

Robert Willoughby (Managing Director and Chairman of Leveraged Finance Origination and Restructuring)

Glenn, did you mention I know Sequenom was a drag on earnings in the Third Quarter. What was the experience in the Fourth Quarter? Are we at profitability there yet? Maybe for Dave, to the acquisition question, the stock seems to be trading more on speculation over what you may acquire than maybe on the fundamentals here. Can you review maybe what your parameters are, highlighting areas of opportunity and interest for you and what does not fit, and any thoughts on transaction sizes that would be palatable to Labcorp?

Glenn Eisenberg (EVP and CFO)

Okay, I'll start with the first part, Bob, on Sequenom, which is, as we commented even, I believe in last quarter, we expected the Fourth Quarter for Sequenom to be a loss of operating income during the Quarter, so a little bit dilutive. We expect it to be accretive to our earnings in our first year of ownership.

As we go into 2017, we expect obviously profitability from Sequenom, but for the Fourth Quarter, it was a constraint. I think we spoke to the fact that even with diagnostics showing nice margin improvement, it was actually constrained by the loss of Sequenom in the quarter that will be favorable to earnings next year. Okay.

Dave King (Chairman and CEO)

Bob, good morning. On the acquisitions, obviously, let me start by saying not going to speak about any rumors or specific deals, but I think it is a good question, how do we look at acquisition broadly? First of all, there is a very healthy pipeline in both segments, and I think it is important to emphasize for analysts and investors that we try to look at everything that may be relevant to us.

I think people would be surprised at the number of transactions that we look at that we end up not being interested in. I think that's important to say because obviously there has been a rumor out that we're looking at something and it was in the newspaper, and people should recognize that we look at a lot of things and we end up passing on most of them because they don't fit. What's the question about how things fit? Let me start with the framework and go back to the presentation that we made at J.P. Morgan, in which we highlighted that one of our three 2017 priorities was to reinitiate return of capital to shareholders. As Glenn said, we started that in Q4 of 2016, and our plan is to continue that.

Our philosophy around M&A is that there are sort of four fundamentals. One has to be a strategic fit. That may be geographic. That may be complementing testimony or capabilities, but the transaction has to fit our well-articulated long-term strategy. Second, it has to meet financial metrics. So IRR, return on invested capital, multiples, synergy opportunities, these are things that are a very important part of how we think about acquisitions. Third, it has to create or present a future growth opportunity. As we highlighted with Sequenom, even though it did not meet all of our metrics out of the gate, the future growth opportunity in women's health and non-invasive prenatal testing, where we are now the market leader, and the opportunity to add capabilities to Sequenom's platform was a very important consideration. We think about how is that acquisition potentially going to help us grow in the long term.

Then fourth, of course, is EPS accretion. We fundamentally want these deals to be immediately accretive, but we certainly think about them being accretive over time as an important consideration. The last thing I would comment just broadly is, as a general proposition before Covance, our approach was after CapEx and investment in the business, we spent about half our free cash flow on acquisitions, and we spent about half of it on returning capital to shareholders. You should continue to think about that as our fundamental philosophy of how we deploy cash in the business.

Robert Willoughby (Managing Director and Chairman of Leveraged Finance Origination and Restructuring)

That's very helpful. Thank you.

Operator (participant)

Your next question comes from Bill Bonello with Craig Hallum.

Bill Bonello (Senior Research Analyst)

Good morning, guys. I'm just going to beat on that same question in a couple of different ways if I can.

If I just do some sort of back-of-the-envelope math in my head and I think of you deploying almost $1 billion of free cash flow to either acquisitions or share repurchase, it feels like the guidance you gave is kind of low. What I'm trying to figure out is within the scope of what you're contemplating, do you allow yourself room for, hey, there may be acquisitions that could be potentially nicely accretive, but because of the timing on when they get completed in 2017 or the time in which you realize some of the synergies, they don't necessarily aren't as much of a boost to 2017 as they might be to the future? I'm just trying to figure out why maybe the math doesn't work so well.

Dave King (Chairman and CEO)

Bill, it's Dave.

Just as you know, the guidance incorporates a wide range of potential outcomes, and you should think about timing as being a very important factor because transactions that may be in the pipeline and may be rumored to be in the pipeline and may be rumored to be coming to market, timing of signing, closing, antitrust clearance, all of those affect where the earnings power is created and how accretive the transactions are. I think it is important. As you know, we do not slice and dice the guidance to try to break down every individual number and what is contemplated there, but there is a fair balance in the guidance of capital deployment towards share repurchase and capital deployment toward acquisitions.

Glenn Eisenberg (EVP and CFO)

Yeah, the only thing I would add to that, Bill, too, just to kind of level set, what our guidance does reflect is obviously good top-line growth across both of our businesses, margin improvement, and then with capital allocation, even driving earnings even higher. Just to reinforce his data points, you do have a lot of timing and how much we allocate of that free cash flow between the various areas that we can. We view the overall guidance that we're providing would be another very strong year for the company.

Dave King (Chairman and CEO)

I should just, one other comment I should make, which is the guidance includes a pretty strong headwind from currency that does knock down where we would end up, all of the things being equal.

I think it's important to recognize that we need to factor in there is an impact on revenue from currency translation. And as we've often said, when you take that dropdown off of that revenue to earnings, that has an impact on obviously what we earn.

Bill Bonello (Senior Research Analyst)

Sure. Okay. That makes sense. If I can, my follow-up, just curious how you think about leverage. Obviously, you were willing to take on a significant amount of debt to do Covance. If you were to do a big CRO acquisition, I'm not looking for you to comment on that, but presumably that would require a significant amount of debt too.

What I'm curious is how you think about leverage, potentially taking on any leverage in the absence of those opportunities, potentially taking on any leverage for share repurchase, just given that you're at an unprecedented discount to your peers right now.

Dave King (Chairman and CEO)

I'll start, and then Glenn may have some additional comments. We established, I think back in 2009 or so, that our target leverage is two and a half times. Obviously, in the seven or eight years since, the company has grown pretty substantially in terms of the amount of EBITDA that we generate. That two and a half times remains a target. It is not a commandment. We've demonstrated a willingness to be flexible about our leverage.

For example, we repurchased shares in the fourth quarter, even though we're not at two and a half times leverage because we thought it was a great opportunity to deploy capital and return it to shareholders. In terms of increasing the leverage, we've demonstrated a willingness to do it for M&A. Our investment grade rating is important to us, and that's something that we would intend to maintain. Increasing leverage for share repurchase, again, it depends on what else is out there in the marketplace. We know the value of investing in our own business. We know the return from buying our own shares. And we evaluate that against what's the value of other things we might buy, what's the long-term return on other things that we might buy, and we'll be disciplined about how we deploy and use the leverage in 2017 and obviously in the years ahead. Yeah.

Glenn Eisenberg (EVP and CFO)

The other thing I'd add to that, Bill, is that the company is generating significant and sustainable free cash flow. As a result, it gives us the flexibility to utilize the balance sheet appropriately as we feel we need to do. We've gotten the leverage down from when we've done it. We ended the quarter, the end of the year at 3.1 times. Again, we've got another strong year of cash flow ahead of us.

Bill Bonello (Senior Research Analyst)

Excellent. Thank you.

Operator (participant)

Your next question comes from Nicholas Jansen with Raymond James.

Nicholas Jansen (Stock Analyst)

Hey, guys. Two questions for me. One, organic volume in the lab seemed to bounce back nicely relative to three Q, even though there probably was some Hurricane Matthew dynamics to consider. Just wanted to get your thoughts on kind of market share growth within the lab segment.

Then secondarily, on the CRO, as you look at the margin performance, it did bounce back sequentially, but you were down year over year on operating profit. I just wanted to know, within the guidance that you set forth for 2017, when do we start to think about the CRO growing again from a profitability perspective? Thanks.

Dave King (Chairman and CEO)

On the organic volume in diagnostics, I think this and the second part of your question just demonstrate that it can be a little bit deceptive to look at a particular quarter over a particular quarter in a prior year. I think if we look broadly at 2016, we saw about 1% organic volume growth. That's about what we think the market is growing. We had a dip in the third quarter, which I think was anomalous for a variety of reasons.

We had a strong recovery in the fourth quarter. As you say, that was dragged a little bit by Hurricane Matthew. We felt very good about fourth quarter volume growth, particularly because it's growing in esoteric. It's growing in women's health. It's growing in the focus areas that we're devoting our resources to. Nice, strong volume growth in the fourth quarter. We look to 2017 and say approximately 1% organic volume growth seems to be market. We always want to beat that, but that's how we think about the year. I'll turn it over to Glenn and John in terms of the diagnostics margins. I'm sorry, the Covance margins.

Glenn Eisenberg (EVP and CFO)

I'll take a first cut. John, you may want to provide more color. As you commented, Nick, we feel good about the sequential improvements that we had in the business.

When we think about the comp in the fourth quarter, we obviously are comparing it to a record quarter, I think 16% margins in the fourth quarter a year ago. As we look to 2017, we believe, again, we've given you the revenue guidance, but we also believe we're going to get margin expansion benefiting from the growth in the business and continue to improve on the clinical efficiencies. We also did comment, though, that the first half for the company will be lighter than the second half of the company, and that affects Covance as well. Obviously, we continue to invest in the business. We talked about the labor, the called Salesforce, the CRAs that haven't annualized yet. That'll be a headwind in the first part.

We also talked about the late cancellations that obviously will have an impact in the first half as we look to replenish, given that those were active accounts that we had. Again, we expect good margin improvement year over year, but expect that the first half would still be light year over year in the first half of 2017 and then picking up very nicely in the second half.

Nicholas Jansen (Stock Analyst)

Great. I'll hop back in the queue.

Operator (participant)

Your next question comes from Lisa Gill with JPMorgan.

Lisa Gill (Managing Director)

Thanks very much. Good morning. Dave, usually this conference call is the opportunity to highlight some of the things that came out of our conference on the Covance side. What were people looking for this year? I know John's on the call. Anything that you want to highlight that you were able to sign as we think about 2017?

Dave King (Chairman and CEO)

We do not talk about things that we have signed until they become public. From my perspective, I mean, from my perspective, what came out of the conference from the Covance perspective was a better understanding of how well the integration between the two businesses has gone. We talked about the patient recruitment and site selection. We talked about the companion and complementary diagnostics already. Again, I want to highlight our work on Keytruda, our work on Opdivo, our work on Tecentriq and Tarceva, our work on Tecentriq. I cannot even pronounce the names of these drugs, but really just a terrific performance in terms of establishing industry leadership in the development and the commercialization of companion diagnostics in a way that we do not see any competitor present.

We highlighted our ability to partner using Labcorp and Covance with real-world evidence and post-market surveillance capabilities, specifically around the liver testing example with Top 20 Pharma, where we're using the Labcorp resources to do the draws. We're using the Covance market access to remind patients of their appointment and scheduling. We're using the combination of our technology to deliver results to physicians and patients. We highlighted how we can specifically open and close sites based on real-time data that Labcorp is receiving on things like respiratory tract infections. We highlighted the database of physicians who order the FibroSure test in recruiting NASH trials, the scientific capabilities that our combined organizations bring to sponsors, and obviously the value of our oncology, rare and orphan, and infectious disease capabilities, and the opportunity around the research hubs and the whole research hub model that goes back into the health system partnership.

Those are probably kind of the big things I hope that we conveyed to investors, a better understanding of what are the ways in which the organizations are really working well together, and how do we think about the long-term opportunity, and why we think the long-term trajectory for these businesses combined is really terrific.

Glenn Eisenberg (EVP and CFO)

I think you saw that in the strong look to build within the Fourth Quarter of strength across the businesses, whether that was in clinical or in the labs or in early development. You saw the solutions that Dave just talked about coming to the fore. Even though we had the cancellations in the two large lab studies, still pulling off 1.24 and without that being in the high 1.3. Nice performance.

Dave King (Chairman and CEO)

That's kind of how you gauge whether that integration is moving swiftly, and you're seeing that within our order.

Lisa Gill (Managing Director)

Right. I wasn't talking about from an investor perspective. If I just remember our Q&A from maybe the last two years, it was more around the opportunities of meeting with pharma and biotech and what they were looking for from Covance and some of the incremental opportunities without naming specific opportunities. I was just looking for any incremental color from that perspective. Did you feel like it was better than the last two years, in line with the last two years? Just any color around how you think about how that went versus your expectation or what you've seen in previous years.

I know, John, this was your first time from a Covance perspective.

John Ratliff (CEO)

Yeah. I saw a great amount of partnering activity.

The biotech business area and the large pharma, mid-tiers, significant partnerships that either were initiated or developed, and great momentum across the marketplace. Obviously, we have R&D growth, but at the same time, I think the partnering capabilities with the data that we are driving from the Labcorp side and/or solutions that we're driving with respect to the combination our customers are seeing. That was evidenced by all the different partnering capabilities that we saw at the conference.

Lisa Gill (Managing Director)

Great. Thank you.

Operator (participant)

Your next question comes from Ross Mugin with Evercore ISI.

Hi, guys. This is Elizabeth in for Ross. I just wanted to ask a question regarding the change in management at Covance. I wanted to just hear sort of a little bit more about how has the team reacted? What incremental opportunities do you see available? Thanks.

Dave King (Chairman and CEO)

I'll start at Dave, Elizabeth.

My perception is that John is a terrific executive. He has been well received both internally at Labcorp and Covance and externally by our sponsors and partners. As I think he just highlighted, the opportunities in terms of partnering and in terms of the level of interest in the Labcorp and Covance services is very high. We feel terrific about the leadership change and about where it's going to take us in 2017 and ahead. I think that we've seen great double-digit growth in studies based on the data side. This is all about net orders at the end of the day and winning. We're seeing that show up in the marketplace for us.

Thank you.

Operator (participant)

Your next question comes from Amanda Murphy with William Blair.

Amanda Murphy (Senior Analyst)

Hi. Good morning. I just had a follow-up to some of the conversations on the CRO side.

I was just wondering, so obviously you had.

Dave King (Chairman and CEO)

Hey, Amanda, can you speak up a little bit? You're really muffled.

Amanda Murphy (Senior Analyst)

Yeah. Is this better? I'm sorry. Yes. I just had a quick follow-up to some of the questions on the CRO side. So obviously, you had a good, strong book to build. I was curious if you could talk to some of the broader trends. I think a couple others have seen cancellations, and I think some have mentioned dynamics around revenue conversion just given shift to biologics over time. I'm wondering if you could speak to those two dynamics more broadly.

Glenn Eisenberg (EVP and CFO)

Okay. I think in terms of the book to build was strong across each area. We are different in the sense that on the revenue conversion side, we are the only broad early development lab and then clinical business CRO.

In the early development, you do have a faster backlog conversion. Most, you will have two to four quarters of that bookings convert into revenues with a little bit faster within the early development time frame. In terms of cancellations, this in fourth quarter was probably our highest within the last couple of years if you look at that quarterly rate. Thus, the 1.24 at the end of the day or the 1.19 new methodology is showing real signs of strength in the quarter itself. That is a little bit of color on, A, the book to bill and the cancellation.

Amanda Murphy (Senior Analyst)

I guess is there, so there is nothing to read into the cancellations in terms of that becoming a broader trend? Obviously, there is concern around pharma.

Dave King (Chairman and CEO)

No, no. This was, public-side cancellations in late in the quarter, November, and clinical research.

This is nothing to do with an industry trend.

Amanda Murphy (Senior Analyst)

Just totally switching topics, I had a question on Beacon. Just wondering what your—

Dave King (Chairman and CEO)

Amanda, I'm sorry, but Amanda, I'm really sorry, but we just cannot make out what you're saying.

Amanda Murphy (Senior Analyst)

Okay. Sorry. I'll try. I'll check in queue. I'm sorry. Something's wrong with my phone, clearly. Thank you, though.

Dave King (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from Bill Quirk with Piper Jaffray.

Alex Nowak (Equity Research Analyst)

Great. Good afternoon, everyone. This is Alex Nowak on for Bill today. In the prepared remarks, you mentioned that there are numerous benefits to the business of having patient health data after combining the diagnostics and CRO business. I was just curious, are there any other verticals that you would consider acquiring or partnering with to gather additional patient health data?

Dave King (Chairman and CEO)

It's Dave. Good morning.

I would say we're always partnering with other organizations to enhance our database and broaden our reach in the patient population. Generally, we don't talk broadly about them in specifics, but I think you can feel confident that we are always reaching out to find other sources of data that will expand our resources just beyond pure lab data.

Alex Nowak (Equity Research Analyst)

Okay. That's helpful. I think my second question is what Amanda was going to ask. We're hearing the Beacon LBS project in Texas is getting some pushback and may actually potentially be on hold. I was just curious, what is the latest there?

Dave King (Chairman and CEO)

Sure. As you probably know, United has delayed the claim denial application part of Beacon LBS and a postcard went out to physicians. I'll just comment briefly on that.

First of all, as you may remember, we had a similar situation in Florida. This is sort of part of the normal course of how you change healthcare and change patient and provider behavior. There is a lot of learning. There is a lot of detail. We are always trying to accommodate the balance between what needs to be done and what the marketplace needs to get what needs to be done, done. The decision support tool is active, and UnitedHealthcare has encouraged physicians to use it, to become accustomed with it, so that at the point where they do implement, the market will be ready. We have 98% of Texas physicians registered, and 89% of the Texas labs within the network are registered. We continue to enhance the platform with things like EMR integration and new tools and capabilities.

I do want to comment editorially that the need for this type of tool is great. As you probably have seen, it was publicly reported that UnitedHealthcare sued a toxicology lab in Texas that was charging 3-10 times the amount of network providers and 2-3 times the amount that out-of-network providers charged, which meant that it was charging the customer between $1,400 and $6,500 for toxicology panels that were available from network providers for vastly lower amounts. This generates unnecessary costs for the systems, and it generates unnecessary out-of-pocket costs for patients who are paying co-payments and deductibles. To the extent that that is addressed by providers by waiving patient co-pays and deductibles, that is a non-compliant practice that just drives additional systemic costs. The Beacon LBS tool is constantly iterating and improving to make it better.

That's part of the reason why the implementation in United, again, of the "hard implementation" has been delayed, although the tool is available and being used. This is absolutely necessary if we want to change the cost of the healthcare curve and eliminate non-compliant practices in the marketplace.

Alex Nowak (Equity Research Analyst)

Great. Thank you.

Operator (participant)

Your next question comes from Ralph Jacob with Citi.

Ralph Jacob (Credit Portfolio Intermediate Analyst)

Thanks. Good morning. There are local press reports of you buying Pamel, which is a fairly sizable regional lab. I guess I'm just wondering, is that a unique opportunity, or are you seeing more larger regional assets coming up? And if you can give us a sense at all of the range of revenue and EBITDA multiples for just deals generally and maybe the margin profile of outreach businesses when you buy them.

Dave King (Chairman and CEO)

I'm not going to comment on anything about any particular transaction.

I think to some extent, we responded to this question earlier, which is the pipeline is robust, and there is a new interest from health systems generally and more broadly in terms of strategic opportunities. That may include sales, or it may include broader partnerships. In terms of multiples, I mean, there is no way to characterize what multiples are going to be of revenue. Every system is different. Even the way that health systems account for their lab revenue is extremely different. Some, for example, charge the lab with IT. Some do not charge the lab with IT. That makes the supposed profitability look very different. Suffice it to say, I go back to what I said before, which is we are disciplined about our financial metrics. We are disciplined about the way we deploy our capital.

We're looking for acquisitions that are strategic, provide growth opportunities, meet our return criteria, and are going to be accretive.

Ralph Jacob (Credit Portfolio Intermediate Analyst)

Okay. Fair enough. And then just follow-up. You talked about the push toward value-based. If payers are focused there, do you think there's an incentive or a continued incentive for exclusive relationships to continue versus payers wanting sort of broader access to lower-cost national labs versus narrowing the network to just one?

Dave King (Chairman and CEO)

I can't really comment on payer philosophy. I would say I think we have a terrific managed care book and highly valued managed care partnerships. And we're going to continue to pursue solutions that not only meet their needs but meet the needs of the healthcare system and of patients and providers.

Ralph Jacob (Credit Portfolio Intermediate Analyst)

Okay. Thank you.

Operator (participant)

Your next question comes from Steven Valiquette with Bank of America, Merrill Lynch.

Steven Valiquette (Managing Director and Healthcare Technology and Distribution Analyst)

Thanks. Good morning, Dave and Glenn.

I guess without discussing any specific M&A opportunities, just at a high level, some investors have asked us, in general, whether short-term stock reactions to things that you may or may not acquire, whether that reaction is positive or negative, is this something that you pay attention to when pondering M&A, or is this maybe just, let's say, less critical in your thinking, and instead, you and everyone at Labcorp just stays focused on what they think is right for the business? Thanks.

Dave King (Chairman and CEO)

I have emphasized over the years and continue to emphasize that we always look at long-term value creation. We always look at what is right for Labcorp as a business. We believe that in the long term, that will serve the best interests of our shareholders. That said, our shareholders also have some input into what they think is going to create long-term value.

We've listened to them very carefully on things like return of capital, and you can see that we respond to that. Again, even though our leverage was not at target in the fourth quarter because this was highlighted as something that was very important. We spent a lot of time with shareholders. We listened closely to their input. We value their views highly, and we take that into consideration. Stock price reaction, that's less of a factor because there are so many moving pieces in how the stock reacts. Long-term interests of the business, long-term value creation, views of investors, those are things that are very important to us as we think about the strategy for the business ahead.

Steven Valiquette (Managing Director and Healthcare Technology and Distribution Analyst)

Okay. That's helpful. One other real quick one.

This seems pretty straightforward, but just any additional color on the thought pattern on changing the book-to-bill methodology or just the timing of doing it now? Thanks.

Glenn Eisenberg (EVP and CFO)

Yeah. Steve, this is Glenn. As we reflected on it, we saw, obviously, another CRO that's changed their methodology as well. It is interesting that the backlog has been built up, if you will, based upon just it could be an email just stating that there's future business that we'd like you to work on. I think from our perspective, being more conservative, just to know that we have kind of an executed contract that we would now be working on and calling that the backlog, we felt was a better representation of the backlog. Again, better visibility of saying of that backlog now that we have, how much will that translate into our revenues over the next year?

Obviously, getting guidance for revenue, it also gives you a good sense of what business do we need to bring into the company during the year and still transact during that year. We think it is just overall more conservative, better color on the business. Again, saw someone else do it, and we agree with that methodology.

Steven Valiquette (Managing Director and Healthcare Technology and Distribution Analyst)

Okay. That's great.

Dave King (Chairman and CEO)

Thanks. We're past 10:00 now, and we still have a number of people in the queue. We'd like to finish up no later than 10:15. I'd encourage people to be concise. Unless you really need a follow-up, let's try to limit it to one question, please.

Operator (participant)

Your next question comes from Dan Keightley with Deutsche Bank.

Dan Keightley (Analytics Developer and Reporting Analyst)

Just a quick follow-up on that last question.

Does the change in order and backlog reporting, does that impact the business operationally in any way when it comes to sales compensation or any other metrics, or is it purely optics?

Dave King (Chairman and CEO)

It does put a renewed focus on the time between the award and the contract and what efficiencies you can drive for that. As to the overall operational approach, no, it does not change. I'd also say if you're coming from outside the industry to inside the industry and now being an old-time vet, if you ask coming in, "What do you generate backlog on?" and it's not a contractual obligation, it just hits you that it might be a more conservative approach to go to the contract. It's just a more rational approach to go to the contract side and eliminate some level of volatility at the same time between that award and contract.

But bottom line is it doesn't change the operations.

Dan Keightley (Analytics Developer and Reporting Analyst)

Okay. Thank you.

Operator (participant)

Your next question comes from A.J. Rice with UBS.

A.J. Rice (Managing Director)

Hello, everybody. Just wanted to ask, I think in Glenn's prepared remarks, he talks about the Phoenix initiative and also the discussion about co-location of sites with retail pharmacies. First, on the Phoenix one, when you think about what you're doing with revenue cycle management upfront, being able to tell patients, I guess, what their co-pays and so forth might be, can you give us any sense of what you think that might mean for you over the next year or two in terms of potential savings relative to bad debts or bills that you can't submit because they're not properly filled out? And then on the co-location on the pharmacies, what does that opportunity look like long-term?

Is that just broadening your reach, or is there some actual cost savings from potentially rationalizing phlebotomists and things like that? Give us some flavor on those two a little more.

Dave King (Chairman and CEO)

AJ, Dave, and since those weren't my remarks, I feel obligated to respond to.

A.J. Rice (Managing Director)

Okay. Sorry about that.

Dave King (Chairman and CEO)

On Phoenix, I mean, there's two or three benefits from Phoenix. The first one is the patient knows at the time of service what their actual responsibility is going to be. That's helpful because if it's more than they want to pay, they have the option to say, "I don't want to pay," or, "I don't want the test," or, "I don't want a particular test." Those are things that are going to be incorporated into the patient service center experience. Ultimately, we want to push that out to physician offices as well through our LabConnect tool.

The benefit for us is we collect credit cards from patients at the patient service center. We do not know how much the patient is going to owe, or we have not historically. Often, we collect a credit card where the patient does not owe anything, and we do not collect a credit card where the patient does owe. We ask the patient for more money authorized to the credit card than they are going to owe us. We get some resistance. This way, there is going to be an exact estimate. This is based on your deductible, your plan, where you are in your cycle. This is what you are going to owe. Now, it is not perfect because there can be an add-on test. There can be something else ordered by a pathologist. It is going to be an accurate representation of the patient of what they are going to owe.

I think that's really going to be helpful. I'm not going to try to make an estimate of what it's going to save or reduce in bad debt. It's part of an ongoing initiative to keep our bad debt flat in percentage and reduce it over time. On retail, we find that about 65% of our patients are coming from home. If you make it convenient for them to be drawn in a setting closer to home, that makes it easier for them to get their service. When you combine it with something that's healthcare-related, it provides, I think, broad opportunities on a lot of fronts, including as we think about direct patient engagement, consenting to trials with Covance, broadening capabilities that can be delivered in a pharmacy. This is a growth initiative.

It's not focused on cost savings, and that's how we think about it.

A.J. Rice (Managing Director)

Okay. Thanks a lot.

Operator (participant)

Your next question comes from Gary Liberman with Wells Fargo.

Gary Liberman (Private Wealth Advisor)

Good morning. Thanks for taking my question. Under this administration, some fairly substantial changes at the FDA. I'd be interested in your thoughts on how that might impact the CRO business.

Dave King (Chairman and CEO)

Oh, I think if you believe what you read in the papers, it could be everything from complete revamp to nothing. I think it's just way too early to even think about that until we have some guidance from HHS and some idea about who the commissioner would be.

Gary Liberman (Private Wealth Advisor)

Okay. Maybe to follow up on your comments earlier about discussions with shareholders, the stock continues to trade at a fairly wide multiple to your nearest competitor. I guess I'd just be interested in your thoughts on that.

Is that something you pay attention to, and why do you think that might be the case?

Dave King (Chairman and CEO)

I mean, we're doing what we think is best for the long-term interests of the business. I think we have demonstrated that the combination of the businesses works. We've demonstrated that we're growing the business on both sides of the equation. From my perspective, we've demonstrated that the opportunity ahead is great for us. I don't think short-term multiples are—I'm not a short-termer. I've been around a long time now. I don't think short-term multiples or short-term multiple dislocations are anything that is beneficial for us to focus on and try to run this business in the best interest of our shareholders.

Gary Liberman (Private Wealth Advisor)

Okay. Great. Thanks a lot.

Operator (participant)

Next question comes from Ricky Goldwasser with Morgan Stanley.

Ashley Parmenter (Analyst)

Hi. Good morning. This is Ashley Palmeer on for Ricky.

I just had a quick question about the Covance changing in the methodology. If I look at the $2 billion that you plan to convert from the backlog over the next 12 months and compare it to your guidance, it looks like we're seeing a roughly 70% kind of guaranteed contracts for the next year. Is that about average to what you've seen before? Is this something that tends to fluctuate throughout the year, or is that an average number? Also, as a quick follow-up, how long does it generally take from announced awards to convert into signed contracts? Thank you.

Dave King (Chairman and CEO)

Yes. It is about the same as in past historical. In terms of award to contract, vary by the individual businesses. You should have in the neighborhood of that two-quarter kind of conversion.

In some cases, certain customers will go to contract on award time, and then others will have a lengthy dialogue between the award and then the contractual. It does vary by customer. As we said before, the early development has a faster conversion rate than the clinical and the lab space.

Ashley Parmenter (Analyst)

Great. Thank you.

Operator (participant)

Your next question comes from Isaac Ro with Goldman Sachs.

Isaac Ro (Analyst)

Thank you. Question on NIPT. Just looking for an update on how Sequenom's doing and how you're currently thinking about the opportunity in average risk NIPT testing.

Dave King (Chairman and CEO)

Isaac, it's Dave. Good morning. We're very pleased with Sequenom, with the growth and with how well it's integrated into our women's health portfolio and what we perceive to be market share gains in NIPT. As you know, average risk coverage from payers is expanding.

We think that's a promising trend as well as the opportunity to add capabilities to the Sequenom platform.

Isaac Ro (Analyst)

Got it. And just as you think about the size of the average risk, I mean, what's it going to take for it to really materialize? Can you maybe map out a couple of key initiatives that you're working on to make that a reality?

Dave King (Chairman and CEO)

I think, I mean, obviously, it's been supported now by professional societies. I think patient advocacy groups are picking up on the value. It's really a question of payer acceptance. We continue to speak with medical leadership and all of our key payers in terms of broadening the NIPT capabilities to average risk because of, obviously, the opportunity to avoid long-term systemic costs down the road.

Isaac Ro (Analyst)

Got it. Thank you.

Operator (participant)

Your next question comes from Brian Tanquilut with Jefferies.

Brian Tanquilut (Senior Analyst of Healthcare Services and HCIT or Digital Healthy Equity Research)

Hey, good morning, guys.

Dave, just a quick question on PAMA from what you guys are seeing at either Labcorp or the ACLA. Any updates or color you can share on hospital participation and any change in views on where you think PAMA would shake out rate-wise? Thanks.

Dave King (Chairman and CEO)

I don't have a lot to add here. We don't know specifically, nor does ACLA, how many more labs are captured or how many hospitals are captured under the expanded definition of applicable labs. We are submitting data. There have been a number of ACLA engagements with CMS about the data that's to be submitted and the interpretation of the rule. As soon as we have more clarity and an update, we'll provide it to you.

Brian Tanquilut (Senior Analyst of Healthcare Services and HCIT or Digital Healthy Equity Research)

All right. Got it. Thanks, Dave.

Operator (participant)

Our next question comes from Mark Massaro with Canaccord Genuity.

Mark Massaro (Analyst)

Hey, guys. Thanks for the question.

I wanted to ask about your interest level in liquid biopsy. Can you just characterize the degree to which you are pursuing partnerships or exploring potential acquisitions in that space? Related to that, I know you acquired Sequenom, and Sequenom, I believe, had some capabilities there. Can you comment on whether or not you think Sequenom can provide a valid liquid biopsy strategy?

Dave King (Chairman and CEO)

We are quite interested in liquid biopsy and see it as an attractive opportunity. On the Covance side, we do have a partnership with one of our valued partners around validating and implementing liquid biopsy. You are correct that Sequenom had begun developing liquid biopsy technology, and it was kind of shelved prior to the acquisition. We have reinitiated that to look at whether it provides us with a viable option that we can scale and develop.

There are literally hundreds of liquid biopsy providers and companies of all sizes and shapes, and we continue to look at and evaluate them as to which ones would be the best partner or partners for us. At the same time, pursuing the Sequenom option is an internal opportunity.

Mark Massaro (Analyst)

Thank you.

Operator (participant)

Your next question comes from Hima Inguva with Bank of America.

Hima Inguva (Managing Director of Global Healthcare and US Financials)

Thank you very much. Can you hear me okay? Yes. Great. Thanks. Morning, Dave and Glenn. First of all, thank you for reiterating the commitment to investment-grade credit ratings. That's great. All the color on leverage targets. One question we often get from investors is if there is a business reason why Labcorp has to be rated at investment grade, or is it more about gaining access to capital at attractive levels?

Dave King (Chairman and CEO)

From my perspective, it's been a pretty fundamental principle that we want to maintain investment grade. It is access to capital markets. It's also favorability when we access those markets of what we pay and what it costs us to take on debt. I also think it's just responsible management of the balance sheet. When we stay investment grade, it helps frame for management. We need to manage the balance sheet responsibly and deploy our capital wisely to maintain that rating. That's my perspective. Glenn may have something to add on top of that.

Glenn Eisenberg (EVP and CFO)

No, just other than I agree. We enjoy, obviously, great access to low-cost capital. Given the strength and sustainability of our free cash flow, don't read into being below investment grade as a constraint. I mean, we can obviously lever up the balance sheet as we have for the appropriate strategic investments.

Dave King (Chairman and CEO)

Given the substantial cash flow that we generate, we can obviously continue to make investments in our business, make investments in acquisitions, and return capital to our shareholders.

Hima Inguva (Managing Director of Global Healthcare and US Financials)

Great. Thank you very much.

Operator (participant)

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. King for closing remarks.

Dave King (Chairman and CEO)

Thank you very much. Thanks, everybody, for joining us this morning. I think, as you can see, we have a lot of exciting things going on at Labcorp, and we're very enthusiastic about 2017, about the years ahead, and look forward to updating you on our activities in the quarters to come. Have a great day.

Operator (participant)

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.