Q4 2023 Earnings Summary
- LabCorp has strong momentum in its Diagnostics business, focusing on four high-growth therapeutic areas: oncology, women's health, autoimmune disease, and neurology, which are expected to grow disproportionately and drive continued growth in both routine and esoteric testing, with esoteric testing growing slightly faster.
- The acceleration of hospital and local laboratory partnerships is enabling LabCorp to grow faster than in the past, with a strong pipeline of future partnerships. They have increased their longer-term inorganic growth guidance to 1.5% to 2.5%, up from 1% to 2%, and these partnerships are accretive in the first year and expected to improve margins over time.
- LabCorp expects margin improvement across both Diagnostics and Biopharma businesses in 2024, driven by top-line growth, cost-saving initiatives like the LaunchPad program, and normalization of prior headwinds such as early development cancellations and COVID impacts. They are confident in improving margins despite a COVID-related revenue headwind of approximately $130 million, and lower Non-Human Primate (NHP) costs could help margins.
- LabCorp's Diagnostics margins are being constrained by the mix impact from recently closed hospital partnerships, which are initially dilutive and will take time to improve.
- The Early Development Research Laboratories business is experiencing higher-than-normal cancellations due to funding issues in smaller biotech companies and other factors, which could impact revenue growth.
- COVID testing revenue is expected to decline by $130 million in 2024, creating a headwind for the Diagnostics business.
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Margin Outlook
Q: Will margins improve in 2024?
A: Management expects margins to increase across both Diagnostics and Biopharma businesses in 2024, despite a $130 million headwind from decreased COVID-related revenue. Volume growth and cost reductions from the LaunchPad initiative, targeting $100 to $125 million in annual savings, are anticipated to drive margin improvement. -
Biopharma Growth & Bookings
Q: What is the outlook for Biopharma bookings and growth?
A: Biopharma services are expected to grow 5.5% to 7.5% in 2024, with strong RFPs and win rates, particularly in the Central Laboratory segment. Early Development is also projected to improve, especially in the second half of the year, despite prior cancellations from smaller biotech clients. -
Capital Allocation & M&A
Q: Are there plans for larger M&A deals?
A: The M&A pipeline remains strong, with opportunities in multiple health systems that, combined, can be meaningful. Inorganic growth expectations have increased from 1-2% to 1.5-2.5%, reflecting significant opportunities. -
Diagnostics Volume Growth
Q: How are diagnostics volumes trending?
A: Diagnostics Base Business grew 8% in the fourth quarter, with momentum expected to continue into 2024. Growth is driven by both routine and esoteric testing, focusing on core therapeutic areas like oncology and women's health. -
COVID Headwinds & Cost Reduction
Q: How will COVID headwinds impact margins?
A: A $130 million reduction in COVID-related margins is expected in 2024, but this will be offset by business growth and cost savings from the LaunchPad initiative. The company remains confident in achieving margin improvement despite this headwind. -
Regulatory Environment (PAMA & SALSA)
Q: What is the outlook on PAMA and SALSA legislation?
A: Management is optimistic that SALSA will pass, potentially delaying PAMA cuts. If not passed, PAMA impacts could occur in 2025, and they are actively working with trade organizations to find legislative solutions. -
Labor Costs & Inflation
Q: How is labor cost inflation being managed?
A: Labor inflation is expected to be around 3% to 4%, approximately a $100 million increase. The LaunchPad initiative aims to offset these costs with $100 to $125 million in annual savings. -
Share Buybacks & Debt Refinancing
Q: What are the plans for share buybacks and debt?
A: Free cash flow will be allocated to M&A, share repurchases, and dividends. The company plans to refinance $1 billion of debt due in late 2024, maintaining leverage within the targeted 2.5x to 3x range. -
Esoteric Testing Growth
Q: Will esoteric testing continue strong growth?
A: Both routine and esoteric testing volumes grew strongly, with esoteric slightly outpacing routine. Management expects this trend to continue, driven by focus on key therapeutic areas. -
Tax Rate Outlook
Q: What is the expected tax rate for 2024?
A: The adjusted tax rate is expected to be around 23%, reflecting increased R&D investments and a favorable geographic earnings mix. -
NHP Pricing & Supply
Q: How does NHP pricing affect margins?
A: NHP supply is sufficient, and pricing has decreased, which is beneficial as costs are passed through to clients. Lower NHP costs may slightly improve margins, despite potential revenue decline from reduced pass-through costs. -
Ovia Women's Health Offering
Q: What's the significance of the Ovia announcement?
A: The Ovia acquisition expands digital capabilities in women's health, offering fertility and family-building benefits to patients and employers. This aligns with the company's focus on growth in key therapeutic areas.
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