Labcorp Holdings Inc. (LH) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Q1 2015 Laboratory Corporation of America Holdings Earnings Conference Call. My name is Latoya and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. However, to maximize time please limit your questions to one and one follow-up. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host Mr. Paul Surdez, Vice President of Investor Relations. Please proceed, sir.

Good morning, and welcome to LabCorp's first quarter 2015 conference call. With me today are, Dave King, Chairman and Chief Executive Officer; Glenn Eisenberg, Executive Vice President and Chief Financial Officer; Jay Boyle, Chief Executive Officer of LabCorp Diagnostics and Joe Herring, Chief Executive Officer of Covance Drug Development. Before we get started, I would like to point out that there will be a replay of this conference call available via telephone and Internet. Please refer to today's press release for replay information. This morning, in addition to our press release we filed a Form 8-K that included additional information on our business and operations, both of which are available on our Web site at www.labcorp.com. Please refer to today's press release, for a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. These non-GAAP measures include adjusted EPS, free cash flow and adjusted operating income. Finally, we are making forward-looking statements during this conference 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 2014 10-K and in our subsequent 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, Paul. When we announced the acquisition of Covance, we said that the timing was excellent because the lab business was showing strength after a couple of very challenging years from a regulatory and reimbursement perspective. The acquisition would provide us with new opportunities in an industry that is closely adjacent to ours and the combined capabilities of our businesses would provide exciting new opportunities for long-term revenue and profit growth. Our operating performance in the first quarter in my judgment demonstrates the wisdom of our decision to make this transformational move. First, LabCorp Diagnostics delivered an exceptional quarter. Pro forma net revenue increased 4.9% over last year to 1.5 billion, despite 30 million lost due to weather during the quarter. Organic volume was a very strong 5.2%. Pricing was relatively stable with revenue per requisition declining a modest 60 basis points, mostly attributable to mix. LabCorp Diagnostic's s strong revenue growth leveraged its operating income growth. Pro forma adjusted operating income now excluding amortization increased 150 basis points over the first quarter of 2014 to 20.2% of net revenue or 18.9% including amortization. The business benefited from excellent expense control and improvement in productivity driven largely by Project LaunchPad, which includes a number of projects that target procurement, bad debt, service delivery at our patient service centers and revenue cycle management to improve the experience of everyone involved in our clinical diagnostics value chain. LaunchPad is progressing well and we are on-track to deliver 50 million of net savings in 2015. Second, the Covance project development segment reported strong full quarter net orders of $855 million generating a very impressive book-to-bill ratio of 1.37. Revenue growth for the full quarter on a constant currency basis increased 2.2% over last year, with strong performance from the early development business, partially offset by unfavorable mix in central labs. Although our growth rate was more than expected we achieved record orders for the quarter positioning us for improved revenue performance overtime. In addition, Covance drug development is on-track to deliver cost synergies in 2015 of approximately 35 million. Third, we continue to see examples of clients coming to LabCorp for the power of our combined businesses. As a reminder, we expect to drive more than $300 million in incremental annual revenue by 2018 through accelerated clinical trial enrollment, end-to-end capabilities and companion diagnostics and combined infrastructure that will improve real world trials. Client continue to express interest in the utility of our unique patient data to deliver fast and efficient patient enrollment, as well as enhanced study and feasibility plans. We have a specific example of the power of our data to help win a clinical study on our fourth quarter call. Since then we've had several examples of using LabCorp data to assist us in winning business. One example I would like to highlight is a request for proposal from a biotechnology company to conduct a late-stage trial with an experimental antibiotic in patients with serious life threatening staph infections including MRSA. These infections are increasingly resistant to establish treatments. If successful the results would be submitted to the U.S. FDA for accelerated approval of the antibiotic under new guidelines designed to strengthen the countries stockpile of affective antibiotic and anti-microbial agents. Using our combined data set we were able to generate a geographic heat map that visually depicted where we had a match to the trial criteria. The client awarded the project to Covance and the trial would be enrolling for the next 18 months. The data will be used to target known areas with an increased prevalence of the underlying infection which can go a long way in speeding study start-up, one of the most time intensive aspects of running a clinical trial. If the study is successful Covance and LabCorp will have helped a client get a new treatment against deadly infections to doctors and patients sooner meeting an important medical need and vividly demonstrating how only months after the merger we are already capitalizing on the promise of our combined company. Furthermore, several customers of LabCorp’s legacy bio-analytical laboratory Tandem recently awarded multiple components of early R&D projects to us, rather than their past practice of using CROs for bio-analytical toxicology and other chemistry services. The broader more comprehensive platform that we have as a result of the acquisition provides our customers a one-stop-shop in their efforts to improve efficiency and reduce the cost of drug development. These are examples of the opportunities for revenue and profit growth that we are uniquely positioned to deliver as the world's leading healthcare diagnostics company. I would now like to provide an update on recent regulatory and reimbursement developments. First, the passage of the Medicare Access and CHIP Reauthorization Act of 2015 removes the overhang for potential payment reductions that have been implemented in prior years to pay for the legislated decision to suspend the impact of the sustainable growth rate adjustment to the physician fee schedule, also known as the doc fix. This is a positive development for the clinical laboratory industry and we commend congress and the administration for a constructive solution to a problem that has vexed the Medicare system and those of us who provide care for the Nation’s elderly patients for many years. Second, we await CMS’ preliminary rule on its methodology underlying the market-wide survey proposed in the PAMA legislation. The congressional attempt was clear that this analysis should encompass independent and hospital laboratories to appropriately determine market rates. We have met on multiple occasions with CMS to discuss a practical approach to gathering the survey data and we appreciate CMS’ thoughtful consideration of this extremely complex task. Third, we continue to express our disagreement with FDA’s draft guidance on laboratory developed tests. This unnecessary regulatory burden will increase costs and slow innovation in laboratory medicine and will be terribly harmful to patient care. As always, we are engaged in dialogue with CMS, the FDA, members of congress, ACLA and other stakeholders on all of these matters. Our goal is to protect patient interests, secure reimbursement of medically necessary tests and enable innovation in laboratory medicine. Finally, I'm pleased to update you on our progress in expanding our capabilities to change the way care is delivered. We are doing this through the development and commercialization of technology-enabled solutions and we now have two services in play. The BeaconLBS team achieved its goal of full implementation earlier this month. BeaconLBS’ technology-enabled solutions are modernizing healthcare by conveniently incorporating laboratory decision support into provider workflow and we will continue to enhance LBS overtime to provide broader physician decision support, as well as timely feedback to physicians about their test ordering patterns and patient compliance with the tests they have ordered. This innovation promotes the use of the appropriate test for the appropriate patient at the appropriate time to enhance care and improve outcomes. I want to commend the entire BeaconLBS team on their unstinting efforts to introduce this innovation into clinical practice. Enlighten Health is expanding by combining our informatics and analytics capabilities to support our revenue growth opportunities. Enlighten Health is the second cornerstone of our strategy to create technology-enabled solutions for our customers, which will add to our extensive suite of services in both clinical diagnostics and drug development. We are enthusiastic about the opportunities that lie ahead for both of these businesses. This is an exciting time for our company and our 48,000 employees around the world. I deeply appreciate their hard work in growing the business, executing flawlessly through the closing of the Covance acquisition and fulfilling our mission of improving lives and improving health. We remain confident in the long-term opportunities for our company and expect to continue to deliver profitable growth and create value for shareholders for many years to come. Now I'll turn the call over to Glenn.

Thank you, Dave. I'm going to start my comments with the review of our consolidated first quarter results followed by a discussion of our LabCorp Diagnostics and Covance drug development segments and conclude with an update on our 2015 guidance. The following consolidated results include Covance as of February 19, 2015. Revenue for the quarter was $1.8 billion, an increase of 24% over last year. The acquisition of Covance contributed 267 million from the date of closing, driving 19% year-over-year revenue growth with the other 5% primarily due to strong organic volume across both core and esoteric testing. Gross profit for the quarter was $596 million or 33.6% of revenue. This compares to 517 million or 36.1% last year. Excluding $33 million of one-time acquisition-related costs gross profit was $629 million or 35.5% of revenue. The increase in gross profit dollars was due primarily to the acquisition of Covance, as well as organic volume and productivity. Excluding Covance gross margin would have been 36.9%, an increase of 80 basis points over last year. SG&A for the quarter was $415 million or 23.4% of revenue compared to 285 million or 19.9% last year. Excluding special charges of $87 million related to the acquisition of Covance and Project LaunchPad, SG&A in the quarter was $328 million or 18.5% of revenue, 140 basis point reduction versus last year. The increase in SG&A was due primarily to the acquisition of Covance and labor inflation. The reduction in SG&A as a percentage of revenue was due to the impact of the Covance acquisition, as well as tight expense controls and a reduction in our bad debt rate. Excluding Covance SG&A as a percentage of revenue would have been 19.3% an improvement of 60 basis points over last year. During the quarter, we recorded $139 million of restructuring charges and special items, primarily relating to the Covance acquisition. Amortization expense for the quarter was $31 million up from 21 million a year ago due to the acquisition. Operating income for the quarter was $130 million or 7.3% of revenue compared to 203 million or 14.2% last year. Excluding amortization, restructuring and special items of $170 million adjusted operating income was 300 million or 16.9% of revenue compared to 232 million or 16.2% last year. Beginning with this quarter we are excluding amortization from adjusted operating income to be consistent with our calculation of adjusted EPS. The exclusion of amortization benefited operating income margin in the quarter by 1.8% compared to 1.5% last year. Interest expense for the quarter was $104 million compared to 26 million last year. The increase was primarily driven by non-recurring acquisition-related items of $53 million and higher debt balances to fund the acquisition. The tax rate for the quarter was 96.7%, higher than last year's 39.5% rate due to the tax treatment of one-time acquisition-related charges. Excluding these charges the effective tax rate for the quarter was 35.8%. The decline in the tax rate from a year ago was driven by the mix impact of Covance which has a greater percentage of its earnings from lower tax rate foreign jurisdictions than our base business. Net earnings for the quarter were negatively impacted by restructuring and special items of 141 million after tax, as a result net earnings for the quarter were $1 million or $0.01 per diluted share compared to 113 million or $1.31 per diluted share last year. Excluding amortization, restructuring and other special items adjusted EPS were $1.73 in the quarter, up 15% from $1.51 last year. During the quarter operating cash flow was negative $87 million compared to $142 million last year as we incurred approximately $154 million of one-time charges relating to the acquisition of Covance, excluding these items operating cash flow was $67 million. The decline in cash flow was due to Covance's seasonal use of cash, partially offset by improved earnings and working capital in our base business. Capital expenditures totaled $34 million compared to 56 million last year as a result free cash flow was negative $121 million compared to 86 million last year, excluding acquisition-related nonrecurring items, free cash flow for the quarter was $33 million. At quarter-end our cash balance was $446 million during the quarter we raised $3.9 billion in debt to fund the Covance acquisition at a blended interest rate of approximately 3.2% with a weighted average maturity of approximately 12 years. Total debt at quarter-end was approximately $6.9 billion. Our liquidity at the end of the quarter was approximately $1.3 billion consisting of cash in unutilized credit. We now manage and report as two operating segments LabCorp Diagnostics and Covance Drug Development. Segment results are presented on a pro forma basis for all periods, as of the acquisition of Covance closed on January 1, 2014 and exclude amortization, restructuring, special items and unallocated corporate expenses. Segment definitions and reconciliations of segment results to historically reported results are included in today's press release and the current report filed today on Form 8-K. First I'll review the performance of LabCorp Diagnostics. Pro forma revenue for the quarter was $1.5 billion, an increase of 4.9% over last year. The increase in revenue was the result of volume measured by requisitions and tuck-in acquisitions, partially offset by price mix and currency. The increase in net revenue of 4.9% includes unfavorable foreign currency translation of 0.7% and a decrease in revenue per requisition of 0.6%. Total volume measured by requisitions increased by 6% of which organic volume was 5.2% and acquisition volume was 0.8%. LabCorp Diagnostics’ pro forma adjusted operating income for the quarter was $300 million or 20.2% of revenue. Compared to 265 million or 18.7% of revenue last year including amortization, margins would have been 18.9% versus 17.3% last year. The increase was primarily due to strong volume growth and productivity, partially offset by pricing mix. Improvement in productivity was driven by labor efficiency and our project LaunchPad initiative which delivered approximately $10 million in savings in the quarter. These benefits included procurement savings, bad debt rate reduction and headcount. We remain on-track to deliver approximately $50 million of LaunchPad savings in 2015. Now I'll discuss the performance of Covance Drug Development. Pro forma revenue for the quarter was $625 million, a decrease of 1.9% from 637 million last year. The strengthening U.S. dollar negatively impacted revenue growth by approximately 410 basis points. On a constant currency basis revenue increased to 2.2% over last year on increased volume partially offset by business mix. Pro forma adjusted operating income was $72 million or 11.6% of revenue compared to 77 million or 12.1% last year. The decline in operating margin reflects the impact of currency and unfavorable mix, partially offset by increased volume. Changes in mix resulted from stronger growth in the early development business and lower revenue per kit in essential lab business. Operating income benefited from approximately $5 million of cost synergies relating to the integration of Covance. We are on-track to deliver cost synergies in 2015 of approximately $35 million. Net orders during the quarter were 155 million, representing a net book-to-bill of 1.37. Backlog at the end of the quarter was $6.4 billion. This figure reflects the change in methodology from how Covance accounted for its backlogs historically. We have excluded committed minimum volume backlog that is not yet associated with specific project awards. In addition we've adjusted the backlog to reflect the segments current configuration. A reconciliation of beginning to ending backlog is included in our current report filed today on Form 8-K. Now I'll comment on our 2015 guidance. We expect revenue growth of 39% to 42% inclusive of Covance as of February 19th after the impact of approximately 230 basis points of negative currency. We've assumed that the foreign exchange rates stay at March 31, 2015 levels for the remainder of the year, resulting in an additional 70 basis points headwind versus our previous guidance which used rates as of January 31st. We expect LabCorp Diagnostics to grow 3% to 5% in 2015, after the impact of approximately 70 basis points of negative currency. Covance Drug Development is expected to grow 0% to 2% versus full year 2014 after the impact of approximately 440 basis points of negative currency. The lower guidance for Covance reflects an additional 110 basis point headwind from currency versus prior guidance, as well as unfavorable mix in the central lab business and lower than expected revenue conversion in the clinical business. We expect 2015 adjusted EPS of $7.55 to $7.90 compared to $6.80 last year. We estimate approximately 100 million total weighted average diluted shares outstanding for 2015. Operating cash flow in 2015 is expected to be 1.045 billion to 1.07 billion. Capital expenditures of 325 million to 350 million and free cash flow of 695 million to 745 million. Operating and free cash flow estimates are reduced by approximately $120 million of net non-recurring items related to the Covance acquisition. These items include advisory fees, the makewhole payment on Covance’s notes and change in control payments partially offset by paying only one of the semi-annual interest payments on the acquisition debt in 2015. The $30 million reduction in operating and free cash flow from prior guidance is due to a reclassification which increased acquisition-related charges and decreased the acquisition cash purchase price. Excluding the net non-recurring items we expect free cash flow to be 815 million to 855 million unchanged from our prior guidance. This concludes our formal remarks and we’ll now take questions, operator? Operator, we’ll now take some questions.

Your first question comes from Robert Willoughby with Bank of America. Please proceed.

The one-time cash needs for Covance for the year were about 30 million from the initial estimate what drove that?

Yes. Robert this is Glenn it's effectively a reclassification, what we had assumed at the time we announced our deal and provided the guidance as you know was kind of the day after closing was we had to assume how much was going to be the purchase price and cash for the value of the business and then the subsequent events of one-time deal-related advisory CIC and so forth. 30 million that we assumed would be part of the purchase price based upon the accounting would now be treated as cash from operating activities so effectively what we've done is we’ve increased or decreased cash from operating activities by about 30 million, decreased the purchase price cash that we paid for the acquisition so from a cash standpoint there is no change, so when you look at free cash flow though we obviously have to -- and you gave that 30 million but again effectively when you exclude the deal-related our free cash flow excluding one-time deal-related is the same as what we’ve provided as guidance when we established it back in February.

And we have Project LaunchPad cost and what you are going to spend to achieve the Covance deal synergies, do you have any target for the other restructuring expense for the year that was still tracking a higher level?

Yes I’d say for the most part all of the, I’ll call it deal-related charges were done in the first quarter, the only difference will be some additional CIC payments that would be paid out as people would potentially exit the company if they were part of the synergies. The other restructuring if you will, will continue to be as we execute and implement our Project LaunchPad, primarily there is some advisory fees in that but that will start to go away and then it really will be just the cost associated with executing on those programs so whether it would be facility rationalization, headcount reduction and so forth there will be some additional one-time charges as we’ve told you before what we've also done is when we provide savings from effectively whether it's Covance synergies or LaunchPad savings we do it on a net basis relative to ongoing cost that would be needed to support those savings, so for example if we implement a new systems to support a LaunchPad initiative the ongoing depreciation or additional cost would be netted out of those savings.

Your next question comes from Lisa Gill with JPMorgan. Please proceed.

As I look at the guidance for Covance going forward it looks like the expectation is from here that the trend is going to get better so one Glenn am I looking at that correctly and then secondly Dave when you talk the most recent biotech opportunity, last quarter if I remember correctly Joe had quantified the size of it, are you comfortable quantifying the size of what you talked about today?

Lisa, it's Dave. Unfortunately I don't have the size of the opportunity I just got the information shortly before the call this morning, so let us reflect on that and then we can deal with it after the call.

Yes the only thing I’d add Lisa too and ask Joe if he wants to add color to it as that Covance is expected to see continued improvement as it progresses sequentially throughout the year again the only caveat obviously would be the potential impact of currency where we’re assuming that that's flat and not only do we expect to see improved revenue growth sequentially throughout the year in the business, by what the benefit of the synergy capture that we expect we should be able to leverage those incremental sales very well.

The revenue opportunity is in the range of 10 million.

In the range of $10 million, okay. And then just lastly as we look at this and we look at the results incredibly strong Dave as you talked about in LabCorp but can you give us any more color around that 5% organic I know you said both core and esoteric growing but can you talk about may be what some of the key trends for around that growth in the quarter and substantially better than what we're seeing kind of across the industry?

Yes. I'll make a couple of comments and then I'll ask Jay who runs the business if he wants to add anything. First of all, obviously it's a one of the strongest quarters we've had in recent years and so I want to give credit to our senior operating team, our leadership and everyone of the 36,000 up and down from top to bottom who have made it possible, it’s just a tremendous effort in maintaining the quality of service and the quality of our work as the volume increases, so kudos to the entire leadership team. We won some business last year, we won a couple of significant contracts and those absolutely have helped us in terms of volume growth and just to focus expectations for the latter part of the year those will be annualizing by the end of the second quarter so obviously we will see a once those annualize you will see a little bit different volume growth characteristics but 5.2% organic volume is just an outstanding performance and I am very proud of the team for that. Jay?

Thank you, Dave and thank you Lisa for noting that. Dave kind of hit on some of the things that I would have talked about, he talked about our people and I think it really does start there. We have just an outstanding salesforce, we have outstanding senior leadership and the thing that I'm pleased about is as you can imagine there is a lot of excitement around this business right now and the opportunities that we have in front of us with the acquisition of Covance and it was important that our people stayed focused on growing the business which is what they have done. In addition to that we have some outstanding relationships with our managed care partners and we’re seeing growth across the board in both the esoteric and the core business, but particularly in our managed care sector and our hospital reference business because of the contracts and the awards that we won Dave alluded to earlier so we’re really pleased and as Dave mentioned we’re going to continue, we expect to continue to grow our volume we’ll have tougher comps as we head through the back half of this year but we look forward to continued good performances and thank you for noticing.

Your next question comes from Gary Lieberman with Wells Fargo. Please proceed.

Is it possible for you to quantify the impact of the new business as it annualizes in the second quarter and the rest of the year organic volume growth?

Gary. It's Dave. Generally as you know we don't breakout specific contributions to volume and revenue growth other than at a high level as we have with volume growth price impact and currency so I would say the answer to your question is no, it's possible but we’re not going to do it.

The organic volume growth benefit in any way from Covance I thought you might have mentioned that there were some testing that shifted over to LabCorp?

No I’d say by definition organic we've excluded all acquisition-related volume from that we have said and as I guess Dave alluded to earlier that the organic growth was 5.2% in the diagnostic side we did share with you that an acquisitions contributed an additional 0.8 from the volume that we would have done from those acquisitions but organic is excluding it.

And then may be going back to the comments on the biotech win you mentioned that you created a heat map to sort of figure out I guess geographically where the patients were, what's the dynamic in terms of reaching the physician who can then reach out to the patient or was that not appropriate in this case?

No obviously one of the ways that we support trial recruitment is for patients who have a direct relationship with us we can reach out to them and for patients who we don't have a direct relationship with that is they haven’t signed up for the patient portal or given us an email address or other ways in which we can contact them directly then we go to the physician and we highlight to the physician the opportunity that they have patients who are trial-eligible and would they like to recruit the patients in the trial. Obviously given the acuity of these types of infections one would expect the physician response rate and the patient response rate to be fairly high.

Yes. This is Joe. I'd like to just add how unique this asset is in the combined company. Keep in mind that Covance is directly connected to 50% of all clinical trial patients in the world and when you add that to longitudinal database of 75 million of LabCorp when you can query both of those extensive databases and use informatics capabilities and data display to show the sponsors where the patients are and then following the appropriate HIPAA guidelines to be able to either contact them directly or through a physician is really an unmatched asset on this planet. And we have a couple of wins in a very short amount of time and we are highly motivated to automate that capability and use it as a real competitive advantage and ultimately that means sponsors get their drugs to market faster which benefits them and ultimately patients get new life saving medications like the one Dave mentioned that attacks, among other infections most of which is very resistant to current therapy, so it's really a win for everybody.

Your next question comes from Bill Bonello with Craig-Hallum. Please proceed.

It looks like a very strong quarter. I wanted to just focus on CRO revenue piece and just have you may be give us a little bit more color besides currency what changed in your thinking in terms of the CRO revenue guidance or the Covance revenue guidance and kind of how that relates or contrasts with the very strong book-to-bill and sort of which numbers are more important to read into?

Bill, good morning it’s Dave I am going to make a couple of preliminary comments and then let Joe give you more detail, the first thing I want to highlight is, if you adjust for the impact of currency we are still guiding to 4.4% to 6.4% revenue growth, so that in my view is very strong growth guidance on a year-over-year constant currency basis. As we indicated in the prepared comments, the major impacts were strong growth and early development which mixes us down and reimbursement or price per kit in central labs which also mixes us down from a revenue growth perspective. But the orders and the book-to-bill are extremely impressive and so we feel terrific about the long-term revenue growth opportunity and as has been previously mentioned obviously the guidance implies that revenue growth increases later in the year. So with that, my perspective is we had a lot of currency headwind but the base business, the base Covance business is performing very well and with that I'll turn it over to Joe for further comments.

Yes first of all for the second consecutive quarter Covance reported record new orders. If you followed us historically we had 12 consecutive quarters where net orders started with a seven and we’ve pushed through 800 million in the fourth quarter and then 855 million in the first quarter and that is right in the middle of announcing the combination of our companies and trying to keep people on-track and keeping them focused so to have record order quarters is pretty impressive. In fact they were so impressive we did an independent market research project where it was blinded and clients said they were actually more inclined to include Covance in the bid list and to consider Covance as combined with LabCorp than even Covance on its own. When you think about the 855 million in net orders that is overwhelmingly and both central labs and clinical that’s where our orders come and those don’t start producing revenue generally for six to nine, and more like nine to 12 months so there is a little bit of a delayed reaction. In terms of the revenue softness being softer than what we expected, it is overwhelmingly related to central labs and it's personally frustrating for me and the whole Covance team because record orders in the first quarter we had record kits going out the door and so the engine is stoked but for the vagaries of central lab not as many kits have come in so far and the ones that have come in either have revenue per test or geographic or therapeutic mix which is less than what we were expecting. Keep in mind that for the past 10 years whether you look at a three or five or a 10 year CAGR Covance, central lab grows 10% and that’s what we’ve projected for the year and last year it was much higher than that and this year so far it’s much lower but we are projecting much stronger kits in the second half of the year and that’s what you see in our revenue guidance. Secondary to that was slower than expected conversion of clinical studies, and again that happens from time-to-time but clinical also had greater orders and then that marries off against really strong performances in early development, our market access business and early clinical, so that thrown in the blender with the FX headwind and that’s where we are but again we are optimistic looking forward.

That was an awesome explanation and makes us feel much better about the lookout, or the outlook I guess. And just if I can ask one completely unrelated question, Dave, can you give us any thoughts on when BeaconLBS will be expanded to either other payers beyond United or to other markets beyond Florida?

Bill. It's our goal to expand BeaconLBS both to additional markets and to additional payors and that's -- we had a number of discussions with additional payors. Obviously we've been live for a relatively short period of time, we got to get some experience under our belt and we’ll look forward to updating you on progress and when those expansions will occur overtime.

Your next question comes from Michael Cherny with Evercore. Please proceed.

So I just want to dive in a little bit more. Joe, you mentioned some of the book-to-bill numbers. You've seen the really strong trends last couple of quarters. As you think about how you make those discussions with some of these biotechs, using maybe the one as an example in terms of the trial that you were pleased with, how are you going to get the proof points out? Will you be able to provide interim data in terms of the way that some of these enrollment processes are going on these trials where you can go out and further prove just how successful it has been on an early basis? Or I guess given that you won't have the proof points of how successful these trials are early on, is it still just the promise of what you can deliver verses maybe necessarily having actual results for how successful this will be?

Well, first of all, all of our relationships with clients as well as specific study data is contractually confidential and if you look at the history of our company, and frankly our competitors you know we really only make specific comments along those lines when the customer wants to publish the data and it would not surprise me, if these first two studies if they perform as we thought, clients may want to say something about that, they could, I think they're very excited about being able to actually see where the patients are which makes them much more confident that a CRO can enroll the trial on-time or faster. But again it's the clients’ decision on that, not ours.

And then just you talked about central lab, you talked a bit about late stage. Can you just give us a little bit more color, as well on early stage and some of the underlying performance there and what you are seeing from both the strengths and potential challenges perspective?

Well a fundamental sort of canary in the coal mine is biotech funding and you know it's been at a very-very high level and those clients basically help build the capacity for Covance and our major competitors. Secondly, a number of pharma companies are as you well know starting to have better productivity from their pipeline and they're more enthusiastic about investing in R&D and knowing that they're going to get a return on their R&D investments, so some of those are coming back to for. That didn't really happen in the first quarter but the new wins and the forward outlook anticipates pharma at sort of getting back to work I guess I would say. But the strength of the early development business in the industry in total is very encouraging after the last four or five years of less than expected performance.

The next question comes from Glen Santangelo with Credit Suisse. Please proceed.

Just two quick questions, Dave, wanted to follow up on the Covance margins. If I hear what you are saying correctly on the revenue side, it kind of sounds like there was unfavorable mix and the central lab as being one of the big contributors to the lower-than-expected revenues and is that primarily what explains maybe the slightly weaker-than-expected margins? And if we assume that the trend in central labs reverses itself throughout the balance of the year, should we see that positively impact the margin line in the balance of the year as well?

Yes Glen, this Glenn Eisenberg, let me take a first cut and Dave and Joe may want to step in. But to your point during the quarter obviously margins came down but principally due to the impact of currency but also the mix of the business so the benefit was obviously we got some volume benefit as well as the synergy savings. As we project out in the business going forward we do have a more positive outlook, volume is going to continue to improve, hopefully the mix will start to improve and we know we're going to get the synergies to continue to grow so our expectation for the business will be again continued top-line growth as we go throughout the year subject to the currency impact obviously but especially leveraging those sales well.

Maybe if I can just follow-up with one question on the diagnostics side. The pricing, the rev per requisition was down 60 basis points, which seems like another small sequential improvement from where we were trending in fiscal 2014. Dave, maybe could you update us what is going on there and sort of your outlook on lab pricing for the balance of the year?

Yes, sure Glen. Obviously the 60 basis points is both a sequential improvement and a significant year-over-year improvement and basically the big driver of the 60 basis points and reported decline is just payor mix so we continue to see uninsured patients moving to exchange or manages Medicaid products and that has a downward impact on the revenue per requisition and so I think we're actually looping our way through that as I see a enrollment completes and stabilizes but that to me is kind of the primary reason and as I say we feel pretty good about it because unit price is not going down what we're seeing is mix-driven price impact.

Your next question comes from Amanda Murphy with William Blair. Please proceed.

Just had a follow-up on the guidance, I think you said 100 million in share count that you expected -- diluted share count -- for this year and maybe that was a slight reduction in what you had said last quarter. I don't know if I am reading too much into that?

No Amanda that's correct. That on a fully dilutive weighted average shares count we expect to and our guidance is predicated on a assumption of 100 million shares for the full year.

So then the right way to think about that is $0.20 of increase roughly, $0.15 of that is the share count and so then the base business maybe added $0.05 or more given the increased currency effect, is that fair?

That's correct.

And then just another one on the book-to-bill, so I realize it's early and you have made a few comments on this already, and especially some anecdotal evidence of wins, but is there a way to tease out at this point the strong book-to-bill, how much of that is the legacy Covance business and markets doing better vis-à-vis any benefits from having the combined company together at this point?

I’ll say it’s overwhelmingly legacy Covance at this time, but again high client interest in talking with us and exploring the assets of the combined company.

And Amanda, Dave just a quick exclamation point of that I mean I think Joe made a very important point which is you are going through an acquisition and integration of closing and you have another quarter of record orders and very strong book-to-bill, so I think the important thing to think about is yes it is we agree I agree it’s mostly legacy Covance, but we didn't have a distraction factor in either of the businesses and I am very pleased about that.

And did you give a cancellation rate on the backlog?

No we did not.

Okay. All right, thanks very much.

Keep in mind that we report net orders so it’s net of cancellations. We normally don't comment on cancellations that's a not a part but I think I would say that they are the lowering of the historical range.

Your next question comes from Isaac Ro with Goldman Sachs. Please proceed.

Just a follow-up on the early-stage business, hoping that you could maybe put a little more color on the specific constant currency growth rate you saw there and maybe give us and apples-to-apples view on how that trended versus 4Q?

This is Glenn well let me really start and then Joe may want to provide color. As we've now moved to kind of the new segmentation of the company we are really providing the details if you as the segments. We’re glad to provide color as far as the direction that the businesses that comprise those segments, but we are not providing detailed numbers and growth rates and so forth.

Yes I think generally what you say is that early development was higher than that company average of 2.2, clinical Phase 1 to four was sort of in that average and central labs was basically flat, so ballparkish on a constant currency basis.

I appreciate all that incremental, and then just a follow-up on the general environment. I think if we look at the numbers for the biotech industry, first-quarter funding on the equity side was by far a record quarter, a huge amount of money raised. So if we take in context what is going on with the funding side versus what you guys are seeing book-to-bill, maybe help us reconcile the timing around which we might see any of those bolus dollars kind of flowing through to your business. Appreciate it is going to be company-specific and maybe not directly correlated, but I would assume that it's at least a positive correlation between the amount of money being raised and the amount of money being spent on CROs?

Yes there is a positive correlation it’s usually a six to nine month lag between what you see in terms of funding and revenue coming into the CRO industry.

Your next question comes from Jack Meehan with Barclays Capital. Please proceed.

I just wanted to follow up on the PAMA commentary and just see if you had an update in terms of when you -- timing for when you expect we will get a formal update and I know, Dave, you mentioned the complexity of collecting data and just thoughts around the hospital labs submitting the data -- they already submit cost reports, so just what is some of the thinking there?

Yes. Jack it’s Dave good morning. I think this is a it is a quite complex task and I think CMS is making a real good faith effort to listen to the constituencies and try to understand what they should be looking for. It's true that hospital submit cost reports but as you know the hospital, what we're looking at here is not DRG payments, it's not out patient prospective payments, it's just fee-for-service payments and so it's a subset of payments and it's a subset of payors because it’s non-government payors that the government is interested in looking at to determine market, so it's a pretty complicated task, you don't want to overburden either the hospitals or frankly the independent labs, I mean if you think about the number of acquisitions that we have done and the number of tax ID numbers that we have, you don't want an independent lab to have to report their data with 55 different tax IDs, that would be enormously time consuming and complex, so I think CMS is making an effort to listen to the constituencies and deal with the complexity and come out with a rule and we don’t have any update on the timeline but we know they're working hard and we're trying to be constructive and supportive in that effort.

And then just trying to tease out between the routine and the esoteric growth in the quarter, is there any -- was there anything noticeable on the esoteric side in terms of individual products that were driving the growth, or do you think it is just more broad-based -- the market is doing better and the segment is doing better?

I think it's broad-based, market doing better and segment doing better I wouldn't point to or highlight any specific test or group of tests. Obviously we continue to do nicely with women's health, that's been a strong point for us, we continue to do nicely with genetics, those are couple of good areas within esoteric.

Your next question comes from Ricky Goldwasser with Morgan Stanley, please proceed.

Dave, you responded to Glen's question that coverage expansion is impacting the price mix and it sounds like it's coming from Medicaid. So are you seeing any pullthrough volume from coverage expansion, excluding Medicaid, and are you factoring in any benefit from expansion or pick up there in your guidance for the second half?

The challenge in determining what is ACA driven other than managed Medicaid where it's pretty obvious is that when a patient shows up with an insurance card we don't know if it's an exchange patient or if it's a standard commercial patient. We don't have any way of determining that so it's a little hard to say are we seeing pull through business from coverage expansion or are we not. Again I think we saw very strong organic volume growth which suggests to me that we're seeing the benefit of the business that we won last year and there are clearly some pull through coming from that business. In terms of what's factored in for the second half of the year actually the next three quarters of the year, we haven't finished the first half of the year, we're not factoring in any significant increase in enrolment for the balance of the year, we're simply factoring in the diagnostics business continuing to do a very nice job in the market in terms of selling and execution and that's what drives the top-line revenue growth guidance.

And then one follow-up on the Covance business, can you share with us how you think about the Covance portfolio, especially kind of like the early development, but really preclinical within it? Obviously, demand is high and it seems from results that Covance is growing top line, but how does the segment fit with your long-term strategy?

Well, Ricky it's Dave, you know one of the reasons that we liked Covance as an acquisition opportunity is the complete platform and the broad scope of services, so I mentioned in the prepared remarks how the bio-analytical business was cross-selling into toxicology, was cross-selling into chemistry. So right now we like the way all the businesses fit together and we're enthusiastic about the opportunity to grow, early development obviously had as Joe mentioned had some challenges for a couple of years but right now the business is growing strongly, it's an integral part of the complete one stop platform that we built and so we're excited about it.

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

Maybe two quick questions here, first of all, I know one area in the lab testing that you have highlighted the last two years has been the molecular diagnostic area and some of the travails of trying to get approval out of some Medicaid programs as well as TRICARE. Any update on that?

A.J., it's Dave, we continue to work hard at that. I wouldn't expect any significant impact in the run rate either of the -- where MoPath is not being paid for or of collections, we have collected based on appeals and payor policy changes, we have collected some against the outstanding receivables but the run rate's about the same. Obviously we're looking now at accounts and opportunities to where we know that there is an account where there is a large amount of MoPath business that we’re not getting paid for it opportunities to manage better with that and Jay if you have any further comments on that you can.

I think you have covered it.

And then just the other one is you had mentioned in the prepared remarks about the lab-developed tests and the FDA review there and commentary, any sense of how that is going to unfold timing-wise and when we might actually get some resolution on this?

I think the FDA comment period closed I think there were a very large number of comments so it's really going to be determined by the FDA in terms of when they respond to the comments and obviously there is some legislative activity going on as well and we’re doing our best to be engaged in the all of the conversations.

Your next question comes from David Clair with Piper Jaffray. Please proceed.

I had a couple quick questions on the diagnostics side of the business here. So the first one, just on the recently issued next-generation sequencing, CPT codes, just curious if LabCorp is billing under these new codes currently and is this impacting collections at all. And then can you give us an update on BRCA and NIPT testing?

It's Dave I'll start with next-gen and then Jay will talk about the BRCA and NIPT the next-gen sequencing codes I want to be clear that next-gen sequencing is a methodology so it's not like we're doing new testing or different testing it's simply there is a different methodology being used and so at this point the coding has not have an impact first of all it’s not a significant component of the business at this point, although it will grow but the coding has not had an impact on either revenue or collections and I will turn it over to Jay in terms of the BRCA and the NIPT.

Yes on the BRCA David we see it obviously as a growth opportunity however given the size it's not substantial in terms of or it is not material, in terms of our entire book of business and it’s one of the many tests that we go ahead and offer.

And it's Dave on NIPT obviously we are -- we have transitioned to offering our own test in pharmacy and I'm pleased with the volume and revenue there and continue to see it as I mentioned as a growth opportunity around women's health.

Thank you.

So, we're right at the top of the hour we have a couple of more people in the queue I'll ask you to keep the questions short please so we can get everybody in and also not ask questions that have been previously responded to.

Your next question comes from Darren Lehrich with Deutsche Bank. Please proceed.

Just a brief question I had about companion diagnostics and just wondering if you can frame at this point the backlog in terms of how the trials are with companion diagnostics as a component of that and where you think that might be going. I think you've laid that out as a strategy, so that's the question?

Yes. We don't break down the backlog by type of trial companion diagnostics as you know particularly oncology about 40% of the trials involve some kind of an associated biomarker in companion diagnostic and so it's a very nice long-term opportunity for us as I think we mentioned early on there were 16 companion diagnostics 10 years ago and now there is 116 and that number grows every year. We have a work team that is specifically focused on capitalizing other companion diagnostics opportunity and integrating all of our services to be the desired partner in companion diagnostics and we’re very pleased with the progress there.

Your next question comes from Bryan Brokmeier with Maxim Group. Please proceed.

You talked about providing a heat map of where patients are located to the biotech company whose business you won in the quarter. It sounds a bit more detailed of an analysis than you provided to the customer in the prior quarter. Are you still improving your understanding of how to present your offering to customers and while you have won a few contracts already, which is impressive, should we anticipate an inflection point later this year when customers start to award you with many more contracts?

Well. It’s hard to say what is going to happen in the back half of the year all I can say is that we try to target places where this data would make the biggest impact on the client and so far we’re very excited about what's going on. We have a lot of work ahead of us in terms of making the process easier and more efficient and having the right display tools and that type of thing, so I would just say we will continue to talk about this in coming quarters but we’re pleased with the start actually faster than what we would have projected.

Yes. I agree with Joe's comments I think that as he said automating this process and making it simple from our perspective and from the client's perspective will only lead to greater opportunity in the long run but as you mentioned Bryan the idea of being able to provide a heat map with potential patients for a condition as acute as this one, I think is a real competitive differentiator and just shows you what the long-term opportunity is here in terms of our first dated priority which is to improve the speed of trial recruitment and reduce the cost of trials.

I would now turn the call over to Mr. Dave King for closing remarks.

Once again we'd like to thank you all for participating in our first quarter conference call. Very pleased with the quarter and with the performance, both from the Diagnostics and the Drug Development business and we look forward to updating you on our performance in the future. Have a great day.