Good day and welcome to the Laboratory Corporation of America Holdings Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] Please be advised, today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Christin O'Donnell, Vice President, Investor Relations, please go ahead.

Thank you, operator. Good morning and welcome to Labcorp’s fourth quarter 2023 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 Adam Schechter, Chairman and Chief Executive Officer and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning in the Investor Relations section of our website at www.labcorp.com we posted both our press release and an investor relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures, both of which are discussed during today's call. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to statements with respect to the estimated 2023 guidance and the related assumptions, the recently completed spinoff of Fortrea Holdings Inc., the impact of various factors on the company's businesses, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and general economic and market conditions, future business strategies expected savings, benefits and synergies, from the launchpad initiative and from other acquisitions and other transactions and partnerships and opportunities for future growth. Each of the forward-looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company’s other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I’ll turn the call over to Adam Schechter.

Thank you, Christin. Good morning, everyone. It's a pleasure to be with you today to discuss our fourth quarter 2023 results and our guidance for 2024. Labcorp delivered a strong finish to what was a transformational year for the company. Looking back, we executed well on our strategic priorities. We successfully integrated the lab operations of Ascension, one of the largest health systems in the United States. We completed the spin of Fortrea, our former clinical development and commercialization services business. We announced six new laboratory partnerships, reinforcing our position as a partner of choice for health systems and regional local laboratories and we launched new innovative tests in our focus specialty areas across the business. As we begin 2024, we have momentum in both diagnostic laboratories and biopharma laboratory services. We expect to drive continued growth by expanding our base business, finalizing and integrating acquisitions and partnerships, by advancing our position in science, technology and innovation. We will continue to focus and lead in oncology, women's health, autoimmune disease, and neurology. Now, let's turn to the fourth quarter results. Labcorp performed well, driven by strong base business revenue growth in both diagnostics and bioparma. In the fourth quarter, revenue totalled $3 billion. Adjusted earnings per share was $3.30 and free cash flow from continuing operations excluding spin-related items was $422 million. Enterprise revenue increased 4% compared to fourth quarter of 2022, with diagnostics growing 3%, led by base business growth of 8% and bioparma growing 7% due to strong performance in central laboratories more than offsetting softness in early development research laboratories. Enterprise-based business margin was flat compared to the prior year despite being constrained by the mixed impact from recently closed hospital partnerships. Looking forward to 2024, we expect strong enterprise revenue growth of 4.7% to 6.5%. We…

Thank you, Adam. Going to start my comments with a review of our fourth quarter results, followed by a discussion of our performance in each segment and conclude with our 2024 full-year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3 billion, an increase of 3.5% compared to last year, primarily due to organic-based business growth and the impact from acquisitions; partially offset by lower COVID testing. The base business grew 7.4% compared to the base business last year, while COVID testing revenue was down 73%. Organically in constant currency, the base business grew 5.2%. Operating loss for the quarter was $123 million due to an impairment charge of $334 million related to our early development research laboratory's business, as we've experienced soft biotech markets. In addition, we had $125 million of special charges related to acquisitions, COVID and the spin of Fortrea. Excluding these items in amortization, adjusted operating income in the quarter was $395 million or 13% of revenue, compared to $413 million or 14.1% last year. The decrease in adjusted operating income and margin was due to lower COVID testing. Base business margins were in line with last year, as the benefit of demand and launch pad savings were offset by higher personnel and stranded costs and the mixed impact of recently completed hospital partnerships. Our launch pad and stranded cost reduction initiatives delivered around $125 million of savings this year, consistent with our long-term target of $100 million to $125 million per year. The adjusted tax rate for the quarter was 19.5% compared to 25.4% last year. The lower adjusted tax rate was primarily due to the geographic mix of earnings, and the benefit from increased R&D…

[Operator instructions] Our first question comes from Jack Meehan with Nephron Research. Your line is open.

I wanted to start with a question on capital allocation. So last year was obviously pretty active year for you guys, integrating Ascension, doing the spin. It feels like you have a little bit more bandwidth and the cash flow has been strong. I was wondering if you thought there could be any larger deals available either in the independent lab or health system space. Like I know it's tough to come up with something that's Ascension size, but what does the funnel look like?

Yeah, hi, Jack. So, if you look at the pipeline for M&A that we have, it remains very strong. As you say, there's not deals the size of Ascension necessarily in health systems, but there's quite a few health systems that when you add them up, obviously become meaningful. In fact, if you look at our longer term guidance, historically we've said that we'd have 1% to 2% growth from inorganic means. We have now said we believe it's going to be 1.5% to 2.5%, reflecting that we believe that there is significant opportunity before us. We also mentioned partnerships with regional and local laboratories, and I think that there could be some additional partnerships in that areas, but as I think about capital allocation in general, I first thought that we're committed to our dividend. We then look to do as many of these hospital, local, regional laboratory deals as we can do because they're so sensible to do. They return across the capital very quickly. They're accretive in the first year, and we know how to do them really well. And then if there's something that is strategic to us, and one of our strategic priorities, we would look to do those, albeit we're not looking at anything of massive size, but after that, we then look at our share buybacks, which we continue to believe is a good way to use our funds as well.

Yeah, Jack, the only thing I'd also add to your comment earlier is that our guidance assumes that, again, we're going to generate between $1 billion to $1.15 billion of new free cash flow this coming year, and that we'll redeploy that for capital allocation of M&A buybacks and dividends, but the balance sheet is also strong. We ended the year at 2.5 times gross debt to trailing 12 months adjusted EBITDA, and we have a targeted range of 2.5 times to three times. So to your point, if there were attractive opportunities out there on the M&A front, obviously share repurchases as well in addition to the free cash flow, we also have additional financial flexibility to pursue those opportunities.

Great. And can you talk about what, on the diagnostic side, what realized unit price was in the quarter, what your expectation is for next year and the reason I ask is, I get a lot of questions on the margins in the business, and it feels like we're in this elevated inflationary environment. Just like, what do you think, do you see opportunities to kind of use price more as a lever to offset that?

Yeah, so, Jack, let me first talk about margins just in general. So if you look at 2023, the margins were basically flat versus prior year. If you look at some of the things that we had to overcome, they were pretty significant, like COVID work that was significantly less this year than the prior year, but in addition to that, the hospital deals that we've done, in particular in the fourth quarter, had an impact on our margins, because although there are freedom in the first year, they're dilutive in the first couple of months as we do the integration until we have the ability to reduce costs to a level that makes sense over time. So we saw some impact from that in the fourth quarter as well. I feel really good about our margin accretion as we go into 2024 and we've said that we expect the margins to increase, but we also expect them to increase in each of the businesses, not just diagnostics, but also biopharma. Within biopharma, we expect them to be increased not just in Central Laboratories, but also in early development. So we continue to look for ways to reduce costs through a launchpad initiative. We're committed to reducing costs by $100 million to $125 million this year and each year for the next several years. In addition to that, our volume growth is helping us significantly. In particular, as we see growth in biopharma, that's going to help us with our margins. Despite the fact that we still have COVID overhang in 2024 versus '23, that we're continuing to improve the margins in our hospital deals, we're expecting to see the margins being accretive and growing this year, which to me is just a good sense of the underlying growth. With, particular focus on price, I would say price is net neutral when you look at overall price. There is some benefit to mix, and we continue to see mix helping us there.

Yeah, Jack, the thing too, as Adam said, when you think about the Diagnostics business and the benefit, frankly, of seeing PAMA at least deferred out one year, that we expect the margins within diagnostics to be up in '24 all in, and that's even with the expectation that COVID testing is going to be down. Obviously, the underlying base business margin improvement would even be greater than that and as Adam said, the nice thing is with the growth that we expect, it's demand driven. A lot of it is the volume side. Price mix is still going to be favourable at a lesser extent than obviously the volume, but with unit prices being relatively flat, we have the opportunity, again to still see favourable mix to help, drive that improvement.

Our next question comes from Kevin Caliendo with UBS. Your line is open.

On biopharma, I just want to understand the expectations for margin there and how much of that is improvement in early development. I know you have sort of an easy comp in 1Q versus sort of actual improvement in margin and mix. Can you just talk about the dynamics of that and sort of the cadence of that as we think about the course of the year?

Yeah, I'll talk a little bit, and I'll ask Glenn to provide some additional context. Our Biopharma laboratory service business, remains a leader in both segments. We're a leader in Central Laboratory. We're also a leader in early development. Central Laboratory performed very well in the fourth quarter, and we expect is going to continue to perform well as we look at 5.5% to 7.5% growth in 2024 across the segment. But early development, we expect to continue to improve as we go through the year and we also expect early development to grow about the same amount as the overall guidance that we're giving for biopharma. A lot of the early development growth we expect will be in the second half of the year as we continue to see improvement and ramp up. Our RFPs look good in both segments. The largest segment, obviously, by far, is the Central Laboratories. The RFPs look good. Our win rate looks good. Big Pharma is continuing to send us a lot of RFPs that feel great. If you look at early development, the RFPs look good. The win rate looks good. What we've faced are some cancellations that are well above normal levels and we expect as we go through 2024 that, that will normalize and get us back to the RFPs and the win rate being positive for us, and therefore providing us with growth.

Yeah, Kevin, just would add to that, when you look at the cadence, to your point, one, we expect Biopharma margins to be up year-over-year. Given the softness that we experienced, especially in the first half of 2023 with the supply constraints that we experienced in the early development in particular, you would expect to see the stronger part of the margin improvement in the first half of the year versus the second, but margins that would still be up year-over-year, even as we go through each quarter of the year and as Adam commented, that we expect margin improvement driven across both of our businesses. So we have early development and Central Lab both looking at revenue growth within that guidance range of 5.5% five and 7.5%. So on good top line growth, launch pad savings, we expect to see good margin improvement and to leverage that top line well.

Great. If I can ask a quick follow-up to that; just the outlook for NHP pricing and sort of your reliability of supply, how does the -- what's happening in the marketplace there? We've heard, pricing is coming under pressure a little bit. How does that -- how do you anticipate that helps or hurts on the margin front? Like how should we think about that impact?

Yeah. So Kevin, right now, the supply is not an issue. We have as much supply as we need. I feel very good about, as we go through this year and into the future, we have multiple suppliers now. We've certainly seen some of the pricing come down in the market, which is a good thing for us because NHP cost is largely a pass-through for us. We pass the benefit on to our clients. So you might see the revenue come down for us because the cost is coming down, but it shouldn't have any significant impact. In fact, it can help us a little bit when it comes to our margins.

Our next question comes from Erin Wright with Morgan Stanley. Your line is open.

So how would you characterize this general volume trends and utilization trends, relative to pre-COVID and just excluding COVID I knew, and if you also mentioned some of the weather impact in the first quarter, how big of an impact is that and how should we think about just volume dynamics as we head throughout the year in 2024? Thanks.

Sure Erin. So first of all, I would say, we came into 2024 with significant momentum. The diagnostics-based business grew 8% in the fourth quarter. Biopharma grew 7.1% in the fourth quarter. So I feel good about the guidance that we're providing for each of those businesses. So for diagnostics, it's 3.2% to 4.8%, midpoint of 4% growth. Biopharma, it's 5.5% to 7.5%, and midpoint of 6.5% growth. So very strong revenue growth. We are comfortable also saying that there'll be margin improvement in each of those businesses. That's despite the fact that there is going to be an impact in Diagnostics from weather and we expect it to be $0.10 to $0.15 in the first quarter and, therefore, the first quarter will be the hardest quarter for us of 2024, but the numbers I just gave you and the ranges that I gave you, midpoints, already, we already know what the weather was in January. So it already contemplates what happened in January.

Yeah, Erin, a couple of comments too as well that demand utilization is positive and frankly, we're kind of at the higher end right now when you look at it year-over-year. When with the guide of, call it again, midpoint of around 4% for Diagnostics, kind of organically next year, our normal historical call it two-thirds volume, one-third price mix is probably a good indication which still speaks to the fact that volume levels are up nicely. When you compare them to pre-pandemic levels, we're within the normal range where historically we would say kind of 1% to 2% from volume, one on the price side. We're within that 1% to 2% growth rate now, cater organically compared to 2019, kind of on the lower end, but well north of kind of 1% growth. So, we're at kind of a normal level right now, a little bit higher expected than historical and the weather impact that we saw in January, to give you kind of the rounded numbers, probably impacted our revenue by around $25 million and we incrementally, the drop down on that would be at around 60% margin. So call it around 15%-ish of operating income or that $0.10 to $0.15 range that we gave in our prepared remarks from an earnings manager standpoint.

Perfect. Thanks and just your quick thoughts on sort of the regulatory environment as it stands now, whether it's LBT, PAMA and SALSA. Do you think PAMA just continues to be pushed out at this point? What are your thoughts there? Thanks.

Yeah. So, Erin, we continue to support SALSA, and we continue to be optimistic that SALSA will get passed. We have support from both sides of the aisle, and ACLA, our trade organization, is working really hard to get that legislation passed. If it doesn't get passed, then we'll try to see if there's a way to get another year's delay. In our guidance, longer term guidance, we assume that there will be an impact from PAMA. So therefore, we continue to say, if it's not this year, it'll be next year. If it's not next year, it'll be the following year. Until the SALSA legislation is passed, then, I'm not going to take a lot of comfort that it could be another year delay or so forth. We're going to really work hard to have that passed. With regard to LBTs, we do not support the FDA's kind of what they're currently thinking about in terms of taking legislation that was created for the device industry and applying it to the diagnostic industry. We were very supportive of that, and that was legislation that would give FDA oversight of laboratory-developed tests. We think that's the right path to go. We'll continue to work with the trade organization to see if we can make progress there, but we think legislation that is fit for purpose for the diagnostic industry is the right path forward.

Our next question comes from Stephanie Davis with Barclays. Your line is open.

Good morning. Congrats on the quarter. Thanks for taking my question. I was hoping you could walk us through what's driving some of your diagnostics market growth being so above market, especially on the EPS side, because I've historically attributed some of your above-market growth to the extension deal, but I also thought about the lower margin profile. So I guess I'm a little surprised at this level of profitability bifurcation versus your largest peer.

Yeah, so what I would say, Stephanie is, number one, we have momentum in the diagnostics business and the momentum is coming from our base core business. We see it in both routine and esoteric testing. We have four therapeutic categories that we focus on that have higher growth in other specialty areas and we're going to continue to focus on those areas, oncology, women's health, autoimmune disease, and neurology and I believe that those are going to help us continue to grow because those parts of the market should grow disproportionately as we continue to go into the future. At the same time, there's no doubt that the acceleration of the hospital and local laboratory partnerships has enabled us to grow faster than what we've grown in the past and the good news is we have a strong pipeline of those as we go into the future. That's why we've raised the longer-term guidance for inorganic growth to 1.5% to 2.5%. Historically, we would have said 1% to 2%. So I think all those things combined give us momentum when it comes to the diagnostic volume.

I understand. Looking forward to it and changing gears a little bit for the follow-up, could you dig a bit more into the Ovia announcement? How much of that was driven by inbounds from your existing employer clients versus the decision to expand into the market? And what does this mean in terms of investment lists in employer-facing sales or platform tech investments and the like?

Yes. So if you look at what we've done with Ovia, we think it's a terrific way for us to have a digital capability in a very important core therapeutic area that we're focused on, women's health. And it really is what they've offered a first of its kind fertility family building benefit that we will be bringing to customers. The service offers care navigation and concierge services that helps individuals throughout their family building journey. And, we can offer it directly to patients if they like. We can offer it to employers. We have a very strong employer group, Laboratory Employer Services and this is just one of many offerings that we're going to be bringing to the marketplace, but because women's health is so important and because we are so focused on it, this is just another avenue for us to help in the women's health arena.

Our next question comes from Patrick Donnelly with Citi. Your line is open.

Thanks for taking the question. Maybe on the biopharma booking side, the book-to-bill picked up a little bit from last quarter. I know last quarter you guys were flagging, maybe some elevated cancellations and on the emerging biotech side. Can you just kind of let us know what the environment looks like now? How you're feeling about that backdrop? Again, just given a little bit of volatility there and we've seen some biotech IPOs trickle out. How are you feeling about the backdrop and how should we think about bookings this year?

Yeah, absolutely and I'll start broadly about our biopharma business and then I'll talk about the individual segments as well. So broadly, we had a good quarter of $1.26 billion, which we said in third quarter we expected the fourth quarter to be improved and obviously it was improved. If you look at our trailing 12 months, it's about $1.04 billion and we believe that that's -- you want to be around $1.05 billion to $1.1 billion and $1.1 billion is typically what we're targeting. I feel confident we'll be able to get there as we go through this year. We dropped off a really strong quarter in the fourth quarter of 2022. If I break apart the businesses and we start with a much larger business, which is the Central Laboratory business. Our RFPs are very strong. Our book-to-bill is very strong. Our win rate is very strong. We're not seeing as many cancellations as we're seeing in the other part of business because it's focused more on larger pharma. Although there are some cancellations there, there always are, it's not nearly as large as what we're seeing in early development. In early development, I feel comfortable as we go through 2024 because our RFPs coming into us are still very strong. Our win rate remains good. I feel good about where our win rate is. What's happened there is, there's been a lot of cancellations. I think there's two reasons for that. One is I think with NHP pricing the way it was, some very small biotech companies that got in line just decided to say we're just not going to do it now and then I also think that there are other pressures with smaller biotech companies that they're going through financially. As I look at this year, I feel good about both businesses and in early development, we're actually even seeing a larger amount of our business come from large and middle-sized pharma versus early pharma or early biotech and I think as we kind of make that transition to get more and more larger pharma in early development, we'll be able to even have a stronger book-to-bill moving forward, but net-net, I feel confident in both of the businesses, the ranges that we've provided and where we are today with the book-to-bills.

Yeah, Patrick, just one other thing to think through as well. Again, we had a strong fourth quarter, which obviously is very encouraging, but it was still driven more on the Central Lab side. So while the orders and the RFPs and our win rates for even early development are doing well, it's those cancellations that have impacted it. So as you think about the cadence too for next year, when you look at the biopharma, you expect to be kind of a second half-weighted year on the revenue growth. So both businesses, again, within that 5.5% to 7.5% growth, but because of those cancellations, we do expect to see early development growth rate be much stronger in the second half than the first. We're on the Central Lab. Given the continued strength of its backlog, we expect that normal cadence of improvement each quarter as we go.

Okay. That's helpful. And then just a couple quick ones on the P&L for '24, Glenn, you talked a little bit about the diagnostics margins. Can you talk about what the COVID headwind is? I'm just trying to figure out maybe the core expansion versus the COVID headwind, if you have that and then just quickly, the interest expense expectations for the year and how you think about the debt load, addressing that at all during '24. Thank you.

Sure. Again, expect to see margins in both businesses that are up, but specifically in diagnostics. We do expect margins to be up in total diagnostics, albeit slightly up because of the impact, to your point, of COVID still being a headwind and the underlying base business margins doing well, but overall, we would say that we're going to be down around $130 million due to COVID. From a margin standpoint, call it 20 basis points to 30 basis points of kind of headwind that we're going to get. That, again, will be more than offset by the growth of the business and our Launchpad initiative. When you look at the interest expense, you can effectively take the run rate or where we ended the fourth quarter and kind of annualize that and then we do have around $1 billion of debt that's due late in 2024. So we're on $600 million in September, another $400 million in December. So we'll look to refinance it. The absolute debt levels that we have at that $5 billion, $5.1 billion, we expect to maintain. So we'll just refinance it, obviously, slightly higher rates than what will be maturing. So if you wanted to add 10% to the annualized number on top of that to reflect the refinancings at the end of the year, that would be a decent ballpark to be in. And again, the debt load from where we stand, we'll look for refinancing. We commented a little bit earlier that the leverage that we have as a company is still within our targeted range of kind of the 2.5 times to three times, but we're at the lower end. So obviously, we could potentially use additional leverage, additional debt, as we see potential other opportunities to deploy capital above the billion plus free cash flow that we'll generate this year, plus, we're sitting on a little bit of excess cash.

Our next question comes from Brian Tanquilut with Jefferies. Your line is open.

So I guess my question, Glenn, as I think about the P&L lines, the cost of sales and G&A and factory and labor and obviously Launchpad, seeing that both of those lines outpace revenue growth in Q4, how are we thinking about the -- I hear you about margin improvement this year. So just curious, how you think about the labor environment and how that factors into driving margin improvement in terms of like actual dollars and the growth in those P&L lines?

Yeah, so no, Brian, we normally view, well, one obviously continues to be a tight labor market, but a market that's improved. From a nutrition standpoint, we continue to see improvement, but as a company, we're still higher than we were pre-pandemic and that varies across the segments because actually our biopharma is back to where we've been and we still see some additional pressure within the diagnostic side, but again, improving. Our general premise is that the labor market inflation for labor is around 3%, you can say 3% to 4%, but within that range. We've always commented that our Launchpad initiative was really in place to help offset that inflationary pressure. For us, a 3%, give or take, increase in our labor, call it merit in particular, would be a little bit over $100 million and again, we target that $100 million to $125 million a year. So again, we think things are levelling off, if you will, and that part of the margin improvement will be the Launchpad initiative to help offset those inflationary costs.

Understand. And Glenn, maybe just housekeeping, maybe I just missed this, but share buybacks, how much are -- how much share buyback activity is based into the guidance?

So what we do guide to is that the free cash flow generation that we have will be used for share repo, M&A, and dividends. So it'll be across the board would be our expectation. We don't comment about how much is in each of the components, if you will, because it may vary based upon the acquisition opportunities that we see. But it'll be blended across and again, we commented as well that we have some additional balance sheet strength if we wanted to use that for additional M&A or buybacks, but the guidance that we gave and the earnings guidance, if you will, is reflected with all three of those capital allocation opportunities.

Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Back on the '24 guidance to diagnostic business, can you sort of quantify the margin improvements next year and any details on split between SG&A and gross margins and how much is coming from acquisitions and improving versus just pure organic improvements?

I'll give some context on that, and I'll ask Glenn to add on. So if you look at the diagnostic business, I'd say the first thing is if you look at fourth quarter, you saw very strong revenue growth, about 8%. If you look at margin versus prior year, it was down slightly, about 30 basis points. What drove that primarily was that there were some minor things like increased health care costs and so forth, but it was driven primarily by the hospital deals that we did, that although they're accretive in the first year, in the first several months, they're typically diluted and we did several of those deals at the end of last year. As we come into this year, we're confident in the margin accretion for several reasons. One is obviously PAMA's been delayed. So that would have been a real headwind that we're not facing this year. We pushed that off into 2025. If you look at our volume increases, that's going to help us. The volume is going to be strong. If you look at the hospital deals, that we said extension would continue to give us some margin improvement over the next several years. Each of the hospital deals get a bit better as you go year-over-year. So we'll get some improvement from the hospital deals continuing to improve. We're also going to be looking to reduce costs across the enterprise, but a significant amount because of the size is in diagnostics of $100 million to $125 million and when you look at all those things together, we're expecting inflation to be about 3%, which is more than a typical rate than it's been in prior years. So if you put all that in, that's for our inflation of our people costs and so forth, should be around 3%, 3.5%. You put all those together and that's why we're confident that even though we have a headwind from COVID, that's fairly significant, about $130 million, we'll still be able to get some margin improvement in the diagnostic business.

Yeah, no, I kind of think that's right. Pito, that when you look this year as COVID becomes less of an impact, still an impact, it's kind of being offset by the acquisitions that we did late in the year. Really, it's the hospital partnerships and to your point, the margin is constrained a little bit when we do the in-hospital lab management agreements, but a typical M&A for us that would include hospital labs management tend to be more weighted to frankly the acquisition component. Ascension, as we've talked about, we called out one because of its sheer size, but also was disproportionately tied to the in-hospital lab. So less of an impact, a little bit of a headwind, but less of an impact. So it's really top line growth, cost controls, Launchpad business process improvement initiatives is really what's going to help drive the margins across both of our businesses.

Okay, great. And then back on for fourth quarter on the early stage cancellations, is it the color of why you saw that spike? Was that just a single customer or is that sort of a swath of customers? And why do you think that should normalize 2024? Thanks so much.

Sure. And it wasn't specific to fourth quarter, although there was an increase in the fourth quarter. We saw it throughout last year and we think there were several reasons. One, when there was an NHP supply issue, people were getting in line to run their NHP trials well in advance of what they typically would. By the time it was their turn, they would look and say, you know what, we're not going to do that trial. Either they reprioritized the pipeline, they decided the NHP costs were higher than what they had budgeted for, they decided just not to move forward at that time. The second thing is the funding in smaller biotech has been more difficult. So they're choosing their trials very carefully in the compounds that they move forward, but as we go forward, we're seeing, the RFPs look good as well as our win rates look good. So, the cancellations we believe are going to normalize. We're also starting to see a shift in our business a bit more towards mid-size to larger pharma as some of the smaller biotech have had those cancellations. They have less cancellations typically than the smaller ones. So that's why we think, we're going to see improvement as we go through this year.

Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.

Hi, good morning. Thanks for the question. So I just want to follow up on that last question. So the shift towards mid-to-larger pharma in early development, is that really solely a function of this cancellation dynamic that you're seeing over the shorter term, because I thought for maybe one of your prior comments it seems like that was also maybe more of a strategic shift moving up market there. So any additional color there would be helpful. And then secondarily on the cost improvements in BLS, I understand what you're saying about the continued revenue improvement there. Are there any other sort of cost improvements as we move further away from the spin or should we sort of think about those cost opportunities as largely you've already done them and this is really just like an organic opportunity? Thank you.

Yeah, sure. So as I came up with early development business, I've been saying for quite some time that we would like to see a shift towards more mid to larger size and I want to be clear, it's not significant. It's still more in the smaller biotech than it is to the mid to larger size. It's been something that we've been working on for multiple years now and we're seeing some progress, but also a part of it is that cancellations are occurring more often in the smaller biotech companies. So we were purposely moving that direction. There is a reason that we're able to move a little bit faster, but we still have work to do there. But over time, I would like to see that mix move more towards mid-size to larger format.

Yeah, Elizabeth, also on the cost side for BLS, it's not only the growth, but there are cost opportunities kind of in the post spin environment. We still have stranded costs that affect our Biopharma business that we're continuing to take out and obviously that's getting wrapped in our overall launchpad initiative as we talk to the $100 million to $125 million of savings each year. We did take out a meaningful amount of costs that were stranded. We had talked about having a $25 million dollar run rate of cost savings in the fourth quarter, which we achieved. So we'll get the benefit of that going forward, but there's still opportunities to consolidate. We still have a little bit of excess capacity within our early development side of the business. So we're managing that cost and the capacity, leaving ample room, though, because of the expectation that we're going to start to see good growth in that business as well. But it's not only obviously top line growth, but still opportunities to take some costs out.

Got it. And maybe just one quick follow up. Anything that you can comment on the expected 2024 tax rate?

Yes. So we've kind of guided that we think a 23% adjusted tax rate is reasonable for the company and what's interesting, if you think about Labcorp today post spin, we actually have a higher percentage of our earnings now that are generated in lower tax rate jurisdictions than we did when we had the clinical business. In addition, we have a higher percentage of R&D. So a higher percentage of R&D benefit than we did when we had clinical. So overall, while we historically have trended and seen our tax rate decline year-to-year over the last few years, the profile of the company gives us confidence that the 23% rate now is a sustainable rate, plus or minus going forward.

Next question comes from Eric Coldwell with Baird. Your line is open.

Good morning, guys. Of course, all of my self-proclaimed good questions have just been asked in the last couple of minutes here, but I'm going to dive into that last one on R&D tax credit. Can you tell us what specifically might have happened in the fourth quarter to drive what appears to be some additional upside and thoughts on legal or regulatory changes and in addition to Glenn's comments here about the geographic mix and the higher proportion of revenue associated with businesses that now would get an R&D tax credit, I'm just curious on how much of a sustainable impact this might be for favorable long term tax rates.

Yes. So, Eric, when you think about the focus of the company, one of the key areas of target is an oncology. And obviously with PGX, OmniSeq, other areas that we've acquired as well are more R&D driven than historically Labcorp was. So each year we continue to make more investments, more opportunities and with that increased investment come the tax deductibility of that. Obviously, there's still some pending tax laws that are out there right now, where you can advertise that benefit over a number of years. From a cash standpoint, we're kind of pre-funding it. So hopefully we'll get -- that will change and we'll get more. There's obviously the impact of potentially global minimum taxes that really don't affect us that much, given as we look at where, again, geographically we generate our earnings. Really not going to have any meaningful impact. So from a sustainability standpoint, we think that 23% plus or minus rate is a reasonable rate to go forward, but obviously, the more we grow, the more we grow internationally gives us an opportunity to structurally change that maybe a little bit more favorably as well.

And Glenn, maybe education on my behalf, but are you seeing R&D tax credits on the CRO side as well, the BLS segment, or is it mostly or entirely associated with your internal investments in advanced diagnostics and LDTs, things of that sort?

Yeah, it's across the board. We have investments that span the entire company. I think the increase that we've been seeing that has been driving the more favourable amount has been driven more on the diagnostic side, but frankly, our oncology spans the enterprise. So everything that we work on and where we work on it and who's working on it, again, we would say is across the enterprise, but more weighted to diagnostics.

Great. And if I could get one more in here, the stranded cost commentary, could you just remind us what you're sharing in terms of what those total costs were, how they phase out, and what happens at the end of 2024 when Fortrea, thinks they're going to be completing their biggest TSA transitions, particularly on the IT side? I'm just, what is the impact to Labcorp over the next handful of quarters and into 2025 as you face these stranded costs, but they start to come out, and then what happens at the end of the TSAs? Thank you very much.

No, sure, Eric. So from the stranded costs, we commented that we had around $45 million of stranded costs and that our initial target was to take out that $25 million at a run rate this year, which, again, we've achieved. So there's more to come. So in the fourth quarter, call it around a $6 million headwind that we had due to stranded costs that obviously impact margins. As we go forward with the TSA support, so what we're doing to support Fortrea, IT and other areas, that's effectively a pass-through, right? We're providing the service. They're paying us for that service. Once they're fully sustainable on their own and the TSAs would go away, our costs go away because, frankly, most of the costs are contract labor-related on the IT side. So when the job's done, those costs are gone overall, but we continue to tackle the other stranded costs as well. So when you look at it, the goal was, to have all the TSAs completed within two years. I can tell you Fortrea and Labcorp are both very motivated to see and incentivized to see that transition happen as soon as possible. The good news is that both are focused on it. We're making good progress. Fortrea is making very good progress and we would expect to hopefully see those TSAs expire earlier than what we had planned or at least what we had planned for, but again, the costs will go with that.

Our next question comes from Lisa Gill with JPMorgan. Your line is open.

Thanks for taking my question. I first wanted to start with the guidance range. Glenn, can you help us understand, it's a pretty wide range. What's in the low end of the range and what gets you to the upper end of the range would be my first question. And then secondly, I just want to understand managed care contracting and pricing for 2024. You talked about volume and pricing mix, but just curious as to do you have many contracts that are up for renewal? Is there anything that's different when we think about contracting with managed care entities?

Yes. So I'll take the second one first, which is, we feel confident in our contracts that we had put a few in place last year, but this year, there's no major expiration. So we feel good about where we are and there's not much risk in the guidance range as we go through this year and the next. But with regard to the ranges and certain things that go to the upper end of the funnel, obviously, the bottom of the revenue range, obviously, the diagnostic volume looks great and we're expecting that to continue. The weather is a bit of what's taking us a little bit back to the midpoint. So the weather is 10% to 15% impact, but the volume continues to be very, very strong. The rate in which we integrate the hospital deals will help us and we have very good track record of doing that. But the good news is there's not as much volatility this year as there's been in years in the past with COVID. So I feel good about the range. And in fact, the EPS range, we've narrowed it versus what that means would have been last year, the year before that, because there is less volatility and then I'd say in the biopharma services business, I would say that the strength we have and momentum is great. The thing that we're watching carefully are when the cancellations, in particular in early development, start to come back to more normal.

Yeah. And Lisa, I think on Adam's comment that when you look at the profile of Labcorp now that we've spun the clinical development business, it has taken out some of the volatility and variability, if you will. So the guidance ranges really across the businesses and the enterprise are actually a little bit tighter than what we normally do. Obviously, we're just starting out the year. The midpoint, obviously, our guidance is our best expectation that we have, realizing obviously higher demand would promote more on the upper end or softer demand down below, but needless to say as we go through the year, we'll continue to tighten the ranges with less time left in the year.

[Operator instructions] Our next question comes from Derik de Bruin with Bank of America. Your line is open.

Hey, good morning. This is John Kim on for Derek. I think a lot of the key questions I had have been answered, but I wanted to ask about the esoteric versus routine testing you laid out or you reaffirmed your focus on the four therapeutic areas and it seems like the esoteric had a pretty good growth in the fourth quarter. But going forward, can we continue to expect that high single digit, low double digit growth in the esoteric and then the rest of it would be made up in routine?

Yes. So if you look at the esoteric testing volume, we continue to have a significant focus on the four therapeutic areas that we talked about. And we did, in fact, see in the fourth quarter and the full year that esoteric testing volume grew slightly faster than the routine, but it's strong to note that both of them grew strongly and we expect them to continue to both grow strongly, but we would expect esoteric to grow at a slightly higher rate in both volume and the volume obviously is at higher dollars. So maybe a little bit faster in the dollars.

And then in terms of pricing, you mentioned that you're expecting mostly flat pricing in 2024. There are no major contract renewals coming up and PAMA has obviously been pushed out, but if I look at the margins between biopharma and diagnostics, biopharma had a pretty strong margin compared to the diagnostics in the fourth quarter and you mentioned that there's going to be a slight expansion in diagnostics. What's going to be the dynamic between the two for the full year 2024? Can we -- is the fourth quarter a good jumping off point for the biopharma margins?

Yeah, no, I wouldn't use any one quarter for the margins. We expect the margins to actually improve across the business, across both diagnostics and biopharma. Diagnostics in the fourth quarter was impacted to some degree by the hospital integrations that we're doing, that there were several new ones. And although they're accretive in the first year, they were dilutive in the first couple of months. We expect that to improve as we go into next year. As we go to next year, there's still a COVID overhang in the diagnostic business, probably about $130 million or so, but even with that, we expect to get some slight margin improvement in that business and overcome that.

Okay. So in closing, I know we're at the end of the hour. I just want to thank everybody for joining us today. I want to thank our team here at Labcorp for their focus and dedication and everything that they do to serve the patients that we all are trying to do the best we can to improve health and to improve lives. And we look forward to sharing more with you as we go through the year. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.