Scott Frommer - Laboratory Corp. of America Holdings David P. King - Laboratory Corp. of America Holdings Glenn A. Eisenberg - Laboratory Corp. of America Holdings John D. Ratliff - Laboratory Corp. of America Holdings.

Jack Meehan - Barclays Capital, Inc. Robert Willoughby - Credit Suisse Securities (USA) LLC (Broker) William Bishop Bonello - Craig-Hallum Capital Group LLC Nicholas M. Jansen - Raymond James & Associates, Inc. Lisa Christine Gill - J.P. Morgan Securities LLC Elizabeth Anderson - Evercore Group LLC Amanda Louise Murphy - William Blair & Co.

LLC Alexander D. Nowak - Piper Jaffray & Co. Ralph Giacobbe - Citigroup Global Markets, Inc. Steven J. Valiquette - Bank of America Merrill Lynch Dan Leonard - Deutsche Bank Securities, Inc. A.J. Rice - UBS Securities LLC Gary Lieberman - Wells Fargo Securities LLC Ashley Polmateer - Morgan Stanley & Co. LLC Isaac Ro - Goldman Sachs & Co.

Brian Gil Tanquilut - Jefferies LLC Mark Anthony Massaro - Canaccord Genuity, Inc..

Good day, ladies and gentlemen, and welcome to the LabCorp Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Mr. Scott Frommer, Vice President of Investor Relations. Sir, please go ahead..

Dave King, Chairman and Chief Executive Officer; Glenn Eisenberg, Executive Vice President and Chief Finance Officer; and John Ratliff, CEO of Covance Drug Development. In addition to our press release, we also filed a Form 8-K this morning that includes additional financial information.

Both are available in the Investor Relations section of our website at www.labcorp.com, and included a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. Finally, we are making forward-looking statements during today's call.

These forward-looking statements include, among others, statements about our expected financial results, the implementation of our business strategy and the ongoing benefits from acquisitions. These statements are based upon current expectations and are subject to change based upon various factors that could affect our financial results.

Some of these factors are set forth in detail in our 2015 Form 10-K. We have no obligations to provide any updates to these forward-looking statements even if our expectations change. Now, I'll turn the call over to Dave King..

Thank you, Scott, and good morning. LabCorp had a strong finish to an outstanding year. We delivered record revenue of $9.4 billion, record earnings per share of $8.83, and record free cash flow of $900 million, while driving margin improvement in both segments.

We also reinitiated our share repurchase program, buying back $50 million worth of shares in the fourth quarter.

Our 2017 guidance contemplates another year of strong revenue and EPS growth as well as margin expansion, producing record free cash flow which we will continue to deploy toward return of capital to shareholders, strategic acquisitions, and debt reduction.

We continue to drive these strong financial results through a combination of operational improvements and long-term strategic initiatives. I will highlight key activities in these areas in turn.

In 2016, we made significant progress on a number of initiatives designed to enhance quality of care, improve our patient and customer experience, and increase efficiency.

Through process reengineering, the integration of new tools and technology and facility consolidations, our LaunchPad program continues to deliver long-term quality and margin improvement to our Diagnostics segment. The LaunchPad portfolio currently includes over 100 projects at various stages of implementation.

At LaunchPad's inception, we established a goal of sustainably reducing $150 million of expense from the business during the three years ending in 2017. Ending in the year three, we remain on track to achieve this objective, and our LaunchPad initiatives will generate additional savings extending into 2018 and beyond.

Let me review a few of these activities now. Project Phoenix involves deployment of new Revenue Cycle Management technology. Our nationwide insurance eligibility verification tool has improved our ability to capture accurate patient information at the time of service in our patient service centers.

We also recently introduced, in several markets, a patient responsibility estimator which provides patients with an advanced estimate of what they will pay for our services.

We plan to introduce this offering to our entire PSC network throughout 2017, improving pricing transparency and point-of-service collections, and reducing surprises for our patients when they receive their bills. Project Horizon consists of multiple activities to improve the patient service center experience.

As part of this project, we will provide new self-service registration options at select sites later this year, improve the PSC selection and appointment scheduling experience, and incorporate advancements in technology to allow patients to access these tools seamlessly from multiple mobile devices.

We also implemented a workflow and workforce optimization tool as part of Project Liftoff, enabling us to implement scheduled adjustments and process changes on a site-by-site basis for our contact centers and PSCs.

These improvements, along with new employee shift options, will provide greater certainty for our employees about their schedules, and enhance the customer and patient experience by deploying staff based on the real-time needs of our sites. Our initial pilot is underway, and we will deploy this technology in other functional areas in the future.

In addition to LaunchPad, we continue to benefit from the ongoing implementation of lab automation such as our proprietary Propel robot. The Propel robot enhances quality and efficiency, and reduces waste by replacing the manual pre-analytical splitting and sorting processes with automated precision.

At the end of 2016, the Propel robot was operational at five sites including our recent implementation at Birmingham, and we plan to deploy additional systems in our major laboratories during 2017 and 2018.

In our drug development business, we completed the integration of our central lab facilities in Singapore and China, and are on track for mid-2017 site consolidations in the U.S. and Europe.

These consolidations are an integral part of the $100 million of cost synergies in the Covance Drug Development business that we are on track to achieve during the three-year period ending in 2017. Our commitment to continuous operating improvement drives a steady focus on quality, efficiency, and margin improvement.

Concurrently to deliver long-term revenue and profit growth, we are pursuing several major strategic initiatives which I will now discuss. We are focused on the complete organizational integration of Covance and LabCorp to build on our successes in the use of data, companion diagnostics, and specialized disease state expertise.

Through the combination of LabCorp, patient data, and global Covance physician investigator data, we continue to win new orders and increase our win rate across multiple therapeutic categories. In companion diagnostics, we worked on over 60 programs supporting over 145 clinical protocols in 2016, and we grew revenue 35% in this area since 2014.

In the innovative area of immuno-oncology drug development, we doubled the number of study awards from 2015 to 2016, and also performed thousands of PD-L1 tests through our Diagnostic and Drug Development segments. We are the clear industry leader in these areas, and see great opportunity for growth in the years ahead.

As part of our ongoing data integration, we are focused on expanding our capabilities to support innovative applications. For example, we have amassed a growing database of approximately 100,000 patients who have provided consent through our patient portal to be contacted about future clinical trials.

We are also developing a cloud-based application that leverages public and proprietary data sources to help sponsors thoughtfully plan their clinical trial strategy.

In addition, our data assets provide capabilities for conducting real-world evidence studies and providing hospitals, health systems, and large provider groups with greater access to clinical trials, an unmatched value proposition.

Another area of strategic emphasis is the implementation of our health system data and analytics platform in cultivating long-term comprehensive partnerships with anchor health systems. Last month, we entered into a significant transaction with Mount Sinai Health System in New York City.

In addition to providing broad laboratory testing solutions and enhanced data analytics, we are incorporating Covance Drug Development's expertise into these relationships.

Over time, these anchor health systems will also become research hubs, improving their access to trials as well as Covance's site activation and investigator and patient recruitment capabilities. Our pipeline for these deals is stronger than ever, and we expect to continue to add health system partnerships this year and in the years ahead.

We likewise continue to invest in innovative solutions for our industry-leading portfolio of managed care partnerships. We bring several strategic differentiators to these important relationships, providing support for the healthcare systems transition to a value-based payment environment.

BeaconLBS is a front-end platform that improves the quality of patient care, lowers patient and system costs, and provides guidance on lab and test selection.

The Litholink clinical decision support platform uses proprietary algorithms to tailor reports for chronic diseases including kidney stone, chronic kidney disease, osteoporosis, diabetes, and cardiovascular, driving improved adherence to evidence-based guidelines and increased patient and provider engagement.

These capabilities are only available through LabCorp, and we will continue to expand them as well as enhance them via machine learning, as we integrate more deeply into the delivery of care. As these comments demonstrate, we are ramping up innovation in our combined organization, capitalizing on our unique capabilities.

We are also focused on the expansion of our capabilities to alternate sites and methods of service delivery.

In Diagnostics, we continue to introduce and commercialize new tests and technologies, redesign our patient-facing applications, expand our food safety and integrity business, and advance our consumer engagement and price transparency initiatives.

In Drug Development, we continue to build on our accelerated informatics technology enabled platform, and leverage our unique market position as an end-to-end provider of drug development capabilities, from preclinical service all the way through to market access expertise.

We will also extend the availability of our services to new settings, enabling greater patient access and convenience. We continue to explore the opportunity to collocate patient service centers within retail pharmacies, where consumers are accustomed to seeking healthcare.

In addition, we are working to integrate our lab testing solutions into telemedicine partnerships, reaching more patients and making it easier for them to access our services. Both of these markets represent new channels for long-term organic growth.

Finally, we are committed to returning capital to shareholders while making disciplined capital investments in our business and strategic acquisitions. As noted earlier, we resumed share repurchases in the fourth quarter and plan to deploy our capital flexibly to continue to maximize long-term shareholder value.

In closing, we expect 2017 to be another year of significant innovation, as we continue to reposition ourselves to meet the needs of a rapidly changing healthcare system.

We occupy a unique market position as a global life sciences company, presenting us opportunities to play an essential role in delivering high-quality and high-value patient care, unlocking long-term profitable growth, and increasing long-term shareholder value.

Supported and inspired by the shared focus and commitment of more than 50,000 colleagues worldwide to improve health and improve lives, I have great enthusiasm for the years ahead. Now, I'll turn the call over to Glenn..

Thank you, Dave. I'm going to start my comments with a review of our fourth quarter results, followed by a discussion of our LabCorp Diagnostics and Covance Drug Development segments, and close with our 2017 guidance.

Revenue for the quarter was $2.4 billion, an increase of 6.3% over last year, due to the strong organic growth across both segments as well as acquisitions, partially offset by unfavorable currency translation of 60 basis points. Organic revenue growth in the quarter on a constant currency basis was 4.3%.

Gross profit for the quarter was $788 million or 33% of revenue, compared to $741 million or 33% last year. The increase in gross profit was primarily due to the demand, price, mix, acquisition, and our LaunchPad and Covance cost synergy initiatives, partially offset by personnel costs.

SG&A for the quarter was $406 million or 17% of revenue, compared to $406 million or 18.1% last year. Special charges in the quarter were $5 million, primarily related to the integration of acquisitions and executive transition costs, compared to $32 million a year ago.

Excluding special charges, SG&A in the quarter was $401 million or 16.8% of revenue, compared to $374 million or 16.7% a year ago. The increase in SG&A was primarily due to acquisitions.

During the quarter, we reported $10 million of restructuring charges, primarily related to the ongoing consolidation of our drug development operations and associated severance. Operating income for the quarter was $323 million or 13.5% of revenue, compared to $237 million or 10.5% last year.

Excluding amortization, restructuring charges, and special items of $64 million, adjusted operating income was $388 million or 16.2% of revenue, compared to $367 million or 16.4% last year. The increase in adjusted operating income was primarily due to price, mix, acquisitions, and our LaunchPad and cost synergy initiatives.

The decline in adjusted operating margin was due to the mix impact from the acquisition of Sequenom. Excluding Sequenom, margins would have increased 10 basis points over last year. Interest expense for the quarter was $53 million, down from $57 million a year ago, due to lower debt balances.

The tax rate for the quarter was 33.3%, compared to 38.5% last year. Excluding special charges and amortization, the adjusted tax rate was 33%, down from 33.9% last year, primarily due to lower foreign tax rates. For the full year, the adjusted tax rate was approximately 34%, in line with our prior expectations.

We expect the rate in 2017 to also be approximately 34%, which assumes no major regulatory changes to the U.S. corporate tax code. Net earnings for the quarter were $184 million or $1.75 per diluted share. Excluding amortization, restructuring charges, and other special items, adjusted EPS were $2.15 in the quarter, up 9% over last year.

Operating cash flow was $449 million in the quarter, an increase of $64 million over last year, primarily due to higher earnings and improved cash collections. Capital expenditures totaled $74 million or 3.1% of revenue, down from $85 million or 3.8% last year.

As a result, free cash flow was $375 million in the quarter, an improvement from $300 million last year. At quarter-end, our cash balance was $434 million, down from $568 million at the end of the third quarter. Total debt was approximately $5.8 billion.

During the quarter, we invested $152 million in acquisitions, paid down $302 million of debt, and reinitiated our share buyback program repurchasing $50 million of stock. As a result, we have $740 million of authorization remaining under our share repurchase program at year-end.

The company's leverage at year-end was 3.1 times gross debt to last 12 months' EBITDA down from 3.3 times at the end of the third quarter. Now, I'll review our segment performance beginning with LabCorp Diagnostics. Revenue for the quarter was $1.7 billion, an increase of 7.8% over last year.

The increase in revenue was driven by acquisitions, price, mix, and organic volume measured by requisitions. Revenue for requisition increased 5.2%, benefiting from price, mix, and the Sequenom acquisition. In addition, esoteric testing grew at faster rate than core testing.

Total volume increased 2.7%, of which organic volume was 0.6% and acquisition volume was 2.1%. LabCorp Diagnostics' adjusted operating income for the quarter was $318 million or 19% of revenue, compared to $292 million or 18.8% last year. The increase in operating income was primarily due to price, mix, acquisition, and our LaunchPad initiative.

Operating margins were up 20 basis points, despite the negative impact of 50 basis points from the Sequenom acquisition, which we continue to expect to be accretive to earnings during our first year of ownership. Now I'll review the performance of Covance Drug Development. Revenue for the quarter was $716 million, an increase of 3.5% over last year.

Excluding the impact from approximately 160 basis points of negative currency and the expiration of the Sanofi site support agreement which annualized at the end of October, revenue increased 6.1% over last year.

The revenue growth was primarily due to increased demand in our clinical and early development businesses as well as favorable mix in central labs. Adjusted operating income was $106 million, or 14.9% of revenue compared to $110 million or 16% last year.

The decline in operating income and margin from last year's record performance were primarily due to investments in the sales force and CRAs to support ongoing growth, partially offset by favorable demand mix and cost synergies.

On a sequential basis, margins increased 130 basis points over the third quarter, primarily due to improved clinical efficiencies. Beginning this quarter, we are reporting net orders and backlog on a fully executed contract basis as opposed to the industry practice of recognizing orders and backlog based on non-contracted written awards.

We're also providing our expectation of the contracted backlog that will convert into revenue over the next 12 months. Beginning next quarter we will report net orders and book-to-bill on a trailing 12-month basis only.

We adopted this approach as we believe this methodology creates a more conservative threshold for including awards in the backlog and with our new disclosure will provide greater visibility into revenue conversion from the backlog.

Using this methodology, net orders and net book-to-bill during the quarter were $849 million and 1.19 respectively, compared to $887 million and 1.24 under the prior methodology. These strong results were negatively impacted by the cancellation of two large clinical studies late in the year for which we provided central laboratory services.

During the trailing 12 months using this methodology, net orders and net book-to-bill were $3.1 billion and 1.11, respectively, compared to $3.3 billion and 1.16 under the prior methodology. Backlog at the end of the year was $4.9 billion, and we expect approximately $2 billion of this backlog to convert into revenue over the next 12 months.

This change in methodology resulted in the removal of $2.2 billion of non-contracted written awards from the backlog, a substantial portion of which will be contracted and added to the backlog in 2017.

Now, I'll provide our 2017 guidance, which uses foreign exchange rates as of December 31, 2016, and includes the impact of anticipated capital allocation including acquisitions, share repurchases, and debt repayment.

We expect reported revenue growth of 4.5% to 6.5%, after adjusting for the negative impact from approximately 60 basis points of foreign currency translation. We expect LabCorp Diagnostics reported revenue growth of 4.5% to 6.5%, after adjusting for the negative impact from approximately 10 basis points of foreign currency translation.

We expect Covance Drug Development reported revenue growth of 3.5% to 5.5%, after adjusting for the negative impact from approximately 180 basis points of foreign currency translation.

Covance's revenue growth in 2017 is lessened by approximately 100 basis points due to the cancellation of two large clinical studies late in 2016 for which we provided central laboratory services. Our 2017 adjusted EPS guidance is $9.35 to $9.75, an increase of 6% to 10% over 2016 including the negative impact of foreign currency translation.

We expect free cash flow to be between $925 million and $975 million, up from $897 million in 2016 and expect our capital expenditures to be approximately 3% of net revenue, consistent with 2016.

From a timing perspective, all of our guidance is expected to be impacted by seasonality, one fewer day this year as the result of leap year in 2016 and other factors referenced in our comments. As a result we expect first half results to be lower than second half results. In summary, we're enthusiastic about our prospects for 2017.

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

This concludes our formal remarks and we'll now take questions.

Operator?.

Your first question comes from Jack Meehan with Barclays..

Hi, thanks. Good morning, guys..

Good morning, Jack..

So, I want to start – Dave, you talked about the pipeline on the hospital side, really good to see the Mount Sinai deal this quarter.

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

So, I think that part of the conversation is in anticipation of the potential impact of PAMA. I think part of the conversation is some uncertainty around generally regulatory reform, how much of the bundled payment demonstrations and other things that CMS has been doing, are going to continue and what form they'll take.

And, yes, to your specific question, I think as we talk with our managed care partners, there is more and more of a push toward what they broadly characterize as value-based payment. And value-based payment includes bundled payments. It includes pay for outcomes. It includes pay for adherence to metrics.

And I think a lot of hospitals and health systems are focused on what are our core competencies in delivering value-based care and where can we partner to gain those competencies elsewhere. And I think in Diagnostics, laboratory services and drug development obviously are our competencies or our – and capabilities are industry-leading.

So, I think it's a combination of things, but I do think the environment obviously is changing and that's to our benefit and a lot of it is the long-term play that we've been doing about how these partnerships take shape and what the value is over the long term..

That makes sense. And then just as a follow-up for Glenn, you mentioned that the guidance assumes some level of capital deployment from here. Can you just be a little bit more explicit in terms of share repurchase what the expectation is or what the share count you're using for guidance is? Thank you..

Hey, Jack. It's the overall – what we're saying is that the free cash flow which obviously we guide to, we're going to fully redeploy in 2017. And that is reflected in the guidance range that we have. It will be inclusive of share repurchases, which again we reinitiated in December of last year.

It will include M&A, obviously the announced deal that we've already had, but also a pretty good pipeline as well as debt repayment. At this point, we're not commenting specifically on how much of that free cash flow will apply to each, other that we expect it within that range to encompass all three..

That makes sense. Thank you..

Your next question comes from Robert Willoughby with Credit Suisse..

Glenn, did you mention – I know Sequenom was a drag on earnings in the third quarter. What was the experience in the fourth quarter? Are we at profitability there yet? And then maybe for Dave to the acquisition question, the stock seems to be trading more on speculation over what you may acquire than maybe on the fundamentals here.

Can you review maybe what your parameters are, highlighting areas of opportunity and interest for you and what doesn't fit, and any thoughts on transaction sizes that would be palatable to LabCorp?.

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

And so as we go into 2017, we expect obviously profitability for Sequenom. But for the fourth quarter, it was a constraint. And I think we spoke to the fact that even with Diagnostics showing there's margin improvement, it was actually constrained by the loss of Sequenom in the quarter but will be favorable to earnings next year..

Okay..

One, it has to be a strategic fit. That may be geographic, that may be complementing test menu or capabilities, but the transaction has to fit our well articulated long-term strategy.

Second, it has to meet financial metrics, so IRR, return on invested capital, multiples, synergy opportunities, these are things that are a very important part of how we think about acquisitions. Third, it has to create or present a future growth opportunity.

So, as we've highlighted with Sequenom, even though it didn't meet all of our metrics out of the gate, the future growth opportunity in women's health and non-invasive prenatal testing where we're now the market leader, and the opportunity to add capabilities to Sequenom's platform was a very important consideration.

So we think about how is that acquisition potentially going to help us grow in the long term. And then fourth, of course, is EPS accretion. We fundamentally want these deals to be immediately accretive but we certainly think about them being accretive over time as an important consideration.

And then the last thing I would comment just broadly is, as a general composition, before Covance, our approach was after CapEx and investment in the business, we spend about half our free cash flow on acquisitions and we spend about half of it on returning capital to shareholders and you should continue to think about that as our fundamental philosophy of how we deploy cash in the business..

That's very helpful. Thank you..

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

Good morning, guys. I'm just going to beat on that same question in a couple of different ways, if I can. If I just do some sort of back-of-the envelope math in my head and I think of you deploying almost $1 billion of free cash flow to either acquisitions or share repurchase, it feels like the guidance you gave is kind of low.

And so what I'm trying to figure out is, within the scope of what you're contemplating, do you allow yourself room for, hey, there may be acquisitions that could be potentially nicely accretive but because of the timing on when they get completed in 2017 or the time in which you realize some of the synergies, they don't necessarily – aren't as much of a boost to 2017 as they might be to the future? I'm just trying to figure out why maybe the math doesn't work so well..

Bill, it's Dave. As you know, the guidance incorporates a wide range of potential outcomes.

And you should think about timing as being a very important factor because transactions that may be in the pipeline, that may be rumored to be in the pipeline, that may be rumored to be coming to market, timing of signing, closing, antitrust clearance – all those affect where the earnings power is created and how accretive the transactions are.

So, I think it is important as, as you know, we don't slice and dice the guidance to try to break down every individual number and what's contemplated there. But there is a fair balance in the guidance of capital deployment towards share repurchase and capital deployment toward acquisitions..

Yes. The only thing I would add to that, Bill, too, just to kind of level-set, what our guidance does reflect is obviously good top line growth across both of our businesses, margin improvement, and then with capital allocation even driving earnings even higher.

And then just to reinforce Dave's point, we do have a lot of timing and how much we allocate of that free cash flow between the various areas that we can. But we view the overall guidance that we're providing would be another very strong year for the company..

Sure..

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

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

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

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

So I'll start and then Glenn may have some additional comments. We established I think back in 2009 or so that our target leverage is 2.5 times. Obviously in the seven or eight years since, the company has grown pretty substantially in terms of the amount of EBITDA that we generate. So, that 2.5 times remains a target.

It is not a commandment, and we've demonstrated a willingness to be flexible about our leverage. For example, we repurchased shares in the fourth quarter even though we're not at 2.5 times leverage because we thought it was a great opportunity to deploy capital and return it to shareholders.

In terms of increasing the leverage, we've demonstrated a willingness to do it for M&A. Our investment grade rating is important to us, and that's something that we would intend to maintain. Increasing leverage for share repurchase, again, it depends on what else is out there in the marketplace. We know the value of investing in our own business.

We know the return from buying our own shares, and we evaluate that against what's the value of other things we might buy, what's the long-term return on other things that we might buy. And we'll be disciplined about how we deploy and use the leverage in 2017 and obviously in the years ahead..

Yeah. The other thing I'd add to that, Bill, is that the company is generating significant and sustainable free cash flow and as a result it gives us the flexibility to utilize the balance sheet appropriately as we feel we need to do, but we've gotten the leverage down from when we've done it.

We ended the quarter at the end of the year at 3.1 times and again we've got another strong year of cash flow ahead of us..

Excellent. Thank you..

Your next question comes from Nicholas Jansen with Raymond James..

Hey, guys. Two questions from me. One, organic volume in the lab seemed to bounce back nicely relative to 3Q, even though there probably was some Hurricane Matthew dynamic to consider. So I just wanted to get your thoughts on kind of market share growth within the lab segment.

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

So, on the organic volume in Diagnostics. Nick, I think this and the second part of your question just demonstrates that it can be a little bit deceptive to look at a particular quarter over a particular quarter in a prior year. And so I think if we look broadly at 2016, we saw about 1% organic volume growth.

That's about what we think the market is growing. We had a dip in the third quarter which I think was anomalous for a variety of reasons. We had a strong recovery in the fourth quarter. And as you say, that was dragged a little bit by Hurricane Matthew.

But we felt very good about fourth quarter volume growth, particularly because it's growing in esoteric, it's growing in women's health, it's growing in the focus areas that we're devoting our resources to. So, nice strong volume growth in the fourth quarter.

We look to 2017 and say approximately 1% organic volume growth seems to be market, we obviously want to beat that, but that's how we think about the year. And I'll turn it over to Glenn and John in terms of the Diagnostics margins – I'm sorry, the Covance margins..

I'll take a first cut and John, you may want to provide more color. But as you commented, Nick, we feel good about the sequential improvement that we had in the business. When we think about the comp in the fourth quarter, we obviously are comparing it to a record quarter, I think 16% margins in the fourth quarter a year ago.

As we look to 2017, we believe – again, we're giving you the revenue guidance but we also believe we're going to get margin expansion, benefiting from the growth of the business and continue to improve on the clinical efficiencies.

We also did comment though that the first half for the company will be lighter than the second half for the company and that affects Covance as well. Obviously we continue to invest in the business. We talked about the labor, the call it sales force, the CRAs that haven't annualized yet. So that will be a headwind in the first part.

We also talked about the late cancellations that obviously will have an impact in the first half as we look to replenish given that those were active accounts that we had.

So, again, we expect good margin improvement year over year, but expect that the first half would still be light year-over-year in the first half of 2017 and then picking up very nicely in the second half..

Great. I'll hop back in the queue..

Your next question comes from Lisa Gill with J.P. Morgan..

Thanks very much. Good morning. Dave, usually this conference call is the opportunity to highlight some of the things that came out of our conference on the Covance side.

What were people looking for this year? And I know John is on the call, anything that you want to highlight that you were able to sign as we think about 2017?.

Well, we don't talk about things that we've signed until they become public. From my perspective – I mean, from my perspective, what came out of the conference room from the Covance perspective was a better understanding of how well the integration between the two businesses has gone.

We talked about the patient recruitment and site selection, we talked about the companion and complementary diagnostics already. Again, I want to highlight our work on Keytruda, our work on Opdivo, our work on Tagrisso and Tarceva, our work on Tacendra (42:58).

I can't even pronounce the names of these drugs, but really, just a terrific performance in terms of establishing industry leadership in the development and the commercialization of companion diagnostics in a way that we don't see any competitor present.

We highlighted our ability to partner using LabCorp and Covance with real-world evidence and post-market surveillance capabilities, specifically around the liver testing example of top 20 pharma where we're using the LabCorp resources to do the draws, we're using the Covance market access to remind patients of their appointments and scheduling, and we're using the combination of our technology to deliver results to physicians and patients.

We highlighted how we can specifically open and close sites based on real-time data that LabCorp is receiving on things like respiratory tract infections.

We highlighted the database that physicians who order the FibroSure test in recruiting NASH trials, the scientific capabilities that our combined organizations bring to sponsors, and obviously the value of our oncology, rare and orphan and infectious disease capabilities and the opportunity around the research hubs and the whole research hub model that goes back into the health system partnership.

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

And I think you saw that in the strong book-to-bill within the fourth quarter, the strength across the businesses, whether that was in clinical or in the labs or in early development. And you saw the solutions that Dave just talked about coming to the fore.

And even though we had the cancellations in the two large lab studies, still pulling off 1.24 and without that being in the high 1.3s. So, nice performance, and that's kind of how you gauge whether the integration is moving swiftly and you're seeing that within our ordering..

Right. I wasn't talking about from an investor perspective. If I did remember our Q&A from maybe the last two years, it was more around the opportunities of meeting with pharma and biotech and what they were looking for from Covance and some of the incremental opportunities without naming specific opportunities.

So, I was just looking for any incremental color from that perspective. Did you feel like it was better than the last two years, in line with the last two years? Just any color around how you think about how that went versus your expectation or what you've seen in previous years. And I know, John, this was your first time from a Covance perspective..

Yeah. I saw a great amount of partnering activity, the biotech business area and the large pharma mid-tiers, significant partnerships that either were initiated or developed and great momentum across the marketplace.

Obviously we have R&D growth, but at the same time I think the partnering capabilities with the data that we are driving from the LabCorp side and/or solutions that we're driving with respect to the combination our customers are seeing, and that was evidenced by all the different partnering capabilities that we saw at the conference..

Great. Thank you..

Your next question comes from Ross Muken with Evercore ISI..

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

Well, I'll start. It's Dave, Elizabeth.

My perception is that John is a terrific executive, he has been well received both internally at LabCorp and Covance and externally by our sponsors and partners, and as I think he just highlighted, the opportunities in terms of partnering in terms of the level of interest in the LabCorp and Covance services is very high.

So, we feel terrific about the leadership change and about where it's going to take us in 2017 and ahead..

I think that we've seen great double-digit growth in studies based on the data side and this is all about net orders at the end of the day and winning, and so we're seeing that show up in the marketplace for us..

Thank you..

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

Hi. Good morning. I just had a follow-up with some of the conversations on the CRO side. I was just wondering, so obviously you have.....

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

Yeah. Is this better? I'm sorry..

Yes..

I just had a quick follow-up to some of the questions on the CRO side. So, obviously you had a good, strong book-to-bill, but I was curious if you could talk to some of the broader trends.

I think a couple of others have seen cancellations and I think some have mentioned dynamics around revenue conversion just given shift to biologics over time, I'm wondering if you could speak those two dynamics more broadly..

Okay. I think in terms of the book-to-bill, was strong across each area. We are different in the sense that on the revenue conversion side we are the only broad early development lab and in clinical business CRO. And so in early development you do have faster backlog conversion.

At most, you will have two to four quarters of that booking convert into revenues with a little bit faster within the early development timeframe. In terms of cancellations just in the fourth quarter was probably our highest within the last couple of years, if you look at that quarterly rate.

And thus the 1.24 at the end of the day or the 1.19 new methodology is showing real signs of strength in the quarter itself. So that's a little bit of color on – A, the book-to-bill, and the cancellations..

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

No. This was well publicized, cancellations late in the quarter, November, and it's clinical research. And there's nothing to do with an industry trend..

And then just totally switching topics, I had a question on Beacon, just wondering what you're seeing....

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

Okay. So, I'll try – I'll get back in the queue. I'm sorry. Something is wrong with my phone clearly. Thank you, though..

Thank you..

Your next question comes from Bill Quirk with Piper Jaffray..

Great. Good afternoon, everyone. This is Alex Nowak on for Bill today. In the prepared remarks, you mentioned that there are numerous benefits to the business of having patient health data after combining the Diagnostics and CRO business.

So I was just curious, are there any other verticals that you would consider acquiring or partnering with to gather additional patient health data?.

It's Dave. Good morning.

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

Okay. That's helpful. And then I think my second question is what Amanda was going to ask, but we're hearing the BeaconLBS project in Texas is getting some pushback and may actually potentially be on hold.

So I was just curious what is the latest there?.

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

So, first of all, as you may remember, we had a similar situation in Florida, and so this is sort of part of the normal course of how you change healthcare and change patient and provider behavior, there's a lot of learning, there's a lot of detail, and we're always trying to accommodate the balance between what needs to be done and what the marketplace needs to get what needs to be done, done.

The decision support tool is active and UnitedHealthcare has encouraged physicians to use it to become accustomed with it so that at the point where they do implement, the market will be ready.

We have 98% of Texas physicians registered and 89% of the Texas labs within the network are registered, and we continue to enhance the platform with things like EMR integration and new tools and capabilities.

I do want to comment editorially that the need for this type of tool is great, and as you probably have seen, it was probably reported that UnitedHealthcare sued a toxicology lab in Texas that was charging 3 to 10 times the amount of network providers and 2 to 3 times the amount that out-of-network providers charge, which meant that it was charging the customer between $1,400 and $6,500 for toxicology panels that were available from network providers for vastly lower amounts.

This generates unnecessary cost for the system and it generates unnecessary out-of-pocket cost for patients who are paying co-payments and deductibles. And to the extent that that's addressed by providers by waiving patient co-pays and deductibles, that's a non-compliant practice that just drives additional systemic costs.

So, the BeaconLBS tool is constantly iterating and improving to make it better and that's part of the reason why the implementation in United, again, the "hard implementation" has been delayed, although the tool is available and being used.

But this is absolutely necessary if we want to change the cost of the healthcare curve and eliminate non-compliant practices in the marketplace..

Great. Thank you..

Your next question comes from Ralph Giacobbe with Citi..

Thanks. Good morning. There are local press reports of you buying PAML, which is a fairly sizeable regional lab.

I guess I'm just wondering, is that a unique opportunity or are you seeing more larger regional assets coming up and can you give us a sense of all the range of revenue and EBITDA multiples for just deals generally and maybe the margin profile of outreach businesses when you buy them?.

Well, I'm not going to comment on anything about any particular transaction. And I think to some extent we've responded to this question earlier, which is the pipeline is robust and there is new interest from health systems generally and more broadly. In terms of strategic opportunities, that may include sale or it may include broader partnerships.

In terms of multiples, I mean, it's just – there's no way to characterize what multiples are going to be of revenue and EBITDA. Every system is different. Even the way that health systems account for their lab revenue is extremely different. Some, for example, charge the lab with IT. Some don't charge the lab with IT.

That makes the supposed profitability look very different. So, suffice it to say, I go back to what I said before, which is we're disciplined about our financial metrics. We're disciplined about the way we deploy our capital.

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

Okay. Fair enough. And then, just a follow-up, Dave, you talked about the push toward value-based.

If payers are focused there, do you think there's an incentive or a continued incentive for exclusive relationships to continue versus payers wanting sort of broader access to lower costs in national labs versus narrowing the network to just one?.

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

Okay. Thank you..

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

Thanks. Good morning, Dave and Glenn.

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

Well, I have emphasized over the years and continue to emphasize that we always look at long-term value creation. We always look at what is right for LabCorp as a business, and we believe that in the long term that will serve the best interest of our shareholders.

That said, our shareholders also have some input into what they think is going to create long-term value. We listen to them very carefully on things like return of capital, and you can see that we've responded to that.

Again, even though our leverage was not a target in the fourth quarter, because this was highlighted as something that's very important, and so we spend a lot of time with shareholders, we listen closely to their input. We value their views highly, and we take that into consideration.

Stock price reaction, that's less of a factor because there are so many moving pieces in how the stock reacts. So, again, long-term interests of the business, long-term value creation, views of investors, those are things that are very important to us as we think about the strategy for the business ahead..

Okay. That's helpful. One other real quick one, this seems pretty straightforward, but just any additional color around the thought pattern on the change in the book-to-bill methodology or just the timing of doing it now? Thanks..

Yeah, Steve, this is Glenn. As we reflected on it, we saw, obviously, another CRO that's changed their methodology as well. It is interesting that the backlog has been built up, if you will, based upon just – it could be an e-mail just stating that here's future business that we'd like you to work on.

I think, from our perspective, being more conservative, just to know that we have an executed contract that we would now be working on and calling that the backlog we felt was a better representation of the backlog, again, better visibility of saying out of that backlog now that we have, how much will that translate into our revenues over the next year.

And then, obviously, giving guidance for revenue, it also gives you a good sense of what business do we need to bring into the company during the year and still transact during that year. So, we think it's just overall more conservative, better color on the business. And yeah, we again, saw someone else do it, and we agree with that methodology..

Okay. That's great. Thanks..

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

Your next question comes from Dan Leonard with Deutsche Bank..

Just a quick follow-up on that last question.

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

It does put a renewed focus on the time between the award and the contract and what efficiencies you can drive for that. But as to the overall operational approach, no, it does not change.

And I'd also say, if you – coming from outside the industry to inside the industry and now being an old-time vet, if you ask coming in, what do you generate backlog on, and it's not a contractual obligation, it just hits you that it might be a more conservative approach to go to the contract.

It's just a more rational approach to go to the contract side and eliminate some level of volatility at the same time between that award and contract. But bottom line, it doesn't change the operations..

Okay. Thank you..

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

Hello, everybody. Just I wanted to ask – I think in Glenn's prepared remarks, he talks about the Phoenix initiative and also the discussion about collocation of sites with retail pharmacies.

First, on the Phoenix one, when you think about what you're doing with Revenue Cycle Management upfront being able to tell patients, I guess, what their co-pays and so forth might be, can you give us any sense of what you think that might mean for you over the next year or two in terms of potential savings relative to bad debts or bills that you can't submit because they're not properly filled out? And then, on the collocation on the pharmacies, what does that opportunity look like long term? Is that just broadening your reach, or is there some actual cost savings from potentially rationalizing phlebotomists, and things like that? Give us some flavor on those two a little more..

A.J., it's Dave, and those were in my remarks. I feel obligated to respond to....

Okay, sorry about that..

On Phoenix, I mean, there's two or three benefits from Phoenix. So, the first one is the patient knows at the time of service what their actual responsibility is going to be, and that's helpful because if it's more than they want to pay, they have the option to say, I don't want to pay, or I don't want the test, or I don't want a particular test.

And those are things that are going to be incorporated into the patient service center experience, and ultimately we want to push that out to physician offices as well through our lab connect tool. The benefit for us is, we collect credit cards from patients at the patient service center.

We don't know how much the patient is going to owe or we haven't historically. And so, often we collect a credit card where the patient doesn't owe anything, and we don't collect a credit card where the patient does owe. And we ask the patient for more money authorized to the credit card than they are going to owe us, and so we get some resistance.

This way, it's going to be an exact estimate. This is based on your deductible, your plan, where you are in your cycle. This is what you're going to owe. Now, it's not perfect because there can be an add-on test, there can be something else ordered by a pathologist.

But this is going to be an accurate representation to the patient of what they're going to owe and I think that's really going to be helpful. I'm not going to try to make an estimate of what it's going to save or reduce in bad debt. It's part of an ongoing initiative to keep our bad debt flat in percentage and reduce it over time.

On retail, we find that about 65% of our patients are coming from home, and so if you make it convenient for them to be drawn in a setting closer to home, then that makes it easier for them to get their service.

And when you combine it with something that's healthcare related, it provides, I think, broad opportunities on a lot of fronts, including as we think about direct patient engagement, Covance – consenting to trials with Covance, broadening capabilities that can be delivered in a pharmacy. So, again, this is a growth initiative.

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

Okay. Thanks a lot..

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

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

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

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

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

I think we're doing what we think is best for the long-term interests of the business. I think we're – we have demonstrated that the combination of the businesses works. We've demonstrated that we're growing the business on both sides of the equation. And from my perspective, we've demonstrated that the opportunity ahead is great for us.

So, I don't think short-term multiples or – I'm not a short-termer, I've been around a long time now, and I don't think short-term multiples or short-term multiple dislocations are anything that is beneficial for us to focus on and try to run this business in the best interest of our shareholders..

Okay. Great. Thanks a lot..

Your next question comes from Ricky Goldwasser with Morgan Stanley..

Hi. Good morning. This is Ashley Polmateer on for Ricky. I just had a quick question about the Covance changing in the methodology. So, if I look at the $2 billion that you plan to convert from the backlog over the next 12 months and compare it to your guidance, it looks like we're seeing a roughly 70% kind of guaranteed contracts for the next year.

Is that about average to what you've seen before? Is this something that tends to fluctuate throughout the year, or is that an average number? And then, just also, as a quick follow-up, how long does it generally take from announced awards to convert into signed contracts? Thank you..

Yes. It is about the same as in past historical, and in terms of award contract, varies by the individual businesses, but you should have in the neighborhood of two-quarter kind of conversions.

And in some cases, certain customers will go to contract on award time, and then others will have a lengthy dialogue between the award and then the contractuals. So, it does vary by customer. And as we said before, the early development has a faster conversion rate than the clinical and the lab space..

Great. Thank you..

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

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

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

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

Got it.

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

Well, I think, I mean, obviously, it's been supported now by professional societies. I think patient advocacy groups are picking up on the value. So, it's really a question of payer acceptance.

And we continue to speak with medical leadership at all of our key payers in terms of broadening the NIPT capabilities to average risk because of the – obviously the opportunity to avoid long-term systemic costs down the road..

Got it. Thank you..

Your next question comes from Brian Tanquilut with Jefferies..

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

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

And so, as soon as we have more clarity and an update, we'll provide it to you..

All right. Got it. Thanks, Dave..

Your next question comes from Mark Massaro with Canaccord Genuity..

Hey, guys. Thanks for the question. I wanted to ask about your interest level in liquid biopsy, and can you maybe just characterize the degree to which you're pursuing partnerships or exploring potential acquisitions in that space? And then, related to that, I know you acquired Sequenom. And Sequenom, I believe, had some capabilities there.

Can you comment on whether or not you think Sequenom can provide a valid liquid biopsy strategy?.

So, we're quite interested in liquid biopsy and see it as an attractive opportunity. On the Covance side, we do have a partnership with one of our valued partners around validating and implementing liquid biopsy. You're correct that Sequenom had begun developing liquid biopsy technology, and it was kind of shelved prior to the acquisition.

And we have reinitiated that to look at whether it provides us with a viable option that we can scale and develop. There are literally hundreds of liquid biopsy providers and companies of all sizes and shapes. So, we continue to look at and evaluate them as to which ones would be the best partner or partners for us.

At the same time, pursuing the Sequenom option is an internal opportunity..

Thank you..

Your next question comes from Pima Anuba (01:15:02) with Bank of America..

Thank you very much.

Can you hear me okay?.

Yes..

Great. Thanks. Morning, Dave and Glenn. So, first of all, thank you for reiterating the commitment to investment grade credit ratings, that's great. And all the color on leverage targets.

One question we often get from investors is, if there is a business reason, why LabCorp has to be rated at investment grade, or is it more about gaining access to capital at attractive levels?.

Well, from my perspective, it's been a pretty fundamental principle that we want to maintain investment grade. It is access to capital markets. It's also favorability where we access those markets – of what we pay and what it costs us to take on debt, and I also think it's just responsible management of the balance sheet.

And when we say investment grade, it helps frame for management we need to balance sheet responsibly and deploy our capital wisely to maintain that rating. So, that's my perspective. Glenn may have something to add on top of that..

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

And given a substantial cash flow that we generate and obviously continue to make investments in our business make investments in acquisitions and return capital to our shareholders..

Great. Thank you very much..

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

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

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