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Laboratory Corp Of America Holdings  (NYSE:LH)
Q3 2018 Earnings Conference Call
Oct. 24, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 LabCorp 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 be given at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Scott Frommer, Vice President of Investor Relations, you may begin.

Scott Frommer -- Vice President-Investor Relations

Good morning, and welcome to LabCorp's third quarter 2018 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and Internet. With me today are Dave King, Chairman and Chief Executive Officer; Glenn Eisenberg, Executive Vice President and Chief Financial Officer; and John Ratliff, CEO of Covance Drug Development. In addition to our press release, we also furnished Form 8-K this morning that includes additional financial information, both are available in the Investor Relations section of our website at www.labcorp.com and include a reconciliation of non-GAAP financial measures discussed during today's call to GAAP.

Finally, we are making forward-looking statements during today's call. These forward-looking statements include, but are not limited to, statements with respect to 2018 guidance and the related assumptions, the impact of various factors on operating and financial results and the opportunities for future growth. 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 2017 Form 10-K and subsequent Forms 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 Dave King.

David King -- Chief Executive Officer

Thank you, Scott, and good morning. LabCorp's results in the quarter were highlighted by year-over-year revenue growth of 8% and adjusted EPS growth of 16%. Our performance was driven by strong results in our Covance business this quarter with increased net orders, a 1.41 book-to-bill organic revenue growth of over 7% and 130 basis points of margin expansion. These are clear indications that our investments in the business are differentiated offering in our Covance LaunchPad process improvement initiative are combining to deliver results in the market.

In Diagnostics, excluding the impact from a ransomware attack in July and Hurricane Florence, we delivered 1.4% organic revenue and 1.9% organic volume growth. Nonetheless, this outcome was below our expectations with margin performance particularly disappointing and we are taking strong action as a result. First, we are making organizational changes to strengthen our leadership and operational performance. Second, we are launching the next phase of diagnostics LaunchPad, which will result in multi-year cost savings at the similar magnitude to LaunchPad Phase I, applying the same principles as before process reengineering, automation, integration of new tools and technology, and facility optimization, this phase of LaunchPad will build on our prior work and lead to an even more streamlined and efficient diagnostics business. We will provide additional detail about the size and scope of LaunchPad Phase II on our next earnings call.

During the quarter, we continued to be good stewards of capital, we sharpened our life sciences focus by divesting our Food Solutions business at a very attractive valuation. As a result of the business divestiture, we exited the quarter in a strong cash position. We continue to develop our acquisition pipeline and increased share repurchases to $150 million. We are committed to supporting near and long-term value creation through capital deployment including share repurchases, internal capital investments, strategic acquisitions and debt paydown.

As Glenn will explain, we expect to deploy more capital in the fourth quarter and in 2019 for share repurchases, which we will complement with financially sound acquisitions as we continue to create shareholder value.

I'll now update you on our progress on key strategic initiatives. The first strategic objective is to create a leading and differentiated consumer experience. We continue to enhance patient convenience engagement, broaden our channel to market and build brand loyalty. Earlier this month following positive results and very high net promoter scores, our initial 17 sites, we announced an agreement to significantly expand our LabCorp Walgreens collaboration to at least 600 locations. Consumers, healthcare providers, and managed care plans have expressed strong interest in this innovative partnership. LabCorp and Walgreens complementary healthcare expertise underpins the LabCorp Walgreens channel, which is uniquely situated to deliver a wide range of personalized integrated consumer facing services overtime. Examples of additional collaboration opportunities under discussion include novel approaches to clinical research and supporting the ongoing transition to value-based care. We will begin announcing the newest LabCorp at Walgreens locations later this year. Our consumer strategy also involves integrating new tools and technology into our offering. Towards this end, we are preparing for the commercial launch of our convenient wellness testing with sample collection anywhere and personalized online results. This platform will extend consumer access to a high quality trusted lab testing in new additional settings. Most immediate of these is reaching patients in the home, which is critical to designing care for high need patients that small cohort with complex needs to represent the greatest usage of the healthcare system. Our initial offering with -- limited menu of tests focusing on wellness and chronic metabolic illness, and we will expand the offering overtime. This offering will also have application to our Covance business, as we support trials with convenient accurate testing outside the physician office. We also continued our rollout of patient self-service tools, including self check-in, improved insurance card recognition technology using machine learning, enhanced mobile applications and upgraded online bill pay. Our multifaceted consumer engagement strategy is advancing at a rapid pace further differentiating our offering from competitors and creating new opportunities for long-term profitable growth.

Our second strategic objective is to streamline the drug development process. We continue to execute on our $9.4 billion backlog, one of the largest in the industry, expand our customer base with new awards through our integrated Covance and Chiltern offering and make investments that increase efficiency in drug development. Our investments encompass capabilities to support top line growth, as well as enhanced operational performance. Our Covance LaunchPad initiative includes over 90 projects and thus had a clear impact on Covance's margins, which improved by 130 basis points year-on-year. The global service delivery model is well under way and will expand over the next two years. Other initiatives include the integration of new tools and technology into existing processes, such as utilizing robotic software process automation to enhance efficiency and quality. Technology is a critical component of streamlining trials and we continue to see broad sponsor interest in our powerful investigator performance data, real world evidence, insights and accelerated platform. In the future, we expect to see increasing adoption of mobile health technology and virtual trials by sponsors. These offerings individually or in combination can speed patient recruitment of site selection, improved trial design and data quality and thereby decrease study duration, costs, and the patient burden of participating in clinical research.

Our third strategic objective is to support our customer's transition to value-based care, as discussed last quarter, our proven track record of delivering convenient, high quality and cost-effective services translated into expanded opportunities and favorable reimbursement rates with UnitedHealthcare and Aetna. In anticipation of changes to each plans laboratory provider network next year, our commercial and leadership teams continue to execute our provider engagement strategy. We are also developing an employer focused offering to help self-insured businesses better manage, both lab and drug spent. Transition to value-based care is also relevant to providers, last week we announced a comprehensive laboratory collaboration with Baptist Health, a largest not-for-profit system in Kentucky. As part of this collaboration, we will utilize our fully standardized laboratory solutions, operational expertise and comprehensive test menu to support the delivery of care across eight hospital based labs. The expansion of this long-standing partnership provides another example of hospitals and health systems turning to LabCorp's high value offering to help them achieve their strategic and financial goals. We have an activate pipeline of opportunities in this evolving market and look forward to providing you with updates in the future.

Before I turn the call over to Glenn, I will briefly comment about our outlook for 2019. Next year will be challenging due to the ongoing impact from PAMA and contractual changes in managed care, at the same time, we expect another year of revenue growth and margin expansion in Covance, cost savings in both businesses from the LaunchPad initiatives and strong free cash flow underpinned by a solid balance sheet. In some although the headwinds facing our company will be at their steepest next year, we expect to deliver modest growth and adjusted EPS in 2019, and to establish a solid foundation for accelerating growth in 2020 and beyond.

Particularly in light of the challenges we faced this quarter from the ransomware attack, Hurricane Florence and Typhoon Mangkhut, I want to recognize and commend the dedication of our 60,000 colleagues around the world. There are countless active individual and collective heroism's to take care of patients and of each other during these events, maybe once again enormously proud to lead this great company.

Now I'll turn the call over to Glenn.

Glenn Eisenberg -- Executive Vice President and Chief Financial Officer

Thank you, Dave. I'm going to start my comments with a review of our third quarter results followed by discussion of our performance in each segment and include with commentary on our full-year outlook. As a reminder, on January 1, 2018, we adopted ASC 606 using the full retrospective method, meaning that we restated our 2017 financial results to better enable evaluation of our 2018 performance and guidance. In the press release, our prepared remarks and the Q&A session to follow all references to our 2017 results are to the restated numbers unless we specifically note otherwise.

During the quarter, there were two unusual events, the ransomware attack in July and Hurricane Florence in September. First the ransomware attack impacted revenue by approximately $10 million and operating income by approximately $23 million, of the $23 million total impact to operating income, $13 million has been classified as discrete expenses related to recovery efforts, including directly identifiable overtime consultant and contractor expenses. These discrete expenses have been excluded from the company's adjusted operating income, the remaining $11 million reduce the company's adjusted operating income, primarily due to lower volume caused by our decision to temporarily take certain systems offline to contain and remediate the ransomware attack, as well as higher labor expense incurred to expedite processing of the built-up backlog, these metrics do not include any benefit from insurance recovery, which we are pursuing. Second, Hurricane Florence impacted revenue by approximately $4 million and adjusted operating income by approximately $3 million, also due to lower volume. Together, these two unusual events negatively impacted adjusted EPS by $0.10. For the remainder of my remarks, I will refer to these two events together as business disruptions.

Revenue for the quarter was $2.8 billion, an increase of 8% over last year with acquisition growth of 6.5% and organic growth of 2.8%, this was partially offset by divestitures of 1.1% and unfavorable foreign currency translation of 30 basis points. Revenue growth was constrained by around 50 basis points due to business disruptions. Operating income for the quarter was $343 million or 12.1% of revenue compared to $327 million or 12.5% last year. During the quarter we had $31 million of restructuring charges in special items, of which $13 million was due to discrete expenses related to recovery efforts following the ransomware attack, and the remaining $18 million was primarily related to our LaunchPad business process improvement initiative and acquisition integration.

Adjusted operating income, which excludes amortization and restructuring charges in special items was $429 million or 15.2% of revenue compared to $432 million or 16.5% last year. Adjusted operating income in the quarter was negatively impacted by approximately $13 million due to business disruptions. Excluding business disruption, the $10 million increase was due to organic revenue growth, acquisitions, and savings from our LaunchPad initiative, partially offset by lower Medicare pricing as a result of the implementation of PAMA divestitures and personnel costs. The 130 basis point decline in adjusted operating margin was due to the implementation of PAMA, the negative impact from business disruptions and the mix impact from the acquisition of Chiltern.

The tax rate for the quarter was 36.2% compared to 34.7% last year, the adjusted tax rate, excluding special charges, amortization, and the net gain on divestitures was 25% down from 33.6% last year. This lower rate was primarily due to the implementation of tax reform in the US, we expect the full-year 2018 adjusted tax rate to be approximately 24.5%, implying a fourth quarter tax rate of 25%. Net earnings for the quarter were $319 million or $3.10 per diluted share, which includes the net gain on divestitures of $125 million or $1.22 per share.

Adjusted EPS, which excludes amortization, restructuring charges, special items, and the net gain on divestitures were $2.74 in the quarter up 16% over last year. Adjusted earnings in the quarter were negatively impacted by approximately $0.10 per diluted share for business disruptions. Operating cash flow was $252 million in the quarter compared to $351 million a year ago. The benefit of increased cash earnings was more than offset by an increase in working capital, a discretionary pension contribution and the impact from business disruptions. The increase in working capital was used to support the company's growth, but was also negatively impacted by timing that will benefit the fourth quarter.

We made the discretionary pension contribution to take advantage of the change in tax rates from tax reform. Capital expenditures totaled $98 million or 3.5% of revenue compared to $75 million or 2.9% last year. As a result, free cash flow was $154 million in the quarter compared to $275 million last year. During the quarter, we repurchased $150 million of stock, as of September 30, we had $844 million of authorization remaining under our share repurchase program.

Total debt at quarter end was $6.5 billion and our leverage was 3.1 times gross debt to last 12 months EBITDA compared to our target leverage ratio of 2.5 times to 3 times. At quarter end, our cash balance was $893 million, up from $221 million at the end of the second quarter, primarily due to cash proceeds from the divestiture of the Food Solutions business. Between using excess cash on hand and free cash flow expected in the fourth quarter, we plan to deploy approximately $1 billion in cash in the fourth quarter after capital expenditures. We will spend around half of this amount on the repayment of maturing debt of $400 million at a tax payment related to the Food Solutions divestiture of approximately $125 million. This leaves around $500 million available in the fourth quarter, primarily for increased share repurchases, as well as strategic acquisitions.

Now, I'll review our segment performance beginning with LabCorp Diagnostics. Revenue in the quarter was $1.8 billion, a decrease of 0.2% compared to last year. The benefit from acquisitions and organic volume measured by requisitions was offset by the implementation of PAMA, the impact from business disruptions, as well as divestitures. Foreign currency translation lowered revenue by approximately 20 basis points. The impact from unfavorable weather in the third quarter of last year was offset by the effect of approximately one less revenue day this quarter. As a result, organic revenue growth on a constant currency basis was 0.6%, which was lower than expected, but included the negative impact from business disruptions of approximately 80 basis points. Revenue per requisition decreased by 40 basis points, excluding the impact from divestitures. This decline was driven by the impact of PAMA of 100 basis points, as well as the impact from the ransomware attack of 20 basis points. On a similar basis, total volume increased 2% of which organic volume was 1.3% and acquisition volume was 0.8%. We achieved this volume growth despite the negative impact of approximately 60 basis points for business disruptions.

LabCorp Diagnostics' adjusted operating income for the quarter was $332 million or 18.9% of revenue compared to $374 million or 21.3% last year. The benefit from acquisitions and organic volume growth was more than offset by the negative impact from PAMA, business disruptions, divestitures, and personnel costs. As Dave mentioned, given the outlook for 2019, we launched the next phase of our LabCorp Diagnostics LaunchPad initiative. As we position the business for growth in 2020 and beyond. We will provide details of this program on our year-end earnings call.

Now, I'll review the performance of Covance Drug Development. Revenue for the quarter was $1.1 billion, an increase of 25% over last year, due to growth from acquisitions of 18% and organic growth of 7%, partially offset by 50 basis points of unfavorable foreign currency translation. Adjusted operating income for the segment was $131 million or 12.1% of revenue compared to $94 million or 10.8% last year. The $37 million increase in operating income and 130 basis point improvement in margins were primarily due to organic demand, LaunchPad savings, and acquisitions, partially offset by personnel costs. We remain on track to deliver $150 million of net savings from Covance LaunchPad by the end of 2020 and $30 million of cost synergies from the integration of Chiltern by the end of 2019. Net orders during the quarter were $1.5 billion, up 35% from last year contributing to a net book-to-bill for the quarter of 1.41 compared to 1.30 a year ago. For the trailing 12 months net orders were $5.3 billion and net book-to-bill increased to 1.25 from 1.22 last quarter. Backlog at the end of the quarter was $9.4 billion, an increase of approximately $400 million from last quarter, we expect approximately $3.8 billion of this backlog to get original revenue over the next 12 months.

Now I'll discuss our 2018 guidance, which assumes foreign exchange rates as of September 30, for the remainder of the year, our guidance also includes capital allocation from the proceeds of divestitures and free cash flow in the fourth quarter toward an increase in our share repurchase program, acquisitions, and debt repayment. We expect revenue growth of 10.5% to 11% over 2017 revenue of $10.3 billion, which includes the benefit of approximately 40 basis points of currency translation. This is a narrowing of our prior guidance range of 10.5% to 11.5%, and now includes the impact from business disruptions of 10 basis points, as well as the 10 basis point unfavorable change in currency translation.

We expect LabCorp Diagnostics revenue growth of 3% to 3.5% over 2017 revenue of $6.9 billion, which includes a benefit of approximately 10 basis points of currency translation. This is a narrowing of our prior guidance range of 3% to 4.5%, primarily due to the impact from business disruptions of 20 basis points, lower volume, and the 10 basis point unfavorable change in currency translation. We expect Covance Drug Development revenue growth of 24% to 26% over 2017 revenue of $3.5 billion, which includes the benefit of approximately 110 basis points of currency translation. This is a narrowing of our prior guidance range of 23% to 26%, we remain on track to deliver mid to high-single digit organic growth in 2018. Our adjusted EPS guidance is $11.25 to $11.45, which is lower than the prior guidance of $11.35 to $11.65, primarily due to the negative impact of $0.10 per share from business disruptions, as well as the performance in the third quarter.

Finally, we expect free cash flow to be between $975 million and $1.025 billion, this is lower than the prior guidance of $1.1 billion to $1.2 billion, due to the upcoming tax payment of approximately $125 million related to the divestiture of the Food Solutions business, which was not included in our prior guidance.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Ross Muken of Evercore. Your line is now open.

Ross Muken -- Evercore -- Analyst

Good morning, gentlemen. So maybe let's start on Covance, I think relative to the prior quarter across the board the results were materially better and obviously the bookings piece was probably the highlight and core growth was good as well, maybe just give us a feel for kind of, coming off of that, sort of disappointment last quarter, what you saw change, how much of the stuff that sort of impacted you last Q, just kind of temporal and you saw relief on it. And then on the margin side also felt like as well, you got some of that drop through on the better revenue, but also you're getting some momentum on the cost side?

John Ratliff -- Chief Executive Officer

Sure. Thank you, Ross. This is John. In terms of the stronger book-to-bill that was across all of our areas, early development, labs, clinical, driven by healthy market fundamentals, in terms of the funding environment, approvals, FDA, high interest in the drug development innovation from ourselves. We do have a strong pipeline of opportunities across the board in terms of proposals. And continued success with our differentiation whether that's with the data or the stronger FSP offerings or the solutions in terms of companion diagnostics or biomarkers. But clearly strength across the units, second quarter temporal and I think you see why we lean toward more of last 12 months versus clearly quarter-by-quarter basis. And on the margin side that's going to be a heavy lift in terms of on both LaunchPad initiatives as well as the revenue, but you're seeing that leverage come through. And you're seeing that sequential leverage show up in terms of the margin side, but we see continued upside in terms of the margin. We know we need to get superior level margins and work to do in terms of early development in clinical. And know that both on the revenue and margin side we're looking for continued progress there.

Ross Muken -- Evercore -- Analyst

Thanks, John. And maybe, Dave, just sort of philosophically here, obviously lot of moving parts in the lab business, and I'm sure you're not thrilled with some of the near-term pieces, albeit obviously, a lot of it's out of your control, as you think about all of the capital you have now post the food divestiture and some of the activity picking up in the market, and also having opportunity to play on the CRO side, I guess how are you thinking about into next year, I know you talked about a pretty good return of capital in the fourth quarter, but it seems like you also have plenty of fire power on the M&A side to continue to supplement, how are you thinking about the opportunity set that's out there?

David King -- Chief Executive Officer

As we've said, we think about every opportunity that's presented to us individually and collectively, so individually does it meet our strategic objectives, does it meet our financial objectives, and what is the -- what is the value to the total enterprise. And then collectively, how do we want to deploy our capital for growth, and so what I would say is there is no predisposition toward deploying capital toward one business or another when it comes to acquisitions, we're going to look at every one individually. I will say that assuming that the second round of PAMA is implemented as planned, I think there will be acquisition opportunities on the lab side, I think there would be collaboration opportunities on the health system side as you've seen in our broadened relationship with Baptist, and so we have, in my mind done a very good job of reducing our leverage and returning capital to shareholders and we're going to continue to tightened up that target leverage, and at the same time maintain the flexibility of the balance sheet, so that we can do the best deals that come along.

Ross Muken -- Evercore -- Analyst

Thanks so much.

Operator

Thank you. Our next question comes from Lisa Gill of JPMorgan. Your line is now open.

Lisa Gill -- JPMorgan -- Analyst

Great. Thanks, and good morning. First, congratulations on the great numbers on the Covance side. Dave, I'm going to ask about the diagnostics side, so as I think about your expectations in the quarter versus what was delivered, you talked about organic being lower than expected, your chief competitor reported yesterday, talked about recent concessions, as well as some reimbursement issues, can you just walk us through, are you seeing similar things, are there different things that you're seeing for LabCorp as far as Quest (ph), just want to understand the expectation versus what you delivered in the quarter, and then also understand if there is a bad debt issue here?

David King -- Chief Executive Officer

Sure. Good morning, Lisa. Thanks for the nice comments about Covance, we're very pleased with their performance. Our bad debt year-over-year is basically flat, and are as a percentage now to be clear, as revenue grows, obviously if you apply the same percentage, the dollars of bad debt can higher, but as a percentage of revenue, and I'm glad we account for it differently, but was talk about the way we used to talk about the old days (ph), as a percentage of revenue bad debt was basically flat, and in fact in the year from 1Q to 3Q bad debt has sequentially declined each quarter, so we're not experiencing that headwind, and I think just make a comment that we do this internally, our revenue cycle management team has done a fantastic job, we do see higher patient responsibility across the board in the business, but our team has done a fantastic job addressing and managing that through a lot of innovative tools, including front-end collections in the patient service center and our pricing transparency. So bad debt has not been a headwind.

On the specific call-outs in terms of individual tests and payment denials, medical drug monitoring continues to grow although the growth rate is trending down, some of that has been fewer scripts being written because of constraints on opioid prescriptions, some of it is physicians in-sourcing the lab work, because they can build for directly and get paid as opposed to sending it out to labs, and some of it has been denial policies, now again, I want to come back to it grew, it just didn't grow at the rate that it has grown over prior quarters. The hepatitis C and vitamin D, there's nothing materially different from what we've seen historically, what we have seen in prior quarters there. The one thing I would call out in terms of slowing the incremental growth is 23andMe was slower this quarter than it was in 2Q, and so that's where you saw some of the decline in organic growth, just as we've said that is a contributor to our organic growth, we expect that to increase sequentially in the fourth quarter, and so that would probably be the one thing I would point out as a detractor in terms of organic growth rate, that said the fact that 23andMe's volume growth rate slowed is part of the reason that you see our price, because again it's mix, it's not unit price, but our price improvement, because as we've said our profitability on 23andMe is fine, but it is a lower per in counter price than our average requisition.

Lisa Gill -- JPMorgan -- Analyst

And anyone say there's any changes on anything else from a managed care perspective or contracting, when we think about the sequential diagnostic business?

David King -- Chief Executive Officer

No. Not at all.

Lisa Gill -- JPMorgan -- Analyst

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from Patrick Donnelly of Goldman Sachs. Your line is now open.

Patrick Donnelly -- Goldman Sachs -- Analyst

Great. Thanks, guys. Maybe just on the retail strategy with the Walgreens expansion, can you just kind of talk through what made you comfortable expanding that so significantly, I guess what encouraged you about the initial locations, how should we thinking about the economics of that versus some stand-alone patient centers?

David King -- Chief Executive Officer

Sure. It's Dave. Start with the economic, so the economics that we have worked out with Walgreens, we're pleased with in that they are essentially comparable to the economics of our stand-alone patient service centers, and the reason that we like the retail strategy is it's very difficult to identify, are you getting incremental volume, but in the patient feedback that were the realtime patient feedback we're getting from those stores, we see a fairly significant number of patients who say that they are new to LabCorp or that they haven't been to LabCorp more than a year, and so we think it is increasing patient float versus a stand-alone patient service centers. The other thing that's very attractive about it is the opportunity to provide broader health services to the patient, so whether it's biometrics screening, whether it's drug monitoring and management through the collaboration of the pharmacist, whether it's presenting the patient with the opportunity to share their drug information, their pharmacy information and combine it with their lab information or whether it's the clinical trials piece, we get a much more in-depth and robust engagement with the consumer in the Walgreens centers, and so that's why strategically we think it's very important as part of the consumer platform and increasing our ability to capitalize on the power of our data.

Patrick Donnelly -- Goldman Sachs -- Analyst

That's helpful. Thanks. And then maybe just looking forward, I know you're not going to guide for 2019 by any means, but I think increasingly focus of shifting there, and I think the headwinds on profitability are pretty well understood at this point, but maybe just help us think about some levers to offset some of those headwinds whether fundamental underlying trends pull-through on new LaunchPad initiatives, it'd be helpful just to hear your perspective on '19?

David King -- Chief Executive Officer

Yes. Let me just say, I mean, I said in the prepared remarks, the headwinds in 2019 will be the steepest and they will, but let's do two things, number one, in the near-term, obviously we'll get some savings on both sides of the business from LaunchPad; number two, the growth in Covance and the opportunity in Covance will significantly offset the impact for us of what's going to happen with PAMA for example, in the diagnostics business; number three, we have significant amount of capital that we can deploy toward growth of the business, whether through share repurchase or through acquisitions. But I also want just to take a step further back and say from a broader perspective, we need to reemphasize to the community and to our investors, when you think about healthcare and think about what are the key elements of healthcare, you're seeing all sorts of innovation around whether it's digital and bricks and mortar, whether it's providers who are not physicians, whether it's emergency rooms that are part of hospitals, but one thing is fundamental about healthcare is that the front-line of diagnosis is in the laboratory. And it's inconceivable that there's going to be any healthcare system ever without the clinical laboratory, so as we think about where we are, we have capital to deploy, we're a scale business, the market trends are moving in our direction, whether it's sales of assets, whether it's hospitals, hospital collaborations, whether it's hospital outsourcing, and also think about the demographics of 10,000 people a day turning 65 and becoming eligible for Medicare and increasing coverage under whatever structure we're going to have from the insurance markets. So for the long-term our perspective is we're in a great business, the scale is there, the leverage is there, it generates a ton of cash flow, and I look at 2019 as a year in which -- yes, there are going to be some challenges, but in the long-term we're building for a significant opportunity to grow the business on the Covance side, on the lab side in the out years, and we feel very optimistic about where we are.

Patrick Donnelly -- Goldman Sachs -- Analyst

Understood. Thank you very much.

Operator

Thank you. Our next question comes from Jack Meehan of Barclays. Your line is now open.

Jack Meehan -- Barclays -- Analyst

Thanks. Good morning. Dave, I want to continue on that line, so -- and I really appreciate all the commentary on '19. I think PAMA and LaunchPad are pretty quantifiable, but is there any additional visibility you can provide on the impact of the national payer changes, whether it be on both the volume impact and on the pricing side, that would be helpful?

David King -- Chief Executive Officer

Morning, Jack. The volume side is very difficult to estimate or quantify, and so I'm not going to try to do that. On the pricing side, with United, we said that our position in the negotiation was that if they were going to open the contract that we felt we were entitled to an increase in price, unit price, and we said at the time that the contract negotiation concluded that we were very pleased with the outcome, so I think you can draw your conclusion there in terms of what the pricing is going to be. With Aetna, all in we view the pricing that we received as relatively flat, and so I don't see significant price downs in the transition of the managed care from going out of network with Aetna to going in, or from the United contract change. Now as the risk of being accused of talking down the year, which I'm not, but I'm just doing simple math for you, I will say, as I said in the last call, the math tells you that with United being having the larger membership and Aetna having smaller membership that the contract transition will be a net headwind for us, but it's not going to be a net headwind because of the price downs, in my view it's going to be a net headwind just because the math says if each national lab loses the same percentage of customers that they had in the prior exclusive arrangement we have, we will lose more than our competitor.

Jack Meehan -- Barclays -- Analyst

That's fair. Glenn or Dave, I have one follow-up on the operating income in the diagnostics segment for the quarter, so it was down a little over $40 million year-over-year, the business impact, you quantify that $13 million, I'm estimating PAMA is about 17, you also had European (ph) sale, is there anything else to call out in terms of the segment earning of this quarter, whether it be a positive or negative just year-over-year?

David King -- Chief Executive Officer

Yes. The positive is obviously would be the organic volume that we did have, as well as acquisitions, to your point we gave up some of that with the divestitures, and the other is really just, we talked about the personnel costs that while volumes were up, they were down a little bit from where we'd expected it, our cost structure was kind of supporting the higher levels, and part of LaunchPad and part of what we would expect to be an improvement as we go into the fourth quarter, we'll be taking down those costs to more right-size with the current level of demand.

Jack Meehan -- Barclays -- Analyst

Great. Thanks.

Operator

Thank you. Our next question comes from Kevin Ellich of Craig-Hallum. Your line is now open.

Kevin Ellich -- Craig-Hallum -- Analyst

Hi, guys. Thanks for taking the questions. I guess Dave, wanted to go back to your prepared remarks, I think you made comments about organizational changes, (inaudible) any more details you can provide or was that already covered?

David King -- Chief Executive Officer

Morning, Kevin. We will provide more details of it, but basically the organizational changes are just as we said streamlined organizational leadership and improve our focus. The volume growth take out all the puts and takes, we were satisfied within the quarter, but the margin, and as Glenn said the level of expense was a frustration, and we're going to manage that better and that's basically with the structural changes are designed to do.

Kevin Ellich -- Craig-Hallum -- Analyst

Got it. Okay. And then just going back to your comments on the national payer change transition even with United having more members than Aetna, I mean, are you just taking a more conservative stance here, because I guess we thought that more of the volume shift between the two largest labs would come from some of the smaller labs versus each other, I guess, can you help us understand that dynamic?

David King -- Chief Executive Officer

Yes. I think the -- my sense from the market Kevin, is that our competitor has been aggressively targeting our accounts where we have United business, and so certainly there'll be some volume shifting from regional labs, but it's no secret that were the two largest, and so if you're looking to gain volume with the contract change, where you can go, you're going to go to the largest partner, and we have the largest share of United business, so it certainly seems natural to me that our competitors is targeting our accounts. So, I agree with you there will be some shifting from the regional's, but if you just think about who had the largest single share of the United business, that would be us. We're the greatest opportunity for Quest to gain share, and that would be from us, and that's why we expect that there will be some volume loss for us and volume gain for them.

Kevin Ellich -- Craig-Hallum -- Analyst

Got it. Okay. Thanks, Dave.

Operator

Thank you. And our next question comes from Ralph Giacobbe of Citi. Your line is now open.

Ralph Giacobbe -- Citi -- Analyst

Thanks. Good morning. I just want to go back to 2019, and again, I know you don't want to explicitly guide, but hoping, Dave, you can give a little more on your definition of what modest growth, is that sort of low-single, mid-single, high-single, is that EPS including share repurchase or just operating earnings, and any further details you maybe well to give on sort of margin, just overall margin expectation structure? Thanks.

David King -- Chief Executive Officer

Yes. We'll give our guidance, when we do the 4Q call, Ralph, so modest means modest, and until we put a number on it, modest is going to be what it is. Modest EPS growth includes capital deployment, so it include share repurchase, acquisitions all of the components. And we're not going to say anything about margins other than as a result of the Covance LaunchPad process, as John said, we expect to see margin improvement there. Diagnostics margins, because of the impact of PAMA will likely be flat to down, but again, we don't guide generally margin, so that's probably about all that I can say.

Ralph Giacobbe -- Citi -- Analyst

Okay. All right. Fair enough. And then, I did want to go to the organic volume, it was positive, but again it did slow and I know you mentioned some of the business disruption impact, but anything you're seeing from the UNH book of business, specifically in terms of maybe early share shift away from you that you can comment on? Thanks.

David King -- Chief Executive Officer

No. We're not seeing anything significant in terms of early share shift, and remember to that end that, that we are still the sole exclusive national provider for United up through the end of the year. So any early share shift would mean moving from an in-network provider if they're going to our competitor to an out-of-network provider, that's not something that is good for patient, it's not good for the system. So we're not seeing much and my expectation is we're not going to see much until the first of the year.

Ralph Giacobbe -- Citi -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Erin Wright of Credit Suisse. Your line is now open.

Erin Wright -- Credit Suisse -- Analyst

Great. Thanks. It was a nice book-to-bill trend in the CRO business, and were there any outside business wins on the CRO side or how broad-based was it. And I'm curious if you could comment on your win rates overall, when leveraging the combined data assets across both the Covance and LabCorp side of business? Thanks.

John Ratliff -- Chief Executive Officer

Great. Erin, this is John. And there was no outsize wins, there was nothing above 10% of the bookings, the $1.5 billion so it's pretty broad-based, nice wins in terms of an aggregate on the early development lab side and clinical. And then, your second question was again, sorry, apologize, (multiple speakers) clearly, that is our differentiation. We're seeing clearly a vast majority of our trials and proposals using the data, we're up to around two-third, and moving to three quarters of the use of the data and all of our wins and all of our proposals (ph), and looking to move that into 100% of the trial. So we are using it in accordance with the high interest from our drug development partners, and clearly making us stronger in terms of our pipeline of opportunities.

Erin Wright -- Credit Suisse -- Analyst

Okay. Great. And a quick follow-up on the Walgreens relationship here, I guess, can you comment a little bit more on timing, magnitude, when this sort of will really materialize here and how you're kind of balancing that with your needs for your own patient service centers, and I know you commented on that before, but I guess does your -- do your thoughts in that some sort of way to productively rationalize some of the footprint here on a capital efficient manner? Thanks.

David King -- Chief Executive Officer

Erin, it's Dave. You're going to see a pretty substantial acceleration through the balance of this year and into next year in terms of the opening of new stores, obviously there's a build-out in many of the stores required and that's sort of negating factor, when we originally started the project it was -- we did not anticipate that we would be relocating patient service centers, we view this as another channel, but what we've seen is really nice traffic coming from existing patient service centers into Walgreens, so we'll be looking at the existing patient service center structure to determine whether there are opportunities to essentially either move them to Walgreens or combine that with the Walgreens capabilities.

Erin Wright -- Credit Suisse -- Analyst

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from Ricky Goldwasser of Morgan Stanley. Your line is now open.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Yes. Good morning. So first of all, just following up on this last comment, so when we think about 2019, you're saying you're building out Walgreens facilities, but you haven't made a decision as yet on how to rationalize existing infrastructure, should we assuming our models, some duplicate cost structure?

David King -- Chief Executive Officer

No. Ricky. No. It's Dave. Sorry, I didn't understand the keyword there. No, you should not assume duplicate cost structure, whatever we do with Walgreens will be sequenced with patient service center infrastructure.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Okay. Great. And then, Dave, in your prepared remarks, when you talked about 2019, you also highlighted the 2020, you're going to see a return to growth, so just to clarify we're going to see another PAMA step down in 2020, so are you basically saying that taking into account that PAMA step down, you can return to top line growth in 2020?

David King -- Chief Executive Officer

Yes. I think we can, Ricky, and I'm not, by the way I'm not saying we won't have top line growth in 2019, I still think there will be top line growth, because we're expecting, obviously growth in Covance. But once we annualize the impact of the managed care contract changes, which will be at the end of '19, then in my view, absolutely '20, yes, we have incremental PAMA impact, assuming that we don't get any relief on that, and we're proceeding under that assumption, but still working very hard to get relief. But assuming we get -- we all get relief, we still will have the opportunity to return to top line and stronger earnings growth.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Derik de Bruin of Bank of America. Your line is now open.

Derik de Bruin -- Bank of America -- Analyst

Hi. Good morning. A couple of questions, so on the Covance business, could you just give any color in terms of what the growth rates were in split was between the early and late stage businesses. And then as a follow-up on that, I know if my memory serves Covance was a strategic partner for Bayer, and I know they have discussed increasing some of their outsourcing potentially going forward, I'm just curious in terms of -- is that a chance of getting some incremental business from Bayer, are you still tight with them?

John Ratliff -- Chief Executive Officer

This is John, Derik. And so, we hope to really breakout the actual segment, all I will do in terms of color was the early development versus labs versus the clinical side, all areas grew. And in terms of the revenue growth, early development (inaudible). So nice growth from that segment, the growth across the board. And then on, they are very specifically, we don't really talk customer specific, they've been a great partner to us and continue to be.

Derik de Bruin -- Bank of America -- Analyst

Okay. And I'll do one lab follow-up, are you still expecting when you're modeling the contract changes for the bulk of that to be in the first half of next year?

John Ratliff -- Chief Executive Officer

Yes.

Derik de Bruin -- Bank of America -- Analyst

Okay. That's it. Thanks.

Operator

Thank you. Our next question comes from Brian Tanquilut of Jefferies. Your line is now open.

Brian Tanquilut -- Jefferies -- Analyst

Hi. Good morning, guys. Just a quick question, Dave. In your prepared remarks you talked about physicians doing more in office testing, is that a structural trend that we should be worried about. And then, just broadly speaking, as you think about overall demand, am I right in interpreting your comments that you don't have any worries just that you had these one-off situation this past Q3?

David King -- Chief Executive Officer

Good morning, Brian. I don't think in my prepared remarks that I said there was more position in office testing, I think what I said was that in terms of the Covance business and the new platform that we're launching that we thought we had the opportunity to provide self collection outside the physician office that could be relevant to trial, so maybe I wasn't as clear on that as I --

Brian Tanquilut -- Jefferies -- Analyst

Prescription drug monitoring business, I think --

David King -- Chief Executive Officer

Yes. So that was, yes, that's really specifically an issue in prescription drug monitoring at the moment, and historically what happens is when there's an area of testing that is growing rapidly, you may remember if you covered the space years ago, there was all the in-sourcing of pathology and there were all the shell (ph) labs setup to do pathology testing, and there are typically a pretty strong regulatory response when physician start doing significant in-sourcing, simply because it leads to significant increases in utilization, which are not necessarily, again, either in the best interest of the patient or the system. So, I see this as a near-term trend in one specific area of the business, I wouldn't characterize it as a long-term trend. And in in-office physician testing as a total percentage of the lab market has basically been in the low-single digits throughout, certainly throughout my career in the industry. So, no, don't see that as a particularly alarming trend more as a temporal issue. In terms of third quarter incidents being one-offs, obviously the weather is a constant, it's just an unpredictable constant, at the ransomware, we certainly hope is a one-off, but let's be realistic, I mean, every business today and certainly healthcare businesses among them is constantly being attacked, and so I think our team did a phenomenal job responding, our security is high and we continue to increase our investment in IT security, but you can never -- it certainly isn't going to be a continuing issue arising continuing implications of it. So I would say these are sort of singular events, and not things that we need to be thinking are going to persist in the long run.

Brian Tanquilut -- Jefferies -- Analyst

I appreciate. And just one quick follow-up for John, as I think about Covance and LaunchPad and Chiltern synergies coming in, where do you think we can take margins, I mean like (inaudible) of that a reasonable number to be thinking about overtime?

John Ratliff -- Chief Executive Officer

I know we'll do on the next call, our 2019 guidance, so we'll talk more tactically about that, but we're looking at peer level margins, and so you can look at the industry and then know that we have work to do in terms of the clinical and then on the early development, so we see opportunity there, but we'll give more details on the next quarterly call.

Brian Tanquilut -- Jefferies -- Analyst

I appreciate that. Thanks, guys.

Operator

Thank you. Our next question comes from Bill Quirk of Piper Jaffray. Your line is now open.

Bill Quirk -- Piper Jaffray -- Analyst

Great. Thank you, and good morning, everyone. Two questions, I guess, first off, I want to go back to one of the earlier Walgreens questions, Dave, you referenced additional services you could provide, which presumably overtime would lead to higher volumes, is this something that you're seeing now in the pilot program or should we be thinking about this as a future opportunity to help drive -- same-store sales or higher volume growth in that segment. And then secondly, John, any comment on pricing, you obviously referenced a healthy market on several occasion, so curious about your thoughts there, and then just overall industry capacity? Thanks.

David King -- Chief Executive Officer

Morning, Bill, it's Dave. On Walgreens, what we've done in the initial 17 service centers is basically setup the capability of providing the draws in the lab services. In many of our patient service centers now, we do have additional capabilities to do things like biometrics screening for employers or indeed for our own employees, and we'll be migrating those into the Walgreens stores, the thing to think about is in the kind of the prototype of these Walgreens stores is, there are other health-related activities there, there is a pharmacy, there might be audiology, there might be vision, there might be an urgent care, so all of these things will combine to give a broader opportunity for the patient to have a comprehensive healthcare experience in some of these cases even almost a quality (ph) primary care experience, and for us to capitalize on a more robust engagement with the consumer around the data around the biometrics, around information that would be really helpful for us to have that in many cases, because we don't see the patient and personally we don't collect.

Now I ask John the Covance pricing question that he asked.

John Ratliff -- Chief Executive Officer

Early development capacities are tight, pricing is good, the labs pricing will always be under pressure, but that's need to be more efficient and effective, and a best in class margins there. And then on clinical, the FSP model pricing is a lot of pressure, but again that forces you though into the automation technology tools process work that we're doing in order to better those margins. And on the programmatic side, from the standpoint of pricing, a normal environment, we're moving a lot more to milestone pricing and seeing deal in terms of looking for margin upside in that environment to offset even the pressure on the pricing.

Bill Quirk -- Piper Jaffray -- Analyst

Great. Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Mark Massaro of Canaccord Genuity. Your line is now open.

Mark Massaro -- Canaccord Genuity -- Analyst

Hey, thank you. Dave, it seems like the market is pricing and certainly PAMA here to stay and you're managing the business for Phase II of PAMA to be implemented on January 1, but can you just speak to any actions that ACLA is making now in terms of legal options in lobbying Congress, and can you give us any sense of substance or timing as it relates to any further actions?

David King -- Chief Executive Officer

Sure. Good morning, Mark. Start with the legal action, so the district court decision was disappointing putting on my long abandoned lawyer (inaudible), I can say that the judge decided the case on very narrow procedural grounds and although she noted that there were significant questions presented on the merit she didn't reach them, she didn't reach one of the key arguments today CLA made, which was that the regulations were beyond CMS's authority, because they were directly contradictory to the statute, so ACLA after a board discussion, and I think correctly is signed to appeal and filed the notice of appeal, we'll ask for an expedited schedule, but the reality is the likelihood of getting a decision before the middle to end of 2019 is pretty low from the court of appeal, so we'll continue to press on the legal front, but the process now will play itself out. On the regulatory and legislative front, we are very active with Congress, there is if I can characterize a general sense of, within the key committees and staff and among members that this was not what was intended that was not expected that 70% to 80% of the data points were going to come from LabCorp and Quest, and this was going to be kind of a cherry picked quote-unquote market analysis that would just pick the lowest price for everything, and so they are looking at potential fixes. ACLA had submitted some language that has been sent for scoring that would provide a near-term fix, so there is a considerable amount of activity in the congressional front. And then we continue to meet and discuss with CMS, what administrative options there may be, as well as you saw on the physician fee schedules, a proposed rule CMS asked about ways in which they could include more hospital data and we've been meeting with them recently and made a number of proposals. One of the initial objections from hospitals was the amount of resources that would be required to report the data, and so we've provided some proposals to CMS around things like aggregate data reporting as statistically significant surveys that would allow them to look at that market without the enormous burden of reporting. So there is a lot of activity on every front, and I'm still optimistic that commonsense is going to prevail here in terms of what PAMA was meant to do and how it's going to be implemented, but as we say, we're planning as though PAMA is going to be fully implemented and we're running the business that way.

Mark Massaro -- Canaccord Genuity -- Analyst

Great. And historically you've called out areas like Women's Health and NIPT as strong growth areas, is that still the case. And then in terms of next gen sequencing based tools like liquid biopsies, can you comment on the degree of importance that is both in your diagnostics and your CRO business, and are there ways that you can advance those offerings?

David King -- Chief Executive Officer

Well. Womens Health and NIPT continue to be strong areas of growth for us. Next gen sequencing is a part of the lab business in both LabCorp and Covance, mostly in terms of moving existing genetic testing or genomic testing onto that platform as oppose to (inaudible) or other prior methodologies. And innovations like liquid biopsy and other technologies are certainly things that we're considering in both businesses, we actually have a pilot program running within Covance on liquid biopsy, so these are going to be things, the technology or the tools continue to change and we're going to continue to adopt them as they make sense, as they provide improved patient care and obviously as we see reimbursement trends.

Mark Massaro -- Canaccord Genuity -- Analyst

Thank you.

Operator

Thank you. And this does conclude our question-and-answer session. I would now like to turn the call back over to Dave King for any closing remarks.

David King -- Chief Executive Officer

Thank you. Well, thank you for joining us this morning, I hope we've given you not only clear insight into the third quarter, but also into the long-term view that we have at the business and the success of our strategic execution, we look forward to speaking to you on the fourth quarter call and wish you a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

Duration: 70 minutes

Call participants:

Scott Frommer -- Vice President-Investor Relations

David King -- Chief Executive Officer

Glenn Eisenberg -- Executive Vice President and Chief Financial Officer

Ross Muken -- Evercore -- Analyst

John Ratliff -- Chief Executive Officer

Lisa Gill -- JPMorgan -- Analyst

Patrick Donnelly -- Goldman Sachs -- Analyst

Jack Meehan -- Barclays -- Analyst

Kevin Ellich -- Craig-Hallum -- Analyst

Ralph Giacobbe -- Citi -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Ricky Goldwasser -- Morgan Stanley -- Analyst

Derik de Bruin -- Bank of America -- Analyst

Brian Tanquilut -- Jefferies -- Analyst

Bill Quirk -- Piper Jaffray -- Analyst

Mark Massaro -- Canaccord Genuity -- Analyst

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