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Laboratory Corp Of America Holdings (NYSE:LH)
Q3 2019 Earnings Call
Oct 24, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen thank you for standing by and welcome to the Q3 2019 LabCorp's Holdings Earnings Conference Call. At this time all participants are in listen-only mode. After the speaker presentation there will be a question and answer session. [Operator Instructions] I would now like to hand over the conference over to your speaker Clarissa Willett, VP of Industrial Relations. Please go ahead.

Clarissa Willett -- Vice President of Investor Relations

Good morning and welcome to LabCorp's Third Quarter 2019 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.

This morning in the Investor Relations section of our website at labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call. Additionally, we are making forward-looking statements. These forward-looking statements include but are not limited to statements with respect to estimated 2019 guidance and the related assumption, the impact of various factors on operating and financial results, expected savings and synergies, and the opportunities for future growth.

Each of the forward-looking statements is 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 2018 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 will turn the call over to Dave King.

David King -- Chairman, President and Chief Executive Officer

Thank you, Clarissa, and good morning everyone. LabCorp delivered another excellent quarter again demonstrating the power of our combined capabilities. We saw strong market demand across both businesses, which with the benefit of strategic acquisitions delivered solid top line growth.

We also continue to manage expenses aggressively and execute our LaunchPad initiatives. As a result, revenue grew 3.4% in spite of a year-over-year headwind of 1.3% due to divestitures. Adjusted earnings per share grew 6% despite the impact of PAMA and the opening of managed care contracts and diagnostics, and we generated $363 million in free cash flow.

We continue with our disciplined capital allocation program, repurchasing $100 million of shares and successfully executing several tuck-in acquisitions. We have a robust acquisition pipeline and remain focused on strategic value-creating acquisitions in both of our business units. Covance [Indecipherable] across all measures, constant currency revenue growth increased by more than 9%. We realized 270 basis points of margin expansion, backlog increased by over $400 billion sequentially to $10.7 billion and our trailing 12-month book-to-bill stands at an impressive 1.28.

Despite the market headwinds we are experiencing Diagnostics turned in another strong performance, normalizing the performance for the impact of PAMA and managed care changes we grew revenue excluding divestitures by 4%, increase in revenue for acquisition by 2.3%, and volume by 1.7% solidly within our performance expectations for this business. At the enterprise level, we are successfully weaving Diagnostics and drug development together into a unified whole.

Creating value by focusing on consistent execution of our strategy to deliver world-class Diagnostics, bringing innovative medicines to patients faster, and use technology to improve the delivery of care. Among the recent examples of the power of the combined health systems continue to express interest in our ability to both reduce their lab testing costs and bring a meaningful clinical research opportunities. Today we have 16 Covance site partnerships with US based health systems and have offered these health systems some 200 meaningful trial enrollment opportunities.

This 2-pronged value proposition continues to gain traction with health system partners. We continue to win in the marketplace by using data as a differentiator. In the quarter and year-to-date we have achieved broad-based customer success. For example, by combining LabCorp patient population data with Covance's unique site location tools and protocol design insights we deliver a truly integrated patient-centric approach to recruitment. This approach enabled us to win 9 studies principally focused on oncology from a single sizable customer doubling our win rate and our program value.

Companion diagnostics also continued to show strong growth. Revenue from all aspects of companion diagnostics grew nearly 20% year-over-year. As we sharpen the focus on excelling in oncology in both of our businesses, the ability to develop, support, approve for and commercialize companion diagnostics will prove a sustainable competitive advantage.

Now I will discuss this quarter's Diagnostics highlights. Our managed care portfolio continued to perform well, a testament to our teams in the field who have done an exceptional job retaining our customers. The opening of the managed care contracts led to a net reduction in volume of 1%, stable since the last quarter and we continue to see volume and revenue growth across the rest of the managed care business.

We finalized several new partnerships with health systems in the quarter. We acquired the clinical diagnostics business SouthBend Medical Foundation enhancing the scope of services that LandCorp offers to hospitals, physicians, and patients across the region concurrently partnering with the health system to offer expanded pathology services. We also partnered with the New Jersey Primary Care Association, which represents 23 community health centers. By using our care intelligence platform we and NJPCA will provide physicians with accessible, comprehensive, and secure integrated lab and clinical data focusing on improving outcomes for patients with chronic conditions.

This partnership will help NJPCA achieved key value based care objectives. As we have stated, we are proud to be included in the United Healthcare's preferred lab network. Concurrently with the PLN in 2019 UnitedHealthcare made the decision not to renew the BeaconLBS pilot in Florida. Nonetheless, UnitedHealthcare continue the BeaconLBS for their national molecular contract beginning in September.

This reflects UnitedHealthcare's approach to offer programs and networks including the PLN to consumers on a national basis. Although the non-renewal of the Florida pilot will have near-term negative impact on revenue and margin in the fourth quarter and next year, we are optimistic about growth opportunities with the PLN and in addition to the UnitedHealthcare national molecular contract BeaconLBS has multiple other opportunities for revenue growth.

On the consumer front, we continue to expand accessibility, transparency, and convenience, so the consumers may engage LabCorp when and where they want to.

Through our LabCorp Walgreens partnership we continue to expand patient access in the retail healthcare center. We now have 58 locations opened in 9 states and more than 75 other locations in progress, total our rebuild of 600 by the end of 2022. In addition, we are pursuing other collaboration opportunities focused on our shared goals of enhancing tools available for clinical research, supporting the shift to value based care, and expanding health-related services available to consumers in the retail environment.

We significantly expanded our Pixel by LabCorp platform to include sample collection by PAMA in our patient service centers. Pixel by LabCorp enables to consumers to shop and pay online for many lab test directly. The menu now includes 28 test packages comprised of more than 100 analysts. We've been pleased with the initial response and continue to add offerings to the platform each month including measles and MMR immunity testing.

Our relentless customer focus drives our LaunchPad 2 initiatives which are designed to digitize the business, automate processes, improved productivity and create an exceptional experience for all of our customers and our employees. We remain on track to deliver a total of $200 billion of net savings by the end of 2021.

Now I will discuss this quarter's Covance highlights. Covance's strong performance is a result of building on our unique capabilities with strategic acquisitions, the creation of highly targeted offerings, enhanced therapeutic expertise, and focus geographic expansion. The result is added value across multiple dimensions of the Covance business, resulting in strong growth across all lines of business and customer segments.

One of our key strengths is that Covance is the only CRO to offer comprehensive R&D services for early development through commercial solutions around the globe. Our strength across the spectrum, allows us to fully support our partners' portfolios. The best evidence of success in the market is our solid track record of moving molecules from early development into clinical services, which continues to gain momentum with our customers. Our newly opened R&D center in Shanghai establishes Covance, as the only CRO to offer comprehensive R&D services from early development through commercial solutions in China. This expanded presence, as well as our more than 1,000 colleagues in China was a critical factor in winning a large oncology study with a China based biotech.

Covance also continues to strengthen its capabilities in the exciting area of cell and gene therapy, supporting sponsors focused on developing treatments for debilitating and life-threatening diseases. Covance offer superior capabilities across early development, early clinical, Central Labs, and late-stage clinical to deliver unique solutions in these complex therapeutic areas.

We have already seen significant opportunities and growth across the enterprise from preclinical to clinical development. Those opportunity span our entire geographic footprint including China, where adoptive T cell therapies are a major focus for oncology.

We also continue to execute the key priorities in our Covance LaunchPad initiative and are on track to deliver $150 million of net savings through these initiatives by the end of 2020. We were also attracted to deliver $10 million of net cost synergies from the integration of in-vitro by the end of 2021.

In short, Covance continue to deliver results and validate our decision to become a global life sciences player.

In closing, I'm grateful to our terrific leadership team and our 61,000 colleagues around the globe for their consistently outstanding efforts in support of our mission to improve health and improved lives. Those efforts are reflected once again and still in our strong third quarter performance and will continue to be reflected in last quarter's performance in the years ahead.

Now, I'll turn the call over to Glenn.

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Thank you, Dave. I'm going to start my comments with a review of our 3rd quarter results followed by a discussion of our performance in each segment and conclude with an update on our 2019 guidance. Revenue for the quarter was $2.9 billion, an increase of 3.4% over last year. The increase was primarily due to acquisitions of 2.8% and organic revenue growth of 2.2%, partially offset by divestitures of 1.3% and foreign currency translation of 30 basis points. Excluding the negative impact from PAMA of 90 basis points, organic revenue grew 3.2%.

Operating income for the quarter was $340 million or 11.6% of revenue compared to $343 million or 12.1% last year. During the quarter we had $29 million of restructuring charges and special items primarily related to LaunchPad initiatives, acquisition integration and the previously announced vendor data breach, partially offset by the release of a contingent consideration accrual for a prior acquisition.

Adjusted operating income, which excludes amortization of $62 million as well as restructuring charges and special items was $431 million or 14.7% of revenue compared to $429 million or 15.2% last year. Adjusted operating income benefited from organic growth, acquisitions and LaunchPad savings that were essentially offset by the impact from PAMA of $27 million and higher personnel costs, excluding the 80 basis point reduction from PAMA margins would have increased 40 basis points. The tax rate for the quarter was 24.1% compared to 36.2% last year. The adjusted tax rate, excluding special charges and amortization was 23.9% compared to 25% last year. The lower adjusted tax rate was primarily due to a favorable change in the Swiss tax rate, we expect the company's adjusted tax rate for the full year to be approximately 25%, implying a 4th quarter tax rate of approximately 24%.

Net earnings for the quarter were $221 million or $2.25 per diluted share. Adjusted EPS, which exclude amortization, restructuring charges and other special items were $2.90 in the quarter, up 6% compared to last year. Adjusted earnings in the quarter benefited by $0.02 from 3 unusual items. A $0.06 benefit from the favorable change in the Swiss tax rate, a $0.02 unfavorable impact from Hurricane Dorian, and a $0.02 reduction due to the non-renewal of the BeaconLBS UnitedHealthcare contract pertaining to the Florida market.

Operating cash flow was $456 million in the quarter compared to $252 million a year ago. The increase in operating cash flow was due to higher cash earnings and favorable working capital. Capital expenditures totaled $93 million or 3.2% of revenue compared to $98 million or 3.5% last year, as a result, free cash flow was $363 million in the quarter compared to 154 million last year. We remained active throughout the quarter in terms of capital allocation. During the quarter we invested $149 million in acquisitions and repurchased $100 million of stock. As of September 30, we had $950 million of authorization remaining under our share repurchase program.

At quarter end, our cash balance was $361 million up from $265 million at the end of the second quarter. Total debt at the quarter-end was $6.6 billion and our leverage was 3.3 times gross debt to last 12 months EBITDA.

Now, I'll review our segment performance beginning with LabCorp Diagnostics. Revenue for the quarter was $1.8 billion, an increase of 0.4% compared to last year due to organic growth of 0.9% and acquisitions of 0.8%, partially offset by divestitures of 1.3%, excluding the negative impact from PAMA of 1.5%, organic revenue increased 2.5%.

Total volume excluding divestitures increased by 0.7% over last year of which acquisition volume was 0.5% and organic volume was 0.3%. Organic volume was reduced by approximately 1% from the managed care contract changes. Excluding managed care contract changes organic volume was up 1.3%.

As a reminder, we do not include hospital lab management agreements in our volume, which would have added approximately 1.9% to our volume growth.

Revenue per acquisition, excluding the impact from divestitures increased by 1% due to favorable mix and acquisitions, revenue per requisition was negatively impacted by 150 basis points from PAMA and 50 basis points from the non-renewal of the Beacon LBS UnitedHealthcare contract. Given the nature of the Beacon LBS business, the unfavorable impact from the non-renewal of the contract is entirely reflected in revenue per requisition.

As such we expect an unfavorable impact from Beacon LBS on revenue per requisition of approximately 150 basis points in the fourth quarter due to the full quarter impact.

LabCorp Diagnostics adjusted operating income for the quarter was $296 million or 16.8% of revenue compared to $332 million or 18.9% last year. The $35 million decline in adjusted operating income and 210 basis point decline in margin were primarily due to the negative impact of PAMA of $27 million and one additional payroll day in the quarter, which was an offset from the payroll date benefit that we discussed in the first quarter.

In addition, organic growth and LaunchPad savings were partially offset by higher personnel costs, primarily consisting of the annual merit increase. We remain on track to deliver $200 million of net savings by the end of 2021 from our Diagnostics LaunchPad initiatives.

Now, I'll review the performance of Covance Drug Development. Revenue for the quarter was $1.2 billion, an increase of 8.7% compared to last year due to organic growth of 4.7% and acquisitions of 6%, partially offset by a 1.2% reduction due to the divestiture of our research products business as part of the Indigo transaction. And foreign currency translation of 80 basis points, excluding lower pass-throughs organic revenue continue to grow in the mid to high single digits.

Adjusted operating income for the segment was $175 million or 14.9% of revenue compared to $131 million or 12.1% last year. The $44 million increase in adjusted operating income and 270 basis point improvement in margins were primarily due to organic demand, acquisitions and LaunchPad savings, partially offset by higher personnel costs to support growth. We remain on track to deliver $150 million of net savings by the end of 2020 from Covance's LaunchPad initiative.

For the trailing 12 months, net orders and net book-to-bill remained strong at $5.7 billion and 1.28 respectively, backlog at the end of the quarter was $10.7 billion, an increase of approximately $400 million from last quarter. We expect approximately $4.2 billion of this backlog to convert into revenue over the next 12 months.

Now I'll discuss our 2019 guidance which assumes foreign exchange rates as of September 30th for the remainder of the year and includes the impact from currently anticipated capital allocation toward acquisitions, share repurchases, and debt repayment.

We expect revenue growth of 1.5% to 2% over 2018 revenue of a $11.3 billion. This is an increase over our prior guidance of 1% to 2%. This guidance includes the negative impact from divestitures of approximately 1.5% and foreign currency translation of 60 basis points.

We expect LabCorp Diagnostics revenue to decline 1.5% to down 0.5% as compared to 2018 revenue of $7 billion. This is an increase over our prior guidance of down 3% to down 2% primarily due to acquisitions in organic growth, partially offset by the non-renewal of the Beacon LBS UnitedHealthcare contract. This guidance includes the negative impact from divestitures of approximately 2% and foreign currency translation of 10 basis points.

We expect Covance drug development revenue growth of 5.5% to 7.5% over 2018 revenue of $4.3 billion, a reduction from our prior guidance of 5.5% to 8.5%. The reduction of the midpoint of guidance is due to the 40 basis point unfavorable change in currency translation bringing the full year negative impact from foreign currency translation to a 130 basis points. Organic revenue growth, excluding pass-throughs is also expected to be 5.5% to 7.5% over 2018.

Our adjusted EPS guidance is $11.20 to a $11.30 which is an increase of 2% to 3% of our 2018 adjusted EPS of $11.02 and a narrowing of the range as compared to our prior guidance of $11 instead of $11.40. We are holding to the midpoint of our guidance as the benefits from acquisitions and organic growth is being offset by the previously mentioned unusual items.

For clarity, although we do not provide quarterly guidance with only one quarter left in 2019, our narrow guidance implies a fourth quarter adjusted EPS range of $2.75 to $2.85, that includes a negative impact from the non-renewal of the Beacon LBS contract.

Free cash flow is expected to be $950 million to $1.05 billion, which is an increase of 3% to 13% over 2018 and unchanged from 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 Lisa Gill with JPMorgan.

Lisa Gill -- JPMorgan Chase & Co. -- Analyst

Good morning. I just wanted to follow up on what's going on in the margin side. Glenn, you gave a good amount of detail, but as we think about Beacon LBS impacting the fourth quarter and then probably having some impact on 2020, how do we start to think about margins going into 2020? Any framework, you can give us around thinking about the puts and takes on the margin side, can you expand margins or margin is steady as we think about 2020 and then anything else that you can give us this kind of just an early framework around 2020 would be really helpful.

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Sure Lisa. First of all, we're obviously saying, we're going to provide our guidance just in general on 2020 when we report our fourth quarter results as we do in the normal course. But to your question, with the Beacon LBS non-renewal of the contract, obviously, it is a headwind that we'll have going into next year. We've given kind of the impact if you will on the fourth quarter. So obviously you can annualize that and you'll have a sense of the headwind that we'll look to overcome through either additional businesses.

Dave commented earlier within Beacon as well as just the growth in our overall business. But as a general rule directionally and I think we've shared this with you and the others as a preliminary view of 2020 that overall for the Diagnostics business with another year of PAMA ahead, the good news is we now have half the managed care impact essentially in the numbers. Obviously it just started within the first couple of months. But essentially, relatively flat year-on-year and now with the Beacon non-renewal, we would expect the Diagnostics, plus or minus would be flat to down margins as we look into 2020 but again having Covance's expectation in drug development to see improved margins next year as well.

David King -- Chairman, President and Chief Executive Officer

Lisa its Dave, I would just say flat just slightly down. I want to be clear on that, flat just slightly down for 2020 in Diagnostics.

Lisa Gill -- JPMorgan Chase & Co. -- Analyst

And so as we think about that comment Dave of flat just slightly down. I think also you talked about some acquisitions this quarter. Do we start to see some of the accretion come in for 2020, is it cost cutting like what are some of the drivers that we should think about to offset whether it's Beacon LBS or PAMA or some of the other headwinds that you have in the Diagnostics business?

David King -- Chairman, President and Chief Executive Officer

Lisa it's Dave, I think you're correct. Obviously the acquisitions come in at a lower margin. And so as the synergies are realized that will improve margins. We also have the continued impact both the carry over and then the additions within the LaunchPad 2 program. And so those will offset some of the margin pressure that we're experiencing, as Glenn said we annualize the managed care contract changes basically in January, February. So there are puts and takes. But at the end of the day, we feel confident that flats is slightly down, its a very realistic view of 2020 margins in diagnostics.

Lisa Gill -- JPMorgan Chase & Co. -- Analyst

That's very helpful. Thank you.

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Yeah Lisa, just to answer that. Well, I have the annualization of acquisitions in Diagnostics, which do mix up the margins. We continue to see a good pipeline for Diagnostics. So as we look to redeploy capital in 2020 with the strong cash flow that we expect an opportunity to see additional benefits from that.

Lisa Gill -- JPMorgan Chase & Co. -- Analyst

Okay, thank you.

Operator

Thank you. And our next question comes from Jack Meehan with Barclays. Your line is open.

Jack Meehan -- Barclays Bank -- Analyst

Thank you. Good morning. So I wanted to continue on the diagnostic side and I was hoping you could walk us through some of the moving parts for the fourth quarter. So you've raised the full-year outlook for diagnostics, but that also includes the headwind from Beacon LBS. So just versus the model what's coming in better. Is there any other headwinds or tailwinds we should be thinking about for the fourth quarter?

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Yeah. Jack this is Glenn. I'll take a first cut. But as you see with the implied guidance first on the revenue side, we're looking at a positive quarter in the fourth quarter. So we're benefiting, if you will from the acquisitions that we've done that we'll have a full quarter's worth if you will. We've also, as you know we've been experiencing the headwind from the divestitures that we've had that essentially have annualized in the 3rd quarter. So, we'll get the benefit of that. And then just normal call it organic demand growth within the business, as we commented earlier in the fourth quarter, we will actually get the benefit of a revenue day that would have been the offset to the headwind from a revenue day that we experienced in the first half of the year and then again to your point, we do have the headwind in Beacon, but as we look across the spectrum in the 4th quarter we do expect to see some good top line growth. And while we do expect margins to be down in the first quarter year-on-year. We expect it to be down to least amount that we would have experienced throughout any quarter this year, based upon that topline growth but also based upon the continuation of diagnostics launch pad initiative.

Jack Meehan -- Barclays Bank -- Analyst

Great. That's all helpful. And then can't help it asking a couple of questions on 2020 as well. I'm just curious as we sit here today, how meaningful you think the PLN could be to growth and then also in terms of some of the recent contracting on the managed care side how you're feeling about just unit pricing for the lab business?

David King -- Chairman, President and Chief Executive Officer

Jack, its Dave. So in terms of the PLN obviously being included in it, one of the small number of laboratories is terrific opportunity. UnitedHealthCare is undertaking some initiatives that we are very supportive of such as Euro dollar co-pays for some of their offerings and they are upselling the PLN to ASO employers right now in this selling season. So we'll know a lot more about the long-term opportunity when we see what the uptake is among employers. But we feel very optimistic that the PLN is an opportunity to move share away from the higher cost providers to us as a high quality and lower cost provider. I also want to point out just reiterate that in entering the PLN there was no downward pricing adjustment with United, so our price remain what we had previously agreed to when we were selected to be part of the PLN network. In terms of unit price, what we always say is unit price is basically as it is everywhere in healthcare services a flat to slightly down proposition, so I think in a typical year, you would expect to see unit price you know at zero to negative 50 basis points.

The positives that we reported in revenue per requisition as you know are driven by test mix and utilization. So as we see growth in higher value testing as we see growth in Esoteric testing that improves the reported revenue per requisition but it doesn't change the the basic nature X panel, which is a singular event of unit price being sort of flat to 50 basis points down. And that's how we think about unit price, year in, year out 2020 not seeing any difference.

Analyst

Great. Thank you, Dave.

Operator

Thank you. And our following question comes from the line of Kevin Caliendo with UBS. Your line is open.

Kevin Caliendo -- UBS -- Analyst

Hi, guys. I just wanted to go through Beacon thing a little bit more. I want to make sure the math that we're doing here is right, because if I'm looking at your guidance for the fourth quarter it assumes that the diagnostic margin would fall to about 13% and that's for the full quarter of Beacon and our math that 150 basis points on revenue per requisition is around $25 million impact, is that all falling, should we just assume that all falls to the EBIT line, and that's maybe how we would want to think about it for the first three quarters of 2020?

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

-- No

Kevin Caliendo -- UBS -- Analyst

I'm sorry that's Diagnostics, I might add that's Covance at 13% diagnosis is higher than that. I apologize.

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Yeah, Kevin. The biggest part using with what the 1.5% impact on RevRec would get you to call it the $25 million in revenue that you're speaking to. But obviously there is a margin associated with that then will fall to the operating income in this we talked about Beacon was an attractive business with margins that were higher than the diagnostics overall, but that's a shortfall to earnings that again we'll have to make up.

So annualizing that is a fair proxy to start and again we'll look to make up some of that through additional business to the business again LaunchPad savings in the growth overall in the business, but your margin decline that at least the margin that you're, it's saying in the fourth quarter, as we said earlier, while margins will be down in the fourth quarter, again, in part because of the impact of Beacon they'll be down less than it's been down all year.

So we actually do see some favorable in this coming in and when you look at our margin the year-ago were I think we were 16.5 so you can kind of factor in that the margin will be better than what you're expected.

Kevin Caliendo -- UBS -- Analyst

Got it. Okay. That is helpful. And just one quick one on Covance. The M&A contribution was bigger than we had thought and you talked about some pass-through revenue weakness, I just question excluding the pass through what was Covance organic revenue growth and at what point should we cycle past the -- the pass through weakness we've seen in the Covance segment?

David King -- Chairman, President and Chief Executive Officer

Yeah, I think that as we said in the press release and then Glenn just stated that pass-throughs without-- excluding the pass-throughs we expect to grow mid to high single digits. And then from the standpoint variety of factors include influence the pass-throughs and steady lifecycle geographic mix, some business mix and right now I think once we get through 2019 you'll see, as we see the early development the labs, the content of FSP mix versus programmatic, you will see a little bit of volatility, but 2020 will be a more natural year as I call it.

Kevin Caliendo -- UBS -- Analyst

Great, that's very helpful. Thanks guys.

Operator

Thank you. And our next question comes from the line of Kevin Ellich with Craig-Hallum. Your line is open.

Kevin Ellich -- Craig-Hallum -- Analyst

Good morning, thanks for taking the questions. I guess Dave wanted to go back to your comment in the prepared remarks about the 9 studies that you won from a single customer in oncology. Can you give us little bit more color as to what's driving that, who the customer was and if you have other opportunities like that?

John Ratliff -- Chief Executive Officer, Covance Drug Development

Yeah, Kevin, this is John. We don't provide a specific customers but clearly with this large pharma customer. They've seen the value of the data. They've seen the value of -- patient recruitment strategies through the voice of the customer and the specific inclusion exclusion criteria that they can manage -- the trials in a much quicker manner and more efficiently and effectively and so that has then upped our win rate significantly doubling as well as in magnitude of dollars then from that.

It's principally in the oncology area, but also in the NASH area respiratory, but we've seen our strategies, our data capabilities work and work very effectively and obviously broadening that out to the entire oncology therapeutic area, as well as our other therapeutic areas, that we support.

Kevin Ellich -- Craig-Hallum -- Analyst

Great, thanks John. So, Dave, I know this is your last call. I just wanted to say happy retirement and it's been great working with you.

David King -- Chairman, President and Chief Executive Officer

Thank you, Kevin. Appreciate it.

Operator

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

Ralph Giacobbe -- Citi -- Analyst

Thanks, good morning. Dave I do want to go back to your comments on sort of the unit price commentary being sort of flat to slightly down, I think you made a comment that like it is in healthcare, I just want to clarify -- as we look across sort of the healthcare spectrum managed care been in specifically has pointed unit price being sort of the overly significant driver of call it a 6% type trend. So I guess I'm still unclear and don't understand how you can't get at least a CPI, if not more increase from commercial especially given sort of the value proposition that you present, which obviously has been evident by the open network and open contracting.

David King -- Chairman, President and Chief Executive Officer

Yeah. We just spend a lot of time on this Ralph, but I think at a high level, I would summarize by saying that, first of all just realize that from a structural perspective, the market particularly with hospital acquisition of physicians and their ability to direct work into the hospital laboratory creates a competitive disadvantage for us that does affect pricing right because they get paid more they have a in many markets a dominant market position and now they can dictate to the physicians of the lab work has to be sent there.

So that's one sort of structural impediment to this idea that we should be able to get, we should be able to get market -- sort of market rate increases every year. The second thing is, I think your 6% unit price statistic is distorted when you think about the laboratory business, because if you think about, for example, pharma were you may get a 10% price increase on a drug that cost 50 times the typical lab and counter that's going to heavily skew your overall assessment of price.

If I look at healthcare services broadly, think about distributors, think about pharmacies, think about laboratories, think about home health, think about durable medical equipment, you're not seeing price increases you're seeing price being flat to down. And you're seeing contract negotiations, leading to down-pricing in the typical pace. So I'm actually very proud of what we've accomplished in unit pricing over this year and over the last several years, but particularly this year with the contracts opening. And then the last comment I would make you for better or worse is when you're seeing it as offering a service that is readily replacable by somebody else it's just difficult to go in and say, well, we should get a price increase when others can be switched in. All that said, I will say we negotiated in our contracts for cost of living increases, -- type increases we don't get them every year, but they are part of our contracting strategy and that's part of the reason that we are able to keep price -- unit price relatively flat over time.

So I hope that's helpful and obviously, it's a very complicated topic, but those are some of the market dynamics that I think explains why it's not just a simple proposition of we get a price increase.

Ralph Giacobbe -- Citi -- Analyst

Okay, all right. Yeah, fair enough. I guess just my quick follow up here, the other income line I know it's nuanced question, but it did have a fairly sizable swing in the quarter, what was that related to? And can you help on, sort of the annual run rate of that line item maybe moving forward? Thanks.

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Ralph, were you at other income, is that what you said?

Ralph Giacobbe -- Citi -- Analyst

Yeah. The other income, the other net I think went on next negative $10 million expense to a couple of million dollars favorable or positive.

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Yeah, when you look at the, call it the year ago period of $209 million and you'll see this counted in the reconciliation of our GAAP versus adjusted that was essentially the gain on the divestiture of our Food Solutions business, and that even in the third quarter of this year we had again in that reconciliation chart, you'll see the same. There was a net impact of around a $2.7 million gain due to the benefit of primarily a gain from our venture fund that $2.7 million as well as the, call it the 2.9 are both excluded from our as adjusted results. So other income slashing plus or minus, relatively flat.

Ralph Giacobbe -- Citi -- Analyst

Okay. Maybe we can follow up offline. Because I thought I saw even sequentially that change, but we can follow up on that offline. Thank you.

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Okay. Thank you.

Operator

Thank you. And our following question comes from Bill Quirk with Piper Jaffray. Your line is open.

Bill Quirk -- Piper Jaffray -- Analyst

Great, thanks. Good morning, everybody. So I guess, so I appreciate the comments around the ongoing revenue synergies for Covance that are being helped augmented by lab core diagnostics business. Dave, I was wondering, thinking about revenue synergies going the other direction, ie leveraging Covance's access to clinical trials in terms of directing that diagnostics business any thoughts there?

David King -- Chairman, President and Chief Executive Officer

Yeah, Bill. Good morning. As I mentioned in the prepared comments, the Covance site partnerships provide benefits in both directions. So the opportunity to offer clinical trials to health systems is seen as positive because it gives us more than just we can help you manage your lab cost, we can help you reduce your lab cost, it gives us, we can help you reduce your lab cost and manager your lab cost, we can also bring new revenue opportunities. And so I think that the Covance business supports the diagnostics business in a very clear way in that instance.

John Ratliff -- Chief Executive Officer, Covance Drug Development

I'd also say and this is John when you get into the capabilities of the hybrid virtual trials, the diagnostics capabilities with patient service centers coupled with the Covance central lab analytics, the market access areas of clinical side as well as the CRO side allow you to do those hybrid virtual trials in a much more efficient manner and so that's another way of utilization of multiple parts of the enterprise.

Bill Quirk -- Piper Jaffray -- Analyst

Understood. And then I guess as a follow-up, I guess is there any way to historically you've quantified periodically the Covance impact from LabCorp could we maybe talk a little bit about again the LabCorp benefit from Covance. And then secondly just on the PLN and broadly speaking, there is a lot of chatter around others beyond the United following suit, any update there. Thanks guys.

David King -- Chairman, President and Chief Executive Officer

Well, yeah, I think what you -- I think the best way to quantify the benefits of the businesses is top line growth and Covance grow into 9% this quarter and constant currency and enterprise, when you adjust for the divestitures grew almost 5%. So I think it's pretty clear that the top line growth is strong as a result of the combination of the businesses. On the PLN we continue to have conversations with other payers, nobody has rolled out something similar. I think there is great interest in what United is doing and if it's successful, we'll see followers.

Operator

Thank you. And our next question comes from the line of Erin Wright with Credit Suisse. Your line is now open.

Erin Wright -- Credit Suisse -- Analyst

Great, thanks. I had a broader question, just on underlying demand trends across the CRO segment and Covance and where are you seeing better demand trends in full service or FSP or large pharma versus smaller biopharma, and have there been any sort of meaningful changes and outsourcing demand trends in your view or any sort of changes that you've seen in the nature of the new business wins that you had in the quarter? Thanks.

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Had a great quarter in terms of business wins and they were broad-based and so it was broad-based in terms of early development labs as well as clinical with respect to segmenting that, the significance of the biotech sector within our wins has been increasing and that's where the vast majority of the portfolio development is in terms of pharma and so we see that within our order rate and then with respect to, the FSP versus the programmatic, we do see strength on both sides.

We do see strength in terms of the programmatic wins as well as the FSP. I think if you look at market data, the FSP might be slightly higher, but from the standpoint of -- in terms of the way we look at the business and the way that is flowing the early development business, of course, is a quicker burn business, but in the Central labs and the clinical business are seeing broad based positive and our penetration in that obviously with the 1.28 last 12 is a very good result.

Erin Wright -- Credit Suisse -- Analyst

Okay, great, thanks. And then can you give us an update on the relationship with Walgreens, where it stands in terms of both the lab side of the business as well as from the CRO perspective too? Thanks.

David King -- Chairman, President and Chief Executive Officer

Yeah, it's Dave. As we mentioned in the prepared remarks from the diagnostic side the Walgreen -- we continue to roll-out the Walgreens, we continue to get very positive commentary around the patient experience from the kind of integrated side of integrating patient data, recruitment, virtual trials, we continue to discuss the roll-out of what we call the beyond PSC aspects of the Walgreens relationship and we expect to have an update on that as we move into 2020.

Erin Wright -- Credit Suisse -- Analyst

Okay, thank you.

David King -- Chairman, President and Chief Executive Officer

So we're at 10 minutes before the hour. We still have six questioners in the queue. We'd like to get to everybody. So let's please one question and one follow-up and also, if your question has been asked please don't ask it again. Thank you.

Operator

Thank you. Our next question comes from Eric Coldwell with Baird. Your line is open.

Eric Coldwell -- Robert W. Baird & Co. -- Analyst

Hey, thanks, David. You made it easy for me because Erin actually hit on my topic. So I'll leave it to the next questioner. Just want to say good luck in your future endeavors. Thanks so much.

David King -- Chairman, President and Chief Executive Officer

Thank you, Eric. It's been a pleasure.

Operator

Thank you. Our next question comes from Donald Hooker with KeyBanc. Your line is open.

Donald Hooker -- KeyBanc Capital -- Analyst

Hey, guys good morning. So you guys have talked a couple of this quarter and last quarter about increasing pass-through from preclinical to clinical trial work at Covance. I guess you've had those two businesses at Covance for many years. Is there some reason why I guess you're seeing more pass through now versus in prior years. Is there something going on there in the science in what you're doing?

John Ratliff -- Chief Executive Officer, Covance Drug Development

Yes Donald. This is John. And so we are -- whenever you have a large content of of biotech within the early development, then the movement in terms of the later stage or early late stage then moves in much greater penetration. I'd also say that there is the level of science and organization that we've put within the early development to enhance that capabilities as we bring across the bridge, whether that's on the pure clinical side or on the regulatory side whether that moves to our bio areas or whether that view moves into the first in man within the Phase 1 area.

So clearly that first forward up the ladder is tremendous. We have over 100 opportunities there right now.

David King -- Chairman, President and Chief Executive Officer

And I'll just say Don is that historically I think prior to John coming, Covance was a much more siloed organizations, early development kind of thought about early development and land thought about lab and under John and Paul's leadership, we've really expanded the scope of the organization. In my mind work through some of those silos, so that there is the, the Covance organization is much more integrated and thinking about and tracking these opportunities to pull them cross and that's part of the reason for the success .

Donald Hooker -- KeyBanc Capital -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Mark Massaro with Canaccord. Your line is open.

Mark Massaro -- Canaccord Genuity -- Analyst

Hey, guys. Thank you for the question. I might be splitting hairs here. But the managed care impact from volumes was about 100 basis points. First couple of quarters was about 70 basis points. Recognizing that that's a small difference. I'm more asking about your expectations on seeing a trend potentially getting better or maybe becoming a little more challenged as we think about 2020 because your large competitor talked about it's confidence and continuing to add lives from United. So any feedback there would be helpful.

David King -- Chairman, President and Chief Executive Officer

Yeah Mark, it's Dave. I think it was -- I think the spaces have been 70, 90, 90, 100, which in my mind is flat. I mean, we know 70 in the first quarter, because the change over actually looks like it started more in February than in January and then it has been 90, 90, 100 so I definitively can say the trend is stable. We are not losing share, our participation rates for United in Horizon have been quite steady and in terms of the future, we had the same growth opportunities in the same networks that our competitor talks about. And so it's one of the reasons I feel very optimistic there are a number of market forces the demographics, the aging population, the greater utilization of lab as people as people age, the introduction of new test and technologies, all of those things support long term growth as well as the things like the preferred lab network that are innovating in favor of the highest quality and lowest cost providers.

So we feel great about what we've done this year in the managed care contracting. The team the boots on the ground in the field, done a terrific job we're really proud of that.

Operator

Thank you. And our next question comes from Matthew Larew with William Blair. Your line is open.

Matthew Larew -- William Blair & Company -- Analyst

Hi, good morning. Thanks for taking my question. Dave, you just mentioned some in a broader dynamics driving the language during the next several years. I just want to know if whether you early enough with Walgreens in terms of whether you're reshaping of your footprint into more of a retail setting could be a long term driver of share that's something with the providers of scale can't be replicated by some of your hospital have competitors. And then second, if you think this sort of in the second year PAMA whether you're starting to see a sort of a step change in the willingness or interest of a possible an average labs to partner with you. Thanks.

David King -- Chairman, President and Chief Executive Officer

Sure. So, second question first, yes, I think the dynamics of PAMA are being becoming much more well recognized in the marketplace. It is affecting in the industry and we've talked about some of the ways with the challenges, the smaller -- providers are our smaller labs are facing, I'm going to say again, as I've said all along is not a good thing for patients access is being limited nursing home patients are being left with our regular services, it's very unfortunate situation and we continue to work very hard through the land back them through the lawsuit to reverse the misguided way in which this has been implemented by CMS.

In terms of the Walgreens opportunity and thinking about offering more opportunity in the retail setting. I think of Walgreens is being more complementary to our footprint that replacing a lot of the existing footprint, patients are still going to want to come to patient service centers in the doctor's office or here the doctor's office at the same time, there are a lot of patients who are not fasting or want to come in the afternoon. We're going to be able to make use of Walgreens, they have to make trip to the drug store most people leave the doctor's office with a prescription to pick up and the lab slip.

We provide them the opportunity to fill the prescription and get their labs on there. So I think I also think as Walgreens and other retailers start partnering more broadly in offering broader healthcare services so urgent cares in the retail clinics in the retail we work with CVS and Mediclinic and all of these things are going to, lead to further growth opportunities for us. And that's why we've had so much focus on the consumer and on meeting the patient where they want to be met.

Matthew Larew -- William Blair & Company -- Analyst

Thank you.

Operator

Thank you. And our following question comes from the line of Derik De Bruin with Bank of America. Your line is open.

Derik De Bruin -- Bank of America -- Analyst

Hi. Good morning and thanks for the question. So, just a -- just going back to think about fourth quarter the last year, there was obviously a number of headwind from the DTC volumes and potentially in-sourcing from other hospitals and probably such a contract shipped weather. I'm just trying to infect -- I am just trying to understand -- I am just trying to understand the impact when you start to think about normalizing the outlook for 4Q this time and then compared it to last year. And so, like what's better what's worse when you look at this?

And I'm just trying to figure out where we are with the various headwinds and where, what's going to get annualizing this, I mean obviously something has gotten better. You guys going to get the full impact of the United contracts which but just sort of compare and contrast on in the quarter would be great. Thanks. And that's my question.

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Yeah, Derik. This is Glenn. I'll take the first one. To you point, we did have a softness in the fourth quarter last year. But when you really think about from this year's standpoint, we have good organic volume growth again, with the offset being opening up in the managed care contract. We have a full year impact of our LaunchPad initiative. We will have a benefit of a revenue day. The acquisitions that we've done are additive to call it the annualization of our divesture that would have been there in the fourth quarter of last year, that's not going to be in the fourth quarter of this year.

So as you -- you know, fair amount of pluses and minuses but from our perspective we expect to see good growth, good margins, albeit still down, even a year ago, but that's all driven off of PAMA. But again, the least of margin decline that we would've seen year-on-year for this year setting us up well as we move into the next year.

David King -- Chairman, President and Chief Executive Officer

Derik. Its Dave. I think two major factors that we spoke about the last year in the fourth quarter were the hospital volumes and then direct-to-consumer genetic testing. And we haven't seen any impact or unusual change in hospital volumes this year so far, at any point the way that did last year in the fourth quarter.

And as we've said and continue to say that we modeled the direct-to-consumer businesses basically flat to down. So those are the status if you will of the items that we call out last year in 4Q is being the headwinds.

Operator

Thank you. And our next question comes from the line of Ricky Goldwasser with Morgan Stanley, your line is open.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Yeah, hi. Good morning. And so Dave going back to some of your prepared comments when you talked about BeaconLBS, you highlighted that there are multiple opportunities for growth with other payers. So maybe you can share with us what type of discussions you are involved with?

And also from a payer perspective, what's the value-add? But also when -- if payers need to kind of decide we want to do -- do we want to adopt BeaconLBS versus a Preferred Lab Network. What you think is easier from a payer perspective? And then just follow-up question that I have is, your comments around margin for next year for diagnostic being flat to slightly down -- in line with what you said when we last met back in September in our conference and we view them as very, very bullish.

So my question -- my follow-up question on that is back in September did you factor in that the exit of Beacon already into your comments or have other things transpired since that help off that in help you maintain that kind of that positive outlook into next year?

David King -- Chairman, President and Chief Executive Officer

Good morning, Ricky. I will start first of all, in the prepared comments I said BeaconLBS has multiple other opportunities for revenue growth, I didn't specifically talk about payers. There are some opportunities with payers. But there are multiple other opportunities with ACO's, with health systems of want to manage utilization internally with large multi-disciplinary physicians, specialty practices that want to adhere to clinical guidelines for testing. So the value proposition is and -- by the way I will say from my perspective BeaconLBS was huge success in Florida.

Certainly there was some market push-back about utilization management. But there were significant savings realized. There was a much higher level of network adherence from physician so it certainly works. And in my view the decision that United made was as I said in the prepared comments, it was a strategic decision on their part to offer programs and networks including the PLN and BeaconLBS to consumers on a national basis.

So I think of the opportunity for any payer or provider or health systems looking at BeaconLBS as it's an opportunity to enhance testing utilization, pursuant to evidence based guidelines. It's an opportunity to manage -- the use of high cost testing particularly by non-network providers. And it's an opportunity to engage directly with the physician about test selection at the point service to educate them about when they are choosing the right test and what it's going to cost the patient to have the test performed. So that's -- I think why we are optimistic about the revenue opportunities for BeaconLBS despite the non-renewal in Florida.

In terms of the margin Glenn, you want to comment on that one.

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Yes, obviously when we were together in September and we did talk kind of flat to slightly down. Our margin outlook for next year, which again will provide more color as we go in the 2020 is just obviously a wide range of outcomes. Obviously at that time, we do the potential for the non-renewal of the contract is one of the factors that have come in, which is why we're giving you a little bit of bandwidth relative to our margin expectations.

Operator

Thank you. And I'm not showing any further questions at this time, I will now turn the call back over to your speakers for any further remarks.

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

Thank you.

David King -- Chairman, President and Chief Executive Officer

Well, I guess we have to do a little valedictory here, so what I want to talk about is that on October 6, we celebrated the 50th anniversary of LabCorp as a Company, which is pretty amazing when you think about it. In 50 years of history here, one thing we've learned is that when we begin an amazing journey and pursue it with preparation and passion, there's no telling where it could end. And I am at the end of an amazing journey; I've been enormously privileged to play a part in an incredible process of growth and transformation at this company. And I want to thank all of you for your encouragement and your support along the way.

I am leaving the company in great hands. We have outstanding leaders succeeding in terms of Adam Schechter and John Paul, and Glenn and the entire LabCorp and Covance leadership team, and of course, our 61,000 dedicated colleagues around the world. I couldn't feel better about the long term opportunities for this business, and the long term validity and proven success of our strategy.

So I know that the LabCorp flame will burn brightly while the torch isn't keeping of our next generation of leaders. I wish every one of you good luck and Godspeed. Thank you and good day.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Clarissa Willett -- Vice President of Investor Relations

David King -- Chairman, President and Chief Executive Officer

Glenn Eisenberg -- Chief Financial Officer, Executive Vice President

John Ratliff -- Chief Executive Officer, Covance Drug Development

Lisa Gill -- JPMorgan Chase & Co. -- Analyst

Jack Meehan -- Barclays Bank -- Analyst

Analyst

Kevin Caliendo -- UBS -- Analyst

Kevin Ellich -- Craig-Hallum -- Analyst

Ralph Giacobbe -- Citi -- Analyst

Bill Quirk -- Piper Jaffray -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Eric Coldwell -- Robert W. Baird & Co. -- Analyst

Donald Hooker -- KeyBanc Capital -- Analyst

Mark Massaro -- Canaccord Genuity -- Analyst

Matthew Larew -- William Blair & Company -- Analyst

Derik De Bruin -- Bank of America -- Analyst

Ricky Goldwasser -- Morgan Stanley -- Analyst

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