LabCorp expects continued growth from Covance, despite headwinds in 2019

By Melissa Fassbender

- Last updated on GMT

(Image: Getty/maxsattana)
(Image: Getty/maxsattana)

Related tags Covance LabCorp Earnings call

LabCorp sees significant opportunity to grow its Covance Drug Development business in the face of a potentially challenging 2019 and is on track to deliver costs savings as part of its LaunchPad initiatives.

LabCorp’s third quarter (Q3) 2018 revenue was $2.83bn, an increase of 8% compared to $2.62bn in the third quarter of 2017, the company reported yesterday.

LabCorp CEO David King said the performance was driven by strong results from Covance Drug Development, its contract research organization (CRO) business, 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, our differentiated offering and our Covance LaunchPad process improvement initiative are combining to deliver results in the market,”​ said King on the company’s third-quarter earnings call yesterday.

Read more: Covance plans closures – and expansions – as it aims to 'right-size'

The LaunchPad initiative​ is a two-phase plan intended to create operational efficiencies. The first phase included a reduction in workforce last year. The second phase focuses on long-term structural changes to create a more efficient business model.

The Numbers

  • Q3 revenue of $2.8bn, up 8% over $2.6bn last year
  • Q3 diluted EPS of $3.10, which includes the net gain on the disposition of businesses of $1.22 per share
  • Q3 adjusted EPS of $2.74, which was negatively impacted by approximately $0.10 per share from a ransomware attack and Hurricane Florence
  • 2018 adjusted EPS guidance of $11.25 to $11.45, up 22% to 24% over 2017
  • 2018 free cash flow guidance of $975m to $1.025bn

Covance’s revenue for the quarter was $1.1bn, an increase of 25% over last year. Adjusted operating income for this segment was 12.1% of revenue at $131m, compared to 10.8% or $94m last year.

The $37m 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,”​ said Glenn Andrew Eisenberg, executive vice president and CFO.

King said LabCorp expects another year of revenue growth and margin expansion in Covance, as well as cost savings in both businesses from the LaunchPad initiatives.

The company is on track to deliver $150m of net savings from Covance LaunchPad by the end of 2020 and $30m of cost synergies from the integration of Chiltern by the end of 2019, he explained.

The Covance LaunchPad initiative includes more than 90 projects. In an SEC filing from April 2017​, LabCorp announced the expansion of its LaunchPad business process improvement initiative to include Covance.

King said the initiative “has had a clear impact on Covance's margins, which improved by 130 basis points year-on-year.”

“The global service delivery model is well underway and will expand over the next two years,”​ he added.

Further details on the LaunchPad initiative will be discussed on the year-end call.

Strategic objectives

The company’s first strategic objective is to create “a leading and differentiated consumer experience.”

As part of this, LabCorp is preparing for the commercial launch of its wellness testing, which provides sample collection anywhere and access to results online.

The initial offering went through limited testing focusing on wellness and chronic metabolic illness. It will be expanded over time with application to the Covance business, as the company aims to support trials with “convenient, accurate testing outside the physician office,”​ King said.

This leads to the company’s second strategic objective: to streamline the drug development process.

King said LabCorp continues to execute on its $9.4bn backlog, while expanding its customer base. It also has won new awards through the integrated Covance and Chiltern offering​ and is making investments to increase efficiency in drug development, he said.

“Our investments encompass capabilities that support top line growth as well as enhance operational performance,”​ King added.

Other initiatives involve integrating new tools and technology into existing processes. This includes using robotic and software process automation.

“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 Xcellerate platform,”​ King said.

The company expects to see increasing sponsor adoption of mobile health technology and virtual trials, which have been touted as a potential solution to patient recruitment and retention problems.

King explained, “These offerings, individually or in combination, can speed patient recruitment and site selection, improve trial design and data quality, and thereby decrease study duration, costs and the patient burden of participating in clinical research.”

The third strategic objective is to support the transition to value-based care.

In concluding, King noted that “the headwinds in 2019 will be the stiffest,”​ but in the near term, savings will be realized from the LaunchPad initiative.

“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,”​ he said, referencing the Protecting Access to Medicare Act (PAMA)​.

The company also has a significant amount of capital that can be deployed toward growth in the business, he added.

King said, “I look at 2019 as a year in which yes, there are going 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.”

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