Labcorp Holdings Inc. (LH) Q4 2007 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Fourth Quarter 2007 Laboratory Corporation of America Earnings Conference Call. My name is Daniel and I will be your coordinator for today. At this time all participants are in a listen-only mode. And we will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over Mr. David King, Chief Executive Officer. Please precede Sir.

Thank you Daniel. Good morning and welcome to LabCorp's fourth quarter conference call. Joining me today from LabCorp are Brad Smith, Executive Vice President of Corporate Affairs, Brad Hayes, Executive Vice President and Chief Financial Officer, Ed Dodson, Senior Vice President and Chief Accounting Officer and Eric Lindblom, Senior Vice President of Investor and Media Relations. This morning we will provide a review of our fourth quarter and year-to-date 2007 results, and update you on achievements in key strategic areas during the quarter. Later in the call we will update guidance for 2008 and cover a few anticipated questions. I would now like to turn the call over to Brad Smith who has a few comments before we begin.

Before we begin, I would like to point out that there will be a replay of this conference call available via the telephone and Internet. Please refer to today's press release for replay information. This morning the company filed an 8-K that included additional information on our business and operations. This information is also available on our website. Analysts and investors are directed to this 8-K and our web site to reviewed this supplemental information. Additionally, we refer you to today's press release for a reconsideration of EBITDA, which is non-GAAP financial information discussed during this call. I would also like to point out that any forward-looking statements made during this conference call are based upon current expectations and are subject to change, based upon various important factors that could affect company's financial results. These factors are set forth in detail in our 2007 10-K and subsequent filings. Now Brad Hayes will review our financial results.

Thank you Brad. Our fourth quarter results are as follows. Net sales increased 11.9% to $1,005.8 million. Compared to the fourth quarter of 2006, testing volume measured by the accessions increased 11% and price increased 0.9%. We estimate that net sales increased by approximately 5 percentage points due to our agreement with UnitedHealthcare. Before restructuring and other special charges recorded in the fourth quarter of 2007 and 2006, earnings per diluted share increased 22.4% to $1.04 for the fourth quarter versus $0.85 in the fourth quarter of 2006. During the quarter, our estimate of the impact of the fires in San Diego and weather related events resulted in a reduction in EPS of $0.01. During the quarter, we recorded a restructuring charge of $12.3 million. The charge related primarily to the closure of underutilized facilities as well as cost related to further reductions in our work force, including the [inaudible] downsizing. We continue to take actions to ensure that our capacity and capabilities remain aligned with our volumes and service requirements. As we act on cost reduction opportunities, they are identified going forward, there likely will be similar restructuring charges. EBITDA increased 13.6% to $258.7 million or 25.7% of net sales compared to $227.7 million and 25.3% of net sales in the fourth quarter of 2006. Operating cash flow for the quarter, net of $8.7 million in transition payments to UnitedHealthcare, was $240.4 million. Through the end of the year, the company had been built $38.3 million in transition payments related to our agreement with UnitedHealthcare with approximately $32 million paid. The $38.3 million billed, represents the vast majority of claims activity through September. Leakage continues to run significantly below the $200 million maximum, and we remain extremely proud of this performance. DSO at the end of December was 56 days. At the end of December, the company had cash and short-term investments of $166.3 million and no borrowings outstanding under our revolving line of credit. Capital expenditures in the quarter were $34 million. During the quarter, the company repurchased $403.4 million worth of stock representing 5.8 million shares. Approximately $425.8 million of repurchase authorization remained under our approved share repurchase plan at the end of the year. Now I'd like to review our year-to-date results. Net sales increased 13.3% to $4,068.2 million compared to the prior year, testing volumes measured by accessions, increased 12.3% and price increased 1%. We estimate that net sales increased by 6.6 percentage points due to our agreement with UnitedHealthcare. Before restructuring and other special charges recorded through the fourth quarter of 2007 and 2006, earnings per diluted share increased 26.7% to $4.18 for 2007 versus $3.30 in 2006. EBITDA was a $1,071.3 million, or 26.3% of net sales in 2007 compared to $935.7 million in 2006 or 26.1% of net sales. Operating cash flow for the year, net of $32 million in transition payments to UnitedHealthcare was $709.7 million compared to $632.3 million in 2006. During 2007, the company repurchased $924.2 million worth of stock representing 13.1 million shares. We are very pleased with our financial results for the quarter and the year. I will now turn the call over to Dave.

Thank you, Brad. We had a strong fourth quarter with volumes up 11% and price up 0.9%. We are very pleased with both our UHC growth and our non-UHC growth. We also grew earnings per share by 22.4% in the quarter, grew our EBITDA margin by 40 basis points and grew operating cash flow significantly. We knew that 2007 was going to be a year of transition for LabCorp and the industry. Indeed it was a watershed year. We significantly grew our business increasing revenue by 13.3%, expanding EBITDA margins by 20 basis points, increasing earnings per share by 26.7% and growing operating cash flow by over $75 million. We also expanded our national footprint by strengthening our presence in the Northeast, Chicago, St. Louis, and other key markets building a solid foundation for profitable future growth. And we continue to lead the industry in quality, innovation and convenience. Before I discuss our progress on our key areas of strategic focus, I want to talk about two important initiatives in which we are engaged and one significant development relating to our financial reporting. First, we have embarked on the three-year plan called LabCorp 2010 that was build on the foundation we have created for future growth. As many of you know LabCorp invested significant sums during the 1990s to standardize our instruments as well as our lab and billing information systems. This standardization distinguishes us from our competitors because among other things we can move more freely among laboratories and our results can be used longitudinally in accessing a patient's condition and disease progression. It also gives us the opportunity to improve the efficiency of our operations, because what we do in one facility can be easily replicated in all of our other facilities. LabCorp 2010 will drive growth by providing improved tools to our valued employees, increasing automation in the pre-analytical process using robotics in the laboratory, optimizing logistics and allowing better management of our supply chain. We are finalizing the schedule and financial measures for the 2010 project and we will update you on those items as well as our progress in succeeding calls. Our second initiative is our commitment to being a leading clinical laboratory in a rapidly evolving field of personalized medicine. We have shown this commitment in the acquisition of Tandem Labs, which we expect to close in this quarter and then our continuing investment in our rapidly growing clinical trails business. Our intent here is to partner with pharmaceutical companies in developing diagnostics that will help to ensure the drugs are safe, effective and correctly dosed for the people taking them. You can also see this commitment in our decision to expand our Litholink kidney stone management program into other disease states, collaborating with doctors and patients to identify and treat chronic diseases that can be identified and appropriately managed through proper use of laboratory medicine. We are excited about the opportunity in personalized medicine, which we see as an increasingly important segment of health care. Finally, I would like to explain the accounting treatment of our Ontario joint venture. We previously accounted for this joint venture as equity income, so we did not record revenue or expense associated with this business. In January, we acquired additional partnership units and we will now consolidate these operations. This is the second largest lab in Canada and has been a positive contributor to our results over the years. The management team is well tested and anxious to grow this business in 2008 and beyond. Because our results include the consolidation of this joint venture for the first time, we've outlined our 2008 guidance both pre and post consolidation in our press release. Going forward we will report consolidated results. I would now like to bring you up-to-date on the progress the company is making towards achievement of our key strategic objectives. All national managed care plans except that have been re-contracted and none are due for renewal until the end of 2009. We've also re-contracted with our major regional plans. Although the industry remains as competitive as ever, we see clear opportunities to grow our managed care business in 2008. With the end of the Cigna marketing restrictions, we can now tell physicians in all of Cigna’s major markets that we are fully contract provider. With United we continue to see volume increases and in May 2008 LabOne becomes non-contracted. We will vigorously pursue this business. We're also focused on improving pull-through, especially as we gain entrance into additional plans and markets with other payers. With our strategic partners at Wellpoint, we are working on innovative projects that we believe will help them improve patient outcomes and reduce costs. Finally, all of our managed care partners have stressed the importance of redirecting work from higher cost labs to more efficient providers. This is a significant opportunity for us as 80% of clinical laboratory services in the United States are performed by laboratories other than LabCorp and our principal competitor. We are working with our managed care partners on a number of initiatives that we believe will begin to redirect work away from higher costs, less efficient providers. In science, LabCorp continues to lead the industry in the introduction of new capabilities where there is an unmet clinical need. During the fourth quarter we added new 10 new tests in disciplines including genetics, oncology, infectious disease, and coagulation. Additionally in 2008 we've already achieved several milestones in science, including an exclusive licensing agreement with Duke University to commercialize Duke's new blood based assay for early detection of lung cancer. There were over 174,000 new cases of lung cancer in 2006 and 164,000 deaths. Although imaging technologies have approved the ability to detect lung cancer, this test can complement current diagnostic methods by stratifying patients who may require more aggressive follow-up treatment and monitoring. If all goes well this test would be on the market in early 2009. The availability of an ultra high-density micro ray based on the Affymetrix Whole-Genome sampling technology. LabCorp first offered comparative genomic hybridization testing in 2005 and this enhanced test will offer unparalleled resolution for the detection of mental retardation, developmental delay, autism and other clinically significant genetic changes. In breast cancer we completed validation studies on the molecular estrogen receptor and progesterone receptor assays and the testing is now available. This is significant because of recent concerns about the accuracy, lack of standardization, and reproducibility of immunohistochemistry assays for these markers among smaller laboratories. Also in breast cancer we have made progress on the analytical and clinical validation of the prognosis signature assay with several of our study presented at National breast cancer meetings. We expect to complete these validations soon and hope to launch this test in the mid to latter part of 2008. As I mentioned earlier, on January 24th we announced a definitive agreement to acquire Tandem Labs. A leading bioanalytical and immunoanalytical CRO supporting pharmaceutical and biotechnology companies with discovery, pre-clinical and clinical drug development programs. This acquisition will advance our leadership position in the laboratory and drug development industries and solidifies LabCorp's position as the premier laboratory in companion diagnostics. We expect this acquisition to close in the first quarter. It is not included in our guidance and we do not expect it to have a material impact on end [ph] year EPS. We continue to improve and refine our processes to deliver on our customer promise as part of our customer focused culture. I am pleased that our customer satisfaction in Q4 reached 92%, the highest point since the third quarter of 2006. I thank our more than 26,000 dedicated employees for their hard work in achieving that success. We know that our performance is evaluated daily by patients and doctors and their satisfaction is our goal. We will continue to work hard to deliver the best customer experience in the industry. Now I would like to update our guidance for 2008 including the consolidation of our Ontario based joint venture. To see our guidance before consolidation of the JV, please refer to today's earnings press release. Excluding the impact of any share repurchase activity after December 31st, 2007 our guidance for 2008 is as follows. Compared to 2007, LabCorp expects 2008 revenue growth of approximately 13.0% to 14.3%, EBITDA margins of approximately 25.6% to 26.0% of revenues, diluted earnings per share in the range of $4.74 to $4.90, operating cash flow of approximately $775 million to $800 million dollars excluding any transition payments to United Healthcare, Capital expenditures of approximately $120 million to $140 million, and net interest expense of approximately $66 million. I would like to remind you that although we do not provide quarterly guidance, we should point out that Easter falls in the first quarter of this year versus the second quarter of last year. We expect to achieve this growth through the following initiatives, organic growth and further shifts in our tested mix, particularly in our esoteric and genomic businesses, managed care opportunities previously discussed, contributions from acquisitions made in 2007 and realization of cost reductions. Now Brad Smith will review anticipated questions and our specific answers to those questions.

Thank you Dave. Can you update us on the mix of your business coming from esoteric testing? At the end of December, approximately 34% of our revenues were in the genomic, esoteric and anatomic pathology categories. Although this percentage declined by 1% year-over-year, we expected this because we knew the UnitedHealthcare business transitioning to us was more weighted to core testing. Our goal over the next three to five years is to increase our esoteric test mix to approximately 40% of revenue. Our ability to increase this percentage depends on factors such as continued adoption of existing esoteric test, development and acceptance of new esoteric tests, acquisition and licensing opportunities and the mix of our new business. Can you update us on your progress in Image-guided pap in HPV? Adoption of the TriPath, SurePath System and Cytyc ThinPrep Imaging System by our physician clients continues to increase. By the end of the third quarter image guided pap screening was being requested for approximately 59% of all liquid based pap smears order. We continue to experience growth in primary screening HPV testing. During the fourth quarter of 2007 HPV testing increased approximately 32% versus the fourth quarter of 2006. What are your plans for uses of free cash flow during 2008? We remain committed to returning value to our shareholders. First by using our free cash flow to grow our business through strategic acquisitions and licensing agreements and second through continuing our approved share repurchase program. The acquisition market remains proactive, especially in light of recent credit market corrections with a number of opportunities to strengthen our scientific capabilities grow our esoteric testing franchise and increase our presence in key geographic areas. As you know, we acquired PA Labs during the fourth quarter and expect to close the Tandem Labs acquisition during quarter one. As Brad mentioned earlier, LabCorp repurchased $924.2 million worth of common stock during 2007. At the end of the quarter $425.8 million remains under our approved share repurchase authorization. Our activity during 2007 proves that we will be opportunistic when it comes to share repurchase. How would an economic downturn effect your volumes and cash collections? During the last downturn in the economy we did not experience any significant volume declines. I must note that at that time there were other industry factors that could have masked any decline. We recognize that economic conditions and health plan benefit designs have changed significantly over the past several years. So we are uncertain of the effect on volume of a prolonged economic downturn. We monitor our volumes daily and will be closely of tune to any emerging issues. On the collection front, we see an increasing number of high deductible plans where the patient is responsible for more payments prior to insurance covering the cost of care. Co-patient deductibles have also increased, although we have been successful in the past in collecting in the phase of increased patient responsibility, 2008 could be a challenging year in patient collections if there is a prolonged economic downturn. Can you explain why you acquired additional partnership units in you Ontario, Canada joint venture and why you are now consolidating them for financial purposes? LabCorp acquired its interest in Ontario, Canada based JV when we acquired Dynacare in 2002. We have been pleased over the years of the performance in Canada and are excited about growth opportunities there. Due to changes in the partnership agreement, we will now fully consolidate their financial results into ours. Why will your EBITDA margins contract with the consolidation of your Ontario, Canada joint venture? As Dave mentioned, we previously recorded our share of the income from this joint venture but we did not record any revenue or expense. For 2008, the company EBITDA margins will decline because we will recognize both revenue and expense. What is the status of the Medicare competitive bidding demonstration project? Currently the deadline for submission of bids to participate in the demonstration project is February 15, 2008. We are concerned that CMS continues to clarify the bidding rules even as we are less than 10 days away from the bid date the. A lawsuit challenging the demonstration project has been filed in the U.S. District Court of the Southern District of California. The place [inaudible] Laboratory, sharp healthcare and Scripps Healthcare are seeking injunctive relief to stop the implementation of the demonstration project before the February 15th bid deadline and to require Medicaid to proceed through formal notice and comments we are making before implementing the demonstration project anywhere. We fully support the planners [ph] in this litigation because as we have repeatedly stated we believe competitive bidding fails to recognize the distinct value of clinical laboratory services and will hurt Medicare patients. We will know before the bid date whether the court will grant interim relief. Now I'd like to turn the call back over to Dave.

Thank you, Brad. In summary, we had a very solid year in 2007 and look forward to success in 2008 and beyond. Thank you very much for listening. We are now ready to answer any questions you may have. Question and Answer

Thank you, sir. [Operator Instructions] And your first question will come from the line of Robert Willoughby with Banc Of America Securities. Please proceed.

Good morning. Brad, just a question on the United payments, I think you mentioned a $38 million number there in the K somewhere, do we tack on another $10 million or so for the fourth quarter and assume that's kind of the run rate over the next three years and that can gradually decline?

Bob, I think at this point, that's a little bit, I would not do that. We still think there is an opportunity for us to decline. We did not change our estimate in the fourth quarter for what we think the eventual liability will be, which is at the end of the third quarter was $115 million. So, from a cash flow perspective, yes, we will have that paid down in 2008 that fourth quarter that you mentioned. But in terms of a run rate, we're comfortable at the $115 million for now but we think based on the trend that we would hope to do better in that line.

Okay, great. And just as it relates to the JV, what economically changed that mix you want to step up and consolidate it today versus six months ago?

I'm not sure that economically there was a change more so than an opportunity for us to purchase additional units and the resulting change in the partnership agreement, it has always been a nice part of our business that hasn't been very evident in our financial segments based on the way that was accounted for. So it's more of a change and just that opportunity was there and we decided to act on it.

Well, the opportunity wasn't there a while ago, it was just you would have done and had you have been able to do it earlier?

Bob, it’s Dave. We have for a considerable period of time desired to increase our share of the partnership and we have been negotiating with our partners to be able to do that and the transaction came to fruition in January, but this has been something that we have complemented for a lengthy period of time.

Okay, and can you hazard [ph] a guess what the dollar amount of the investment was then that you made?

No we haven't disclosed what the dollar amount of the investment is.

It will be in the K though?

It would show up in the cash flow in the first quarter in term of in the acquisition line.

Okay, thank you.

Your next question will come from the line of Bill Bonello, with Wachovia. Please proceed sir.

Good morning guys. Couple of questions, the revenue guidance for '08 is pretty consistent with what it had been prior, so I am just trying to make sure I understand what's driving the EPS guidance increase if that is predominantly share repurchase or if it’s also on the margin front relative to what you had expected and then I have a couple of follow-up if that's okay?

Bill it's Dave. The adjustment to the EPS guidance is share repurchase.

Okay. That make sense, and then on the revenue growth for next year, 7% to 8% top line in but ex United... you did 6.6% for the year and 5% for the quarter, what made give you confidence in the step up there?

Well, as we have stated, there are opportunities to grow the Managed Care book with Cigna with United, with LabOne going out of the contract with pull-through improvement, with access to some new Humana markets and with strategic collaborations with Wellpoint. That suggest to us that we should be able to do better than what we think about as the typical industry growth rate Bill, and so we view the guidance as being consistent with the growth trajectory that we've experienced and with doing a little better than what we think others kind of the industry growth rate as a whole.

Okay. And I would assume that's factored in there or maybe some small acquisitions?

We always factor in the assumption that we're going to make some small acquisitions and so it's accurate to say that, that would be factored into this revenue growth as well.

Okay. And then just the last question and I'll stop bugging you. When you think about acquisition opportunities, should we be thinking about it in terms of like what you just did with Tandem and that they are sort of giving you new strategic capabilities or expanded strategic capabilities? Or is there still an interest in just purely expanding geographically and I'm saying that wrong, acquiring geographically sort of in the old fashioned synergy driven kind of acquisition?

The answer is that both are attractive, we still remain interested in opportunities to make acquisitions that will expand or complement our infrastructure through new markets, patient service centers, and the like. At the same time we remain very interested in strategic acquisitions like Tandem that will enhance our presence in key areas and in opportunities that we see for the long-term growth.

Okay. Great. Thank you very much.

Your next question will come from line of Ricky Goldwasser with UBS. Please proceed.

Yes, good morning. Couple of follow-up questions. Just to clarify on the 11% volume growth that you reported you were saying that's 3% is from UNH?

I think we said 5%... you talked for the fourth quarter?

Yes.

Yes 5%.

5% from U&H, okay. And the rest is just from kind of the small acquisitions that you've made. So if you kind of like... what would be the organic growth compared to what it was in the third quarter?

Well, I think overall revenue growth we reported about a 11%. There was one additional revenue day in the fourth quarter this year versus last year. So when we think about that we think about probably in the range of 4% overall organic growth.

4% organic and... you bid some small kind [inaudible]?

Yes.

Okay. And then just to clarify, are you seeing already changes. It doesn't seem like from what you reported in the fourth quarter. Due to the economy and if I recall in kind of the last session period. The impact that the lab stall was more on the customs abuse testing. So if you can just clarify to us what’s your revenue exposure? What percent of current run rate is from really drug testing?

You are correct that in the last down turn, we saw an impact on our drug testing business because a lot of it is pre-employment screening and when there is not a lot of employment going on there is not a lot of pre-employment screening. Our occupational testing business is I'm going to say approximately $150 billion in revenue. So, certainly any downturn in that business would have an impact although would not be material to our overall results. In terms of, what we see in volumes at present, I think it is very difficult to judge just based on where we are in January. January is always a slow month, not as slow as December but it is a slow month, and also and I know you are aware of this but the holiday this year is falling on Tuesday has a dramatic skewing effect on our volumes. So, I would say, based on what we are seeing now, we are not seeing any significant volume impact based on the economy, but I would also say it is too early to tell. I would agree with you that we didn’t see any significant impact in the fourth quarter based on what was going on in the economy in Q4.

Okay. And then on the top line opportunities that you're kind of factoring into guidance, you named a number of managed care contract. We also talk about the fact that 80% of clinical services is really done by regional and not national. So, the assumptions you are making regarding the growth in '08 coming from additional managed care opportunities, are there more from those regionals rather from your national competitor, the other national competitor? How should we really think about that? And then you mentioned Wellpoint. Are you also referring there to the I think its the WellChoice contract that is in New York and if so is this up in mid '08 or mid '09?

To answer the last part first. I believe the WellChoice contract is up in mid '09. Although, I am not certain because obviously we are not contracting with that plan. To answer, the first part of your question, just a clarification first, about 50% to 55% of the clinical laboratory volume actually goes through hospitals, and then about another 25% goes through smaller laboratories including regional labs other than LabCorp and our major competitor. So, when we think about redirection, we think about the hospital market actually as being one major opportunity for us to redirect work to more efficient providers. And we haven't quantified in thinking about the managed care opportunity, how much of that is sort of pure organic growth from our major competitor, how much of it is from regional labs, and how much of it is from hospitals. But, clearly the opportunity is greater in redirecting work from other providers and that is where we will focus our resources in achieving organic growth in 2008 and beyond.

Right. Thank you.

Your next question will come from line of Ralph Giacobbe with Credit Suisse. Please proceed.

Thanks. Good morning. Just to clarify the… when you mentioned the 4% organic growth, was that... that's just volume right, not sort of all in top line growth, is that right?

That is volume, correct.

Okay, and then just, when we look at 2008, we look at pricing, in '07 it sort of bounced around from that 0.3% to I guess about 1.5% growth. I know you don't typically break it down, but just given what happened in '07, how should we think about the pricing stat for 2008, is there… at least have a range you guys can give or narrow a little?

I think the only definitive thing we could say is it's our view that the pricing we set in the industry has occurred and that we expect to see pricing stabilize and turn up through 2008, partly because we have no major re-contracting partly because we will benefit from some pricing escalators and some existing contracts. And this is pure price Ralph, obviously price based on shifted mixed has continued to improve at about 50 to 100 basis points per year just depending on how rapidly the mix shifts. So, borrowing any unforeseen events we look at a relatively stable pricing environment, for next year.

Okay, fair enough. And then just going back to the JV, what percentage of share do you now have? Have you disclosed that?

We have not.

Okay. Is that going to be in the K or is that something you are not going to put out there?

The historical number will be in the K and I think probably in the Q when we do the after the transaction is closed it would probably appear there.

Okay and I guess maybe... I guess what is the opportunity there going forward? And is the Canadian market we should be focused on should we view it differently than the US market, just any more color on that specific market?

Well the Canadian market is very different from the US market in that it is fundamentally a single payer system that is government sponsored. So in that respect it is quite different. With respect to Ontario, there are basically three major laboratory providers and as we have mentioned we are the second largest of the three. There are some relatively complicated formulas by which the government allocates a certain amount of revenue and there are some relatively complicated formulas by which that revenue is divided among the laboratories in Ontario. For Canada in general, we see an attractive environment there. And we desire to growth the business. It’s a good business, the pricing obviously is what you might expect given a single payer government sponsored system. But it’s a… there is a lot of opportunity, there are large population basis and so we continue to look to Canada as a positive contributor.

Okay and then just last thing here, can you maybe talk about the UNH opportunity sort of outside that Quest bucket? I guess first is there any way to quantify in terms of how much is in the regional and outreach area, just big picture? And then second, should we start to see that market share shift in ‘08 or is that more of an ’09 and beyond type opportunity?

The way that I've always thought about the United opportunity is that, when United went into the process of doing their RFP, they said they were spending about $2 billion a year on clinical laboratories. So, that means that... consistent with the rest of the US healthcare, about 70% of what they were spending was not being spent with Quest and LabCorp. So, the opportunity for redirection is quite significant. When will we see it, obviously, it's an area of focus for us in 2008. I think some of the things that we'll assist in redirecting work like benefit design and incenting patients and potentially physicians are probably more 2009 initiatives.

Okay. Great. Thanks.

Your next question will come from the line of Amanda Murphy with William Blair. Please proceed. Amanda Murphy - William Blair & Co.: Hi, good morning. I just had a couple of questions on Litholink. First, what type of reaction and adoption are you seeing from health plans for that program?

We are seeing very positive reaction and adoption at what we consider to be very favorable pricing. The other thing that we consider to be a significant positive about Litholink is that a very substantial portion of the Litholink growth comes from word-of-mouth referrals from other physicians who are treating kidney stones as opposed to sales effort. So, we think it's an excellent program, it has been well received, it's well reimbursed, and the growth has been terrific. Amanda Murphy - William Blair & Co.: Okay. And then, also in terms of a the expansion to other disease states, can you provide any color on sort of the timeframe of that, is that three to five years out? And also what are the upfront costs associated with ways of expanding those programs?

We expect to launch the next disease state with Litholink in July of this year and we are well into the process. Beyond that, we see at least three or four other opportunities. While we can't say with any certainty what is going to happen in the ensuing years, I would like to see us be able to do at least one or two new programs every year along the lines of Litholink. The cost is not material... I mean, it's IT programming and the use of outside resources to help us develop the treatment metrics, but there is not a significant cost investment. Amanda Murphy - William Blair & Co.: Okay. And then in terms of... just health plans in general, can you provide any more color on the types of programs that... or anything new that's coming out of health plans and employers in terms of this whole cost control for actually directing volume. So, for example, have you seen any impact from pay-for-performance initiatives and things like that?

I think I would say the evidence is decidedly we mixed. I think if you saw the release that came out from CMS within the last week or so, their product disease management programs have not only failed to reduce cost, they have actually increased costs. I think if you look at the pay-for-performance metrics among the top six managed care plans, there is no commonality whatsoever and so unfortunately physicians are being asked to… and physicians are being measured on ten factors by six different plans, but there is fundamentally no overlap between the factors that are being measured. So, I think the, I think the major cost reduction initiatives that managed care has advanced have been... I would... it's too strong to say that they have not been effective, but I mean, I don't think they have, I don't think they have net up to their potential expectations and I think part of the reason for that is, it is very difficult to manage disease states like obesity and diabetes that are so widespread in the population and that's why we focus on disease states that are more... that are less frequent in the population and that are heavily dependant on laboratory medicine for management. Amanda Murphy - William Blair & Co.: Okay. And then just one clarifying question, for your EPS guidance, does that include or exclude share repurchases for 2008?

It does not include any share repurchase after December 31st of 2007. Amanda Murphy - William Blair & Co.: Okay. Thank you very much.

Your next question will come from the line of Adam Feinstein with Lehman Brothers. Please proceed.

Thank you, good morning everyone.

Good morning, Adam.

Few questions here. I guess just as we think about the revenue growth attributed to UNH, we have seen a moderation here in the fourth quarter. Do you do that just as you saw it ramp up last year at the end of the fourth quarter, you know the contract didn't officially start. So...so is that why we saw some moderation in the growth rate here?

I would say yes, we saw it because of the ramp up in the fourth quarter of last year and we also saw it because I think as we've commented in the third quarter, the United ramp up or the United transition occurred early in the year in the first two quarters we saw huge United gains and so as you reach a certain level of volumes, the growth is going to be slower.

Sure. Okay, all right. And then just switching gears. If I look at your quota [ph] pricing in terms of the data you guys broke out in the 8-K filing, it looks like it accelerated about 2.7% from about 1.2% last quarter. Just curious in terms I was surprised to see that with the, some of the pricing pressure we've been hearing about and you guys talked about in the past, just curious if there was anything in there or any contract that would have led to an improvement in that fourth quarter relative to the third quarter?

We did get some pricing improvement with that when we went out of that work and some of that had an impact in the fourth quarter better than the third quarter, Adam.

Okay.

The other impact I think is, we had a very favorable quarter in clinical trials, which shows up in the client pricing line but which is it at a much higher price than the overall company pricing.

Okay, all right. And then just one more pricing question here and then I will switch to something else but… and then just the managed care capitated number was lower relative to the fourth quarter so, just wanted to make sure we had the details there also?

Adam, lower in price?

Yes, so I guess just the price in the… I am sorry the year-over-year growth, just to clarify that right. So I guess it looks like in the third quarter, maybe was down about 3.9% if I remember correctly. Here and I guess it was 6.4% for the fourth quarter? I am sorry that was the total managed care, the capitated piece was up 3.3 in the third quarter and was flat in the fourth quarter.

Yes. No real change in any pricing there. One thing I would say is there was one more revenue day in the fourth quarter. So, you get a flat payment and potentially more volume against it, so that would level out the pricing.

Okay. It makes sense. All right. And then just finally on the cost savings. Last quarter you talked about annualizing at about $60 million and $10 million last quarter and you get another $15 million in another fourth quarter. Just maybe you could give us an update there and I know you had talked about... you made some broad comments about that earlier, but just wanted to get some more detail anything you can give us here today?

Sure. The $15 million in the fourth quarter was achieved and in fact, we did little better than the $15 million. And so, and $60 million in cost reductions is already fully built into next year's run rate Adam. So, that's in the run rate and is in the guidance, any additional cost savings opportunities that we take advantage of through our LabCorp 2010 plan will be incremental to what we provided for guidance.

Okay. It sounds great. Thank you.

Your next question will come from the line of Tom Gallucci with Merrill Lynch. Please proceed.

Hi, good morning everyone. It's Andrea Alfonso calling in for Tom Gallucci at Merrill. Just a couple of questions here. First could you talk a little bit about the JV more to help us factor in the incremental revenue growth contribution there. Specifically if you can just provide a little color about the business mix of that JV versus your current book of business, that would be very helpful.

It's predominantly core business. So, it's not going to significantly improve our core to esoteric percentage.

Okay. Thanks. And my second question is just sort of following Adams question, on pricing. For your Managed Care fee-for-service business, it looks like the decline in the quarter was more pronounced than in the previous quarter. I was hoping you could just perhaps discuss some of dynamics that occurred there, and how we should really be looking at this particular metric going forward.

This is Brad Hayes. I think if you look at that quarter-to-quarter, starting from the fourth quarter of '06, the more dramatic decrease was from Q2 to Q3. So, while Q4 did decrease, I would... in my analysis say that the fourth quarter declined less than the third quarter compared to second quarter. As we have analyzed that, there are a number of feeds into the particular line in the reporting. The biggest feed of which is from our centralized billing system, and if we go to the detail there and look at the Managed Care fee-for-service line from the majority of the business, we see it being flat on the fee-for-service basis in the fourth quarter compared to the third. So, as we dig down deeper into that, we see some of the systems that are the non-centralized systems and there were adjustments in the fourth quarter unrelated to real pricing adjustments that drove that total down.

Great. Thank you so much for taking my questions.

Your next question will come from the line of Matthew Borsch with Goldman Sachs. Please proceed.

Hi, thanks for taking our question. This is Shelly Naal [ph] on for Mat Borsch this morning. Just a quick question on the quarter and then a quick follow-up as well. Did the tax rate this quarter come in better than you expected?

I'm sorry, say again.

Did the tax rate come in better than you expected? What drove the better tax rate this quarter?

The tax that did not come in better than we expected. With the adoption of FIN 48 in 2007 it creates a situation where the tax rate is elevated for the first three quarters and then down in the fourth. So, we expect that to happen from here on now in terms of how that will occur. For the year the tax rate was actually up about 40 basis points, 50 basis points over the prior year.

Okay, great. That’s very helpful, thanks. And then a follow-up on pricing, just directionally, your pricing assumptions in the 2008 outlook, can you tell us, if you're forecasting any deterioration in Medicaid rate?

We are not forecasting any deterioration in Medicaid rates. I would say that the caveat to that is, Medicaid has a way of adjusting pricing throughout the year on a fairly arbitrary basis. And so, it's not unusual for a Medicaid plan simply to tell us at a certain time of year that they've run out of money or they're going to reduce everybody's, every providers fees by X%. So we haven't forecast that in and if you look at our business mix, about 18% in total comes from Medicare and Medicaid. And the vast majority of that is Medicare, Medicaid is only about 4% of our total book. So, while we never like to see people arbitrarily reduce pricing in the middle of a year, it doesn't have a material impact on the business.

Okay, great. Very helpful. Thank you.

Your next question will come from the line of Kemp Dolliver with Cowen And Company. Please proceed Kemp Dolliver - Cowen & Co.: Hi, good morning.

Good morning. Kemp Dolliver - Cowen & Co.: Thanks. Couple of questions, first you did a actually pretty substantial number of very small transactions in '07. I think it may be 14 or so depending on last count. Couple of these have been disclosed in one-way or another. But, it still leaves a large number of small deals. Could you just talk about some of thought process behind some of these moves and in which markets you expanded as a result of them?

Sure. Most of these small deals were either expansion of infrastructure or specific targeted areas of esoteric testing in which we want to grow. So, we made several small acquisitions and what we thought of is important markets. Obviously we made PA and DSI, which were larger acquisitions in significant opportunity markets for us. But, we made small acquisitions that are, that were in markets like Arizona, California, Kentucky, Alabama. Just a complement on our existing infrastructure and client base. We also made some small acquisitions in specific areas of esoteric testing that are of interest to us like endocrinology, coagulation, anatomic pathologies. Those are the kinds of what we think about as either strategic expansion of the esoteric portfolio or folding opportunities for core that we make when we do these small deals. Kemp Dolliver - Cowen & Co.: Great. That's very helpful. The second question is you've spent a bunch of time mentioning some of the calendar affects in Q1 that are negative. But, I think this is leap year, and does leap year help you at all or is that fall on the day of week that it won’t benefit you?

It gives us one extra revenue day in the first quarter. So, it kind of gives us one just extra revenue day for the year? So, yes, it does help. Kemp Dolliver - Cowen & Co.: All right. How would all that net out? It's still, probably down, off a day or two from '07 for Q1?

I don't think. I mean I think it normalizes, it's just that... last year Easter was in Q2. So, Q2 is going to be lower, because of the loss of volumes around Easter. This year, with Easter in Q1, we'll lose those volumes in the first quarter instead of the second quarter. So, I don't think about it as it's going to be overall a down here because of the timing of the holidays. But I do think about it as the timing of revenue maybe different because we have a major holiday in Q1 that last year was in Q2. Kemp Dolliver - Cowen & Co.: That's great. Thanks.

Your final question will come from line of Andreas Dirnagl with JPMorgan. Please proceed.

Yes. Thanks for getting me in under the wire. Dave I was wondering if maybe you could just sort of comment in general on how the United contract anniversarying is going to sort of impact you? I mean the way I would characterize it potentially is that, the volume increase that you have been seeing will probably drop off as we anniversary it. But at the same time, can you confirm that there are price escalators built into the contract so the negative impact on pricing will switch to a positive escalator impact?

Well, clearly we are not going to see volume gains from United like we saw in the first two quarters of last year. So, there will be a slowing of volume growth as we reach the anniversary date. We are still seeing pick-ups in United volume, but clearly it's not the type of pick up we had in the first quarter last year. There are pricing escalators in the United contract, and as those take effect and there are pricing escalators in other contracts as well, and as those take effect, we should see positive trends in pricing for 2008 and going forward.

Okay. Great. And maybe just, can you give a little more color? You've now mentioned in recent sort of weeks, a couple of times that you're focusing or going to focus more in terms of gaining market share from some of the hospital outreached programs as opposed from necessarily your competitors on the independent clinical lab side, and I was wondering if you could just give some color behind the, sort of the reason how you plan on doing that?

Sure. I mean, again if you look at the total market opportunity based on the...based on the reported numbers, we have about 8% of the market, Quest has about 12% of the market, and 80% of the market is elsewhere. So, as we think about how do we expand resources to gain business, we want to go after the...we want to go where the majority of the business is. The factor that helps us with that is as has been widely discussed that Managed Care pays hospitals significantly more for the same type of testing than it pays us. And so, we think about the hospital opportunity, and we think about Manage Care's desire to redirect hospital-based business, and that helps us to focus the allocation of resources on redirecting the hospital work. How do we do it? Obviously, part of it is simply educating employers, who fund their own insurance that if their employees are going to hospitals to get their lab work done, they're paying substantially more than they would be paying if they used an independent clinical laboratory. And then, as we think about into 2009, we think about things like benefit design, use of deductibles and co-pays lower deductibles or co-pays if you use a national laboratory as ways of incenting patients to you to choose a national laboratory which creates not only savings for the system, but we believe ultimately better long-term patient outcomes.

Okay great, thank you.

Thank you.

At this time there are no more questions in the queue. I would like to turn the call back over to Mr. David King for any closing remarks.

Thank you very much for listening to our fourth quarter call. We hope you have a great day.

Ladies and gentlemen, this concludes your presentation. You may now disconnect and have a great day.