Labcorp Holdings Inc. (LH) Q3 2009 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the third quarter Laboratory Corporation of America earnings conference call. (Operator's Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. David King, Chairman and Chief Executive Officer. Please proceed, sir.

Thank you. Good morning and welcome to LabCorp's 2009 third quarter conference call. Joining me today from LabCorp are Brad Hayes, Executive Vice President and Chief Financial Officer, Ed Dodson, Senior Vice President and Chief Accounting Officer, and Steve Anderson, Director of Investor Relations. This morning we will discuss our third quarter results, highlight our strategic priorities and growth drivers, and provide answers to several frequently asked questions. I'd now like to turn the call over to Steve Anderson 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 a Form 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 website to review this supplemental information. Additionally, we refer you to today’s press release which is available on our website for a reconciliation of non-GAAP financial measures discussed during today’s call to GAAP. I would also like to point out that we are making forward-looking statements during this conference call. And these statements are based upon current expectations and are subject to change based upon various important factors that could affect the company’s financial results. These factors are set forth in detail in our 2008 10-K and subsequent filings. The company has no obligation to provide any updates to these forward-looking statements even if our expectations change. Now, Brad Hayes will review our financial results.

Thank you, Steve. By now you should have had a chance to review our third quarter financial results. On today’s call I’ll discuss four key measures of our financial performance; cash flow, revenue growth, margin, and liquidity. First cash flow. Our cash flow trends remain excellent. Pre cash flow for the trailing 12 months ended September 30, 2009 increased 13.5% to $740 million. For 2009, we expect operating cash flow, excluding any transition payments made to United Healthcare to be approximately $825 million. The operating cash flow guidance includes a $54.8 million reduction from the pension contributions. We expect capital expenditures to be approximately $115 million. We’re also pleased with our strong cash collection efforts in the quarter. VSO at the end of September was 48 days, down five days year-over-year and down two days sequentially. Our bad debt rate was stable at 5.3%. Second, revenue growth. During the quarter we achieved strong pricing growth and continued mix shift to higher value test. Revenue increased 4.4% year-over-year in the third quarter. Revenue per accession increased 3.7% year-over-year. Excluding the consolidation of the company’s Ontario, Canada joint venture, revenue per accession increased 4.3% year-over-year. The growth and revenue per accession is attributable to both mix shift and rate increases. Total company volume increased 0.7% year-over-year excluding the consolidation of the company’s Ontario, Canada joint venture, volume was equal to last year. Drugs of abuse testing declined by 15% year-over-year which reduced total volume growth by 100 basis points. Esoteric volume increased 9.2% year-over-year. Third, margin. For the third quarter our adjusted operating income margin was 20%. This margin increased 60 basis points year-over-year due to strong growth in revenue per accession and cost related initiatives. We remained focused on top-line growth and increased automation and efficiency in our labs and patient service centers. Fourth, liquidity. We remained well capitalized. At the end of September we had cash of $126.9 million and approximately $350 million available under our revolving line of credit. At the end of September total debt was $1.4 billion, including $70.8 million drawn down on our revolving credit facility. During the quarter we acquired Monogram Biosciences. The transaction was funded from cash on hand. We recorded a penny per share of Monogram transaction related expenses during the quarter. When we announced the Monogram acquisition, we estimated total transaction related expenses to be approximately $0.04 per share. Because Monogram incurred and paid most of these fees prior to closing they were treated as goodwill rather than expense. Also during the quarter, we completed our prior share repurchase authorization of $500 million and our board authorized a new program under which we may repurchase up to an aggregate of $250 million of our common stock from time to time. During the third quarter we repurchased $165.1 million of stock, representing approximately 2.4 million shares. At the end of September approximately $180.2 million of repurchased authorization remained under the program. On August 20th, Standard & Poor's upgraded all of its rating on LabCorp to triple B plus from triple B. Also, on September 21st, Moody's upgraded its outlook on LabCorp to positive from stable. This morning, we announced updated 2009 financial guidance. We are maintaining our guidance of expected revenue growth of approximately 4%. We now expected adjusted EPS of $4.84-$4.89 including the operating impact of Monogram. Please refer to the table within our press release this morning for a reconciliation of our previous 2009 adjusted EPS guidance to our updated 2009 adjusted EPS guidance. We intend to provide investors with our 2010 guidance when we release our fourth quarter earnings in February. I’ll now turn the call over to Dave.

Thank you, Brad. We are very pleased with our third quarter results and particularly our margin expansion, which was driven by strong pricing, esoteric volume growth and cost control. As we predicted volume growth slowed this quarter due to the economy, continued softness in the labor market, the termination of two large government contracts and the annualizing of acquisitions. I would like to provide a few details on how these factors impacted our volumes in the quarter. We have said throughout the year that volume growth in the second half of the year could slow given declines in the number of insured lives and the timing of Cobra and severance expirations connected to layoffs. While we cannot predict the performance of the broad economy we remain focused on growth the components of our business that are less sensitive to it. As part of this initiative we grew our esoteric volumes by 9.2% during the quarter. The labor market remains soft. Our drugs of abuse volumes declined 15% in the quarter versus a 10% decline in the third quarter of 2008. Declines in our drug testing business lowered volume by 1% this quarter. With respect to contracts, at the end of the second quarter we chose not to renew a large state correctional contract in which pricing had fallen below our standards. In additional, after years of litigation, a high volume federal contract was terminated in the second quarter of this year. The impact of these two terminations lowered third quarter volume by approximately 1%. I will mention three of our strategic priorities. The integration of Monogram Biosciences, expansion of our outcome improvement program, and development and commercialization of companion diagnostics. First, in early August we completed our acquisition of Monogram Biosciences. The integration has been going as planned and we expect the addition of Monogram to enhance our industry leadership in infectious disease and oncology testing and in companion diagnostics. With our sales force and national infrastructure supporting Monograms virology, oncology and personalized medicine offerings we expect to drive profitable growth in these business lines in 2010 and beyond. Second, we continue through our outcome improvement programs to help physicians diagnosis and optimality treat patients. We have expanded our chronic kidney disease program into new markets and it has received a very positive response. The CKD program will be a gateway to other outcome improvement programs as we build on the strategic initiative. Our lithe length program for kidney stone management also continues to generate wide spread support among physicians, patients and payers and brings us premium reimbursement. Third, we continue to develop and commercialize companion diagnostics as a key element of our leadership in personalized medicine. Our KRAS testing that physicians use to guide therapy for colon-rectal cancer continues to gain acceptance. As a reminded, at the beginning of the second quarter of this year, United Healthcare began to require the submission of a pathology report documenting KRAS gene type to determine coverage for Erbitux and Vectibix. During the first quarter of this year, we introduced a companion diagnostic test for Plavix. And we are pleased with its uptake. Our test determines patients who are poor metabolizers of the most common CYP2C19 Alleles which is useful in determining risk for adverse cardiovascular advents. Two years ago we announced a strategic alliance with Medco Health Solutions to perform a collaborative research effort related to Tamoxifen. The drug deprives certain tumors of estrogen needed for their growth but approximately 10% of women using Tamoxifen do not fully benefit from the drug because of variations in genes encoding drug metabolizing enzymes. Our diagnostic test helps physicians identify the patients who will not respond allowing use of an alternative therapeutic based on the patients personal characteristics. We are working with Medco to expand the scope of this innovated program to other drugs and disease states. Finally our acquisition of Monogram brings us the profile co-receptor tropism test which helps physicians chose efficacious treatments for their HIV patients. In summary, we continue to execute on our strategic priorities and remain excited about the growth opportunities that lie before us. Now, Steve Anderson 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? In the third quarter approximately 36% of our revenues were in the (inaudible) esoteric and anatomic pathology categories. Our goal over the next three to five years is to increase our esoteric test mix to approximately 40% of revenue. What are your plans for uses of free cash flow during 2009? We remain committed to returning value to our shareholders. First by using our free cash flow to grow our business through strategic acquisitions in licensing agreements. And second, through continuing our approved share repurchase program, which currently has $180.2 million of authorization remaining. The acquisition market remains attractive with a number of opportunities to strengthen our scientific capabilities, grow our esoteric testing franchise and increase our presence in key geographic areas. Historically, we have been a consistent buyer of our own shares. Since the beginning of 2006 the company has repurchased approximately $2 billion worth of its stock. Can you remind us of how drugs of abuse volume trended during the year? In the quarter, our drugs of abuse volume declined 15% year-over-year. That compares to year-over-year decreases of 19% in Q2 of this year, 20.1% in Q1 of this year, 15.9% in the fourth quarter of 2008 and 10.3% in the third quarter of 2008. What is the status of your transition payments to United Healthcare? In the quarter the company was billed $6.8 million in transition payments and paid $5.9 million in transition payments. To date, Lab Corp has been billed a total of $99.3 million and paid $96.2 million in transition payments to United Healthcare. Now, I’d like to turn the call back over to Dave.

Thank you, Steve. In summary, we are pleased with our performance for the quarter and the year-to-date. We thank you very much for listening and we are now ready to take your questions.

(Operator's Instructions) Your first question comes from the line of Bill Quirk with Piper Jaffray.

Thanks, good morning. Thanks very much for the call on the volume impact on the termination of the two government contracts. I believe you indicated that at least one of these was priced below the corporate average. Can you talk a little bit about what impact, and I assume it was probably slightly positive, that had on the revenue per requisition here?

We're not specifically breaking that out, but they were lower priced than the average.

So said another way there was a positive, if slight, impact of that metric then?

Yes. I would say very slight.

Okay. And then just looking at guidance guys, if we take a look at the upside here in the quarter on the bottom line and then also just considering the integration of monogram into the operations, no change to the revenue guidance. Is this a function of the government contracts? And then on the EPS side if you could just give us a little color there?

On the revenue side, I mean we say approximately 4%. We've obviously got the loss of the contracts as you mentioned, offset by monogram so we're comfortable with maintaining that 4% on the revenue line. On the EPS, and I mean there's a table in the press release, but I'll just talk through how we think about it. Prior to monogram we were 485 to 495 for the full year of EPS. Monogram operations we estimated and still believe will be $0.08 diluted. So that brings us to an adjusted total of $4.77-$4.87. This quarter we are updating that guidance to $4.84 to $4.89, so that's the way we think about that guidance. And one thing I might add is that excludes any estimates of the transaction related fees.

Understood. Last question for me, and again just kind of sticking on Monogram here, what was the contribution from both Monogram as well as, for that matter, any of the other smaller lab acquisitions that you've done specifically for the quarter?

We're not, again, specifically breaking out acquisitions like Monogram. That has been probably the only one of any size that we've done during the quarter. I would just say that it's very low on the volume side that you would see it show up. It's very much above our average price pre transaction so it is helping on the price metric.

Specifically on the esoteric price metric through, correct?

Yes, and on the overall as well.

Your next question comes from the line of Darren Lehrich with Deutsche Bank.

Thanks and hello, everyone. Just as it relates to the two clients you highlighted here in the quarter, I just want to make sure we're thinking about that right. So the client revenues as you disclose it in your 8-K were down 4% and so basically the entire amount would be related to those two contracts, is that the right way to think about?

Darren, one other thing, that's also where the drugs of abuse testing business is. So as I look at the impact from that and the contracts that we mentioned, it absolutely makes up what's going on in that line.

Okay. And so as we think about that line which is a bout 25% of your total business, are there any other government-type contracts that are up over the next few quarters that we should be thinking about having a similar type of impact, and I guess the corollary question is would you expect client revenues to be down until you anniversary this point next year and any kind of commentary around that would be helpful.

The government contracts were sort of in two different categories. So as we've mentioned, the first one was a state correctional contract. It came up for renewal and the pricing demands were not acceptable to us and so we chose not to compete for it. The other one was a federal contract that my recollection of has been literally under appeal and in litigation since I came to LabCorp in 2001. And so I would say what simply happened is the timing of the process occurred that all the appeals were resolved, unfortunately adversely to us in this quarter. We do have any number of federal and state contracts. Probably we don't have many as large in terms of a volume contributor as these couple were. They do periodically come up for renewal. There's nothing I can point to in the next quarter or six months or year that I can predict is going to have a similar impact as this one. As I say, it was just the timing of two contracts in one quarter here. And in terms of the client revenue, the annualization of when the client revenue would be down, there will be some impact on the client revenue obviously for the next three quarters in terms of seeing these contract losses annualized. On the other hand, a Brad pointed out, the drugs of abuse testing is in there, hospital is in there, clinical trials testing’s in there, so there are a lot of moving parts and you will see some impact on client revenue as a result of this, but I don't think we should automatically decide that it's just going to be down for the next three quarters.

Okay. That's helpful. And moving to the managed care book of your business, we saw capitation down, but nice growth in fee for service. So it looks like there's some moving pieces there. Can you just give us some commentary about how to think about that? I'm not sure that we've seen capitation volumes down as big so far this year as we did in the third quarter.

Three things that we talked about last quarter and as we look at this quarter the same three things are driving the numbers that we're seeing there. We’re seeing membership loss from plans that we have under capitation. So we're seeing, because we pay per member per month based on the membership, we're definitely in some geographies and with some payers, seeing a membership loss. We've also lost a few contracts in that line as well and there are some contracts that have converted from capitation to fee for service. So you see a fee for service line that's growing at above our company average for sure and some of that is a transfer from capitation. But no one of those things is bigger than the other, it is just a combination of those three items that are affecting that line.

Okay. That’s good. And then I just have one other bigger picture question. You spent a lot of time in recent months really discussing some of the strategic merits of moving deeper into the PhRMA services sphere, and I guess I just wanted to get some commentary from you here about how we're evaluating those kinds of opportunities and how we should think about that in terms of your M&A?

Well, I think we always try to evaluate the M&A landscape and what potential acquisition opportunities present themselves, and just in at thumbnail fashion obviously there's kind of two basic types of lab acquisitions. One is the smaller acquisition that we consolidate into our existing operations. The second is an acquisition like Monogram which is a strategic acquisition because of the virology center of excellence, because of the capacity to cross sell the Her-Mark testing with our oncology and breast prognostic and Her-2 testing. And then of course the companion diagnostic with the Trofile test. Then we're always thinking about what our broader strategic opportunities are, and as we look out into the future and we look at how should the clinical laboratory be positioned for the evolution of health care in the next five to 10 years, we do see a potential fit with a broader expansion into PhRMA services. We have a terrific clinical trial central laboratory business that is, in our minds, the premier esoteric central laboratory business in the clinical trials arena. That allows us to do biomarker discovery, it allows us to bring up specific tests for PhRMA sponsors, it allows us to have the opportunity to commercialize companion diagnostics when they're discovered in clinical trials. Now, having said that, we're not a CRO. We don’t have an international reach. As we've said many times, for our clinical trials central laboratory business to really compete for large international contracts, we do need more international scale in that part of the business. So this is an area that's of interest to us. It's an area that we continue to explore and think about and it's one of the things as we think about how strategically we're positioning ourselves for the future that in our thinking potentially makes some sense.

That's real helpful. Thanks very much, guys.

Our next question comes from the line of Ralph Giacobbe with Credit Suisse.

Thanks, good morning. Just a couple of things on the volume side going back. David, I think you mentioned sort of the economy — I guess would you say there's, at this point, maybe a little bit of a lag effect? We didn't see it as much sort of in the first couple of quarters and we're starting to see it now and you mentioned potential COBRA roll-offs, any way to get any more granular in terms of quantifying or thinking about that?

There's really not much of a way to quantify COBRA roll-offs or loss of severance. I mean the IMS data that we see continue to suggest that physician visits are down year over year, and in some practice areas like internal medicine and cardiology and women's health, I mean even sequentially quarter over quarter it appears that physician visits are down. So it's pretty difficult to draw a straight line and say well, physician visits are down because of COBRA and severance benefits finding out, but this is something we have said was a potential in the second half of the year form the very beginning of the year. I would just say from the perspective of our overall volumes, I think it would be, again, naïve to think there's not some impact given what's going on in the economy, but I think our volume growth continues to be pretty healthy.

And then I guess as we think about the fourth quarter, clearly we're going to comp some level of the drugs of abuse testing drag. We also sort of face a seasonally weaker quarter and you've got sort of these terminations of these large government contracts that you mentioned which I don't know if you aid exactly the timing of when they hit in the quarter. Given all that, is there a way to think about or can you sort of direct us into how you think about 4Q volume? I mean do you think we could potentially negative, do you expect positive, do you expect flattish?

Well, we have a pretty firm policy that we don't talk about volumes in the quarter so I don't see anything that suggests huge differences one way or another in the trend that we saw in the third, but I'm not going to talk about it beyond that. The timing of those contract losses, my recollection is both of them termed around the end of June, beginning of July, so you pretty much saw the full impact of them in the quarter.

Okay. And then going back to the margins, a little bit of an uptick there after a little bit of pressure in the first half of the year. When you think about LabCorp 2010, I know there was sort of a big push at the end of last year and even heading into this year. Can you maybe give us an update on where you are there?

Yeah. One of the principle components of LabCorp 2010 was the ability to achieve bad debt reduction through improved efficiency and improved collection processes and clearly we have not achieved bad debt reduction in 2009. Given the overall economy given what we've seen around us that's not terribly surprising to me, but we have kept bad debt stable and obviously you can see by the five day year over year and two quarter over quarter improvement in DSO, we're doing a good job on collections. So we're not going to get the full impact of the bad debt reduction that was contemplated in 2010. The rest of the 2010 program is very much on track and we're doing a number of the things we talked about — our collection processes and patient service centers, the automation of our HPV testing, some additional lab automation that I'm not going to talk about in specific detail, some additional patient service centers that I'm not going to talk about in specific detail, but all of those things are starting to work their way into the run rate as cost savings and you see them appearing in improvement in both gross profit and operating margin.

Okay. And then just my last one, can you tell us what percentage of your business is Medicare Advantage?

I don't have that data point.

Okay. But what would that fall under Medicare or within your managed care bucket?

That falls in our managed care bucket, and it doesn’t come into us, at least that I can tell, identified that way.

Okay. And could you tell us if that's reimbursed at Medicare or commercial rates?

I don't think we're going to talk about specific reimbursement rates within the managed care group, Ralph.

Okay. Thank you.

Our next question comes from the line of Arthur Henderson with Jefferies & Co. Arthur Henderson - Jefferies & Co.: Hi, good morning. Going back to this guidance question, and maybe I'm not understanding. On the high end of the guidance range it looks like as you adjusted it from the Monogram biosciences it looks like you just bumped it by $0.02 and yet the low end was$0.07. Brad, what is that swing factor right there that's causing that differential, if you could address that?

I think it's just our performance year to date would be simply the only thing driving the tightening of that range on the bottom and the arrays on the top. Because essentially we're down to the fourth quarter here. We've got — Arthur Henderson - Jefferies & Co.: Right. I understand. I was just curious if there was anything in the last say three months that you've seen after Monogram Bioscience that would — that on the high end didn't sort of meet your expectations?

No. Nothing specific. Arthur Henderson - Jefferies & Co.: Okay. And then back on the Monogram Biosciences acquisition, as far as the integration is concerned, can you kind of give us an update as to what you're doing right now with respect to that integration and where you stand and if you could remind me, I think when you made the acquisition you made some commentary that it would be dilutive of this year which obviously we see in the numbers, but next year did you indicate that it was going to be breakeven? Just an update there would be helpful.

Good morning, Art, it's Dave. We said that it would be slightly accretive in 2010, so operationally dilutive this year, but slightly accretive in 2010. And with regard to the integration, probably the biggest focus of the integration up to this point has been the integration of the sales capabilities and the ability to, from a selling and a test requisition form and an IT perspective, to be able to — physicians who were ordering tests from Monogram, but not using LabCorp, or using LabCorp, but not ordering tests from Monogram, the ability to order the testing in a consolidated fashion and the convenience of one-stop shopping, plus obviously Monogram with its premier array of tests complimenting what we offer the physician office. So that's probably been the number one focus. The number two focus has been just evaluation of the capabilities and of what Monogram has been focusing its resources on and making sure that those are consistent with LabCorp's strategic priorities so that together we can advance Monogram as a center of excellence. For virology we can use our Her-2 and breast prognostic capabilities, integrate their Her-Mark capability into that because the Her-Mark test is extremely important. As a reflex test, there are women who test who are positive by Her-2 or negative by Her-2, but falsely so and the Her-Mark test is a more sensitive indicator of whether they should or should not receive Herceptin. So those are probably the two biggest things that we're focused on right now. And then obviously number three, Monogram has the full company public infrastructure which isn't necessary once we complete the integration. And so just eliminating the expense associated with the public company's infrastructures is the third thing we're doing. Arthur Henderson - Jefferies & Co.: Okay. That’s very helpful. Last question just on the commercial payer contracting front, anything in the horizon over the next year as far as new contract opportunities anything that's coming up for renewal?

We did extend the CIGNA contract and that document ion was completed this quarter so that was the nearest upcoming renewal in terms of a significant managed care contract. None of the major managed care contracts will be coming up for renewal and I think the opportunity for us continues to be expanding our footprint and gaining share within the contracts that we participate in. Arthur Henderson - Jefferies & Co.: Okay, great. Thanks very much.

Our next question comes from the line of Tom Gallucci with Lazard Capital.

Thanks for all the color, good morning everybody. Thinking back to those contracts that you mentioned, the state and the federal ones, who's performing those services now?

I don't know with respect to the state one, Tom, and the federal one, the litigation centered around the government’s desire, as I recall, to award the contract to a small business and we didn't fit the definition.

Okay. And then we talked a little bit about the impact on those contracts from sort of a payer-mixed endpoint. As far as test mix, the way you all look at the different buckets, where’s the primary impact there, whether it's routine or other?

Tom, most of that impact is showing up in the core on our testing mix schedule.

Okay. And then histology is still under some pressure. Can you remind us sort of how you're thinking about that business currently and some of the issues there?

Yeah. There are a couple things that are going on in histology and we've mentioned them before. One primary one is in-sourcing of pathology work by large non pathology practices which is contributing to volume pressure and it remains a highly fragmented and very competitive market and so we are, I think, doing a good job in the histology market, but we recognize there are a lot of small competitors out there. The in-sourcing phenomenon seems to have continued to gain momentum and that does have an impact on the results that we achieve.

Was there anything strategically that you could do differently or operationally that you're doing in that business given that landscape?

I think the biggest opportunity for us is the advantage of the IT capabilities and the one-stop shop capabilities that you can get with a larger provider like LabCorp. You probably saw the article recently, and I'm not sure where it came out, that said that about 30% of the women who should be getting Her-2 testing before they're administered Herceptin are not getting it and that in about half the cases where it is administered, it's not being correctly interpreted. I think smaller pathology labs, because they see fewer cases, because they don’t have the resources or the capabilities of a larger provide like us, are going to be more prone to not being able to provide consistent high quality results. I think the second thing strategically is physicians who were doing pathology, oncology, have a lot of testing needs over an above the anatomic pathology. They have peripheral blood, they have toxicity testing, they have the need to determine whether companion diagnostics have a diagnostic which will assist in determining which therapeutic to use. So I think strategically just continuing to focus on the full menu of LabCorp offerings, the range of our offerings, the IT capabilities to deliver it all on one consolidated report. We brought up eight color flow cytometry which has been extremely well received by our customers. The main thing is to continue to stay the course and execute, and we're going to be fine.

Okay. Back on the payer mix, patient directiveness has been down all year. You started talking about the economy, maybe some drop-off of the COBRA benefits, do you think there’s a risk that you see more of those patients over time or do you think that those patients are sort of going in other directions or just not getting any care at this point?

Certainly there's a likelihood that if more people are becoming uninsured that we would see more uninsured patients and so part of the reason for our focus on collection at the front end and part of the reason for our introduction of the uninsured patient discounts was to make sure first of all that we provide a viable alternative to get laboratory testing for people who don't have insurance ,and second of all to make sure that we get paid for the services that we perform.

Okay. And then finally just to get back to your answer about your central lab business, maybe could you just give us an update on what the trends are there in your business today?

Like all clinical trial related business, Tom, it's been a tough year for our central lab business, not due to anything other than major PhRMA consolidations, a lot of even work for which we have signed contracts being deferred until PhRMA mergers close. So year over year the revenue run rate is down. It's not a huge part of the business, but the revenue run rate is down. On the other hand, I think we have started to see, even in the last month as some of these mergers have closed, and are starting to see a better flow of work and of new projects being contracted out.

Last question, do those mergers maybe increase any pressure on you to get bigger as those bigger companies are narrowing the number of players that they're using?

I don't think they put pressure on us to get bigger because where we're positioned in the clinical trial central lab space is that we do a lot of esoteric testing and with our tandem acquisition we do a lot of marker discovery and large and small molecule work that many of the big CROs don't offer. So I don't think it puts pressure on us to get bigger. As I have said, we would like to be able to compete for large international trials in addition to being an esoteric niche lab, and to do that we need more international reach in the clinical trials business.

Right, great. Thanks for all the color.

Our next question is coming form the line of Kevin Ellich of RBC Capital Markets.

Good morning. Thanks, guys. Just going back to the two contracts, and Brad I think you might have mentioned it, but I misses it. Which payer segment were those two contracts in?

In the client payer segment.

Client segment, okay got it, thanks. And then I know you don't talk about volumes intraquarter, Dave, but could you talk in general about the kind of trends that you're seeing as you exited the quarter and kind of your thoughts as you head into 2010?

We didn't see anything abnormal at any point in the quarter so I think there were no major ups and downs. Volume was consistent in terms of how it trended with what we had seen in the past. And a lot of what's going to happen in 2010 in terms of volumes, I think, is very dependent on where does the economy go? I mean we obviously, as you can tell by looking at our numbers, we are annualizing the drugs of abuse declines. It was 160 basis points in the first quarter, I think it was 150 in the second. It's 100 in this quarter. So we're seeing that number decline which means that we're from quarter to quarter which means that we're annualizing it, and obviously the fourth quarter is where we really saw the drop-off last year. That’s going to suggest volume growth year over year because of the comp. But that business alone is not going to pick up until we start to see some job creation in the economy. So as I say we're very satisfied with our volumes considering what we see in the world around us and when the economy returns to what I think is a more normal environment, I think we'll see volumes return to what we think of as our normal expectations.

Okay. Thanks for that color. Going back to — Brad, you mentioned that some of the capitated contracts converted to fee for service. What’s' driving that, and is it more of an opportunity given the pricing differential (inaudible)?

Well, and some of that is showing up in the price decline that you see there too because sometimes it’s just a payment mechanism for some payers. So they may have been higher than the average on a capitated basis and just as a payment mechanism want to switch to a fee for service mechanism. So that's one reason. Another reason maybe I typically think of the capitated business as associated with HMO membership and even IPA membership in some geographies. So as potentially plans phase out their HMO plans or reduce their HMO membership, we would see a shift to fee for service.

Okay. That makes sense. And then Dave, you talked about I think your extending the CIGNA contract. Are there any details that you can provide, such as how long that contract is now?

I believe we extended it to 2013 and no, we're not going to provide any details other than that except to say that we're very pleased with the terms and conditions.

Is that exclusive?

No. It is not.

Oh okay, thanks. And then if I did the math right, it looks like the Canadian price for your session has been increasing — I think it came in at around $28.50 per test. And we have seen this trend over the last couple of quarters. What's driving that increase because that's more like captivated business isn't it?

Yes, Kevin. And the exchange rate is totally what you're seeing there. It has improved sequentially throughout this year, but in the third quarter it's still a drag from what it was in the third quarter of last year, but it has been sequentially improving this year.

Okay. And then given the stability of that business, Dave, I think we've had conversations — you seem to like that business. Is there any way you could expand up in Canada? Or I guess I’d also like to get your updated thoughts on the international markets.

Obviously we do like the Canadian business and we continue to look at opportunities to grow that business in a way that's consistent with our overall growth strategies. I would say on the international market, the international market, while there is a lot of opportunity, also involves multiple payment systems, many single payer government system — so we continue to look at the international market. I should mention that in our collaboration with Mubadala, the Abu Dhabi sovereign wealth fund around opening the National Reference Lab in the United Arab Emirates that we are on track to open the first phase of that laboratory in Dubai and that is on track to open in November, so next month. And we continue to be on track to open the second phase of it which is the Emirates Reference Lab in Abu Dhabi in the spring of next year. So we are looking at international opportunities where particularly in a collaborative approach we can test the international market without taking on a great deal of risk. But we still see many obstacles to thinking about a significant international presence.

Got it. That's all I had. Thanks.

(Operator's Instructions) Our next question comes from the line of Amanda Murphy with William Blair. Amanda Murphy - William Blair & Co.: Hi. Good morning, just a couple of follow-ups on the esoteric business. First, you spoke to the strong esoteric volume growth specifically, but if you look at revenue per requisition, it looks like that's down again this quarter. I'm just curious, is that mix related or perhaps the in-sourcing trend you spoke to earlier?

Amanda, I completely consider that to be mix related. There aren't any major rate resettings that have gone on there. As I've mentioned in the past, I think when we have tests like Vitamin D that are lower than the average growing rapidly and, for example, the histology volume going away that is higher than the average, I think that's what's playing into what you see there in the total numbers. Amanda Murphy - William Blair & Co.: So how do we think about, just in the longer term, the contribution of volume and revenue per requisition to overall esoteric revenue growth for a longer-term trend perspective?

I just think it's very difficult to predict. I mean if you go back three or four years, the big driver of esoteric volume growth was cystic fibrosis which is a substantially higher priced test. If you go back two years, HPV which is sort of a higher, but not as high priced test. Now Vitamin D which is a still above the company average price per test, but below cystic fibrosis and HPV. So I mean obviously if we're able to sell more of the Monogram tests, that's going to drive higher revenue per requisition with relatively low volume impact. As we start to see uptake of our microarray testing, I mean again, relatively high price growth per requisition without a lot of associated volume growth. Ideally think it's just difficult to predict what we're going to see as a trend there other than we are going to continue to focus on growing the esoteric volumes and fully integrating the esoteric businesses into the test menu. Amanda Murphy - William Blair & Co.: Okay, that's helpful. Last one, clearly the focus on specialty docs has had some positive impact. How much more traction do you think you can gain from that initiative going forward?

I think there's still ample opportunity in things like advanced cardio lipid testing, the oncology specifically as opposed to anatomic pathology, rheumatology, endocrinology — we have seen very, very strong growth in our endocrinology business. Our allergy business is performing very well. So I still think there’s plenty of opportunity in the specialty markets for us. Amanda Murphy - William Blair & Co.: Okay. Thanks very much.

Our next question comes from the line of Bill Quirk with Piper Jaffray.

Yeah, thanks. Just a couple of real quick followups. One, just want to clarify, guys, periodically the tests that are once classified are changing to core and I'm thinking a good example may be amino assay a couple of decades ago . We didn't reclassify anything in the core in the quarter did we?

No. We don't.

Okay, great. And then last question for me, you guys called out KRAS as well as Vitamin D, anything else in the esoteric side that helped drive that business?

Well, when we talked about KRAS in terms of companion diagnostics, I wouldn't — that by itself is not moving the needle on esoteric. I mean it is Vitamin D, it is HPV, it is prenatal genetics. Those are the things that probably are accountable for the most growth there.

Very good, thanks.

Our next question comes from the line of Robert Willoughby with Banc of America/Merrill Lynch. Robert Willoughby - Banc of America/Merrill Lynch: Thanks for taking my question. Dave, you had mentioned in the past shutting down some of the central lab facilities — Herndon is the one that you called out, but I think you told me once that there were three or four others that could ultimately come offline as well. Is that still in the cards and can I get your sense of timing on something like that?

We have substantially downsized the Herndon facility and you probably remember a couple of years ago now we substantially downsized the Louisville facility. And we continue to look at these opportunities. The challenges to maintain logistics and customer service around any sort of a facility downsizing or a facility shutdown, I think there still are some opportunities for us, Bob, but I don't have a sense of when those things might occur. In the next couple of years we will continue to look hard at all of our facilities and seek opportunities for rationalization. Robert Willoughby - Banc of America/Merrill Lynch: Okay. My understanding also is you won a large paternity contract in Ohio from the mighty orchid Cellmark there. Did that hit this quarter or is that something that is to come?

We did. You are correct. We did win a large paternity contract in Ohio and I believe we started seeing revenue from that at some point in the quarter. Robert Willoughby - Banc of America/Merrill Lynch: Early, late do you know?

I just don’t remember — I'm going to say in the middle of the quarter. Robert Willoughby - Banc of America/Merrill Lynch: Okay. And then relative to what you lost, any sense of size on it?

It's considerably smaller than what we lost. Robert Willoughby - Banc of America/Merrill Lynch: Okay. And then just lastly, given what's on the table for health care reform, I mean I could see as scenario where smaller labs with more Medicare business might be under more pressure going forward. Is there any thought or logic in a strategy to maybe get a bit more aggressive on price over the next year to hasten some departures from the market or just no interest on your end to shift the strategy?

I don't think — well, first of all obviously as you know Medicare is fee-scheduled based payments so we don't compete directly with labs that have a higher percentage of Medicare on Medicare pricing. In terms of other pricing, I mean we evaluate every opportunity based on a number of factors; what is the potential volume opportunity, what is the pricing opportunity, what's the mix of testing? So I can say we don't have any intention of adopting a strategy of let's just go out there and cut price to gain volume. We'll continue to look at all of these opportunities based on what's the overall potential positive impact to the business and is the business going to be consistent with the profitability profile that we look for when we bring ne work on. Robert Willoughby - Banc of America/Merrill Lynch: Got it. That's it, thank you.

Our next question comes from the line of Adam Feinstein with Barclays Capital.

All right. Thank you. Good morning, everyone. Just a couple of final questions here. I know it's late in the call so I'll to be brief. Maybe can you just talk a little bit more about the pricing here in that you guys did see a really good number, obviously more favorable mix shift. So how do you think about true pricing and how do you think about benefit from mix as we look at the numbers here, and I have a quick followup? Thank you.

I think mix is a larger driver in the past, currently and in the future, than real pricing to that as a general answer to that question.

Okay. But the quarter here has got revenue per session accelerated pretty meaningfully and so you're saying that that would be primarily mixed the way you look at it?

Right, in test mix, and I might add in payer mix as well as some other questions got around. I mean, we are losing captivated volume and revenue which is lower priced. So I think that also you have test mix, you have payer mix, and I think those are two contributors. I'll also mention one other factor which is Monogram, and again, Monogram has very little volume so we're seeing that in the revenue per excision much more so than we would see in the volume statistics. And again, around the contract losses, without specifically quantifying it, we mentioned those were also lower than the average price. So again we can be fairly certain what's going on with real prices in most of our business as we've talked about managed care, as we've talked about government payers, as we've talked about some of our client business. So again it just leaves it to the fact that it is the other two factors that drive it more so than real price.

I just don't want to leave the impression that there's no real price in the revenue per requisition trend that we're seeing because obviously there was a government price increased this year and we have had government price increases from a number of different payer groups. Every year we seek to increase prices in our client sector whether it's direct physician, hospital, clinical trials — even in our drugs of abuse testing. And we have price escalators built into managed care contracts. So I don't want to leave the impression that this quarter's revenue per requisition is wholly driven by mix because there is some real price in there that has been the result of our pricing initiatives.

Absolutely. Okay, and then just final question, as you guys think about volumes, a kind of pro forma volumes if you back out some of those items you're saying that it's about 2%. Quest earlier in the week, they put a flat number, but after backing up some stuff they were a little bit lower than that. So I guess, do you guys think that the market’s growing at that rate between 1%-2% in terms of volumes? And I guess what I'm getting it, do you think you're taking share, do you think share has been stable? Just curious to get your thoughts there.

I think right now the market is probably growing at about that rate. I think the market is growing more slowly than it has historically just because of all the factors that we've talked about. And I think when we start to see again, job creation in the economy and a little more stability in the economy, we'll see a return to more traditional growth rates. I think it's hard ever to say that one is taking share. I mean we are growing the top line and we are growing the volumes when you adjust for these somewhat unusual circumstances, and we're pleased about that. And again, I think a lot of it is just we're doing a good job focusing on doctors who were writing lab slips and showing them the benefits of why ordering their testing from LabCorp with our fully integrated IT solutions, with the broadest test menu in the industry, is advantageous to them in helping them to treat their patients optimally.

Okay, great. Thank you very much.

(Operator’s Instructions) Our next question comes from the line of Shelley Gnall with Goldman Sachs.

Thanks for taking the question. Just a little bit more on the volumes front, as you think about your run rate volume trends, do you get a sense that the demand is weaker coming from hospitals or from physician offices?

I don't know the answer to that question. I mean, when we see the volumes coming in, it's probably just very difficult to get to that level of granularity about where does it come from. When a patient comes into a patient service center with a lab req, we don't have any ability to identify did that come directly from a doctor's office, did it come from a hospital campus, did it come from a hospital clinic — I mean, so I think it would be nothing more than speculation if I were to try to give you a direct answer to that. I would just say again, we didn't se anything in the quarter that was inconsistent with what we started seeing in past quarters in terms of the trend and we didn't see anything that kind of jumped out at us as a particular sector other than drugs of abuse being way or up or way down.

Okay, thanks. I guess on the drugs of abuse testing just one followup; can you tell us where we are now with drugs of abuse as a percent of volume or as a percent of revenue or both?

I don't know that we could tell you specifically where we are today. Historically we've said drugs of abuse is about 3%-4% of total revenue and it's about 7% of total volume. Obviously as drugs of abuse testing has declined and total volume has gone up — I mean, those numbers are an approximation, but that's where we've been historically.

And am I right in my understanding some of the feedback that you've given on the call to think that it's realistic to expect a continued drag from the drugs of abuse testing beyond the anniversary effect in the fourth quarter?

Well, it's hard to know because it's hard to know what would happen in the first quarter. I mean, the fourth quarter was when we saw the major decline last year. Just to kind of quickly review those numbers for you, the drug of abuse testing, and I think Steve mentioned them in his comments, in the first quarter of this year we saw a 20% decline year over year. It was 19% in the second quarter and it was 15% this quarter. If we go back to the fourth quarter of 2008 it was 16.9%, remember that's off a higher base, and then in the third quarter of 2008 it was 10.3%, again off of a higher base. So what you would see in the fourth quarter presumably is the annualization of the first real significant big drop, and then you would see in the first quarter, the annualization of a big drop that we had in the first quarter of '09. So the comps will definitely get easier and as I've noted, if you look sequentially at the drag from drugs of abuse testing in our results, the drag is getting smaller. So I would expect the drag to continue to get smaller going forward. It's not a static number, but I can't predict what it will do as we get out beyond the fourth quarter and into next year.

That's very helpful. Thank you so much.

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Great. Thank you very much. We appreciate you listening to our call.

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