Labcorp Holdings Inc. (LH) Q1 2010 Earnings Report, Transcript and Summary

Tom Gallucci - Lazard Capital Markets Glenn Greenberg - Brave Warrior Kemp Dolliver - Avondale Partners Bill Quirk - Piper Jaffray Gary Taylor - Citi Ricky Goldwasser - Morgan Stanley Ralph Giacobbe - Credit Suisse Shelley Gnall - Goldman Sachs Gary Lieberman - Wells Fargo. Anthony Vendetti - Maxim Group Kevin Ellich - RBC Capital Markets

Good day ladies and gentlemen, and welcome to the first quarter 2010 Laboratory Corporation of America, earnings conference call. My name is Jasmine and I’ll be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. David King, Chairman and Chief Executive Officer of LabCorp; you may proceed sir.

Thank you Jasmine. Good morning and welcome to LabCorp’s 2010 first 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, Investor Relations. This morning we will discuss our first quarter 2010 results, highlight some of our strategic initiatives, 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 get started, I would like to point out that there will be a replay of this conference call available via the telephone and the 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 2009 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 first quarter 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. Free cash flow for the trailing twelve months ended March 31, 2010 increased 17% to $777 million, compared to $663.9 million in 2009, net of transition payments to United Healthcare. We are also pleased with our strong cash collection efforts in the quarter, as evidenced by significant improvement in DSO. DSO at the end of March was 46 days, an improvement of six days year-over-year. Although DSO increased two days sequentially, this increase is typical from the fourth quarter to the first quarter. As a result of our success in cash collections, we reduced our bad debt rate by 25 basis points. Second, revenue growth. Revenue increased 3.3% year-over-year in the first quarter. During the quarter we achieved strong growth in revenue per requisition, which increased 6.4% year-over-year. The growth in revenue per requisition is attributable to mix shift, increases in test per requisition and rate increases. The revenue growth per requisition was also impacted by the Canadian exchange rate, Monogram and the lost government contracts, which together improved revenue per requisition by 3.5%. Total company volume decreased 3% year-over-year. Excluding Canada, volume decreased 3.3% year-over-year. Inclement weather had a significant impact on the first quarter, resulting in an estimated 1.3% reduction in our volumes. Also the termination of two large government contracts at the end of the second quarter of 2009 reduced volume by 2.4%. Excluding these items, domestic volume increased 0.4% in the quarter. Esoteric volume increased 5.3% in the quarter. We estimate that bad weather lowered revenue by $23 million, and EPS by $0.08 in the quarter. Third, margin. For the first quarter our adjusted operating income margin was 20.4%. This margin decreased 40 basis points year-over-year, due primarily to the impact of weather. Fourth, liquidity. We remain well capitalized. At the end of March we had cash of $172.2 million, and approximately $440 million available under our revolving line of credit. At the end of March, total debt was $1.3 billion, including $20 million drawn down on our revolving credit facility. During the first quarter we repurchased $105.7 million of stock, representing approximately 1.4 million shares. At the end of March, approximately $216.1 million of repurchased authorization remained under our previously approved share repurchase program. This morning we reaffirmed our 2010 financial guidance. We expect revenue growth of 2.5% to 4.5%. Adjusted EPS in the range of $5.35 to $5.55, excluding the impact of any share repurchase activity after March 31, 2010. Operating cash flow of approximately $870 million, excluding any transition payments made to United Health Care and capital expenditures of approximately $135 million. I will now turn the call over to Dave.

Thank you Brad. We are very pleased with our first quarter results. Despite severe weather we grew revenue by 3.3%. We also grew esoteric revenue by approximately 5.2%. Taking into account weather and the previously lost contracts, total company volume increased by 0.5%. Revenue per requisition remained strong, increasing 6.4%. Our continuing focus on optimizing our business would have resulted in operating margin expansion, but for the impact of weather. In addition, gross profit margin expanded year-over-year by 20 basis points in the quarter and would have expanded further, but for the weather impact. This is a good indicator of the success of our key initiatives to optimize our business. I would briefly discuss these initiatives, which are focused on enhancing the patient and physician experience. First, we continue to improve the patient experience through online appointment scheduling and automating the workflow in our patient service centers. More than 80% of the patients that visit our patient service centers now have access to our online appointment scheduling, and they have responded favorably to it. Patients can now schedule appointment times that are convenient for them, and typically get in and out of our facilities within approximately 10 minutes. Later this year we will introduce second-generation online appointment scheduling, which will provide further improvements for our patients. We have also automated the workflow system in our patient service centers, to guide [Inaudible] through the specimen collection process via a pictorial touch screen interface. The system provides standardized processes across our patient service centers, helping to eliminate unnecessary steps and improving speed and accuracy in the collection process. Second, we continue to make significant strides in our lab automation, through our protodyne subsidiary. This automation improves throughput, speed and accuracy of testing, and improves turn around time, giving physicians and patients faster access to even more reliable results. Third, we continue to enhance our IT capabilities with a focus on online services, client connectivity and analytic tools. As part of our open platform strategy, we interface with thousands of VMR and EHR systems, enabling physicians to easily order testing and receive results. Later this year we will roll out IT improvements that will make it easier for physicians to order testing and receive actionable diagnostic information from LabCorp. As we have said, our strategy is to be the leader in personalized diagnostic medicine. The realization of the potential of personalized medicine will be heavily dependent on the identification of markers and genetic characteristics of disease. Yesterday we announced the formation of a joint venture with Duke University Medical Center to commercialize such biomarkers. The biomarker factory is designed to discover, validate and translate new biomarkers into wildly available clinical tools, that can measure individual therapeutic responses, predict disease progression, and evaluate biologic or disease causing processes. Biomarkers are currently being used in developing treatments for many forms of cancer, as well as for many diseases such as alzheimers, cardiovascular and hepatitis-C. The biomarker factory will position LabCorp squarely on the pathway from the research bench to the physician office. This venture will contribute to the realization of the promise of individualized medicine, and will assist physicians in understanding how to use newly developed biomarkers to improve patient outcomes, and reduce healthcare costs. In summary, we are pleased with our first quarter performance and remain very excited about our future growth opportunities and the strategic initiatives that will help us to capitalize on them. 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 first quarter, approximately 36% of our revenues were in the genomic, 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 2010? 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 programs. 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 increased 6.8% year-over-year. That compares to year-over-year decreases of 6.5% in Q4 of 2009, 15% in Q3 of 2009, 19% in Q2 of 2009, and 20.1% in Q1 of 2009. What is the status of your transition payments to United Health Care? In the quarter the company was billed $10.1 million in transition payments, and paid $14.5 million in transition payments. To-date, LabCorp has been billed a total of $118.8 million, and paid $117.3 million in transition payments to United Health Care. As a reminder, our obligation to reimburse United Health Care for transition payments ended on December 31, 2009. We expect the final invoices for these payments to be processed over the next quarter, and we continue to expect that final amount to be in the range of $125 million. We will update you on these final payments next quarter. Now, I’d like to turn the call back over to Dave.

Thank you Steve. In summary we are pleased with our performance this quarter and are optimistic about our business in 2010 and beyond. Thank you very much for listening. We are now ready to take your questions.

(Operator Instructions) Your first question comes from the line of Adam Feinstein of Barclays Capital; you may proceed sir.

Yes, thank you. Good morning everyone. I appreciate all of the details there. Maybe just if you could talk a little bit about just with weather, so February was a little weak, obviously there was a lot of bad weather in February, but then do people go back to the doctor in March. I’m just trying to figure out, did you see a bump-up in March as some of that volume came back, or if some of that does not come back; how are you guys thinking about that; just a big picture question there?

I understand. The way that we think about it is that some of it comes back. Typically after a severe weather, we do see a small increase in volumes in the next several days, but clearly it doesn’t all come back, and the reason I say that is, if you think about who is getting testing -- first of all, on days when doctor’s offices are closed, people are just not going to the doctor, and whether those patients all come back or don’t come back, we have no way of knowing. Second of all, you have the person who goes to the doctor’s office and gets a slip for a blood draw, and then there is weather and they can’t get to the patient service center for two or three days, and they feel better, so they just don’t go, and that volume doesn’t entirely come back. So you can’t look at weather and say “We lost this much, but we gained this much back.” I think the way we quantify it is, we look at what is the typical experience given the day of the week, the month, the strength of the day, how much did we see a decline; offset that by if we saw anything unusual, immediately following, and that’s how we reach the quantification.

Okay great, and I guess the only part that would be this pathology piece. If surgeries were pushed back and they got reschedule for the next month, I guess there may be some pick up there.

Yes, you could see a little bit of pick up there, but again, I think that the pathology and oncology business probably tend to be less weather affected just because of the nature of the illness, but they also were a smaller component of total volume.

Okay, fair enough. Then just with respect to volumes, obviously we’ve seen your volumes and others, and clearly there was impact from weather in the quarter, but even ex weather has continued softness, just with anecdotes about less people going to being a doctor and such. I guess how are you guys thinking about your market share, and so instantly its always hard to really gauge, but do you think with the slowdown that everyone is seeing the same slow down outside of the two major companies. So, I’m just trying to think about how you guys think about whether you think you have stable market share or just any thoughts there?

Yes, I think we have stable to slightly growing market share. I do think, and that’s particularly in the core business and what I would describe as the non-pathology esoteric business. I think they are our market shares, stable and even slightly gaining. I think the pathology business, we have not been gaining market share, and I think there is several reasons for that. One is the physician in-sourcing that we talked about. The second is the very difficult competitive environment, and the relative ease of entry into the market. So I kind of draw a circle around the pathology business and say, ‘Our market share there has not been increasing, but the rest of the business I think our market share is stable and even slightly growing.’

And then just my final question, it’s just on the guidance. You guys maintain guidance even with some of the negative impact in the quarter. So I guess, is there some assumption of margins being better. I’m just trying to think about how you guys are thinking about the guidance and what are the puts and takes there?

Adam this is Brad. I think our guidance is a fairly wide range still at this point, and has a lot of likely outcomes. If I think about some of the puts and takes, I mean obviously you can see we had a pretty significant increase in our revenue per requisition, up 6.4%, and there are some contributes to that that will more than likely annualize during the year; the monogram acquisition we mentioned, the Canadian exchange rate would be one that’s hard to call, the lost contracts we will annualize for certain. So I would expect to see that number moderate over the course of the year, and then volume would need to be there to offset it, and some of the factors that I mentioned will also have counter impacts from annualization as well. So I think just after one quarter of results we are still comfortable with our guidance where it is, and again we will be looking to perform for the rest of the year.

Thank you very much.

Adam, this is Dave; just one thing to add to that. Our guidance does not imply the add back of the weather. So in maintaining our guidance, it doesn’t imply that we are adding back the $0.08 of weather impact this quarter.

Okay great. Okay, thank you for clarifying that.

Your next question comes from the line of Bob Willoughby of Bank of America. You may proceed.

Hey Dave you touched on it I think briefly, but I guess if I look at that histology business and the volumes and the model let out at the current rate. For the next 10 years or so you will be completely out of the business by then. Is there a new approach or a new answer to why the attrition on the histology side is going to slow down here, but for acquisitions, I mean what can you do organically to stop that attrition relative to the trend it’s been on.

In the first place Bob, I think the physician in-sourcing, we’ve seen the largest impact of, and physician in-sourcing generally works with large physician groups, and frequently with highly specialized physician groups, and so its urology, its dermatology where we have seen a lot of the impact, and I think that for the most part the big customers we are going to in-source have the in-source. I think in the competitive, the rest of the -- and I should say there, I am optimistic that as part of overall healthcare reform, there will be a hard look in Washington at what does in-sourcing and these types of activities do to utilization, and from a regulatory perspective what should be permitted. So I don’t think the in-sourcing trend is going to continue forever. We go back to the history of the Shell Labs and the Pod labs, and these are not trends that I think go on indefinitely. On the competitive environment, the landscape is difficult. There are a lot of strong competitors in the market place, and my answer to that would be, we just have to pick up our game competitively; pick up our game in terms of manual work [ph], we have to pick up our game in terms of customer service. I think the IT initiatives will make it easier for doctors to order that type of testing from us. So we are not giving up and we have no intension of exiting the market. Part of it is not within our control and part of it is.

Okay, and the 25 bips improvement in the bad debt metric, is that the run rate for this year. You sounded somewhat optimistic. There is more leverage on that front this year, but is that too much to hope for?

Bob, this is Brad. We are always looking to do better on that metric. So I think our initiatives are still working, they are still helping us, and I would expect over time, I wouldn’t give you a definitive timeline, but we still think there is room for improvement in the bad debt rate.

Great, thank you.

Your next question comes from the line of Kevin Ellich of RBC Capital Markets. You may proceed.

Good morning. Thanks for taking my questions. Just going back to the guidance, I want to make sure that the $0.08 weather impact is not included in the guidance. So basically we could theoretically look at your guidance as $0.08 higher.

Kevin, its Dave. The $0.08 of weather is not included in the guidance. Now you can look at our guidance as $0.08 higher, but that’s not the way that I look at it. I look at the guidance was intended to encompass a broad range of potential outcomes, and if I look at the $1.30 that we recorded versus the $1.31 consensus in the quarter, what I see is, by maintaining our guidance the same we haven’t taken back the $0.08 of weather, but that $0.08 of weather never really materializes in terms of what we report. So I look at our guidance as being what it previously was, and I don’t look at it as we’re raised by $0.08. I look at it as we had an unusual weather impact, but we recorded a $1.30, and for the balance of the year we are going to record exactly what we think we are going to record within the range that we’ve given you.

Okay, that’s helpful, thanks Dave. Another competitor reported today, and they indicated that volume trends were kind of weak across the board, and they were pointing to physician office business and script data. I was just wondering what you think about that, and how you think we should think about some of that data that’s provided from sources like IMS.

Well, we have been busy preparing for our calls, so we haven’t really had an opportunity to review what anybody else did today, but what I would say is I think the IMS data is directionally helpful, not the script data, which I think really has very little relationship to the lab. I think it’s directionally helpful Kevin, but I don’t think that it is in and of itself, something you can draw a straight line and say ‘lab volume follows IMS physician office volumes.’ For example, this year in the first quarter we had a very light flu season. So physician office business maybe down year-over-year because of flu comparables, and yet we know historically flu has very little impact on our reference land business one way or the other. So we certainly see the same things, both anecdotally and otherwise we see physician practices that are closing, we see physicians reporting fewer patients, we see hospitals buying physician practices because the physicians financially would rather not continue in their current state, but its hard to put anecdotes and data into anything other than the volume we report, which I think we feel quite good about for the quarter.

Okay, and then looking at the strong pricing this quarter, it looks like the other esoteric testing bucket increased 13%. How much of that was attributed to monogram, or was monogram a big factor in that?

Kevin, this is Brad. No, monogram is not in that category, it’s in the genetic category. So what you are seeing in the other esoteric bucket is largely driven by Vitamin D.

Vitamin D, okay. And then owing to the other genomic testing bucket, it looks like the number of the session has actually declined in the quarter. Was that weather related or would it be something else that impacted that?

Kevin, this is Brad again. I attribute it to weather. I mean up and down the payer mix schedule, as well as the test mix schedule, there is going to be weather noise.

Okay, and then just going back to the physician in-sourcing comment, Dave do you think Medicare will do something or address this in 2010?

I think it’s very optimistic to think that it would be addressed in 2010. We would certainly like it to be addressed in 2010, but there’s a lot going on in FCMS and in Washington generally with helps reform, and it just depends how high this gets on the list of regulatory priorities. So it continue to be something that we are concerned about, again from a health care cost and a public policy standpoint, and we continue to emphasize to regulators that it should be a concern for them, and that they should look at objective data and see if it is leading to increases in utilization or inappropriate utilization, but I think for something to happen this year is not in our expectations.

Okay, and then last question. It looks like you guys might have a small investment in modality. I’m just wondering if you can talk a little bit about that and what you expect to see?

We do have a small investment in that company, and we think they have some very innovative cancer diagnostic assets. As you know, and as we have said, we are very much focused on individualized and personalized medicine. I think oncology and the treatment of cancer is going to be a very, very substantial growth area, and I think it will be one of the areas in which we see the realization of the promise of personalized medicine most quickly. So our investment and modality is an attempt to further increase our leadership position in personalized medicine and specifically in diagnosis and treatment of cancer.

Excellent! Thanks, and a nice quarter.

Thank you.

Your next question comes from the line of Amanda Murphy with William Blair. You may proceed.

Hi, good morning. So this is just a follow-up to a previous question regarding Vitamin D. Given that that’s been such a driver of sort of the other esoteric bucket, just curious how much more traction you think you can get there, and is there anything else coming down the pipe that you think could be as influential?

Amanda, its Dave. I think there is still opportunity in Vitamin D. Obviously we’ve seen very significant growth in this test. At the same time, if you look at some of the recent publications about Vitamin D, this originally was a test that was thought to be very highly correlated. Vitamin D deficiency was thought to be very highly correlated with bone disease and osteoporosis. But the papers that have been coming out show correlation with development of certain types of cancer, and one of the most recent papers showed a correlation between Vitamin D deficiency and an overall morbidity and mortality. There was also a recent paper that showed that even within the first two years of life, there is a substantial portion of the input population that’s Vitamin D deficient. So I think there is still opportunity for growth in Vitamin D. Obviously its not going to continue to grow at the rate that it has. In terms of what else is in the pipeline, I would just go back to the history of clinical laboratory testing. Part of the reason that we offer over 4000 tests is that as scientific discoveries were made, as clinical practice advances, there is up take in testing that may have been under appreciated for substantial periods of time. So cystic fibrosis several years ago when Acog made the recommendation for cystic fibrosis screening, that test has been around for a long time without a lot of utilization. Vitamin D around for a long time without a lot of utilization. We continue to bring new test to market, but we also continue to offer the broadest menus, so that as clinical and medical practice and science advances, we have the ability to capitalize. I think one of the nice things about the collaboration with Duke on the biomarker factory is exactly that we will be involved with a first rate academic medical center in discovery and commercialization of new test that will be focused on two things; better treatment of disease and lowering the cost of our healthcare system.

Okay and just as a follow-on to that, I think in the past you’ve talked about your outcome programs as being a strategic focus like Litholink, and some parents have reacted well to those programs. I am just curious if you can provide an update and also to the extent that you are working to expand those types of programs into other disease states as well.

Litholink has been a great acquisition for us. The kidney stone program has been very successful and has grown very nicely. The chronic kidney disease program, we have a terrific program. As we put it out into the market place we discovered that there were some things about the work flow in the program that were causing physicians difficulties. So again as part of the IT initiatives we are talking about, we are really retooling the chronic kidney program to make it fit more seamlessly into the physician office workflow, and then I expect that we will see very positive growth there, and we are continuing to work on outcome improvement programs for other chronic diseases that we think will be impactful. Again come back to the same thing; better treatment, lower costs.

Okay, thanks a lot.

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

Good morning. This is Bryan Zimmerman filling in for Darren Lehrich. I was wondering if you can talk a little bit more about the increased competition you referred to at the pathology segment. Where do you think the competition is coming from outside of the hospital-based labs?

Well, first there is a lot of competition from hospitals, because hospitals themselves have pathologists, and to the extent that they have owned clinics or affiliated clinics, they are very competitive for that, to bring that pathology work in house. Second there are independent community pathologists who may be individuals who are in small groups, who may have particular affiliations with medical groups that give them an opportunity to gain business. Third; there are other independent clinical laboratories that are focused on pathology, and many of them are very highly specialized, they are very highly pathology focused, and many of them have very good offerings, both from a service and a substantive prospective. I don’t think their offerings are any better than hours, but again we offered 4,400 tests; they offer a very limited and highly specialized menu; and as I mentioned, the barriers to entry in the pathology business are relatively low. So that’s a fact of life in the market place, and as I said before, we are going to pick up our game to improve our performance here, but we are fully capable of competing head-to-head against anybody, based on our capabilities and our service and our test menu.

Okay thanks, and then I guess just one follow-up question. Can you elaborate a little bit more about the $9.3 million restructuring charge taken in the first quarter, and also do you see any further restructuring charges going forward this year?

Bryan, this is Brad Hayes. Part of the $9.3 million restructuring charge related to severance, where we are consolidating some activities that are spread around the country into one facility or smaller number of facilities, so there is some job loss associated with that. There is another portion of the $9.3 million that relates to some abandoned IT systems that we decided during the quarter we were going to abandon, and that’s the charge that represents those activities. Hard to predict the future of those, but we are continually evaluating our foot print, our patient service centers, our organization and opportunities for efficiencies, and sometimes the actions to change some of those things result in these type of charges.

Okay, thanks a lot guys.

Your next question comes from the line of Tom Gallucci with Lazard Capital Markets. You may proceed.

Thanks. I just have a handful of follow-ups if I could. Not to be a dead horse on the histology area, but just curious, are there any particular sub-specialties that the pressure is more pronounced or is it sort of generally with an AP?

I think it’s generally with an AP Tom. I don’t think there is anything I would single out as being particularly pronounced.

Okay, in terms of your margins I guess, if you add back the weather impact, you’re generating good margin trends, you outline the three initiatives that you are focused on. Could you give us sort of maybe a big picture, a longer term view of where you think margins can go, maybe in effect sort of you’re helping us frame or quantify the impact of some of those initiatives?

Well, I think as we have said, our foundation model is that on 4% to 6% top line revenue growth we should get, all other things being equal, about 20 basis points of margin expansion. So that’s how we think about the business going forward, including the leverage in the business, but it also includes the continued optimization efforts, because if you look at gross margin for example, our gross margin is heavily labor and supplies. So as volumes grows, supply costs has to grow, and the only way we can offset that is by becoming more efficient, which is what our lab automation programs are about. Labor; there is always upward pressure on labor expense because of the cost of living and wage rate adjustments. So again, our optimization programs are designed to offset some of those costs. So the way I would think about it is you know the foundation models say 4% to 6% top line growth should get you 20 basis points of margin expansion, and included in the puts and takes are all the efforts that we are continuing to make to optimize the business.

Not necessarily over and above that, but sort of included in there.

That’s the way I think about it.

Okay, that’s helpful thank you. Then I guess just a last one on the guidance, just to make sure I am clear, you sort of had the $0.08 hit on the weather, and you mentioned that it takes into account a variety of potential outcomes. I guess on the flipside you don’t necessarily include buy backs in there, right. So given you did some buy back activity in the quarter, that would have been something that would have been an added positive versus the weather being negative to the original guidance, is that fair?

Tom, this is Brad. Yes, that’s fair, but I think given the level of repurchase that we did, yes it still falls within the range.

Okay, perfect thank you.

Your next question comes from the line of Karen Blanchet with Brave Warrior. You may proceed.

Hi, this is Glenn Greenberg, good morning. On the Duke biomarker factory, I wonder if you could talk about which tests or treatment guides you think are closest to market, and how important they could be?

Good morning Glenn. The closest thing to market right now is the IL 28 marker for Hepatitis C, which is basically ready and is in the licensing process, and that’s a marker of responsiveness to Hepatitis C therapy for individual patients, and I think could be quite impactful if you look at the epidemiologist predictions about the growth in Hepatitis C in the United States. Its going to past what we saw with the HIV experience in terms of infectious disease. There are some markers relating to guiding physicians who were treating cancer. In selection of chemotherapeutic agents, there was a separate company form for the commercialization of those markers which is called Cancer Guide, and which were an investor. So those are probably the closest things to market. I think there is a good deal of ongoing discovery work, and we’ll continue to update you on what we are seeing in biomarkers and what we think as reasonably ready for commercialization.

And what about a test that would indicate the presence of cancer in early stage, will that be part of the focus?

Absolutely, and we still are hopeful that at some point the FDA will let us bring all the share back to the market in some form or another.

Okay, and how much is the Hepatitis C test going to cost?

We don’t know at this point. As I say, the intellectual property is not owned by us, and we are still in discussions about licensing.

Okay, thank you.

Thank you.

Your next question comes from the line of Kemp Dolliver with Avondale Partners. You may proceed.

Hi, good morning. First question relates to Monogram; could you discuss where you stand with both the infrastructure integration, and then also progress on growing the revenue for the two main tests you have there?

Sure. First of all, I just want to reiterate that from a strategic prospective monogram is exactly the kind of acquisition we want to do because of the personalized characteristic of the testing, because of obviously the esoteric nature of the testing, the focus on both genetic testing and on oncology, and the focus on infectious disease. So we are very happy that monogram is part of our family. In terms of the infrastructure integration, I think it’s gone quite well. We continue to do the profile testing at the monogram facility out in South San Francisco, and its been nicely in terms of ordering and logistics, and all those things has been nicely integrated into the LabCorp system. The HERmark [ph] test, which is the oncology test, is actually being moved into being sold by our oncology sales force, and over time we probably will move the performance of that test into one of the laboratories that performs our oncology testing, just so that we don’t have specimen transportation, and other issues with it. But, again we think there is very nice opportunity in the HERmark test for patients who are either falsely positive or falsely negative by traditional HER2. So all in all I’m very pleased. Revenue has probably been consistent with what we thought it would be, and once we fully integrate all of the IT capabilities and the test ordering and result delivery capabilities, I expect to see that revenue growth.

How much do you think you reduced the EPS drag, relative to Q4’s $0.08?

The guidance I think that we gave on the acquisition was that monogram would be slightly accreted this year, and so Q1 was better than Q4 in terms of the drag, but we still are not to breakeven to slightly accretive, which is where we expect to be by the end of the year.

Okay, thank you.

Your next question comes from the line of Bill Quirk with Piper Jaffray. You may proceed.

Thanks, good morning guys. First of Brad, you mentioned that the earnings impacts in weather obviously several times now, and talked at least directionally the impact on the P&L. Could you give us a little more specificity to the extent that you have it on the expense impact for both costs and service, as well as on SG&A?

Sure Bill. The revenue is as you said; we quantify that by taking the volume that we estimate we lost from assumed price. On the expense side we know that we automatically get supplies, and bad debt would have been part of that expense base, and then the compute the ultimate drop down we have another small layer of variable costs. When we loose revenue due to weather it’s a relatively robust drop down, because you may see it in the SG&A line which was higher as a percent of sales than in the prior year first quarter. Those costs are basically fixed, and so are a lot of our other costs when we think about rental or maintenance of premises and careers and things of that nature, patient service centers, all those costs are still in there. So we think it has a pretty high drop down when we loose weather related business.

So is it safe to say then its going to be roughly two thirds costs of service, roughly one third SG&A, is that the right way to think about it?

Well I think of the all in drop down as about 70% of the revenue number roughly speaking, and a big chunk of that is related to supplies and bad debt. We are certainly don’t have those, and then some other costs as well factor into that calculation.

Okay, and then on the KDM price per excision, if I’m doing my math correctly here, it looks like about 19% of the 23% gain was forex [ph], so we are seeing a little improvement year-over-year on the price of excision, is that the right way to think about that?

Absolutely.

Very good. Then just lastly from me, other than calling out Vitamin D earlier on the call, anything else to highlight from a testing standpoint?

Bill, its Dave. Continuing to see good growth in HPV testing, and with more new tests coming to market out of the vile, we’re continue to see nice growth there, but Vitamin D, HPV, some of our cancer diagnostic testing, KRS and related testing, those offer relatively small base, so you wouldn’t see them particularly in any place in the numbers. We had a number of tests that are moving in the right direction. Obviously they are somewhat overwhelmed in total impact by the Vitamin D growth.

Understood. Thanks guys.

Your next question comes from the line of Gary Taylor with Citi. You may proceed.

Hi, good morning. Kind of a couple of questions; you guys have been I guess really the most forthright maybe the right way to say, just in terms of talking about competitive activity in your business. I don’t recall it was something you talked a lot about a year or two ago. So I guess, can you help us understand, where are you seeing the most change in terms of competitive activity; obviously hospital, the labs and outreach programs etc. So in that equation of kind of the fore factors where there is competition in pathology in particular, where do you see the greatest degree of change?

Gary, its Dave. I don’t think the competitive landscape has changed very much in my time around the industry, which is going on ten years. Obviously there has been a lot of consolidation, which has changed the competitive landscape to some extent. I would say that the biggest change that I perceived in the competitive landscape is what I would describe as aggressive sales and marketing practices that we as a company are not comfortable with. So what I have seen in the last 18 months to two years is, I think some practices by competitors and I’m not making excuses here, because as I say, we need to pick up our game, but some practices by competitors that I think helped them gain business in ways that from a legal and regulatory perspective, we are not comfortable replicating. Again as I mentioned, the physician in-sourcing are the two biggest changes in the competitive dynamic.

Looking I guess to kind of overall just core volumes, I mean really at least in my model you haven’t had this period of extended weakness. If you go back to kind of ‘04 and ‘05, you had a period that was similar, but certainly not as lengthy. So what do you think is the key factor that recovers core volume growth. Is it just purely employment growth and growth in the ensured workforce driving increased utilization; is that really what probably the key macro swing factor needs to be?

Yes, I think when you look at loss of commercially insured lives, I think United reported another 4% loss in commercially insured lives this quarter. So you look at the continuing loss in commercially insured lives, and you look at the lack of job growth in the economy, which means as long as people are not getting jobs they are not going to be insured, those are the big factors. I mean interestingly to me we haven’t seen a big increase in uninsured or in-patient paid testing, either from a volume or a revenue perspective, which suggest to me that people who are not insured are fundamentally staying home.

Okay, thank you very much.

Your next question comes from the mind of Ricky Goldwasser on Morgan Stanley. You may proceed.

Good morning. Can you give us some additional color on first, what was the impact from acquisitions on top line growth in the quarter? I know you’ve made a couple of called in acquisitions in the fourth quarter. I just wanted to understand the impact on the 0.5% volume growth that you provided us on the call. Then also on the pricing growth, obviously very strong growth. Some of it I am assuming is coming from monogram and vitamin D. What was the impact of the weather on pricing, so when we think about modeling pricing for the remaining of the year, should we assume some step down in pricing and to what level. That is it for now.

Ricky, this is Brad, good morning. First one, acquisitions; we don’t typically break those out, especially the size of acquisitions that we’ve done with the exception of Monogram. On Monogram what I will say and I included in our prepared comments, not specifically but I will specify now, that’s about a point of our pricing growth, and you would not see it on the volume front, because it is much higher than our average price test. So it is not noticeable in the volume growth number, but about a point of the pricing number, so we don’t break that out. Weather has a very much typical profile of our pricing. So the 1.3% we reported I think for revenue and volume, so there is very little in the pricing front by way of weather.

Okay and just on the acquisitions, can you confirm that you’ve made a couple of acquisitions in the first quarter? Just as we model we know when to assume the year-over-year anniversary. Then also, what is the revenue contribution for vitamin D. I know you highlighted is the key area of growth for other genomics such as KRS [ph] on the impact or what percent of total revenue it is?

Ricky, it’s Dave. We don’t break out individual tests by their percentage of revenue or their revenue contributions. Vitamin D is not only a significant grower, but is a significant test in terms of overall utilization for the company, and that’s as much as we would say. As was reported, we did a couple of small acquisitions in the fourth quarter, and they are not material in terms of top line excision or revenue growth, but as we’ve always said, part of our foundation model is small holding acquisitions that involve increasing top line revenue and being able to take cost out post close.

Okay, thank you.

The next question comes from the line of Ralph Giacobbe with Credit Suisse. You may proceed.

Thanks, good morning. Just a couple of quick ones. David, I guess on the volume side going back to what Gary was sort of talking about. Obviously volumes up 0.5% when you sort of exclude some of the non-recurring if you will. What do you think about sort of volume growth going forward outside of some of the near term headwinds. Do you still think of it as sort of the historical growth rate or is it a sense of, you guys are obviously much bigger now, it’s going to be harder to drive that type of volumes. So love to get a big picture take on where you see normalized volumes in the future.

I think its going to be hard to know when we return to the “normal environment” just because there are couple of new normal’s, one being economic and the other being Healthcare reform, but my belief is that there is still 2% to 3% volume growth that we should be seeing in the industry and then we should be getting our share off and that that should be our assumption as part of the foundation model.

Alright that’s helpful, just in terms in your term can you talk about may be what actions you can take to help sort of reintegrate volumes. I know in the past you’ve talked about sort of a sales focus on the esoteric business in the areas that aren’t as tied to economic factors. Anymore sort of color there or what you are dealing to drive better volume.

I think we are continuing to do the same things. Focus on specialty physicians who may have reason to use more lab testing for their diagnoses treatment and monitoring of patients. I think continuing you enhance the IT capabilities to make it easier to order test, receive results, look at results over period of time. If we continue to improve the physician experience and improve the patient experience, we continue to have a robust menu of tests I think volume will take care a bit self.

Just my last one, on the cost reduction side where exactly costs are sort of coming from, may be aside from just the layoffs and anyway to quantify. You talked about automation, anywhere to quantify some of the impact that may be having.

I think it is pretty hard to quantify the impact. I do want to take exception to layoffs. We don’t have any layoffs in 2009. We managed our personal, our headcount very, very well and the charge that you saw in this quarter is the result of consolidation of operations in which we basically offer our employees the opportunity to continue with the company, in other roles and some have chosen not to. So, what you are seeing particularly in gross margin improvement is greater efficiency in our service centers, greater efficiency in our collection process, which means less backend work on collecting. Greater efficiency in the laboratory, improvement of our performance in the supply chain and you are going to see all those costs continuing to come out. This is an ongoing process and bad debt reduction in this quarter comes from some of those processes. This is going to be an ongoing process that we think it is going to continue to help us offset some of the upper pressure that comes from labor, supplies, rent is the other big components of our cost of sales.

And then just realty quick last thing; is there anyway to quantify sort of drugs of abuse testing. It sound like it bounce back a little bit, is there any way to think about it was a sort of incremental or from the easier comp that sort of help the underlying volume number, because last year obviously we are able to strip it out. Is there anyway to think about it as sort of what it added to volumes this quarter.

Ralf this is Brad, I think Steve said it was up little over 6% on its own on a volume basis and in the fourth quarter was down 6%. So if you look back at that component, it did definitely help on the volume side.

Okay. Alright, thanks guys.

Your next question comes from the line of Shelley Gnall of Goldman Sachs. You may proceed.

Thanks so much for putting me on. A couple of questions, first a follow-up on the restructuring charge, it sounds like you are consolidating your work forward. Is it fare to assume that’s rationalizing the workforce in response to weaker volume trends relative to historical trends.

No it is not.

Are there other parts of your labor force that are growing through, same fold to sales force?

Without referring specifically to the composition of any particular part of our business, yes, generally our labor force is growing in a variety of areas phlebotomy, couriers, sales. So, yes we are continuing to hire people so that we can continue, as we’ve said to improve the physician and patient experience and be prepared for the return of volumes. Again the volumes that we lost, particularly the government contract and the prison contract didn’t involve a lot of people. They involve the lot of pretty automated testing, so we didn’t reduce a lot of people as a result of that and net of that we are still seeing volumes growing.

Great that’s, guess on a related question. Your volume trends continue to outperform your pear. I’m just wondering, it sounds link you are also getting a little bit of market share in the testing outside of histology. Can you talk about a little bit about may be the strategic initiatives or sales force initiatives, or sales force expansion that may be driving the better volume in the market share grab. What do you think is some of the most important factors that drive the better volume trends?

First of all let me say that our peer is a very strong competitor and that the differences in these volumes are not enormous, so I think we should keep perspective on this. I think as I said earlier our market share is stable, just slightly up outside of the histology business. I think the biggest thing is the continued initiatives to improve the patient and the physician experience, the continued focus on making it easier for doctors to order testing electronically, receive results electronically, integrate them into any electronic medical records system or electronic health record system that they choose as opposed to proprietary systems. We want to make it easier for physicians and patients to do business with LabCorp and those are the things that I think are going to help us continue to grow our volumes.

Okay great, thanks. Just one more quick question, I’m just wondering if broadly you are seeing any change in the dynamics of your conversations, your contracting discussions with the health plan.

No I don’t think so. The health plans are always looking for ways that they can save money and we are always looking to show them the value of laboratory testing at 2%,3% of healthcare spend driving 70%, 80% of decisions. So I think that conversation is a pretty consistent one.

Okay, great that’s so much.

Your next question comes from the line of Gary Lieberman with Wells Fargo. You may proceed.

Thanks for taking the question. You noted that the total payments to United would end up being about $125 million. Can you just remind us in terms of where that comes out versus what your initial expectations were and how that evolved over time, and then also maybe to what extent there’s still some opportunity to increase volumes to that contract.

Gary it is Dave. The initial cap was $200 million dollars, so I cannot do the math quickly in my head, but we are coming in at 125 million against the initial expectation of 200 or so, we’ve done substantially better. Is there opportunity to increase volume through the United contract, absolutely and we continue to focus on the opportunity to gain volume, reduce their out of network utilization in collaboration with them and continue to grow the business with a very, very valuable partner.

If I could ask one quick follow-up on the Medicaid front; Medicaid enrollment grew pretty dramatically in parts of the country last year and overall. Is there anyway you can sort of quantify what kind of impact that had on your business, either from a volume or a pricing perspective.

Gary this is Brad. Not really noticeable in the quarter. I reviewed the Medicaid growth rate as well as the percent of sales and still pretty small for us at about 4% of sales.

Okay Gary, thanks a lot.

Your next question comes from the line of Anthony Vendetti of Maxim Group. You may proceed.

Okay thanks. So I want to just try to dig little more into the drug of abuse testing, which was up 6.8%, which is a very nice number for the first quarter. Is there any regional impact or any particular payer mix that’s contributing to that?

Anthony it is Dave. Drugs of abuses reported in our third party or other category, so it’s all one pair, it’s reported in client on the 8K, and obviously its part of core versus esoteric. I’m not aware that we are seeing any particular regional trends in drugs of abuse testing that would be worthy of mention.

Pricing comp seems like they would get more difficult as we go through the year. Is their anything that you are seeing that would cause pricing to either slow or remain same as we move through the year?

Well as Brad mentioned, we will annualize Monogram in August, so that is one percentage point of price. We will annualize the impact of the lost contracts in June, so that will make the volume copies here, but that will detract from price. We will be subject to fluctuation in the Canadian exchange rate, which has been strongly in our favor year over year, but no assurance that that’s going to continue and if it starts going the other way that could have an impact on pricing. So there is some things that we know are going to change and there is at least one that is variable.

And lastly, are there any large contracts that you are currently bidding on that could be a positive sometime this year?

Nothing that we are in a position to discuss at this point.

Okay, great. Thanks.

Your next question comes from the line of Kevin Ellich with RBC Capital Markets. You may proceed.

Thanks guys. Just a quick follow-up. Dave, I know you guys like the Canadian business. I was just wondering what your thoughts are regarding the funding environment up in Canada and it looks like the cap increase might slow down in 2011 once that contract expires. Any thoughts or color on that?

The funding environment in Canada has always been a year-to-year proposition. I mean they have a different health care system from ours. They have different drivers of what they pay and what they are willing to pay. Again, I think of it as fundamentally a capitated system in Ontario. So, if we continue to become more efficient, we should be able to continue to be successful in the business and I don’t look at the Canadian funding environment as being particularly impactful to the overall business of the company. We like the Canadian business, we’ve been successful with it, we continue to look to expand our opportunities there.

Okay, and then just one last question for Brad. With the Medicare cut of 1.9%, is that about a 40 or 50 basis point impact on pricing growth?

I get a little south of there, probably in the 30-range.

30 basis range.

Yes.

Okay. Thanks.

Your next question comes from the line of Bob Willoughby with Banc of America.

Dave, there has been some positive headlines even from Obama, believe it or not on the need for DNA-based forensics testing. Has that translated into any renewed further activity among the States at this point, or is it still just [Inaudible] waiting for that market to open up.

Bob, the identity business for us is doing quite well as is the forensics business. The challenge is, the States all want to do more but they have no budgetary resources for it, and so we are not seeing anything changing in that dynamic.

Okay. Thank you.

At this time, there are no further questions. I would like to turn the call back to Mr. David King for closing remarks. You may proceed.

Thank you very much Jasmine, and thank you all for listening to our first quarter 2010 earnings conference call.

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day. ,