Labcorp Holdings Inc. (LH) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Laboratory Corp. of America Holdings Earnings Conference Call. My name is Katie, and I'll be your coordinator for today. [Operator Instructions] I would like to now hand the call over to your host for today, David P. King, Chairman and CEO of Laboratory Corp. of America. Please proceed.

Thank you, good morning, and welcome to LabCorp's, Second Quarter 2011 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, Vice President, Investor Relations. This morning, we will discuss our second quarter, 2011 financial results, highlight our progress on our key 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 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 the 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. These non-GAAP measures include adjusted EPS excluding amortization, free cash flow and adjusted operating income. I would also like to point out that we are making forward-looking statements during this conference call. These forward-looking statements include, among others, statements about our expected financial results. These statements are based upon current expectations and are subject to change based upon various factors that could affect the company's financial results. Some of these factors are set forth in detail in our 2010 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. On today's call, I'll discuss 4 key measures of our financial performance: Cash flow, revenue growth, margin and liquidity. First, cash flow. Our cash flow remained strong. Free cash flow for the first half of the year was $325 million, which is in line with our expectations and historical performance. Cash flow has been reduced by approximately $20 million due to expected delays in the Genzyme Genetics enrollment process, which we had previously discussed. We expect that these delays will be resolved in the ordinary course and are reiterating our 2011 operating cash flow guidance of $900 million, excluding the Hunter Labs settlement. We remain pleased with our cash collections. DSO increased 1 day year-over-year to 46 days at the end of June due to the Genzyme Genetics acquisition and decreased sequentially by 1 day. Our bad debt remained stable at 4.7%. Second, revenue growth. Revenue increase 13.3% year-over-year in the second quarter. Genzyme Genetics accounted for approximately 7.6% of this growth. During the quarter, we achieved strong growth in revenue per requisition, which increased 8.1% year-over-year. The growth in revenue per requisition is attributable to acquisitions, rate increases, test mix shift and increases in test per requisition. Genzyme Genetics accounted for approximately 6.4% of the growth in revenue per requisition. Total company volume increased 4.8% year-over-year during the second quarter. Genzyme Genetics accounted for approximately 0.9% of this volume growth. Esoteric volume increased approximately 10% in the quarter. Third, margin. For the second quarter, our adjusted operating income margin was 19.9% compared to 21.8% in the second quarter of 2010. Acquisitions that we have not yet fully integrated caused an approximate 180 basis-point drag on margins. Over time, as we integrate the businesses, margins will improve. Margins expanded sequentially by 60 basis points, which is in line with past experience. Fourth, liquidity. We remain well capitalized. At the end of June, we had cash of $118.9 million and approximately $463 million available under our revolving line of credit. During the second quarter of 2011, we received notices to convert a portion of our 0 coupons subordinated notes. The total conversion value of approximately $231 million was settled by cash payments of approximately $143 million and by the issuance of approximately 900,000 shares of stock. At June 30, the remaining accretive value of the 0 coupons subordinated notes is approximately $140 million. At the end of June, total debt was $2 billion, and there were no borrowings outstanding under our revolving credit facility. During the second quarter, we repurchased approximately $60.5 million of stock, representing approximately 600,000 shares. At the end of June, approximately $408.5 million of repurchase authorization remained under our previously approved share repurchase program. This morning, we reaffirmed our 2011 financial guidance. We expect revenue growth of 9.5% to 11.5%. Adjusted EPS, excluding amortization in the range of $6.17 to $6.32, excluding the impact of any share repurchase activity after June 30, 2011. Operating cash flow of approximately $900 million, excluding the Hunter Labs settlement and capital expenditures of $150 million. I will now turn the call over to Dave.

Thank you, Brad. We are very pleased with our second quarter results. We generated strong revenue growth of 13.3%. Volume increased 4.8% and esoteric volume increased approximately 10%. Importantly, despite economic headwinds, our organic volume grew by approximately 2% year-over-year. Revenue per requisition remains strong increasing 8.1%. Genzyme Genetics accounted for approximately 6.4% of the revenue per requisition growth. Excluding the impact of Genzyme Genetics, our DSO declined on a year-over-year basis to 43 days, reflecting the continued strong performance of our operational and billing personnel. We continue to make significant progress on each aspect of our Five Pillar Strategy, and I will now provide specific updates on each pillar. The first pillar of our strategy is that we deploy our cash to enhance our footprint and test menu through acquisitions and to repurchase shares. Genzyme Genetics is performing well. We are pleased with revenue performance and are on track with planned cost reductions. LabCorp and Genzyme employees continue to work together to combine the businesses without disruption to our customer base, as evidenced by the very limited customer attrition we have experienced to date. The Genzyme acquisition has allowed us to introduce significant customer benefits given the complementary nature of our services. With respect to the Genetics business, our customers now have broad access to novel tests and technologies, such as the SMA molecular genetics assay and the whole chromosome SNP array, part of our combined reveal family of SNP Micro Arrays. On the oncology side, LabCorp's broad molecular oncology test menu, such as BRAF mutation testing which has applications in a variety of cancers, including colorectal cancer and melanoma, complements the strong pathology expertise of Genzyme Genetics. Further, LabCorp's broad test menu has allowed us to internalize approximately 50 tests that Genzyme had previously referred to other labs. Last month, we acquired Clearstone Central Laboratories, a leading global provider of central laboratory services for late-stage clinical trials. The acquisition provides LabCorp with Clearstone's global network of central laboratories and clinical trials management system, Apollo CLPM, which provides clients with realtime access to global data, strengthened chain of custody, automated sample stability monitoring and guaranteed consistency across all lab sites. The combined entity will have the largest available Biomarker assay portfolio that globally harmonizes state-of-the-art testing platforms in areas such as pharmacogenomics, microbiology, immunohistochemistry, allergy testing, cytogenetics and flow cytometry. We have stated for some time that our clinical trials' central lab business needed broader international reach, and with laboratories in China and Singapore, Clearstone accomplishes that goal. In April we announced our intended acquisition of Orchid Cellmark, an international provider of DNA-testing services, primarily for forensic and family-relationship applications. The transaction remains subject to regulatory approval, and we are working with the FTC to complete the process. We continue to expect the transaction to be mutual to GAAP earnings in 2011. Finally we have repurchased approximately $325.5 million of our shares thus far in 2011. The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. We continue to make progress on our LabCorp Beacon product. This quarter, we launched several new modules, migrated half of our Westcliff customers and surpassed 15,000 users on Beacon. We also plan to introduce our Beacon Order Entry System nationally in the third quarter, which will allow our customers to place electronic orders for all LabCorp brands and services. On the Genzyme front, we have converted billing, report delivery and other key IT systems onto LabCorp platforms. The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. The national rollout of our Touch and AccuDraw order entry systems should largely be completed by the end of the year. We are also progressing well with lab automation projects that will lower our cost structure, increase throughput and allow us to more efficiently manage personnel. These automation projects, improvements throughout our logistics network and other enhancements in our supply-chain operations have allowed us to increase the per employee throughput in our core laboratories by 30% over the last 4 years. Further our service metrics, customer satisfaction ratings and turnaround times are at all-time highs. The fourth pillar of our strategy is to continue our scientific innovation at reasonable and appropriate pricing. We continue to introduce new tests and collaborate with leading companies and academic institutions to provide our customers with the most scientifically advanced testing in our industry. In women's health, we have enhanced our menu of tests for sexually transmitted diseases. Our testing from the liquid-based PAP bio now includes cervical cancer screening, HPV testing including genotyping and detection of 4 of the most commonly transmitted -- sorry, 4 of the most common sexually transmitted diseases: chlamydia, gonorrhea, herpes and trichomonas, which recently received FDA approval. CDC reports that there are over 7 million new cases of trichomonas in the United States each year. We are pleased to be one of the first labs to offer the only FDA-approved test for this treatable sexually transmitted disease. Also to simplify specimen collection for our physicians, we are simplifying our collection devices, adding HSV 1 and 2 to the same collections swab we offer for our other molecular STD testing. At Monogram, we have launched the first in a series of HCV drug resistance assays that have been developed to support the clinical evaluation of HCV direct-acting antiviral agents and their effective use in the management of HCV infection. Identification of certain mutations may be important for the long-term drug treatment strategy. These tests add to LabCorp's industry leading suite of HCV testing. The fifth pillar of our strategy is to consider alternative delivery models. We continue to discuss alternative models with our managed-care partners, as we believe that our healthcare system will continue to move away from traditional fee-for-service payment. Healthcare reform will likely bring changes to our payor mix and reimbursement systems, and our goal in serving our customers will always be to provide the highest value for each dollar of laboratory spent. In summary, we are pleased with our second quarter performance and remain optimistic about our position in an ever-changing healthcare system. As the most efficient and highest-quality provider in the laboratory industry, we believe our services will be increasingly in-demand through the era of healthcare reform. We are excited about the opportunities ahead and remain focused on executing our Five Pillar Strategy to enhance shareholder value. Now, Steve Anderson will review anticipated questions and our specific answers to those questions.

Thank you, Dave. Can you update us on the status of the Hunter Labs settlement? As previously announced, to avoid the uncertainty in costs associated with the prolonged litigation, the company has reached an agreement in principle with the State of California and the qui tam relators to settle the Hunter Labs litigation. The settlement in principle provides that LabCorp will pay $49.5 million without an admission of liability to the State of California and qui tam plaintiffs to resolve all claims against LabCorp. As a result of the agreement in principle, the company recorded a pre-tax charge of $34.5 million, $20.7 million of which is after-tax. The settlement is subject to completion of a settlement agreement accessible to all parties. The Medi-Cal program continues to reimburse LabCorp for services rendered. Why are you not adjusting your guidance higher given your performance? Our guidance encompasses a wide range of potential outcomes, and we are only halfway through 2011. We continue to note that the diluted share counts in analyst estimates differ considerably from our own and from each other. It appears to us that many of the components of the First Call estimates include future share repurchase and our guidance does not. Furthermore, in reviewing the analyst models, we continue to believe the seasonality of our business is not captured within many of the published estimates. We have previously noted that the fourth quarter tends to be the lowest quarter from a revenue and earnings perspective due to seasonality, weather and holidays. Can you update us on the mix of your business coming from esoteric testing? In the second quarter, approximately 40% of our revenues were in the genomic, esoteric and anatomic pathology categories. As we reiterated last quarter, our new goal is to increase our esoteric test mix to approximately 45% of our revenue within the next 3 to 5 years. Do recent acquisitions and other uses of cash limit your ability to repurchase shares or act upon other acquisition opportunities? We repurchased approximately $325.5 million of our shares in the first half of 2011 and have $408.5 million of authorization remaining under our previously approved share repurchase program. While we do not comment specifically on share repurchase, we have been a consistent buyer of our shares. We do not believe we are precluded from making acquisitions as usual or from pursuing our strategic goals. Can you remind us of how drugs of abuse volume trended during the year? In the quarter, our drugs of abuse volume increased approximately 8% year-over-year. That compares to a year-over-year increase of 14% in Q1 of 2011, 12% in Q4 of 2010, 13.9% in Q3 of 2010 and 15.4% in Q2 of 2010. Now I'd like to turn the call back over to Dave.

Thank you, Steve. Thank you very much for listening, we are now ready to take your questions.

[Operator Instructions] Your first question comes from the line of Bill Bonello from RBC.

Just first, a couple of housekeeping questions. Can you tell us where the restructuring charges that are excluded from the adjusted EPS show up in the income statement? You talked about some of them, but not all of them in the footnotes.

This is Brad, 18.3% appears in the income statement that's in the press release. That's the combination of the severance and facility-related restructuring charges. And Hunter Labs' settlement and the Orchid legal cost are part of the SG&A.

I see. I'm sorry, so the 18.3% rate is broken out separately. What a stupid question. Maybe my second one is just as dumb. Organic volume growth, is that truly organic or does that include tuck-in acquisitions?

It's Dave. The approximately 2% organic growth is truly organic. So it's everything -- it's all acquisitions backed down.

That is helpful. And then I want to make sure I understand the margin impact of the acquisitions. And tell me if I'm thinking about this right. I mean, if I just take second quarter revenue and I add 180 basis points to operating margin and tax effect, that's $0.15, which would say if you could get these acquisitions up to corporate averages, there's close to $0.60 of earnings power from these deals. Am I thinking about that correctly?

Bill, this is Brad again. Haven't worked through the math exactly that way, but it's hard to find problem with the logic. I mean, I think we've been in the past clear about what Westcliff was doing, and we've recently started to integrate that business given the clearance that we received. Still very early in the Genzyme process. But absolutely, if all things being equal in our business, we should see that start to be upside.

Your next question comes from the line of Amanda Murphy from William Blair. Amanda Murphy - William Blair & Company L.L.C.: Just a question on Genzyme. Obviously, that business is doing well. I'm just curious, I think you've talked in the past about some sort of cross-selling opportunities between the 2 business lines. Have you seen any benefit from that at this point? And then also, just a question on sort of your plans of branding for that business going forward.

Amanda, it's Dave. Yes, I think the cross-selling efforts have been quite successful. The Genzyme reps have been very much in demand in terms of introducing new testing into existing LabCorp customers. And as we've mentioned on the call, yes, we've been able to internalize a lot of the testing to Genzyme we're sending out so that the Genzyme customers basically have one-stop shopping for services that they were ordering from other laboratories. I think as we progress with the IT integration and particularly the rollout, the national rollout of Beacon order entry, this will be a further enhancement because it will allow all our physicians to order all of the various LabCorp services from one platform. So you'll be able to order DIANON, order Genzyme, order LabCorp, order Esoterix from one Web portal as opposed to having to use multiple methods of order entry. On the branding, we have the right under the purchase agreement to continue to use the Genzyme Genetics brand for a certain period of time, and we're engaged in a review of all of our brands at this point. The Genzyme Genetics brand, Esoterix, DIANON, US LABS, we have a lot of brands as a result of our historical growth by acquisition. And I expect that by the end of this year, we'll have a good deal more clarity in terms of where our long-term branding strategy will be going. Amanda Murphy - William Blair & Company L.L.C.: And then just switching topics to insourcing for a minute. I noticed that you're not breaking out the histology piece anymore, but just curious if you can provide some perspective on -- it seems like that, for you guys had been, I guess, improving or the growth -- rate had been slowing. Are you still seeing that dynamic?

I think you're always hesitant to say that you're on the bottom because we don't know. But the trend of insourcing absolutely has leveled off in our business. We're just not seeing the kind of insourcing that we were last year and the year before. Our histology volumes, we actually had little year-over-year growth, which we are happy to see and an improvement sequentially. So the challenge with insourcing is that as you get through a wave of one set of physicians insourcing, other physicians start at least exploring the behavior, if not imitating it. And so, I think we're kind of at the -- we've weathered the major part of the storm and we feel pretty good about where we are. Amanda Murphy - William Blair & Company L.L.C.: That's helpful. And then just kind of a question, I guess, pretty high level, but given the sizable PBM transaction announced this morning, that combined and you will have 1/3 -- access to 1/3 of the prescription drugs out there. I'm just curious as lab testing becomes more and more important part of therapeutic and healthcare provided medicine, if you will, how do you kind of envision the lab working together with the PBMs and other players in the healthcare, sort of, value chain.

Well, we have a terrific relationship with both Express Scripts and Medco, and we admire both of those companies and their leadership a lot. We've had a long-standing pharmacogenomic project with Medco around several double drugs and associated diagnostic tests, Tamoxifen, Abacavir, and we've actually been expanding that program. So I think that you'll continue to see a tighter link between utilization between drug utilization, particularly expensive drugs, particularly oncology drugs and what I would describe as gatekeeper-type lab testing. So before some of these drugs can be prescribed, a diagnostic test would be required to assess either safety or efficacy. I think as the -- as we see consolidation in PBMs, this will only increase the momentum because the goal of the PBM industry obviously is to make the provision of therapeutics both more efficient and more cost effective, and the labs will have a significant part in that.

Your next question comes from the line of Adam Feinstein from Barclays.

Dave, maybe just get your point of view in terms of, I mean -- so the 2% organic volume growth is a pretty good number in the current environment, very strong relative to the peers. I think I'm just curious to get your thoughts in terms of what's going on. I mean, do you guys assume you're taking market share with that type of growth rate? So just -- how do you think about the 2% relative to the industry?

A couple of things, Adam, it's Dave. I think the 2% is a very strong performance given to reiterate what we said in the press release, what we perceive to be some mounting headwinds on the economic front. I mean, we're not seeing the unemployment rate come down in any significant way. We're not seeing a lot of job creation in the private sector. We're not seeing a lot of increasing enrollment in managed care plans. And as the IMS data suggests, they're directional but nevertheless, they're out there. Utilization in a number of physician specialty areas seems to have declined from 1Q to 2Q. So I think the 2% is a very strong performance, and we're very pleased with it. I'm always reluctant to claim that we're taking share or that somebody else is losing share or that we're performing better than the industry. What I would say is a lot of the investments that we have been making in our business and continue to make in our business in IT, in logistics, in automation, in efficiency are manifesting themselves in the marketplace through better service, improvements in quality, better turnaround time, more satisfied customers and I think that's what you're seeing. I think what you're seeing is as other peers have essentially reduced investment in their business as a result of the economic headwinds and we've continued to invest, our metrics are improving. And as a result of our metrics improving, we're becoming the lab of choice.

And then, I guess, the second question would just be, so with Genzyme you guys have laid out expectations for us at the time the deal closed. Would you say it's running better than what you anticipated or it is running in line? How should we think about the integration thus far?

I think in terms of the integration, we're doing very well. In terms of the financial performance, I'd say we're doing a little better than our expectation. The one thing we have not seen yet is the impact on managed care pricing that we had talked about earlier on. And as a result of negotiations and contractual discussions, I think we've done a good job in demonstrating the value proposition of Genzyme, but as we get into the second half of the year, we'll see a little bit of that compression. And that's going to have an impact on overall performance. Nevertheless, financially, I'm very happy with where we are, customer retention, very happy with where we are and in terms of what we outlined to improve the cost structure, I think we're doing very well.

Okay, and then just a final question for me is just with everything going on in Washington, clearly a lot of moving parts, but just curious to get your thoughts in terms of what we're hearing about cuts for labs and we've talked about this copayment every couple of years, but certainly, just curious to see how you guys are thinking about that and any thoughts?

Yes, obviously the situation is very fluid and literally changes by the hour. I mean, what I would say is, we at LabCorp and I think we as an industry continue to be adamantly opposed to this idea of a copay or co-insurance. And way back at the time of debt-rupt [ph], there was 20% LabCorp insurance and we made an agreement with the government that in exchange for taking a significantly lower fee schedule, the copay would be eliminated. So that was the deal that we made, and that is the deal that we have had for more than 20 years. If you look at the clinical laboratory fee schedule update from 1995 to 2011, we have had cumulative, now this is not average, this is a cumulative update of 7.7% and we have agreed over the next 4 years to take a 1.75% cut per year plus a productivity adjustment to offset the CPI as the laboratory industry's contribution to healthcare reform. Contrast that with, in that same period, inpatient hospitals are cumulatively up 51.4%, outpatient hospitals cumulatively up 35.6%, physicians cumulatively up 27.9%, DNE [ph] cumulatively up 13.6%. So we've received less than half of the cumulative updates of other healthcare providers. We've agreed to take a reduction. And to me, imposing a copay and just the government saying we got savings by shifting costs on to senior citizens and private lab companies would really be an unconscionable outcome. So as you could tell, Adam, I have some very strong feelings about this, and I think they're shared throughout the industry. The consequences of a copay on smaller labs and particularly those who serve nursing homes and indigent populations would be catastrophic. And -- so I'm hopeful that politicians will see that this would just not be from a financial or a policy perspective, a good long-term solution.

Your next question comes from the line of Ralph Giacobbe from Credit Suisse. Ralph Giacobbe - Crédit Suisse AG: David, I just wanted to go back to sort of your comments on the sort of mounting economic headwinds. We've obviously seen better results on the volume side over the last several quarters, and I think the hope had been that kind of the worst was behind when we think about sort of the last couple of years. So I guess maybe it'd help to just put sort of the mounting economic headwinds that you talked about in the context of -- maybe what you're seeing, what you're thinking going ahead, is there -- has your mindset changed a little bit as we move through the quarter? And maybe it'd be helpful -- I know you don't typically do this, but did the progression of the volumes moving through the quarter sort of change your views as you've seen things fall off at all?

Well, I think talking about the progression of volumes in the quarter is not helpful to anybody because it's just a -- what was yesterday as opposed to how are we doing cumulatively. And cumulatively, at 2% organic growth and close to 5% total growth, I think we've from a volume perspective, I think we had a terrific quarter. Obviously, you can look at the numbers and see that the rate of volume growth on a year-over-year basis trended down a little bit this quarter. You can also see that physician office visits, according to the IMS data, trended down a little bit this quarter and at least if you believe the June data, trended down very dramatically in June. But our basic outlook remains the same and remains what it has been, which is that I think we are through the worst of it. I think that part of the impact that you always see in the first part of the year is, as private insurance patients are working through copays and deductibles, you'll see impacts on utilizations. So we're not changing our perspective or our outlook for the balance of the year. And as I've said for months, if not quarters, we expect the volume trend to basically continue as it has been since 4Q of 2010 and don't see anything dramatic happening there. Ralph Giacobbe - Crédit Suisse AG: Okay, great. That's helpful. And then just in terms of some contracts. Obviously, last year, you got yourself into the Empire contract. Any update from what you're seeing there? And then, maybe any update on Horizon and when a decision could be made?

Well, Horizon goes through December of this year and we continue to be in discussions with the plan and are hopeful that a decision will be sooner rather than later. A lot of that is -- obviously, is not in our hands. But I think we have a very good partnership with Horizon. I think we've had a very constructive and productive relationship over the course of the contract and feel good about where we are. On Empire, we're seeing significant volume gains there, so I think we're starting to execute the opportunity and much improved over where we were in 4Q, and we just need to continue the momentum. Ralph Giacobbe - Crédit Suisse AG: And then just my last one. Any greater interest from managed care around -- trying to get more volumes sort of out of the hospitals into some of the independent labs? Any increased discussion there or interest from them on that front?

Well, there was an analyst note that highlighted some of the disparities in payment, which I think caught the attention of some managed care companies and validated a lot of what we've been saying historically. So I think there's a greater degree of attention. On the other hand, the same considerations remain, which are the managed care companies' broader relationships with the hospitals and their need for other services from the hospitals. So I think there's a sharpened focus on it. And I also think what we'll start to see in 2012 is we'll start to see some pilot programs by managed care companies in various markets to see if there are ways that they can influence hospital utilization and moving work out of the hospitals.

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

So I wanted to just go back to Steve Anderson's prepared remarks around the seasonality topic. And obviously, you've driven that point home a lot in the last couple of quarters just from a modeling and guidance perspective. Now I guess, from the analyst perspective, my own at least, one of the things that we're trying to reconcile is that the progress that you're making from an integration standpoint and you've obviously called out 180 basis points of margin impact in this quarter alone. I guess, maybe, Brad, if you can just help us think about that in the context of how the rest of the year progresses. There's been a lot of integration activities. We can see it in the severance charges, et cetera. So will some of that activity just not show up in the second half of the year or does the managed care pricing that you've referenced from Genzyme more or less offset some of that? Can you just help us think about it a little bit more in the context of what, normally, we understand in the seasonality?

Right. Here's what I think about it. Most of the things that you mentioned were in our original thinking for the year. So there's nothing in the back half of the year at this point that's any different than we thought going in. So we're comfortable at the midpoint of our guidance, but we look out at what's out there and everything is higher. And Steve also pointed out in his comments that it seems to be, in my detailed review this last quarter, the operating metrics were very close, but the share count was what was the difference. And so when we compare what those expectations are to what our own models suggest, it pops out in the fourth quarter. And the fourth quarter of kind of the average of what's out there is maybe slightly higher than the third quarter, which if we look back over time, is just something that is not achievable in terms of reality, taking out some things that have happened in the past in the UnitedHealthcare contract year announcement and some other acquisitions, or things of that nature. So that's really the basis of Steve's comments and the way we think about the rest of the year.

That's really helpful. And then if I could, just on the triggering of the conversion rates, I know you laid that out as 900,000 incremental shares. Can you just maybe remind us or clarify on a year-to-date basis and then any reasonable assumption or estimate that you might have post Q2 in terms of the impact of that on the share count?

Right. Well, one thing to consider is, those numbers are already in the share count when it comes to fully diluted EPS. So from the beginning of that security, that's always been in there. So it's really just an exchange between outstanding and that line item in the reconciliation of shares to diluted shares. But it's really not an impact on the EPS that we report.

Got it, okay. And then, Dave, your comment, I just want to go back to around Genzyme. You said limited attrition, and I think you are referencing either revenue or clients, I'm not sure. If you could just clarify. But maybe just compare that to the last couple of quarters where, I think you were saying there wasn't really much attrition at all. And is there any real change at all with regard to attrition?

Darren, no. No change, just different words, but our customer retention has been extremely high and we're very pleased about it. Nothing has changed between first and second quarter here.

Okay, and I guess my last question just would be on the Medco relationship. And you've highlighted it a lot in the past. Can you maybe just frame for us how significant that relationship is at this point? And I don't think there's anything to read into the security of that relationship if anything gets bigger, but can we put that in the context or some financial context for the company at this point?

Yes, it is not material to any of our numbers. So the hope would be, over time and particularly with the -- assuming that this transaction gets approved, that with the combined power of the 2 entities that it does become material, but at present it's not -- you wouldn't see it show up anywhere that would make a meaningful difference in the numbers.

Your next question comes from the line of Kevin Ellich from Piper Jaffray.

A lot of my questions have been answered but I do have a few more. Dave, just going back to the 2% organic growth, which is a very good number relative to some of the competition in the industry. Do you actually think the industry is growing at this point? Or is that all market share gains?

Kevin, that's a hard question to answer. I do think the industry is growing. I think for all the reasons we've articulated: demographics, new test offerings, better understanding of utilization of test by physicians, I do think the market is growing. At the same time, obviously they're -- the peer comparisons suggest that we may be growing faster than the industry, and we feel great about that. But I don't think we're in a declining industry at all. I think there is great -- I mean, the Medco relationship, which hopefully will become the Medco Express relationship as that transaction proceeds, is one of many examples where there's a tremendous opportunity for diagnostics to grow in the system, and at the same time, contributes to reductions of overall healthcare expense. So I think the industry is in a terrific position for growth.

Okay. That's helpful. And then thinking about expectations going forward, do you think 2% can hold up? I mean, we all look at IMS physician offices' the data, which might not be the greatest data points. So I'm just wondering what your view is on that correlation between physician offices' data and volumes? And also United a few days ago indicated utilization trends are expected to increase in the back half of the year. I think that actually had commercially covered lives increase by about 0.25 million, I think. So how does that play out relative to your business?

Do I think a number in the neighborhood of 2% is sustainable for the rest of the year? Absolutely. Will it be exactly 2% in the third and fourth quarter? Can't say that. That's -- we just can't -- we don't have that level of visibility, but a number in that neighborhood, yes, that is sustainable. United's suggestion that utilization will increase in the second half of the year, it's welcome news that people think that utilization, and particularly physical office visits, would increase because diagnostics and lab testing, obviously, are a key component of not only how we treat sick people, but how we keep people well and how we improve people's health. So that's -- it's encouraging to hear. Obviously, it conflicts a little bit with the data that we, at least, are seeing from IMS. But we're -- I'm not telling you anything you don't know. It's a very bumpy economic time. And I think from our perspective, we're going to continue to invest in the business as we have been, we're going to continue to execute on the key initiatives and I think we're well positioned to continue to grow.

I understand. Okay. And then a couple of days ago, the Institute of Medicine came out with their recommendations for women's health preventive screening, including HPV testing. Have you had a chance to look at that, and what sort of impact do you think that'll have on the Lab business? It should be good, right?

I have not had a chance to look at it. I think -- so -- I mean, I think any recommendations that would suggest that we should be increasing the use of diagnostics for screening for diseases like cervical cancer would be beneficial to the labs and again, I think as a matter of sound policy, going back to what I said about the copay, would you rather discourage people from getting screening by imposing copayments on tests and pay for the cost of acute care for cervical cancer later on. And I realize that past screening is not a key Medicare test, but from a policy perspective the point is, if you discourage people with copayments and beneficiary obstacles from getting screened diabetes, cardiovascular disease, then what you're going to end up doing in the long run is paying more for acute care.

Got it. And then when you issued your guidance originally this year, did you guys know that EmblemHealth's recent plan was going to terminate its agreement with Monogram and also Genzyme Genetics?

I don't think we knew that. I believe that is a -- let me say that the termination of Monogram and Genzyme Genetics by Emblem has nothing to do with their performance or with LabCorp's performance. My understanding is that is a health plan that has an exclusive contract with Quest and that when those entities were acquired by LabCorp, they are contractually obligated to terminate us for their contact with Quest. So it's not a reflection on the performance of Monogram or the performance of Genzyme in any fashion. I don't think our guidance incorporated that, but I also don't think it's -- that the impact, the financial impact there is material enough to impact the guidance one way or the other.

Got it. And then just one last question for Brad. In your prepared remarks, you stated acquisitions not completed was a 120 basis point drag on margins.

180.

180. Does that -- was that only or could somewhere kill what hasn't been closed or...

No, that wouldn't be impacting it, Kevin. It's just that Genzyme and LabWest or a Westcliff.

Got it. Okay, that's helpful. [Audio Gap]

Tom, you're line is open. You may proceed with your question.

A lot of question have been answered, appreciate all the detail, just sort of 2 follow-ups, I guess. That 2% organic growth, as you sort of think about the country and the markets, is it fairly evenly spread? Maybe can you identify anything that maybe unique in one market versus another? I know it's hard to understand market share, but maybe thinking about it that way could be helpful?

Yes, we really can't break it down. It's -- we don't see any market regional differences.

Okay. So pretty consistent?

Yes.

And then you obviously are talking about the macro environment. What about smaller deals? You've been very successful over the years sort of doing the tuck-in type deals, which I think can be pretty helpful over time. Are those types of labs maybe any more willing to sell, any more desperate to sell, to use a different term? And sort of do you think that environment maybe has been more compelling than it has been or sort of status quo?

I think the acquisition environment continues to be attractive. There are lots of opportunities in the market. As you know, we try to be very disciplined about the deals that we do and particularly the fold-in deals. But we will continue to be active in that market and to look for opportunities. As we've said, to execute on the first pillar, which is to enhance both our geographic and our -- geographic footprint and our test menu.

Your next question comes from the line of Gary Taylor from Citi.

A couple of questions. Is there any material difference in that organic revenue, organic volume growth between commercial and Medicare? Anything you can comment on?

No, nothing that we see.

Okay. Another question for Dave. I was intrigued by a comment you made earlier in the call, just about health plans interested at exploring, or I guess fee-for-service kind of going away and health plans interested in exploring alternative payment arrangements. Maybe I'm not quoting you properly, but could you add a little color around what's happening there?

Sure, and I don't mean to suggest that fee-for-service payments are going away or are going away anytime soon, because that gets sort of the standard payment model. But if you look at everything from accountable key organization rules to bundled payments to many of the things that are on tap in the CMS innovations center, I mean, everybody is trying to look at ways to make the delivery of healthcare more cost-effective and improved quality. I saw a write up yesterday about one insurance managed care plan that is proposing premium differentials based on whether patients are willing to accept a menu of what they describe as high-quality, lower cost hospitals, and if patients are willing to -- if the insurers are willing to accept that menu of hospitals, then they pay a lower premium than people who want to be able to go to any hospital that they want. So in my view, the point is we're going to see a lot of pilot programs, we're going to see a lot of efforts to move away from a per-procedure basis for the payment of healthcare services, and move more toward whether it's bundled payments, whether it's episodes of care, whether it's a flat rate to take care of the patient for the whole year. These are the things that are going to be tried out, and obviously we need to be engaged with our managed care partners and with the government as well in a way that these ideas are being thought about to make sure number one, that the value of lab services is recognized and how much we contribute to effective healthcare and high-quality lower cost healthcare; and second, to make sure our interests are protected so that we don't end up being financially compromised by something like a bundled payment or an ACO system.

Great. And I guess, it's not obvious that, historically, when you've had capitated contracts that the value of diagnostics was recognized, so is there a new way to bridge that gap or was capitation really a California-specific heavy managed care situation and it's going to be viewed differently? I guess my concern is, can you get the commercial guys to recognize that value under an alternative payment model? And I guess capitation's the best example we have of one and the rates are materially lower.

Ladies and gentlemen please standby. [Technical Difficulty]

We were getting a little theoretical there. I just had one more quick question. How much of your Commercial business renews just annually evergreen?

I don't know the answer to that off the top of my head. We probably have 3,000 different managed care contracts and the vast majority of them renew annually. But obviously, when you look at -- in terms of size, the sizable plans, United, WellPoint, CIGNA, Horizon, the top payers are on fixed-term contracts that renew at periodic dates.

All right. So I guess, I'm just trying to think about -- when is kind of the next year where you've got, say, 20% of your fixed contract renewals coming due? Is that right about 2014 or is it even later than that?

I hesitate to go with the 20% number only because is it revenue or number of contracts. The big renewal year for us is going to be 2013. As we've said, that's the year WellPoint and CIGNA are the major renewals. So that's the next year where we'll have a couple of sizable contracts up for renewal.

Your next question comes from the line of Ricky Goldwasser from Morgan Stanley.

This is Claire Diesen actually, filling in for Ricky. Thanks for taking the questions. Just have a couple of quick questions for you. First, I was just wondering if you could provide a little bit more information on the phasing in the Genzyme business coming under your managed care contracts. I know you mentioned we might start to see some impacts on the second half of the year. Is this something you could roughly quantify in terms of what percent of business might be coming out of these contracts and what the impact on your pricing metric might be?

Almost all of the business is already under our managed care contracts and any pricing or financial impact is already quantified in the guidance that we've provided.

Okay, great. And then lastly, not to be a dead horse here, but obviously the 2% organic growth is really impressive. Could you say anything more in terms of what you're doing to achieve this? Is it increased sales and marketing? Are you taking share or are your customers taking share?

Well, I think, obviously we provided a good deal of commentary on this. First of all, we've talked for a considerable number of quarters about the investments that we're making in the business, the investments in increasing our geographic footprint, whether it's through acquisitions or through opening new service centers, the investments in improving physician and patient experience through IT, through improvement of throughput in our patient service centers, through simplification of our practices, through automation in our laboratories to improve turnaround times and throughput. So my view is, what we've done is we've set out a clear set of initiatives. We've executed well on those initiatives, and we're now seeing the benefit of those initiatives, which is that our service metrics are better than they've ever been, our customer satisfaction is better than it's ever been. And what we need to do is to continue to invest in the business and execute the initiatives that we have underway, and I think we'll continue to see positive results.

Your next question comes from the line of Dane Leone from Macquarie.

I just wanted to ask, I think last quarter, you said that the Women's Health business is an area of core growth, and there's been impressive rollout of products and what you highlight this quarter. I was just curious, given a more challenging macro environment, how did Women's Health specifically do this quarter, I guess, maybe fundamentally and then in terms of some market share gains?

It's very hard to quantify or think about market share gains. It's just -- I think in terms of the way we look at the business, Women's Health grew in the quarter, which is good. Yes, obviously we're happy with that. There is continuing fluctuation in path volumes, which we've talked about for better than a year now and the path trend drives a lot of the women's health trend. But overall, we're very pleased with the progress in Women's Health. And again one of the key initiatives there is to simplify collection. The collection devices make it easier for physicians to do business with us and for us to provide high-quality results to the physicians and the customers.

Okay. And then just out of curiosity, in terms of the Clearstone acquisition, could this be an entrée into more of a clinical testing model in Asia?

I think it's too early to tell. We need to understand those markets and the goal -- the specific goal on Clearstone was to serve the needs of the pharma companies and the CROs who send us laboratory business by having laboratories in China, where there are very complex restrictions on being able to move blood or other human specimens out of the country and also the market presence in Singapore because it is a hub for clinical trials, lab testing for all of South Asia. So we will look at that, but it's way too early to reach a conclusion on whether that will be an entry point in the long term or not.

Your next question comes from the line of Lisa Gill from JPMorgan. Gavin Weiss - JP Morgan Chase & Co: This is actually Gavin Weiss sitting in for Lisa. I just wonder if you could give us any additional details on the Orchid transaction and the FTC increase.

We really can't give much more in the way of details. We did receive a second request from the FTC. We have responded to that request. We are cooperating with the FTC and desire to see this transaction concluded because we think it would be beneficial not only to LabCorp and Orchid employees, but also to LabCorp and Orchid customers and we hope to get it resolved promptly. Gavin Weiss - JP Morgan Chase & Co: Yes. And then CMS held its public meetings on the 2012 Medicare payment rates for new codes this week. Is that material to you guys, and can you provide us with any outlook on how those meetings went?

My understanding is that the major topic of the public meetings was the molecular CPT coding initiative, and I believe that CMS made the determination as to molecular codes that will be placed on the clinical lab fee schedule and that the decision on coding and payment has been deferred for a year, at least a year, so at least into 2012. So generally, we view that as a positive outcome. That's a very complex process, both the coding and the setting of the payment rates. And I think it's commendable that CMS has decided not to rush into any decisions there. I think generally the lab community views are well regarded at CMS, and they listen to our input, and we're hopeful that we'll continue to have a collaborative working relationship with them.

Your next question comes from the line of Bill Bonello from RBC.

I guess I just wanted to one more time follow up on one of the guidance questions and maybe ask the question that Darren asked, slightly differently in terms of seasonal progression and then just get clarification on something Brad said. So if I look at last year and I just view the exact same split of EPS between the first half and the back half of the year then -- and put that onto this year, EPS would be at $6.42. And maybe you got about $0.05 from share repurchase last year, so take that out and you're still at the very high end of the guidance. Was there anything unusual about the progression of earnings in 2010?

Bill, not that I recall. And I'm looking at just specifically to the Q3, Q4 comment. $1.47 in Q3 and $1.34 in Q4. Are we tracking the same numbers?

Yes, I think so. I don't know. I just -- I did -- literally, I just took your adjusted EPS for what you said it was for 2010 and what you said it was for the first half of the year and did the math.

Yes, and I've done that same math, and I get that we did 49.7% in the first half of '10 to the total. 51.5% in '09, 51.7% in '08, and 50.6% so far this year, so I don't think it's materially different in terms of a progression, and I go back to -- just to reiterate what we said, operationally when I look at what's out there, we're very close. It all comes down to shares and we'll see where it's off if it's Q4.

No, that's fine. And then just on the other thing, that the stocks have dropped like a rock when you made a comment that you were comfortable with the midpoint of the guidance, and I'm glad you're comfortable there. But I just want to make sure that we weren't supposed to read anything more into that. I mean, you're comfortable with the whole range of the guidance, I would hope.

That's exactly right. It is to pick some point to answer the question on.

At this time, you have no further questions. I would like to now hand the call back over to Mr. David King for closing remarks. Thank you.

Thank you very much. We thank you all for joining us on our second quarter earnings call, and hope you have a good day.

Ladies and gentlemen, thank you very much for your participation in today's conference call. You may now disconnect. Have a wonderful day.