Labcorp Holdings Inc. (LH) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2012 Laboratory Corporation of America Holdings Earnings Conference Call. My name is Reggie, and I'll be your conference operator for today's call. [Operator Instructions] I would now like to hand the call over to the host for today's call, Mr. David King, Chairman and CEO. Please proceed.

Thank you. Good morning, and welcome to LabCorp's Second Quarter 2012 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; Adam Feinstein, Senior Vice President, Corporate Development and Strategy; and Steve Anderson, Vice President, Investor Relations. This morning we will discuss our second quarter 2012 financial results, update our 2012 guidance, highlight our progress on our Five Pillar Strategy 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 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. These non-GAAP measures include adjusted EPS, 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 other statements about -- among others, statements about our expected financial results, the implementation of our business strategy and the ongoing benefits from the Genzyme Genetics and other acquisitions. 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 2011 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 will review 4 key measures of our financial performance: cash flow, revenue growth, margin and liquidity. Also review our updated 2012 guidance. First, cash flow. Our cash flow remains strong. Free cash flow for the trailing 12 months ended June 30, 2012, were $749.5 million, excluding the Hunter Labs settlement. We remain pleased with our cash collections. DSO was 47 days at the end of June, a decrease of 1 day sequentially and an increase of 1 day year-over-year. During the quarter, we maintained our bad debt rate of 4.4%. Second, revenue growth. Revenue increased 1.4% year-over-year in the second quarter. During the quarter, revenue per requisition increased 1.5% year-over-year. Total company volume was essentially flat year-over-year during the second quarter. Esoteric volume increased approximately 1.3% in the quarter. Third, margin. For the second quarter, our adjusted operating income margin was 19.7% compared to 19.9% in the second quarter of 2011. The decline in adjusted operating income margin is due to a 30-basis-point drag from recent acquisitions that we've not fully integrated. Fourth, liquidity. We remain well capitalized. At the end of June, we had cash of $124.4 million and $510 million available under our credit facility. During the second quarter, we repurchased $130.3 million of stock, representing 1.5 million shares. Year-to-date, we repurchased 2.9 million shares for $252.6 million. At the end of June, $332 million of repurchase authorization remained under our share repurchase program. This morning, we updated our 2012 financial guidance. We expect revenue growth of 2% to 3%; adjusted EPS, excluding amortization, in the range of $6.80 to $7, excluding the impact of any share repurchase activity after June 30, 2012; operating cash flow of approximately $950 million; and capital expenditures of approximately $155 million. I'll now turn the call over to Dave.

Thank you, Brad. We are pleased with our performance, given that we continue to face a very difficult environment for volume growth. During the quarter, we grew earnings per share by nearly 8% year-over-year. We continued to integrate our recent acquisitions and focus on expense control, lowering our selling, general and administrative expenses as a percentage of revenue by 90 basis points year-over-year, adjusted for the Hunter Labs settlement and Orchid legal expenses in 2011. And we extended our contract with WellPoint on a multi-year basis, stable pricing and continued exclusivity in our key markets. We continue to make significant progress on each aspect of our Five Pillar Strategy. 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. In June, we announced our intended acquisition of MEDTOX Scientific, a premier forensic and clinical laboratory with a diverse test menu and a reputation for exceptional quality, dependability and customer service. This acquisition gives us a great foundation for growth in our specialized toxicology testing, as we build and expand our Toxicology Center of Excellence. The transaction has received FTC clearance, and we expect to close as soon as customary closing conditions are met, including the approval of MEDTOX's shareholders. The integrations of Integrated Genetics and Integrated Oncology and Orchid Cellmark continue to go well and are in line with our expectations. We continue to realize synergies on schedule and to offer new services in genetics and oncology. Finally, we have repurchased 2.9 million shares at a cost of $252.6 million year-to-date. The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. We continue to see strong growth in the adoption of our Beacon platform, which is now deployed to more than 14,500 sites and has more than 66,000 users. We added a number of features to Beacon in the second quarter, and we will add more analytical ordering and reporting capabilities, specifically for physicians and hospitals, later this year. We successfully completed the pilot of our Beacon patient portal and received positive customer feedback. The portal is a secure and easy-to-use online solution that enables patients to receive and share lab results, make appointments, pay bills, set up automatic alerts and notifications and manage health information for the entire family. We continue to see rapid adoption, with more than 2,000 new patient registrations each week, and we remain on track to launch the portal nationwide later this year. We continue to improve our electronic medical record connectivity. We have added over 3,500 new client EMR interfaces year-to-date and are on pace to exceed 7,500 in 2012. We continue to pursue our open platform strategy, allowing our customers to connect seamlessly to LabCorp directly or via the EMR of choice. We continue to expand the capabilities of our Beacon platform to deliver data aggregation and advanced analytics services, including LabCorp datasets alongside diagnostic guidelines, prescription data and hospital information to aid physicians and health care administrators in treatment and population management. These new data sources our industry-leading services that should assist our customers in multiple ways, as they seek to improve patient outcomes and reduce the cost of care. The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. We are pleased to report the LabCorp Touch accessioning and workflow tool is now installed in over 1,500 locations, and deployment is nearing completion. LabCorp Touch, including AccuDraw, automates key aspects of our specimen collection, improving quality by reducing secondary collections by 50% and significantly reducing accessioning labor. Additionally, Touch and our enhanced logistics capabilities allow us to move specimens more rapidly through our supply chain, widening our lab-testing windows and improving turnaround times. We have expanded our patient self-service offerings through 2 key enhancements. First, our online appointment scheduling system now allows patients to enter demographic and insurance information, reducing their registration time at our PSCs and enhancing our efficiency and their experience. Second, in select markets, we have introduced the telephonic voice recognition system to schedule appointments in our Patient Service Centers. We began the rollout of the Vantage positive ID system in our histology testing division. The system will improve quality, standardize workflow and enhance throughput across all of our histology operations. We anticipate the rollout of the Vantage system to last approximately 18 months. We are preparing to pilot our splitting and sorting robotic system, which we call Propel [ph], over the next several months. We are excited about this opportunity to enhance efficiency and quality. The fourth pillar of our strategy is to continue scientific innovation at reasonable and appropriate pricing. We introduced new test and collaborate with leading companies and academic institutions to provide our physicians and patients with the most scientifically advanced testing in our industry. We recently launched an age-based guideline initiative for cervical cancer and STD screening. This innovative age-based test protocol aids physicians in ordering cervical cancer and sexually transmitted disease screening tests. Clinicians can now select a test number that will individualize cervical cancer and STD testing, based on the patient's age and corresponding test protocol as published in the American Congress of Obstetricians and Gynecologists guidelines. We continue to enhance offerings in the new swab family of tests. New swab allows us to perform multiple women's health tests selected by the ordering physician from a single-collection swab. We are the only laboratory that has validated each test we offer on a precise collection device used for new swab testing, meaning that doctors and patients can be assured of the highest quality results to guide diagnosis and treatment. In May, we announced our collaborative relationship with Ariosa Diagnostics, for which we offer an innovative non-invasive test for detection of common fetal trisomies using DNA in maternal blood. The test is performed using a maternal blood draw, taken at a doctor's office or Patient Service Center, and provide accuracy approaching that of invasive testing for common fetal trisomies. The fifth pillar of our strategy is to develop alternative delivery models. We continue to discuss alternative models with managed care partners, health systems and physician groups. And our Beacon Lab Benefit Solution product will be operationally available next quarter to better meet their needs. Our goal in this initiative is to provide payors, health systems and physicians with a variety of options to improve laboratory quality, reduce treatment costs and improve patient outcomes. In summary, we are pleased with the quarter and the progress we have achieved on our Five Pillar Strategy. Now Steve Anderson will review anticipated questions and our specific answers to those questions.

Thank you, Dave. Can you describe the impact of the Medicare reimbursement cuts you will face in 2013? Absent any additional congressional action through the end of the year, we would anticipate an approximate 5% reduction to the clinical lab fee schedule beginning January 1, 2013. The Affordable Care Act baseline for the 2013 update, the clinical lab fee schedule, will be a negative 0.95%, based on the recently published CPI-U and productivity adjustment figures. As part of the Sustainable Growth Rate fix, the clinical lab fee schedule will be re-baselined an additional 2% lower, effective January 1, 2013. Further, absent any congressional activity, mandatory sequestration will impose an additional 2% reduction in the clinical lab fee schedule, effective January 1, 2013. Together, these cuts sum to an approximate 5% cut to the clinical lab fee schedule, which represents approximately 12% of our total revenue. In addition to the reduction in the clinical lab fee schedule, mandatory sequestration will impose a 2% reduction in the physician fee schedule, effective January 1, 2013. The physician fee schedule represents approximately 2% of our total revenue. Can you update us on the status of the inquiry you received from the Senate Finance Committee? LabCorp continues to work closely with the staff of the Senate Finance Committee to respond to their request for information. We were the first company to meet with the committee staff shortly after receiving their letter asking us to provide a responsive overview of how our contracts with managed care organizations work. We continue to work closely with the staff to respond to their inquiry. Can you update us on the mix of your business coming from esoteric testing? For the year, approximately 40% of our revenues were in the genomic, esoteric and anatomic pathology categories. As we reiterated last quarter, our goal is to increase our esoteric test mix to approximately 45% of our revenue within the next 3 to 5 years. 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 Gary Lieberman with Wells Fargo.

This is a little disorienting with Adam not getting the first question. I asked this question on the earlier call, but there's a lot of discussion continuing around pricing pressure and for a very long time, there was pricing stability. And I don't know exactly when, but it seems like 5 or 6 years ago, we started to see pressure on price. So maybe could you comment about, is there a path back towards pricing stability and what are the challenges of getting there?

Yes. Gary, I guess -- it's Dave. I guess I would characterize it a little differently, which is, there was -- I think, as everybody remembers in 2007 and 2008, a fairly sizable pricing reset and my view is that since that time, pricing has been quite stable. And that, on both a unit cost and a mix basis, pricing has generally been positive. So I look at other industries, probably aside from pharmaceuticals and health care services, and I see a trend where unit pricing -- I mean, you look at imaging, at hospital services, look at physician services, I see a trend where unit pricing has been fairly steadily going down. Whereas for us, unit pricing has been relatively flat and in a couple of years, unit pricing has been positive. So our pricing in this quarter was positive, and we're happy about that. And we continue to make every effort to be disciplined on pricing, given the surrounding environment.

Okay. And then maybe just a follow-up to that would be, with the -- assuming the Accountable Care Act is implemented, what kind of impact do you see on your overall unit pricing from the implementation of health care reform?

I just think it's -- I think it's too early to hypothesize about what's going to happen to price. There are too many variables that are in play. For example, it's been widely discussed that employers may decide not to continue to extend coverage and pay the penalty instead. If that happened, and employees go to the exchanges, I mean, that has one potential pricing impact. You have potentially more patients in Medicaid, which has unit pricing implications if they're uninsured now or if they're outside the system. So I just think it's too early to tell what implications the ACA would have for price, because there are too many moving pieces.

Your next question comes from the line of Amanda Murphy of William Blair. Amanda Murphy - William Blair & Company L.L.C., Research Division: This is a follow-up to some comments, Dave, that you made about the alternative delivery models. I'm curious, how -- what are you seeing these days in terms of managed care's efforts to manage lab spend? How willing are they to adopt their type of models? And typically, how do we think about those models impacting the P&L, relative to current models?

I think that there is increasing focus in managed care on lab trend, not so much on lab spend, because as we have always said, the spend is 3% of total health care expenditure, although we provide a heck a lot more than 3% of the value. But I think there is increasing focus on trend, and the trend is utilization. And it's also what tests are being selected. So I think, in a appropriate way managed care, and it's not just only managed care by the way, it's integrated delivery networks, it's health systems, are focused on what tests are being ordered and why are the tests being ordered and are they being ordered from the right provider. So I think there is more willingness to approach these issues. Like everything, there's a implementation period, there's a learning curve. And we're still in the early stages of what I would describe as managed care and hospitals and delivery networks and health systems and even physician groups implementing a more focused approach to how tests are ordered. Amanda Murphy - William Blair & Company L.L.C., Research Division: So just thinking, over the next couple of years, how do we think about the offsetting factors of -- I think there has been a lot of discussion about hospitals purchasing physician practices and how those test volumes are that the -- I guess the referral source changes the direction of the test volume. And then, you think about hospitals selling their outreach businesses and some of the things you talked about. I mean, how do you -- how you rationalize all of those and think about the impact to volumes over the next couple of years? Does one seem like it's standing out more than the other?

So obviously, we've talked about it, and it's been widely discussed that health systems, I would describe them as big health systems, are purchasing physician practices as well as other -- a significant number of other types of services as well, which has the potential to redirect the flow of lab specimens. On the other hand, it also has the potential to significantly increase the cost of the lab expense to the payors and even the internal costs of the laboratory services that the health systems are now providing to the physicians. So to me, the increasing focus on reducing the overall cost of care and on directing, not only lab work but all services to the highest quality and most efficient provider, benefits us because I think we're the highest quality and most efficient provider. Amanda Murphy - William Blair & Company L.L.C., Research Division: And then just last one, if you think about volumes over the past few years, they've been -- it's been a challenging environment just given the macro situation. How do you think about -- if you put reform aside for a second, how do you think about this general utilization of patients? Is this something that you think is a fundamental shift in how people are using healthcare? Or is this something that you think, as the macro environment theoretically improve, then we could see better utilization levels?

I've always maintained that as the macro environment improves that we will see improved utilization levels. And I continue to hold that view. It certainly is the case that we're in a period of low-volume growth. That's the environment and so it requires us to manage the business very well to be able to continue to be successful. But we're also in a very, very tough macro environment with a lot overhang of high unemployment and the economy not picking up steam the way that economists and everybody else thought that it would. And I do think that has the effect of muting the use of health care services generally and lab services specifically.

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

Just a couple of questions here. The first is just on organic growth. Could you comment a little bit on what you think your underlying organic growth was in the quarter, if you x out some of the smaller acquisitions that you made over the last 12 months?

Darren, this is Brad. If we go back in and look at that -- the schedule we prepared to look at the organic growth, I'm going to speak to the volume metric, that volume in the second quarter was down 50 basis points on a year-over-year basis.

And if you could just maybe comment a little bit more about the drivers of the organic growth trends, are you seeing anything that are worth pointing out in either bucket, any test categories, anything that would help put this deceleration into perspective?

Sure, 2 things come to mind that are drivers. One is vitamin D. And the vitamin D test, as you know, grew quickly for several years, and it has since flattened out. So I think that is challenging to the growth rate of overall volume. The other is in our histology area. We see continued weakness from a volume perspective in the histology category of our business. And I think they are some of the trends that we've talked about in the past, are still with us and impacting our experience there.

And just specific to histology, is there a deterioration versus what -- we've heard about in the past, is it still kind of a single-digit decline?

Darren, it's Dave. I think it's just a continuation of the trend.

Okay. And then, I guess, the other question I had is just stepping back. And Dave, I know you've made comments to investors and analysts over time just about the decelerating growth and the overall environment. As you think about that more and look at the company's capital structure, if this trend persists, how seriously would you consider dividend on top of share repurchase? It seems like we're looking at much more GDP-like growth, and that may be deserving of a dividend for your shareholders.

Darren, I mean, we've talked about this frequently in the last 18 months and have said that our goal is to make a decision on this issue of whether to initiate a dividend at the end of this year. I think one of the confounding factors in terms of the idea of introducing a dividend is if what I'm reading in the press is accurate and nothing changes in the tax structure next year, the potential marginal tax rate on dividends could be 45%. And so that, in my view, really takes away from the attractiveness of a dividend. So some of this is going to depend on what are -- what is Congress and the executive branch going to do and are they going to be able to come to any agreement about the tax structure? And the second is what do we see in the environment.

Okay. And then, last thing here, just maybe a comment on strategy. It seems like one of the bigger market share opportunities for the big labs still remains to be hospital business. And I know you've commented a little bit in this, but maybe can you just update us maybe more specifically on how you're approaching that market? What types of things you're working on there that might allow you to capture share in that realm?

Yes. And I think when we think about the system, the system is certainly becoming -- the health care system is becoming more health system centric. I would not -- I think hospitals are becoming more than hospitals. Hospitals own physician practices. They own urgent cares. They own acute care facilities. They own imaging facilities. So hospitals are transforming themselves into integrated delivery networks, broader health systems. And I continue to believe that we have all the tools in place. We have all the right strategies to demonstrate to hospitals and health systems that we can improve the quality of the laboratory services and ultimately of the patient care that's delivered, and we can help them reduce their costs. I think some of it is that the health systems also need to increase their awareness of the savings and quality improvement opportunities. Managed care payors need to increase their awareness of the savings and quality improvement opportunities. And we need to continue to refine the message and refine the financial analytics that demonstrate that. So I think there's some -- there's opportunities on all sides of the equation. But I continue to believe that we're extremely well positioned to benefit from what we're all going to see, which is in the next several years, which is, there is going to be pressure to reduce costs. The higher-cost, less-efficient providers are going to be disadvantaged. And the more-efficient providers, particularly the high-quality, more-efficient providers like LabCorp, are going to be in a strong position.

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

A couple of questions. First -- the first one is more focused on the near term. If you can just detail for us what would be the impact of the MEDTOX acquisition on pricing metric in the second half of the year.

Ricky, we -- since we haven't closed, we haven't incorporated any of the MEDTOX numbers into our evaluation. You can -- obviously, MEDTOX is a public company, so you can look at their revenues and their reported price and do that math. But it's not something that we're incorporating into our outlook for the rest of the year until we actually close.

But if we just think about it, if we -- about the trends, should we think of it as a headwind or a tailwind to second half as we kind of work it through our model?

I actually don't know, because I have not looked at their -- I believe their PPA is comparable to ours. But, again, it's a publicly reported number, and so it -- the calculation should be relatively easy to do.

Okay. And then just going to talk longer term, as we think about stuff like industry growth and I think you commented earlier on your expectation for volume to go back to kind of like historical rates as the economy improves. So when you think about stuff like top line growth and the mix between volume and the price, should we get to kind of like historical 45% top line growth just from core business fundamentals improving? Or are you looking to augment top line growth with complementary acquisitions and not necessarily kind of affecting core business but just looking outside core and what would you look as -- see as complementary?

So we've always said our foundation model was 4% to 6% top line growth. It's a combination of volume, price and some small fold-in acquisitions, and that continues to be our view of the long-term opportunity. When we think about complementary acquisitions, you can't say yes and you can't say no, hypothetically, to anything without having had the chance to evaluate it. I wouldn't be -- so I wouldn't rule out something that would be highly complementary to what we do. And over time, we've done some of those things. They've been very small. For example, we've acquired small IT companies that provided capabilities to do things that we felt it was easier to buy than build. So I wouldn't rule anything out. But I think each one we would have to evaluate on a case-by-case basis. We would have to determine, is it complementary to our core competencies, does it give us the opportunity to advance our strategy, do we have the management capabilities to run it? Those are the factors that we obviously -- what would the return be and how will we -- how would this add value to shareholders? And those would be the things that we would evaluate in any situation where we look into that -- where we looked at a complementary acquisition.

Okay. But would it be fair to say that for the time being, you still -- your key focus is on the more small fold-in acquisitions?

Yes.

Your next question comes from the line of Lisa Gill of JPMorgan. Gavin Weiss - JP Morgan Chase & Co, Research Division: This is actually Gavin Weiss, in for Lisa. And hopefully, this will go a little bit more smoothly than our performance on the last call. But in the press release, you noted that you expect Genzyme to be slightly accretive, which I believe is consistent with what you said previously. But can you clarify if there have been any changes in your expectations for Genzyme? Is it more or less accretive than you previously thought?

I didn't listen to the last call but obviously, there's something I need to go back and listen to, I guess. No, our expectations for Genzyme have not changed in terms of what we set out at the beginning of the year.

The next question comes from the line of Isaac Ro of Goldman Sachs.

Just a quick clarification, one on vitamin D. Is there something in there beyond just sort of the comps there that you think is driving the slowdown? And specifically, what I'm wondering is, did see any signs of pushback from payors with regards to the amount of vitamin D testing that gets done?

Isaac, it's Dave. There have been some proposals by a couple of the Medicare carriers to impose diagnosis-related requirements on Vitamin D. They certainly are not material to the overall utilization. I think what's happened is, we have reached a plateau in vitamin D, which is that there was tremendous growth as there was widespread physician adoption. Now the test is largely adopted. The utilization is what -- is where physicians think it's appropriate, and so we've just seen it flatten off.

Okay, fair enough. And then maybe if I could ask a more structural question. Long term, we're obviously in a -- based on the economic forecast, sort of for protracted period of sluggishness -- and so [indiscernible] that continues to be a headwind for volumes. How do you look at maybe taking the asset base you have? You obviously touched millions and millions of people in the health care system. Are there other verticals that you might consider expanding into? You've obviously bolted on with incremental capabilities. I'm just trying to think out of the box here regarding other ways in which you can try and monetize the access you have to the health care system.

I think, as I've said in response to Ricky's question, we always look at things that might be interesting that could be complementary. Again, the question is, is it going to create value for shareholders? Are we going to get an acceptable rate of return on invested capital? Do we have the -- does it fit with our core competencies? Does it -- is it -- do we have the capability -- the management capabilities to run these things? And obviously, I mean, we've all read the reports of a number of recent acquisitions that one could argue or, if not outside the fairway, at least on the edges of the fairway for some sizable services businesses, we continue to look at opportunities. I don't have anything specific that I can't point to and say, this is a terrific opportunity for us. But we continue to look at what might be out there in the marketplace that we would have the capabilities to run and that would enhance value for our shareholders.

And you guys talked at maybe a board level sort of a horizon. I mean, if we're in a period of protracted sluggishness -- I mean, there sort of becomes sort of this question of if rates stay low, there's tons of cash flow in the business. And I understand the comment on returns. But I mean, we've seen a lot of other adjacencies in health care, where companies maybe taking a short-term hit to returns in the interest of a long-term strategic shift. And if we sort of stand this current volume environment, is there a deadline here where you might start to revisit your hurdles there and then pivot into a new business?

I think it -- I'm not going to comment on what we talk about at the board. I think at every level of the company, we consistently review our strategic focus. And we review what the business opportunities are in health care services generally and the laboratory industries specifically. I'm hesitant to say that there's a deadline by which we're going to do something, simply because we're in a rapidly changing environment and, granted, we're in a low growth environment. But with 2014 ahead, if the ACA is implemented, there can be dramatic change in the overall health care environment. And as I've mentioned earlier on the call, we're in an environment in which the center of gravity in health care services is moving towards broader integrated delivery networks and broader health systems, larger and larger physician groups. These are all things that continue to evolve, and we're going to continue to evolve with them.

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

First, just wanted to congratulate Adam again on joining the company. Dave, not to beat a dead horse on the volume environment, but I was just wondering if there is any way you can quantify or how much of this do you think is cyclical versus structural?

I think it will be hard to -- it's hard to come up with a number, Kevin. I mean, if we look back at the first quarter of 2011, when I think people had the general sense that the economy was getting better, that we were kind of coming out of the 2009, 2010 funk, organic volume growth was about 3%. Pretty good. Very good. As we went through 2011, and it became clear to -- I think that we weren't coming out of the funk and that, in fact, Europe was going into the funk, and employment was not improving and the fundamentals of the U.S. economy were not really getting much better, we saw organic growth decline. And then the beginning of this year again we had a little bit of a pickup, and this quarter we saw a decline. So I continue to believe that the data suggest that when the economy gets better, we are going to return to better utilization trends. There's no question that there is more focus on cost management and on utilization management in every aspect of health care services than there was 3 years ago. But I still think this is more cyclical and less structural.

Okay, got it. And then just going back to the molecular diagnostic initiatives that have been put in place by Palmetto and the new codes that are coming out in 2013. I don't think you guys have ever really quantified what percent of your revenues might be impacted by this. Could you give us any update on that?

Yes. I mean, let me just say, as I think I've said a number of times, this -- in our view, first of all, we support enhanced transparency in billing and coding. The amount of molecular testing that is billed to Medicare is quite small, and this is not a material component of our revenue. And it also is not going to have a material impact on our financials.

Got it. And then just last question, could you give us an update on the managed care contracts? I think Humana was coming up at the end of this year. Has that been renewed? And then, you have, what, Cigna and WellPoint next year?

Well, Humana is coming up at the end of this year, and we're deep in discussions with Humana. Cigna is the middle of next year, and we're in discussions with Cigna as well. And as we mentioned earlier on this call, we extended WellPoint on a multi-year basis with stable pricing and retaining exclusivity in all of our key markets.

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

One question I want to ask about -- you may have talked about this and I missed it, but what are the trends on test per requisition or ascension and -- accession and what really drives that? Is that just product selection as the primary driver on that?

Gary, it's Brad. We continue to see an increase in that trend. If we look back over a long time of history, it has continued to go up. So I would say that just new tests, I mean, vitamin D would be a good example that we've talked about many times on the call today. New tests or tests that have a new or -- application or new use in the practice of medicine, we believe, drives that trend. The other thing that's helping or -- that trend, I believe, is the aging population. Because we do know from looking at our different parts of our business that older patients receive more tests per encounter than do younger patients. So I think it's -- it has many factors. But the ones I just mentioned, I think, are the primary drivers.

Gary, it's Dave. Just a little more color on that. I mean, first of all, there are small increases in the number of test per requisition year-over-year. So they're not a test per requisition. They're tenths of a test per requisition. And the second thing is, just to be clear, it's one of our fundamental principles that we offer physicians a wide variety of choices in how they select and order tests. So we offer them a very broad menu. They may choose to have groups of tests that they have preselected, but we offer them a very broad menu and the ability to order every test individually, other than the tests that are grouped into panels by CMS, for example. So it is -- it's physician choice that is changing the number of tests per requisition, not product choices, to use the word you used to describe it.

Okay. And one sort of pseudo-follow-up on that, just kind of thinking forward, I mean, obviously, you guys have mentioned ATOs a little bit, and those are just getting started. And some of the financial incentives for physicians are initially much more limited than you could see down the line or we have seen. For example, in California, where physicians are in capitated models. I mean, do you have enough experience, I mean, maybe in California with groups like HCP, which DaVita bought, which are on a full capitated model? And what sort of impact there is on lab utilization versus fee-for-service? I mean, all of these big integrated medical groups that have taken capitation talk about really substantial reductions in imaging and hospital in-patient utilization. And I would guess that, to a certain extent, lab testing falls into something as well, where utilization is impacted negatively. But do you have enough experience with that, just to comment on that?

Yes. The -- normally, in that type of an environment, Gary, we're -- we would be sub-capitated to the capitated provider. So -- and then we might have and we would have carve-outs for specific types of testing that wouldn't fall within the sub-capitation, whether they're molecular testing or things that are not included in a capitated rate. So even in our capitated managed care plans and in our sub-capitation with IPAs, I don't think there's huge negative impact on utilization. Obviously, there are pricing implications of sub-capitated models, but I don't think we see huge impact on utilization. And again, I think that just goes to the point of -- I don't think that doctors are out deliberately over-ordering lab testing or even deliberately over-ordering images or -- I mean, that's not what physicians do. I think there's liability concerns for many physicians. There's patient demand for many physicians, where a patient comes in and says, "My knee has been hurting for 3 weeks, and I want an MRI done." So I don't think any -- other than truly bad people, I don't think anybody sets out as a physician to overuse services. I think that there are a number of drivers in the system that lead to utilization. And again, this is -- the whole intention behind the LBS is -- it's not to tell people you can't order lab testing. It's to order -- it's to help physicians order the right test for the right patient at the time the patient needs it by the highest quality provider at the most effective cost.

Yes. I wouldn't -- I don't disagree with that, I guess. Obviously, we've seen that since there's been financial incentive to use less services or incur less costs, that marginal test or diagnostic might fall to the wayside. But if you're sub-capitated -- I mean, if you saw a growth to that, clearly, you're not going to, I guess, be willing or able to make some of the pricing or revenue concessions you've made and I think some of your existing capitated book. I guess, that would be a fair conclusion, right?

Yes. And by the way, I also -- I do agree with you that when -- one of the things that can change the equation is when physicians have a financial interest in the services that they're ordering. That is a negative for the system, and it's a negative for utilization, and it's a negative for the highest-quality patient care.

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

I have a question on Genzyme Genetics, actually, and how the integration process is going. And maybe if you could just provide a high-level update on when you think you'd hit your ROIC hurdle rate for that deal in the future of 2013 or '14, be it. And it did seem like you know something in the press release, so I'm just wondering if there was a change in integration strategy or timeline than what had been previously stated.

Dane, this is Brad. Just want to comment, the integration is going well. When we started out this process on a multi-year -- with a multi-year integration plan, and I would say so far, we are on track. And we would expect to come out of 2013 with some improvements still in early 2014 at the levels that we started out believing that we would achieve. So nothing in our thinking has changed in terms of that time frame or that experience and -- as part of the integration.

And just -- I know this question has been asked over and over but just on the, I guess, high level on the volume growth, I'm just trying to parse out the macro issues here. Because I mean, the comps year-over-year on the volumes have obviously been affected by some of these high-deductible health plans but should then boost it a little bit by just that national demographic shift. Yes, employment year-over-year has kind of comps out to 0, I think. Maybe it's incrementally more negative, but just what is -- I mean, why -- there's something structurally different? Or I mean, what can you do in terms of content to help drive it? You've had a number of introductions of interesting tests in oncology. Is it just really sluggishness with the routine business that's kind of overwhelming everything else or is it a temporary fact that hiccup maybe in the esoteric business that we can see a re-acceleration potentially later this year?

Dane, it's Dave. I don't really think there's much to add. I think we've covered this topic in as much detail as we can really offer you. The macro environment is tough. Unemployment is not getting better. Managed care enrollment is not getting better. And I think we're doing a very good job in terms of executing on our company priorities and our Five Pillar Strategy. But we can't make the external environment improve for us.

Okay. And just a last question, can you just give an opinion or some color on the market for acquiring hospital outreach programs or customer lists at the smaller scale, something that you don't really report? Is that environment becoming more competitive? We've heard some private equity groups getting into the roll-up game with the smaller labs. I'm just curious for your thoughts on that.

I think the acquisition market is always competitive. I wouldn't describe it as any more competitive or less competitive today. The industry remains highly fragmented. The barriers to entry remain extremely low, and it's a very intensely competitive market for starting businesses and for acquiring them and for running them. As we have about 5 minutes left, so we're going to try to -- if you're asking -- if you're going to ask again about the environment, maybe we can go -- not pass over that. And if you have substantive questions, we'd be happy to address them.

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

You had talked about the weakness in histology and vitamin D. Well, I guess, vitamin D had been strong for a while, and that's dropped off. Can you talk about some of the other tests that you think will help drive genomic and esoteric testing to 45% of revenues in the next 3 to 5 years?

Yes. We've seen really nice growth in our specialized endocrinology business, our specialized coagulation business. We have seen good performances in cardiovascular, or our chronic kidney disease program is having terrific success in terms of year-over-year growth. We're very pleased about the progress with new swab, with the age-based guidelines for sexually transmitted disease testing, which follows the -- specifically follows the ACOG recommendations so the so physician is able to select based on what ACOG tells them to do. The universal carrier screening tests, Genzyme Genetics, Integrated Genetics, the Ariosa non-invasive trisomy -- fetal trisomy test, a number of oncology markers and, of course, continued development of our next-generation sequencing platform for even broader analysis of tumors, cancers and oncology generally. So I think there are a lot of terrific things going on at LabCorp. And again, outside of this environment, I think we will see nice improvement in utilization and esoteric testing growth.

Your next question comes from the line of Hima Inguva of Bank of America.

I'd like to know your outlook on M&A for remainder of the year. Do you expect to see smaller bolt-ons or will you be open to doing larger transactions? I have a follow-up.

I think if -- it would depend on what larger transaction, but I think if an attractive transaction became available, of course, we would look at it. We're in the process of doing a sizable integration with Integrated Genetics, Integrated Oncology, and we have another not-insignificant integration coming up, assuming that we're able to close MEDTOX in relatively short order. So the focus will clearly be on the fold-in, bolt-on type deals for the rest of the year.

And do you expect to exit debt markets this year?

We haven't made a decision on that, but we're always looking at whether there's the opportunity to improve our overall capital structure.

Your next question comes from the line of Sandy Draper of Raymond James. Alexander Y. Draper - Raymond James & Associates, Inc., Research Division: My questions have been asked and answered, but just maybe a quick clarification. I think at some point, you guys had talked about either how much organic volume growth or total top line growth you need to get margin expansion, excluding any cost-saving activities. Could you just remind me what that is and tell me if it's total top line growth, indiscremental price or volume or if it needs to be dependent on volume?

Sandy, this is a Brad. I don't know that we've ever put that out there in terms of a hard-and-fast number, but I go back to the kind of the way we think about the business in that 4% to 6% top line growth range which, as Dave mentioned earlier, has some tuck-in acquisitions built into it. It creates nice leverage in our business regardless of any cost structure to grow our margins and our earnings. So I really haven't -- I don't think have a grid of, okay, at this level, it's this and at this level, it's that and we're always working on the efficiencies that Dave mentioned as part of our prepared remarks.

Sandy, it's Dave. I mean, obviously, if you get 3% unit pricing growth, it's easy to get margin expansion. So -- but there is a lot of leverage in the volume, and so we tend to think of it as it's a -- like everything in this business, it's a combination of the impact to volume and price.

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

Just a quick housekeeping item. On the equity method income, you've obviously had a $2.9 million increase there that you've disclosed. But I guess the question I had is, will you have a new Canadian partner in this calendar year? Should we expect the equity method income to remain pretty consistent now that you own basically 100% of that?

Darren, this is Brad. One thing I'd like to point out too on that $2.9 million, that was excluded. That gain was excluded from our adjusted EPS. I want to make sure people appreciate that. And on the second question, we're always looking at our business structure in Canada and thinking about partners and how we own and operate that business. So it would be speculation to think about what might happen between now and the end of the year.

At this time, there are no further questions. I would now like to turn the call back over to David King.

Thank you very much, Reggie. We appreciate everyone listening this morning and wish you all a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.