Labcorp Holdings Inc (LH) 2002 Q2 法說會逐字稿

Ladies and gentleman, thank you for standing by and welcome to the Laboratory Corporation of America Holdings second quarter results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time if you have a question you will need to press the 1 followed by the 4 on your telephone. As a reminder this conference is being recorded Thursday, July 25th 2002. I would now like to turn the conference over to Mr. Thomas Mahon, Chief Executive Officer. Please go ahead sir.

Thank you Tammy. Good morning and welcome to LabCorp's second quarter conference call. You are going to meet today from LabCorp, Brad Smith, Executive Vice President of Public Affairs, Wes Elingburg, Executive Vice President and Chief Financial Officer, Ed Dodson, Senior Vice President and Controller, and Pam Sherry, Senior Vice President, Investor Relations. This conference call is to discuss second quarter results. So I would address what I think are the most frequently asked questions recently about the company. I will also detail LabCorp's strategy and how we are implementing this strategy. Simply put, our strategy is to be a national laboratory capable of servicing all major geographic areas and to continue to develop as the leading molecular testing laboratory in the United States. This approach which began in 1997 with particular focus on the introduction of new genomic tests has been the driver of our results now for over five years, and the results continue to be industry leading. But now I would like to introduce Brad Smith with a few comments before I begin.

Before beginning I would like to point out that there will be a replay of this conference call available on the telephone and via the Internet. Please refer to our press release dated July 24th for replay information. On July 24th the company filed an 8K which included additional information on its business and operations. Analysts and investors are directed to this 8K to review the supplemental information. I would also like to point out that any forward looking statements made during this conference call are based upon current expectations and are subject to change based upon various important factors that could affect the company's financial results. These factors are set forth in detail in our 2001 10K and subsequent filings.

Thank you Brad. Now to the results. Second quarter results as outlined in our press release last night continue to set the industry standard. Overall revenues increased 11.4% to $612.4 million. Volume increased 7% and price was up 4.4%. There were the same number of revenue days in this quarter as in the second quarter of 2001. EBITDA for the quarter was $156.4 million or 25.5% of revenues, which represents a 22% increase over the second quarter of 2001. We believe LabCorp is the only major laboratory to reach and surpass EBITDA margins of 25%. We have now demonstrated an ability to continue to increase margins even as margins have become a higher percentage of our revenues. We believe this is due to our genomic strategy and our ability to successfully rationalize costs. Operating income for the quarter was $134.1 million compared to $102.6 million in the second quarter of 2001. Diluted earnings per share was 55 cents, 31% ahead of prior year's quarter. DSO for the quarter was 58 days, down 6 days from the end of the same period last year. Bad debt was 8.75% compared to 9.4% last year in the second quarter. Cash flow from operations was very strong, $93.1 million compared to $74.2 million in the second quarter of 2001 representing an increase of 26%. Now for the six month results. Revenues for the period of approximately $1.2 billion, increased 11.8% as a result of a 7.6% increase in volume and a 4.2% increase in price.

There was one last revenue day in the first half of 2000 compared to the first half of 2001. On a per day basis revenues increased approximately 12.7% with an 8.5% contribution from volume increases and a 4.2% from improved pricing. EBITDA for the first half increased 23% to $294 million or 24.4% of revenues, an improvement of 200 basis points over the first half of 2001. Operating income for the half was $50.5 million, a 24.2% increase over the same period last year. Diluted earnings per share were $1.01, a 31% increase over the first half of 2001. Cash generated from operations was $205.3 million, an increase of 48% over the prior period. At the end of the first six months our cash balance was $304 million. Now I would like to mention several important accomplishments during the second quarter, which are directly related to the implementation of our strategic plan, a plan that provides both short and long-term growth opportunities for LabCorp. First, the acquisition of Dynacare. In May we announced a definitive agreement to acquire both the Canadian and US operations of Dynacare. That same day Standard and Poor's reaffirmed its BBB+ plus rating on LabCorp. We have seen received US and Canadian regulatory approval and yesterday Dynacare shareholders also approved the merger. We expect to complete the acquisition later today. We are extremely excited by the Dynacare opportunity.

It directly supports our strategic objectives of strengthening our national presence by expanding our geographic reach, which allows us to expand our leading position in the introduction of commercialization of genomic tests. Dynacare's network is a top-dollar strategic fit for LabCorp with numerous opportunities to optimize operating efficiencies and expand patient access to our network and expenses menu. In terms of geographic regions, Dynacare operates in geographic areas where we have often mentioned we want to be. The south, the southwest, and the Pacific northwest, all great growth regions. Offering services in these regions and in Canada, Dynacare operates 26 central facilities, two of which are esoteric, 115 rapid response labs and 302 patient service centers in 21 states and two Canadian provinces. Dynacare's operations also include four joint ventures with hospital partners. Two are 50% owned and based in the United States and two are in Canada, one 73% owned in Ontario and another 43% owned in Alberta. We are acquiring all the stock of Dynacare for $11.50 in cash and 0.2328 shares of LabCorp's stock for each share of Dynacare stock. We are financing the transaction by issuing approximately 4.9 million shares of LabCorp common stock, and using $260 million in cash. A $150 million bridge loan for which we already have a commitment, borrowing $50 million under our $300 million re-borrowing, and paying off Dynacare's existing $195 million of senior subordinated unsecured notes. There is a core premium of 103.6% at par on these notes, which will amount to approximately $7 million.

This acquisition supports our position as the leading low-cost provider and producer with significant cost saving opportunities. Synergy savings will primarily come from the following areas: internalizing esoteric send out by redirecting Dynacare send outs to our esoteric centers of excellence, converting all key vendor contracts to LabCorp's lower supply costs, and optimizing our infrastructure by reducing overlapping functions, rationalizing lab capacity, and consolidating distribution routes and patient service centers. Significant progress has been made to complete post acquisition integration plans, and we are prepared to begin implementing these plans immediately. Based on our expected close date synergy savings are currently expected to be approximately $4 million in 2002 and $36 million in 2003. The total savings of approximately $45 million will be in place in 2004. We would also like to let you know in advance that in any event our third quarter results are about one week later than the time we normally report. It is due to the extra time needed in connection with finalizing purchasing accounting related to the acquisition. Second issue I would like to discuss during the quarter is our new partnership with Premier. Last week we announced a new agreement with Premier, one of the last group purchasing organizations in United States. This agreement expected immediately positions LabCorp to offer our routine esoteric and genomic tests to more than 1600 member hospitals throughout the United States. Many of Premier's members are located in regions where LabCorp already has a solid presence.

Because the compliance rate for member hospitals in the Premier network is high we look forward to getting profitable new hospital business from this opportunity immediately. New genomic tests; in early June we announced the availability of Myriad Genetics' predisposition test for breast, ovarian, colon, uterine, and melanoma skin cancer. To this exclusive partnership our 600-person national sales force has now been trained and equipped with the educational tools to communicate the value of these genomic tests to LabCorp's over 200,000 primary care physician customers. We also now offer Myriad test for cardiac risk. Later in June we announced a new five-year exclusive partnership with EXACT Sciences to offer the first of noninvasive DNA based screening method for colon cancer in an average risk of population. We expect to operate as early as the second quarter of 2003. We already offer EXACT'S test for hereditary colon cancer, Pregen-26, which has a limited market. However, in the average risk population as many as 80 million Americans over the age of 50 are candidates for a screening test for colon cancer, and if the disease is caught early it has a cure rate of over 90%. The new test Pregen-Plus has the potential to become a blockbuster diagnostic product. Exclusive partnerships like these with Myriad and EXACT demonstrate that companies recognize LabCorp's leadership position in the molecular testing market, allowing us to offer valuable tests covering the entire cancer testing spectrum beginning with previous position testing to diagnosis to monitoring.

They demonstrate our commitment to providing our clients with only the most advanced DNA-RNA tests in technology. Cystic fibrosis; I have often talked during the last nine months about cystic fibrosis and how a genomic test becomes accepted as standard of care and have a quick significant impact on volumes. Our second quarter cystic fibrosis testing volumes increased more than six fold compared to the same period last year, and we are now performing in excess of 7500 of these tests per month. HPV testing; we continue to see significant growth in HPV testing, in part related to the new consensus guidelines published in April in JAMA which recommend human papillomavirus testing as a followup to borderline PAP results. HPV has increased to more than 100% compared to the second quarter of 2001. I hope this brief summary of the highlights of the second quarter and results provide you with a good indication of our significant strategic accomplishments and demonstrate to you that LabCorp's plan continues to be highly effective. Now I would like to review a few frequently asked questions, and I think you give answers to those questions. Has anything changed in the regulatory environment that you expect to negatively impact the industry? The answer is no. Although we are well aware of the significance of how these types of changes can impact on us and watch them closely, we don't see anything on the immediate horizon which will have a significant impact to LabCorp. This includes the proposed changes in the physician service fees schedule, which we expect to have less than a $2 million impact annually, even if we assume a worst-case scenario from the alternatives presently being considered by CMS.

We also believe the broad scope of clinical and pathological services and years of experience position us to help balance and effectively deal with a regulatory and reimbursement environment and help us to moderate the impact of tests by test variance and reimbursement experience. Why don't you initiate a stock repurchase program? We have considered the adoption of a stock repurchase program, and at least at this time continue to believe there are many acquisition opportunities that are clearly a better use of LabCorp's cash. Until such time as we believe acquisitions are not a viable strategy and not available we will maintain our current approach. We will, however, continue as we have in the past to evaluate on a periodic basis the best way to utilize LabCorp's financial resources. What are LabCorp's thoughts about all the proposed changes in corporate governance? We at LabCorp are proud of our record of leading the way in the areas of full and fair disclosure of corporate information and corporate governance practices which support the independence of our board of directors. We welcome the recent corporate governance proposal, which we designed to enhance the public's confidence. These types of issues are being appropriately addressed by all public corporations. We believe that we already comply with these proposals in all material respects, and fully comply with all the other specific details of the proposals immediately after they are enacted.

What has been the impact of LabCorp's decline in drugs and abuse testing? Overall for the second quarter drugs and abuse testing had a negative impact on testing volume of approximately 1% where the volume is related to monolayer tests. We continue to see significant increased conversion to monolayer PAPs. In 2001 LabCorp performed approximately 80 million PAP smears. The run rate for conversion to monolayer was 65% at the end of June compared to 60% at the end of March and 57% at the end of December. We expect that our conversion rate will approach 70% by the end of this year and will likely approximate 80-85% of our PAP smears by the end of 2003. What impact did acquisitions have on your revenue and volume growth during the quarter? The second quarter revenues increased 11.4%. Without acquisitions our revenues would have increased at 9.5%, 5% related to volumes and 4% related to price. What is your current volume situation and thinking at LabCorp? LabCorp volume including or excluding acquisitions has consistently been at the top or near the top of our industry for the last several years. We have also been a clear leader in pricing, which we believe is absolutely critical to our growth plans. These volume increases which we are speaking about have fluctuated between 6% and 10%. During the second quarter our volumes increased at a rate of 7%. Quite frankly I had hoped that it would have been in the 8-8.5% range.

We have been seeing slow volume growth in certain of our regions even as others continue to show solid volume growth. So our guidance for the remainder of the year will reflect our latest information. What is your current thinking related to price? We remain committed to appropriate pricing. In this regard we will implement our annual price increases towards the end of the third quarter. We will continue to benefit from our favorable mix shift towards higher value genomic tests as we demonstrated in the second quarter, and we will continue as appropriate to walk away from volume business which does not satisfy our pricing guidelines. We recognize that there were times when we hacked the balance volume versus price, and we remain committed to this approach. Ultimately we believe our shareholders should evaluate our progress based on both volume and price growth, because these combined factors have the greatest impact on increasing LabCorp profitability. How can you to continue to grow volume? LabCorp, as stated, has consistently demonstrated over the last five years our ability to grow testing volumes, price, and therefore revenues. We have achieved our strategic objectives to a clear three-pronged approach. We expect to continue and actually accelerate this growth strategy as follows. One: to internal growth. The Premier announcement earlier in July is an example of implementation of this internal growth strategy. We also expect to continue to internally grow our genomics business lead by cystic fibrosis, HPZ, and PCR testing for the plasma market.

As a further example of this strategy we recently entered into a long-term agreement with Ventures Bearings to perform all of their HPZ and HIV plasma testing utilizing our NGI facility. This testing will begin in September. For the first half of this year our genomic testing business increased 24%. Secondly, selected acquisitions. Acquisitions which need our rigid criteria are an important tactic. Dynacare will contribute significantly to our growth during the next three years and we fully expect there will be other acquisitions. Three: licensing partnerships. We have learned at LabCorp that we can in fact expect exclusive licensing agreements going forward. We had stated that we want to be the leader in cancer molecular testing and believe cancer testing will grow significantly. Exclusive relationships with Myriad and EXACT will help fuel our growth in the next three years in cancer and molecular testing. Can your financial performance get any better? As you and I are acutely aware, the laboratory stocks have been weak recently. Yet the dynamics of the medical testing industry has never been stronger. We believe that this does present opportunities and also presents some investment opportunities. I know LabCorp is in an excellent position to execute its strategic plans to all of the methods I have just mentioned without relying on any single approach to fuel our growth and profitability. Since I often get asked if our performance can get any better, I will repeat briefly what I regularly say with one new feature. We at LabCorp have now demonstrated our consistent ability to surpass 20% EBITDA margins, and I truly believe it can get better.

How? By growing revenues; utilizing the growth strategies I have mentioned, the new tasks, new relationships, and selected acquisitions, and two - by controlling costs. We, more than anybody, have demonstrated any ability to do this, and we will do it again with the Dynacare integration. Bad debts is a further example. We have consistently reduced our bed debts, but the opportunity exists for further reductions. What is expected incremental impact of Dynacare on 2002 financial performance? Assuming Dynacare closes by August 1st for 2002 we expect Dynacare to: one - generate revenues of approximately $120 million. Two - provide an adjusted EBITDA of approximately $20 million. Three - the EPS neutral, and four - generate synergy savings of approximately $4 million. Finally, what is your guidance for 2002 and 2003? Our guidance for the remainder of 2002 includes Dynacare and assumes an August 1 closing. I hope you appreciate that our goal is to integrate Dynacare as soon as possible, including client conversions and the related financial tracking of Dynacare. Therefore, I am providing you with a company wide guidance that now includes Dynacare. Please note, however, that this guidance does not include anticipated restructuring charges in 2002 related to the Dynacare acquisition. Our 2002 guidance is as follows. Compared to 2001 LabCorp expects revenue growth of approximately 15.5-16.5%, with approximately 12% from volume and approximately 4% from price.

We expect adjusted EBITDA margins in the range of 23% of revenues, including EBITDA from the Dynacare equity investments, and earnings per share in the range of $1.90-$1.95. We expect a bad debt rate of 8.3-8.6% of sales in the third and fourth quarters. We expect capital expenditures of approximately $85 million, net interest expense of $17 million and a tax rate of approximately 41.5% for the third and fourth quarters. Now for 2003 we expect the following: revenue growth of approximately 16-17% compared to 2002, adjusted EBITDA margins of approximately 24-24.5% of sales, and an earnings per share growth of approximately 25-30% compared to 2002. In the coming years opportunities exist for LabCorp that are greater and more meaningful to us and to health care that at any time in the history of this industry. The EXACT screening test for colon cancer in an average risk population is only one example of many near-term opportunities we anticipate. Over the long term LabCorp's volume growth will be the key driver fueled by our genomic strategy. This strategy is the cornerstone for future growth and draws upon LabCorp's substantial competitive advantage. Our size, our national distribution system, our scientific culture, our extensive 13 years' experience in genomic applications, our ability to identify evolving market opportunities earlier than others, and our ability to partner with the very best genomic companies in the business.

Today we continue to drive LabCorp's programs that will provide significant revenue opportunities in the 2003-2005 timeframe. We believe that our strategic plan does just that, and we look forward to demonstrating to our shareholders that our longer-term growth prospects are excellent. Thank you for listening and we are now ready to answer questions.

Thank you. Ladies and gentlemen, as you requested questions for today's question and answer session, you will need to press the 1 followed by the 4 on your telephone. You will hear a three tone prompt to acknowledge your request. If the question has been answered and you wish to withdraw your question, you may do so by pressing the 1 followed by the 3. If you are on a speakerphone, please lift up your handset before entering your request. One moment please for the first question. The first question comes from Bill Bonello from Wachovia Securities. Please go ahead with your question.

Yes, just a couple of follow-up questions. Can you give a little bit more detail? You mentioned volume growth slowed in certain markets. Can you give a little bit more explanation on why you think that was, and what if anything you might be able to do to rectify that aside from the contract opportunities, but is there anything executional?

Sure Bill. Double reason for disproportional impact that we consider are our inability to finalize several long big deals that really are essential part of our growth plans. In addition, we had some smaller wave of providers in these regions, which quite honestly are pretty effective. Now what have we done? We have redoubled our efforts to get the big deals done, and Premier is a good example. I think even in the last conference call I remember you mentioning, Bill, that several of the acquisitions from the previous year annualized during the second quarter. I don't know if you remember saying that. Operator?

One moment.

Hello?

Just one moment.

Operator?

I am sorry. Are your ready to take the next question?

There is some problem here. We had cut in to another earnings call, and I want to make sure that we have all of our people on the people, and that I can go back to answer the question that was asked.

Are we? Actually everything looks like it is fine. I don't know, they must have just connected into the conference.

Okay. So is Bill Banello listening?

I am.

Okay. I apologize for whatever happened. I was talking about the fact; the question is can you shed some more information on what happened in certain regions. I guess my answer is that Bill, there were some regions that were disproportionally impacted by our inability to finalize the Premier deal as well as some other big deals. The fact that there were some smaller labs out there that really hurt us in several regions of the country. Now what are we going to do about that? The first thing we are going to do when we begin is we have got the Premier deal done. That does impact in certain regions in a greater way than other regions. We are putting great emphasis in getting some of these other deals done. Secondly we had developed plans to more effectively compete with these smaller lab providers, which include highlighting the advantages of our genomic strategy, differentiating ourselves in the esoteric area, and developing plans to be more effective from a sales perspective in a couple of these regions.

Great. Excellent. Just one other follow-up question. I am just curious. You gave your guidance on pricing, but I am curious if you can give any more color on how you think Dynacare's pricing has been relative to yours. Obviously the last time we saw significant consolidation in the space and pricing went up considerably, and now you have got DML acquisition and the Dynacare acquisition, and I am just curious if you think we may enter another phase of pricing bumping up.

Well, it's a good try though. We are not going to talk about Dynacare pricing, but we will say that we continue to be committed to our pricing strategy, and that includes periodically, which quite honestly we also did during the second quarter, shedding on profitable accounts. We think it is important to balance volume with price. We think in this industry it is more difficult to balance price than to grow volume. We can go out and we can get volume. I am sure all the major heads have made that statement over time. But what we think is critical is for our shareholders to look at the relationship between our volume growth and our pricing growth. What you ought to be doing is you ought to be looking to make sure that that double-digit growth is coming from both volume and price.

Great. Thanks a lot.

The next question comes from David Lewis from Thomas Weisel Partners. Please go ahead with your question.

Good morning guys. Thomas, just a couple of quick questions. First of all, the pricing declines we are seeing prior to what you seen in repeated sections, is it still just a result of mix shift or accelerated growth in cystic fibrosis testing?

David, let me comment, as I am sure everybody knows, our profitability increased dramatically in my opinion during the quarter to over 25%. That is a direct result in many ways to our cost reduction programs and our genomic strategy. So the overall pricing for the company continues to increase, and a large part of that is because of the increase in genomic tests where the volumes are up 24%. There is mix shift going on in the genomics area towards cystic fibrosis and towards HPV. There is also the continued decline of some of our resistance tests. The genotyping testing is growing substantially. The phenotyping continues to decline, and they are very high priced products. So that is exactly what you said. It is not related at all to price reductions but to mixed shift.

Okay, great. You obviously signed this very nice agreement with Premier recently. Should we assume that this is just a one-time event or is there a new strategy on behalf of LabCorp to pursue more GPO type contracts and other large contracts like this that you are going aggressively after?

I think you should assume that this is something that we have tried to do for a long time and we have finally been successful. Premier has been a long-time effort for the last one year. We are delighted that they have recognized the role we can play with hospitals. I think you should expect also periodically as hospital opportunities come up in the industry, that LabCorp will make the right effort to try and get these contracts. But again we need to do it at an appropriate price.

Okay. Just in closing Tom, we have obviously had some very nice exclusive arrangements both with EXACT and Myriad Genetics. Given your 600 manager direct sales force, obviously these are exclusive relationships that require a more direct physician relationship. How are you restructuring, or are you restructuring the sales forces to be in the focus of these exclusive relationships to a great extent? Thank you very much.

We believe now over the next few years that we ought to begin to have all of our sales reps at least provide some information to clinicians about the availability of our genomic tests. We were clear to say today with the Myriad relationship that it is not our specialized 30% sales force that sell genomics, presenting this educational information to physicians. It is all 600. We are only into that relationship for about two months, but all the feedback we get is very positive both from the marketplace and from our partners at Myriad. So we are delighted. We think that the industry in the 21st century is going to require that all of our sales reps are educated to understand the whole issue of genomic testing. When we introduce the testing from our other partner, EXACT Sciences, we will be doing the same thing. We will be expecting our sales reps, all 600, to present from an educational perspective of these products. We will do it through rigid training programs over the next nine months at LabCorp based on our expectations for success.

Great. Thank you.

The next question comes from [Andrea Abissi] from Solomon Smith Barney. Please go ahead with your question.

[ANDREA ABISSI]: Can you comment on how are you going to be accounting? It looks like you are going to be accounting for Dynacare's equity and earnings of affiliate as part of EBITDA. Can you tell us why you wouldn't account for that sort of below the EBITDA line or will you be breaking it out all?

You will see with the third quarter of 10Q that it will be broken out separately on the P&L. So there will be a separate line item for equity investments.

[ANDREA ABISSI]: Thanks. Can you comment, I guess you said you wouldn't, but is part of pricing, does that reflect kind of pricing in Canada? Can you comment on that pricing environment versus the US or what you are seeing?

No, I can't Andrea. I wont get into the Canadian pricing at all.

[ANDREA ABISSI]: Okay. Thanks.

The next question comes from Robert Willoughby from Credit Suisse First Boston. Please go ahead with your question.

Tom, I guess based on the points that you said you went through, which certainly seem encouraging, I guess it's a bit disconcerting with the DEBS guidance that you have drawn out there for this year, but now $1.92-1.95. I mean, clearly the higher share basis is going to hurt you, but with bad debt levels coming down why such a conservative stance? What are the variables that might account: a - for breadth of the range, and b - for just kind of a low end of the range being a possibility?

Well, I guess I look at it the other way Bob. I have always said since I joined this company that I am going to tell it exactly like it is. What we see is we see volumes which are industry-leading volumes in the range of 7%. As I said on the call earlier I thought they would be 8-8.5% for the quarter. So I am taking the remainder of the year based on the latest information that I have. We also now are beginning in integration of Dynacare. That's a major acquisition to this company. This company has experience in these kinds of integration processes. During a lot of our integration processes we have always been the leader in profitability in this industry. This company has continued to deliver tremendous profitability and we will continue to do so. So when I look at what is ahead for us over the next six months I look at strong pricing, I look at continued volume increases, I look at the integration of Dynacare, and I look at the most recent information that I have. I look at our standards compared to everything else that is going on in the industry, and I think it's a pretty good accomplishment.

Can you speak Tom, option these plans how quickly you would intend to pay down some of the debt on a quarterly basis? Can you take $25 million out?

Bob, the only thing I will say is that based on our current forecast we would anticipate paying off entirely the amounts that we would have borrowed under the revolver and the bridge loan facility by the end of the year.

Was any revision to the cash flow goal; I thought it was $400 million or so from operations this year?

This year now it will be at a range between 420 and 440.

That's great. Thank you.

Thank you Bob.

The next question comes from Kemp Dolliver from SG Cowen Securities. Please go ahead with your question.

Great. Thank you. Could you detail with regard to the guidance for the rest of the year if there has been any change in terms of your outlook with regard to drugs of abuse testing, if you have been expecting some kind of snapback? Also to the extent that you are implementing competitive responses to what have seen recently, what kind of effect they should have in terms of how quickly we should see the results?

Kemp, we are pretty much assuming that we will have in the range of 1% decline in drugs of abuse for the rest of the year. Quite frankly, as part of our forecast we are not spending a lot of time determining the impact of drugs of abuse. We think it will stick in the 1% range, and we are hopeful by next year it will get back to at least flat. In terms of our competitor response I think you have already seen we have announced the Premier deal. We expected during the second half of the year that we will strengthen ourselves in those regions as a country where we have identified slower volume growth we would like to have by some of the points that I have outlined before. But what we will not do is we will not get into competitive pricing wars out there.

Great. Thank you.

The next question comes from Ricky Goldwasser from UBS Warburg. Please go ahead with your question.

Good morning.

Good morning Ricky.

Can you comment on what really drove the 4.4% pricing growth in the quarter of product mix shift, payer mix shift, and how sustained it really is? I guess what makes you feel comfortable, I think in the past your pricing was 3-4% and now you are guiding to the higher end of the range. What gives you the comfort there?

I think its some of the things Ricky, that I talked about before in my questions and answers. I think number one is our genomics business is becoming a sizable part of LabCorp. In our earlier days together we used to talk about $100 or $200 million business. When you put it all together now it is 100s of millions of dollars and it is growing at a level this year of 24%. So that is quite substantial. Cystic fibrosis is terrific. Certainly HPV is a wonderful situation for us. We have been talking about it now for three years but we still have a third to go as it relates to monolayers, and that pricing certainly helps us rather substantially. In addition to that we are now kicking in. It wont have much of an impact for a while but we are kicking in the Myriad Genetics relationship, and that is a very profitable relationship we think it is to us as it is to Myriad. So we will begin to see some very limited revenues from that relationship during the third quarter, but those are the kinds of PPAs that are pretty impressive. We will institute our price increases. We are pretty committed to those, and that will be done during the third quarter. So when I add all those up I am a little more optimistic about pricing as it relates to LabCorp at least.

And does that also include a continued shift towards the fee for service business?

Yes. The simple answer is yes, and the more complicated answer is that there is no question we have capitation business. There is no question we will continue to have capitation business, but where we have capitation business we will carve out. We will make sure that we carve out the more expensive tests. We are disciplined in that. We make sure that when we sign these new capitated contracts that we have these carve outs, or I call them formularies here at LabCorp, and that has an impact. So I would not say that you should not expect that LabCorp would ignore capitated contracts, but when you hear that we have capitated contracts you should fully expect and ask if are we carving out some more expenses tasks, and the answer to that will be yes.

It seems that your clients business, which I assume is physicians in hospitals with labs on a year over year basis, is this related to the slowdown that has the softness in volume?

Yes. I just want to impress upon. I know how analysts look at this, but the volume is growing. There is not a substantial slowdown in volume. The volume is still up 7% in most areas of the country more than that. So we continued to be satisfied with that as it relates to the balance, which is the pricing side of things.

It is hospitals in some areas that are being more aggressive in their outreach program?

It is all of the smaller situations around the United States, hospitals, laboratories, and things like that.

Lastly, what was the contribution of [INAUDIBLE]?

I actually don't know the answer to that question Ricky. I know that I can say this, and I am not going further. It is not the northeast that is healthy. The northeast is very strong, and so I would assume that the contribution from that has been very helpful, because I look at the numbers out there are they are pretty good for LabCorp.

Thank you.

Thank you.

The next question comes from [Deborah Lawson] from Solomon Smith Barney. Please go ahead with your questions.

Hi. I just have two questions, one a followup on pricing. I was just wondering if I backed out the numbers for second quarter PPA on your capitated business. It looks like our consecutive quarter base for first quarter and second quarter, and yet about 6.5% decline. I was just wondering if you could give us some color on that and where we should expect that number to trend? Secondly, just a little bit of color on your synergy guidance for Dynacare. I know you are standing by the all-in synergy guidance of $45 million, but it looks like you pulled back a little bit from $6 million to $4 million for 2002. Could you just give us a little color there? Thanks.

Wesley will take the second one and that will give him enough time to look at some numbers here to answer your first question. We haven't really pulled back. I know it is perceived that way, but the big synergies come each month you get into this. What we have done really by not closing on July 1st; if you recall we talked about our synergies were six months for the first part of our synergies than we had anticipated. We hoped to have the deal done by July 1st. When we made that announcement we said that if we get the deal done by July 1st we will get $6 million in synergies. So what has happened is we have lost a month which is kind of critical, because we lost the sixth month of the synergy out at the end of the period, and that's why we have reduced it. There is really no change in our plan at all.

Okay. So it is purely timing.

Purely timing.

The difference in the capitated; you were looking at PPA Deborah?

Yes.

PPA for the first six months was $9.20. For the second quarter it was $8.89. I can tell you that the reason for that is entirely related to an adjustment that we made between capitated and pay for service. In the first quarter there has been some capitated business erroneously reported as pay for service and it was adjusted in the second quarter. So the capitated amount, the PPA in the second quarter is low. Going forward you should expect that amount to be somewhere in the $9 plus range.

Okay. Thank you.

Thank you.

The next question comes from [Tom Isenberg] from [INADUDIBLE]. Please go ahead with your question.

Hi. Good morning. Maybe there is something I don't understand, but your stock; well now it has indicated better. It has indicated like 26-29. It was indicated at one point 21-24, which seems to me earnings were in like and that is like a 10PE on next years. But that's more just rhetorical. I will have to talk to the professional analyst later and see why such a big downfall. But really what I am wondering about is your thoughts to the extent that you could comment on the Quest Unilab situation. In particular, with the Unilab price way down here at $16.50, it seems you are willing to bid $24 half cash and half stock a few months ago, albeit before you did the Dynacare acquisition. I was wondering if when you might not want to be opportunistic, either coming in now or if Quest is unable to buy it because of the government's objections coming in later, it also seems to be a motivated seller. The price may be down, and maybe with your stock down so much from the 51 level it is tougher for you to do. Or would you be interested if they had divestitures? There is talk of their northern California labs, Quest or Unilab, having to be divested. That would of course be a lot less expensive for you. So tell us what you think of this whole thing on those particular questions.

What I think I can't comment on Tom are the questions related to the Unilab Quest deal are best answered by the individuals from Unilab and Quest. I am not privy to what is going on in that situation, and I think that we don't comment at all or are any of our intentions related to the acquisition. So I can't comment on any of the thoughts that you have about what is going on inside the industry.

Well, this is sort of backhanded way to ask it, but is it fair to say you want to take a period of time to digest Dynacare or for the right opportunity you would be willing to strike again soon?

Certainly as it relates to acquisitions. General statement related to acquisitions: we feel we can digest further acquisitions immediately.

All right. Any thoughts on your stock price? I mean, normally people are asked to comment on this on conference calls and it hasn't opened yet, and so it may in fact open up on change and the market is down a little again today. But as I say, it seems to be indicated. Would it just open, I think indication wise, around 27? Is that because industry is just pricing you guys out at 10PE on projected earnings? What do you think people are reacting so negatively to?

I think that I can't answer that question because I am in a conference call and I didn't realize that it had not opened and I did not realize at what prices it did open at. But obviously there must be some concerns about the volume. That's the only thing that I can say. Certainly we think our performance was outstanding but for it.

So volume is down but pricing is up?

Volume isn't down. Volume is actually up 7% and prices are up 4.4% to whatever percent. So we are seeing nice revenue growth.

So volume is up less than expected maybe in the future, but yet your earnings seem to be coming in as projected around to 35-250 for 2003. Right?

Right.

Okay. Thanks a lot.

Thank you Tom.

The next question comes from Bill Bonello from Wachovia Securities. Please go ahead with your follow-up question.

Yes. I had a couple of follow-up questions. Can you give us any sense as the people seem to be focussed on the volume growth; do you have any sense of how the Dynacare intrinsic volume growth has been going?

Wes?

Dynacare volume products revenue and earnings are in line with out expectations and what we thought they would be when we announced the deal in May. So nothing has changed.

No slowdown there?

No.

Okay. Secondly, your guidance for 2003, does that factor in the CPI update for Medicare?

No.

Thanks.

Thanks Bill.

The next question comes from [Theresa Wambles] from [INAUDIBLE]. Please go ahead with your question.

[THERESA WAMBLES]: I had a follow-up question on the Premier contract. Had Premier previously been using a multi-storage program, and if they offered with the single choice do you have that contract?

I think that there were several other major labs in the contract, and LabCorp has been added to contract amongst several others.

[THERESA WAMBLES]: Can you quantify how many people are in the contract?

I believe there are now three. I know that our major competitor Quest has been in the contract and I think there was another lab in the contract also, but I am not positive who it is. I suspect who it is. So I hate to comment on being inaccurate.

[THERESA WAMBLES]: Okay. Back to the EXACT Sciences test; do you have any more information on reimbursement outlook for that particular test, Progen-Plus?

That's something together with EXACT Sciences we will be working on vigorously over the next nine months, and we expect to be reimbursed appropriately for the kind of product they were providing out there. But that is something that we will develop over time as more data and more information becomes available on the product.

[THERESA WAMBLES]: Okay. Thank you very much.

Your next question comes from [Andrea Abissi] from Solomon Smith Barney. Please go ahead with you follow-up question.

[ANDREA ABISSI]: I have a followup on Bill Bonello's question. What percentage of your revenue stream would be favorably impacted by a CPI increase, which we think would be around 2% or so?

If you are talking about the Medicare pricing, it is about price increase. If it were to occur it represents about 12-13% of our business.

[ANDREA ABISSI]: Great. Thanks.

Thank you.

The next question comes from Andrew Bhak from Goldman Sachs. Please go ahead with your question.

With respect to the Premier contract, I am just thinking about what is the reasonable ramp in terms of penetrating those accounts. I assume it offers you an opportunity to go ahead and sort of get that business. So I just want to kind of get a sense of how that might positively impact the volumes going forward. Secondly, do you have any sense of where you pricing stands relative to sort of the smaller independent regional players, whether it is at, above, or below their pricing points?

Andrew, the good news about Premier is that the contract was implemented immediately and we have the opportunity immediately to address all the hospital opportunities out there. So as we move forward this is one of the ways that we expect to increase our volumes over the short term. In terms of pricing as it relates to the overall market, the smaller ones out there, pricing is very competitive. There are people that are lower than us and there are people at our pricing range. So each situation is very much individualized depending upon the account size and the volume that comes out of the account, and quite honestly the relationships that are out there in the community between the local labs and the community labs.

Right. If you were to identify a rate limit step in penetrating or getting that Premier, what would it be just sort of your sales force getting out and your accounts are in the usual selling cycle, or is there anything else that would be involved?

No, I think in these situations it is the usual selling cycle, but it is also relationships. We need to convince Premier's hospitals that they should use LabCorp instead of something else, whether it is themselves or whether it is the competitor, and that sometimes takes a little time to do. The good news about a relationship like Premier's where we have traditionally been strong, and we have not had the opportunity to penetrate the Premier hospitals because of not being part of the contract. We now have that opportunity. So that's where we are really eager to go to those places where we have had some significant strengths right away, and haven't had those opportunities. That's why we are a little more optimistic on the short-term basis. I think I have said it probably many times during the course of my five years here; hospitals are the toughest contracts. They are tough to penetrate, they are tough to get done, and sometimes is not on your side as you are developing these hospital relationships. We think it's a little different with Premier because of our local relationships in certain areas of the country.

Great. Thanks very much.

Thank you Andrew.

The next question comes from Tom Gallucci from Merrill Lynch. Please go ahead with your question.

Thank you. I have a few followups if I could. First, Tom, on your discussion of your confidence in pricing going forward, it seems like a lot of the factors you are throwing out, genomics testing growing more rapidly and becoming a bigger part of the business. What would the contribution between price and mix be at this point in terms of the overall price increase? Should we need to expect that there is going to be a little more mix in the future?

We continue to see about 60% coming from real price, and about 35-40% coming from genomics. I do think, not in any of our forecasts; I do not think over the next year and a half, but I think as we get out into the years 2004 and 2005 the genomic pricing will have more of a profound impact and it will shift as we introduce tests like the [INAUDIBLE].

Right. The question was asked about the physician category volume being relatively flat. You have been talking a lot about geographical, some places are faster and some places have been a little bit slower than your expectations on volume. Is there anything particular to the physician segment that might impact them? Is there any other testing whether it is by geography or across the map, any slower certain types of testing in the routine area?

Not that we can see Tom.

So there is nothing that really is behind the physician piece, but physically it is just kind of that's where it is falling in different geographies.

Exactly.

Okay. The final thing I would just ask is, you mentioned Edna in the northeast generally, is there any comment that you have on any of the other bigger man-scale contracts that you signed or renewed over the last year, and what the ramp has been there?

Well, we continue to grow our business with the big three, Edna, Signa, and United. This year is not a major year in terms of contract renewals. We continue to talk to them, however, on a periodic basis about a variety of things. Most of our big contracts are up for renewal in the second half of 2003.

Okay. Thank you.

Thank you Tom.

The next question comes from John Szabo from CIBC World Markets. Please go ahead with your question.

Good morning. I apologize if I missed this on the discussion of the Premier contract, but did you actually give a percentage overlap of the hospitals in that buying group which you already have, a relationship? How the pricing grid on the Premier contract compare with those existing hospitals?

John, let me restate your question just to make sure that I understand it. Are you asking if we have how much business do we currently have with Premier and what is the pricing between our current business with Premier and the contract and we signed? Is there much overlap?

I guess as I understand it, those hospitals are free to do whatever they want. They could buy through Premier or they could buy direct. I just wondered if there was an arbitrage there. In other words some of the existing hospitals may get a lower price. If you had a high percentage of hospitals that you had contracts with, it could hurt the price.

Right.

You kind of talked about this balance of price versus volume. How much of that weighed into the Premier contract?

Right. We do have Premier business. Premier hospitals ultimately can make a decision which they are pressured not to do, to go out of network and use a lab like LabCorp. We do not significant amounts of Premier business. Our pricing to the Premier hospitals that we have is fairly consistent with the pricing in our new contract.

Okay. That's helpful. As an outsider its sort of hard to get at the issue around the price on the genomic, as the pure price versus a mix shift. On sort of an apples to apples basis if you had the same mix year over year, would the price be up or down?

Price would be up.

Okay. In line with the rest of the business or higher?

I am going to speculate probably a little higher, but I am not absolutely sure of that because I don't have that information in front of me John.

Okay. In cystic fibrosis you talked about that a lot. Could you give us just a ballpark range as to what percentage of the total genomic testing that would account for on a revenue basis?

It is pretty insignificant now. I shared for the first time today earlier in the call, but we are now in excess of 7500 a month. I don't want to give the specific pricing on that, but it is lower. It has been lower than our average transaction price for genomic tests. So you can try and figure it out through that, but its not a significant piece yet but it is growing quite substantially.

Okay. Thank you.

Okay John.

The next question comes from Mark Miller from Banc of America Securities. Please go ahead with your question.

Hi. Good morning. A couple of questions. You provided the reasons why you are confident your price and volume trends will remain strong and perhaps get stronger. Can you give us your sense of long-term kind of same store pricing growth out beyond 2003, which has the impact of Dynacare acquisition?

I can only speculate Mark. We have not gone out beyond 2003. In our models that we develop here at LabCorp we think that the pricing, which again include shift mix because that will continue, is in the 3% range over time.

And volume, even if you haven't done it for purposes of your own internal projections but just big picture both in the industry; I am figuring you can probably do a little bit better than the industry as a whole.

We think we clearly continue to do better than the industry as a whole. Again in our models we traditionally look in the 6-7% range in volumes.

On the same store?

Yes.

The second question; can you give us a little bit more color on the tax credit that was taken in the quarter?

That was a one-time credit and it was an adjustment to our valuation allowance.

Can you provide a little bit more? I just don't understand it.

Its related to transaction and some tax effect going back a few years in universal transaction. Its an adjustment in the valuation allowance related to that. We will elaborate more on that in the 10Q.

Okay. Thank you.

Thank you Mark.

The next question comes from Sandy Draper from SumTrust Robinson Humphrey. Please go ahead with your question.

Given your comments on what you expect for volume and price, and your expectations with Dynacare performed in line, kind of this reconciled with the file [INAUDIBLE] announcement when you made the Dynacare acquisition of 2003 guidance for $0.20-0.25 EPS?

That was before the stocks split. The first thing you have to do is look at adjusted for the square that happened after the announcement of the transaction, and so it would be more like $0.10-0.12.

Okay. So does that affect your organic outlook more than your Dynacare expectations on the $0.10?

That was purely related to the incremental impact of Dynacare for 2003, the $0.10.

Okay. Thank you.

The next question comes from [INAUDIBLE] from Pacific Partners. Please go ahead with your question.

[_____]: Yes. Thank you. Two clarifications really. A little more color if I could, on the competitive environment especially in light of the other proposed transaction in your sector. Secondly, I wanted to follow up on an earlier question. I believe that you have been willing to pay 24. I think that's what was disclosed in the proxy. I think that's why people are wondering, even though of course right now your stock has gotten hit pretty hard, if that might not in fact make sense revisiting.

Im sorry. When you say 24 what are you talking about? I don't understand the question.

[_____]: Unilab.

I am not going to comment on a transaction between two other companies. We don't even comment on transactions that we are contemplating ourselves, and I will remain committed that this is a transaction that Quest and Unilab have announced. From everything I understand they are committed to the transaction and I am not going to comment on it at all.

[_____]: Okay. In terms of the competitive environment, with the expected change in competitive environment?

I am not going to comment on that.

[_____]: Okay. Thanks.

The next question comes from [INAUDIBLE] from US Bancorp Piper Jaffray. Please go ahead with your question.

[_____]: Good morning. I just wanted to make sure that I heard you correctly. I think that you indicated that the 2002 guidance range does show some continued weak volume in starting markets?

What we have done is we have taken our latest quarter and we forecasted for the remainder of the year based on the volume growth that we have seen recently.

[_____]: Okay. Do you anticipate that that weakness will continue into 2003, or does your guidance assume that it is mitigated?

As we move into the 2003 we continue to believe that we will grow the company in the ranges that we described and we will balance it appropriately with pricing and volumes. So we do anticipate that there will be some volume increases from where we are now.

[_____]: Will you comment on which markets you are seeing some weakness?

No.

[_____]: Thank you.

Thank you.

The next question comes from Eric Jacobson from ING. Please go ahead with your question.

What is guidance for line and pricing in 2003?

We have not stated our guidances and we will do that later as we get closer to that period of time. We traditionally don't give detailed guidance at this time of the year. We usually wait till the end of the third quarter and provide the guidance then based on the latest information.

Okay. Thank you.

I am going to take two more calls max. If there aren't any, then that's fine. But I am going to stop after two more calls.

Actually there are no further questions at this time.

Great. Then Accusat worked well. Thank you very much and everybody have a good day.

Ladies and gentlemen, that does conclude your conference call for today. You may all disconnect and thank you for participating.