Labcorp Holdings Inc (LH) 2002 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Laboratory Corporation of America Holdings Third Quarter Results Conference Call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference please press the star key followed by the 0 key. As a reminder, this conference is being recorded today Thursday, October 31st, 2002. I would now like to turn the conference over to Mr. Thomas MacMahon, CEO. Please go ahead, sir.

Good Morning. Welcome to LabCorp Q3 2002 Earnings Conference Call. Joining me are Bradford T. Smith, EVP, Wes Allenberg (ph), EVP and CFO, Ed Dodson, SVP and Comptroller, and Pam Sherry, Senior VP of Investor Relations. On this conference call I will address what I think are the most frequently asked questions about this company. I will also discuss LabCorp's strategy, and how we are implementing this strategy. Our strategy is simple, effective and based on sound fundamentals. That strategy is to nationally serve all major geographical areas and to continue developing 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 behind our industry-leading results for over four years. I now would like to introduce Brad Smith who has a few comments before I begin.

Before beginning, I would like to point out there will be a replay of this conference call available via telephone and internet. Please refer to our press release dated October 30, for replay information. Additionally I would like to announce that LabCorp will host a meeting for Analysts and institutional investors and analysts on November 7, at our Center for Molecular Biology and Pathology at Research Triangle Park, North Carolina. A full day of presentations from LabCorp executives and scientists as well as representatives from Solara Diagnostics (ph), Exact Sciences (ph) and Myriad Genetics (ph) will outline our genomic strategy and the many near and long term testing opportunities we anticipate from its implementation. Interested analysts and institutional investors should contact Pam Sherry at Investor Relations 366-436-4485 if you're interested in participating.

On October 30, the company filed an 8K that included additional information on its business and operations. Investors and analysts are directed to this 8K to review this supplemental information. I would also like to point out that any forward-looking statements made during this conference call are based on current expectations and are subject to change based upon various important factors that could affect the company's financial results. These are set forth in detail in our 2001 10K and subsequent filings.

Thank you, Brad. Now the third quarter results. Third quarter results outlined in our press release last night continue to set an industry standard. Overall revenues increased 16.8 percent to $655.2 million. Volume increase, 13.2 percent and price was up 3.6 percent. On a pro forma basis, assuming Dynacare (ph) had been part of LabCorp since January 1, 2001, volume would have increased 4.3 percent. There was one more revenue day in the quarter than in the third quarter of 2001. On revenue per day basis, which is the way we look at the business, revenues increased approximately 15 percent with volume growth of 11.4 percent. EBITDA, including earnings from equity investments and excluding special items, was $145.9m or 22.3 percent of revenues, which represents a 16.4 percent increase over third quarter '01.

Diluted earnings per share were 46 cents before the restructuring charge. DSO for the quarter was 56 days, the lowest in our company's history. Bad debt was 8.4 percent compared to 9 percent last year in the third quarter. LabCorp took a $17.5m restructuring charge in the third quarter related to the integration of Dynacare. Cash flow from operations was strong, $121m. We paid down $80 million against the $200 million in debt we borrowed in connection with the acquisition of Dynacare and expect to repay the balance end of this year.

Now for the nine month results. Revenue for the period of approximately $1.9 billion increased 13.5 percent as a result of a 9.5 percent increase in volume and a 4 percent increase in price. On a pro forma basis, volume increased 6.5 percent, assuming Dynacare had been a part of LabCorp since January 1, '01. The first nine months of 2002 had the same number of revenue days of 2001. EBITDA for the nine-month period increased 21% to $439.9m, or 27.3 percent of revenues compared to margins of 22.2 percent in the same period in '01. Nine month diluted earnings per share were $1.47 cents, a 24.6% increase over '01. Cash generated from operations increased 29 percent to $326.4 m, compared to $252.4 m in the same period in '01. At the end of nine-month period our cash balance was $98m.

And now for some accomplishments during the quarter. I would like to mention several important accomplishments during the quarter that are directly related to the implementation of the strategic plan - a plan that continues to provide both short and long term opportunities for LabCorp. First, the acquisition of Dynacare. We completed the acquisition of Dynacare on July 25th and are extremely excited about this opportunity. It directly supports our strategic objective of strengthening our national presence by expanding our geographical reach, which allows us to expand our leading position in the introduction and commercialization of important genomic tests. Dynacare's network is a solid, strategic fit with LabCorp with numerous opportunities to optimize operating efficiencies and expand patient access to our network extensive testing menu. Recently, we announced the closing of the Dynacare facility in Houston will begin in December. To date, the integration is well on schedule. We will achieve $4m in synergy savings by the end of this year, $36 million next year and the full $45m in 2004. This acquisition supports our position as the leading low-cost producer and provides us with significant cost savings opportunities.

Next, our new partnership with Premiere. In July, we announced our new agreement with Premiere, one of largest group purchasing organizations in the United States. To date, we have signed up approximately 25 new Premiere hospitals nationally. This agreement positions LabCorp to offer our routine genomic and esoteric tests to more than 1600 member hospitals throughout the country. And many new testing opportunities continue to develop. LabCorp has a focused team of key people working to identify and commercialize medically important new genomic tests, a solid advantage in executing our genomic strategy.

In October, we announced the collaboration with Solara, to establish the clinical utility of laboratory tests based on novel diagnostic markers. The initial areas of collaboration include efforts to improve the diagnosing of Alzheimer's patients, to identify prostate cancer patients with aggressive tumors and to determine the risk of breast cancer patients with metastases. This exclusive relationship is a continuation of LabCorp's strategy to develop a broad genomic testing menu for cancer. Late in the second quarter, we now see availability of [myriad] genetics predisposition tests for breast, ovarian, colon, uterine and melanoma skin cancer through an exclusive five-year partnership. We also now offer [myriad] tests for cardiac risk. Orders for the [myriad] test are strengthening every month.

Also in the second quarter we announced a new five-year exclusive partnership with Exact Sciences to offer the first non-evasive DNA-based screening method for colon cancer in an average risk population. We expect to offer [Pre-Gen] Plus around mid-year 2003. About a year ago I informed you that our emphasis in terms of new deals over the next 18 months would be on cancer. Since then we have solidified exclusive relationships in virtually every major area of cancer.

Existing genomic tests also continue to grow dramatically. Cystic fibrosis testing continues to increase monthly as more physicians adopt CF testing as a standard of care. Our third quarter cystic fibrosis testing volume increased more than nine fold compared to the same period last year, and we are now performing in excess of 11,000 CF tests per month. We also continue to see significant growth in [HPV] testing, in part related to new consensus guidelines published in April in JAMA which recommend human [Papaloma] virus testing as a follow up to borderline PAP results. HPV have increased more than 100 percent, compared to third quarter '01. I hope this brief summary of results and significant strategic accomplishments demonstrates to you that LabCorp's plan is highly effective and the genomics is key to LabCorp's future growth.

Now, I would like to review a few frequently asked questions and our specific answers to those questions. First, and I think foremost on many people's minds, is what are you doing to address the volume problem in certain affected regions. I'd like to first point out that our third quarter revenue came in only 1.4 percent below the original first quarter consensus revenue estimate, and LabCorp continues to deliver industry-leading margins. Since pre-announcing results about three weeks ago, we at LabCorp have spoken to several hundred investors and the major focus of these discussions has been how we intend to deal with [excession] (ph) volume in the affected regions. As discussed we have begun as early as late July and in August a reinvestment program which includes adding individuals to service our customers and expanding our distribution capabilities. This deals with the situation [inaudible] to account managers, to phlebotomists and to making sure we have enough sales coverage in the areas. This reinvestment had a negative impact on expenses on the quarter and will most likely continue into the fourth quarter. We believe we are addressing the situation in the appropriate manner based on the experience and skills of people at Lab Corp. However, due to the competitive environment and the specificity with which we have addressed this issue with our investors, we now believe it is best for LabCorp to [solve] (ph) the issue and only discuss our efforts quarterly in the context of company-wide results.

What are your intentions regarding the recently announced stock repurchase plan? We plan to fund the $150m program out of free cashflow; we will update you at the end of each quarter regarding the status of the program. For obvious reasons, we will not be disclosing further specifics concerning how we plan to execute the program.

Has your strategy changed due to recent LabCorp events? No, our strategic plan, implemented in 1997, has resulted in continued industry-leading growth and profitability, even in this quarter. Cash flow remains strong. This growth and profitability is directly related to that plan which emphasizes our national distribution capability and establishes LabCorp as the leading molecular testing company. To achieve these objectives, we will continue to grow internally, utilizing both operational and strategic acquisitions that make sense and enter into licensing agreements that bring us gene-based tests which will enhance patient care.

Any change in the regulatory environment that you expect to negatively impact the industry? The answer to that questions is, no. Although we are well aware of the significance of how these types of changes can impact us and we watched them closely, we don't see anything today on the horizon that will have a significant impact. As a matter of fact, should Congress allow the freeze on CPI updates to lapse at the end of this year and increase in the Medicare national fee schedule of approximately 2 percent will occur on January 1, '03.

What has been the volume impact of LabCorp's decline in drug abuse testing? Overall for the quarter, drug abuse testing had a negative impact on testing volume of approximately 1 percent.

What are your volumes for monolayer tests? We continue to see increased conversion to monolayer tests. In 2001, LabCorp performed approximately 8 million Pap smears. The [run] rate for conversion to monolayer was 68.9 percent at the end of September, compared to 65.2% at the end of June and 57 percent at the end of December. We expect that our conversion rate will surpass 70 percent by the end of 2002 and will likely approximate 80-85 percent of our Pap smears by the end of '03.

Is pricing more competitive than in the last several years? We at LabCorp remain committed to receiving appropriate prices for our services prices. And a 3% increase in the third quarter is a result of these efforts. Toward the end of the third quarter, we implemented our annual price increases and we will continue to benefit from our favorable mix shift towards higher value genomic tests. We will continue, as appropriate, to walk away from volume business that does not satisfy our pricing guidelines. Of course, on an account-by-account and test-by-test basis, there's always been and always will be price competition to deal with and we will deal with that. What we will not do is provide pricing discounts below fair levels for our services.

How can you continue to grow volume? Over the last four years we have consistently demonstrated our ability to grow testing volumes and revenues. Even if the organic volume growth in our routine business moderates from previous levels closer to the industry average, we see excellent opportunities to consistently grow sustainable profitable levels all while generating strong cash flow; we have achieved our strategic objectives through a clear three-prong strategy. We expect to continue and accelerate this growth strategy as follows:

Continuing internal growth programs. The Premiere agreement is opportunity to gain from more than 1600 Premiere hospitals. We also expect to continue internally grow our genomics business, led by cystic fibrosis, HPV, and PCR testing for the plasma market. Recently, we began plasma testing for event despairing at LabCorp's National Genetics Institute. This relationship is expected to make a substantial contribution to NGI's revenues and profits in the future. For the first nine months of this year, genomic testing volume increased about 22 percent and over 25 percent for this quarter. Our genomic business continues to contribute to our solid performance and is a strong factor in our ability to maintain high EBITDA margins.

To [inaudible] acquisitions. Acquisitions which meet our rigid criteria are an important tactic. Dynacare will contribute significantly to our growth during the next few years and we expect there will be more acquisitions both strategic and operational.

Licensing partnerships. We have learned at LabCorp that we can in fact expect exclusive licensing agreements going forward. We have stated that we want to be the leader in cancer molecular testing and believe cancer testing will grow significantly. Exclusive relationships with Solara, Exact and Myriad will help fuel our growth in that area in the next three to five years in cancer molecular testing.

What is your guidance for '02 and '03?

Our guidance for '02 includes Dynacare; this guidance excludes the third quarter restructuring charge related to the Dynacare acquisition. Our '02 guidance is as follows: Compared to 2001, LabCorp expects '02 revenue growth of approximately 14 percent, with approximately 10.5 percent from volume, and 3.5 percent from price. Adjusted EBITDA margins in the range of 22.5 percent of revenues including EBITDA from Dynacare equity investments. Diluted earnings per share of approximately $1.83. A bad debt rate of 8.4 percent in the fourth quarter. Capital expenditure of approximately 85 million. Net interest expense of 15.5 million and a tax rate of approximately 41.5 percent for the quarter.

Our preliminary guidance for '03 is as follows. Revenue growth of approximately 13-14 percent. Diluted earnings per share growth of approximately 20 percent compared to '02. I remain confident in the long-term growth prospects for LabCorp and believe our company demonstrates it has the scientific and business experience to build substantial and profitable organization. Today, opportunities exist for LabCorp that are greater and more meaningful to us and to health care than at any time in the history of this industry. The exact screening tests for colon cancer in an average risk population is only one example of many near-term opportunities you can anticipate. Over the long term, LabCorp's genomic strategy will be the key driver. This strategy is our cornerstone for future growth and draws upon LabCorp's substantial competitive advantages. Our size, our national distribution, our scientific culture, our extensive 13 year 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 United States and throughout the world. Thank you for listening. We are now ready to answer your questions.

Thank you. Ladies and gentlemen, if you would like to register for a question please press the one followed by a four on your telephone phone. You will hear a three-toned prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, press one followed by three. If you are using a speakerphone please lift handset before entering your request. The First question is from the line of Tom Gallucci of Merrill Lynch. Please go ahead.

Good morning, everyone. I'm just wondering about the fourth quarter guidance that you gave. Even with the seasonality considered, it seemed like it showed some more deterioration versus the third. How much of that is volume-driven versus how much of that is that the increased expenses you were talking about to try to resolve some of the issues you got?

Actually, it's a little bit of both. We are continuing to spend against the situations which we talked about and we do see increased expenses in the third quarter and certainly continued expense increases in the fourth quarter as we put more effort, such as sales reps, such as patient service centers, into the affected areas. So there will be an increase in expenses and quite honestly we have forecasted some continued moderation in that area until we get this situation behind us. So I think it's fair to say it's both.

Have you factored in any future share repurchases to either the fourth quarter or 2003 EPS guidance?

No we haven't.

Thank you.

Thank you, Tom.

The next question is from the line of Bill Bonello from Wachovia Securities. Please go ahead.

A couple of questions. I'm wondering if you might be able to quantify how much non-recurring costs associated with the Dynacare acquisition have impacted Q3 and Q4?

I think we decided, Bill that we're not going to do that. Wes, do you want to take this one?

I will tell you that the top of those are costs, though, and these are costs that don't qualify as a restructuring charge on the P&L, but those type costs are your overtime costs, your costs such as temporary help and retention bonuses related to the integration.

Okay, but you can't give us a sense of how much that's impacted?

No.

The second question would be the continued investment you're making in the markets where you've had increased competition. Do you expect those investments to be completed this quarter? Or is that something that's going to carry on into next year?

Well, we hope that the investments, and we don't really want to talk about the size of them, because it is a deeply competitive situation we're in down in this area. We hope that they will be finished with by the end of this year or maybe through the January period. But obviously those investments will continue to occur but won't increase once we've finished implementing our plan.

Sure. And just one last question, you mentioned instituting an annual price increase at the end of the quarter. Can you give us a sense of how that price increase compares with the price increase that you implemented a year ago?

No, I won't give you that either.

Okay, thanks a lot.

The next question is from the line of David Louis with Thomas Weisel Partners. Please go ahead.

You mentioned the significant competitive improvements you are making in the market, most of these seemed to be tied to customer service, for a competitive advantage standpoint, is there any evidence that the regional competition is competing on price and is it a tactic you think it's possible they may employ in the future?

Well, I think in individual situations, you should conclude that people do compete on a price basis. That happens, in what I call the affected regions and happens everywhere else in the United States. So I don't think that's an improper conclusion for you to develop that pricing is part of the equation as these regional players compete against us. Obviously we have to look at each situation. We have a team of people that looking at this, including senior management, and we make decisions on an individual basis. As we always have, by the way, on all those kinds of situations. And I think the best way to measure how we're doing is the pricing that we put out each quarter, at least for the third quarter of '02, we've continued to show what we think is very strong industry-leading pricing.

Great. I have just two more quick ones. I know you won't talk about the relative size of the retention bonuses and overtime, but can you just tell us whether those were anticipated expenses in the quarter, or, the overtime payments, for example, were something that was unanticipated?

No, what we did when we decided on the Dynacare deal with the experience of the people here, we developed what are synergy opportunities are and what we call our contra synergies. And those contra synergies include stay on bonuses, overtime, they even sometimes include, as we go through the conversion for the billing systems at LabCorp, extra people coming in to help us on that; so all of those costs are well-anticipated and some of them will go on and they are in our forecast.

I have one last quick question. A lot of your private competition has reported some tremendous gains in West Nile virus testing in the last six months. Given the [ViraMed] acquisition, are you seeing those some of those trends?

Yes, ViraMed performed significant number of West Nile virus tests in the August, September, early October period. As the weather changes we don't anticipate seeing West Nile through the winter months and we'll see what happens next year, but there was quite a bit of West Nile virus [serology] testing and PCR testing done at our facility during the quarter,

Thank you.

The next question is from the line of Robert Willoughby with CSFB.

Why are acquisitions critical now, what are you seeing in the market that will drive asset valuations higher over the next 12 months?

I don't think acquisitions are anymore critical than before. If you look at history of this industry, it goes well back into the 80's and 90's and now '01, consolidation has been a major growth driver for all of the large labs. And what we have opportunities to do is to strategically, potentially acquire companies like we have -- National Genetics Institute and ViraMed -- where it brings another aspect of care to patients through LabCorp. It's a strategy we've enacted we think very appropriately over the last several years and we plan on continuing to do it as it's appropriate. We obviously, see enormous synergies through these deals.

What are you seeing in the way of pricing? Also, do you perceive breaking out some metrics for Dynacare employees and centers, so we can track the progress on a quarterly basis in terms of productivity gains?

Back to Dynacare; that's really impossible for us to do with because of the locations, the Alabama markets, the Louisiana markets, the Texas markets, the Pacific Northwest. We are already converting significant numbers of customers at the doctor's office to LabCorp, so it's virtually impossible for us to do what your question is asking. And I think we probably said since the end of the second quarter that we couldn't really do that. I think the best we can do is give you periodic updates on how we stand with the synergies and if we are achieving the synergies that we have laid out to our investor community. I can tell you during the third quarter, we achieved the synergies that we laid out. We achieve the workforce reduction plan that we expected. And we now have announced that our first facility, the Houston facility, will be closed and we will give you those kinds of updates but we won't quantify.

Can you comment on acquisition pricing, what you are seeing in the markets, are things expensive, cheap?

I don't want to comment on pricing of acquisitions because that will let other people know how we feel about that.

One last question. Can you prioritize the use of cash for me between share repurchases, debt reductions, capex, and acquisition spending?

We definitely want to get the debt reduced.

The very first priority is to pay off the bridge loan related to the Dynacare acquisition. You should fully expect that to be done after this quarter. After that, of course, we have to continue to do the capex, especially as related to the integration of Dynacare and then we fully intend pursuing all $151m of the share repurchase, but it will be over period of time based on free cash flow. But number one is debt; the bridge loan.

Okay, thank you.

Next question is from the line of Andrew Bach of Goldman Sachs. Please go ahead.

Good morning. I have two questions. With respect to the new contract [winds] under the Premiere partnership, I was wondering if you could provide some color as to whether this was your taking the business away from another vendor, if so what type of vendor or was this an opportunity to have the contract to go after the business. And then just in general terms what is the average revenue contribution from that type of hospital? And secondly and on separate note, the new revenue guidance seems to be a modest reduction relative to the revenue guidance given in July 8K. I want to make sure that we're clear one what's driving that modest reduction.

I will ask Wes to handle the second question and I'll come back to the Premiere.

The guidance that we've given compared to what we gave on July 19th is entirely impacted by volume. The P.P.A. guidance is pretty much the same. But it's volume related. It's specifically related to the regions which we have talked about and our guidance going forward is based on a run rate. It's based on a current run rate. That's our position and how we model for next year, but it's about two percent difference and it's volume related and it's specific to the [inaudible] region.

With respect to the first question, Andrew, we were lead in to the premiere contract. There were several other clinical laboratories throughout the United States that already had business through this Premiere G.P.O. contract. We also had some business that is called out-of-contract business with Premiere and the 20 wins that I talked about were not part of our original business. But I can't tell you because quite honestly I don't know the exact names, if those 20 wins did come from competitive laboratories. So they came from laboratories that you are probably familiar with and they came in regions of the country where LabCorp is very strong and historically where we haven't had opportunities to bid. The contracts are all over the place, which is why I'm hesitant to quantify it. They can be anywhere from $100,000 per year to $800,000 to $900,000 per year. I think as we get more wins in these contracts next year, I'll be able to give you more of a sense of the economic benefit to LabCorp from these contracts.

That makes sense. One more follow-up. It is the case that these are exclusive contracts?

Thomas P. MacMahon Yes. When we win the 20, they are usually exclusive to the lab that wins the contract. And just to make sure, the contract is not exclusive with Premiere; there are a variety of layouts that are a part of that contract.

Okay, thanks. That's great.

The next question is from the line of James Star with Henry Crown and Company. Please go ahead.

Just to get a sense of the conservatism of your guidance for '03. You mentioned before that it doesn't include share repurchases. Does it include any potential changes in the Medicare reimbursement rate?

No it does not.

Okay, thank you.

Next question is from the line of Deborah Lawson with Solomon Smith Barney.

Two quick things. Just wondering, you commented in your 8K that bad debt expense you expect it to be about 8.4 percent of sales in the fourth quarter. Can you give us some sense of where you think that number can go in '03? And secondly, can you tell us what equity and earnings in [inaudible] was that's in the EBITDA?

Yes, the guidance for the fourth quarter is 8.4 percent related to bad debt. We have not given specific guidance for 2003 related to bad debt. But I will tell you that in the guidance that we have given it is assuming a continuation of 8.4 percent. Of course, I [inaudible] lower than that, but it does assume an 8.4% rate.

So the 20% EPS guidance for '03 assumes 8.4?

Yes. As far as equity investment, that was $6.2m in the quarter, it reflects the joint ventures related to Dynacare since July 25th on an ongoing basis, on a quarterly basis that number should be more around $8m but it is primarily the Canadian joint ventures.

Ok, so it wasn't in there for the full quarter this year?

That's right; through July 25th.

Thank you.

The next question is from the line of Abe Bronstein with Glenview Capital. Please go ahead.

Most of my questions have been answered, Tom. I want to get some information on the pricing for these genomics tests. How's it being determined? What kinds of negotiations are occurring with whoever the payers are or are they being paid privately? I just want to get a feel for the level, how are they being negotiated? Because they sound very expensive and I'm just curious about that.

Abe, I will have Bradford T. Smith answer that, but I don't want you to think they are expensive. They are appropriate for the information that we provide. Brad, why don't you talk a little bit about some of the ways our teams do that with our licensing partners?

Yes. The test themselves, and I think as Tom pointed out, we negotiate on a payer-by-payer basis with Medicare in some cases, with managed care plans in other cases. It really depends in each case, when it's a new test, on a strategic approach to getting the right CPT codes, the right medical information to show that the test [has met] the standard of care, and also to show that the value that's returned in connection with those tests to patients and to physician providers supports what we think is a fair price for the test. It really is a test-by-test, payer-by-payer process.

I would also like to add that it's not unusual for us to get into discussions with the managed care or the health care agencies, CMS or the old [HCVA] (ph) on comparative pricing. For example, when we get into discussion on the exact sciences test, we'll obviously discuss things like the cost of a colonoscopy and how this is a useful method in concert with a colonoscopy. So other methods are often considered in the equation.

Are they asking you to expose your costs in these discussions and would you do that?

No, and we wouldn't do that.

Okay, thank you. This is a very forthcoming call.

The next question is from the line of Andrew Bach, Goldman Sachs. Go ahead with your follow-up.

Again on this Premiere contract, if you were to identify maybe two or three factors that allowed you to win the business, what would those 2 or 3 factors be? Thanks.

I think the number one factor is location, Andrew. Since we are a national lab and didn't have access to the Premiere contract until recently, we have very strong market positions in certain areas of country and we had been kept away from those contracts. So, the relationships that LabCorp has in regions of the country are obviously are a major factor. The other major factor that we always talk about is our menu of reference offerings. We continue to believe that this whole area of genomics gives us somewhat of an advantage against competitors sometimes when we're offering these tests. So that's what we do. In terms of pricing, just so you know, it's kind of a national contract and pricing is negotiated in advance before we go into these institutions. It's service and geographical location.

With respect to location, do you have sense of the 1600 member hospitals, if you do two map overlay, how many markets are an easy fit with you? I presume, too that this is a good old logistics [inaudible] density where the incremental cost to pick up a new hospital, if it is an existing market, it must be incrementally high. Are those assumptions fair?

Yes. I think we've all learned from the quarter, we have such huge infrastructure in certain areas of United States. And when revenues are high, and when we surpass objectives it's usually because of the enormous infrastructure that drives revenues above budgets and that's very profitable business. When we miss only by a little bit, it impacts negatively. There's not a lot of added infrastructure cost associated with something like the Premiere contract because we are in so many locations. It's good business and I would say that LabCorp fits well with the imprint of the Premiere hospitals. Some are heavily in the South.

Okay, thanks for taking the follow-up.

The next question is from the line of Sandy Draper, with Robinson Humphrey. Go ahead.

I have just two quick questions. One, Wes, on the comment you made about equity and earnings from Dynacare. Would you expect some seasonality in that? That would mirror seasonality in the top line?

Not in that line. That's pretty constant. Most of that is coming from the Canadian partnerships. And the experience there is that's pretty much flat-lined.

Okay, great. The second question is the synergies, Tom, that you mentioned for the rest of this year, and for '02, or '03 or '04. Are those numbers built in the guidance or how do we factor that?

Those numbers are built into the guidance. [Inaudible] from Dynacare, which would be $4m, $36m and $45m, are in the guidance.

Thank you.

Your next question is from the line of Wayne Cooperman from Cobalt Capital. Please go ahead, sir.

My question was just answered, thank you very much.

The next question is from Bill Bonello with Wachovia Securities. Go ahead with your follow-up.

Understand that Medicare pricing from automated Pap smear is going up substantially. Is that something that will have any meaningful impact on your revenue stream?

I think the issue is, Bill, and I have heard about this and we haven't done a detailed analysis of the theory of reimbursement, but I think first you have to look at whether the automated system itself and the way that you have to work it into your workflow makes sense. And I think the automated system, the one that I'm aware of, can only be used with small percentage of the monolayers we now do. So I think the answer at this point would be no. Longer term, if we were able to use it and if reimbursement holds up, then yes.

Okay, and one follow up on that. Do you have any thoughts going forwards on what might happen with cost on monolayer?

I would like to comment, Bill, but it seems we are pretty steady in our cost there, we're not seeing significant incremental benefits. If you mean cost, you mean what we pay for the monolayers as opposed to what we price in the market place?

Yes.

We hope we are being conservative, but we are keeping the costs as they are and don't see any significant decline in the cost of those monolayers.

Okay, thanks a lot.

Our next question is from the line of Tom Nelly with Janus. Please go ahead.

I have just a couple of questions. In terms of the guidance in '03, what does it assume for any kind of the launch of the exact sciences product?

It doesn't have anything in there, Tom. We are hopeful that we'll launch a product mid next year, but it will always be our policy not to put new tests [inaudible]. If they don't come then it's a real issue.

So right now there are zero revenues in that product group?

Zero revenues, (inaudible).

Second, if the share repurchase was accomplished in some form or other -- I realize it's somewhat sensitive based on when it happens, but what is the expected impact to the earnings if that were to be accomplished?

Well, it all depends on the price -- somewhere between 5 and 10 cents, but it depends on the price.

If you bought 150 million or something?

Yes.

Also, you mentioned the theoretical Medicare price increase. What would be the impact be if that were achieved?

Here's what the impact would be, just to repeat what's going on here, we right now are scheduled for a price increase. And it's in the law. So if Congress comes back, which I think they are, and they remove it, then we don't get it. So there has to be an Act they implement in order to take that away from us, but that's happened before. So, no new guidance numbers include this. About 13 percent of LabCorp's' revenues are from Medicare. So the way I look at that is that would have an impact at 2 percent of between 5 and 6 million dollars. If that were to happen and it's not in the guidance.

Fair enough. And so finally, you mentioned several things that could theoretically increase your estimate for 2003. Are there things that could decrease the estimate that may not be anticipated in the current guidance?

I think the challenge for LabCorp is to put all of its focus now behind resolving this issue in what I call the affected region or affected regions. There's really two that I documented. One is a very high profit region to us. And we are comfortable that we are going to stop the bleeding there, quite honestly. But that's what we have to do. I would say, we're comfortable we're going to deal with, since you asked the question, that's where the risk area is, I think.

Thank you.

Thank you.

The next question is from the line of Ricky Goldwasser with UBS Warburg. Please go ahead.

Good morning.

Good morning, Ricky.

Tom, in the past you said it takes about two to three months to switch a doctor back. Are you seeing some customers contact the coming back in the [Carolina's]?

I think, Ricky, what we're concentrating on is not losing, quite honestly, more physicians. I think I said this now with two health care conferences we've spoken at. We tried to be very visible over the last two weeks. We looked at accounts in three ways. We look at new accounts, we look at lost accounts and we look at jeopardy accounts and we do that as a management team, very senior, every week. Quite honestly, I've seen some accounts come back. But I think it's very early for me to make any conclusions from that. And it's still very early in our process of fixing this problem. The big issue to me is getting down to zero on a weekly basis the way we look at it, the lost accounts. And that does look to me, like it's getting a little bit better. But you should draw no conclusions from that yet. We have to give doctors in our affected regions good, solid reasons to come back to us. And that has to be directly related to the quality of the patient service centers. It has to be related to the quality of the account management in the doctor's offices and it has to sometimes be related to assisting the doctor through appropriately putting phlebotomist in their offices. And we're considering each of those often on an individual situation.

Okay. In your 8K you provided payer mix information. And on quarter-to-quarter basis it looks like decline portion of the business, which I think includes physicians and hospitals was up higher than other lines of businesses. Is this really impacted by the new 20 contracts you got on the Premiere side? Does it show growth in other areas outside of the [inaudible] -- if I remember correctly, the client basis is really where you are losing some of that business.

Wes?

Ricky, the primary reason for that is included in the year-to-date September 30th numbers is Dynacare, since July 25. So the increase you see there with client has a lot has to do with year-to-year basis with the client mix part of the Dynacare acquisition. That's the primary reason for the growth there.

Is this also driving the growth in the third party with Medicare and Medicaid?

That has a lot to do with that also, it's probably the primary reason for that being up also. When you look at that schedule, '01 is not adjusted to reflect Dynacare; it's only the '02 numbers.

Okay, thank you. That clarifies that.

Thank you, Ricky.

Our next question is from the line of Jeff Berg with [Inaudible] Capital. Please go ahead.

Just some follow-up on the question of genomics testing, I know some of these tests are not in the marketplace, but I was wondering if you could speak to what you think the life cycle of these tests will be like relative to pricing and also if you can speak about the accounting treatment associated with these tests. For instance, it's either Exact or Myriad, I forget, I believe is amortizing the license payments from LabCorp for over five years. My question is LabCorp amortizing the [inaudible] payments you've made over a similar time period?

Let me try the first one and then I'll even try the second one, and if I get myself into trouble I'll ask my financial people to answer that. In terms of pricing, as it relates to genomic tests, the good example I have is the H.I.V. viral load, that's a test that we introduced at LabCorp in a large basis in 1996. For four to five solid years we saw pricing which was solid and there was no deterioration in pricing. In the sixth year now we are seeing some heavy pricing competition there. So where in the traditional business we see heavy pricing much sooner than that. The only example that I can give you, and we have probably introduced 8 or 9 significant genomic tests over the last six years, that I can show you any deterioration now is the H.I.V. viral load. So, I think in those kinds of genomic tests where there are multiple source competitors that are providing them, we're getting solid consistent pricing for a sustained period of time. Now with the ones that we're talking about with the Myriad relationship and with the Exact relationship, we have exclusives for a period of time, and of course that will assist us in our pricing strategy. In terms of how we deal with these financial matters on our balance sheet and on our P & L, some payments are expensed depending upon the kind of payment it is, and others are amortized over the length of the exclusive period and I guess I could even argue, we do sometimes, if there are patents involved they could be amortized over the life of a patent. So what we have to do is sit down and discuss these licensing agreements each time we have one and look at the exclusivity, look at the patents' lives, and look at the actual reasons for the payment. And it's all over the place. Some are expensed right away and some are amortized over a period of time.

Okay. One quick follow-up, on the Exact test, I know the data on that test versus other non-invasive tests looks really outstanding. However, it seems like the home run opportunity is displacing colonoscopies as you alluded to before. Do you think as you go out with that test you will need to provide that kind of data and is that available? Because when we looked, we didn't see data comparing this test versus colonoscopies, it more versus other non-invasive tests.

I am by no means the expert on the science surrounding Exact, but I can certainly put you in touch with the exact people. But since you ask me I will take a shot at the answer. I think you should expect when LabCorp launches this product in concert with the advice that we get from Exact Sciences, that we will not launch this product to compete against the colonoscopy. What we will be launching this product to do is provide the physician with information that will help support the need for a colonoscopy or it will be used to supplement it. What I mean is kind of the following. Those of us over 50 years of age, depending on our medical history may need colonoscopies every year, every three years for five years. This is an excellent method of helping the clinician make the decision of how often we need these colonoscopies. While the real home run clearly is to supplant the colonoscopy, to me the real home run is that this product can pick up polyps. Exact Science can talk to you better about that than I can. But I don't think we should be concluding at this point in time that this product is going to compete head on with the colonoscopy and take the place of the colonoscopy.

Very good. Thank you.

The next question is from the line of Jeff Road with Seagle Bryant. Please go ahead.

I just want to talk about two things, one your experience with losing some business in certain regions, can you talk about some of the controls that you've implemented nationwide to protect against that and other areas in the future. And two, I think you mentioned that you have signed up with 20 of possibly 1600 hospitals to the Premiere relationship. Can you talk about your penetration rate there? Is that above plan? Is it behind plan? Is it on target?

With the Premiere, I would say it's probably on target. I want to make sure you understand that we have more than 20 Premiere hospitals. We have been allowed over the years to have Premiere hospitals through other sources. But we are pretty much on target as it relate to Premiere. As this situation relates to the affected regions, and I think probably this would be the last time I talk about it in this much detail, we have many different control systems here at LabCorp. We look at accessions on a daily basis, by region, by location and by divisions. We have senior management meetings constantly related to accession growth in all the regions throughout the United States. We look at trends and we look at predictions. Unfortunately, this particular region is very sensitive to LabCorp and its overall profitability and overall success. And a slight change in the behavior of LabCorp in this area of the world has an impact like we've all seen over the last three weeks. We look at our distribution network constantly as it relates to the number of patient service centers, the number of account managers, number of sales force contacts we have with our customers. We have call reports for sales forces. We have account manager customer calls every week. Unfortunately this situation moved very quickly. And it had the impact it had because of the sensitivity of the profitability that comes out of this area of the country.

Are you ready for the next question?

Yes I am.

The next question is from the line of Dan Lipscheitz with Fur Tree Partners. Please go ahead.

Good morning, Jeff, in terms of getting my model right here, what does your 2003 EPS guidance translate into as far as EBITDA growth?

We've not given that guidance yet. We will wait a little bit longer and see how the fourth quarter develops and give you our sense of EBITDA.

Thank you.

Your next question is from the line of Phillip Arnold with Heartline. Please go ahead.

My question has been essentially asked. Thank you very much.

If the line is still open for questions, I will take two more questions.

We have a question from Michael Stanski with Tutor Investments. Please go ahead.

Can you talk about what's necessary from a [inaudible] standpoint, if you do keeping growing esoteric over the next few years, what do you need to add facility-wise?

Michael, we made a strategic acquisition about 15 months ago, ViraMed, and ViraMed fortunately brought us significant excess capacity in the whole area of genomic testing. So as we speak here at LabCorp we're beginning to expand our genomic capability over to ViraMed in Minnesota. The other thing that we have done is decentralized some of the older genomic tests. For example, our H.I.V. viral load test is now out in the operation, being done in many locations. Our H.P.V., which is one of our fastest growing products, is now decentralized entirely and not done at our center for molecular biology. The only place that I'm concerned as it relates to genomic capacity is in our California operation, the National Genetics Institute. It's likely over time we'll have to make a multi-million dollar investment in that facility in California. The other major expenditures for genomic kinds of tests are the large sequencing machines that are in the range of $400,000-$500,000. So absent an investment over the next couple of years in our NGI facility, I don't see any significant capital expenditures in the gene based testing area.

So it's safe to assume we will start to see leverage in '03 and '04 from those tests growing?

Oh, absolutely. We see it now and it certainly contributes significantly to profitability.

Would an acquisition in California solve your capacity issue?

It depends on the kind of acquisition in California. If it's a routine, no. It would have to be gene based P.C.R. kind of experience.

Thank you, Tom.

We'll take one more question if there is one.

All right our final question is from the line of Ben Pabst with RBC capital. Please go ahead.

Good morning. With regards to Northern California and growth strategy do you see assets out there of competitors that might make it attractive and easier for you to enter the marketplace and have you examined potential synergies?

I actually thought I was going to get through this conference call without that question. We're not going to comment on anything related to the California acquisition market.

I appreciate it.

Thank you all very much, and have a nice day. Thank you.

Ladies and gentlemen, that concludes your conference call for the day. You may all disconnect and thank you for participating.