Labcorp Holdings Inc (LH) 2003 Q2 法說會逐字稿

Please stand by for the realtime transcript. The Laboratory Corporation of America conference call will begin shortly. Ladies and gentlemen, thank you for standing by. And welcome to the Laboratory Corporation of America holdings second quarter 2003 earnings conference call. During the presentation all participants will be in a listen-only mode and afterwards we will conduct a question-and-and answer session at that time if have you a question press the one followed by the four on the telephone. As a reminder this conference is being recorded Tuesday, July 22nd, 2003. I would now like to turn the conference over to Mr. Tom Mac Mahon, Chairman and Chief Executive Officer at Laboratory Corporation of America holdings. Please go ahead, sir.

Thank you. And good morning. And welcome to Lab Corp.'s second quarter conference call. Joining me today from LabCorp are Brad Smith, Executive Vice President, Public Affairs, Wes Elingburg, Chief Financial Officer, Ed Dodson, Senior Vice President, Controller, and Pam Sherry, Senior Vice President Investor Relations. On this call, I will answer the most frequently asked questions about the company.

I will also discuss Lab Corp's strategy to continue developing as the leading gene based testing laboratory in the United states. The strategy emphasizes the introduction of new cancer tests and specialized anatomical pathology services and the foundation for what we believe will continue to be industry leading results over the next several years. I would now like to introduce Brad Smith who has 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 via the telephone and Internet. Please refer to our press release dated July 22nd for replay information. This morning the company filed an 8k that included additional information on its business and operations. This information is also available on our web site. Investors are directed to this 8k and our web site to review this supplemental information.

Additionally we refer you to our press release dated July 22nd for a reconciliation of EBITDA which is non-GAAP financial information discussed during this call. 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 on our 2002 10-K and subsequent filings.

Thank you, Brad. Second quarter results as outlined in our press release this morning, continue to be the strongest in our industry. Revenues increased 21.5 percent, to $743.7 million. Volume increased approximately 16 percent, and price was up about 5.5 percent. Estimated organic volume growth was between three and four percent for the quarter. Please remember, however, that we are near completion of the DynaCare integration, which makes it very difficult to precisely determine organic volume growth. EBITDA was $187.4 million or 25.2 percent of revenues, which represents a 19.8 percent increase over the second quarter 2002.

Diluted earnings per share were $.60 cents. DSO for the quarter was 54 days. During the quarter, we lowered our bad debt rate one half percent to approximately 7.5 percent. Cash flow from operations continued to be strong, increasing 32 percent to $123.2 million. During the quarter, we repaid $50 million in debt borrowed in connection with the acquisition of DIANON and during the quarter we repurchased approximately $53 million worth of LabCorp stock, representing approximately $1.9 million shares. Now, for our six-month results. Revenues for the period of approximately $1.5 billion dollars increased 21 percent, as a result of a 15 percent increase in volume, and a six percent increase in price.

EBITDA for the period increases 20.1 percent, to $353.1 million, or 24.3 percent of revenues. This compares to margins of 24.4 percent in the 2002 period. 2003 six-month diluted earnings per share were $1.10, an 8.9 increase over the same period in 2002. Cash generated from operations increased 26 percent, to $258.2 million. At the end of the period our cash balance was $33.9 million. I would now like to mention several important accomplishments that provide both short and long-term growth students for LabCorp. First our acquisition of DIANON. We completed the transaction on January 17th, and are still on track to achieve synergy savings of approximately $7.5 million in 2003, $25 million in 2004, and the full $35 million in 2005. Overall, the operational integration is proceeding smoothly. We continue to be excited about the strategic contribution this acquisition brings to the company.

We have a trained, committed, and n focused sales force in place with a well-defined execution plan. The combined company is now in an exceptional position to offer primary care physicians and specialists throughout the country, such as oncologists, urologists, and gastroenterolgists the leading edge, anatomical and other testing technology for the rapidly growing mark. During the past month or so, there have been published reports about sales force departures and the creation of a company lead by former DIANON salespeople.

This situation, which I will discuss later on this call has no bearing on the strategic importance of this acquisition. As we have said in the past, we believe that anatomical pathology and gene-based cancer testing are "the" most important growth opportunities over the next three to five years. DIANON is a key component in our cancer business strategy. DIANON and LabCorp involve the companywide conversion of convention anatomical processes and procedures to the standardized highly regarded DIANON brand of pathology. Second, the integration of DynaCare. We are well into the finalization of the integration of DynaCare. Integration continues to be highly successful, and on schedule. We achieved $4 million in synergy savings by the end of 2003, and are on track to have cumulative savings of $36 million in 2003, and the full $45 million in 2004. This acquisition supports our position, as the leading low-cost producer, has provided us with significant cost savings opportunities. Next, our acquisition of assets in Northern California. In March, we entered an agreement to purchase certain assets from Northern California from Qwest. The agreement includes the assignment of four contracts with independent physician associations, as well as the leases for 46 patient service centers. Five of which also serve as rapid response laboratories. We developed the specific schedule to transition these businesses to our system during a four-month period to minimize the impact of the transition upon our new clients.

We now have a fully staffed sales force competing for business in Northern California. Currently, we are in the last phase of transferring the assets we purchased and converting the IPAs, with three of the four IPAs transitioned to LabCorp during the June to July time frame. The transitions have been smooth, with positive results in converting the IPAs as well as the associated non-IPA business. We expect to complete the conversion of the fourth and the largest IPA in early August. This new infrastructure now puts us in a position to immediately increase our -- us in a position to immediately increase our ability to compete for core and genomic business in the San Francisco market. LabCorp's licensing team continues to identify and help commercialize medically important new genomic tests. The solid advantage in executing our genomic strategy. We continue to prepare for the launch of exact sciences screening tests for colorectal cancer which we now expect to occur between August 1st and August 15th. All 800 LabCorp sales represents have been trained to offer the product to primary care physicians, as well as gastroenterologists. We'll provide an update on our progress during our third quarter conference call.

Millions of Americans over age 50 are candidates for colorectal screening. We believe that the data is competing compelling for utilization of this new test, particularly for individuals not currently being screened. Through our agreement with Correlogic Systems we also plan to specialize their protein pattern blood test for the detection of ovarian cancer later this year. This test offers us prospect of accurate and early detection of ovarian cancer, a common disease often diagnosed too late to be effectively treated. If identified early, it is readily treated and often curable.

We also recently announced a national marketing and distribution agreement with Athrotech to offer their PA BAP cholesterol test. We estimate there are 23 million persons at high risk for heart disease in the United States, and this valuable protein fractionation test should help improve the identification of these persons to allow more effective monitoring and early treatment. We are continuing to work on broadening our relationship with Athrotech to include the transfer of the BAP technology test to LabCorp and become the first clinical laboratory -- LabCorp and become the first clinical laboratory to perform this risk assessment within our own laboratory network. Existing genomic tests also continue to grow dramatically during the quarter. Esoteric testing representing -- esoteric testing represents approximately 30 percent of our revenues through June 30th. Additional details are available in the 8k we filed this morning. These additional details show a 45 percent increase in our highly specialized genomic revenues. Cystic fibrosis testing continues to increase monthly, as more physicians follow the new standard of care guidelines. Our second quarter cystic fibrosis testing volumes significantly increased compared to the same period last year, and we are now performing in excess of 15,000 CF tests per month. We also continue to see significant growth in HPV testing.

The HPV testing has increased approximately 70 percent compared to second quarter 2002. I hope this brief summary of results and significant strategic accomplishments demonstrates to you that LabCorp, genomics is a key strategy for our future and it is working. Now I would like to review a few frequently asked questions and our specific answers to these questions. How is the integration of the DIANON sales force proceeding and how has the loss of some of the sales force affected your sales momentum? Although the widely reported situation involving the activities of certain members of the former DIANON sales force is obviously disappointing to us, we are very happy with the progress we have made to form a top-notch sales team that maximizes the strength of each of the former LabCorp and DIANON sales teams. Our team has also been strengthened by the return of several former DIANON salespeople, who left in February, and March and have rejoined LabCorp in the last few weeks. Together, this well-focused and highly-committed LabCorp sales team is uniquely positioned to take advantage of offering the broadest diagnostic cancer-testing menu available anywhere. What is the status of the legal action that you have taken against the former DIANON sales persons? Although it is always our policy not to comment on matters that are currently in litigation, we are in litigation because we believe our rights have been violated. Rest assured, that we will, in this case, and in every other case aggressively pursue all of our legal options to protect our business from those who pursue activities which violate LabCorp's rights. We hope this issue will be be resolved by the end of the third quarter. Have you noticed impact on your business as a result of the slowing economy? It is hard to quantify an impact, but we do think that the economy and physician malpractice strikes continued to negatively impact us during the second quarter. We also believe that our genomic business segment was and will continue to be less impacted by similar trends in the future.

Do you think that there's any correlation between outpatient lab volume trends and the recent weakness in hospital inpatient admissions? There may be certain forces in common that could generally affect both, such as the economy, the demographics, changes in deductibles and new technology advances. We also think more and more healthcare is being delivered on an outpatient basis. And looking carefully at the number of doctor office visits may be a good gauge of our business. Unfortunately, we do not have good data on the number of office visits that is less than one year old. To tell exactly what is happening in doctor office visits. Additionally, as I just stated, we do think the economy has impacted our volumes in the short term. Can you provide an update on the co-pay proposal and the potential impact on your business as -- if it becomes a reality? I think as most of you already know, the House proposal has no provisions for a 20 percent LabCorp co-pay, but the Senate proposal does. As a result this item will be dealt with in the joint conference.

We're working very hard with our representatives in Congress and other members of our industry to prevent the adoption of a laboratory co-pay. There are a number of reasons that we believe this is a bad idea, including the fact that it is nothing more than a cost shift to Medicare beneficiaries. It would be extremely difficult for labs to collect, given the expected size of the co-pays and the fact that labs do not normally have a direct relation with Medicare patients which would make it -- billing very difficult. We are very early in this process and we believe there is support to prevent a co-pay; however, until we know the actual details, and the structure of the co-pay, we cannot predict at this time how any of these proposals could affect LabCorp. Given your experience during the quarter, have your long-term revenue volume or price expectations changed? Our experience in the quarter continues to underscore the soundness of our strategic plan, which focus on growing revenues, increasing profits and most importantly, generating cash. As evidenced by the recent increases in the percentages of our genomic testing revenues, the contribution genomic makes to this achievement of our financial goals is now substantial.

Looking forward and despite possible test introduction hurdles, genomics will be more important than ever and continue to influence revenues and price to even -- even greater degree moving forward. What makes up the six percent price increase for the first half of the year? And what are your pricing assumptions for LabCorp this year? Approximately two percent of the increase is an increase in rates. The rest is related to shifts in our test mix. Predominately in both our genomics business and histology testing which is primarily DIANON related. For the full year for LabCorp rate increases are expected to be between two and three percent. Additional price improvement will come from shifts in our test mix associated with esoteric tests like Cystic Fibrosis and Human Papillomavirus and from continued tests of histology from DIANON. What are your plans for use of cash going forward? As I mentioned previously, we did repay $50 million in debt, and repurchased $53 million worth of stock in the quarter utilizing our free cash flow and we continue -- and we plan to continue executing our $150 million stock repurchase program if our prices are within an acceptable range.

We plan to update you at the end of each quarter regarding the status of this program. We will also continue to pay down the remaining balance on our revolving line of credit utilized to help fund the DIANON acquisition. Would you consider a dividend? Many things have changed recently, which may cause us to take another look at this issue, including the change in law that favors the tax treatment of dividends. We continue to consider this matter, and when we make a decision -- a decision regarding our position on dividends we will let all of our shareholders know it at the same time. Are you currently in the market for acquisitions? As we have discussed in the past, we don't expect to pursue any large acquisitions over the next 12 months, as we integrate DynaCare and DIANON; however, we fully intend to continue to make small acquisitions. All of our acquisition activities will be conducted with the express objective of maintaining our investment grade rating as well as meeting our criteria of being compliant, having no billing problems, and being accretive to EPS within the first year.

When do you expect to launch the exact screening test for colon cancer? As previously mentioned, we expect to begin the launch of this test in early August, 2003. Have you begun your negotiations with managed care contracts? We have many managed care contracts and are fully renegotiating them. For obvious reasons we will not disclose the timing or the terms of the negotiations of our major agreements until they are completed. We do want to reiterate, however, that we expect these discussions to be be more difficult than they have been in the recent past. What is your guidance for 2003 and 2004? Proven LabCorp strengths is our ability to consistently deliver the strongest financial results in our industry. While continuing to effectively manage our nationwide operations in a dynamic and ever changing marketplace. In addition, we have delivered these strong results even as we rapidly integrate new acquisitions and extract maximum efficiencies from those new combinations.

As expected, we did incur some additional contrasynergyies in the first half of the year to achieve our 2003 synergy savings goals, however, we still expect additional synergy savings during the second half of the year. We will be providing guidance for 2004 as regular during our conference call to discuss third quarter results. Our updated guidance for 2003, therefore, is as follows: Compared to 2002, LabCorp expects 2003 revenue growth of approximately 18 to 19 percent. With EBITDA margins in the range of 24 percent of revenues. Diluted earnings per share in the range of $2.20 to $2.25. Capital expenditures of approximately $90 million. Free cash flow net of capital expenditures of approximately $380 to $400 million, and net interest expense of approximately $35 million. Please note that we have included a range for EPS guidance, which we think is a more appropriate way to look at expectations, particularly given how positive and negative assumptions may ultimately balance out. Although we will not discuss the details of our guidance models, future positives is up as bad debt reduction, revenues from new deals or new test and higher synergy savings may or may not be offset by possible negatives, such as the weak economy or physician strikes, which cause weakness in our core volumes.

As I stated before, by any measure, LabCorp is stronger today than ever before. Whether it's revenue growth, profitability, cash flow, or most importantly, the wide array of tests we offer to physicians and their patients, and the reason it is simple, we continue to execute our strategic plan. Thank you for listening, we are now ready to answer any questions you may have. Dwayne?

Thank you, sir. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will then hear a three-tone prompt to acknowledge your request. If your question has been answered and would you like to withdrawal your registration, please press the one followed by the three. If you are using a speaker phone we ask that if possible, please lift your hand set before entering your request. One moment please for our first question. Our first question comes from the line of David Lewis of Thomas Weisel Partners. Please proceed with your question.

Good morning, guys.

Good morning, David.

Tom, could you start off talking about pricing assumptions? It looked like in our model that you missed price a little bit. Is there a potential going forward if there was some weakness in the DIANON business, would you think about potentially augmenting that with some core business, which may be at a lower price point? Is that possible strategy heading to the back half of the year to mitigate some of the DIANON effects, or no?

No, I don't think that's the case. I will ask Wes to answer the question on pricing and then I will come back to talk about the philosophy of pricing.

I think -- you know, we've reported PPA increases of 5.5 percent, and six percent for the year. The pricing in the second quarter was off just a little bit compared to what we saw as far as rate increases in the first quarter but there was no significant event that caused that at all. So it's pretty much in range with what we thought it would be.

In terms of, David, our pricing strategy, we continue to be very diligent with pricing in this company and will be moving forward. And we continue to balance carefully the volume opportunities versus appropriate and disciplined pricing in the marketplace, and I think ultimately that's best reflected by the profitability that LabCorp delivers. So we continue to be very sensitive about pricing in the marketplace.

Okay. Just a couple more. One still on price. If we think about the six percent pricing growth for the year, we talked about two to three percent of that being rate increases. The rest being somewhat mixed. What percent of that mixed component, either Wes or Tom, do you think is related to DIANON?

That's something, Dave, we are not going to break it out any further. I'm sorry.

Okay. And you mentioned in terms of DynaCare, because the integration is now essentially anniversarying, you said it is difficult to project or determine what is organic growth. Can you walk us through that?

One of the problems, and I mentioned this on the other conference call, and I think sometimes it's difficult for everybody to understand, is that a lot of the conversion that has gone on with DynaCare has gone on in the field by sales reps. So what they actually do is they -- they convince a DynaCare customer to utilize a LabCorp form. And where -- if you recall, the original acquisition, it was in areas of the country, some areas of the country, where there was very large LabCorp capabilities and some DynaCare capabilities, and a good example of that would be the Alabama market. So the way that we convert doctors is we try to convince them just to switch from the DynaCare submission form to the LabCorp submission form. And there's no way in our system that we can tell that that's happened.

So we can't -- we can't break it out by new business that's coming in from that doctor versus a conversion from DynaCare. So it -- as time went on, and we anniversarized at the end of this month -- as time goes on it becomes more and more difficult to determine whether that volume was old volume from DynaCare, new volume from LabCorp, or a combination of both.

Okay. And then last question, Tom, you mentioned exact science commercialization sometime in the first half of August here and you talked publicly about a price point of $5.95 to $7.95 whether it's retail or wholesale. What are you anticipating in terms of cost per test, or what long-term gross margin do you expect to have on the exact sciences tests?

Let me talk about the exact sciences tests. We expect to launch it. We've gone through a rigorous validation period now that really had its beginnings in late May. We have used a new technology that they have talked about recently in terms of validating that and we expect that we will be launching that product sometime within the next -- within the next month. We do have -- we do have an enormously well done and completed sales training program, so all of our sales reps are ready to sell the product, they are eager to sell the product. Now with that, David, I regret to tell you that we're not going to discuss the gross profit of that product. I can say this, with the introduction of this technology, which I believe they call EpiCure, there has been a significant increase in the gross profit of the product.

And that was one of our goals is to get the price of this product down to a manageable cost inside the laboratory so that LabCorp can recognize very good gross profits on this product. Now that we're comfortable that this technology is working in our labs the way that we expected, I can only say that there will be pretty decent gross profits associated with the product.

Thanks, Tom. I knew it was a long shot, but thanks. [ LAUGHTER ]

Our next question comes from the line of Tom Gallucci of Merrill Lynch. Please proceed with your question.

Thank you. I'm sorry I was on hold with the operator there for a little bit in the beginning of the call. Did you discuss -- I understand the difference that you -- did you discuss pro forma numbers in terms of volumes? Wes?

No, Tom, we've not been disclosing or discussing the pro forma numbers. We have been targeting new organic volume growth and what we have said is the organic volume growth is three to four percent within a range because it's becoming increasingly difficult to precisely come up with a number. So there's what we're more focused on is organic volume numbers.

And you're in that range in the current quarter or the second quarter?

Yes, it's in the three to four percent growth range and long-term, we've said that we expect it to be be three to four percent range.

Right. Okay. And then on the -- on the revenue growth guidance for the year, I'm sorry again if you discussed this -- guidance for the year, I'm sorry again if you discussed this in the beginning, did you discuss the specific changes that happened there in terms of that guidance?

Right, well, we did see, Tom, and we've mentioned that -- what we've mentioned is that we've seen that there has been an impact. We believe it's the economy. We do believe that these physicians strikes have impacted on our volumes. These volumes that have been impacted have been in the core business. They have not been in the gene-based testing business. They have been across all business segments with the exception of gene-based testing. What we saw during the quarter, and I think I may have even mentioned this on the April conference call, that we saw a rather weak April. And we were pleased to see that May and June came back pretty well.

But we do still see some weakness in our core -- our core business compared to where we expected it to be. And, again, that's across all core areas of the company. So as a result, we are bringing down the revenue estimate to about 18 to 19 percent.

I'm just trying to make sure I understand the two answers there. It sounds like Wes said that you expect the organic volumes to be three to four percent and I think that's where you have been, but now you say that the economy may be having a bigger impact on volume than you thought which is causing to you lower the total year revenue expectations. Can we just make sure we get the understanding of those two moving parts?

Well, sure. Number one, is we thought the -- we thought the growth would be -- would be better in all of our business segments. We are predicting now that it will be slightly weaker -- predicting now that it will be slightly weaker, that we will have in our core business, modified growth compared to where we thought it would be.

And all of our forecasts, as I recall, that we put out there late last year, and early this year, was not, Tom, related to what our organic growth was, but more so what our growth would be for the year as a result of LabCorp plus DIANON, plus DynaCare. So our guidance had always taken into account all of those factors in the core area.

So I guess it sounds like the slippage, if the organic volume is not within expectations the slippage is more of DynaCare and DIANON business?

I think that's -- that's partially true, but there has been some slippage in our LabCorp business too. That has happened also.

And then it's that change in the revenue range that's causes the expansion of the range of the EPS guidance, that's the correlation?

Yes.

-- EPS guidance. That's the correlation?

Yes.

Okay. Thank you.

Our next question comes from the line of Rob Hallosey out of Black Rock.

Okay, thank you. I was wondering two questions in relation to the exact sciences test. Have you spoken at all about your capacity for volume for that test in the first 12 or 24 months? And also could you talk a little bit about negotiations with managed care on getting reimbursement for that, as I understand, Medicare would reimburse on existing CPT codes.

Okay, I'm going to -- Rob it is, I will take the -- let Brad Smith handing the question on where we stand with reimbursement and then I will go back to the first question which relates to capacity issues. Brad, why don't you talk about how we get reimbursed from Medicare and the managed care plans as it relates to -- to exact -- there is a significant effort going on both by LabCorp and exact to get reimbursement, the problem is particularly with managed care, you really can't set reimbursement goals until the product is launched.

Yeah, and I think it's -- as Tom just mentioned, we have a very definitive and comprehensive plan to obtain reimbursement. I think your comment is right, that you could -- there are existing codes to identify the various steps in the testing process, but so obtain fair and appropriate reimbursement, you have to make sure that for each payer -- and Medicare is one of them -- that you meet their other requirements other than just coding, so standard of care. You have you to make sure that your price point and the reimbursement price is fire for the value. You also have to address issues like, for example, with Medicare, if it's used as a screening as opposed to a diagnostic, other colon cancer screening tests are covered.

Will this be one of the tests that will be covered? And I think we have a plan, we believe it should be, and we have a plan to try and get Congress to agree to that. We have a very definitive plan, but until the test is launched, insurance coverage is just that. We can't get somebody to confirm that they will cover something prior to the launch. So we're prepared and we're ready to obtain -- ready to obtain the fullest and fairest reimbursement at the earliest possible date but we have to launch first.

Thanks, Brad. In terms of capacity we actually have a two-phase program going on at LabCorp. We have a three-month plan which we believe meets what our expectations are in terms of volumes at the time that we launched the product and we're quite comfortable that we have the capacity to handle during the first three months.

By early November, we will have expanded rather significantly the amount of sequencers needed and the amount of space that's required and the amount of people to handle the upturn in this product as we move into next year. So we are investing in capital in the -- in the period beginning in late August to have additional capacity for this product available in early November. So we -- we have spent a considerable amount of time looking at the whole issue of capacity for this product as well as what we anticipate the -- the positive market reaction will be for this product. In terms of what you need, is you need additional people, additional sequencers and obviously, we are expanding our space requirements for this.

Is that a multiple of what you started out with?

Yes.

Thank you very much, Tom.

Our next question comes from the line of Robert Willoughby, Banc of America Securities. Please proceed with your question.

Thank you. Tom, what specific milestones do you need to achieve from a merger synergy standpoint, what type of tangible events?

With DynaCare, Bob, we're pretty much finished in terms of major facility closures. We have really already achieved most of the synergy -- not most of the synergies, but all of the milestones to achieve the synergies going forward. As it relates to DIANON, the major activity now under -- underway in this company is the preparation for the first conversion of LabCorp to the DIANON system.

So all of the efforts of the Information Systems people are directed at now what we DIANONizing LabCorp. That will begin in the first quarter of the year '04. So all of the major milestones, as it relates to DIANON were accomplished in terms of facilities or mergers of facilities during the first half of this year. The main activity now will be DIANONizing LabCorp which will begin in the first quarter of '04.

How many facilities of DIANON did ultimately come down then?

I don't have -- I don't have that number in hand but I'm going to guess it's six to eight.

Okay. And was that ahead of schedule, Tom?

Probably. Yes.

Okay. Thank you.

Thank you.

Our next question comes from the line of Rick Goldwasser from UBS. Please proceed with your question.

Yes, hi, good morning.

Hi, Ricky.

My first question relates to guidance. How did your launching exact, is it in line with the guidance?

No. I think our feeling there, Ricky, is we really need to get some -- some experience with this product and we'll be able -- I think to have a better sense of expectations in -- in the -- at the end of the third quarter. So we really have not built virtually anything in to it.

Okay. Then regarding DIANON, usually when -- when you make an acquisition, you lose some business. So far, did you lose in DIANON more than what you were expecting on the sales side? And do you expect that kind of loss rate to change in the second half of the year?

I hope -- I hope you can appreciate this answer. You may not like the answer, Ricky, but I hope you can appreciate it. I'm involved now -- or the company is involved in litigation. And the litigation may discuss some of the issues surrounding the question that you just asked. So I really have been advised by -- by counsel, not to get into things like revenues or numbers of sales reps or customers during this conference call.

As soon as this litigation gets behind us, which I hope is during this quarter, I will try and be somewhat more specific on the impact of revenues. Suffice to say, though, as I did say, I think, to a question by Tom Gallucci a few minutes ago, all of the business areas of LabCorp, DIANON, DynaCare, and LabCorp have demonstrated softness, more than we had expected in the second -- in the second quarter. And that's why we forecasted what -- what we did moving forward. Which would suggest there was some softness in DIANON also.

Right. And then -- and I guess it's a related question. On the same-store basis, are you seeing any change in the number of requisitions that you are getting from doctors and hospitals? Is that kind of contributing to the softness? In the business?

Can you try that? Take that Brad?

Yeah, I think we tried to look at that, Ricky, and we really haven't seen -- we haven't seen the data that convinces us that that's true that there's less requisitions coming on a same-store basis.

Okay. Thank you. That's helpful.

Thank you. Our next question comes from the line of Bob Wright of Bear Stearns. Please proceed with your question.

Yeah. Mr. Mac Mahon, I'm glad to hear you're reconsidering the dividend. I would vote for that if I have a choice.

Why am I not surprised, Bob?

But at least it would be great to have a five percent, but anyway, I will leave that for another time. [ LAUGHTER ] The question I have is that, you know, there's -- there's two issues that seem to be to be going on. One, pricing seems to be really good and the volumes seem to be a little bit weaker.

When -- is there -- are you -- and you blame it on -- or not blame it, you use the economy. Have -- have things continued to weaken? Have they strengthened? Have they stabilized? In other words -- there's still growth, but can you just give us a sense on, you know, what kind of trends we're seeing now? I understand what -- that you had some but it seemed like May and June were a little bit better and we were starting to see a little bit of recovery or too early to say or what?

I -- everything you said is accurate. We did see -- we had an April that we didn't anticipate. April is usually a very strong month for a company like LabCorp. Now, we thought -- quite honestly, we did a bunch of surveys and we were not happy with the quality of those results we did with the surveys. Now, April usually -- you know, there was Passover, there was Easter, and there seemed to be an economy issue surrounding the war, so April was -- was not -- was not very strong. May did come back rather well compared to April, and June was also fairly decent.

So we're hoping that we're -- we're through this, but given what I would consider erratic volume trends over the past six to eight months, I'm not ready to say yet that we're through this issue, and there still seems to be some suppression in the volumes compared to where we thought we would be when we forecasted last November and December and then when we reforecasted in the -- in the March to April period. But there was some strengthening in the May/June period but I would like to see it be better.

I realize we're three weeks in July, but would you say July, you know, looks reasonable or do you have any major --

Here's the problem be with July, and I -- I know I got myself into -- I was very specific last year. The problem be with the third quarter is July is usually a weak month. August, the first half is weak and then it gets stronger as the month goes on, and then September, when the children are back in school, and vacations are over, the -- the September period usually is a very important period to make -- make volume and make the numbers in the third quarter. So in contrast to what I said in the April call, where our April call was a week late, it was at the end of April, and I pretty much had April results, it's really too early for me to make any comment on -- on the third quarter, Bob.

Okay.

Thank you. Our next question comes from the line of Abe Bronchstein of Glenview Capital. Please proceed with your question.

Good morning.

Morning.

I'm not sure I'm reading this right but on the press release the abbreviated balance sheet that was provided appears to show a fairly substantial increase, almost $40 million in investments and equity affiliates from the end of the first quarter. Is that -- is that correct or is that just the -- an artifact or is cash actually being invested in those equity affiliates?

I'm going to look at this for a second.

Abe, this is Ed Dodson. That's primarily the effect of the Canadian exchange rate on the Canadian dollar investments in those joint ventures.

Okay. So it's not a cash use?

No, it's not a cash use. It's the decline of the U.S. dollar versus the Canadian dollar. I got you. And our Canadian assets are therefore valued higher based on the exchange rate.

Okay. And I think Ricky asked you if you had the exact sciences test in your guidance and you said no.

Right.

I assume that it is the same answer for the Correlogics.

That's correct there's nothing in there for Correlogics.

Okay. All right. The return of the -- of this DIANON -- some of the DIANON people. Yes. I wonder if you could maybe give us a little bit more color as to type of people, who -- at what level in the organization, and what their reasons might have been for originally leaving and then returning? It seems like a fairly significant validation of the notion that the pathology capability is really the guts but I'd like to make sure I'm not hearing what I want to hear.

Well, here's what -- the reason I put it into this -- my prepared comments, Abe, was because I does think it was important, as -- as was reported, I'm not going to comment on the accuracy of the report, but there were sales reps, as is always the case that leave the company during a period of -- of acquisition. And in this particular case, I do believe, and this is information that I receive, I do believe that the DIANON salespeople, or at least some of them, were concerned about what it would be like to work for -- for a very, very large company in their minds. And they -- as is always the case in these kinds of acquisitions, the headhunters are out and they are trying to recruit away very confident salespeople. So several salespeople did leave and after working for other companies, and talking to their peers that were now part of LabCorp, they reapproached LabCorp and asked to come back. And they're at the sales level. They're at the level of calling on doctors, selling DIANON pathology services. And I -- I'm not sure of the exact number, but I think two or three did come back within the last six weeks and -- and we -- because of their skills in sales we -- we did decide to let them return.

What -- did you ever -- were any pathology -- were any pathologists -- did any pathologists leave, other than an odd one or two?

No. No.

Was there any similar experience?

We have not seen pathologists leave, other than, as you say one or two, but we lose one or two pathologists at LabCorp in this period, so there's been no major -- LabCorp in this period so there's been no major loss of pathologists.

Can I circle back? They had some data indicating a pretty significant jump in the sensitivity of the test that one of the recent -- at one of the recent cancer meetings.

Yes.

And their call, they indicated that they took the data as trend indicating and not confirming that increase. Will your sales force be talking about that? Because a change from 64 to nearly 80 percent sensitivity would be -- seems to me would be extraordinarily significant.

Right.

And will you be able to mention the trend? What -- what restraints are there on your ability to use that kind of data in -- in marketing the test?

Let me tell you what handed there the way I understand it. My understanding is the new technology, this technology that we call EpiCure, it yields more DNA. There's more materials we get out of the sample. So theoretically if you get more materials, I think out of the sample, or more DNA, you really should get a better result. And I think that's the conclusion that really has come out of this new data that either -- that evidently appeared in the marketplace. We need to confirm that. Theoretically, from what I understand in talking to scientists, what is being said makes sense.

But when we introduced this product, we will introduce it at the sensitivity levels that we are comfortable with. But hopeful that over time, I hope a short period of time, that the data that has been mentioned, which is my understanding very small study, could be confirmed. So we would not talk about that until it was confirmed by our own studies.

Okay. On the bad debt experience, you went down a bit, you had been -- you had been fairly cautious about projecting an improvement earlier in the year and I assumed it had to do with the integrations of the two companies. Now that you have more experience and you've seen the billing systems and the procedures, it appears you've taken that down quite a bit. And are you comfortable now thinking that the trend of that heading lower will now continue into the -- you know for the next few years?

Yeah, Abe, we lowered it a half percent in the second quarter and from the second half of the year, we are -- our guidances and our expectations would be to lower it another half a percentage in the last six months of the year. And the things that have changed is what we told everyone before. We fully expect and our goal is to reduce bad debt expense about one percentage point per year. The conversions of DynaCare have worked wonderfully.

We've run into basically no big billing issues relate to that and the -- you know DIANON billing area we've left intact. That area is still operating on a stand alone basis in Connecticut, and be we have a wonderful operation up there. We're in no hurry to convert that at this time.

We must discuss the ultimate achievable level of bad debt, and you pointed out that there were some differences between the way companies estimated uncollectibles that affected the -- you know what was reported as bad debt. You -- you guys were reluctant to -- you put a very number on it, to incent people to collect every dime and resulted in a higher reported bad debt number. Qwest has a, you know, target of four percent out there for their bad debt number. Do you have in mind a lower limit that you're attempting to reach? How many years do we get one percent a year do we get it for one more year, three more years or five more years?

If we get down to a five percent level or so, you know, that's a job well done. It's hard to imagine getting -- it's hard to imagine getting down to a two or three percent level related to bad debt, Abe, but, you know that's what we'll continue to do. We'll just continue to -- to keep the DSO down and to lower the bad debt expense.

Now the other thing that I think is important to know is you need to look at the billable party mix as you look at DSO comparisons. If you have -- for example, if there's more capitated business that's a lower DSO. So there's other factors other than just pure collectibility and operations of the billing area. You have to look at the billable party mix and see, you know if you have a higher percentage of capitated business, your DSO's gonna be lower.

Speaking of paying mix. Tom, you just made a comment you thought the managed care contracts would be -- I'm not sure of your exact words -- I guess a little bit more difficult.

Yes.

Did you mean to indicate you thought that there would be a -- prices would be forced down or that we have just simply seen -- that any increases would be more subject to inflation than the catchup we had a few years ago?

I think -- here's whey meant Abe, and then we'll have to move on. I believe that people sometimes don't anticipate the complexity of these negotiations with managed care. And I just want my investors and analysts to understand we expect difficult negotiations with managed care. They're tough negotiators an they always have been tough negotiators and we're fortunate several years ago to get very nice price increases from them, because we hadn't seen increases in a long time. We certainly have every expectation about getting price increases because we deserve them. That's one and because they are dealing them out, that's number two. But I think that -- that they're tough negotiators.

Thank you very much. Thank you for taking the questions.

Thank you. Our next question comes from the line of Sandy Draper at Deutsche Banc.

Thank you. Just two quick questions. One, Wes, can you remind me what the balance of debt on the term loan that's prepayable? And then the second question on the guidance for the -- the interest expense of 35m, is that a net number or is that just the expense and excluding income?

The first one -- well the second question, that $35 million is a net number, Sandy, and just to give you the various debt levels -- of course, we have have the $350 million bond, the zero coupon lines. The balance at June 30th is $518 million and the revolver, the credit facility at June 30th, the outstanding balance is $85 million.

Okay. And the $350m, is that prepayable without substantial penalty or is it the 85m on the revolver that you can pay down near term?

It's the 85m on the revolver.

Okay. Great. Thanks.

Thank you. Our next question comes from the line of Ed Shenkin at Wells Fargo Security. Please proceed with your question.

Yes, the question is about the conversion rate to monolayer testing. Could you tell us what the conversion rate is in the current quarter compared to what it was last quarter? And, you know, if it's -- we ex -- where you expect that to go in the future quarters.

Yes. The conversion, we have about 74 percent of all of LabCorp's pap smears were done by thin layers at the end of June. That compared to about 72 percent at the end of March. Our expectation is that that will get up to at least 85 percent over the next 18 months.

Okay. And can you tell us about the HPV testing? You know,how many you did or if you could tell us-- you know, how many you did, or, if you could tell us what the growth was year-over-year, but they have an expanded label recently. I wanted to get an idea of where you expected that to go.

To be honest with you, I don't have that number in my hand in terms of the exact numbers that we do do, but I think that the interesting number that we're seeing now is that I mentioned before, we're at 74 percent penetration of the liquid-based paps by the end of June. I should add that more than 50 percent of those, including -- to reflex automatically if indicated to the pap smear -- excuse me to HPV, you mean? The Papillomavirus.

That's where we're seeing the significant growth in Human Papillomavirus, in the doctor asking to get it reflexed if, of course, it's indicated. I -- I -- I'm sorry, I don't have the -- the exact number, but it -- but it continues to grow substantially.

Thank you very much.

Our next question comes from the line of Seth Kaish at Apex Capital. Please proceed with your question.

Hi. Good morning. I was trying to come out, perhaps at the organic growth rate from a slightly different perspective. I was wondering if you could provide us on a pro forma basis for the second quarter of '02, what the pro forma revenues were? I think you provided that in your 10-Q for the March quarter.

Right. We -- we'll -- we will provide that in the queue when it goes in. We'll we're working on that now.

Okay, well, maybe just to get me there, if I look at what your revenues were that you reported in the second quarter, as well as DIANON's revenues that they reported, that's incremental $27 million from the $710 that was in the queue so, I mean, just using that math, you get to roughly $735 to $740. Is that in the ballpark?

I'm not going to discuss breaking down revenues between lab be corp, DIANON and DynaCare. We give out so much information. That's not information that -- we give out so much information. That's not information we give out.

No, I understand. I'm not asking what they were in the pieces. Asking in the aggregate.

I understand -- I understand the question.

Just after of we file the 10-Q, we can have that discussion. We're not prepared right now to talk about pro forma numbers. But if you want to call right after the cue, we'd be happy to talk to you about that.

Okay. And if - have you done any analysis on that number to give us a sense of what on an apples-to-apples growth rate what that growth rate would look like?

As we have discussed earlier the only thing we're prepared to talk about today is what most people want to talk about is the organic growth rate which we think is in the range of three to four percent.

And is there a way that you can help us understand how you are calculating that? Because you said it was three to four percent, I think --

In a range. You know that's why we -- we have said, I think on this call a couple of times, that the best we can do is a range now, because of the difficulty of tracking that information. You -- there's no way we'll ever be able to say, for example --

Right.

A 3.5 percent increase related to organic growth volume. It's a range and the range may even get bigger by the end of the next quarter.

Okay and that range is similar to what it was in the first quarter; is that correct?

Yes. Because I guess --

in the first quarter, it -- it's in that range when you back out the impact of weather.

Oh, when you back out weather. Okay. Because that's one of things I didn't understand relative to the first quarter as well is if you have organic growth rate three to four percent, but on a pro forma basis on revenue for the first quarter your revenues were up 1.5 percent. I just can't get those pieces to add up.

Okay. We're -- we really are not going to discuss that any further since it's so much detail.

Okay. Great. Thank you.

Thank you.

Our next question comes from the line of John Patrick Walsh at Wachovia Securities. Please proceed with your question.

Hi, I just wanted to get a sense of how your business in the Carolina performed in the quarter. Is that up to your expectations and how do you expect that portion of why you are business to perform over the year?

John Patrick, as we talked about late last year, we're not going to break out the North Carolina market anymore. It's one of our business segments. We have six of those around the country. We speculated quite clearly what went on there last year and we're no longer, for competitive reasons -- and it is competitive, giving details of that.

Okay.

Okay?

One more quick follow-up question. How much of your revenues are -- come from Medicaid and what's your outlook for that component of your business?

Medicaid, versus Medicare?

Right.

Okay. Medicaid is very small. It's less than four percent and Medicaid is not a business that we expect very much from. It's a business that LabCorp has shied away from because of the reimbursement issues surrounding Medicaid. Of course that's different than Medicare.

And I guess one last question, you know, the proposals out there in the Senate, we hope that won't go through. If that were to go through, what would be the implications be for you on that front? How much of a potential margin impact may that have? Do you see that potentially if that does get past having -- do you see that causing a lot of logistical problems in terms of collecting payments with people and that type of thing.

Obviously for a very long time I said on calls like this that a co-pay is not a good thing, and it certainly presents logistic problems in our ability to collect, which may be a small amount of money from a Medicare recipient. It also presents logistical problems because, you know, the law requires that we do attempt to collect that money. There are not very good things that I can say about a co-pay, other than we think there are many people in Washington, including the Institute of Medicine that have written reports indicating that this is not a very good thing to do.

Not only for the lab industry, but it basically is a cost shifting to the Medicare recipients to fund another aspect of healthcare, which in this case is pharmaceuticals. So the direct answer to your question is we have not done any calculations yet, because we continue to put all of our energies, as do other members of the industry, in convincing the Senate not to onerous feature -- feature passed, and I won't categorize my optimism, but certainly we think this makes no sense at all. So we continue to vigorously oppose it. At the point where we think we understand what the outcome will be, we'll -- we'll try to put some numbers on it, but we have not done that yet.

Okay. Thank you.

I'll take two more questions if there are questions. If not --.

Thank you, sir. The next question comes from the line of Dennis Chukoff with Urban Capital Management.

Tom, it's Chip-o with Dennis. Do you have expected level of stock repurchase built into your guidance for the remainder of the year? That's question one. Question two is, are you without any specifics -- without any specifics are you seeing any opportunities for acquisition of hospital business from outreach programs that have decided that competing with you just doesn't make sense anymore?

Wes, why don't you take the stock repurchase.

Through the six months now we've purchased somewhere around $87 million worth of stock and that's all that's billed into the guidance going forward.

The total plan is $150 million, so the Delta between what we have done and what we have left remaining in the plan, that's not billed into the guidance for the rest of year.

Okay. So that's as before. Thank you.

In terms of the hospital outpatients there are opportunities that we are working on. They take, as I problem probably said before, they take a very long time but certainly there are opportunities out there for additional hospital business. But -- but they are very long. In terms of getting them completed.

Okay. Thank you.

One more question. If there is one.

Yes, sir there's a question from the line of Bill Bonello, Wachovia Securities. Please proceed with your question.

Okay. Great. Thanks. If it can be two parts if it can't, just answer the first one. The joint ventures picked up meaningfully, I'm wondering if that's the FX impact and then also, if I'm reading the balance sheet right, it also looks like there was a pretty big increase in other assets and I'm just wondering what that might be?

Bill, could you repeat your first question? You broke there for a second.

Sorry. Equity earnings in joint ventures ticked up meaningfully I was wondering if it was related to foreign exchange? But actually it wouldn't be right, because that's all in the U.S.

No there is one in Canada. There is one related to the Canadian operations and better than expected performance in the Canadian operations, and part of it does have to do with the exchange rate.

Okay. And the second question, the increase in other assets? Compared to the end of the year?

Well, I was compared to Q1 on the -- what you had on the -- I was comparing it to the Q1 on the 10-Q. I believe it's deferred taxes, but I'm not absolutely certain. Did you hear that Bill?

Yeah, I heard that. We can follow up.

We'll get back to you on that, Bill.

Thank you very much.

Thank you. And I appreciate everybody listening to the call and have a great day. Thank you very much.

Thank you, ladies and gentlemen that does conclude the conference call for today. We thank you very much for your participation and ask that you please disconnect your lines. Have a good day. Thank you.