Labcorp Holdings Inc (LH) 2003 Q4 法說會逐字稿

Welcome to the LabCorp 2003 4th quarter and year-end results call. As a reminder, this conference is being recorded Thursday, February 12, 2004. I would now like to turn the conference over to Mr. Tom McMahon, Chairman and CEO. Please go ahead sir.

Thank you, Good morning. Welcome to LabCorp 4th quarter conference call. Joining me today from LabCorp are Brad Smith, Executive VP Corporate Affairs, Wes Elingburg, Executive VP, CFO, Ed Dotson [ph], Senior VP, Controller, and Pam Sherry [ph], Senior VP Investor Relations. During this call, I'll review our financial results and recent accomplishments and then answer the most frequently asked questions about the company.

I would also like to emphasize how important LabCorp's strategic plan has been to our success over the past six years. Every two years we review and update this plan and we have just completed our most recent assessment. This process demonstrated that our strategy still makes great sense and we continue to believe strongly in the value of combining our nationwide core testing business with our higher growth esoteric and genomic businesses, to consistently generate long-term growth and profitability. To date the strategy has resulted in ongoing significant increases in our gene based testing and esoteric testing businesses, which are the key factors for LabCorp's continued revenue and profit growth.

I would now like to introduce Brad Smith who has a few comments before we begin.

Before we begin 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 February 12, for replay information. This morning the company filed an 8-K that included additional information on its business and operations. This information is also available on our website. Analysts and investors are directed to this 8-K and our website to review this supplemental information. Additionally, we refer you to our press release dated February 12, 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 in our 2002 10-K and subsequent filings and will be available in our 2003 10-K when filed.

Thanks Brad. Now to 4th quarter results.

Our 4th quarter results are as follows: Revenue increased 12.5% to $731.5 million. Volume increased approximately 7% and price was up 5.5%. Organic volume growth was approximately 4.5%. EBITDA was $174.4 million or 23.8% of revenues. Which represents a 40.8% increase over 4th quarter 2002.

Before a 4th quarter restructuring credit of $1.8 million, representing net restructuring charges and adjustments, diluted earnings per share were 53 cents, an increase of 47%. After recording the net credits, diluted earnings per share were 54 cents for the 4th quarter 03. DSL for the quarter was 53 days. During the quarter we lowered our bad debt rate approximately 1/4% to 6.75%. Cash know from operations continue to be very strong, increasing 21.7% to $144.2 million.

During the quarter, we repaid $25 million in debt borrowed in connection with the acquisition of DIANON leaving a 0 balance at the end of the year, and we announced a new $250 million stock repurchase program beginning in the 1st quarter of '04. As you are aware, we completed our $150 million repurchase program in the 3rd quarter 2003.

Now for our full year results. Revenue for the period of approximately $2.9 billion increased 17.2% as a result of a 11.7% increase in volume and a 5.5% increase in price. EBITDA increased 26% to $711.5 million or 24.2% of revenues. This compares to margins of 22.5% in 02.

Before the 2003 third and 4th quarter restructuring charges and adjustments, annual diluted earnings per share were $2.22, a 20.7% increase over 2002. Cash generated from operations increased 26.8% to $564.3 million. Our 2003 free cash flow benefited from one-time tax credits of approximately $50 million. During the year, we repaid all of the $250 million in bank borrowings used to finance our acquisition of DIANON. We also completed our $150 million share repurchase program and spent $83.6 million in capital expenditures. In total, these activities utilized more than $480 million of excess cash, all of which was internally generated by LabCorp.

While we are obviously very pleased with our overall 2003 performance, we are particularly excited about the amount of cash we consistently generated from operations during the year. At the end of the year, our cash balance was $123 million.

2003 was indeed a financially successful year for LabCorp and our shareholders. Even as we completed the integration of two major acquisitions, we increased revenues by $430 million, EBITDA by approximately $148 million and expanded our EBITDA margins from 22.5% of sales to 24.2% of sales. The highest margin levels in our industry. There is no doubt that these two acquisitions contributed substantially to our highly successful performance.

I'd now like to mention several important accomplishments that are directly aligned with the objectives of improving our financial performance as well as adhering to our proven strategic plan. It's important to note that the core business has fueled the growth of our genomic business and our genomic business has significantly outpaced our core business growth. These two business activities are truly connected at LabCorp.

DIANON continues to be a key component of our growth plan. With the integration now completed, the next step is to immediately begin incorporating DIANON's standardized anatomical pathology process into LabCorp. Over the next several years, DIANON's highly standardized system for processing, diagnosing, and reporting anatomical pathology specimens will be integrated into the LabCorp testing process. "DIANON-IZATION", as we call it will redefine our company's approach to anatomical pathology, and is a critical element of our long-term strategy to be the leader in the cancer testing market.

Our launch of the Exact Sciences PreGen-Plus test for colin cancer screening supports our strategic objective to be the leader in the introduction of new high value genomic test. We launched this breakthrough, noninvasive, DNA based test for colon cancer screening in the average risk population in August. Since then, the daily number of specimens received continues to increase. We continue to focus much of our resources on obtaining fair reimbursement for PreGen-Plus from more payers. We have begun to be reimbursed by employers and other payers; however, we are well aware that the obtaining reimbursement from as many major payers as possible is the key to the successful commercialization of this important breakthrough test. We continue to be very excited about this test, but as we have stated in the past, new tests like this take 12 to 18 months to get the kind of adoption that will begin to have a meaningful impact on our revenues and earnings.

LabCorp's licensing team continues to be very active in identifying opportunities to offer new genomic and esoteric tests. Another objective of our strategy. Through our agreement with Correlogic Systems, we plan to commercialize their protein pattern blood test for the detection of ovarian cancer on or around April 1. There currently is no accurate blood test available to detect early stage ovarian cancer. If diagnosed early, this common disease is readily treatable and often curable. We initially planned to offer this test as a test to screen the approximately 8 million women in the United States at increased risk for ovarian cancer. We are pleased that both the medical community and the general press have demonstrated extensive interest in this test as evidenced by recent published articles about OvaCheck. We view this interest as an indicator of the important medical need for this test.

Last October, we announced an exclusive relationship with BioPredictive to offer their noninvasive blood test for liver fibrosis under LabCorp's brand name of HCV FibroSure [ph]. We expect to begin offering this test by the end of March HCV FibroSure further expands our extensive menu of tests for hepatitis C, and has the potential to be used as an alternative to an invasive liver biopsy to evaluate the extent of fibrosis and active inflammation in patients with chronic hepatitis liver disease.

Existing genomic and esoteric testing also continued to grow dramatically during the quarter. Esoteric testing, including genomics, represented approximately 30% of our revenues through the end of December. Additional details are available in the 8-K we filed this morning. These additional details will show a 37.5% increase in our highly specialized genomic revenues.

Testing volumes for HPV and cystic fibrosis continue to grow monthly, as more physicians follow the new standard of care guidelines for use of these tests. Our 4th quarter testing volumes for both tests grew significantly compared to the same period last year and the prior quarter of 03.

I hope this brief summary of results and significant strategic accomplishments demonstrates to you that at LabCorp, our strategic plan is actively working to generate growth opportunities for shareholders.

Now I'd like to review a few frequently asked questions and our specific answers to these questions.

What was your organic volume growth in the 4th quarter. As I stated earlier, our volume growth was approximately 4.5%. That is our organic volume growth.

What are your pro forma revenue results. For the quarter, on a pro forma basis, our revenue grew 4.6% over the 4th quarter of 2002.

What makes up the 5.5% price increase for the year? Approximately 1 to 2% of the increase is an increase in rates. The rest is related to shifts in our test mix. Predominantly in both our genomic businesses and in our histology testing, which is primarily DIANON related.

Can you provide an update on your negotiations with managed care companies? As I stated before, negotiations with managed care companies can be challenging. In addition, managed care prices -- in addition, excuse me, managed care price increases have moderated, so our pricing expectations are moderating as well. We still expect to get modest price increases from managed care.

Given your experience during the 4th quarter, have your long-term revenue, volume, or price expectations changed? No. At this time, our overall long-term expectations remain unchanged. We still expect long-term organic volume growth at LabCorp of 3 to 4%, and overall price rate increases of approximately 1 to 2%. These expectations reflect the more competitive pricing environment, including pricing for some genomic tests, such as cystic fibrosis and HPV, that are now being offered by more laboratories. They also incorporate the loss of testing revenues as a result of slowing volumes in our plasma testing business, which we began to experience in the 4th quarter. This development had an impact of 6 to $7 million for the 4th quarter. The full year 2004 impact is approximately $25 to $30 million and is incorporated into the 2004 guidance, which I will give in a moment. This slowdown was caused by issues in the plasma products industry related to an oversupply of plasma products. In addition to the rate increases, we also expect and depend upon additional price improvements from continued shifts in our test mix toward higher value esoteric and genomic tests. New tests in these areas continue to be a key component of our overall price increases.

Has your acquisition strategy changed now that you've completed integrating both Dynacare and DIANON? As I've said before, we did not seek to make large acquisitions during 2003 and we do not anticipate any large acquisitions at this time. However, we do believe that good deals of all sizes are still available, and that one of the best ways to execute our growth strategy is through appropriate acquisitions. Our results for the year, improved margins and significant growth, demonstrate our success with these transactions, achieving EBITDA margins of 24.2% on sales and approximately $2.9 billion in 03 is a substantial improvement over 22.5% margins on $2.5 billion in sales in 02. Good strategic acquisitions have been, and will continue to be, an important part of our growth strategy. Although it is a little harder to predict this year than it was at this point last year, our current thinking is that we will probably spend approximately 50 to $60 million for acquisitions during 2004.

How do you plan to grow organically? We plan to grow organically through internal sales efforts to gain more physicians and hospital accounts by enhancing our customer service through strategic initiatives in selected markets and by becoming a provider to more managed care companies in key markets. Additionally, a key component obviously includes new tests such as cystic fibrosis, HPV, PreGen-Plus, and our ovarian cancer test, OvaCheck.

What is the medically recommended follow-up for a positive or false-positive OvaCheck result? First of all OvaCheck is not intended to be used as a diagnostic test. The initial intended use of OvaCheck is as a screening test for women at greater than average risk for developing ovarian cancer based on family or medical history. As with any screening test that is positive, additional medical follow-up is recommended to make an accurate diagnosis. Please keep in mind that no screening test in use today is 100% accurate, including the commonly used PSA screening test for prostate cancer. In the case of OvaCheck, it is our expectation that the test will have a very high level of sensitivity and specificity once we complete our test validation process. Therefore, in the case of a positive OvaCheck result, the patient should be referred to a board-certified expert in gynecological oncology for further evaluation and care. This may include a thorough history, a pelvic exam, monitoring of the CH125 level and some form of ovarian imaging, such as ultrasound. If indicated a biopsy or other surgical procedure may then be performed.

How do you plan to further improve EBITDA margins in EPS? In addition to reaping the benefits of our strategic plan, there are three ways we will seek to improve EBITDA margins and generate EPS growth. One, by reducing our bad debt rate from 50 to 100 basis points during 2004. Two, by more closely aligning employee productivity with accession volume. And three, by further shifts in our test mix from lower value, lower margin tests, to higher value, higher margin tests, particularly in our esoteric and genomic businesses, which generate higher margins than the core business. As we work to further enhance EBITDA margins and EPS growth, please keep in mind that there are also expenses we must continue to manage, such as increased costs for employee benefits and medical malpractice insurance.

How do you plan to use your cash in 2004? We plan to spend approximately 90 to $100 million in capital expenditures to support our strategic growth plan. We expect to spend approximately 50 to $60 million to make small acquisitions. We intend to execute on our $250 million stock repurchase plan, and lastly, we'll remain flexible in utilizing our remaining cash.

What is your guidance for 04? As we enter 04, the integration of our two large acquisitions are mainly behind us and many new opportunities are now ahead of us. We now plan to intensify our focus and resources on the continued execution of our strategic plan. Fine-tuning key initiatives for continued growth and profitability. For 2004 our guidance is as follows: Compared to 2003, LabCorp expects 2004 revenue growth of approximately 5 to 7%, including end year revenues of 25 to $35 million from small acquisitions or new contracts. EBITDA margins in the range of 25% of revenues. Diluted earnings per share growth in the range of 11 to 13% compared to 03 EPS. Capital expenditures of approximately 90 to $100 million. Free cash flow net of capital expenditures of approximately $440 to $460 million. Projected 04 free cash flow is impacted, as compared to 03, by increased capital expenditures and the benefit in 03 of a one-time income tax credit of approximately $50 million. We also expect net interest expense of approximately $36 million, and a tax rate of approximately 41%. Our bad debt rate of 6.75% of sales should be dropping to 6.25% of sales by December 31, 2004. Note, this guidance does not include share repurchases, any major acquisitions, possible significant contributions from new tests, and any effect of weather in the 1st quarter of 04.

In closing, I would like to emphasize that in every respect, it is LabCorp's strategic plan which is the framework for our success. As you think about our consistently solid financial performance and scientific leadership, remember that our actions to date, as well as our future initiatives, are all based on this plan. This plan leverages our national infrastructure, which is supported by routine testing, by combining it with our expertise and offering high value, genomic and esoteric tests, particularly in the area of cancer. The result is a highly profitable company generating significant amounts of cash and the leading gene based and esoteric testing lab in the United States.

Thank you for listening and we are now ready to answer any questions, Duane.

Thank you, sir.

[Operator Instructions] One moment please, for our first question.

Our first question is from Bill Bonello at Wachovia Securities.

Yes, just two questions. Tom, just want to make sure I understood your last comment about the guidance and share repurchase. So in other words, if you execute on the 250 million share repurchase, you would expect EPS growth in 2004 to probably exceed the high end of that 11 to 13% range, is that a fair assessment?

No, I don't think that's a fair assessment, Bill. What we're saying is that we believe today we're going to grow in the range of 11 to 13%, and that the share repurchase plan is not included in that forecast of 11 to 13%. I can't sit here today and say whether it's going to be 11, 12, or 13, but what I can say is all of our factors have not factored in that $250 million plan, and obviously, when we executed and the timing of that execution is also critical.

Okay that makes sense, and just the comment on weather for Q1, I mean, I assume given the date you've factored in any weather that has already occurred in Q1, it's just what might occur the rest of the quarter?

We're actually here in North Carolina today with a forecast that is not good so I want to be careful that we still have six weeks to go in the quarter and weather is impacted.

Okay, great, and just the second question, it looks like if we're doing our math right, and I've never totally sure, but looks like if we're doing our math right, that maybe in the quarter, the esoteric pricing was down a little bit year-over-year. I'm wondering if you can tell us if that's (A) is true, and if it's true, maybe why that might be, if it has to do with the mix or what that would be.

Well, number one, Bill, is you've done your homework and it is true. There was a decrease in the esoteric testing in the 4th quarter and that mainly related, mainly related to two factors. One is some shift mix because HPV is a lower priced genomic test compared to some of the others, but equally important, as I mentioned on my prepared comments, we lost a major bit of our plasma business in the 4th quarter. Some of that was rather high priced testing, so it's a combination of the loss of contracts related to plasma testing, which are infectious disease testing, and the shift mix down to the HPV.

Okay, thats great. And can you just as long as you mention the HPV, can you give us any sense, do you know sort of where you're at in terms of run rate on what percentage of PAPS are maybe being done in combination with and HPV as a primary screen?

Brad, do you have that?

I think it's 50 to 60% [inaudible] are ordered with HPV as a reflects. And a combination test, the DNA PAP is at a much earlier stage so it's a much lower number.

Okay, okay, great, thank you guys very much.

Thank you, Bill.

Our next question comes from the line of Tom Gallucci at Merrill Lynch.

Good morning, everybody. Maybe just one follow-up to that and one other. Can you talk about what percent of your volume maybe has plasma been historically?

We've never talked about that, Tom. It's part of both our core business, depending upon what kind of plasma testing is done, and it's part of our esoteric genomic business because it requires some PCR testing. So I think, we really don't get into the specifics of what the volumes are and revenues, but I think suffice to say, as we mention on the conference call, we expect a 25 to $30 million hit in the year 04 from this development.

You said that it was maybe because there was some oversupply out there. Is this something you see as being temporary or tossing out and eventually bouncing back to more normalized levels or can you discuss the trend generally?

I think it's too early to talk about what the trend will be in a year because their industry factors, we are in effect, we're just servicing their needs, we're reacting right now to the oversupply of plasma and how much the market bounce back for plasma products or whether there are other products that could be developed a year from now that continue to keep the situation in an oversupply mode. It's hard for us to tell right now.

Maybe just one other one. You said that pro forma revenues were up 4.6%. Would you talk about pro forma volume at all?

No, we don't do that. We don't do that, Tom, the only thing we do do, in all of the conferences we've attended in the last several months, we continue to say that pricing is a challenge out there and that in terms of mixed shift, that's very important to our pricing assumptions for the year 04 because most of the pricing is going to come from -- we believe from mixed shift.

Right, I guess I was just trying to correlate your pro forma revenues being up 4.6%, but would you call organic volume growth being up 4.5%, presumably there's some positive pricing too in organic bases overall as you mentioned earlier.

I think you have to recognize. We never talked about individual price not guilty the three businesses of the year 2003. There's DIANON pricing, there is Dynacare pricing, and then there is LabCorp pricing. And, while I don't want to get into any detail, there was a lot of pricing noise in all of those areas in the last year, not just the LabCorp pricing. We'll just leave it at that.

Okay, so the difference [inaudible] maybe is more --

Tom, Wes just wants to comment on that.

Okay, sure.

I think -- I think whats important, Tom, too, is what we had talked about the longterm growth in volume and price, we said 3 to 4% volume and 1 to 2% price. Those are the expectations and the trends that we're seeing. And just remember also that DIANON, the anniversary date of DIANON was in the middle of January --

Right.

So all these numbers are -- they're cleaner now going forward and that's why the 1 to 2% price and 3 to 4% volume is a more accurate depiction.

Sure, sure. So, just to your point Tom, maybe, the pro forma revenue number versus the organic volume number, the difference may be a little bit is more on price rather than any other volume issues, is that fair to say?

That's very fair to say, Tom.

Okay, good, thank you.

Okay.

Our next question comes from the line of Gary Lieberman at Morgan Stanley, please proceed with your question.

Thanks. You had really solid growth in -- or improvement in your bad debt expense. Looks like you still have some room there. Can you talk in a little bit more detail about some of the processes that you guys have been able to implement for the improvement or some of the other reasons that you're seeing improvement?

Yeah, sure, Gary, I'm going to ask Wes Elingburg to do that.

I think, the first thing is our continued improvement in front end data collection. We've said all along that one of the biggest problem areas related to bad debt is not the inability of people to pay, but the inability to get the correct information up front and we've become much more sophisticated in that area. It's also a reason why our CapEx is expected to be higher this year, cause we're going to invest even more in that type of technology from an IT perspective. The other thing is the area that is problematic as far as ability of people to pay is the patient billing segment and recognizing that we have put in place many initiatives specifically targeted towards the patient segment. Things such as patients coming in to patient service centers and thus requiring cash or insurance information up front to make sure, before we provide the service -- the service in most cases, the cash has already been paid. But there's many initiatives, primarily in that patient billing area that we think is -- proves successful over the last couple years.

I think also, Gary, as we have more patient service centers, and where we have greater control in terms of access to the patient, we can get better information, and, I think, -- if you're completely familiar with the industry, you know that the industry is moving more towards patient service centers and collecting the specimen than from the doctor's office and that should be an added benefit to collect money.

Thank you very much.

Our next question comes from the line of David Lewis at Thomas Weisel Partners, please proceed with your question.

Good morning guys, Tom, just real quick on -- did you say plasma affect for the entire year was 25 to 30 million?

For the year 04, not year 03.

Okay, for the forward period?

Yeah. For the forward period it was -- it will be 25 to 30 million in revenues, a loss of those revenues, and for the quarter, I think I said it was in the range of $6 million.

Perfect. Thank you.

Just looking at the histology, we may be doing our math wrong as well, it looks like that histology fell sequentially which is not surprising for LabCorp or the -- big lab industry but for pathology segment and DIANON specifically, it's typically the stronger seasonal quarter. Can you just comment on DIANON, are we seeing a sequential uptrend in DIANON core business, or is that still sequentially declining, and that would explain why histology fell from 3rd to 4th quarter?

To be honest with you, David, I'm not that close to that that number. We'll just have to get back to you offline. Certainly our histology business, in the 4th quarter is usually down. So I don't know that I agree with your conclusion that it's usually strong in the 4th quarter. All of our business with OB/GYN is tied to their office practices being open, so I don't know that that's not the usual case, but I think what we need to do is look at that and get back to you offline on it. But, certainly you would expect a decline -- cause you would expect a decline in office visits there.

Sure, so you wouldn't necessarily expect strength in DIANON to be offset the broader LabCorp trend?

I -- I -- by the 4th quarter of 04, DIANON was part of LabCorp. But, again, I think what I need to do on that Dave, we need to get back to you, because I don't want to make a comment if I'm not prepared for it.

Perfect. Not a problem.

Tom, just looking at your acquisition guidance, I want to make sure I'm clear, the AK says 50 to 60 million in cash acquisitions on acquisitions. I guess what I'm looking at -- the $150 to 200 million of incremental sales, given your guidance in 2004, that's total guidance, and if you're going to spend 50 to $60 million in cash, I thought historically sometimes these smaller acquisitions -- sometimes you can pay as much as one times revenue for the smaller ones. I'm wondering if that's just cash, what portion would you spend on debt, what portion could actually be equity, if the acquisition expenditure were much larger than 50 to 60 million that can imply acquisitions of 70 to 80 million in revenue, which would a substantial piece of the total revenue increase for 2004. I'm just trying to get more visibility on that, and, maybe, I'm not thinking about it --

Well I think -- I think, David, we're given an estimate, number one. We don't have any acquisitions we've announced, number two. So what we're talking about is end year sales. So, we may not get an acquisition done until July -- we may not get an acquisition done until September. So, I think to try and connect what we're estimating we're going to get in revenues to the values we're going to pay for those is probably not a good thing to do now because it's all related to the timing. Generally, we will pay more and we've said this publicly, we will pay more for the pathology histology tissue kinds of cancer acquisitions. They bring fairly sizable EBITDA margins for that. So, a lot depends upon the kind of acquisition we do and a lot depends upon the timing of the acquisition.

Wes, do you want to comment --

I think what's important is that most of these acquisitions we're talking about at this level are asset deals, where we're primarily buying customer lists. We're usually not getting BP&E, property, plant, and equipment, things like that, but it's mainly customer list related asset deals.

Okay, and then one quick last question. Just in terms of gross margin, Wes, obviously very strong in the quarter, just looking for reasons why that may happen, it looked to us that there was some improvement in pricing, in client and capitation and maybe a slightly higher piece of business, on a percentage basis, from fee per service, was the gross margin positivity in this quarter, its given esoteric as a percent of sales seem to slip a little bit, or pricing seemed slip, was the payer structure in this quarter more significant than it has been the last couple quarters, in terms of gross margin benefit?

No. I think one thing you have to look at compared to the -- and you're comparing to the 4th quarter of 2002?

That's correct. I think I was looking sequentially actually, but --

Well now, for the 3rd quarter it was 41.3% margins in gross profit, in the 4th quarter 41.1%.

But you usually have a more significant drop off in the 3rd to 4th quarter.

Oh, oh, okay, no, okay, I see what you're say -- I see what you're asking. Yeah, that has to do with realization of synergies. It has to do a little bit with mix shift, but a lot to do with the expense base and the realization of synergies related to the acquisitions that we've completed.

But not specifically payer structure.

No.

Okay, great, thank you very much.

Our next question comes from the line of Ricky Goldwasser at UBS, please proceed with your question.

Yeah, hi, good morning.

Good morning, Ricky.

First question, just to verify, on the plasma testing, is plasma testing refers to plas donation screening so would be kind of HIV, HPV, and if so, just to clarify, is the 25 to 30 million that you're projecting in 04 also reflect the fact that smaller labs are now offering these tests?

No. I'm going to take the second one, Ricky, and ask Brad, who is much closer than I am to take the first one. It's not a loss of business to competitors, it's a reduction of testing in the business environment. So we have had some major contracts, one in particular, that was cancelled because of -- as we are -- as explained to us, an oversupply of plasma in the industry, so they don't need to do testing. And they anticipate that this will go through, at least, all of the year 04. Brad why don't you talk a little bit about the kinds of test.

Yeah, and this is really, it's the plasma its -- when you talk about plasma products, Ricky,, you're not talking about somebody who goes into the Red Cross and donates blood and then that blood, after it's tested, it's actually used on a different patient. This is blood donations that actually are collected by plasma manufacturers for, or fractionators, to make specialty plasma products. And thats -- thats -- as there's more supply and theres more products, there's less need for them to collect these samples, we actually test the pools and the samples themselves as part of the manufacturing process.

Okay.

So it does relate to all of the hepatitis's and HIV.

Alright, but just a by-product?

I'm sorry?

For the by-product.

Right, that's right.

Okay.

And then can you provide us some more color on the trend that you're seeing in physician office visits compared to the same period last year?

The only thing I can say is that we don't see any dramatic change in physician office visits, unless there's weather and we see dramatic issues as the weather comes as relates to closing of facilities. We've been pretty consistent, I think Ricky, in thinking that our volumes are in the 3 to 4% range and we really don't see any major -- major change in that as it affects the market. Getting physician visit information is not something that we're good at to be honest with you and we rely really on published data to see what's going on there.

Okay, and lastly, just to clarify, when you talked about revenue guidance of 5 to 7, you're saying volume is 3 to 4 and then price increases 1 to 2, you assume you're going to get another 1% increase from the product mixture?

I'm sorry, I didn't hear that last -- what you said in the last --

That in your guidance product mix shift contributes about 1% to top line growth.

Well, we expect to get some from acquisitions, we expect to get some from at least one new contract that we're working on very heavily and the rest comes from what you just described.

Okay, so we should look at 4 to 6 being more pure organic and then an additional -- you know, 1 to 2% from the product [inaudible] and acquisition?

I think one. Don't go too far on me.

Okay thanks.

Thank you.

Okay

Our next question comes from the line of Robert Willoughby at Bank of America Securities, please proceed with your question.

Hi, it's Frank Pinkerton sitting in for Bob. Two quick questions. I guess I'm a little bit confused on the bad debt guidance, the way it reads. It kind of, I guess reading it, that it says 6.75% for the year, or is that the 1st quarter and then trending down throughout the year?

At this point in time we're 6.75%, we'll evaluate that as far as the first quarter and we'll let you know if we're still at that rate with the first quarter call, but we're saying trending down by the end of the year to 6.25%.

Okay, and then second question, does your guidance include all the new tests, Correlogic, exact sciences and other things in there, or could those provide upside?

Well, the guidance, and this is a difficult answer,, the guidance includes the current run rate of PreGen-Plus. It does not include hopeful significant increases in PreGen-Plus as reimbursement as comes along. It does not include anything related to the OvaCheck, because we haven't launched the product yet and until we launch the product and get some experience with it, we don't want to provide any expectation in terms of volumes for that. It does not include, which is a smaller test, the launch of FibroSure, so in most cases it's fair to say they are not included.

Thank you.

Our next question comes from the line of Gem Dolliver at SG Cowen Securities Inc., please proceed with your question.

Hi, thanks, and good morning. A couple things, first could you just provide some more color regarding the restructuring credit with -- and what I'm mainly interested in, what events drove the decision or the recognition of the credit this quarter.

Okay, first of all, we had a restructuring charge of $3.1 million in the quarter, but that was offset by restructuring credit of 4.8 million. That was entirely related to some of the restructuring accruals that we've had set up on our books going back -- as far back as five years or so and it primarily relates to acquisitions that we have done in the past and now recognizing that we need to reduce those accruals. It's part of the normal year-end process that we go through.

Okay, but t sounds like these were not the result of any specific events such as any lab closings or layoffs that occurred during the 4th quarter, is that fair?

That is exactly correct.

Okay, great.

Could you give us an update regarding performance of your drugs of abuse business?

Yes, Dempsey, drugs of abuse business showed some modest growth. I think that's the best thing I can say, that there was some growth in the 4th quarter of 04 compared -- excuse me, of 2003 compared to 2002, but it was negligible.

Okay, and how does that compare to earlier in the year, -- had it been down much earlier in the year or kind of like this?

Actually sequentially we've seen our -- and throughout the year our volumes and pricing related to drugs of abuse have gone up, that has returned to a growth mode, not only in volume, but also in price.

Okay, great.

But, recognize that the pricing in drugs of abuse is usually much lower than the pricing that you see in our TPA, so it does negatively affect the overall pricing as we return that business to growth.

Right, that's great, just the last question is what was the allowance for doubtful accounts accounts on the balance sheet?

Hold on one second. [ PAUSE ] 133.1 million.

Thank you very much.

Our next question comes from the line of Abe Bronstein at Glenview Capital, please proceed with your question.

Hold on a second.

I'd like to talk about the EBITDA margin if I could. Compared to where you wound up the year in your guidance, a fair portion of the improvement you're talking about if one uses the 25 as a number, is the bad debt improvement if we just take a midpoint of the beginning of the year and end of the year target, I was just wondering, that doesn't seem like very much improvement operating beyond that for a continuing shift in genomics and synergies coming through and DIANON--nizing LabCorp and all the other things you're doing. And I just -- I just want to make sure first of all, the EBITDA margin you're talking about includes your share of the investment income, equity income?

Yes, it does.

And then I wonder if you could give us a feel for why, with all of these things working, you're not thinking about a little bit more in the EBITDA margin area?

I think it's a combination of things, Abe. We've consistently said that once we get to the 24 to 24.5% margin perspective, that it's going to be tougher to get it beyond that. And that really -- to expect us to someday peak in the 25 to 26% range, so we are forecasting some improvement as we've said in bad debt, and we factored it in over the course of the year, and that's something that until year 04 we have never really given guidance as relates to bad debt. That's one. Two is DIANON-izing LabCorp doesn't bring short term efficiencies. It brings short term expenditures in order to do that, and then, in the longer term, we will gain -- we will gain efficiencies.

In terms of synergies, we were already in the process of realizing most of the synergies that we have seen from both acquisitions, and we'll see some improvement of that in the year 04.

In terms of mixed shift, we are seeing now at the point that 30% of our business is genomic esoteric, and the newer tests, which I just mentioned, PreGen-Plus, OvaCheck, are really not in any of our forecasts. If they develop at the levels that we hope they will, then that will have a positive impact on mixed shift and; hopefully, a positive impact on revenues and on earnings.

In terms of the overall esoteric business, we are seeing HPV become the leading product in terms of growth in this company, and that test price is not at the regular, normal, test price for a genomic test. So when we factor all of these things in, that's our best estimate.

Wes, did you want to comment?

You mentioned the bad debt. If we had booked the bad debt rate at the same level as we did in 02, it had an impact of where our margins would have been 23.6% versus 22.5%, so that impact of bad debt, instead of the 24.2% margins we're reporting, it would have been 23.6, which still shows, even with bad debt, improvement in -- of 100 basis points in EBITDA margin year-over-year.

One small question. The guidance refers to net interest expense of approximately 36 million. Is that net of what on your income statement is -- I'm sorry -- investment income, or is that number, 36, compared to the interest expense number for the year of 40.9?

It's net of investment income.

Thanks.

Our next question comes from the line of Colin Morean [ph] at Chief Capital, please proceed with your question.

It's actually Tom Stern. Most of my questions have and asked and answered, just a clarification though on the interest expense. If I look at your existing debt at year-end, the explicit interest is $33 million, roughly 10.5 on the 2% zeros and 20 on the 5.5% notes. How do you get from the 30 to the 36?

I have to check that calculation. I don't have the answer right now.

Thank you.

Our next question comes from the line of Scott Willken [ph] at UBS, please proceed with your question.

Yes, just a question on the plasma segment of your business. Could you just explain to us if you're testing on collected plasma or if you're testing on post fractionated plasma, and then if you could just relate to us what you're assuming for a reduction, either in the collected fractions -- excuse me, collected plasma or fraction in terms of the market, you know, your guidance, what does it assume in terms of reduction in terms of the plasma market thats out there?

To be honest with you Scott, I don't know whether -- I suspect we're testing in both, but I don't have that level of detail with me so we'll have to get back to you.

Okay, thank you.

Next we have a follow-up question from the line of Bill Bonello at Wachovia Securities, please proceed.

Yeah, Tom, just wanted to follow up on your comments regarding pricing getting harder and I know its not inconsistent with what you've been saying all along, but just curious if you could give us any sense of why you think that's happening. Is it, you know, just purely effort on managed care pay or is it increased competition in the lab sector, increased consolidation on the payer side, I mean, what's giving them leverage on the pricing side that maybe they didn't have in the past?

Well I think it's a combination of all the factors that you just -- you just mentioned. One is I believe that the competition in the laboratory market has increased over the past several years. We see more people interested in the laboratory business, we see more laboratories getting into the business with ultimately the goal, I believe, of getting out of the business, so we see people out there trying to get volume increases with an ultimate goal of perhaps getting out of the business. We see a recognition by managed care plans of the success of some of the larger laboratories, and we see them trying to squeeze us in the pricing arena. And we see many creative approaches out there to deal with the managed care organizations. So over the past 6 to 18 months, I've continued to see, what I call, significant pricing competition in the core business.

In the esoteric business and in the genomic business, we are beginning to see some pricing competition for the older tests. The HIV tests, the HCV tests. As manufacturers now have the ability to deliver automated systems for those older kinds of tests and that's why we have been steadfast at LabCorp in saying that we need to get more new tests into the marketplace. The tests like PreGen Plus, tests like OvaCheck, test like FibroSure, are very sophisticated tests and they are one of the ways that we help to enhance our pricing here at LabCorp. So I think it's just a combination of all those factors that has gone on, Bill.

Okay and just as a follow-up to that, I'm not sure if you're going to be willing to answer this or not, but are you at all concerned specifically with pricing on cervical cancer? I mean, it just seems with the switch to liquid based psychology and the advent of HPV and reimbursement for imaging that payer's have had a tremendous increase in the cost of cervical cancer screening and I'm just curious if you're seeing people specifically address that area or think that they might.

I think, over time, Bill, whenever there is a series of alternatives that reach the marketplace, over time pricing becomes an issue. So I worry about all tests that have been out there for a long period of time related to pricing, and that's why we at LabCorp have spent so much time trying to get new tests into the marketplace and being leaders in those tests, because we have the opportunity of bringing these tests in at what we think are appropriate fair value prices and sustaining that for a period of time.

Thank you.

Our next question comes from the line of David Lewis at Thomas Weisel Partners, please proceed with your question.

Yes Tom, just one quick followup on OvaCheck, can you just tell us if you're -- I may have already said this, I may have missed it. Are you positioning this test as a true screening test?

No, not at the beginning. At the beginning we're positioning it as a screening test for women that have a risk of cancer and that's kind of what the indication is coming out. I think Correlogic has guided us to do that. So, at the beginning we see the potential in the range of 8 million women that could qualify for this test.

Okay, so the data, as you rightly suggest, is not indicated for screening, it's not really designed that way?

It is designed as a screening test for women with a risk of cancer, so it is a screening test, it is not a diagnostic test.

Sure, for a subsegment. So I guess my point is, do you believe that this test is going to be significantly larger than the myriad test and myriad opportunity was -- in the first couple years?

I believe it for a number of reasons. Number one, David, there is no test there, in the United States -- anywhere that I know in the world that can be used as a screen for ovarian cancer. They're either in some type of procedures, so there's no test there today that satisfies that need. Most of the areas, that you are familiar with, usually have some type of an option available. And to the best of our knowledge, there is none available for ovarian cancer.

Okay, and Tom, can you comment about CA-125 levels on an annual basis?

I don't have that actually, that information, if I did I probably wouldn't comment. They are not significant and again CA-125 is not -- the package insert, I don't think, says anything related to screening. It's a follow-up diagnostic test that's used, I think, for women with ovarian cancer. They had a history of ovarian cancer.

Okay [inaudible], thanks so much, Tom.

Our next question comes from the line of Robert Willoughby at Bank of America Securities, please proceed

Hi actually, Tom, this is kind of a follow-up to some comments you made earlier, but could you speak to -- on the HPV side, Rousch [ph] has some data coming out there, how do you currently process the HPV test, is that kit, is it home brew, and would additional market participants on the supply side help you on your margin such that even if it's a lower priced genomic test, the margin could still be very solid? Thanks.

I believe we used the [die jean] [ph] test, I believe we're quite comfortable with the [die jean] [ph] test, I believe that we're getting appropriate pricing from [die jean] [ph], and to be honest with you I'm not close enough to the new Rousch [ph] test and its status in the U.S. market or its status with the Food and Drug Administration, so I think the only data that I have at this point in time is that I'm happy with the current method we're using and I'm sure we do very well on the pricing side. Okay?

I'm going to take two more questions if there are two more questions, if there are two more questions.

Actually I will issue a reminder for all participants to queue up for a question at this time. [Operator Instructions]

Our next question comes from the line of James Star at Henri Crown and Company, please proceed with your question.

Hi, good morning.

Tom, you mentioned that the guidance includes the run rate for the exact test. I assume, or would it be fair to assume that that test is essentially -- is running at a loss?

Jamie, what I meant to say is that the revenues and the accessions were calculated at the run rate. I didn't give any information related to the cost of running the product.

But it would be a fair guess at the kind of volumes we're running at now, correct?

Probably, yeah.

Thanks. Thank you.

One more question.

Sir, I'm showing no further questions on the audio bridge at this time

Right, thank you very much, have a good day.