Labcorp Holdings Inc (LH) 2004 Q3 法說會逐字稿

Welcome to Laboratory Corporation of America Holdings 2004 third quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, press the one followed by the four on your telephone. As a reminder, the conference is being recorded Thursday October 2, 2004. I would now like to turn the conference over to Thomas MacMahon, Chairman and CEO.

Thank you. Good morning, and welcome to LabCorp's third quarter conference call. Joining me today from LabCorp. are: Brad Smith, Executive Vice President Corporate Affairs; Wes Elingburg, Chief Financial Officer; Ed Dodson, Senior Vice President and Comptroller, and Brad Hayes, Senior Vice President Investor Relations.

We will start by having Brad Hayes reviewing our financial results. I will update you on our key strategic initiatives and then I will discuss the most frequently asked questions about the company. I would like to introduce Brad Smith, who has a few comments before we begin.

Before we begin, I would like to point out there will be a replay available via the telephone and the Internet. Refer to our press release dated October 21 for replay information.

This morning the company filed an 8-K that includes 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 October 21, for a reconciliation of EBITDA, which is non-GAAP financial information discussed during this call. I would like to point out that any forward-looking statements made during this conference call are based on current expectations and are subject to change based on various important factors that could affect the company's financial results. These factors are set forth in detail in our 2003 10-K and subsequent filings.

Additionally I would like to announce that LabCorp will host a meetings for analysts and institutional investors on November 10th at the North Carolina Bio-technology Center and Research Triangle Park in North Carolina. Interested analysts and institutional investors should contact Brad Hayes in Investor Relations at 336-436-4602 if you are interested in attending. Now, I would like to introduce Brad Hayes who will review our financial results.

Thank you, Brad. Our third quarter results are as follows. Earnings per diluted share increased approximately 14% to 66 cents. EBITDA was $200.8 million or 25.7% of revenues, compared to 24.5% during the third quarter of 2003. Cash flows from operations continue to be very strong at $137.2 million. Revenues increased 3.9% to $781.5 million. Volume increased approximately 2%, and price increased approximately 2%.

We estimate that hurricanes during the quarter decreased revenues by approximately $7.5 million, and negatively impacted volume by approximately 1%. This loss of revenues resulted in the decrease in EPS of approximately 2 cents. DSO for the quarter was 52 days. During the quarter, we completed our $250 million share repurchase program by repurchasing approximately $67.9 million of LabCorp stock representing approximately 1.6 million shares. We are also pleased to report that our Board of Directors has authorized an additional $250 million stock repurchase program.

Now, for our nine month results. Earns per diluted share increased approximately 18% to $1.97. EBITDA was $602.8 million or 26% of revenues compared to 24.3% over the first nine months of 2003. Cash flow from operations continued -- continue to be very strong at $431.5 million. Revenues increased 5% to $2.3 billion. Volume increased by approximately 4%, and price increased by approximately 1%.

During the first nine months, we repurchased approximately $250 million of LabCorp stock representing approximately 6.2 million shares. And at September 30, our balance of cash and short term investments was $233.7 million. In summary, we are very pleased with our results for the quarter given the challenges we faced due to severe weather. We believe that our performance is due to sound planning and the execution of a focused strategy. Now, Tom will review our key initiatives and frequently asked questions.

Thank you, Brad. As you are aware, this has been an unusually active hurricane season. With four major hurricanes making landfall in one state for the first time in over 100 years. As we speak today, Florida continues to feel the effects from these costly storms. Fortunately for LabCorp, the impact on our business was not long term, largely as a result of the actions of our dedicated employees.

I personally visited Florida and seen first hand the devastation. When weather of this nature occurs, our three primary concerns are for the safety and well-being of our employees and their families, the protection of our assets, and the ability to report results on any testing and progress. We are pleased to report that our employees and their families are safe. Our assets are largely undamaged, and we were able to reroute testing and progress to other LabCorp facilities for near-normal turnaround time. During times of severe weather, specimen volume is negatively impacted due to patients inability to visit doctor's offices. Which is the source of the majority of our testing volume. By the time things return to normal, we believe that the majority of that testing volume cannot be made up, as physician offices have a fixed amount of time in capacity to see patients.

We develop our estimates of the impact of severe weather by looking at specimen volumes before, during and immediately after the severe weather events. We typically see a significant drop in specimen volume during the event, returning to normal several days after the event has passed and services are restored. Estimating this impact has been especially challenging due to the lingering effects of these storms on certain areas of Florida. You should also be aware that while a majority of our estimate is from our Florida business, we also had a significant presence in other states in the southeast that were affected, such as Louisiana, Alabama, Georgia and the Carolinas.

Now the key initiatives. In 1997, LabCorp adopted and began implementing a strategic plan to guide our accomplishments. Recently, for the third time since I became CEO, we completed a review of our strategic plan. Out of this process came three priorities that form the foundation of LabCorp's updated strategic plan: Scientific leadership, customer retention, and managed care. We believe these are key to LabCorp's future growth opportunities and are the chief areas of focus for LabCorp moving forward.

Let's start by talking about scientific leadership.

As a pioneer in genomic testing and the commercialization of new diagnostic technologies, LabCorp remains dedicated to maintaining and enhancing our position of scientific leadership in the industry. This is evidenced by the more than 200 M.D.s and Ph.D scientists on our staff. Our commitment ensures that LabCorp will continue to offer the latest medical science and technology and drive growth in these important business segments.

During the first nine months, the rate of revenue growth for all genomic and esoteric tests as a group was nearly double the rate of growth of the rest of the company. Genomic and esoteric testing represent 31% of LabCorp's total revenue, but are an even greater contributor to profit margin. We will continue to focus our resources on the identification and introduction of novel testing technologies that offer better treatment options to physicians and their patients. Continued expansion of our capabilities through licensing agreements, acquisitions, and key scientific partnerships, ensure that LabCorp makes every effort to be first to market these important new tests.

We believe our past and future success in this area is built upon, one, our depth of experience and relationships in the licensing and acquisition areas. Two, our industry-leading scientific team, which makes us the partner of choice. And three, the value that our national infrastructure presents to potential licensers.

I would like to update you on several of our key initiatives related to this important area of our strategic plan. One, dianonization. Our program for expanding the Dianon anatomical pathology model thoughout LabCorp is on schedule. By incorporating it into LabCorp, the highly standardized Dianon systems for processing, diagnosing, and reporting anatomical pathology specimens LabCorp introduces a more efficient, consistent and physician-friendly system for delivering anatomical results. To date, four LabCorp sites have been dianonized: the center for Molecular Biology and Patholgy in Research Triangle Park, our Center for Esoteric Testing here in Burlington, and two major locations in Florida. All conversions went very well. Over the next three years we plan to aggressively continue dianonizing LabCorp sites. Diaonization continues to redefine our approach to anatomical pathology and helps position us as the clear and preferred provider in this field of cancer testing.

PreGen-Plus. We have previously stated that we believe the roll out of this test to be a two-year process. As we enter the second year, our efforts continue to be focused on expanding reimbursement by payers and getting the test included in standard of care guidelines, both of which are key to broad adoption of the test. Exact Sciences has indicated that they expect the publication of their multi -- their multi-center study in a peer-review journal before year end.

OvaCheck. We remain excited about the medical value of this test, which will be offered for the eight million women in the United States at high risk for ovarian cancer. We are awaiting the results of discussions between Correlogic and the FDA and are prepared to offer this test as soon as that process has been successfully completed.

Fibrosure. This past March, through our exclusive relationship with BioPredictive, we began offering their non-invasive blood test for liver fibrosis under LabCorp's brand name of HCV Fibrosure. HCV Fibrosure further extendeds our extensive menu of tests for Hepatitis C. Since the introduction, demand for Fibrosure continues to increase on a monthly basis. In addition to growth and existing tests, new genomic and esoteric testing opportunities remain numerous and will play an even more important role in LabCorp's future success. Our objective, with growth -- with this growth strategy, is to continue developing licensing opportunities with leading research and development companies that possess diagnostic technologies offering the most potential benefit to physicians and their patients and in turn further our scientific leadership. We continue to work on many exciting opportunities that will be the foundation of our future success.

Two, customer retention. Retention of customers is a key priority to LabCorp. The industry has historically experienced a certain amount of churn due to a variety of factors. We realize that every customer we serve has a choice. Providing exceptional customer service is one of our highest priorities.

Customer retention requires understanding the unique needs and challenges that face each of our customer segmentsm then providing solutions that address them. To maintain our rigorous service standards we continually cultivate our relationship with more than 220,000 clients. You should expect as part of this strategy both an expansion of our sales coverage in the upcoming year, as well as enhanced efforts in the delivery of information management solutions to our customers.

We have now substantially completed our consolidation into a standard laboratory in billing system. To further continue our standardization process, we intend to consolidate all of our customer contact activities into two to three national call centers within the next three years. This consolidation will allow us to standardize the way we interact with our customers. We believe this is a critical step to help us improve service to our customers. Just as consolidation onto a standard laboratory and billing system has provided us with operating in bad-debt performance improvements. I will continue to update you on this important part of our strategic plan as it progresses.

Three, managed care. Managed care organizations constantly monitor, analyze, and direct care for large patient populations. Our broad geographic reach, the breadth and depth, of our product offerings, and our commitment to offering cost effective clinical testing, have made LabCorp a laboratory of choice for more and more managed care organizations. Approximately 40% of our revenues now come from managed care payers. Strong managed care partnerships are key distribution channels for new and existing products and services, and are critical to the long-term evolution of our scientific leadership priorities. LabCorp has devoted substantial business and scientific resources to our managed care customers, to ensure that we are providing this growing customer segment with creative solutions and quality services they have come to expect. In addition, LabCorp is focused on securing a appropriate reimbursement while working closely with managed care organizations to communicate the health benefit of laboratory testing.

LabCorp has multiple initiatives in place to expand profitable opportunities with managed care. As we have discussed during recent calls, we have been working with major managed-care organizations to develop new relationships, and renew existing relationships, that help us grow our business in this important market segment. One example of an initiative designed to expand our business with managed care companies, relates to helping them address the issue of leakage. Leakage is a term used to describe payments to nonpreferred or nonparticipating providers. These payments are usually at higher rates than rates that the managed care company can obtain from preferred or participating providers. We at LabCorp have very specific programs in place to assist managed care companies to redirect work and therefore, payment, away from leakage providers, and into preferred or participating providers such as LabCorp.

As we have stated, negotiations can be difficult. I want to make it clear that although we are not at this point in any of our current negotiations, we will walk away from business if we are unable to obtain what we believe is fair and appropriate reimbursement for the services we provide. Our philosophy is simple and consistent. Select the major areas of focus that we believe are critical to the future successful of this company. Develop plans, metrics and goals for each area, and monitor progress towards achievement of those goals. We believe that by applying this simple philosophy to these three focused areas: scientific leadership, customer retention, and managed care, we can continue to do great things here at LabCorp.

Now, I would like to review a few frequently asked questions and our specific answers to these questions. What is your assessment of revenue in the quarter? For the quarter, revenue grew by approximately 4%, with price and volume each contributing approximately 2%. Quarter includes the impact of severe weather on volume, which we estimate to be approximately 1%. In addition, as we have discussed in the last conference call, the loss of a low-priced capitated contract in Florida has negatively impacted volume, but positively impact price, resulting in very little change to the revenue growth number.

During the quarter also, we did see some volume from our new agreement with WellPoint. We are pleased with the progress we have made to date this year on pricing. To review the trend, pricing was flat in the first quarter, up half a percent in the second quarter, and up 2% in the latest quarter. The increase in price in the quarter was a result of modest increases across most most -- payer categories and a continuing shift in test mix toward the genomic and other esoteric categories. This is a result of a focus and discipline that we have in place on this important metric. Also, we are unaware of anything on the regulatory front that will negatively impact pricing in the foreseeable future.

Two, what is the impact of the rececnt EITF consensu on convertible death? At a September '04 meting, the Emerging Issues Task Force reached consensus on EITF issue number 04-8 which changes the accounting for contingency issueable shares. Using the IF converted method as if the company's zero coupon subordinated notes had been converted as of January 1, '04, diluted EPS would have been reduced by approximately three cents, to 63 cents, and by ten cents to $1.87 excuse me, for the three and nine months ended September 30, '04. We are required to adopt a provision at the end of '04 including retroactive restatement of all diluted EPS calculations presented. In our view, this is nothing more than a change in accounting, from a previously-accepted method to a newly-accepted method.

Three, how do you plan to use your operating cash flow? We continue to believe the best use of LabCorp's operating cash flow is to grow our business. Specifically, we plan to spend approximately $90 million in capital expenditures. We expect to spend approximately 50 to $60 million in total during the year to make small acquisitions. Much of which has already been accomplished. We also plan to maintain financial flexibility to pursue strategic acquisitions. We plan to aggressively pursue the completion of the new share repurchase program as recently authorized by our Board of Directors. For now, we continue to believe that these three uses of our cash flow are the best way to return value to our share holders.

Do you still think there are appropriate acquisition opportunities available to augment your growth? Yes, we do. If you look at the estimated size of the industry, less the known significant players, there are many remaining opportunities. Our policy and connection with the use of cash provides us with the flexibility to take advantage of good opportunities when they present themselves. There are plenty of opportunities out there, and we continue to evaluate potential acquisitions of routine, esoteric, and anatomic labs. LabCorp has consistently demonstrated its ability to extract significant synergy savings from its acquisitions and we will continue to seek appropriate candidates.

What are your expectations for the new agreement with Cytech? Given the importance of cervical cancer screening, we are very excited of our ability to incorp -- incorporate Cytech's thin prep imaging systems into our laboratoriess. The introduction of this technology will give us the latest cervical cancer screening to our customers and their patients. We will keep you updated on our progress.

What is your guidance for '04? And what is your guidance for '05? For 2004, our guidance, most of which remains unchanged, is as follows. Compared to '03, LabCorp expects revenue growth of approximately 5 to 6% including end year revenues -- excuse me of 25 to $35 million from small acquisitions and new contracts. We expect an EBITDA margin of approximately 25.5% of revenues. Diluted earnings per share in the range of $2.55 to 2.60 cents. Capital expenditures of approximately $90 million. Free cash flow, net of capital expenditures, of approximately 475 to $500 million. We also expect net interest expense of approximately $36 million, a tax rate of approximately 41%, and a bad-debt rate of 6.25% of sales for the third and fourth quarter. Note, that this guidance does not include any additional share repurchases after September 30, effective the adoption of EITF number 04-8.

Now for 2005, our preliminary guidance is as follows. Compared to '04, LabCorp expects '05 revenue growth of approximately 4 to 6%. And diluted earnings per share growth in the range of 8 to 10% compared to the first call mean EPS estimate sof $2.58. Note this guidance does not include possible significant contributions from new tests, additional share repurchases after September 30, and the effect of adoption EITF number 04-8.

We expect to achieve this EPS growth through the following initiatives. Increased revenue and further shifts in our test mix, particularly in our esoteric and genomic business, which generates higher profits than the core business. Continued reductions in our bad debt rate, Identified cost efficiencies which are a standard part of our business management process processes -- excuse me, and contributions from small accretive acquisitions. We expect to provide more definitive guidance for 2005 in conjunction with our fourth-quarter earnings release.

In summary, LabCorp continues to deliver on its goal of leading the industry in terms of scientific expertise, profitability, cash generation, and share holder return. We have repeatedly demonstrated our ability to consistently manage both revenues and expenses for optimal performance, and with improving volumes, more stable pricing, better capacity utilization, improving test mix and acquisition-related synergies, we continue to expect strong EPS growth and exceptional cash flow. Thank you for listening. We are now ready to answer questions you may have.

Thank you. Ladies and gentlemen, if you like to register for a question, press the 1 followed by the 4 on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, press the one followed by the 3. If you are using a speaker phone, lift your hand set before entering your request. One moment please, for our first question.

Our first question comes from the line of Gary Lieberman from Morgan Stanley. Thanks, good morning.

Good morning.

You talked about last quarter seeing increased competition, or competition increase supply from others, on some of the genomic and esoteric testing segments. I'm looking at the pricing growth in the quarter. It looks like it continues to be negative at about the same rate as last quarter. So, could you just update us on what you are seeing in that segment?

Sure, Gary. What we are continuing to see is that some of the older genomic tests, things that -- things like HIV viral loads, HCV viral loads, and even to some degree now the cystic fibrosis test. They have-- the manufacturers and suppliers have developed those tests into formats that make them more usable in the hospital community. So where in prior years those tests usually were only available by the big reference labs, they now have been decentralized into -- in some ways into the local community hospitals. And as a result of that, what we see -- and I think we will continue to see it with those older tests, is pricing competition and greater availability from a variety of customers which makes it obviously more competitive in the marketplace.

Thanks a lot.

Yeah.

Our next question comes from the line of Bill Bonello from Wachovia Securities.

Hi. Yeah, a couple of questions. Wanted to follow up on that pricing question. Wondering, Tom, if you could give us any examples of the new tests that have come online that are driving mixed shift for you that hospitals are not able to do? And then, along with that, beyond the viral load and the cystic fibrosis, are there any tests that are kind of on the fringe of being made available to more hospital labs? Then I have one follow-up if I could.

Let me start, Bill, with the last question which -- what are on the fringe? I think it's probably fair to say that the best people to ask that question to are the suppliers, the Roches of the world, the Abbots of the world, the Beckmans of the world, particularly the people that developed the molecular test and in that regard is heavily Roche. Because what they have is, they have the large automated systems that they need to try and get more menu into. I'm not aware in the American market of a large number of tests that are -- that are fitting into that menu. Quite honestly, the only one that I would bring up, and I really don't have the benefit of much information on it, but the whole area of infectious disease and chlamydia and gonorrhea are getting out in a decentralized way. In terms of tests that provide us with -- with helpful uh uh uh revenues on a per-test basis, we continue to actually see the benefits of cystic fibrosis. It still is a benefit, but I anticipate that test will be more widely used next year than this year. But still it's providing us with significant benefit. Human Papilloma Virus, the whole area of cervical cancer, is an area where there is much greater use of that, for a lot of reasons, in the big labs than there will be in the hospital community. We just do more Pap Smears, and we have many more customers that do Pap Smears, so as a result HPV is a very positive product for us. There the two that come to mind obviously. Even though they are smaller volumes, a product like PreGen-Plus which continues to increase and helps us also. Fibrosure is a test that we are only doing in the hundreds and hundreds of those now, not the thousands yet. But we get good pricing on that. And then there is many different technological tests in the area of for example, of flow psychometry. And PCR, specialized cancer tests that through the whole genomic and cancer aream which individually don't really give us substantial volumes, but when you put it all together is probably our fastest growing area.

Great. Thank you. And then just one other question on the Cytech imager, do you expect the imager to drive increased profitability in LabCorp or is adding the imager something you are really doing just to ensure that you remain competitive in the cytology arena?

Well, I hope uh -- I hope both. I think that from our perspective we've done a long evaluation of these products and we selected the Cytech imager because we think it will do two things. It will help automate from a cost efficiency our systems in the labs and it will bring to us a better result for the doctor and a better result ultimately for the patient. So as a result of that, we expect to be paid for the better reimbursement for that product.

And can we -- are we safe to assume that as part of the evaluation process you have been in touch with payers, et cetera?

Brad, why don't you take that because you have been close to it.

I think we -- our primary focus, as Tom said, is upon the efficiency in the lab and increased quality. We're aware of potential payment implications, but that's not been the focus of our evaluation. Okay. Great. Thank you very much.

Thank you.

Our next question comes from the line of Robert Willoughby from Bank of America. Please go ahead.

Hi, Tom. Are you involved in the NIH study that's looking at the breast cancer trials? Is that's something you and Myriad are involved with? And secondarily, can you possibly comment on some of your technology initiatives here, one of your competitors is out there with kind of a portal with some integrity and functionality. Where are you in terms of pursuing those opportunities?

Okay, first question, Rob, the best of my knowledge we are not involved in any NCI study with Myriad as it relates to breast cancer. So, If I'm incorrect on that I will get back to you. But if we are, it hasn't come to my attention. We have a variety of different initiatives under way in the whole area of what I call electronic medical records and information systems as it relates to the doctor's office. Whenever -- whenever I visit doctor's offices with -- what becomes very apparent to me is that virtually all--many doctors in this country now have in their mind their absolute need for electronic medical records. Now, that is a need that they want. Most still don't have it, but it's a priority for them to get it. So in that whole area, what's critical to the clinician is to get the clinical diagnostic tests connected to the electronic medical records system. We recently acquired a small company that only -- it's called Persis, and it's a LabCorp company now and their only role at LabCorp is to build connectivity or systems between doctors, clinical testing program, and their electronic medical record and to do that for hospitals also.

When did you do tha Tom?

I'm sorry?

When was that acquisition?

I'm going to guess eight or nine months ago. It was a small technical acquisition and it folded right into our-- our company and it was a development activity. On the other side, we continue to want to work with a variety of different companies to build interfaces for the medical record systems that are out there. So we will take a flexible approach and it is a major priority and a major source of expenses for LabCorp to do that. We are there and we will continue to be there.

That's great. Thank you.

Our next question comes from the line of Kevin Berg from CFFB.

I have a couple of questions. You talk about your revenue guidance for next year, a little lower from the midpoint than for this year. What's the difference between the two years?

The only difference right now is it's the third quarter of '04, and based on the rates that we see out there, we have pulled -- we estimated that our revenues will be in the 4 to 6% range. There is nothing very different from what we are doing now. We look at our run rates. We look at the marketplace. We look at our expectations of new contracts. We don't include new tests, and we don't include significant acquisitions. And our best estimate, as a stand alone operation now, is that we will grow our revenues in the 4 to 6% range.

In terms of acquisitions and the standard 25 to $30 million that we had this year that is a similar number next year and is that reasonable way to look at it?

Exactly. That is definitely a fair way to look at it. Then in terms -- in -- we are talking in terms of revenue to stay with that for a second -- in terms of volume and price, what are you looking for there? We -- we learned about a year ago, Kevin, that probably not a good thing to give that out. So we are not -- we're strictly going to focus on revenue growth here, because there are things that we do quarter to quarter to try and impact particularly in the pricing areas. So we are not going to guide any longer as it relates to expectations, revenues and volumes.

Couple other little questions. How many call centers do you currently have?

An awful, awful lot. I would say probably somewhere between estimate 30 to 40.

And what's the timing of getting it down you said to two or three national call centers?

Early 2008. Three years.

Okay, then lastly in terms of bad debt, you seem pretty consistent improvement there for awhile now. Do we expect sort of the same type, 70 to 80 basis points improvement again next year? Obviously your larger competitor has bad debt a couple hundred basis points below you. Any reason you can't get down to that level?

We have not given guidance related to bad debt for next year yet. We are 6 1/4% now. Rest assured we will have internal goals that get us down into that-- somewhere in that 5% range, somewhere in 5 1/2 or so and so we will give more guidance on that in the fourth quarter.

There is nothing structurally out there that you guys couldn't get your bad debt down to the 4% range or something like that over a longer time frame. frame?

The only -- and we talked about this consistently for a very long time, Kevin. There is a relationship between bad debt and capitation.

Sure

So if you're a company with higher capitation or lower capitation it does impact on the bad debt levels. But other than that, you are absolutely right. There is no reason we shouldn't get it way down there.

All right, thanks a lot guys.

Our next question comes from the line of Ricky Goldwasser from UBS. Please go ahead.

Yeah, hi. Good morning.

Good morning, Ricki. Couple of questions.

The first one is, can you quantify to us what's the year-over-year change in number of tests per requisition? And then on the pricing side, you are showing strong year-over-year price growth from patient. I was wondering does this reflect your annual price increase? Secondly, can you quantify whether the weather if there's any impact on price from the weather in the third quarter?

Ricky, the number of test per requisition at LabCorp is two per requisition and that has not changed very dramatically. It is impacted a little bit by HPV. There are, as you know, when a doctor orders that thin layer method, it can move right to an HPV test if you want to do it. So it's sticking in the range of two. Your second question related -- I'm going to answer your question on the weather. If pricing was impacted by the weather. I think pricing was not impacted by the weather at all. Where pricing was impacted obviously was in Florida with the loss of that large Blue Cross contract in Florida. That was a low-capitated contract to us with a lot of volume attached to it. The difficulty in completely answering your question is that as we lost this contract, we ran into terrifically bad weather for over -- almost six weeks down there. So there is a lot of noise in Florida for the last two months for LabCorp. But there is nothing that we see that suggests that weather had an impact on our pricing. Your other question quite honestly, I forget.

Patient price.

Oh, patient price. We instituted price increases during the quarter. We were happy to see some of those price increases at least hold so obviously that's impacted throughout -- throughout our line items there.

Okay, are you expecting another one in the fourth quarter in November? Or is that the last one for the year?

It's the last major one of the year. We are on a different pricing schedule. But we will have some price increases early next year.

Thank you.

Okay.

Our next question comes from the line of Sandy Draper from Draper Research. Please go ahead.

Thanks. Just some follow-up I guess on earlier comments and looking at some of the breakdown of revenue trend. The first would be, Tom, you comment a little bit on the histology line, the trend we've seen the negative revenue for the last couple of quarters. Is that -- clearly, little of it is price, why do you think you are seeing the session volume going down in histology?

That's the only question Sandy or do you have some others?

I guess and the other broad one is the flip-flop when you look at 2003 versus 2004, the genomic revenue growth is slowed down now for the last three quarters so the identity but the flip is you have seen a dramatic acceleration in other esoteric. Have you guys been able to figure out anything behind the switch? Is that maybe a classification? Or maybe relates to the answer of one of the earlier questions as you have seen some slowing growth in tests that maybe previously were more proprietary to the reference labs are now going to hospitals?

Let me try the first one, histology. Histology number one continues to be a very, very important strategic area to LabCorp because of its implications in the whole area of cancer and because of the Dianon strategy. So that's very important to us. We see very, very-- pretty significant competition out there. So we continue as a company to emphasize and redirect our sales force into more coverage as it relates to the whole area of histology. I would expect that you'd see a turnaround in those numbers, not necessarily in the fourth quarter of '04, but in early '05 where you see a beginning again of increasing our activities in the whole area of histology. The other esoteric is a significant growth area to us because of our relationships and our continuing new business that we get from hospitals. So that's really all the esoteric work that comes in to LabCorp in the esoteric center here in Burlington and we have a specialized sales force. We have specialized people that are convincing hospitals to outsource their work to LabCorp. And that really is benefitted by the increase in the whole other esoteric areas. and that 40 to $43 testing -- testing price.

So one way to look at other esoteric issues is your success or lack there of and how you are doing in the hospitals and right now it looks like you are making traction there?

Exactly.

Okay.

Exactly. Did you have another one Sandy?

And then when you looked at the broader trends between the esoteric business where you got the genomic going down identity gene probes going down, is that really a function of some of the shifting arounds of these tests?

Well, the genomic is actually going up right?

I guess -- It's more of a pricing issue in the genomic. I'm looking at total revenue. The slower growth. Some is from the acquisition. But dropping down into single digits, I would have thought that genomic was an area that you guys could get back up to a at least a low double digit growth rate. I'm just trying to understand why--

Here is the answer to that question. Now that I -- I thought you thought it was the client. The reason for that is we have not had the benefit of new genomic tests in the year '04 as we have had in previous years. We have seen significant competition in the cystic fibrosis test although it continues to grow. We have seen very nice growth of HPV, but on the pricing side it's not one of the higher-priced genomic tests. Quite honestly, we have got a gap that we have to resolve as it relates to at least two genomic tests that we expect to get significant volumes and revenues from in the next couple of years and that's the area of colorectal cancer and ovarian cancer. So they are products that we had hoped to have done better with in the year '04 that we continue to be very optimistic about as we move into '05. So we need to continually fill that pipeline and we haven't done as good a job this year as we have in other years.

Okay great. That's really very helpful Tom. Thank you.

Our next question comes from the line of Kemp Dolliver from SG Cowen.

Could you give us a brief summary of the small acquisition activity you have done this year? I can think of a couple of transactions particularly involving the MDS labs and then the one you referenced earlier on the technology side. Is there anything else of note you have done?

We have done three or four, Kemp. And some of these are so small quite honestly I don't even myself get involved. I feel like we -- this year we did the MDS deal. We made the Perseus acquisition for the interface acquisition. I feel like we made the acquisition in California, a small acquisition in California. And I feel like like there may have been one other one down in the south. But I can't quite recall if that's the case. There has been three or four.

That's fine. Thank you very much.

Okay.

Our next question comes from the line of James Scar [ph] from Henry Crown and Company.

Hi. It's Jamie Starr. The question has to do with your strategy regarding retention and churn. And I'm wondering, Tom, if you can talk about whether this is an embryonic strategy that's based on hope, or whether there are clear numerical goals, and I am sure you won't be able to share those with us, but perhaps give us a sense of where you are today or where you hope to be in three years versus that. And what are the structured reasons for why you think you might be able to achieve that.

Okay. Jamie, there are a variety of reasons why all laboratories lose a certain number of customers each year. And although I have the numbers, I'm not really prepared to share them-- share them publicly. But I view it as a significant opportunity for this company. People leave labs obviously because sometimes managed care contracts expire and new labs get into those contracts and then it's easier for a doctor to only use that lab that is working with managed care organizations. People leave labs because certain systems aren't consistent between labs and doctor's offices or hospitals. People leave the labs because of pricing issues. People leave labs sometimes -- None of us want to admit it but people leave lab -- leave us sometimes because of customer service issues . This is an industry that loses too many customers. LabCorp is a company that loses too many customers. We have spent a considerable amount of money and a considerable amount of effort since last October studying carefully our lost business. Going to customers all over the country in a very large way interviewing them. Going to competitor's customers and interviewing them and finding out why they use a lab. Why they don't use a lab, and why they leave us and why they leave other labs. And we have established clear metrics and we have clear expectations. One of the issues that I highlighted in my prepared comments was the issues of call centers. And the fact that there are many call centers at LabCorp. And what happens is customers have the potential -- being up front here -- have the potential to be frustrated as they get on the phone and are sometimes looking for technical information, billing information, test result information. And we need to put our information systems together like we did in our billing systems and like we did in our lab systems and we need to have a consistent answer, the first time a customer calls for any issue that that customer wants to deal with. And we have a clear plan to do that. We believe very strongly that if we can interact with a customer, one time with one issue, and by the way that customer is defined as a hospital, defined as a doctor in his or her office, and as a patient, we can retain customers because we can leap ahead of the industry because I think the industry, everybody in the industry, has this same problem. So we have customer surveys with data. We have retention records with data to come out of our billing systems. We actually look and find out from customers if they're ordering the same amount month to month and follow them over long periods of time. So we have all the metrics in place. Unfortunately, I'm not going to share the metrics with you. But we have clear expectations and I will be paid, and other executives will be paid at LabCorp, and the whole company will have compensation programs tied to our ability to improve our retention efforts.

Thank you. Second-- second question, I believe that I read that one of the large managed care organizations had gone to its hospitals that did lab tests for it and said, "We have given you a buy in the past, but going forward you will need to match pricing from Quest or LabCorp. " Is that something that's happening throughout the industry? That kind of pressure being brought on hospitals? Are there reasons why hospitals won't need to sort of compete with you on that even basis?

Jamie, I'm not aware of that at all. The only thing I would say to you that in my seven to eight years here in this company I have not seen the amount of intensity in any prior period related to the desire of the managed care organizations to redirect their business to the contract laboratories. And I say "Laboratories." They are aware of the cost implications of the laboratories service their clients in and out of network system. I don't know what they are saying or how they are saying it. I know what they are saying to us and I know that they have a very keen interest, from a cost basis, in getting more compliance in the contract area and they expect us to help them.

Great. Thank you.

Our next question comes from the line of Eugenia Chen from Thomas Weisel Partners.

Yes I have two questionsn. Can you quantify the impact of -- Blue Cross/ Blue Shield business and also the WellPoint contract? And two, what was the impact on revenue from the resolution of the competitive technology suit?

Okay. Let me take the first two. We never had -- and I don't think we ever will talk about volumes from individual contracts. That's, from a competitive perspective, a difficult thing to do. We are aware of the impact but that's not something that we state publicly. Now, your last question was related to the homocystine thing?

Yes. That's it.

Well, It had no impact on volume because we continue to offer the test. Brad, I don't know --

I guess the question you had would it impact on revenue --

On revenue.

Okay. Are there any other questions?

No. That's it.

Ok. Thank you.

Our next question comes from the line of Michael McGuire from Leerink Swann. Go ahead

Thanks just to follow-up on the pricing question. Your commentary about the genomic category in particular, when you talk about the pipeline in '05, is there a reasonable expectation that says some of these new tests in aggregate any combination of I guess a potential ramp in any of these tests, is there still enough volume there to offset some of the pricing pressures from the HIV, the cystic fibrosis and HPV test that you mentioned earlier in the call. Is it fair to assume that in '05 we could see a turn in the pricing pressure or there is just not enough volume -- potential volume contribution to in fact see that next year?

Yes. Tough one for me to answer, Mike. Certainly we have certain high expectations for the ovarian cancer product. That would in our minds, of the two major new tests that we are excited about, would have a greater volume impact, we believe. We continue to feel very positive about PreGen-Plus and I say that because we are so positive but we need to get payer acceptance of the product and we need to get scientific information out there from the peer review journal. So I can't really answer your question the way you like me to because it's always unpredictable when new products become available to see the ramp up. But I would certainly hope that OvaCheck is available then and that it has the impact on those 8 million people that we hope it will. We certainly receive many inquiries on a daily basis from clinicians that are interested in having that product available.

Thank you. Just a quick follow-up on the guidance as well. Just in terms of details, when you look at the new test line that is not included in the 8 to 10% EPS growth rate, can you define what that means and what I'm trying to get at is, would a test like Pre-Gen be considered in the current guidance or would that be a new test and included in the incremental.

I would say it's fair to say with that one what's in the current guidance is the run rate we have now. We hope that the run rate will increase significantly and then that would not be in guidance.

Okay. And finally on the guidance side, I certainly understand your comments on the lack of economic meeting to the ET -- EITF issuance but at the -- could that offset a vast majority of the accretion out there under the share repurchase program just on a strict diluted EPS basis?

Well, I think if you look at -- this year it's 10 cents through 9 months, so from a pure accounting standpoint, there would be an offset related to the share repurchase from a pure accounting standpoint.

Right, but we were restating everything.

You have -- everything has to be restated going back. When you look at all comparable periods, all comparable periods will reflect about a three-cent reduction in EPS.

Fair enough. Thank you very much. Operate pate our next question comes from the line of Tom Stern from Chieftain Capital Management.

It's Glenn Greenberg pinch hitting for Tom. Two quick questions. Will there be call center consolidation savings as well as potentially more retention of clients to be able to retain clients?

I'm going to answer you two ways, Tom, uh Glen. One is that's not the goal of the project. The goal of the project is to better service our customers. The reality if we do it well will save significant dollars because of the enormous number of call centers we have. So the answer to the question, if done right, which we will do, is yes.

And also, as I recall a year or two ago, every other question on this call was about a lab called Spectrum. And in the last year and a half or so you have increased your revenues and continues to build your margins. I'm wondering what did you do to maintain the business and to get rid of Spectrum as a significant threat to your business?

Well, I'm actually glad you asked that question. One of the fastest -- one of the better success stories at LabCorp this year is in the Atlantic region. We have performed very well in this region and it is one of the leading regions in the United States in terms of performance. I hope we learned our lesson. And our lesson is, one, to make sure that we are always, always aware of competitive threats, little or big anywhere in the country. Two, is we put enormous resources behind coverage in this area of the United States. As you know, it's a very important area to us because it not only is our home base, but it's a good place to operate a clinical laboratory in the North, South Carolina, southern Virginia area. The lesson to be learned from that is never, ever keep your eye off what's going on, even when you have very high market share. Even when you are not getting any feedback that there's problems. But when new labs appear, we now have all kinds of approaches from a competitive basis, anywhere in this country to monitor, follow and understand what those labs are doing. Now, having said all of that, I just want to comment on what you said about not a competitive threat any more. They are out there. They are alive. They are well and they are tough competitors.

Okay, and then finally, it's every time you mention OvaCheck you can hear the frustration in your voice. I wonder, you continue to be optimistic about the results that the test is showing and are you optimistic that ultimately the FDA concerns can be abridged.

I believe this test can have a big impact and I believe that FDA wants to help this test become available. I really believe that. And I hope it's not -- not -- not too far away.

And what about the test, the other tests using the similar methodology. Are you hopeful to follow on tests of breast cancer, prostate cancer, et cetera, using the same methodology.

Absolutely. If you talk to Correlogic they would be fairly excited about their work in both breast cancer and in prostate cancer.

Thank you very much.

Okay. I will take two more questions if there are any.

Ladies and gentlemen, as a reminder to register for a question, press the 1-4 on your telephone. Our next question is a follow-up question from the line of Bill Bonello. Please proceed with your question.

Thanks. Can you tell us how much acquisitions contributed to revenue in the quarter?

In the quarter? No, I don't know to be honest with you, Bill.

New acquisitions or or -- What I'm trying to get is sort of an organic growth is versus a --

Good try.

No answer there?

No answer Bill. Bill, you always have to not answer one of your questions, right?

That's fair. The other question I would say, given your -- what you said the product gap wasn't filled like maybe it had been in other years, is it safe to say that your long-term growth expectations may be a little bit better than the 8 to 10% near-term earnings growth expectations?

I think that's fair to s ay. But that's a forward-looking statement on my part.

I appreciate you making it. Thanks.

Sure. If there aren't any other questions we appreciate your listening our conference call and have a nice day. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.