Labcorp Holdings Inc (LH) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the 2005 first quarter results conference call. During the presentation all participants will in a listen only mode. Afterwards, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded Tuesday, April 19, 2005. I would now like to turn the call over to Tom MacMahon, Chairman and Chief Executive Officer at Laboratory Corporation of America.

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

About one month ago, Wes Eilingburg announced his intent to retire from LabCorp on June 3. For those of you who have followed LabCorp for a sustained period of time, you'll remember a host of financial activities that served as a foundation for our capital structure.

Whether reverse stock split or a preferred stock offering in the early years, refinancing the Company for the sale of growth shares in the middle years or, in more recent times, the achievement of investment grade ratings and recognition as a member of the S&P 500, Wes Eilingburg has been a steady and consistent force behind these important financial efforts. For me, he has been since my very first day, a strong financial and business adviser, and Wes, we at LabCorp thank you for all of your efforts in making this a great Company. Thanks Wes.

Not surprisingly, Wes has planned his exit well. Wes has carefully groomed his successor, Brad Hayes. Brad, welcome to the job.

We will start by having Brad Hayes review our financial results. I will then update you on our key strategic initiatives and Brad Smith will go over a few anticipated questions.

Before we begin, I'd 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 April 19 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 the supplemental information.

Additionally, we refer you to our press release dated April 19 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 2004 10-K and subsequent filings.

Now I would like to introduce Brad Hayes who will review our financial results.

Thank you, Brad. Our first quarter results are as follows. Earnings per diluted share increased 15.5% to $0.67 for the first quarter versus $0.58 in the first quarter of 2004. EBITDA was $207.4 million or 26% of revenues compared to 25.4% during the first quarter of 2004. Cash flow from operations was $154.5 million. Revenues increased 6.2% to $799.1 million. Price increased 5.8% and volume increased .4%.

DSO for the quarter was 55 days. DSO was negatively impacted by 1 day due to the US LABS acquisition. During the quarter we repurchased approximately $112 million of LabCorp representing approximately 2.3 million shares.

On March 30, we entered into an agreement to acquire Esoterix for approximately $150 million in cash. We expect this acquisition will close during the second quarter.

Now Tom will provide an update on our key initiatives for 2005.

Thank you, Brad. As Brad discussed, we have again delivered solid financial performance. Now I would like to update you on the 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.

Let's start with scientific leadership. Esoterix. In March, we announced a definitive agreement to purchase Esoterix for $150 million in cash. We will fund the acquisition through a combination of cash on hand and, if necessary, borrowings under our revolving credit facilities. We are excited about the opportunity to add this provider of specialty reference testing to our business. They are highly regarded brand names like Cytometry Associates, (indiscernible) Sciences, Colorado Coagulation Consultants and Allergy Testing Labs further enhances our position as the scientific leader in the laboratory industry. These specialized testing businesses strategically and operationally are natural fits with LabCorp's strategy of scientific leadership. They are also leaders in their respective areas.

Additionally, this acquisition continues to help LabCorp shift our test mix to the higher values and more profitable esoteric areas. We expect the acquisition to close during the second quarter; and at that time, we will discuss the impact of this acquisition on the remainder of the year.

US LABS. We continue to be pleased with our acquisition of US LABS in February. Our intent is for US LABS to operate essentially as it did before the acquisition. As you will recall, one of the benefits of the acquisition was to enhance our esoteric and genomic capabilities on the West Coast. The planning is well underway at this time to bring up the first phase of added esoteric and genomic testing capabilities at US LABS early in the third quarter of this year.

Cytech Thin-Preps Imaging System. We now have four facilities where this product is available to order-in (ph) physicians. This is a major initiative for LabCorp in 2005. One that offers enhanced quality and efficiency. Early results indicate that clients recognize the benefits of this method and are switching from the nonautomated to the automated system in significant numbers.

Dianonization. Our program of expanding the DIANON anatomic pathology model throughout LabCorp continues to progress. On March 1, we dianonized our first West Coast facility -- our National Genetics Institute. This process went very well and the facility is fully operational. By the end of 2006, we expect to have nearly -- have dianonized nearly 80% of our three US LABS in esoteric anatomic pathology work. Dianonization continues to redefine our approach to anatomic pathology and helps position us as the clear and preferred provider in the field of cancer testing.

The addition of both US LABS and Esoterix is a further demonstration of our belief that anatomical pathology is a cornerstone of cancer testing.

PreGen-Plus. There are several developments with PreGen-Plus that I will discuss today. First on March 1, Exact Sciences announced the California Technical Assessment Form, a program of Blue Shield at California Foundation, unanimously agreed at its recent meeting that colorectal cancer screening with PreGen-Plus meets all of the five of the CTA assessment criteria for new medical technologies. CTAS (ph) has confirmed that it will recommend approval of PreGen-Plus at the Blue Shield of California Foundation Board of Trustees at its meeting in May. Although approval by CTAS does not guarantee coverage of PreGen-Plus by Blue Shield of California, it is a critical first step. We view this as a continued progress in gaining acceptance of this test.

In terms of further product acceptance in the marketplace, we have recently completed some very important marketing research. Data suggests that only one out of three PreGen-Plus tests ordered by practicing clinicians are actually submitted to LabCorp for testing. In other words, our PreGen-Plus testing volume would be three times higher if all testing orders was returned to LabCorp. There are a variety of reasons that samples are not returned. But we believe a majority of the samples would be returned with improved patient education.

As a result of this important finding, Exact and LabCorp have entered into a partnership with practicing physicians, whereby Lab Exact and LabCorp will follow-up directly with patients to answer questions and get their samples to us for testing. Early indications are that patients will comply when they receive sample assistance.

Finally, we have identified several different approaches to begin to significantly reduce the cost of running the test. If these methods prove to be useful, they will also provide LabCorp the flexibility of helping reduce the price of the test to the patient.

OvaCheck. There's no new news with OvaCheck. We continue to work closely with our partner and the FDA to bring this important test to market.

P450 testing. Cytachrome P450 is a family of genes that place a primary role on metabolism. Analysis of these genes can help predict a patient's metabolism of certain drugs. Over the past several years, we have performed expensive P450 testing for pharmaceutical companies in our clinical trial business. The recent approval of the Roche platform by the FDA and Roche's efforts at educating physicians about the testing opportunities could lead to increased utilization of this test in the future. During the second quarter, we plan to launch a formal P450 program for our practicing physician market.

Our second initiative is customer retention. One way to help grow our business is to reduce lost business. That is why customer retention is one of our growth strategies. Metrics to measure lost business are in place and improvement in this area has been tied to our bonus system. While many of our initiatives are in the early phase of the implementation process, we are already noting year-over-year improvement in our lost business metrics. I attribute this reduction to added focused and awareness of our employees, as well as early gains for projects that have already been implemented.

Specifically, progress has been made in the following areas. One, call center consolidation. We are still on track with the planning and activities related to significantly reducing our call centers by the end of 2007. Over the course of this year, most of our operating positions with multiple locations will be consolidating within their division as part of the overall consolidation plan. In addition, we continue to improve processes in the existing centers by adopting best practices.

Second, customer connectivity. In order to continue to support our customers and encourage them to remain or become long-term customers, we must continue to be easy to do business with. LabCorp has maintained an open architecture structure, which involves partnering with the many practice management systems and electronic medical record companies that physicians use in their offices. We are working with a variety of third party technology and EMR companies such as Allscripts and Medicity (ph) so that we are able to offer physicians a choice in how they connect with us. We have specific goals and metrics and monitor progress towards these (indiscernible).

Finally, our sales force expansion is progressing on plan. This plan also contains elements of restructuring to better align our salesforce with our strategic plan related to cancer testing. I will continue to update you on this important part of our strategic plan.

Next, managed care. The objective of this part of our plan is to enhance our value proposition to managed care organizations, through better resourcing, executive partnerships and more sophisticated IT solutions. This approach has solidified LabCorp's standings with all of our large national payors. Over the last few months we have renewed and expanded these national contracts and have set strategic agendas with all of these customers aimed at enhancing our value proposition.

Our strategic partnership with WellPoint continues to expand beyond the Atlanta HMO as both companies continue to see significant values in the strategic partnership. Our LabCorp business philosophy is simple and consistent. Select major areas of focus that we believe are critical to the future success of the Company; develop plans, metrics, and goals for each area; then monitor progress to achievement of these goals. We believe that by applying the simple philosophy to these three focused areas -- scientific leadership, customer retention, and managed care -- we can continue to deliver outstanding results.

Now, Brad Smith will review anticipated questions and our specific answers to those questions. Brad.

Thank you, Tom. The first question is one in connection with our price improvement. Pricings that make up most of your revenue growth. Can you provide some color on the volume size price results. Several factors have helped our improved pricing including -- one -- our emphasis on pricing discipline, which has been an area of heavy focus since early last year when price was flat.

Second, a continued shift in our test mix to more genomic and esoteric as demonstrated this quarter by our growth in these testing categories. And third, the loss of the Florida capitated contract which worked against volume but helped price. Additionally, the acquisition of US LABS positively impacted price during the first quarter. As we have previously said, accession growth will be negatively impacted until the loss of the Florida Capitated contract annualizes on September 1.

Consistent with our efforts to improve pricing, other low-priced businesses also have been consciously terminated, which has positively impacted price while lowering volumes.

Last, we pointed out during our last call that the Easter holiday was in the first quarter of 2005 vs. the second quarter in 2004 which accounts for approximately 50 basis points of volume difference, quarter-over-quarter.

When will you update your guidance on Esoterix? What are their revenues, EBITDA, and planned synergies? We will update our guidance to improve the impact of this acquisition during our second quarter conference call, assuming the acquisition is finalized. Esoterix is a privately held company so public financial information is not available. It has been our policy in the past not to comment on specific financial data related to private companies that we have acquired.

Is there anything new on the regulatory front? We continue to monitor developments on both the federal and state levels and to our knowledge there's nothing specific to report. As healthcare costs continue to rise, however, we know that we need to remain on guard for reimbursement as well as regulatory changes that could impact us negatively.

On POD (ph), we are encouraged by recent reports that the OIG is investigating certain POD anatomical laboratory arrangements as we believe these labs are competing unfairly. Also we are pleased that Florida has decided to withdraw its bidding proposal for a single capitated provider of Medicaid lab testing in that state. We believe the ITN (ph) would not have achieved its stated objectives and that quality care to patients would have diminished. We will continue to monitor and work with the state of Florida as new initiatives are discussed to help assure that quality patient care is available to Medicaid patients in Florida.

Why did DSO go up in the first quarter? DSO historically ends the calendar year at its lowest level, then increases slightly during the first quarter. Also the addition of US LABS added approximately one day to the DSO at the end of the quarter.

Can you talk about Diagene's (ph) recent direct to consumer campaign related to HPV testing? As you may know, HPV as an adjunct to a Pap test is approved for women age 30 and older. It has been added as a recommendation by various professional organizations in the late 2003 to 2004 time frame. While HPV testing use has been growing significantly over time, the highest prescribing growth has been primarily related to the HPV reflex test when the Pap result is (indiscernible). The new Pap combined with HPV option is also growing and beginning to gain some utilization. It also appears that the recent direct to consumer campaign is intended to educate patients and health care providers on the value of Pap with HPV as a screening method.

Now Tom will review our guidance for 2005.

Thank you, Brad. For 2005 our guidance remains unchanged other than to reflect the positive impact of share repurchase concluded in the first quarter. Please note that this guidance includes the effect of U.S. held labs, but exclude the effect of Esoterix, which we expect to close during the second quarter. Compared to 2004, LabCorp expects '05 revenue growth of approximately 7 to 8%, including in year revenues of $25 to $35 million from small acquisitions and/or new contracts; EBITDA margins in the range of 25.5 to 26% of revenues; reported diluted earnings per share in the range of $2.75 to $2.80, an increase of between 12 and 14%. Capital expenditures of approximately $110 to $125 million. Free cash flow, net of capital expenditures of approximately $440 to $465 million. We also expect net increase -- net interest expense of approximately $32 million and a bad debt rate of approximately 5.5% of sales for the year.

Note that this guidance does not include the Esoterix or other major acquisitions. Possible significant contributions from new tests and the impact of new accounting for stock based compensation. We are off to another solid start at LabCorp. The addition of US LABS and the anticipated addition of Esoterix firmly positions LabCorp as a scientific leader.

As we look to the future, we continue to firmly believe that LabCorp's strategic plan makes sense, complements new technology, and scientific leadership with a national core infrastructure. We remain firmly committed to this strategy.

Thank you for listening. We're now ready to answer any questions you may have.

(OPERATOR INSTRUCTIONS) Tom Gallucci with Merrill Lynch.

Just wondering if you could get into a little bit more detail on the volume and pricing side of things? I think the last quarter it was estimated that the Blue Cross/Blue Shield of Florida contract was maybe 1 to 1.5% type of hit on volume. You mentioned also terminating some other low-priced business. Can you give us an idea of the order of magnitude that you're talking about there?

Tom, you're right on the Blue Cross and Blue Shield. So it's in the range of about 1.5%, maybe even a little bit higher than that and we probably terminated another 1% worth of business in two major contracts in other parts of the country that affected us -- will affect us full year '05. So I would estimate, without the loss of all of those contracts combined -- which were pretty much intentional -- that you would have seen volumes in the 2.5 to 3% range and you would have seen pricing in the 3 to 4 range.

Just as we are thinking about customer retention initiative and you said you see some early signs of progress there, can you just contrast what you are seeing in the marketplace in terms of maybe some -- I guess you alluded to low-priced business that you terminated, relative to your customer retention initiatives? Are you trying to overcome some of the demands for lower price through service and other things? Or how should we think about those two counteractive type of forces going on out there?

Let's talk about several large low-priced contracts. These were all by the nature of the volumes, Tom, pretty sliceable deals to us. There were deals that we had to negotiate over along period of time and we elected at the end of last year not to move forward with one of these major contracts because of the price. The customer retention programs are programs that are directed at all of our customers, whether they are $5000 a month customers; $10,000 a month customers; $20,000 a month customers. They are really two separate issues. And with those customers what we now are measuring every month is the amount of new business, the amount of lost business, and the amount of lost business within the customer itself. And we are seeing quite honestly pretty nice progress in the area of retention.

We are doing that through advanced informatics who quite honestly an expansion of salesforce -- we've talked about an expansion of salesforce and more coverage; and in certain situations phlebotimis (ph) in doctors offices.

Final point on this. How much would you estimate there was a boost from volume from new contracts? I think you talked about the WellPoint expansion and things like that. How has that started ramping up?

That has ramped up well. It is probably not as much yet as the loss of the Blue Cross contract in Florida, though. Probably slightly lower than that.

David Lewis, Thomas Weisel Partners.

Tom, just from a structural standpoint, we asked the question last quarter as well and I think you answered it. There wasn't (ph) a change in strategy, but it does appear once again looking at the metrics that there has been a change in your view of focusing on more profitable customers and focusing on retaining those profitable customers. Is this a change in philosophy or a change in focus or do you still believe this the way LabCorp has conducted themselves for the last 18 to 24 months?

I think it is a way we've conducted ourselves the last eight years. Certainly, there was a little bit of a wake-up call at the end of the first quarter last year when we saw that our pricing was flat. We did renew the effort -- let's put it that way. But we are a company that is always -- through the history at least of my tenure here -- puts enormous emphasis on pricing discipline. Pricing is very important to us. This is a very competitive market. I think as a result of this renewed effort last year and the progress we have made and our ability to sustain the cash and improve profitability, we have been more conscious of some of the costing of these large deals. As a result we have elected to stay away from some of these major contracts, because they just aren't good for us.

So I don't view it as a significant change. I think if we had not lost a couple of these deals, you would have seen pricing probably in the range of 3 to 4% and you probably would have seen volumes in the range of 2.5 to 3%. So these are unique deals that have occurred.

Tom, you mentioned a lot about changes in sales infrastructure, revamping sales infrastructure in 2005. I know you don't want to talk about total rep increases but from a percentage standpoint, if it was X numbers of new reps, what percent would be focus on managed care and what percent would be focused on physicians?

The increase is greater than 15% of our sales organization. So it's in that magnitude on a yearly basis. But I would say that the vast majority of those are focused on improving our relationships in the doctors' offices and convincing the doctors that they should choose LabCorp for their managed care contracts. So the way that we are organized, David, is that we have a series of people that negotiate contracts directly with the large managed care organizations and we have expanded that group. It is the largest expansion that's been directed clearly at what I call spaces in the doctors' office interacting with the physician and attempting to convince the clinician to choose LabCorp for all of their lab work.

You mentioned Exact Sciences. I think, Tom, you made a decision a couple of years that to not directly fund cases of sample boxes being shipped directly to patients requiring the patient to come to a patient service center or a physician's office to grab that box. Would you reconsider that strategy on a go-forward basis and fund the shipment of boxes directly to the patients to hopefully improve compliance?

I guess what I would do, David, is I would consider anything. We think this test is very important and the most recent information suggests to us that there's a much greater demand in the doctors' office than we are getting back at LabCorp. I think the first step which we are quite comfortable with and we will update you as we go along, the first step is physicians have allowed us and Exact the names of the patients that are getting these prescriptions. We are following up with them directly. Once we follow up with them and they are answering our calls and we are interacting with them, we do find out that -- at least today -- that they seem to be interested in going to get the sample box or to return the simple box. I guess we will cross the next bridge when we get there but right now we're not doing that.

On Esoterix, Tom. I know you don't want to talk about financial metrics, but if you were to divide that business into three segments -- pathology, clinical tests -- clinical trials testing, and true esoteric hospital reference business. If you looked at those three segments how would you rank them in terms of importance in driving you to acquire the company?

Esoteric anatomical clinical trials.

Robert Willoughby, Banc of America Securities.

Tom, you mentioned I think US LABS added a day to the DSOs and I would assume Esoterix may skew that metric as well. Are there opportunities to get that back? Or is that just the nature of the beast in what you've acquire there?

No. We have a clear goal and -- Wes, you may want to speak to that question. For our second quarter goals.

Well, Bob, first of all in the first quarter, historically, our DSO goes up compared to the fourth quarter numbers. So that's a historical thing and something we've seen that is related to seasonality with DSO.

In the second quarter, we do fully anticipate our DSO to get back down into the lower 50s. By that, I mean somewhere in the 51/52 range. That's the goal.

And that is some improvement at U.S. LABS or was there an inefficiency there?

A lot of that has to do again with the seasonality in the first quarter. At least a day of that will go away because, historically, we have seen in the second quarter that we do go down compared to the first quarter. U.S. LABS won't have that much of an impact on it in the second quarter. It could possibly be one day better. That is about it.

Wes, do you have a tax rate for the year? You came in a bit light relative to where we were.

Yes. It's at 40.7% and what that is, Bob, is this year there are certain taxes that we have historically classified in the income tax line that we are moving up to the operating expense line. So that is what that is. It's no impact on net income or EPS. It's just a movement of a bucket of taxes from the tax expense line to operating expense.

So 40.7 is the correct number to use over the course of the year?

That's correct.

And just more broadly. How big a bucket? You have the clinical trials business, you got the substance abuse business, forensics and paternity as well. In the aggregate, how large a book of business is that for you? And is there any substantive update we can get there?

It's -- I'm thinking as I try and answer, Bob. It is hundreds and hundreds of millions of dollars now. Our local trials business and our drug testing business, if we were to complete the Esoterix deal -- which we fully anticipate we will -- we will probably be generally the same size. So if several hundred million dollars, our paternity business with the other, we are probably talking all of those together in the $300 million range.

Anything on the drug testing business in the latest period?

No. The drug testing business has been fine. Nothing to report, negative or positive. And we continue to show modest growth in that area.

Gary Lieberman, Morgan Stanley.

Was hoping you could give us a little bit of an update on the overall managed care pricing environment? It seemed like it had gotten incrementally a little bit more difficult last year. And just wanted to know if we should read into the relatively robust pricing growth in the quarter if maybe it has eased up a little bit?

We announced at the end of last year, Gary, that we did get favorable pricing from managed care in our contracts. So I think it's fair to say that part of the nice pricing increase here at LabCorp is a direct relation to some modest increases in the managed care area. I don't want to lead people to believe that these increases were substantial. But if you review our latest filing in the 8-K, you'll also see that there are some increases in the managed care area. Most of these are three-year contracts. So we do expect that this will take -- go through for a few years.

Would it be possible for you to quantify the impact that US LABS had on overall percentage pricing growth in the quarter?

I won't do that. We don't do that. But it was not -- it impacted positively but it was not the major piece of the 5 plus percentage increase. It was, again, US LABS, anatomical pathology, higher pricing only two months of the three months were in from US LABS so we didn't get any of those January revenues. But it was not a significant part of pricing.

Ricky Goldwasser. UBS Warburg.

Congratulations on the quarter. The first one is on the trends for (inaudible) physicians business. Physicians were a little bit light compared to same period last year. Does this reflect the result of you walking away from the GPO contract or were there any other reasons behind that?

Secondly on US LABS. Does the pricing used for US LABS in the quarter, does it still reflect US LABS pricing? Or have you transitioned the business already to (indiscernible) managed care pricing umbrella?

First question, Ricky, is the client position -- accession trend is a direct result of the loss of a major contract. It is not the Blue Cross/ Blue Shield contract. It is that contract that I referred to that we walk from on January 1. And it is not a GPO. It is a direct client contract. It was quite sizable.

So when you talk about clients, that would be sort of a hostile or is it going to be a big client physician focus?

It is a hospital or a major physician group. It would have occurred with a direct interaction between LabCorp and that institution. There is no middle person in between. The U.S. LABS pricing is a reflection of how US LABS manages their business. While they report into LabCorp they continue to operate independently. I would say, though, however, they are in a competitive marketplace. So we do not suspect any change in pricing as a strategy for US LABS from LabCorp. So that is the pricing that they implement in the field but it is competitive to other companies.

Sandy Draper from Draper Research.

A couple of financial questions. I don't think I saw or heard a bad debt number in the quarter.

5.5%.

5.5%. Okay, great. On the share repurchase program, are you precluded from repurchasing shares now that you have announced the Esoterix acquisition until you close that?

No. I don't believe -- no. (MULTIPLE SPEAKERS) purchased our 10B5 (ph) plans and that would be our continued intent would be to use the 10B5 plan.

Can you update us on where you are in the quarter? Again what you done to date or do you want to just wait until the second quarter results? Can you give us an update on that?

You are referring to the share repurchase (MULTIPLE SPEAKERS)

You mentioned what you did in the first quarter. Can you give us a sense of where -- if you've been in the market so far in the second quarter?

No, we can't tell you that. The only thing I can say is that we have been working on a $250 million share repurchase plan. And as of the end of the first quarter we have approximately $10 million left to be done on that.

I guess this question is for Tom. In terms of the long-term strategy of the board, obviously, you do have some use of capital with the acquisition of Esoterix coming up. But even with that, with the free cash flow you are expected to generate this year and next year, I would assume that share repurchases continue to be fairly high-priority or else you are just going to build up a ton of cash if you're not back in the market. Is that a fair assumption?

Yes I would assume once we complete this share repurchase, that I will go to the board for another share repurchase plan. So I think that is a good assumption, Sandy.

Adam Feinstein, Lehman Brothers.

First question is basic housekeeping. Could you give us the convertible add back for the quarters here? I just wanted to get the -- I didn't see that in the footnote in the 8-K filing?

Adam, it's about 10 million shares; and also there's an adjustment you have to do to get the EPS to add back the tax affected interest.

Yes how do I do that?

Those were convertible. I don't have the exact number in front of me, but roughly it's $10 million a year. So that is 2.5 a quarter. Tax effected works out to about a penny.

Second question here. Can you talk a little bit more about the WellPoint contract? You had mentioned in your comments, Tom, that there were opportunities outside of the Georgia market. So I just wanted to hear whether that was something you've signed or something you anticipate signing in the future? And also last quarter you spoke about there was some start up cost for that contract. I just want to see how big of an impact that was in and on the quarter.

The WellPoint deal is a national contract. It's a contract that we signed with WellPoint directly last year, as the WellPoint Anthem merger was getting completed. The contract calls for a long-term partnership between LabCorp and the new WellPoint. And we continued to work with WellPoint to open up other markets to LabCorp. We continue to increase our business quite well with WellPoint. We are hopeful that as the year goes on, we will make further announcements of further entry into significant WellPoint markets. We view this as a very important long-term collaboration in a relationship that we feel is critical and that, until last year, had very little business from.

So it is a continuing effort on our part; but more importantly it's a continuing effort on the new WellPoint's part to be interested in moving business to LabCorp. As part of the relationship, there are certain technologies that WellPoint is quite interested in introducing into their system that LabCorp -- some so we feel are proprietary -- and we are also in discussions with them on some of these technologies.

A follow up question, if I may. With more consolidation of the managed care companies, over the past couple of years now, are you guys in talks with other managed care companies here about more national contracts? And should we anticipate any sort of news on anything in 2005?

We have now large national contracts with all of the big managed care plans. United is very important to us, CIGNA, Aetna, WellPoint. I think you are absolutely right, Adam, when they acquire a regional lab, that does have an impact on our relationship with them. And each time that happens, that opens up discussions -- either positive or negative -- for LabCorp. For example, we have not much of a relationship with a group like an Oxford, where we have a strong relationship with a group like a MAMSI, and United goes out and buys those organizations or acquires those, that presents -- we hope -- opportunities for us to get more business. And at the same time we want to protect the relationships we have. So not an easy answer to that question other than to say that each time one of these happens it's probably appropriate for you to be thinking, what impact does that have on the lab business? Because it does.

Could you talk about the competitive environment? Are you seeing any new competition? Are you seeing people get out of other business to just not having the scale? So what are you seeing in terms of the competitive environment? Thank you.

This is a competitive industry. It is an industry where very small labs can complete very effectively against very large labs; and that hasn't changed. My impression right now is the hospital market is probably -- and the esoteric area of the hospital market -- is probably the most competitive area. But suffice to say, this continues to be a very competitive marketplace with lots of people being very interested in the laboratory business.

Kemp Dolliver, S. G. Cowen.

Just a couple of managed care related questions. With the WellPoint contract, are you live in all markets now?

No. We are not live in all markets, Kemp, because quite honestly our infrastructure does not allow us yet to be live in all markets. And they have relationships with other companies. So the simple answer to that question is, no.

Do you have a general timetable for when you think you could be?

I would hope the whole system, over the next couple of years.

Secondly, you commented on a number of managed care contracts, including your major relationships. Are there any other significant managed care relationships up for renewal this year?

I have to think about that. But I don't think there's anything large up this year, Kemp.

(OPERATOR INSTRUCTIONS) Steve Hamil, Piper Jaffray.

In terms of US LABS. Can you help me understand would most all of that revenue have fallen within the histology bucket or would some of it have ended up in genomic and other esoteric?

The vast majority of it is in the anatomical pathology histology budget. There are some but very insignificant in the genomics. By the way if you do look at that bucket, the genomics, you did see quite sizable growth this quarter in the genomics line. That was real LabCorp growth. That really had nothing of any substance coming from U.S. (inaudible) point in time.

I was wondering in terms of broader picture whether or not you expected the changes from Medicare in terms of paying for some additional screening tests such as cholesterol that they hadn't been willing to pay for before will have any material impact on the market this year?

I don't think so, Steve. No. I don't -- I view that as a long-term progressive discussion point with Medicare. And we don't see anything of substantive positive in terms of testing volumes coming from Medicare this year as a result of any regulatory changes.

Abe Bronte (ph), AJV Capital.

Wondering if you could characterize the pricing behavior in the rest of the industry? Walking away from unprofitable contracts might carry the risk of you high grading your business and eventually getting picked off by more aggressive competitors. Do you find that the entire industry is becoming -- moving back towards more rational pricing behavior or are you guys out there by yourselves? Does that put some of your more profitable businesses at risk to more aggressive competitors?

That's a tough one, Abe. I think this is a fairly decent industry in terms of pricing. There are competitors, when there's thousands of labs out there that behave differently than other labs. I just think we really need to focus here at LabCorp on getting value for the tests that we order. On some of these larger contracts more recently where there were some significant revenues attached to them, we just felt that the cost of running the test versus the price that these customers demanded was not appropriate. So we had to make the challenging decision to walk away. It wasn't necessarily because of competitive reasons. It was more them making the decision that they thought they could do it more economically themselves. And I think time will tell whether they have the ability to do that.

So at least one of these situations that I'm speaking about which was quite sizable, we didn't lose it to a competitor. We lost it to them trying to implement it themselves.

I will take one more question if there is one.

There's no further questions at this time.

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

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation.