Labcorp Holdings Inc (LH) 2006 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Laboratory Corporation of America Holdings 2006 First 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. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded, Tuesday, April the 25th, 2006. I would now like to turn the conference over to Mr. Tom McMahon, Chairman and CEO for Laboratory Corporation of America. Please go ahead, sir.

Thank you. Good morning and welcome to Lab Corp's first quarter conference call. Joining me today from Lab Corp is Brad Smith, Executive Vice President, Corporate Affairs, Brad Hayes, Executive Vice President and Chief Financial Officer, Ed Dawson, Senior Vice President and Chief Accounting Officer, and Scott Fleming, Vice President, Investigator Relations. Brad Hayes will provide a review of our first quarter results. I will then update you on achievements in key strategic areas during the quarter and discuss 2006 guidance. And then Brad Smith will cover a few anticipated questions. I now like to introduce Brad Smith who has a few comments before we begin. Brad.

Before we begin, I'd like to opponents out there will be a replay of this conference call available via the telephone and internet. Please refer to our press release dated April 25th for replay information.

This morning the Company filed an 8-K that included additional information on our business and operations. This information is also available on our website. Analysts and investigators are directed to 8-K and our website to review this supplemental information.

Additionally, we refer to you our press release dated April 25th for a reconciliation of EBITDA, which is non-GAAP financial information discussed during this call. I would also like to point out any forward-looking statements made during this conference call your based upon current expectations and are subject to change based upon various and important factors that could affect the Company's financial results. These factors are set forth in detail in our 2005 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. Revenues increased 9.9% to $878.5 million. Price increased 5.3% and volume increased 4.6% compared to the first quarter of 2005. Earnings per diluted share increased 13.4% to $0.76 for the first quarter versus $0.67 in the first quarter of 2005. Excluding the impact of the required change in accounting for share based compensation, earnings per diluted share increased 16.4% to $0.78 for the first quarter versus $0.67 in the first quarter of 2005.

EBITDA was $223.8 million or 25.5% of revenues. Excluding the impact of the required challenge in accounting for share based compensation, EBITDA was $229.6 million or 26.1% of revenue. Operating cash flow for the quarter was $178.6 million. During the quarter the Company repurchased $185.1 million of stock, representing 3.3 million shares. At the end of the first quarter the company had cash and short term investments of $71.4 million and had no outstanding borrowings under its revolving line of credit. DSO for the quarter was 53 days.

We are off to a solid start in 2006 as we continue to execute our strategic plan and focus on operating the business on a daily basis. I will now turn the call back over to Tom who will provide an update in connection with the progress the Company is making towards achievement of our key strategic initiatives.

Thank you, Brad. Our strong performance in the first quarter is due to our continued focus on the three pillars of our strategic plan: scientific differentiation, managed care, and customer retention. During the first quarter, we have continued to build on our strengths in science and expanded our managed care relationships. I would now like to review several of these important accomplishments from the first quarter.

First, esoteric test mix. A significant driver of earnings growth in the future is a continued shift that text mix in more lie reply valid and highly profitable esoteric testing categories. At the end of March, more than 34% of our revenues were in the genomic, esoteric, and anatomical pathology categories.

Business integration activities. As I stated previously, the acquisition of U.S. Labs, Esoterics, and Dianon brought us not only expanded capabilities in anatomical pathology and other esoteric testing, but also the opportunity to provide these services in a more efficient manner. In connection with these acquisitions, Lab Corp's stated objective is to chief cost reductions across the entire organization of approximately $30 million on a pre-tax basis by mid-2007. During the first quarter, we continued to make significant progress in our efforts and are on schedule toward achieving our targeted cost reductions.

Third, Cytech thin prep imaging system. During the first quarter, we continued to experience strong growth in the adoption rate of the Cytech thin prep imaging system. As the PAP testing method of choice of our physician clients. This service delivers an improved quality of results to our clients and their patients as well as increased efficiency to our labs. By the end of the first quarter, the thin prep imaging system was being requested for approximately 38% of all liquid based pap smears ordered. On an analyzed run rate, we are now performing approximately 2.7 million image guided pap tests. We expect the adoption rate to continue to increase as more physicians become aware of this service and the benefit that it provides to them and to their patients. When given an informed choice, physicians recognize the benefit to their patients this have pap screening technology. We continue to be pleased with the increase in adoption and view this as a key growth driver for 2006.

HPV testing. Another key focus area related to cervical cancer is HPV, or Human Paploma Virus. HPV is the cause of almost all cases of cervical cancer. Using advanced molecular technology, HPV testing can determine if one of the HPV virus types that causes cervical cancer is present. HPV testing has been incorporated into treatment guidelines by ACOG nd other organizations as an important cervical cancer screening test for women over 30 years of age. We have experienced a growth in both reflex and primary screening HPV testing of approximately 80% in the first quarter of 2006 versus the first quarter of 2005. On an analyzed run rate basis, we are now performing approximately 1.1 million HPV tests per year. While adoption of this testing as a primary screening method has been relatively slow, we expect continued acceleration as more physicians become aware of this testing as a primary screening tool and it's importance and in the early detection of cervical cancer.

Beyond these two important tests focused on cervical cancer, we remain excited about other opportunities. For example, cardiovascular disease is the leading cause of death in the United States, outpacing all forms of cancer. Testing advances now gives the physician more useful information to diagnose patients who are at risk and to monitor patients currently under treatment. Advanced lipid testing technologies, such as Avera-test, VAF test, and the MMR test from LipoScience, offer the physician insight into a patient's cardiac disease risk that has never been possible before. We've experienced growth in VAF and NRM testing of approximately 65% in the first quarter of 2006, versus the first quarter of 2005. We are excited about these technology advancements and look for test like these to be future growth drivers.

During the quarter, we also announced an exclusive relationship with Yale University to offer their on ovarian cancer test. While additional evaluation of this test is required, prior to commercialization, we are excited about its potential -- excuse me -- for providing physicians with a valuable tool for the diagnosis of on ovarian cancer. We remain focused, on identifying and commercializing novel testing technologies where we see a diagnostic need. We remain optimistic about the long term prospects for the introduction of new testing technologies that will improve patient care. However, this process continues to be both challenging and time consuming.

Let's turn to managed care. In addition to continuing to strengthen our scientific offerings and capabilities, strengthening our relationships with managed care partners is a key strategic focus for Lab Corp. We continue to see acceleration of growth in revenues from our major managed care partners. As the manage care marketplace continues to consolidate, strong partnerships with these important customers will enhance our ability to drive revenue and profitability in the future.

Our partnership with Wellpoint continued to expand in the first quarter as we begin to service Wellpoint's Colorado market as the exclusive natural laboratory provider for their PPO and HMO plans. We continue to be pleased with our partnership with Wellpoint and we expect this partnership to expand through the awarding of conclusive arrangement. You should expect to hear more about these additional arrangements during future conference calls.

We are also excited about our partnership with United Health Care. We continue to work closely with United by providing innovate I have new ideas as they evaluate different options for achieving their objective of reducing their overall spending on laboratory services. We believe we have all of the capabilities necessary to be a strategic partner and helping them achieve this objective. And are excited about the opportunity to expand our relationship with United.

Whether we are working with wellpoint, United, Aenta, Cigna, or Humana, our objectives remain the same, to be a valid business partner in helping managed care companies reduce their cost and improve patient care for their members. Having built strong foundations for cooperating at the top levels of these organizations, we believe we are well positioned to realize revenue growth for Lab Corp while delivering favorable economics, value and scientific capabilities, and unique laboratory information analysis tools through all of our managed care partners.

In summary, Lab Corp continues to be successful by following a simple and consistent business philosophy: Select the most important areas of focus that we believe are critical to the future success of our Company, develop plans, metric,s and goals for each area, and then monitor progress toward achievement of these goals. We believe that by applying the simple philosophy to our three strategic focus areas, science, managed care and customer retention, we will continue to deliver outstanding results.

Now I'd like to discuss guidance for the remainder of it year. We are pleased with the revenue growth, both volume and price that we experienced during the first quarter. However, because we are still early in the year, we have chosen to leave our guidance for 2006 unchanged. Excluding the impact of the required change in accounting for stock based compensation, and any share repurchase activity after March 31st, our guidance for '06 is as follows.

Compared to 2005, Lab Corp expects '06 revenue growth of approximately 6.5 to 7.5%. EBITDA margins of approximately 26 to 26.5% of revenues. Diluted earnings per share in the range of $3.15 dollars to $3.25. Operating cash flow of approximately 600 to $620 million. Capital expenditures of approximately 100 to $115 million. We also expect net increase -- net interest expense of approximately $47 million and a bad debit rate of approximately 5.3% of sales. We estimate that the implementation of the required change in accounting for stock based compensation will have an EBITDA impact of approximately 22 million to $23 million, and diluted EPS impact of approximately $0.10.

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

Thank you, Tom.

Can you provide any details regarding your response to the united health care RFP? As Tom mentioned in his remarks, we continue to be excited about this opportunity and have responded to the RFP with several innovative ideas that we feel would help United achieve its objectives. We can tell you than we continue to have meetings with United. However, for competitive reasons we will not discuss the details of our discussions.

Is there anything new on the reimbursement front? We continue to monitor developments on both the federal and state levels. And we know that as health care costs continue to rise, we need to remain on guard for reimbursement as well as regulatory change that can impact us negatively. As we mentioned during the fourth quarter of 2005 conference call, edits designed to limit the number of services that can provided on the same day of serviced been suggested by Med Pac. We are pleased that through the efforts of Adequa, CAP and others, CMS has delayed the implication of these edits, and has asked for comments, prior to any future implementation decisions.

Can you update us on the status of competitive bidding for lab services? We have been focused on the adoption of competitive bidding the last few years and feel that past efforts have not adequately considered issues such as patient care and access. As you may know, Congress has directed that competitive bidding demonstration project be developed and we agree we should participate to help evaluate competitive bidding. However, we feel the demonstration project will show the competitive business is not in the best interest of MediCare beneficiaries or the federal government. On April 21st, CMS published a notice in the Federal Register requesting comments in connection with the competitive bidding process. CMS currently plans to run two, three year demonstration projects, the first to begin in April 2007 and the second to begin in April 2008. Although the CMS contractor for the project, RTI, previously indicated that each demonstration project would cover one or two MSAs, the proposed geographies have not been disclosed. We will continue to follow this project closely, and to provide updates as appropriate as part of our earnings calls.

What are your thoughts regarding the market for acquisitions? Do any attractive candidates remain? The clinical lab industry remains highly fragmented and consolidation will continue. We remain focused on identifying acquisition candidates that further our strategy of select strengthening our scientific leadership and enhancing our national core infrastructure. Our acquisitions over the past several years have further differentiated Lab Corp from others in the clinical laboratory industry by significantly enhancing our capabilities in the high value, high margin, esoteric testing arena.

Can you give us an update on P450 testing? There's a growing interest in P450 testing, however, volumes remain low. We do believe the P450 testing is a significant step toward true specialized medicine and that over time, volumes will grow as physicians, payors and patients become more aware of the value of this type of testing.

On April 21st, CMS published a notice in the Federal Register requesting comments in connection with the competitive bidding process. CMS currently plans to run two, three year demonstration projects, the first to begin in 2007 and the second to begin in April is 2008. Although the CMS contractor for the project, RTI, previously indicated that each demonstration project would cover one or two MSAs, the proposed geographies have not yet been disclosed. We will continue to follow this project closely and provide updates as appropriate as part of our earnings calls.

What are your thoughts regarding the market for acquisitions? Do any attractive candidates remain? The clinical lab industry remains highly fragmented and consolidation will continue. We remain focused on identifying acquisition candidates that further our strategy of strengthening our scientific leadership and enhancing our national core infrastructure. Our acquisitions over the past several years have further differentiated Lab Corp from others in the clinical laboratory industry by significantly enhancing our capabilities in the high value, high margin, esoteric testing arena.

Can you give us an update on P450 testing? There's an growing interest in P450 testing, however volumes remain low. We do believe that P450 testing is a significant step towards true personalized medicine, and that over time volumes will grow as positions, payors, and patients become more aware of the value of this type of testing.

What is the status of the Metabolite case? This case was argued at the U.S. Supreme Court on March 21st. While we can not predict the outcome, we are encouraged that the Court agreed to hear the case and we are hopeful that the Court will reverse what we feel was an incorrect ruling by the lower courts.

Your volume in the quarter appeared strong. Why didn't you raise guidance? Overall, we experienced mild winter and felt little impact of weather on our volumes. In addition, the Easter holidays fell in the second quarter in 2006, versus the first quarter in 2005. We believe that these two factors combined resulted in approximately 1% higher revenue in volume in the first quarter of 2006 than in the first quarter of 2005. The Easter impact will result in a more difficult comparable in the second quarter of 2006. Because of these factors and because we're only one quarter through 2006, we have chosen not to raise guidance at this time.

Are there other important factors that impact your business quarter to quarter? While we do not provide quarterly guidance, we'd like to point out that certain factors do influence earnings between quarters. For example, our new arrangement with Wellpoint in Colorado became effective in March and will continue to ramp up during 2006. And the earnings impact on the integration efforts that Tom mentioned earlier in the call will build as the year progresses. Also when modeling operating cash flow, it's important to remember the second quarter contains two estimated tax payment dates.

Now I'd like to turn the call back over to Tom.

Thanks, Brad. We are very pleased with our results for the first quarter and feel that they set us up well for a successful 2006 We remain fully committed our strategy of leveraging our core and national infrastructure to deliver industry leading scientific expertise and excellence inpatient care to physicians and their patients. Thank you very much for listening. We are now ready to answer any questions you may have.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Adam Feinstein from Lehman Brothers. Please proceed with the question.

Thank you, good morning everyone. Just a couple of questions here. Can you maybe talk a little bit about the competitive landscape. What are you guys seeing? It seems like a very strong quarter here, just wanted to get your sense. Are you guys taking market share, just any and anecdotes would be great.. And then I have a quick follow-up.

Well, from a competitive perspective, we don't see much change, really, in this quarter from the last 24, 36 months. We see as major competitors, the hospital labs, some Outreach programs that you are all familiar with here in the south, and small regional labs. On a national basis, particularly in the managed care area, we obviously see other major laboratories. So I don't see a significant change in the competitive landscape. I would say this, that the offering of new technologies like HPV, and like image-guided PAP smear is certainly helpful in the whole area of our scientific differentiation.

And just one more quick follow-up here. In terms of volumes, clearly, very strong quarter here. How should we think about, I guess, the core business volumes going forward? I know you guys talked about having analyzed some of the issues that impacted volumes last year. I want to get sense in the general ballpark range for the core business volumes for the remainder of 2006.

I'm going to add Brad to answer that. Before he does, I think there's one thing that's going on as a dynamic in this business, more than ever has been before, is we are beginning to transfer really our thinking of Lab Corp from requisitions, or accessions as we call them, to the actual number of tests. For example, oftentimes we have HPV tests, where we have image guided path tests, that really aren't recognized in our 'accession counts' for a variety of reasons, because they reflect sometimes into other tests. So we really need to be careful here at Lab Corp on how we speak to the -- to your community about volumes. And I think in the future you will begin to see Lab Corp, as we get better information here internally, change our discussion from the number of requisitions or accessions we get in the door to the amount of tests we perform. Because oftentimes we're performing one, two, three, four, five tests off the same accession, which does impact.

Having said that, Brad, why don't you talk about what we're seeing.

I want to say first, we don't break out or talk about generally what we expect going forward with the growth specifically to core. I think what you see in the first quarter is strong core growth. I believe that happens when we have -- we are aided by things that we spoke about in terms of weather, holiday, placement, and then I think major manage care wins can influence that line compared to the other lines of business or the other services that we offer. I specifically think back to the second half of last year when we had issues, as did everyone, with hurricanes in the third and fourth quarter, and remember that core was a very low grower and impacted by that, it seem like more than the other services. And I've heard Tom say many times, you think of core as sort of routine testing, non-sick, potentially deferrable. And you think of as the genomic and esoteric as sick-testing that's going to happen pretty much regardless of what's going on with holidays and weather most times.

Okay. Thank you very much.

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

Good morning, everyone. As a follow-up to that last question first, is there still a little bit of boost from acquisition in the volume numbers? I think, did you anniversary one in February, another one in May. That is the timing, Brad?

What we did, Tom, we anniversarized, I think I'm creating this word. I'm not sure it's really a word, maybe someday you'll remember me for it, Tom. We anniversarized, I think in the first week of February, USL, and we do have esoterics entered through, I'm going to guess this first week of May. It was early May. So you're absolutely right, there is some volume associated. Those are more pricing issues, to be honest with you. There's not a lot of volume that comes along with those products, but there's heavy pricing comes along with those. So there is some as you would call noise in the numbers from that.

You actually led right to my second question, then. Obviously price per accession was strong, too, and you mentioned an increasing number of tests per requisition and you just mentioned the impact from acquisition, more on price. Can you break down a little bit more, absolute price increases versus different aspects of mix on the price per accession in the quarter.

Tom, this is Brad, I don't think we're going to get that specific but the way I think about it, if you look at some of the things we said in the past. I think about real price -- I think the easiest way to look about that is by payor. I know we're frozen for MediCare for the clinical lab part of the fee schedule. Also the physician part of the fee schedule in 2006. Medicaid, I always think of, I know it's a small part of the business, but it's also flat, so you've got a chunk of 20% of the business that's by default flat. Patient, we don't really look to see real price gains there. The client bill is competitive but we are very disciplined in that line. And then managed care, in general, we renewed our relationships over the past several years when they've been up for renewal at over all favorable price increases. Then if I move to mix for a few minutes and some of the things, and Tom touched on them, that are impacting there. If you think about even image-guided as an example, we don't have any change in volume whatsoever, but because of the added service of that offering, there is a price impact due to mix. And that's down in core. So I think we -- we have seen over the years an increasing number of tests per requisition and I hope that gives us a good way to think about the mix versus the price dynamic.

I guess we're getting closer to three than two at this point, just on average?

Yes. That's a good -- that's a good hypothesis, Tom.

And then the final one is, you mentioned your cost reduction initiative is $30 million type of run rate by the middle of next year. Maybe can you give us a couple of small examples of what you're actually doing there as we speak now to get some of those cost savings.

Sure. First, supplies, those kick in day one, the rates we are able to gain supply advantage in the cost line. Second, some facilities consolidation, some very small ones. And then as we progress toward the -- the end point, other things in G&A related to billing goes as we are able to consolidate billing and IT sorts of functions, those will start to gain some traction over that time frame as well.

Thanks, guys.

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

A couple of follow-up questions here. First of all, client fill declined slightly as a percentage of revenue, it looked like, and just curious, do you realize better profit per requisition when you bill directly to a payor than you do when you have client fill? And a follow-up to that.

I'm not sure, Bill. I totally understood your question. We don't break our profitability by payor type.

I know. I guess what I'm asking is, obviously the revenue per rec is a lot higher -- or a lot lower for client bill than it is for anything else. And what I'm trying to understand is, does it mean it's also lower profit or is that just more a function of the kind of tests that are client billed.

I think it's the latter because in the client line you would find things like our hospital business, our drugs of abuse business, where the ratio of test per accession would be lower than the general average. I think that's what makes the transaction price lower than the average or even some of the other payors. If you think about hospital reference work, it's pretty much what we see there as one to one on it test requisition. In the physician old world which is mostly going to be billed to other billable parties, we would see the more standard three test per requisition, let's say.

Okay. I don't need the follow-up on that one, then. A different question. I'm just wondering if you can give us any sort of update on the customer retention efforts. Specifically, if there's any kind of statistics that you can share with us that would tell us what kind of effectiveness you're having there.

I can't give you any statistics other than the data that I see would suggest that we are improving our retention efforts. We continue to spend significant amounts of money related to more focus in the doctor's office through account representation and through sales reps. We continue to rationalize the organization through call center consolidation and will continue to do that. And I think ultimately, the only way to really -- we've learned, at least, the only way other than anecdotal stories, to really determine how we're doing in that area is to look at our volume growth and see how it stands compared to the rest of the industry or compared to our prior history here at Lab Corp.

Okay. And just the final question, you talked about the opportunities with Wellpoint and United. Are you going to need to make some regional acquisitions in order to have enough infrastructure to expand managed care penetration or is that something that you can build out on your own?

Well, I think we need to do both, so that's a simple answer to the question. If there were a strong regional opportunity, as in any acquisition, we would look at it very carefully. On the other side, for example, in the state of Georgia, we built out and we made a small acquisition, as you may recall, from MVS up in Canada, we brought some of their infrastructure down in Georgia, but we significantly increased our capabilities, ourselves through building many, many patient service centers and labs in the Georgia area. So I think the answer to the question is to be competitive and to satisfy the needs of all of the managed care plans, and I don't want to minimize the great relationships we have with Cigna, Etna, and Humana also, is we need to continue to look for ways to have national infrastructure through acquisitions and through build outs.

Okay. Great. Thank you.

Our next question comes from the line of David Lewis from Thomas Weisel Partners.

Good morning. Brad, a couple of quick questions on the financial side and then I have strategy stuff for Tom. Just real quickly on your fee for service business continues to climb very nicely over the last six quarters, I think you hit a high of 29%. Should we think about it directly or linearly related to Wellpoint or a whole host of factors?

I think that related to the progress of Wellpoint is probably the biggest driver.

Okay. Very helpful. And then on Cap Ex, the company begins to get bigger but Cap Ex doesn't continue to grow that dramatically, it still is lower than your direct competitor. That obviously implies you're being extremely efficient with the deployment of that capital, which is great. I'm wondering, can you maintain that level of Cap Ex as the business continues to grow at kind of sub-3% of revenue? And where are you spending the Cap Ex right now to stay competitive?

Our Cap Ex, I always describe, is really three main things. One is IT, and it's the biggest by far. Second is lab equipment. And third are facilities. In terms of your question about over the long term, I think what potentially makes our Cap Ex look lower are a couple of things.

One is we're highly standardized on one IT system. So while that IT system is large, it's got to be, I would think less to maintain and keep up with than lots of different systems. So I think that's a driver.

On the lab equipment side to our labs and I'm sure you have, too, I notice that we have generally the latest and greatest and we've used technology over the years in the laboratory to drive more and more testing through the same square footage.

And then I think the facilities, we probably have an opportunity to look at facilities even further. So absent some dynamic change in our business, I really don't see capital going up tremendously from where it is today.

Okay. That's really helpful, Brad. Tom, a couple of quick questions, we talk about pathology integration from a financial perspective moving forward on pace and will realize those benefits in 2007. What about the sort of integrated brand of pathology at Lab Corp? What things are going on there? And have you started to see evidence of pull through additional testing because you have these very significant pathology assets?

I'll give you two examples, David. One is the [Dianon] brand now and I can't even remember how long it's been since the acquisition, three or four years, continues to be the standard brand throughout the network. So we are now several, several years after that acquisition, beginning to see very nice growth in that area because of the services that we provide and the quality of the information that came out of that acquisition. So that's -- that's one area.

Secondly, in the whole area of cervical cancer, the image-guided path approach, which we think has real value in terms of quality. We are beginning to see customers now look at Lab Corp in terms of a leader in that field also. So the strategy his working. The strategy of trying to differentiate ourselves to offerings of companies like USL, even like in endocrine sciences and the whole area of thyroid disease. So in each of those areas that we've made acquisitions, we now are branding those companies, not necessarily branding Lab Corp but branding the products that these companies offer, which is really the services that they provide. And we are beginning to get some traction in those areas.

Okay. Thank you. The last question here, Tom. We're seeing an emergence of small specialized clinical reference laboratories, offering multi-flexing PCR assays. And I kind of sit back and say "this is something that Tom McMahon came up years ago," talking about the ability of clinical labs to brand specialized testing, but we're seeing some smaller companies get a lot of the benefit in evaluation. And I'm wondering, are there things Lab Corp can do to move closer to, I guess, in the R&D, the D, the discovery? Are the things that you can change that sort of -- instead of in-licensing products be more directly focused on the development of those products and garner a larger piece of the pie or a more significant component on evaluation of the opportunity the products bring? Just wondering if you can comment on that, given the changing landscape here in the last twelve months.

Sure. Number one is , I think it's a very solid strategic question and it's one we have pondered for a long time here at Lab Corp. I don't think Lab Corp does that well. I think that our strength is our distribution of tests and our ability to deliver methodologies into the market place at a very early stage. The concept of scientific development, as these companies have done, is something that requires more bench strength, more PHDs and more research experience, and that's not to be critical of anybody at Lab Corp. So I don't think that Lab Corp is going to move back in that direction.

I would say this. We have to be very aware of these companies. And David, you're right, these companies are out there. They're there more than they were two years ago. And I think they're going to be more out there three years from now. The opportunity for Lab Corp is to do deals with them and ultimately acquire some of them, because they really are developing special niches and often with individual tests, and they're building their company based on individual test. What they lack, is they lack the tremendous distribution capability and scale up capability of a Lab Corp. So we're very aware of those companies. I don't see us today moving backward into that business, but I would hope to say, if we talk again about this a year, two years down the road, that you've seen us get much closer to these companies through distribution agreements and ultimately through acquiring some of them.

Great, Tom. Thanks.

Next question comes from Robert Willoughby from Banc of America Securities. Please go ahead.

Good morning. Tom, results since you last Investor Day really reflect strength across the board, very solid execution. What variable or primary variables really prevents you from ratcheting up a long term growth expectation at this point? There is something we should be focused on that we haven't considered from a challenge standpoint?

Tough question, Bob. I think number one, please don't ratchet us up just off this quarter, but I think clearly, you have watch our managed care execution, and do you have make sure that we are getting the consistency in the big deals like we received in the past eight months. What's driving this Company, and I think which will drive the industry is the can also of the managed care companies and we need to be at the table with those managed care companies. Not only does it give you strong business from the managed care companies, but it also gives you what I call the pull through business attached to that. So we really need -- you need to watch us carefully as it relates to the whole execution of our managed care strategy.

In any metric as you test for accession or invested capital per accession, etcetera, obviously it would help us tell your story very well. I would hope that you would give us historicals if you come with some new metrics at some point, that said, it looked good to us.

I think Bob, what you should expect from us, and I would hope it would be at the beginning of next year, as we get through this year is a conversion from the discussion of just volume and requisitions, to volume and tests, and the whole concept of looking at price per test, cost per test, because I think as we get better systems at Lab Corp and add the concept of an accession generating more tests, it will be more reflective of our performance as a business. You should see us gradually moving there.

That's great. Thank you.

Next question comes from Ricky Goldwasser from UBS.

Thank you. Good morning. Just a quick follow-up. Of this 30 million in cost savings, can you just quantify for us, what percent of it is going to be realized in '06 and what part is realized in '07? And also is the 30 million all realized by the mid-'07 or is it the run rate by mid-'07?

Ricky this is Brad, we're not breaking out with what's achieved so far with what's ahead of us. And the second part is that's a run rate at the middle of '07.

Thank you.

The next question comes from James Star from Boneview Asset Management. Please go ahead.

Hi. Good morning. Tom, I wanted to push on it issue of churn events. Two years ago, at the analyst meeting you called churn, I think, the dirty secret of the industry, and mentioned that Lab Corp had opted clear metrics on that. My question is, are you where you wanted to be or thought you would be at this point? Is there significant future progress you think we can look forward to?

I think we can improve, Jamie. We are lower than we were when we -- I'm not sure I characterized it exactly as you described it. I think you used the word churn and I did say it's a fundamental challenge to Lab Corp into the industry. Our levels have come down. They have not come down as quickly as I would like them to have come down. And we continue to talk to a variety of different groups inside and outside our Company in helping us to do that. We believe that the major reason that retention is a challenge to Lab Corp relates to the face time we have with the customer. So we have, as you know, increased rather substantially our investment and face time with the customer. I think last year our sales and marketing expenses were up close to $40 million. We're putting more account executives in the field. We realized as we got into the process 18 months ago, that it was not just an issue of call centers, it is an issue of call centers, but it's not just an issue of call centers. It's an issue of also the attention that we need to give customers in the field. And that's pretty much as far as I'll go on the issue because of all kind of competitive kind of activities there. But we found that we needed more face time in the field.

Okay, great. Thanks.

Gentlemen, there are no further questions.

Thanks. Appreciate everybody listening. I hope you have a wonderful 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 lines. Thank you