Labcorp Holdings Inc (LH) 2006 Q3 法說會逐字稿

Welcome to the Laboratory Corporation of America 2006 third quarter results conference call. [OPERATOR INSTRUCTIONS]. As a reminder the conference is being recorded, Tuesday October 24th, 2006. I would now like the turn the conference over to Mr. Tom Mac Mahon, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning and welcome to LabCorp's third quarter conference call. Joining me from LabCorp, Dave King, Executive Vice President and Chief Operating Officer, and my successor on January 1st, Brad Smith, Executive Vice President of Corporate Affairs, Brad Hayes, Executive Vice President and Chief Financial Officer, Ed Dodson, Senior Vice President and Chief Accounting Officer and Scott Fleming, Vice President, Investor Relations. .

Brad Hayes will provide a review of our third quarter and year-to-date consults. Dave King will update you on achievements in key strategic areas during the quarter including our recently announced agreement with United Healthcare, and also discuss updated 2006 guidance and preliminary guidance for 2007. Brad Smith will cover a few anticipated questions. I would now like to introduce Brad Smith, who has a few comments before we begin.

Before we begin I would like to point out there will be a replay of this conference call available via the telephone and internet. Please refer to our press release dated October 24th 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 investors are directed to this 8-K and on our website to review the supplemental information. Additionally, we refer you to our press release dated October 24th 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 2005 10-K and subsequent filings.

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

Thank you, Brad. Our third quarter results are as follows: revenue increased 6.7% to $909.9 million. Compared to the third quarter of 2005, testing volume measured by accessions, increased 3.2% and price increased 3.5%. Compared to the third quarter of 2005, testing volume measured by tests increased 5.8% and price increased 0.9%. The third quarter of 2006 is the first quarter of this year where all 2005 acquisitions have been annualized. During the third quarter, the Company recorder pretax restructuring and other special charges of $5.6 million, primarily related to the previously announced retirement of the Company's CEO, effective December 31. This charge impacted EPS by approximately $0.03.

Earnings per diluted share increased 20% to $0.84 for the third quarter versus $0.70 in the third quarter of 2005 excluding the impact of restructuring and other special charges recorded in both periods. Excluding the impacts of the required change in accounting for share-based compensation and restructuring and other special charges, earnings per diluted share increased 22.9% to $0.86 for the third quarter versus $0.70 in the third quarter of 2005. EBITDA, excluding restructuring and other special charges, was $237.1 million or 26.1% of revenues. Excluding the impacts of the required change in accounting for share-based compensation, and restructuring and other special charges, EBITDA was $242.7 million or 26.7% of revenue compared to 25% of net sales in the third quarter of 2005.

Operating cash flow for the quarter was $155 million. As you may recall, CMS suspended payment to all providers over the last half of September. As a result, operating cash flow was negatively impacted by approximately $12 million in the third quarter. Operating cash flow in the fourth quarter will be positively impacted by an equal amount due to the resumption of claims payments on October 1st.

At the end of September the Company had cash and short-term investments of $320.7 million, and had no outstanding borrowings under its revolving line of credit. DSO at the end of September was 56 days. We estimate that DSO was negatively impacted by 1.5 days due to the suspension of payments by CMS that I mentioned previously.

On September 22nd we commenced an exchange offer for our convertible notes due in 2021. The purpose of the exchange offer was to exchange the existing notes for new notes with certain different terms including the addition of a net share settlement feature. The exchange offer expired on October 23rd with approximately 99.6% of note holders accepting the exchange offer. As a result, effective October 24th, approximately 8 million shares which had formerly been included in our diluted share count will be excluding from the calculation of fully diluted EPS.

Our year-to-date results are as follows: revenue increased 7.5% to $2.6922 billion. Compared to the nine months of 2005, testing volume measured by assesses increased 3.2% and price increased 4.3%, on a per-day basis revenues increased 8% versus the first nine months of 2005. Earnings per diluted share increased 15% to $2.46 for the first nine months of 2006 versus $2.14 in the first nine months of 2005 excluding restructuring and other special charges.

Excluding the impact of the required change in accounting for share-based compensation, earnings per diluted share increased 18.2% to $2.53 for the first nine months of 2006 versus $2.14 in the first nine months of 2005. EBITDA excluding restructuring and other special charges was $708 million or 26.3% of revenues for the fir nine months of 2006. Excluding the impact in the required change in acting for share-based compensation, EBITDA was $724.9 million or 26.9% of revenue compared to 25.8% of net sales in the first nine months of 2005.

Year-over-year margin has been realized due to leverage within our infrastructure, reducing bad debt rate and realizing synergy opportunities which we will discuss later in the call. Operating cash flow for the first nine months of 2006 was $462.1 million, compared to $413 million in the same period of last year. During the first nine months of 2006, the Company repurchased $185.1 million of stock representing 3.3 million shares. We are pleased with our financial results for the first nine months of 2006.

I will now turn the call over to Dave for an update on the progress the Company is making towards achievement of our key strategic objectives.

Thank you, Brad. Our focus on developing what we believe to be the broadest menu of services in the industry combined with our national service capabilities make LabCorp a key strategic partner for managed care companies that want to deliver consistent services to their members from coast to coast. Consistently focusing on the key three elements of our strategic plan, managed care, scientific differentiation, and a customer focused culture provides the catalyst for strong financial results.

I would now like to bring you up to date on our progress related to several strategic initiatives. First, managed care. As you know, on October 3rd, we believe that we announced an historic agreement that gives LabCorp the opportunity to generate more than $3 billion of incremental revenue from United Healthcare and associated business over a ten-year contract period at EBITDA margins at least equal to our current EBITDA margins. We have consistently indicated our belief that securing an anchor managed care contract is a key component of our growth plan.

LabCorp has the ability to generate substantial increases in our profitability with increases in our volumes due to the fixed costs basis of our business. This new agreement with United Healthcare makes us their exclusive national laboratory partner over a ten-year period, helps us further achieve revenue and profitability growth. Obviously we are pleased with this new agreement. We feel that this new agreement is good for LabCorp, for United Healthcare, and for physicians and patients for a number of reasons. United's members and all other managed care customers will immediately benefit from a larger number of conveniently located patient access points for laboratory testing. Patients will benefit over time through a more affordable healthcare due to the efficiency of our business model, the reduction of services provided by higher costs lags and the reduction of leakage.

While it may not be clear to everyone following this agreement, it is clear to us that the passion and commitment of United Healthcare working with LabCorp to eventually create a national network concept will reduce the overall spend on lab services for United Healthcare. For example, we understand from United Healthcare that patients utilizing an out of network provider for lab services will be subject to higher costs than if an in-network provider was utilized. More of United Healthcare's members will have greater access to testing performed on technologically advanced platforms. For example, the Cytyc ThinPrep Imaging System will now be offered to more of United's physicians and patients in all geographic markets.

Physicians and their patients will also benefit from standardized longitudinal data for the monitoring and treatment of disease. United Healthcare will benefit from standardized lab data on an increasingly large number of patients. This standardized data will allow for improvements in disease management and provide the capability to implement real evidence-based medicine. LabCorp will have access to and be able to more effectively compete in markets including New York, Connecticut, Chicago, St. Louis and Los Angeles where we have not been a major force in the market. Finally, and most important to LabCorp shareholders, the new United relationship will be profitable for LabCorp at current EBITDA margins or better.

Since our conference call announcing the United Healthcare agreement on October 3rd, much has been done to prepare for the significant volume of additional work that we expect beginning in early January. We are currently hiring additional employees in critical customer facing positions such as phlebotomy, logistics and sales. We are well on our way to achieving our internal hiring goals.

Also, our efforts in establishing additional access points are progressing very well. We've been opening patient service centers at the rate of 20 per week, and we expect this pace to accelerate through the end of the year. As part of our strategy to expand our presence in the New York City market, we have executed an innovative agreement with Duane Reade drug stores. Duane Reade is the largest and more recognized drug store chain in New York City with over 250 locations throughout the Metro area. Duane Reade has a number one market share in Manhattan. Beginning immediately, LabCorp and Duane Reade will work together to open patient service centers in at least 20 key Duane Reade stores.

Those patient service centers will allow Duane Reade and LabCorp customers to conveniently have prescriptions filled, have blood drawn and shop for a wide variety of products including vitamins, nutritional products, cosmetics and greeting cards. The partnership immediately and significantly expands our accessibility for patients in New York City, and we expect to expand this relationship beyond the 20 initial sites in the months ahead. I would like to reiterate these patient service centers will be available for use by all patients, not just those who were United Healthcare members. We are very pleased with our progress to date and our ability to be fully operational by the first of the year.

Beyond United Health Care we continue to focus on our other managed care partners such as WellPoint, Aetna, CIGNA and Humana. We have spoken often about our national strategic partner relationship with WellPoint, and we continue to be very pleased with this relationship and with the significant incremental business we have gained in Georgia, Nevada and Colorado. We place great value on our relationships with all managed care partners, and believe our significant patient service center expansion will benefit all of these plans. We remain committed to working with them in achieving their goals in providing affordable quality care.

Turning toward other strategic initiatives, I would like to update you on our progress in growing our esoteric test mix. As we discussed for some time, increasing our mix of esoteric testing is one of our key focus areas for further expansion of our industry-leading EBITDA margins. Over the next few years our goal is to increase our esoteric test mix to approximately 40% of LabCorp's revenues. At the end of September approximately 35% of our revenues were in the genomic, esoteric and anatomic pathology categories.

Next, I'd like to give a brief update on the integration activities. During the third quarter, we continued to meet our internal expectations toward achieving targeted costs reductions related to the acquisitions of U.S. Labs, Esoterix and DIANON. Our stated objective is to achieve cost reductions across the entire organization of approximately $30 million on a pretax basis by mid-2007. We remain on schedule toward achieving these cost reductions. They are an important driver of our increases in EBITDA margins. In addition to these cost savings, we continue to make significant progress in combining the operational and sales and marketing aspects of these entities into a comprehensive cancer testing business.

Continued progress in implementing this strategy will be a key to growth in this important business segment. In summary, LabCorp continues to be successful by following a simple business philosophy. We focus on the areas of our business that we believe are critical to the future success of our company. We develop plans, metrics, and goals for each area, and then we monitor progress towards achievement of those goals. We believe that by applying the simple philosophy to our three strategic focus areas, managed care, scientific leadership and a customer focused culture, we will continue to deliver outstanding results.

Now I would like to discuss our guidance for the remainder of 2006 and our preliminary guidance for 2007. Excluding the impact of the required change in accounting for stock-based compensation, any share repurchase activity after September 30th, any incremental operating expenses or capital expenditures associated with our agreement with United Healthcare, any impact of our previously announced exchange offer related to our convertible debt, and restructuring and other special charges primarily associated with the previously announced retirement of the Company's CEO, our guidance for 2006 is as follows: compared to 2005, LabCorp expects 2006 revenue growth of approximately 6.5 to 7.2%. EBITDA margins of approximately 26.5 to 27.0% of revenues. Diluted earnings per share in the range of $3.28 to $3.33, operating cash flow of approximately 610 to $630 million, capital expenditures of approximately 90 to $100 million, net interest expense of approximately 40 to $42 million, and a bad debt rate of approximately 4.8% of sales for the remainder of the year.

Additional factors expected to impact final 2000 EBITDA and EPS include additional pretax operating expenses in the range of $14 million to $18 million or $0.06 to $0.08 per diluted share associated with our agreement with United Healthcare. Pretax restructuring and other special charges of approximately $12.9 million or $0.10 per share, primarily associated with the previously announced retirement of our CEO. Approximately $5.6 million of those charges were recorded in the third quarter of 2006.

Excluding stock-based compensation associated primarily with the retirement of our CEO, we expect that the implementation of the required change in accounting for stock-based compensation will have an EBITDA impact of approximately $22 million or approximately $0.10 per diluted share. We estimate that the exchange offer related to our convertible debt will positively impact diluted EPS by approximately $0.02 at current share prices. Additional capital expenditures in the range of 15 to $20 million are expected to be incurred during 2006 in connection with the United Healthcare agreement.

For 2007 excluding the impact of our previously announced accident change offer related to our convertible debt, many share repurchase activity after September 30th, our preliminary guidance is as follows: compared to 2006, LabCorp expects 2007 revenue growth of approximately 11% to 13%, and diluted earnings per share in the range of $3.68 to $3.83. We expect to achieve this revenue and EPS growth through the following initiatives: Increasing revenues through both organic growth and growth related to our agreement with United Healthcare, and further shifts in our test mix, particularly in our esoteric and genomic businesses, which generate higher profits than the core business. Completing the $30 million in annual synergies I mentioned earlier and contributions from small acquisitions.

Our diluted EPS guidance for 2007 excludes the impact of the exchange of our convertible debt discussed earlier. As a result of this exchange offer, we estimate the exchange will benefit 2007 diluted EPS by approximately $0.18 at current share prices. We expect to provide more definitive guidance for 2007 after we complete our internal budgeting process for next year.

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

Thank you, Dave. First question, can you comment on yesterday's Wall Street journal article about pod labs? For those of you who haven't seen the article, it focused on the effort by CMS to more tightly restrict doctors billing for tests they don't perform Much of the article focused on condo or pod anatomic pathology laboratories and the fact that proposed CMS rules are taking aim at stopping these arrangements. For some time now we have spoken about pod laboratory arrangements that we feel are potentially abusive.

As you know, we have experienced some business losses to arrangements like these. We're encouraged by the attention that this Wall Street Journal article can bring to the situation. Also, we're encouraged by the draft language included by CMS in the draft physician fee schedule which would restrict these arrangements. We plan to keep working with CMS and others to close the loop holes pods use to unfairly compete.

Can you update us on your progress and image guided path, HPV and cardiovascular testing? Image guided Pap: adoption of the Cytyc ThinPrep Imaging System by our physician clients continues to increase. By the end of the third quarter the ThinPrep Imaging System was being requested for approximately 46% of all liquid-based Pap smears ordered. On an annualized run rate basis, we are now performing approximately 4.2 million image-guided Pap tests.

HPV. We have experienced a growth in both reflex and primary screening HPV testing of approximately 59% in the third quarter of 2006 versus the third quarter of 2005. On an annualized run rate basis, we are now performing more than 1.5 million HPV tests per year. Advanced cardiovascular markers. We continue our focused efforts to educate our physician clients about advanced testing related to cardiovascular disease. Cardiovascular disease is the leading cause of death in the United States, outpacing all forms of cancer.

Advanced lipid testing technologies such as Astrotech's VAP test and the NMR test from LipoScience offer physicians insight into a patient's cardiac disease risk that has never been possible before. We have experienced growth in both VAP and NMR testing in the third quarter of 2006. We are excited about these technology advancements and look for tests like these to be future growth drivers.

Can you update us on your experience in the marketplace since your announcement of your agreement with United Healthcare? We've been very pleased with the feedback we've received from physicians. By and large, physicians are familiar with the quality and the breadth of our testing services. In fact, physicians have already begun to switch over to LabCorp.

Can you give us some additional color on your quarter over quarter revenue growth? As Brad mentioned while reviewing the quarter's results, revenues in the quarter increased 6.7% versus the third quarter of 2005. On a per day basis revenues increased by 8.4% versus the third quarter of 2005. The quarter over quarter revenue comparison was aided by 1% due to favorable weather in the third quarter of 2006 versus the third quarter of 2005.

How will the new FDA draft guidance affect LabCorp? The recent FDA IDBMIA guidance appears to be aimed at a very small number of unique tests. We believe the FDA is attempting to address the specific area of new testing that they believe requires regulation to protect patients. We do not believe that the FDA intends to change their historical approach to the regulation of most lab-developed tests and also do not believe that the draft guidance will have any significant impact on our current testing. We plan to work closely with FDA both directly and through our trade association ACLA to help make sure the FDA protects the patient interests about which they are concerned without imposing overly broad regulations that will unduly restrict access to important new testing methodologies.

What is the status of the Medicare competitive bidding demonstration project? Based upon recent comments from CMS, we understand the timetable and project process are on hold pending OMB review. We also would be surprised if the first demonstration project begins on schedule.

Now I would like the turn the call back over to Tom.

Thank you, Brad. As I near the end of my tenure as Chief Executive Officer, I remain more excited than ever about the prospects for LabCorp.

Medical testing will always be a critical component for physicians to make treatment decisions. New technology, like all the tests we have described today, and over the past ten years, will only become more important to our health system, and LabCorp's proven level of success in achieving our strategic plan will, in my judgment, provide continued strong financial results to our shareholders.

Thank you very much for listening, we are now ready to answer any questions you may have.

[OPERATOR INSTRUCTIONS]. Our first question is from the line of Tom Gallucci from Merrill Lynch. Please proceed with your question.

Good morning. I had a couple questions if I could. First on the guidance for next year just to be clear. What did you done in terms of Medicare reimbursement changes that may or may not be on the table and could happen within the guidance?

Do you want to ask all your questions, Tom, and I will divvy them out?

The one would be the medicare, the second would was the lines impact was obviously a nice positive for EPS, just wondering what the cash impact is there for next year, and turning to United, I would two questions. One, you mentioned some incentives that United may be putting in place for their patient to say use to stay in network. Is there any particular incentive to use LabCorp versus another regional provider?

And number two, I know WellChoice recently renewed their lab agreement. You've obviously got a close relationship with WellPoint that you talk about. Now that you have a greater presence upcoming here in the New York area, do you know what the status of that contract is and is there any way for you to get into that contract at some point or do you have to wait until it comes up for renewal again?

Why don't we start with if we would maybe Brad talk about the lines and the Medicare proposed increases.

Tom, this is Brad Hayes. Our guidance for 2007 would anticipate a favorable outcome of what's draft for the Medicare fee increase. We have not quantified what that is, but we do expect that to be positive to LabCorp next year. On your question related to the lines and the cash impact, other than the 25 basis points that we will pay the holders for the exchange, there is no cash impact related to the exchange offer that I can think of that goes into next year beyond again what we're paying in terms of the 25 basis points to the holders plus the fees that we have related to the transaction.

Dave, could you answer the question on the managed care contracts, United.

Yes. Your first question was whether incentives would be for patients to use LabCorp specifically or just other regional providers. The incentive is for patients to use an in-network versus an out-of-network laboratory. LabCorp or any other laboratory that's in the United Network, that would be where the patient incentive is. Obviously it is up to us to gain the business. With respect to your question about WellChoice, the current status of the contract as we understand it is that we are not in the contract, and therefore our understanding is that for any work that we would perform for WellChoice patients, we would bill and be paid as an out of network provider.

Mr. Gallucci your line is open.

Thank you very much. I thought you were going to the next question. Thank you.

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

I have a couple questions on the United situation and the other. On the incentive you mentioned, is that something that would occur immediately at the beginning of 2007 or is that something that requires United to go out and make a change in its agreements with the people purchasing insurance?

The incentive, again, our understanding is the incentive depends on the members benefit plan, so it depends what product they have purchased. However, it is our understanding that United is communicating that effective January 1, 2007, that patients who use an out of network laboratory will be subject to higher costs. Again, depending on the plan, but effective January 1, 2007, patients who use an out of network laboratory will be subject to higher costs.

And do you have any sense of the magnitude of those costs? Are we talking a significant co-insurance or a $5 bump in co-pay?

I don't have any information about the magnitude, but I reiterate the comment that I made previously which is that United has great passion for moving laboratory testing to in-network providers.

Okay. That's helpful. And then just one thing that you addressed I think on the original call, but I just want to make sure, does LabCorp bear any risk beyond the $200 million transition fee? In other words, if for some reason you're not successful and there continues to be a high level of out of network leakage beyond the first couple of years, are there any other -- is there any other recourse for United?

No, there is not. Our exposure is limited to the $200 million over the three-year period.

Okay. And then just a final question and I will get back in the queue, but you talked about the pod labs. I guess I am just curious, is your understanding that the proposal and the fee schedule, would that effectively prohibit physician/client billing in general or is that specific to these pod labs?

Bill, this is Brad. It is actually focused on Medicare billing. The client billing is a different issue. That's a state by state issue based usually. These are rules that these Pod organizers took advantage of physician assignment rules meant to help emergency rooms who use temporary physicians and they created these pod labs off site, and Medicare said that they're looking for ways to stop physicians who don't perform anatomic pathology testing from billing Medicare for it.

In other words, you don't have any situations where a physician office refers a test to you and they pay you but they turn around and bill Medicare.

We don't believe we do.

Okay. Great. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from the line of Robert Willoughby from Banc of America Securities. Please proceed with your question.

Hi, Tom or Dave. Looking at the Duane Reade agreements, will there be any changes to your costs here, then, for entering the New York market or the CapEx numbers relative to earlier expectations?

No. I think, Bob, what that basically is is a fast way with to us getting into the New York market. The costs associated with the implementation of the new Duane Reade agreement are covered in the capital expenditures and estimates that we provided today and three weeks ago.

Was this something, Tom, that was in the works a year ago or was this just post United contract you were able to get something in place quite quickly?

We have indicated for a substantial period of time, Bob, that we were coming in to the New York market, and we have been exploring different ways to do that for a substantial period of time now because as you know, back four or five months ago we had also hoped that we would have been more successful than we were in acquiring the Empire contracts, so I am not going to give time lines on how long the discussions have gone on, but suffice to say we have been looking for ways to get into the New York market more quickly, and we think that this is a terrific way to do it.

And, Brad Hayes, any chance you can get us some share-based guidance for Q4 as well as 2007?

Bob, for Q4, again, we gave our guidance for 2006 again at the total level accident, and then gave you in the things to consider section the share-based compensation. Our 2007 guidance would include share-based compensation, so we've broken it out separately throughout 2006 which is the first year of implementation, but in 2007 we will be including it.

No, Brad, I just mean the absolute share counts that you're assuming a fully diluted share number you're assuming for the year in the guidance?

No, we couldn't typically give that out. There is not much to think that it would change beyond the typical dilution from options, nothing else I can think of that would go forward. Again, that guidance was two ways, one excluding the exchange offer and, two, then giving you what the exchange offer impact was, so beyond that, I am not going to give the exact number.

Ballpark figure of maybe $6 million -- 6 million shares out of the Q4 and 8 million shares out of next year is a reasonable expectation?

Yes.

Okay. Thank you.

Thank you. Our next question comes from the line of Adam Feinstein from Lehman Brothers. Please proceed with your question.

Thank you. Good morning, everyone.

Good morning.

My first question is trying to understand the mix, looking at one of the charts you provided in the 8-K filing and just want to get a sense if we look at the Esoteric, it went up as a percentage of total volume but as a percentage of total revenue actually moved down slightly. I know you annualize some of the acquisitions from last year, but want to get a sense of what's going on there, I guess particularly -- and you spoke a little about this last quarter but just wanted to get an update, the histology pricing coming down some. Can you provide a quick update there, and I have a follow-up question. Thank you.

This is Brad Hayes. I think you hit it. The his tolling pricing, especially in the look in the third quarter versus the second quarter growth rate has come down, and incompetent there is mix within mix in that line and related to the comments earlier about Pods, what they typically are attracting away are the higher-valued tests. I think again if you look at the his tolling line sequentially, you will see actually a slight improvement in volume in the third quarter, however a did he line in price, and we think it is directly attributable to what we mentioned earlier in terms of what we're seeing in the Pod impact.

Would you anticipate similar impact going forward so should we look for the esoteric to move down as a percentage of total for next several quarters?

Related to the Pods, again, that would be dependent on what happens in terms of us being able to reverse that trend. In terms of esoteric, the total group as a percentage of total, I wouldn't think of anything that would make that number go down.

Adam, this is Tom. I would hope next year with our new agreement that we get a better market share of anatomical pathology from the United contract than we have today. That certainly is a forward-looking objective. I am hopeful that dealing with the Pod situation, at least in some way, and getting a greater opportunity for enhanced market share with United could be helpful to the Company next year.

All right. Then just a follow-up. I guess on the United contract, what's our feedback have you received from the doctors in terms of -- well, I am thinking about the New York market, but even in other markets, have you had much dialog there and any feedback?

Adam, it is Dave King. We have -- I am not going to give you an exact number because I don't have an exact number, but we have already made in the thousands of customer calls and visits since the announcement on October 3rd and with the exception of an occasional concern about some historical event many years ago, the general reaction in the marketplace has been very pleasing to us.

We have not gotten a lot of pushback. We have a lot of accounts that have already made the decision to switch, so we're very, very pleased with what's going on in the marketplace, and the reaction has been as we had hoped it would be which is that physicians are excited about LabCorp's known quality and service, physicians are excited about the additional menu opportunities that will be available to them, and they're excited about our patient service center expansion plans so there will be more convenience to their patients.

Okay. Just a final question and a bigger picture question but certainly would love to get your feedback. I guess with respect to other payers potentially move to go a national provider contract similar to the United contract, I know you guys are very upbeat about the potential opportunity there, and you mentioned earlier that you've had dialog, but would you anticipate additional announcements over the next year or do you think there will be a longer-term process until we see other types of once again national contracts? Thank you.

Adam, this is Tom. I really couldn't comment on what the direction of the other national managed care companies will be. We continue to have dialog with other managed care companies, and whether they choose to go to one lab or a variety of labs, to me is really an unknown issue at this point in time.

Okay. Fair enough. Great. Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is from the line of Ricky Goldwasser from UBS.

Good morning, a few questions. First on United, are there any and if so what are the incentives that physicians have to send United -- to send special coming from United members to players carb to lab that is are in the network? Second question on United, are there regional players allowed to wave patient co-pays and lastly on United, what percent off United business has patient co-pays, and is it higher than your overall book of business because I know that obviously some contracts do not have patient co-pay for lab testing, and then questions on the financials. Are there any one-timers included in cost of goods, and you might have touched upon that, but I kind of missed it. On the routine side, 7.2% revenue growth, strongest we've seen in the last three years. Can you comment a little bit about that and is that sustainable going forward, not factoring into the count the additional volumes you're going to get from United.

Dave, why don't you handle the United questions and, Brad, you handle the metric questions.

Ricky, I will restate them to make sure I get them correct. Your first question was are there going to be any incentives for physician to send to in-network laboratories.

Yes.

Our understanding is that United is developing physician incentives as well, and I don't have specific details on what those will be, and they have not been communicated to my knowledge to physicians yet, but that is part of the overall leakage control program that United has in mind. Your second question is would regional players be permitted to wave patient co-pays.

Yes.

I don't want to tread into legality here or let me say it this way. For those regional laboratories that would be in-network providers with united, my understanding is there wouldn't be any co-pay other than what they would have as a co-pay if they used LabCorp. If they use an in-network lab, whatever the co-pay is is going to be the same whether they use LabCorp or a regional lab. If they use an out of network lab -- p if they use an out of network lab, and receive a higher co-pay, our understanding is from a legal and compliance standpoint is -- and also as a matter of United policy, that United does not permit routine waivers of patient co-pays, and United would view that in a very unfavorable light, so I hope that answers your question. What Ricky is trying to understand is if a competitor to us in-network, do they have the ability to wave co-pay waive co-pay for --

As well as out of network.

So can an in-network lab waive co-pays? Again, both from a legal and compliance in the United policy standpoint, United's expectation is that their provider labs and their providers in general would collect whatever co-pays are due and I can't obviously comment on specific united contracts because I don't know what they are, but typical contracts with managed care organizations do state that the provider is obligated to collect the co-pay, so for contracted in-network laboratories, it would surprise me if they felt that it was appropriate to waive co-pays on a routine basis.

And what about out of network and the focus is on Quest. Can Quest now waive patient co-pay now that they're out of network.

Routine waiver of co-pays as Dave mentioned generally is considered to be improper and it can and is on a fact basis account by account, there is a safe harbor, the OIG put out about it, and a broad based routine waiver I think we would look at it as being very problematic. I think so also referring to specific providers, if you're at a network and are a contractual relationship with United, most of United's contracts and other managed care contracts require to you follow United rules. If you had a contract somewhere else, my questions would be that it could put that contract in jeopardy if you began to violate United policy. I think the issue that is a lab would face if they did that could be both kickback fraud and abuse and potentially contractual problems in other areas.

Just in general in terms of patient co-pay for the managed care book of business and for United?

Ricky, this is Brad Hayes. As I compare United as a payor to other payors, and look at the your question, I think they're very much in line with other payors.

And what would that be?

In terms of as a percentage?

Yeah, is it 25% of the managed care book of business is patient co-pay associated with them or we know that Medicare obviously doesn't have --

We have never broken that out separately, but again not out of line with other large payors that I have analyzed.

Okay. And then on just the COGS and the revenues.

On the cost of goods sold, I think your question was were there any one timers, and the answer is no. The one time time charge we have would have been in the SG&A line, and on the revenues, Brad Smith spoke to the 1% due to an easier comp with weather, but still if you back that out, we did have revenue growth that was higher I think than we had reported in the second quarter or first quarter to the question of whether we see that moving forward, I would have to say that how we feel about the business is Incorporated in our updated guidance.

Okay. And then lastly, just on the Duane Reade strategy, what is kind of your goal by the beginning of the year? How many pharmacies are you -- how many drug stores are you planning on having in Duane Reade pharmacies by the beginning of the year?

Ricky, we plan to have 20 open chiefly in Manhattan by January 1st.

Okay. Thank you.

Thank you. Our next question comes from the line of Kemp Dolliver from Cowen & Co.

Thanks and good morning. Quickly on the United discussion with regard to the patient cost sharing, do you have a cents as to whether that will go up next year versus this year?

No, we don't have any sense of that, Kemp.

You mentioned you were starting to pick up some business from doctors because of the United contract. Do you have any sense if this is business that's essentially would currently be out of network or are these docs with whom are in network and you're picking up share within the existing relationships?

These -- my sense is that these are doctors who are currently using Quest where Quest is not an exclusive provider and they're switching to LabCorp ahead of the January 1st date.

Okay. Thank you.

Thank you. Our next question is a follow-up question coming from the line of Bill Bonello from Wachovia.

On the physician payment, you said your guidance can you tell us what the impact would be if the currently proposed cut to physician reimbursement is not eliminated and then secondly, again on United just trying to understand your protections here, can you tell us whether at any point in the future Quest would be allowed to contract with United in specific markets but not on a national basis and secondly what would happen to a lab's contract if Quest purchased that lab who was currently an in-network provider.

I think in terms of questions about Quest and their relationship with United, I would prefer, Bill, if we just stick to our relationship with United and the very significant opportunity that we see ahead for LabCorp. I am not going to allow anybody at this table to have any further conversations about a competitor that I respect, and I don't know what their relationship is as it relates to United other than to reiterate that we have been selected as the exclusive national provider for a ten-year period, and to me that means it is LabCorp for ten years.

I get that you don't want to comment on Quest and frankly i am trying to understand it from a LabCorp standpoint. Are you moving forward with the assumption that you will be the sole national lab providing services in virtually all markets for the next ten years.

That is our objective, yes.

Okay.

Bill, on your first question, this is Brad Hayes, about the CMS fee schedule, I think in the first question of the Q&A I may have answered that we hadn't quantified it. We've obviously quantified it. We haven't broken it out separately to you. It is not a large piece of our 2007 expectations. I don't want to -- I am not going to give you the numbers, but it is relatively positive if it all goes our way, and mildly negative if it is not fixed. It is in our expectations for next year, the not a driving force behind our expectations, and that's where I'd like to leave it.

Okay. Thanks.

Thank you. That was our final question.

Thank you very much and have a great day.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.