Labcorp Holdings Inc (LH) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to David P. King, Chief Executive Officer. Please go ahead, sir.

Thank you, Kimberly. Good morning, everyone. Thank you for joining us and welcome to LabCorp's fourth quarter conference call. Joining me today from LabCorp are: 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 of Investor Relations. This morning we will provide a review of our fourth quarter and full-year 2006 results and update you on achievements in key strategic areas during the quarter, including our progress in building out our infrastructure in preparation for increased volumes from United Healthcare. Later in the call we will discuss guidance for 2007 and cover a few anticipated questions.

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

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 February 15th 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 our website to review this supplemental information. Additionally, we refer you to our press release dated February 15th 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 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 and in our 2006 10-K when filed.

Now I would like to turn the call back over to Dave for some preliminary comments.

Thank you, Brad. Before we discuss our results, I want to express my appreciation to our chairman, Tom Mac Mahon for his ten years of exceptional service to LabCorp and the laboratory testing industry. The 25,000 employees of LabCorp owe Tom an immeasurable debt of gratitude for what he has done for us and we wish him well as he begins a new phase of his personal and professional career. I also want to say how gratified I am that LabCorp's senior leadership group remains in place as we begin the new year. This stability in our core leadership team is a testament to their loyalty to LabCorp and their commitment to our employees and our shareholders. I am delighted to have their support as we move into an exciting time for our Company.

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

Thank you, Dave. Our fourth quarter results are as follows. Net sales increased 9.3% to $898.6 million. Compared to the fourth quarter of 2005, testing volume measured by accessions increased 5.6% and price increased 3.7%. We estimate that the year-over-year growth rate in the fourth quarter of 2006 was impacted by approximately 120 basis points due to volume which began to transition to LabCorp related to our new agreement with United Healthcare and by approximately 150 basis points due to favorable weather versus the fourth quarter of 2005. During the fourth quarter the Company recorded pretax restructuring and other special charges of $7.7 million related primarily to the previously announced retirement of the Company's CEO effective December 31, 2006. This charge impacted EPS by approximately $0.04.

Earnings per diluted share increased 26.9% to $0.85 for the fourth quarter versus $0.67 in the fourth 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 31.3% to $0.88 for the fourth quarter versus $0.67 in the fourth quarter of 2005. EBITDA, excluding restructuring and other special charges was $227.7 million or 25.3% of revenues. Excluding the impacts of the required change in accounting for share-based compensation and restructuring and other special charges, EBITDA was $234.1 million or 26.1% of net sales compared to $199.5 million or 24.3% of net sales in the fourth quarter of 2005.

Operating cash flow for the quarter was $170.2 million. At the end of December the Company had cash and short-term investments of $186.9 million and had no outstanding borrowings under its revolving line of credit. DSO at the end of December was 54 days. During the quarter the Company repurchased $250 million of stock representing 3.4 million shares. Approximately $350 million of repurchase authorization remains under our board-approved share repurchase plan.

Also during the quarter the Company's exchange offer regarding its liquid yield option notes was accepted by approximately 99% of holders. These notes have been exchanged for a new series of notes which contain a net share settlement feature. As a result of this exchange, our fully-diluted share count was reduced by approximately 7.5 million shares. During the quarter the Company incurred additional pretax operating expenses of approximately $14 million associated with our agreement with United Healthcare. Also during the quarter the Company made additional capital expenditures of approximately $16 million in connection with the United Healthcare agreement.

Our full-year 2006 results are as follows. Net sales increased 7.9% to $3.5908 billion. Compared to 2005 testing volume measured by accessions increased 3.7% and price increased 4.2%. Earnings per diluted share increased 17.9% to $3.30 for 2006 versus $2.80 in 2005, excluding restructuring and other special charges recorded in both years. Excluding the impact of the required change in accounting for share-based compensation, earnings per diluted share increased 21.8% to $3.41 for 2006 versus $2.80 in 2005. EBITDA, excluding restructuring and other special charges, was $935.7 million or 26.1% of net sales for 2006. Excluding the impact of the required change in accounting for share-based compensation, EBITDA was $959 million or 26.7% of net sales compared to $845.8 million or 25.4% of net sales in 2005. Year-over-year margin expansion has been realized due to leveraging our existing infrastructure, reducing our bad debt rate and realizing synergy opportunities. Operating cash flow for 2006 was $632.3 million compared to $574.2 million in 2005. During 2006 the Company repurchased $435.1 million of stock, representing 6.7 million shares.

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. You may have heard our highly-successful radio commercials in key markets reminding listeners that LabCorp stands for quality, innovation and convenience. We achieve these three differentiating factors by remaining focused on the three key components of our strategic plan; true partnership with managed care; continuous expansion of our scientific capabilities, and relentless focus on the customer. This year has again demonstrated that executing on this plan will provide the basis for growth for LabCorp. I would now like to bring you up to date on our progress related to several strategic initiatives.

In managed care, our focus has been on building out our infrastructure to be ready to take on additional volumes related to our exclusive national laboratory partnership with United Healthcare. I am very proud to inform you that as of January 1st over 400 new patient access points were opened, 1,200 phlebotamists, couriers, lab techs and sales people were hired and trained, and our laboratories were prepared for the testing to be received from United Healthcare's providers. It is a tribute to our 25,000 employees, especially those on the front line, that we achieved what many characterize as an insurmountable task. I am also very proud that during this period of intense focus on United Healthcare preparations, our service levels have remained consistent with our rigorous standards, taking into account transition issues of the sort we have discussed since the announcement of the contract. Such issues are inevitable in an implementation of this scale. We are proud of what we have achieved to date, and we were very pleased with comments made by United Healthcare on their fourth quarter conference call regarding our performance in executing on this significant opportunity.

We also know that we have more work to do. Customer Service is an ongoing and never-ending job. During the fourth quarter we believe that we experienced a larger-than-anticipated level of United Healthcare providers switching to LabCorp in advance of the January 1st contract effective date. We are very pleased with the sales growth in our base business, as well as the contribution this early switch over made to our overall sales growth in the fourth quarter. Nevertheless, we must emphasize that it is our expectation that United Healthcare-related revenues will ramp and have a greater impact during the second half of 2007. We have also been very pleased with our Duane Reade partnership. We are seeing more patients than we had expected to see at those sites, and the response from customers has been quite favorable. We will look to expand this model with Duane Reade and elsewhere during the rest of 2007 as we continue to make LabCorp the most convenience laboratory for doctors and their patients.

So far the transition of United Healthcare business is in line with our expectations. During the remainder of 2007 our focus regarding United Healthcare will be on continuing to attract business through our combination of quality, innovation and convenience. We will work with United Healthcare to control leakage by demonstrating our value proposition of a superior test menu and industry-leading service. United Healthcare has clearly demonstrated its commitment to controlling leakage to non-contracted providers, and there is no question that they are a dedicated partner in this regard. This agreement with United Healthcare and the infrastructure we have built, particularly in the New York Metro area, position us well to take on a more important role with other managed care plans in the area and across the country. Our entree into thousands of new physicians' offices and the connectivity that we have established with those physician offices gives physicians, patients, and managed care companies true choice in markets where they did not have it before.

We also continue to focus on our other managed care partners. We remain WellPoint's sole national strategic partner, and we continue to work with WellPoint to expand this unique association. We greatly value our relationships with Aetna, Sigma and Humana as well as. As you are likely aware, Aetna sent a request for information to many labs across the country. We have responded to this RFI and provided proposals to Aetna, which we believe will help them achieve their goals. We believe that our expanded northeast infrastructure and vastly increased number of convenient patient access points, combined with our capabilities in delivering the broadest menu of consistent, high-quality testing will be attractive to Aetna and other major managed care plans. We also believe that our capabilities in providing standardized lab data to aid in disease management and our partnership approach in helping managed care plans reduce their overall lab spending through leakage control will continue to make us the lab services provider of choice for managed care. We place great value on our partnerships with all managed care companies and remain committed to working with them in achieving their goals of providing affordable quality care to their members.

In the area of science, in 2006 LabCorp continued its long-standing tradition of scientific vision and leadership with the introduction of more than 40 significant test menu and automation enhancements. Our focus is specifically in areas where novel diagnostic assays provide actionable results for unmet clinical needs. In 2006 we introduced six new companion diagnostic tests, providing clinicians with innovative ways to avoid adverse drug reactions in their patients. These tests are particularly important for patients taking the blood thinner Wafarin, patients with colorectal cancer and children with leukemia. We continued our industry leadership in gene-based and esoteric testing, generating $1.2 billion in revenue and growing at more than 10%. We have pioneered a cheek swab format for most genetic tests, making them easier to perform and sparing patients the necessity of blood draws. We already offer a highly sensitive and specific genetic test to detect carriers of the mutation that causes Fragile X, as well as detecting individuals and patients affected with mosaisism.

In 2006 we not only continued to enhance our menu of gene-based testing in areas of historical focus, such as infectious disease and oncology, but also introduced other enhancements in new areas, such as fertility, epilepsy, coagulation and hemoglobinopathies. We continued to expand our capabilities in mass spectrometry, highlighted by our endocrine sciences menu of 18 novel assays. Additionally, our programs in biochemical genetics, oncology and therapeutic drug monitoring take advantage of our mass spectrometry capabilities at both our major North Carolina labs, the center for esoteric testing and the center for molecular biology and pathology. Our esoteric facility, Cytometry Associates, developed a novel ZAP-70 assay for patients with chronic lymphocytic leukemia, assisting clinicians in determining the appropriate therapies for patients with this disorder.

Continuing our leadership in scientific innovation we announced this week a ground-breaking partnership with ARCA Discovery to commercialize a companion diagnostic for the first cardiovascular personalized medicine, bucindolol, a genetically targeted beta blocker. The new test will identify patients more likely to have an adverse drug event, as well as patients more likely to have a positive response to the drug. This agreement represents an exciting new model for the drug development industry and demonstrates our commitment to both companion diagnostics and cardiovascular medicine.

Our customer focus culture. I have already discussed our success in opening patient service centers, hiring and training employees and signing up new accounts during the last four months. The can-do attitude of our 25,000 employees is a persuasive demonstration that we are a nimble customer-focused Company. We also have our eye on the ball when it comes to quality and service. I could cite hundreds of acts by our phlebotamists, couriers and service reps who went above and beyond what was expected to make sure that patients got the right tests and doctors got the right results.

We have over 1,700 LabCorp patient service centers, and a staff of 6,200 of our own highly-trained phlebotamists to provide the quality customer service we demand, that our patients and physicians expect, and that we have committed to provide to our managed care partners. We monitor our service metrics constantly and continue to implement initiatives to reduce patient wait times and make our patient service center experience more convenient and satisfying for patients. Our extensive nationwide logistics network of 2,600 LabCorp couriers provides reliable and on-time pickup of specimens from physicians' offices, hospitals and our patient service centers. The logistics network also includes a fleet of LabCorp aircraft to transport specimens between facilities, reducing turn-around time and complementing our ability to provide doctors and patients with timely results.

Equally important is what goes on in our nationwide network of laboratories. LabCorp is the only laboratory of national or regional scope that across multiple facilities performs testing using standard instruments, reporting with standard, normal and reference ranges on a standard lab and billing system. This uniformity provides physicians with longitudinal data that they can use to provide better care and improved treatment outcomes. This standardized longitudinal data, which is unique to LabCorp, is also critically important to managed care organizations as they implement their initiatives regarding evidence-based medicine.

We continue to expand and enhance our connectivity with physicians. Currently, approximately 90% of results are delivered, and 70% of orders are initiated electronically. Our eLabCorp web based test order and result delivery product integrates easily with many practice management systems and provides the functionality of greatest interest to physicians. It is the job of our 700 MD's and PhD's and thousands of other dedicated employees to keep our quality and service promise to our clients and their patients, and is provide the expertise necessary to help doctors diagnose and treat disease. Beyond this we are not going to spend a lot of time talking about quality and service because it is a given in our business. We are simply going to execute day in and day out. We are proud of our customer-focused culture and the important part it plays in our strategy.

Now I would like to discuss our guidance for 2007. Excluding the impact of any share repurchase activity after December 31st, our guidance for 2007 is as follows: Compared to 2007 LabCorp expects -- I am sorry, compared to 2006 LabCorp expects 2007 revenue growth of approximately 11% to 13%; EBITDA margins of approximately 26.4% to 26.8% of revenues; diluted earnings per share in the range of $3.93 to $4.09; operating cash flow of approximately $690 million to $710 million, excluding any transition payments related to the Company's agreement with United Healthcare; capital expenditures of approximately $110 million to $120 million, excluding any additional capital expenditures related to the Company's agreement with United Healthcare; net interest expense of approximately $46 million; and a bad debt rate of approximately 4.8% of sales. While we do not provide quarterly guidance, we remind that you we expect our expanded relationship with United Healthcare to ramp during 2007 and have a greater impact on revenue and EPS during the second half of the year than during the first half.

For the full year we expect to achieve this revenue and EPS growth through the following initiatives. Increasing revenue through organic growth. 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 margins than the core business. Contributions of small acquisitions; and continued improvement in operational efficiency.

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

Thank you, Dave. First, can you update us on the mix of your business coming from esoteric testing? At the end of December approximately 35% of our revenues were in the genomic, esoteric and anatomic pathology categories. As we have mentioned on previous conference calls, our goal over the next several years is to increase our esoteric test mix to approximately 40% of LabCorp's revenues. Our ability to increase this percentage depends on factors, such as continued adoption of existing esoteric tests, development and acceptance of new esoteric tests, acquisition and licensing opportunities, and the mix of new business that we realize from our expanded relationship with United Healthcare.

Can you update us on your progress in image-guided Pap, HPV, and cardiovascular testing? With respect to image-guided Pap, adoption of the Cytyc ThinPrep Imaging System by our physician clients continues to increase. By the end of the fourth quarter the ThinPrep Imaging System was being requested for approximately 48% of all liquid-based Pap smears ordered. With respect to HPV we have experienced a growth in both reflex and primary screening HPV testing of approximately 56% in the fourth quarter of 2006 versus the fourth quarter of 2005. Cardiovascular disease is the leading cause of death in the United States, exceeding all forms of cancer. Cardiovascular disease is also significantly under diagnosed, with awareness of cardiac disease coming, in many cases, only after an event such as a heart attack. New advanced lipid testing technologies, such as Apotex vap test and the NMR test from LipoScience offer physicians an insight into a patient's cardiac disease risk that's not been available through traditional tests. We continue to be very pleased in the growth of these ground-breaking tests and we look forward for them to be future growth drivers.

What are your plans for uses of free cash flow during 2007? We remain committed to returning value to our shareholders, first by using our free cash flow to grow our business through strategic and tactical acquisition opportunities and licensing agreements, and second through continuing our board-approved share repurchase program. We feel that there are acquisition candidates in the market that could help us strengthen our scientific capabilities and grow our esoteric testing franchise, and candidates that could help us increase our presence in key geographic areas. It is important to remember that our operating cash flow will be impacted during 2007 by transition payments, if any, made in connection with our agreement with United Healthcare. We look at these payments as being similar to amounts paid for an acquisition, as they are an element of our agreement with United that allowed us to secure a very significant growth opportunity over a historic ten-year period.

Has your philosophy regarding pricing discipline changed? In a word, no. Pricing has always been competitive and will continue to be competitive. We looked at the United Healthcare agreement as a strategic and unique opportunity to expand our business significantly, particularly in the New York Metro area where we had been under represented, and we took advantage of that opportunity. We remain committed to being disciplined in negotiating price, and we will remain protective of our industry-leading EBITDA margins.

Do you expect United Healthcare revenue to increase evenly through 2007? No. We expect that revenue increases will be somewhat uneven, with more incremental revenue realized in the second half of the year. We expected and realized a spike in volume in January, as many accounts came on board. We will gain additional volume as market conditions stabilize and interfaces and other connectivity solutions are implemented. We believe that incremental revenues will be somewhat uneven, with the most significant increases coming in the last half of the year.

How will the new FDA draft guidance affect LabCorp? On February 8th the FDA held a public meeting to receive input in connection with their IVDMIA draft guidance. Many commenters obtained to the guidance and some challenged the legality of the proposal and the regulatory method that the FDA used to promulgate the guidance. Although the timing and ultimate form of the guidance is hard to predict, what is clear is that the FDA does intend to vigorously push this initiative. What also is clear, based upon the agency's statement, is that the FDA intends the guidance to affect a very small number of unique tests that the FDA believes require regulation to protect patients. We also do not believe that the FDA intends to change their historical approach to the regulation of most laboratory-developed tests and do not believe the draft guidance will have any significant impact on our current testing. We plan to work closely with the FDA, both directly and through our trade association ACLA, to help make sure that the vehicle that the FDA has chosen to protect patient interests, about which it is concerned, is adopted in a way that is not overly broad and doesn't unduly restrict access to important new testing methods for patients.

What is the status of the Medicare competitive bidding demonstration project? We understand that the timetable and project are on hold pending OMB review of the proposed CMS process. With the changes that have taken place in Congress, many who are close to the issue believe that there is a possibility that the demonstration project may not take place at all. We will continue to work to stop competitive bidding, which we believe is, in fact, anti-competitive, and at least when it comes to laboratories is bad policy and bad for patients.

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

Thank you, Brad. In summary, 2006 was a terrific year for LabCorp. We are very pleased with our progress in executing on our strategic pan -- plan and in the outstanding results we delivered for our shareholders. Thank you very much for listening. Kimberly, we're now ready to answer any questions that our listeners may have.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Bill Bonello of Wachovia.

Yes, just a couple of questions if I can. I don't know if you're willing to give this color, but Quest has suggested that it lost 15% of its UNH business and another 1% of its non-United business. Just trying to get a sense of how much of that you think you've captured versus other people capturing?

Bill, it's hard for us to answer that question given that we're only six weeks into the implementation, so I think what we are going to say is we're very pleased with the amount of business that we have seen transition over, and we will continue to evaluate the business that we gain and where we think it's coming from.

Okay. And then, maybe coming at the question a different way, your revenue guidance for 2007 is -- if I'm understanding it remains unchanged, but you said you certainly captured more business in Q4 than you expected to and you still think it's going to accelerate in the second half of the year. Does that -- I hate to make you say your guidance is conservative, but do you feel more confident in that guidance than you had or do you just look at Q4 and think we just hadn't expected to get the revenue, and we did?

Well, I'm going to let Brad Hayes comment on this after I make a preliminary observation. Our revenue guidance of 11% to 13% that we gave in October in my view, Bill, we're now saying it is going to be 11% to 13% over what we actually realized for the year. In the fourth quarter we had a significant increase, so to me the 11% to 13% is not the same as what we previously gave. It's 11% to 13% off of a higher base.

Yes.

We feel great about the United Healthcare implementation at this point, and we feel very confident of our ability to execute. Brad, if you have any further comments?

Bill, I'd just like to add that as it relates to the fourth quarter, we did see some business move over early. That doesn't necessarily change the total amount of business that we expect in 2007, but we did see it come early.

Okay, that's what I was trying to understand. Then just one last question and I'll hop back in. As we think about 2008, can you just explain to us or give us some sense of what happens to pricing on the United business? Does that have a regular escalator? What happens over the life of the contract?

We haven't talked specifically about the pricing, Bill, but we can say that in the contract there are pricing escalators provided during the duration.

Okay. And no way that pricing would go down in the future?

Well, one never says never to anything, but based on the terms of the contract, there isn't anything in the contract that would provide for a price reduction.

Perfect. Okay. Thank you very much.

Thank you. Our next question comes from the line of Adam Feinstein of Lehman Brothers.

Good morning, everyone. Great quarter here.

Good morning, Adam.

Good morning. Just wanted to get clarification based on one of Brad's comments there. You said some of the business did come over early into the fourth quarter? You said it may have. I just wanted to get clarification to make sure I heard that correctly.

No, it did.

Okay, it did. Great. Just wanted to make sure. Okay, good. All right. I guess if you could talk a little more, you talked about maybe a sort of big contract switch, like this is always some transition issues. You said so far it's been pretty much what you anticipated. Maybe if you could just elaborate a little bit more on that and just so we have a better understanding there? And then was just curious if you could provide any more clarity about the pull-through revenue also? I know we've been talking about that, but was -- just wanted to just go into a little bit more detail, any additional color you could provide on the opportunity there. Thank you.

Sure. The first question, what kind of transition issues are we seeing? Any time that one does a large implementation like this, there are going to be issues in the transition, and so the color that I'm going to give you does not in any way detract from the fact that I think we have done a terrific job in getting 400 patient service centers open, 1,200 people hired, the logistics system up and functioning and running well, and the laboratories performing extremely well. So with those sort of introductory comments, Adam, we're seeing at some patient service centers longer wait times than we would like. We're seeing in some laboratories accessioning closing later than we would like because of volume, which in turn leads to getting results out later than we would like.

Now, we're not talking about 24-hours late. We're talking about closing an hour late. But that's not up to our standards, and we're going to continue to work on ways that we can get the accessions in earlier so that we close the laboratory and get the results back to the physicians earlier. These are the kinds of transition issues that we're seeing. Of course, there'll be a periodic missed pickup. That doesn't mean that we're happy with it, but it happens when you have new routes, new couriers and new physicians, so that's sort of the type of transition issue that we're experiencing. Again, overall very pleased, and as United expressed on their fourth quarter call, very pleased with the execution and implementation.

On the question of pull-through, I think pull-through is more of an art than a science, and I'd make the following observation. It's much easier to see the loss of pull-through than it is to see the gain of pull-through, so in situations where we have lost a contract we've known how many accessions we lost directly from that contract, and you could pretty much figure that the other accessions that you lost were pull-through accessions. On the other hand when you gain accessions from a contract, you can see the direct accessions that you gain, but it is very difficult to see are the additional accessions within your volume growth part of your overall organic growth, are they part of -- you won a big new account some place that was not related to the managed care transition. So I just think, again, it is too early, six weeks into this, for us to try to assess where we are on pull-through other than to say, again, we're very pleased with our volume growth, both during the fourth quarter and to date during 2007.

Okay. Thank you for all of the detail there, Dave. Just one follow-up question. Could you guys just provide some commentary about the Blue Cross Blue Shield of New Jersey contract that you guys recently won and just what's the opportunity there? Thank you.

The Blue Cross Blue Shield of New Jersey, which is the Horizon plan, we have for a long period of time been exclusive to their HMO, and they have been traditionally one of our largest managed care partners, although they're a regional rather than a national plan. Recently they selected us to be the exclusive provider for their PPO product as well. Horizon is the -- has the largest number of covered lives in New Jersey, followed by Aetna and then followed by United. Strategically we believe that the combination of the exclusive relationship with the largest plan and the exclusive national relationship with the third largest plan, as well as our participating status with Aetna, give us the opportunity to significantly expand the beachhead that we have made in the Northeast in late 2006 and into 2007. So we're very pleased about the Horizon relationship and, again, see it as a strategic opportunity to grow the position that we have established in the Northeast.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Bob Willoughby of Banc of America.

Dave or Brad, I guess it follows then it's probably too early to assess any out-of-network utilization with United. Has there been any dialog at all since January 1 on the trends there?

Bob, it is too early to assess out of network. At the moment we don't really even have data or files that we feel comfortable saying this is a good assessment. That said, we are aggressively targeting through our sales efforts, with United's cooperation, any accounts that we -- any significant accounts that we know or believe to be sending out of network to try to persuade them to use an in-network provider. I just don't have numbers to be able to quantify it for you at this point.

Okay. Just in general going forward, when you do start to see some of this out-of-network utilization, how will that show up in your financial statements, then?

Bob, this is Brad. That would show up in the operating cash flow section, and we would plan to point that out as it occurs.

Okay. Just lastly, a question on the acquisition pipeline. You've stated what your interests here are. Can you speak at all to pricing here, post the United contract coming out? Have you seen changes in laboratory pricing?

Bob, it's Dave. I think we have generally seen that pricing for acquisitions has -- multiples for acquisitions, both of revenue and EBITDA, have increased recently. There are other competitors who are interested in making acquisitions. There are financial sponsors who have become very active in the acquisition market, so I would not, however, describe it as post the United contract. I would describe it as beginning probably in 2005, we started to see -- we started to see acquirers paying higher multiples.

That's great. Thank you very much.

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

Good morning and congratulations.

Thank you. Good morning.

Just to follow up on Adam's earlier question, I understand that it's too early really to assess the pull-through opportunity, but first, when do you think that you will be able to provide more color there? And what do you think the pull-through ratio should be -- the pull through to United or could be amounting to in the second half of the year as service levels normalize?

Ricky, I think we'll probably be able to give you greater color on pull-through in our first quarter call, but I think it will really be through the second quarter before we -- and maybe even into the third before we really see the full -- what we fully expect on pull-through. Some of that has to do simply with implementing more connectivity solutions because connectivity in physician offices is a key way of gaining pull-through business. Some of it has to do with we're just going to have a better sense of what the numbers are.

With respect to what the ratio of pull-through should be, there's no set answer for how much pull-through you should get, because it depends market by market and product by product. So you certainly expect higher pull-through in a market where you are a true exclusive provider, such as we are in the Neighborhood contract in Florida or in the MAMSI contract in the Northeast -- I'm sorry, in the Metro DC, northern Virginia and Maryland, or in PacifiCare Colorado. You expect to see greater pull-through where you're a true exclusive provider versus where you're one of a number of network providers. All of those things being said, we ex -- I believe our competitor said they felt that the pull-through was about 1:3, and in general we would expect and hope over time that, if that is a correct assessment of the situation, that the pull-through would increase and there would be more. And let me just clarify by saying I'm not saying that we look at the pull-through as 1:3, because as I said earlier, we think it's too early for us to be able to evaluate the pull-through. But if the pull-through were 1:3, as our competitor suggested, we would expect that to increase over time.

So with goal being 1:3 or you are saying that it could be better than 1:3?

Zero being that there would be more than one pull-through accession for every three United accessions, goal being better than that.

Got you. And just a quick follow up on the connectivity comment. What percent of physician offices that are new to LabCorp are electronically connected, and by when do you expect them to reach the national average? I think you mentioned it was about 80% -- or 80% of your requisitions are coming electronically?

I don't have right now exact numbers on what percentage are connected. We have seen requests for our eLabCorp product and our [SickClient] product increased substantially, obviously, since the United announcement. But again, I expect as we continue to go out, set up physicians, as we continue also to work on some of the more complicated connectivity solutions like unit directional and bidirectional interfaces into lab system and into EMRs, I expect you'll see the number grow over time.

Okay. Thank you.

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

Good morning. Thank you. A couple questions about the New York market as it pertains to United. I think you had mentioned on your investor day the logistics of the city in particular may bring different challenges than you've seen in other places. I was wondering, one, if you could talk to us about some of the positives and negatives as you've experienced more volume in that market? And, two, where is the volume coming from in terms of PSC's versus doctor's office at this point?

Okay. Positives and negatives on logistics, the positives are we have not -- when I talked at investor day about we weren't -- we didn't know where to park our courier vans to pick up specimens at 5:00 in Manhattan, the actual aspects of the pickup of specimens, the delivery of rec forms, the implementation of connectivity, the day-to-day infrastructure execution have gone extremely well, and we're very pleased about that. What would be the negatives, obviously I think I would be understating to say that the traffic situation in New York City is somewhat unpredictable. Add to that the weather in New York City, which has been somewhat unpredictable in the last six weeks. Those obviously have led to some delays in getting accessions into the laboratory which leads to delays in getting results out. That's not a LabCorp systemic issue, it's an issue of optimizing courier routes, optimizing pickup times, getting some better weather, as we move out of the winter. All of those things will help on that front, Tom.

Right, right.

In terms of the volume from PSC's versus the volume from physician offices, I don't have any hard information on that at this point. I think we've typically said the volume from patient service centers is about 20% of our business, and the volume from other sources is about 80%. In the New York market more physicians draw in their office than in many other markets and in-office phlebotomy is not permitted. We might expect to see a higher percentage from patient service centers, but I don't have firm numbers on that.

Right, okay. Maybe if I could just ask one other. Obviously you've the relationship with the drug store. Just curious if you've seen any material amount of business coming from those newer locations than if -- I think we've seen some rumors in the past about potential partnerships with other drug store locations, and if you got any comment on that? Thank you.

We have been very pleased with the volumes coming through the Duane Reade locations. I can't go location by location, but I can tell you that in most of the locations we're seeing more than 50% -- I have to say this right. We're seeing 150% or better of the volumes that we had projected when we went into those sites. We are interested in and in discussion with other drug store chains and similar types of businesses about expanding patient access points through similar arrangements as we have with Duane Reade.

Okay, thanks for all the color.

Thank you very much. Our next question comes from the line of James Star of Longview Asset Management.

Hi. Good morning. It looks like you've done a remarkable job and your team's done a remarkable job getting set up for UNH, especially in the New York area and, Dave, you cited a lot of statistics on that. My question has to go with if we strip out those costs and strip out the revenue associated with the UNH contract that came early, it looks like the core business did extremely well in the quarter. My question is I'm estimating, based what I think you said, that your margins would have been about 50 basis points higher on the EBITDA line. Does that sound about right?

We have our calculators out here.

Jamie, that was about right.

Okay, thank you. That was my question. Appreciate it.

Thank you. Our next question comes from the line of Kent Dolliver of Cowen and Company.

Hi, good morning. This may fall under the heading of too soon to know, but what is your -- what's your experience so far with regard to the stickiness of the business you're getting and, in general, what is your -- I guess your budget assume with regard to the stickiness of the business you get, at least in the initial couple of months of the contract?

I think I agree with your observation that it's too early to tell. Obviously we have had a significant amount of new business come in the door. We monitor our gains and our losses very carefully, but I just think it's -- we're six weeks into this and it's just way too early to say how sticky we think this business is going to be.

Okay. Second question is, in the markets outside New York that are not so -- where there's not a capitation contract driving decisions, how is your performance in some of the major markets going compared to New York?

I would say in general we are very pleased with our performance in all markets. The greatest strength has been in New York and Florida, but we have seen very large pickups in other markets as well. And we continue to view this opportunity as not just a Northeast opportunity, but as a national opportunity that we're going to take full advantage of.

That's great. Thank you.

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

Oh, hey, great. I just had a follow-up question. Can you tell us on the Horizon contract, does that have guaranteed payments for -- or guaranteed protection on leakage like the UHN contract does?

Bill, we generally don't comment on the specific terms of our individual contracts. The reason that we talked in greater detail about the United contract was simply because of its size and its uniqueness. We view the Horizon contract, not in any way to minimize its importance to us, as a relatively standard managed care contract and we're not going to comment on the details of our agreement.

Okay. I guess what I'm trying to get at is some more color on when you talk about improving your relationship with other managed care payors, I guess I'm just trying to understand if there's a lot of markets where you're actually not contracted with major payors or more specifically, is the way that you drive increased volume with other payors to have situations similar to United where the network becomes limited?

There are very few markets where we are not contracted with major payors, and the general approach to winning business with managed care is presenting them with the value proposition of our standardized data, our ability to help them control high-dollar out-of-network leakage, and our science and test menu and service, so the narrowing of the network in my view is not the typical approach, Bill. There are around the country, both with us and with our competitor, a number of plans that are exclusive, but there are many more plans that are open competition.

I guess what I am trying to understand is what would the -- if the payer -- if you're already contracted with the payer, and the payer doesn't limit their network, how does your relationship with the payer end up driving any more volume to LabCorp?

Well, if you look at the Northeast, for example, we have been contracted with all the major payors in the Northeast for many years. We just haven't had any patient service centers for patients to go to. We haven't had the logistics and infrastructure network, and we haven't had the connectivity with physician offices to attract the business. So the initiatives with United and Horizon are to expand our patient service center presence, expand our infrastructure, get connectivity with more physician offices and, therefore, be able to gain more business from our contracted managed care payors.

Okay, but you wouldn't be aggressively pursuing with the other payors a strategy where you would be the sole national lab, that wouldn't be your objective?

Yes, we have said I think many times that going back to United's original request for proposal, it was their idea to have a sole national contracted laboratory, so we responded to the desires of a key managed care partner, but that was not our idea or our initiative.

And it wouldn't be going forward either?

It would not be my expectation that it would be our initiative going forward to be a sole contracted national laboratory with a major payer.

Perfect. Thank you very much.

Thank you. Our next question comes from the line of John Levinson of Westway Capital.

Thank you. You mentioned in your prepared remarks that LabCorp's the only national or regional lab network that uses standard instruments. Can you explain that to me? And also you mentioned that the system provides physicians with longitudinal natural date. I don't understand what that is either. Can you please help me out?

Sure. If a patient comes into a LabCorp patient service center, their doctor sends a test to LabCorp, and it's processed in our Raritan, New Jersey lab. It's the same instruments that are used in Tampa, in San Diego, in Kansas City, in Dallas, and any of our major laboratories. What that means is that in disease states, where data over time is what the doctor cares about, they are able to see standardized data with standardized reference ranges over time from LabCorp, which they are not able to see from others. So, for example, it you take the PSA test, it's important to know whether your data -- whether your test result is within the normal range, but what's more important is what is the trend? Is it from low normal to high normal, below normal to just in the normal range? Well, if those are -- if your PSA test is being run on different instruments with different reference ranges and the reference ranges are being normalized by the performing laboratory, that's not the same as having the same test on the same instrument no matter where that test is performed, and that's what we have in our LabCorp system.

Okay. And what about -- and longitudinal data is nothing more than the ability to look over time at a variable?

Correct, just as a described with the PSA test.

Yes, got it. Okay, thank you.

Thank you. Our next question comes from the line of David MacDonald of Suntrust.

Good morning, guys. Just a quick question on WellPoint. As you build out networks in a bunch of other markets now tied to the United contract, are there now conversations with WellPoint about markets and exclusive contracts that you weren't talking about before you announced the United win and built the networks out? And then I guess the second question is I think you touched on it briefly with regards to the Aetna RFI that's out there. Any anecdotal comments about the reaction of some of the other major players to how the United contract is done and been implemented, et cetera?

In response to your first question there are always discussions going on with WellPoint and other managed care plans about our desire to expand our capabilities. In response to the second question, obviously we're in constant discussions with other managed care plans. I think the general response to the United contract from the perspective of other managed care plans has been they are pleased that we are expanding patient access points and expanding our infrastructure because it provides us the opportunity to serve them and their patients better.

Thank you.

I actually have no further questions at this time.

Very good. Thank you all for listening. We appreciate your time this morning and have a great day.