Labcorp Holdings Inc (LH) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Laboratory Corporation of America Holdings' first-quarter 2007 earnings conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, April 26, 2007.

I would now like to turn the conference over to Mr. David King, Chief Executive Officer of Laboratory Corporation of America Holdings. Please go ahead, sir.

Thank you, Frank. Good morning and welcome to LabCorp's first-quarter conference call.

Joining me today from LabCorp are Brad Smith, Executive Vice President-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.

This morning, we will provide a review of our first quarter 2007 results and update you on achievements in key strategic areas during the quarter, including our progress related to UnitedHealthcare. Later in the call, we will update guidance for 2007 and cover a few anticipated questions.

I'd now like to turn the call over to 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 April 26 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 Web site. Also, investors are directed to this 8-K and our Web site to review the supplemental information. Additionally, we refer you to our press release dated April 26 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 2006 10-K and subsequent filings.

Now, Brad Hayes will review our financial results.

Thank you, Brad.

Our first-quarter results are as follows. Net sales increased 13.7% to $998.7 million. Compared to the first quarter of 2006, testing volume, measured by accessions, increased 12.3% and price increased 1.4%. We estimate that net sales increased by 7 percentage points due to our new agreement with UnitedHealthcare. We estimate that severe weather during the quarter impacted revenue by approximately 1%.

Earnings per diluted share increased 28.9% to $0.98 for the first quarter, versus $0.76 in the first quarter of 2006. We estimate that severe weather during the quarter impacted EPS by approximately $0.03. EBITDA was $260.5 million or 26.1% of net sales in the first quarter, versus 25.5% of net sales in the first quarter of 2006.

Operating cash flow for the quarter was $185.8 million. At the end of March, the Company had cash and short-term investments of $76.7 million and $80 million in outstanding borrowings under its revolving line of credit.

Capital expenditures were $40.8 million, of which $16.6 million related to our new agreement with UnitedHealthcare.

DSO at the end of March was 55 days.

During the quarter, the Company repurchased $358 million worth of stock, representing 5.2 million shares. Approximately $492 million of repurchase authorization remains under our Board-approved share repurchase plan. During the first quarter, we stepped up our share repurchase activity in response to what we consider to be an overreaction to our announcement regarding our contracted status with Aetna. We are very pleased with our first-quarter results.

I will now turn the call over to Dave.

Thank you, Brad.

First, I'd like to make a few observations about our first-quarter results. As Brad mentioned, our net sales grew by 13.7% with 7 percentage points resulting from our new ten-year agreement with UnitedHealthcare. The remaining 6.7 percentage points of net sales growth came from continued robust growth from existing accounts, as well as new accounts coming on board for reasons unrelated to UnitedHealthcare. We are very pleased with both elements of our sales growth. This growth puts into hard numbers what we have been saying; physicians choose LabCorp because of service, quality, convenience, and scientific leadership, not just because of our partnership with UnitedHealthcare.

Not only did we attain impressive growth in net sales, we also further expanded our already industry-leading EBITDA margins. During the quarter, EBITDA margins grew by 60 basis points compared with the first quarter of 2006. We also group EPS by an impressive 28.9% and generated $185.8 million in operating cash flow.

We saw revenue growth across the board this quarter, demonstrating that our strategy of true partnership with managed care companies is working and that entering into our ground-breaking, ten-year partnership with UnitedHealthcare was the right thing to do for our company. Our service, quality, convenience, and scientific capabilities make us the clear choice for physicians, patients, and managed care organizations.

Next, I'd like to make a few comments about the Results for Life campaign recently kicked off by our trade group, the American Clinical Laboratory Association. This campaign is designed to educate patients, policymakers, the media and others about the value of clinical laboratory testing as a key component of a 21st century healthcare system focused on prevention, cost efficiency, and improved patient outcomes. America's healthcare system is in the midst of a profound transformation. Instead of simply treating disease, we are finding new and better ways to prevent illness and keep patients healthy.

The Results for Life campaign will deliver a compelling message about clinical lab testing and the vital role it plays in healthcare. Laboratory testing has been a relatively invisible component within the healthcare system. We are rarely noticed until it comes time to freeze the Medicare fee schedule for another year, yet the 4% of the healthcare spend that goes to clinical laboratories influences 80% of healthcare decisions. The Results for Life campaign will raise awareness by sharing compelling, real-life stories of how people's lives and health are positively affected by constantly improving laboratory testing, and why laboratories should be fairly paid for the enormous value we bring to the healthcare system. We are very excited about the Results for Life campaign and the opportunity that it creates for the laboratory industry to speak to with one voice and educate key stakeholders about the value of clinical laboratory testing.

Now, I would like to bring you up-to-date on the progress the Company is making toward achievement of our key strategic objectives. We will continue to be successful by providing patients, physicians and managed care with better service, greater convenience, and broader scientific reach than our competitors. We remain focused on the three key components of our strategic plan through partnership with managed care, continuous expansion of our scientific capabilities, and relentless focus on the customer. What this quarter's results demonstrate, once again and still, is that execution of this plan results in growth and success.

In managed care, we will of course continue to be intensely focused on maximizing our opportunity as the exclusive national laboratory provider to UnitedHealthcare. We are now in the seventh month of the UnitedHealthcare rollout. As we have noted before, we have opened some 450 patient service centers, hired and trained more than 1,600 employees, completed thousands of connectivity installations for test ordering and result delivery, and set up thousands of new physician accounts. This in itself would be a significant achievement, but I am particularly pleased that even as we have seen record testing volumes in our laboratories and record numbers of patients at our patient service centers, we continue to see improvements in key service metrics such as result turnaround time and patient service center wait times.

UnitedHealthcare has been pleased with our solid performance and our industry-leading quality, and we have been pleased with our service execution. Nevertheless, we know there is always opportunity to do better, and we're working on a number of innovative approaches to improve the overall physician and patient experience with LabCorp. For example, we are working to expand our Duane Reade relationship by opening patient service centers in additional stores. We're also discussing similar relationships with others drugstore chains to locate patient service centers in stores around the country.

From our perspective, the Duane Reade relationship is another is another successful partnership. We are serving as many as 35 patients per day at each of our Manhattan locations and continue to receive positive feedback on this innovative approach to convenient patient care. We will continue to invest in new approaches to improve customer service and in meeting the needs of patients and doctors, whom we are here to serve.

Of course, not all of our managed care news in this quarter has been positive. As you know, on March 1, we announced that we had received a termination notice from Aetna effective July 1. We are deeply disappointed by Aetna's decision, particularly because, as a growing company, we are expanding our geographic reach into the markets where Aetna has the most covered lives. We have valued our relationship with Aetna over the years and hope that we can continue to find ways to be of service to them in the future. We realize that direct Aetna revenue and some pull-through is at risk. However, we will work on unstintingly to retain every account and every accession.

We continue our focus on all of our other managed-care partners, including WellPoint, Cigna and Humana. We place great value on our sole national strategic partnership relationship with WellPoint, and we are constantly working with them to expand this relationship. We are also working with Cigna to further our long-standing relationship in ways that will help them achieve their goals of superior patient care at competitive prices.

We believe that our unparalleled service, convenient access, and industry-leading test menu create true value for managed-care organizations. We also continue to believe that our existing pricing provides managed-care organization with significant savings opportunities compared to other laboratory providers, particularly higher-priced local and hospital-based laboratories. Our standardized lab data creates further value for managed-care companies that are working to enhance their disease-management capabilities.

True value has many components. We believe that our service, quality, convenience and scientific leadership, including our leadership in using the science to provide meaningful data, provide our managed-care partners with true value and help them achieve their goal of providing affordable, quality healthcare to their members.

In science, LabCorp continues to lead the industry in the introduction of meaningful new testing capabilities in areas where there is an unmet clinical need. During the first quarter, we introduced numerous new tests, including an assay for circulating tumor cells for breast cancer patients. This test is useful for both detection of these cells and for monitoring their levels in patients undergoing therapy. This kind of testing could prove to be useful in the detection of prostate and colon cancers as well.

A PCA3 test useful in the diagnosis of prostate cancer -- the PCA3 gene is overexpressed in prostate cancers. Using the PCA3 test in combination with the PSA test can give the physician valuable information in assessing the need for a prostate biopsy.

Assays for genotyping the hepatitis B virus -- genotype information for HBV is particularly important for identifying drug-resistant mutations for antiviral therapies.

Looking forward, we are making significant progress in our efforts to introduce a signature breast cancer assay for both detection and measurement of risk of breast cancer. We plan to introduce this assay this summer and believe that it will provide true clinical value to physicians and their patients and true economic value to managed care and other payors. Yesterday, in a significant step towards this goal, we announced an agreement with Celera granting LabCorp a license to Celera's breast cancer metastasis and estrogen/progesterone receptor discoveries. This agreement allows us to select from among Celera's generic findings to develop and commercialize two molecular oncology laboratory service tests. We plan to offer one test to help predict the risk of metastasis in early-stage breast cancer patients, and a second test to provide a genetic assessment of hormonal receptor status, which is used to select women for endocrine therapy.

We continue to lead in delivering innovative value to physicians and patients. Our Litholink subsidiary's proprietary kidney stone management program reduces recurrence by up to 80% in kidney stone sufferers. Managed-care companies have fully embraced the Litholink model and actively encouraged their patients to enroll. The patients avoid the pain and inconvenience associated with stone recurrence and our managed-care partners benefit from reduced treatment costs.

We continue to be the leader in gene-based and esoteric testing. These categories of tests generated $340 million in net sales during the first quarter, substantially ahead of any of our competitors for similarly categorized tests. We continue to be very pleased with the mix of testing generated from new accounts that have come on board during the first quarter -- fourth quarter of 2006 and the first quarter of 2007.

I'd now like to turn to the third component of our strategic plan, our customer-focused culture. Providing industry-leading customer service continues to be an area of intense activity. We continue to see improvements in our customer service metrics, and we continue our efforts to enhance the customer experience of physicians and their patients. We have received many comments from physicians and patients praising the performance of our phlebotomists, couriers, and other front-line employees who have gone beyond expectations and have provided truly exemplary customer service. The past seven months have shown me that our people are can-do people and we are a can-do company. I am enormously proud of that and of the 26,000 people at LabCorp who bring that can-to approach to work with them every day.

It seems appropriate now to make a brief comment about our philosophy on acquisitions. As our results again demonstrate, we are growing the business organically by executing our strategic plan. We will continue to use acquisitions as a growth strategy, but we feel that we cannot pay multiples at the level announced last week. The sale of AmeriPath did not come as a surprise to us, and although we would have liked to have owned it, it would not have been prudent for us to pay the sale price announced. In summary, we will continue to look for attractive acquisition opportunities and to be disciplined about what we are willing to pay for them.

Now, I would like to update our guidance for 2007. Excluding the impact of any share-repurchase activity after March 31, our guidance for 2007 is as follows. Compared to 2006, LabCorp expects 2007 revenue growth of approximately 12 to 14%; EBITDA margins of approximately 26.4% to 26.9% of revenues; diluted earnings per share in the range of $4.11 to $4.27; operating cash flow of approximately $690 million to $710 million, excluding any transition payments related to the Company's agreement with UnitedHealthcare; capital expenditures of approximately $110 million to $120 million, excluding any additional capital expenditures related to the Company's agreement with UnitedHealthcare; net interest expense of approximately $45 million, and a bad debt rate of approximately 4.8% of sales. For the full year, we expect to achieve this revenue and EPS growth through the following initiatives -- increasing revenues through both organic growth, growth related to our agreement with UnitedHealthcare and further shifts in our test mix, particularly in our esoteric and genomic businesses, which generate higher margins than the core business; contribution from 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 March, approximately 34% 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 our new business.

Can you update us on your progress in image-guided Pap, HPV and cardiovascular testing?

Adoption of the Cytyc ThinPrep imaging system and the TriPath SurePath system by our physician clients continues to increase. By the end of the first quarter, image-guided Pap screening was being requested for approximately 53% of all liquid-based Pap smears ordered. We continue to experience growth in both reflex and primary screening HPV testing. During the first quarter of 2007, HPV testing increased approximately 71% versus the first quarter of 2006.

What are your plans for uses of free cash flow during the remainder of 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 there are acquisition candidates in the market that could help us strengthen our scientific capabilities and grow our esoteric testing franchise and candidates who could help us increase our presence in key geographic areas. As Brad mentioned earlier, LabCorp purchased $358 million worth of common stock during the first quarter of 2007. At the end of the quarter, 492 million remains under our Board-approved share repurchase authorization. Our share repurchase activity during the first quarter validates what we have always said. We will be opportunistic when it comes to our share repurchases. During the first quarter, we stepped up our share repurchase activity at a time when we felt there had been an overreaction to our announcement regarding our contract with Aetna. It is important to remember that our operating cash flow will be impacted during 2007 by transition payments made in connection with our agreement with UnitedHealthcare. 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.

During the first quarter, no transition payments were made to UnitedHealthcare as the reporting necessary to determine these payments continues to be jointly analyzed and verified. We expect that, during the second quarter, we will make transition payments related to the first quarter and a portion of the second quarter. This does not change our outlook regarding the amount of expected payments and does not change our expectations regarding the timing of payments within calendar quarters.

Has your philosophy regarding pricing disciplined changed?

In a word, no. Pricing has always been competitive and will continue to be competitive, but we remain committed to being disciplined in negotiating price and we will remain protective of our industry-leading EBITDA margins.

Can you comment on efforts in Congress to regulate lab-developed tests?

To date, two bills have been introduced regarding potential regulation of lab-developed tests. Senator Kennedy's bill calls for [FD] regulation of all lab-developed tests, while Senator Obama and Senator Byrd's bill calls for a further study to determine what level of regulation, if any, is required in order to ensure that public health is protected without impeding innovation. We are committed to working with Congress to ensure the protection of public health in a manner that does not interfere with access to and innovation in clinical laboratory testing.

What is the status of the Medicare competitive bidding demonstration project?

CMS recently said that the Office of Management and Budget has approved but the key design elements for the demonstration project, but the further operational details are still under development at CMS. We are hopeful, with the changes that have taken place in Congress, 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, bad policy and bad for patients.

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

Thank you, Brad.

We are off to a terrific start in 2007. We are very pleased with our progress in executing on our strategic plan and in the outstanding results we delivered for our shareholders.

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

Thank you. (OPERATOR INSTRUCTIONS). Tom Gallucci, Merrill Lynch.

Thank you. Good morning, everybody. I'm just wondering two things, first of which -- can you sort of outline the primary drivers, in your view, of the increase in the guidance? So, you obviously racked up on the share repurchase and you modestly raised your revenue and your margin estimates but I just wanted to make sure that we sort of captured the key drivers properly.

Good morning, Tom. I will ask Brad Hayes to respond to that.

Yes, Tom, this is Brad. Obviously, the way we think about the EPS guidance raise is that the share repurchase basically offset the top end of the Aetna announcement that we had earlier in March. Then, we obviously did better than we had planned in the first quarter, and even taking the weather into account there, so we have to put that on top of our previous guidance. Then we raised what I consider to be, if you follow all of those numbers, a $0.10 on top of that.

So from the operating perspective, this modest raise in the revenue is in the margin?

Exactly.

Okay. Then just maybe looking at the quarter in a little bit more detail, you said you did a little bit better than planned. Can you talk about some of the major components of the volume growth and also within price? So volume, is there any way that you can give us an idea of sort of what underlying volume growth is versus the excess volume that you saw from United specifically? How is the pull-through aspect of the United situation going?

Tom, it's Dave. As we said, 7 percentage points of the 13.7 in sales was attributable to United, and 6.7 came from existing accounts. So, I would hypothesize that the volume correlates relatively well to that. So we saw solid volume growth from United but we saw solid volume growth in other areas of the business as well.

The major components of price -- obviously, as you see from our 8-K, our total managed care pricing year-over-year for the first quarter is slightly down. We haven't made any secret of the fact that part of the United deal was a price reduction, so that should not be any surprise to anybody. But overall, quarter-over-quarter, our pricing was up and we are very pleased with the stability of pricing, given that the increased volume and, as we've talked about many times, the leverage of the business with better pricing drives margin expansion. (multiple speakers)

[Is it fair to say], just on your comment there on the managed-care pricing, overall I guess within fee-for-service, it was down 5%, and within capitated, it looked like it was up 10%. how should we think about that pretty wide differential I guess in managed-care, generally?

Well, as we said from the beginning, part of the united Phase I was the addition of three, let's say four plans that have a considerable element of capitated business. That's the Oxford plan in New York, Neighborhood in Florida, the exclusive position in MAMSI in northern Virginia, DC and Maryland, and PacifiCare in Colorado. It's not surprising that you saw capitated accessions increase, and we are pleased with the increase in pricing in the capitated business.

In the fee-for-service business, as we've said, we did provide a price reduction to United as part of the overall consideration for this agreement, and so it's not unexpected that you would see a small decline in price in the overall managed-care fee-for-service business.

Okay, thanks for the color.

Bill Bonello, Wachovia.

Sure, just a couple of questions. In terms of the increased revenue guidance, is that a reflection of the belief that you're going to get more total revenue than you had initially expected out of United, sort of over the long haul, or is it more a reflection of the pace at which you are picking up that business?

Good morning, Bill. I would say there's actually three parts of it. The first is the non-United business grew in a way that we are very pleased about, so we are seeing better revenue growth outside of the United relationship; that's one piece of it. The second piece, as you have mentioned, is the United business came on probably more quickly than we thought that it would. The third is we think there's more opportunity for the United and associated business as a result of the fact that we picked up more in the first quarter than we had anticipated that we might.

Okay, so when we think back to the original sort of $3 billion opportunity over ten years, what you're saying is that you now believe it could, without quantifying that, you now believe it could be greater than that?

Yes, I think that's an accurate statement. Without quantifying it, I think it could be greater than that.

Okay. Then I know that another part of the united deal that we haven't heard a whole heck of a lot about yet is the potential establishment of additional networks in other markets. Is there anything sort of in development on that front yet?

We are discussing, with United, the timing and structure of the networks. It's not something that we are ready to talk about in more detail now but it continues to be part of the long-term plan.

Okay, so that is still something you believe will happen eventually?

Yes.

Okay. Then just you mentioned that Kennedy bill. Can you tell us, under that, what happens to the sort of home-brewed tests that are already in use? Are they exempt in that legislation?

I'm going to ask Brad Smith to comment on that.

Bill, actually, it has been through a couple of different iterations, but both of them have a process that would require most home-brewed tests in existence to eventually go through a modified review process that I think virtually everyone who knows anything about regulation has looked at it and said, "It just wouldn't work." So the answer is no, there isn't any exemption for existing tests, but there is a recognition that it would take a period of time and there would be a modified -- I would call it not a stringent process as -- or a review of those tests. But we are hopeful, again, that there will be a compromise and that Congress will focus just on those tests that they believe that pose a greater risk to patients and need heightened review, rather than go to all the tests.

Okay, great. Thank you.

Adam Feinstein, Lehman Brothers.

Thank you. Good morning, everyone. A few questions here -- I guess, just in terms of cost for UNH, I just wanted to see, in terms of what you anticipate for the rest of year. In other words, I'm trying to figure out if this is a good run-rate for the current quarter as we think about your costs. You did a good job breaking out the revenue but I'm just curious if there's anything we need to be aware of as we think about additional spending.

Obviously there's two components of the cost. One is the sort of day-in and day-out expense, which is personnel costs, leases on new patient-service centers, those sorts of things. For the most part, Adam, those are in the run-rate right now, so we're not going to see any significant difference in those for the balance of the year.

The second component would be capital expenditures. As Brad pointed out in his comments, we did have approximately 16.5 million in additional first-quarter capital. Part of that was the carryover from the build-out of the patient service center infrastructure last year, and part of it is just what I will describe as tweaking things like increased accessions volumes requiring us to purchase a new instrument for a laboratory. So again, we see that as tapering off for the rest of year. We don't see that we will have extraordinary capital expenses.

So I would summarize by saying I think most of the expense and capital that you would see for the rest of year is either built into the run rate or is not going to be significantly different from -- is not going to be any higher. It will be lower on capital than what you saw in this quarter.

Okay. Just a quick follow-up question, if I may here? Dave, you mentioned earlier that WellPoint, Humana and Cigna are contracts you continue to focus on also. You made some specific comments that you're working with Cigna on something related to cost savings. I was just curious if you could elaborate there and even just talk about some of the opportunities with some of those payors and any thoughts there. Thank you.

As you know, Cigna is in the middle of a contract renewal process, so for competitive reasons, I don't want to talk specifically about Cigna. But I will say that we continue to be closely engaged with them. We think we have some innovative ideas for them, and they have some innovative ideas as well, particularly innovative ideas around their wellness programs that are of great interest to us.

With respect to WellPoint, we continue to value our strategic relationship highly. We continue to be engaged with them at every level in our efforts to grow the business and to provide a comprehensive range of services to them.

With respect to Humana, there is an RFP out. As to the best of my knowledge, the response date has not yet been determined but we are also engaged in the process of demonstrating to them the things we talked about in this call, which is the true value proposition that we bring to our managed-care partnerships.

Okay, great. Then just one more final question and I will get back into queue here, but just on the esoteric pricing, it looks like that was down about 4%. I was just curious if you could talk about what's going on there and what we should anticipate through the balance of the year.

Sure. I will make just one quick comment and then Brad Hayes may have some additional comments.

One of the things that you see within esoteric pricing, as within all of the pricing, is you can see not only changes in mix but you can see mix within mix. So if the overall genomic pricing, for example is at $70-odd and HPV grows very rapidly, that test is below $70, so even though it's high-margin, it's very -- first of all, it's clinically a very good test and second of all, from a growth and revenue standpoint to the test, we are very pleased to see it grow. But it does drag the overall esoteric pricing because it's at lower than the blended esoteric price points. So that's one reason that you are seeing an impact on esoteric pricing.

Brad, if you have any additional comments, I would turn it over to you.

Yes, Adam, I think there's also a direct correlation to the payor mixed schedule and where we see the business growing initially in the first quarter. As Dave also mentioned, the first phase of United gave us access into four capitated markets, one of which is in the Northeast, one of which is in Florida. Typically, we've seen the testing, the genomic in the genomic category, be very strong in those markets. So, I think we've got a direct correlation to where our business is growing on a payor basis in those lines as well.

Okay, great. Thank you for all of the details.

David MacDonald, SunTrust.

Good morning, guys. A couple of questions on United -- you know, now that you've been there for a handful of months, can you talk about the initial markets that you guys were kind of rolling out to, and any of those geographic markets doing a lot better or a lot worse than you were expecting, or are they all kind of outperforming, given the revenue amount?

Then the second question is, given the breadth of your esoteric test menu, are you seeing a decent opportunity for some tests that were maybe going out of network before with United that you got because the tests weren't offered by some of the other providers -- to pick that up or even on the pull-through side?

I don't want to comment about specific markets. David, I'm not trying to avoid your question. Obviously, we feel that we've done very well in the Northeast, which is a new market for us. Beyond that, just for business reasons, I really don't want to talk specifically about individual markets.

On the breadth of esoteric testing and the opportunity, absolutely. You know, one of the things that we are quite pleased about is that our DIANON anatomic pathology business has grown very nicely. That's in large measure because we have much more exposure in the Northeast than we ever had before. So, we are seeing additional opportunities for the esoteric businesses come from UHC. The same is true of our endocrinology business out of Endocrine Sciences in Calabasas.

Then of course, there's a significant opportunity for image-guided Pap testing that has not been available to many physicians in the Northeast because it's not offered by our major national competitor or has not been offered by our major national competitor. So, we view that as an opportunity to provide a clinically better test offering to physicians in that market.

Okay, thank you.

Robert Willoughby, Banc of America Securities.

Dave or Brad, I guess we have the abbreviated financial statements. Can you possibly give us a little bit of detailed -- just how United will flow through here? Obviously, a revenue contribution -- but can you talk about cash flow and balance sheet and line items that will appear, related to United?

I'm going to add ask Brad to address that.

Yes, Bob, I can't think of anything specific that would be directly related to United. As just a reminder, the amortization of our estimate of the leakage is a contra to the revenue line, so you won't see it as a specific line, but you know that it is netted out from there. And think about that, too, as you look at the margins, as you can either gross margin or EBITDA. That is a natural drag there. That's where it belongs from an accounting perspective, but in some of our earlier comments, we think of that more as an investment sort of than an operating number.

On the statement of cash flows, when you see our Q, there will be detail. There's nothing that is specifically related to United, and I think we will continue to, as the year goes on, as Brad Smith mentioned, there have been no transition or no payments of that sort under the leakage agreement yet. But as those occur, we will be breaking them out for you, not necessarily on the face of the financials but certainly in our comments on the quarter.

When do those payments actually occur, Brad? Has that been established?

Bob, it's Dave. The original schedule called for quarterly payments. The data files have been a little more of a challenge I think than either we or United expected, so as Brad Smith mentioned in his comments, we did not make a payment in this quarter. We do expect that there will be a payment in the second quarter, and we don't expect that this will have any material impact on what we would pay in this calendar year. It's just essentially a timing issue more than anything else.

Okay. I did see the histology price-per-accession was down a bit relative to the prior year. Can you review what that was? Is that all physician fee-schedule issues or something else?

Bob, this is Brad. I relate it more to the same comment on genomics, I mean, and tied to the payor mixed schedule, our business (inaudible) 25% in the managed-care blended category. That's a lot of capitation, although capitation is not any more as a percent of total accessions than it was this time last year, but the growth that we've seen, as we mentioned again, in the Northeast, has been in the Oxford capitation, in the MAMSI capitation. I think that has put some pressure on the pricing line there. It's just due to the mix of business and the way it's grown.

Okay, that's great. Thank you.

[Maya Levy], UBS.

It's Ricky Goldwasser. Congratulations, great quarter.

Most of my questions have been answered already, but if you can just comment on what percent of physicians, of new physicians that you're working with are now connected through your IT systems?

You know, Ricky, I don't have the detail on new physicians versus existing physicians. We say that we get about 70% of our orders and result delivery through electronic means.

We can get you -- we can look and see whether we can come up with a separate breakdown. We do say, on Page 5 of the K, that 90% of our results are delivered electronically and 70% of tests are ordered electronically, but I don't know what that breakdown is with new accounts versus prior accounts.

Okay. Is this a good metric for us to track going forward? I mean, my assumption here is that the more physicians are connected, the greater the stickiness is and then the greater the likelihood is to get more pull-through business. Is that how we should think about it?

I think it's a good way to think about it in terms of connectivity leads to ease in test ordering, which leads to greater ability to get pull-through business. I will comment that, in my view, the reality is that there are many, many doctors' offices that have electronic connectivity to more than one clinical laboratory, two or three clinical laboratories, just depending on physician preference, insurance requirements. So, I'm not entirely sure that I agree with the stickiness comment because if you go into most doctors' offices and they are using Web-based technology, they are going to have an icon for a number of laboratories. But I do think it gives you a better opportunity to capture the pull-through, and it makes it more convenient for the physicians to order the tests and see the results.

I think, Ricky -- this is Brad. I think, if it's a customized interface, I think that may be more true than if it's a Web-based product like Dave just mentioned.

Okay. Then a question of mine has been asked, so apology if I'm repeating it. But just as far as the additional managed-care contracts out there that might be renewed, kind of based on your expectations, do you expect to see more national exclusives or are we back to just kind of preferred-provider agreements, from your standpoint?

Well, I have proven to be a not-very-good prognosticator of these things in the past, but you know, I would like to think that we are returning to an environment of robust competition between LabCorp and other national, regional and local competitors.

We are not seeking exclusive national relationships. We are seeking fair competition on a level playing field with all managed-care plans because, for the reasons we talked about in the call, we feel that we're going to win because of service, quality, convenience and innovation. So, our goal is not to win national exclusives but to win the opportunity to compete on a level playing field with all national payors.

Okay, thank you.

Kemp Dolliver, Cowen & Company.

Thanks and good morning. If you could give some perspective on Q1 in the context of just viewing the trends in the ramp-up of United contract, how representative it would be for, say, the rest of the quarter, just given that I suspect -- is volumes in March are higher than they were in, say, January for instance? Can you give us some color on the pace of transition?

Yes, good morning, Kemp. I would say the transition occurred more quickly than we thought it would. We got a very significant -- we had very significant increases in volume early, and those have been sustained throughout the quarter. So, yes, we expect that we will continue to see some ramp through the rest of the year, but I would say we're starting the ramp from a higher point at the end of the first quarter than we thought that we would be.

Okay, so essentially lower slope of the curve?

Yes, I would agree.

Okay. Secondly, given that you are off to a faster start with United, I guess why is it likely there are going to be any transition payments?

Well, even though we are off to a good start, there clearly is still some work that is going outside the United network in areas where we have agreed to be responsible for transition payments. So I guess the way you could think about that is there are still going to be some transition payments. They may be -- and I want to stress "may be" -- lower than what we had initially modeled them to be. But until we and United really understand the data, we are not in a position to change what we have said, which is we committed to $200 million in transition payments over a three-year period in the defined markets, and we've said, in people's models, that they should assume that we're going to make all of those payments. As soon as we have any information that would be helpful in assessing the likelihood of making those payments and the size of what that would be, we certainly will make that available to you.

That's very helpful. Thank you.

Bill Bonello, Wachovia.

Yes, just a couple of questions. I wanted to comment on one of the things Ricky was asking about, I guess from a different perspective, on exclusivity. You mentioned that you are not actively pursuing to be the exclusive national lab, but you had also mentioned that, in the United contracts, they were very determined to have just one lab. Do you have any sense, at this point, whether Cigna or Humana have that same kind of determination to work with just one lab?

I don't think it would be appropriate for us to talk about that, Bill. I'm not trying to avoid the question but I think that is something you would have to direct to those companies.

Okay. Then, actually, that's all. I will take the rest off-line. Thank you.

David [Clara], Piper Jaffray.

Congratulations on a great quarter. Just a question -- in the past, you've broken out the genomic business a little bit in more detail in the 8-K. I was hoping you could do that for us.

We don't have those numbers in front of us, and we collapsed it. We did break it out differently a long time ago when we added a category, and that category was so much smaller than the larger category, and it hasn't really trended in any way that would be meaningful, so we collapsed those two together.

Mr. King, there are no further questions at this time. Please continue with your presentation or closing remarks.

Frank, thank you very much. Again, everyone, thank you very much for joining our call this morning and we hope you have a great day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everybody.