Labcorp Holdings Inc (LH) 2007 Q2 法說會逐字稿

Welcome to Laboratory Corporation of America Holdings second 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. Only investors and analysts will be allowed to ask questions. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Tuesday, July 24, 2007.

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

Thank you. Good morning and welcome to the LabCorp's second 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 Eric Lindblom, Senior Vice President Investor Relations.

This morning we will provide a review of our second quarter and year to date 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 would 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, there will be a replay of this conference call available via the telephone and Internet. Please refer to our press release date July 24 for replay information. This morning, the Company filed an 8K that included additional information on our business and operations. This information is also available on our Website. Analysts and investors are directed to this 8K and our Website to review this supplemental information.

Additionally, we refer you to our press release dated July 24 for a reconciliation of EBITDA, which is a 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 second quarter results are as follows. Net sales increased 15.4% to $1.0431 billion. Compared to the second quarter of 2006, testing volume measured by accessions, increased by 14.2% and price increased 1.2%. We estimate that net sales increased by 8.8 percentage points due to our agreement with UnitedHealthcare. Before restructuring and other special charges recorded in the second quarter of 2007, earnings per diluted share increased 25.3% to $1.09, versus $0.87 in the second quarter of 2006. Before restructuring and other special charges recorded in the second quarter of 2007, EBITDA was $279.6 million, or 26.8% of net sales.

Operating cash flow for the quarter was $153.1 million, versus $128.5 million in the second quarter of 2006. At the end of June, the Company had cash and short-term investments of $51.7 million, and no outstanding borrowings under its revolving line of credit. Capital expenditures were $32.2 million, of which $7.6 million related to our agreement with UnitedHealthcare. Through the end of the quarter, the Company had been billed $16.7 million in transition payments, related to its agreement with UnitedHealthcare, with approximately $5.4 million paid. The $16.7 million billed represents the vast majority of claims activity through April.

DSO at the end of June was 55 days. During the quarter, the Company repurchased $51.5 million worth of stock, representing 668,000 shares. Approximately $440.5 million of repurchase authorization remains under our approved share repurchase plan.

Our year to date results are as follows. Net sales increased 14.6% to $2.0418 billion. Compared to the first half of 2006, testing volume measured accessions increased 13.3% and price increased 1.3%. We estimate that net sales increased by 7.9 percentage points due to our agreement with UnitedHealthcare. Before restructuring and other special charges recorded in the second quarter of 2007, earnings per diluted share increased 27.2% to $2.06 for the first half of 2007, versus $1.62 in the first half of 2006.

Before restructuring and other special charges recorded in the second quarter of 2007, EBITDA was $540.1 million, or 26.5% of net sales in the first half of 2007. Operating cash flow for the first half of 2007 was $338.9 million, compared to $307.1 million for the same period last year. During the first half of 2007, the Company repurchased $409.5 million worth of stock, representing 5.8 million shares. We are very pleased with our financial results for the first half of 2007. I will now turn the call over to Dave.

Thank you, Brad. First, I'd like to make a few observations about our second quarter. As Brad mentioned, our net sales grew by 15.4%, with 8.8 percentage points resulting from our agreement with UnitedHealthcare. The remaining 6.6 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. Our continued strong non-UnitedHealthcare growth in this quarter, again showed that physicians used LabCorp because of service, convenience and scientific leadership.

We also grew earnings per share by an impressive 25.3%, grew EBITDA by $32.5 million and generated $153.1 million in operating cash flow. This is an excellent performance by every measure. I would also like to mention how pleased we are with our acquisition of DSI Laboratories in the southwest Florida market, which we look forward to closing after completion regular regulatory review. Absent a second request, the antitrust review period will expire July 31 and DSI will then join the LabCorp family.

We believe this is a key strategic acquisition, as evidenced by the interest in DSI from many of our competitors. We are extremely pleased that we were able to collaborate with a hospital to purchase their outreach program without hurting their core lab and concurrently expand our infrastructure in the very important Florida market. We are also delighted to have 21 new patient service centers in the heavily populated and fast-growing Naples area. Although the acquisition environment remains extremely competitive, we will continue to pursue other acquisitions that meet our strategic objectives.

We are proud of our performance in the quarter and of our continued industry-leading margins. We recognize that EBITDA margins decreased compared to the second quarter of 2006, but we do not view this as a trend. We have previously explained that our accounting for United transition payments, affected by a simple reduction in top line revenue, has a negative impact on margins.

Additionally, margins were impacted by expense growth as we made investments in sales and service, both to minimize leakage and to make sure we serve all new clients appropriately. As a result of our investment in minimizing leakage, we currently estimate that our exposure on United transition payments will be 25% less than our maximum contractual commitment. This significant improvement in our leakage forecast is a testament to the outstanding job that LabCorp's front line people have done in sales and service.

We are also pleased that leakage appears to be trending down each month. I want to emphasize that we increased EBITDA margin by 10 basis points over the first half of 2006, even with the impact of leakage accounting and the investments I have just discussed. We are well satisfied with this performance and will of course continue to balance the need to invest in superior customer service with our commitment to margin expansion as we move forward.

Next, I'd like to remind you about the Results For Life campaign sponsored by LabCorp and our trade group the American Clinical Laboratory Association. This campaign is designed to educate patients, policy makers, the media and others, about the value of clinical laboratory testing as a key component of a 21st century health care system focused on prevention, cost efficiency and improved patient outcomes.

America's health care system is in the midst of both transition and crisis. We are finding new and better ways to prevent illness, diagnose disease when it is more responsive to intervention, and treat it more effectively. Yet all of these advances come at a price and everyone is aware that the cost of health care is spiraling upward. As an employer of 25,000, we and our dedicated people directly feel the impact of increasing health care costs.

We constantly strive to provide the most cost effective laboratory testing to our customers but it is important that people know that laboratory medicine is part of the solution and not part of the problem. Laboratory testing has been a relatively invisible component of the health care spend. The $0.04 of every health care dollar that goes to clinical laboratories, influences 80% of health care decisions. Yes instead of trying to enhance the role of laboratory medicine, the government and other payers are simply trying to reduce the total dollars they spend on labs.

The most recent example of this trend is the ill-conceived Medicare competitive bidding project, which if implemented as recently described by CMS, will harm Medicare beneficiaries and likely put many small laboratories out of business. I submit that we should spend more, not less, on laboratory services because each dollar of lab spend reduces the amount we spend on more expensive and often less efficacious treatments. It is time to recognize that people's lives and health are positively affected by constantly improving laboratory testing and that labs deserve to be fairly paid for the enormous value we bring to the health care system.

I would now like to bring you up to date on the progress the Company is making toward achievement of our key strategic objectives. Managed care. As you are aware, managed care continues to be a main focus for us. From the large national plans to the small regional plans, we believe that by working together we can continue to maximize our opportunities. We have now been the sole, exclusive national clinical lab for UnitedHealthcare for six months and by all measures it has been a huge success.

Simply put, we have built out the infrastructure, handled the volume and improved our service metrics. This is especially satisfying knowing that we opened nearly 500 patient service centers, hired over 1,800 people and saw double-digit volume growth. Our commitment to our clients and patients is constant and unwavering.

WellPoint continues to be a valued partner and we continue to work with them on ways to expand our national strategic relationship. I met personally with senior management at WellPoint in recent weeks including their new Chief Executive Officer, and reiterated our commitment to help them maximize the value of their lab spend. We are proud to be WellPoint's sole strategic partner and look forward to continued growth in our relationship.

We are very pleased that Cigna renewed its agreement with us during the quarter. The exciting news for LabCorp and our shareholders, is that effective January 1, 2008, we will no longer be subject to marketing restrictions in 17 major Cigna markets, including New York, New Jersey, Florida, Texas and Georgia. These marketing restrictions prevented us from telling doctors and patients that we were and are contracted with Cigna.

The new agreement allows us to compete on a level playing field and give Cigna members true choice in laboratories. We are confident that we will win our fair share of business when the playing field is leveled, because doctors and patients will choose service, innovation and convenience. We look forward to having our Cigna work grow, as physicians in these and other major markets begin to understand that they can send their Cigna patients to us.

Humana is currently evaluating its laboratory network and we have responded to their RFP. We continue to be in discussions with them and hope to achieve a satisfactory outcome.

As you are no doubt allow, as of July 1, we are no longer a contracted provider for Aetna. We value our relationship with Aetna and despite our deep disappointment at being excluded from the contract, we continue to seek ways in which we can serve them and bring value to their members. We know, of course, that we will lose Aetna work but the first week of our non-contracted status included a major national holiday, so it is too early to give you an estimate of how much business we will retain. We will update you further on our third quarter call.

We remain committed to our successful strategy of true partnership with managed care organizations. We believe that our service, convenience and scientific leadership, including our leadership in using science to provide meaningful data, provides our partners with true value and helps them achieve their goal of providing affordable, quality health care to their members.

Science. In science, we continue to lead the industry in the introduction of meaningful new testing capabilities in areas where there is an unmet clinical need. During the second quarter we added 12 new tests in several disciplines, including oncology, infectious disease, immunology and women's health. Additionally, we announced several important agreements, including an agreement to license Intema's technology for combining first and second trimester screening results to assess the risk of Down Syndrome. As you may know, in January, 2007 , the American College of Obstetricians and Gynecologists issued a practice bulletin, recommending that regardless of age, all pregnant women should be offered screening for Down Syndrome.

An agreement with Roche Diagnostics to offer a new, highly accurate HIV test for diagnostic use. This agreement enables LabCorp to be the first commercial laboratory to enter a supply reach for Roche's FDA, fully automated, real-time PCR test that quantifies the amount of the virus in the blood from very high to very low levels. As of the first week of July, we have fully implemented this technology and all of our HIV patients are benefiting from this advanced capability.

An agreement with Veridex to commercialize nucleic acid testing technology for detecting the presence of a key tissue marker in prostate cancer, methylated GST-Pi. When used in combination with conventional histopathology testing, quantifying the level of GST-Pi may provide a more sensitive and accurate detection of prostate cancer than histology alone. And most recently, we announced our expanded licensing agreement with EXACT Sciences for their colorectal cancer screening test, PreGen-Plus. This expanded agreement extends our exclusivity with EXACT, with provisions for certain labs to distribute the tests.

Additionally, we also purchased an innovative automation company called Protedyne This company combines powerful robotic hardware with customized software to automate pre-analytical processes in the laboratory. We intend to install these robots on production lines in all of our major laboratories.

Protedyne has already installed robots in a number of commercial laboratories and the result has invariably been a reduction in pre-analytical errors, improved turnaround time and labor and supply savings. The acquisition of Protedyne again demonstrates our commitment to the fastest and most accurate results for our physicians and patients, and to running the most efficient laboratory operation in the industry.

We continue to be focused on gene-based and esoteric testing. These categories of tests generated $359 million in net sales during the second quarter, substantially ahead of any of our competitors for similarly categorized tests. We are very pleased with the mix of testing generated from new accounts that have come on board during the second quarter of 2007.

I would like to turn to the third component of our strategic plan, our customer focus culture. Providing industry leading customer service continues to be an area of intense activity. In March, I sent a letter to every account asking about their experiences with LabCorp. I received many comments and either I or one of our senior officers personally followed up on each one. I sent a similar letter in the beginning of July and we are again addressing each response.

I am pleased that the letters elicited so many positive responses. I am just as pleased that we listened to customers who wrote to tell us of experiences that were not positive and that we used this learning to improve our service. We know that our physicians and patients are the reasons we come to work everyday and although we will never be perfect, we will never stop trying to be perfect when it comes to serving them.

Now, I would like to update our guidance for 2007. Excluding the impact of any share repurchase activity after June 30 and excluding restructuring and other special charges recorded in 2007, our guidance for 2007 is as follows. Compared to 2006, LabCorp expects 2007 revenue growth of approximately 13% 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 $100 million to $110 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. Now, Brad Smith will review anticipated questions and our specific answers to

Thank you, Dave. Can you update us on the mix of your business coming from esoteric testing? At the end of June, 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 and image guided path, 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 second quarter, image guided Pap screening was being requested for approximately 56% of all liquid-based Pap smears ordered.

We continue to experience growth in both reflex and primary screening for HPV. During the second quarter of 2007, HPV testing increased approximately 66% versus the second 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 improved 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 that could help us increase our presence in key geographic areas.

As Brad mentioned earlier, LabCorp repurchased $409.5 million worth of common stock during the first half of 2007. At the end of the quarter, $440.5 million remains under our approved share repurchase authorization. Our activity during the first half of the year proves that we have -- what we have always said, we will be opportunistic when it comes to our share repurchases.

Can you update us on your expectations of the $200 million in transition payments to the UnitedHealthcare? As stated earlier, through the end of the quarter, the Company had been billed $16.7 million in transition payments related to its agreement with UnitedHealthcare, with approximately $5.4 million paid. The $16.7 million represents the vast majority of claims activity through April. We are encouraged by the trend and as a result, we currently estimate that our exposure on leakage will be 25% less than the contractual maximum.

How is your philosophy regarding pricing discipline changed? In a word, "no." Pricing has always been competitive and will be 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.

What is the status of the Medicare competitive bidding demonstration project? CMS recently released a draft Bidders' Package for the Medicare competitive bidding demonstration project for clinical laboratory services and conducted a special open-door forum to discuss the draft and announce a tentative timeline for the project. Despite years of effort by CMS and its contractor RTI International, the Bidders' Package package reveals a serious lack of understanding of the operational realities of the clinical laboratory industry and raises the specter of loss of access to quality laboratory services from Medicare beneficiaries who will be forced to participate in the demonstration.

The timeline announced by CMS, including notifying winners in early 2008 and beginning the demonstration in the spring of 2008, is in our view unrealistic, given the numerous unanswered questions and issues. The entire clinical laboratory community, including both large and small labs, is United in opposition to this demonstration. And we will continue to work together toward a legislative repeal because we continue to feel strongly that it is bad policy for Medicare patients, physicians and laboratories.

Can you tell us why the new Results For Life campaign is important to labs? We continue to be very excited about Results For Life, the public relations campaign that our trade organization, the American Clinical Laboratory Associations, ACLA, and other corporate sponsors are facilitating to promote the value of clinical laboratory services for better health and improved outcomes.

Results For Life is actively reaching out to the laboratory community through industry conferences to develop ambassadors who will be trained to carry the Results For Life message to others. In addition, Results For Life is generating earned media through interviews with trade publications, Congressional article on the values of lab testing and publications targeted to policy makers such as the Hill and eTip sheets to update policy makers highlighting the importance of the results we provide. We believe these efforts will result in public policy that better recognizes and fairly values the vital role of laboratory services in our health care system.

Can you comment on efforts in Congress to regulate lab developed tests? We do not expect any legislative effort to regulate lab developed tests to be enacted in the foreseeable future. We do expect that the FDA will issue final guidance on analyte specific re-agents and in-vitro diagnostic multi-variant index assays in the near future. Although the FDA issued its draft guidance on these topics at the same time last fall, we expect the ASR final guidance to be issued first. In any event, we don't not believe that these final guidelines will have a significant impact on our operations or strategic plans.

What is your opinion of the new pod language contained in the recently issued draft Medicare Physician Fee Schedule Rule? We are analyzing the provisions of the CMS proposed rule on the 2008 Medicare Physician Fee Schedule dealing with revisions to the Physicians' Self Referral Regulations and expect to file comments on the proposed rule in August through our trade association ACLA. We have been and continue to be supportive of all steps to approve compliance in our industry and to prevent unfair and abusive practices. Now, I would like to turn the call back over to Dave.

Thank you, Brad. In summary, we have had a terrific first half of 2007. We are very pleased with our progress on all fronts and with the outstanding results we delivered for our shareholders. Thank you very much for listening. Edison, we are now ready to answer any questions from investors or analysts.

Thank you, ladies and gentlemen. (OPERATOR INSTRUCTIONS.) As a reminder, only investors and analysts are allowed to ask questions. And our first question comes from the line of Tom Gallucci with Merrill Lynch. Proceed with your question.

Good morning, thank you for all the color. Two questions. First, obviously the good news on United is limiting the leakage so far. Just wondering if you can give us any color, the success on the pull-through side from incremental business from doctors as you're getting the United business in the door? And along the same lines. Can you offer us any color with respect to Cigna? How significant of a change, really, is the marketing opportunity? Are these pretty much existing doctors that you talked to but just technically you couldn't talk to them about their Cigna patients or maybe if you can just add a little color to that situation?

Sure, Tom, on the United pull-through, we don't break down the direct United business and the pull-through. And as I've said, I think several times previously, it's more art than science in calculating pull-through to begin with.

Right.

I would say that our pull-through, we're very pleased with the amount of pull-through that we have generated from United. And at the same time, we think there is still upside on the pull-through. We think there is more opportunity for us to gain pull-through as physicians, particularly in these new markets, have greater experience with us and become more confident in our abilities to serve their entire book of business.

That actually leads into your second question, which is about Cigna, which is obviously, for example, in New York, our inability to tell physicians that we're contracted with Cigna has limited the amount of pull-through that we can gain. And so we look at these 17 major markets under which we have been subject to these restrictions and feel that there is significant upside there, both in existing accounts where we have not been getting Cigna business and in other accounts where physicians, because of the inconvenience of not being able to send us Cigna, have probably not sent us other business as well.

They can send you the Cigna business but you just can't tell them they can. Is that sort of the quirky thing that's been in effect in the past?

I think that is an accurate statement, yes.

And then maybe if I can just ask one other on the acquisition landscape. Your purchasing DSI, we've seen some fairly sizeable prices talked about out there in the acquisition landscape and you described it as competitive. Can you just maybe add a little bit of color to your comments on the opportunity for DSI specifically and again, what the broader landscape looks like for opportunities on the acquisition side? Thanks.

Sure. I think what we're most pleased about with DSI is, first of all, it is a very important location. That southwest Florida coast is growing very rapidly. The population is -- are significant users of laboratory testing and of the health care system in general, so it is a great place for us to be. And 21 new patient service centers in that market, where we have historically been under-represented simply because the investment in patient service centers was not -- we didn't get return on it because of DSI's preiminence in the area. To us, that is a great acquisition for us and something that we're very, very pleased that we're able to do. The other thing is we're able to do it in a collaborative way with a hospital that was interested in continuing to have a core laboratory operation, but wanted to divest itself of its outreach business. And so for both of those reasons, we think DSI is a great acquisition for us.

Obviously, the acquisition environment is competitive. Pricing is higher than what we've been used to in the past. I'm sure it hasn't gone unnoticed that Sonic Healthcare made some significant acquisitions in the U.S., as well. So there really is a third competitor in the market that is competing for these acquisitions. So, we still see attractive acquisition opportunities out there but we know that pricing is going to be higher than it has been in the past. And we also know that we're going to have to be very strategic in moving aggressively on the assets that we want to own.

Thank you.

And our next question comes from the line of Art Henderson, Jefferies & Company. Please proceed with your question.

Good morning. Dave, had you guys ever disclosed how much Humana is as a percentage of your business?

No, we have not.

Is it material or it -- is this a sizeable contract for you?

I would respond by saying that I believe Humana's total membership is about 5 million members. So if you compare that with -- and I'm stating these numbers from memory -- but I believe Cigna is about 10 million and Aetna is about 15 million. United is about 27 million and WellPoint is about 30 million. So, that gives you the sense of the scale of their covered lives. And while we're not going to comment on their specific component on our book of business, it can probably give you a sense of their scale in the book of business as well.

Yes, that's helpful. Is -- are you expecting some sort of an announcement from Humana sometime soon, or is this going to be a longer process, from what you can tell?

All I can say is that they put out an RFP, we responded to it. We continue to be in discussions with them and I don't really have any further color to add on that.

That's fair. In thinking about the transition payments going forward, obviously I appreciate the color you have given so far, is there a way to think about how we should model those transition payments and the cash flow on an ongoing basis? It looks like you may have -- you've got $16 million billed, you've paid $5 million out. So, I assume that the next quarter we're going to see something in the order of like an $11 million payment. Am I thinking about that correctly?

Art, this is Brad Hayes. And yes, you are. It won't get as close as to say by quarter, what you should expect by going forward, but we still believe the majority of that now reduced expectation will be in the first 18 months of the contract. So, that's why we give our cash flow guidance excluding those payments because the timing is still a little hard to predict. But I think you're thinking about it correctly, at least in the short term.

And then, one last question. On competitive bidding and again I also appreciate your color that you given on that. Are you getting some traction on Capitol Hill with your criticism, for lack of a better word, on this particular program? Is Congress willing to listen and possibly undo this particular initiative?

I would comment that predicting what Congress is going to do is not something that -- if I start doing it, it is not going to keep me in this job very long.

Understood.

So, I think ACLA and the laboratory industry in general, and it is not only ACLA it's the Clinical Laboratory Coalition and the other labs that are involved in this, have done a terrific job of raising the visibility of this issue on Capitol Hill. Obviously, I'm hesitant to make a prediction about what Congress would do and I think Brad Smith has been very close to this and probably could probably add a little bit of color for you here.

The only thing I would add is that Congress is willing to listen to this point and they understand some of the weaknesses. But many of the details hadn't been available, so they really couldn't see what the true impact would be, especially among a number of smaller labs and on specific Medicare beneficiaries because they haven't announced where these demonstrations are going to take place yet.

Right.

As those details come up and the impact can be more tangible, specific beneficiaries and specific laboratories that are going to be threatened, I think then we'll stand even a better chance of sort of motivating or trying to accomplish the result of getting them to repeal this demonstration project. But as Dave said, it is impossible to predict and it would take an Act of Congress to stop it.

So if we basically don't get an Act of Congress to stop it this year, it goes into affect sometime next year, right?

That's currently what has been proposed. But again, a lot of the details are not out there. And I will say that CMS has listened to what we've said and they feel that they're required to do it because it was included in a directive from Congress. The timing of it, as they listen to the feedback that they're getting in these special forums, could affect their announced timing.

Great. That is very helpful. Thank you.

And our next question comes from the line of Adam Feinstein with Lehman Brothers. Please proceed with your questions.

Thank you. Good morning, everyone. Just a few questions here. On the UNH contract, I just wanted to see, as we think about kind of the base case, and kind of where you are, just want to think about the ramp-up. So, would you still characterize it as ramping up? What we had in on the quarter, is it a pretty good run rate from here? So, just a couple thoughts there. And then I just wanted to see if you can just talk more about the impact on the other margins in the quarter from some of the investments you spoke about, Dave, earlier? Just wanted to see if you could give more detail on this? Wondered if you can talk about, are we at a run rate there or should we look for additional investments in the back half of the year, too?

Sure, good morning, Adam. In terms of the ramp-up, I think it is accurate to say that the United business came aboard faster than we expected, starting in the fourth quarter of last year and continuing into the first and second quarter of this year. So what I would say is we probably will not see as much of an increase as we might have expected in the third and fourth quarters because we're higher than we thought we would be at this point based on the modelling that we did.

Are we at a run rate? I think there is still opportunity on the upside, both in United and in the pull-through business. And I say that because as long as there's leakage, there is opportunity and we know there is still some leakage. And because, again, we're happy with the pull-through but we think there is the opportunity to do better.

With respect to your question about the margins and the investments. I think we are at a run rate on what we have done to invest in the business, I don't think we're going to need to invest significantly more. And, in fact, there may be the opportunity to rebalance in some of these areas the investments that we've made on the IT side and on the service side. We wanted to make sure, as we went through these first couple of quarters, that our service levels were better than what physicians, particularly in these new markets, had been used to from our competitors. And certainly, that it has been a tough fight in the northeast to gain business. That we have put a lot of resources and a lot of energy into winning the United business.

I think the numbers tell you that we have been extremely successful in doing that but you have to invest in service to get people convinced that you can serve them. And that is what we have done in the first six months.

Okay. And, Dave, one quick follow-up, if I may, here. Just as we think about the Aetna business and the transition there, just like you guys picked up some UNH business prior to the contract actually starting, and obviously, I know it is hard to quantify. But just wanted to get your sense in terms of how much of an impact you think that may have had in the quarter? Once again, if it is something you can't quantify, just any general thoughts.

Well, I think that we certainly lost some Aetna business in the run-up to the announcement. Again, our major competitor that won this contract is a very tough competitor. And we don't underestimate that and they were certainly out there aggressively pursuing the Aetna business. So there is no question in my mind that we lost some Aetna business during the quarter and probably as we got later in the month of June, we trended to lose more.

I am not going to use that, though, as saying that that's a significant reason or a significant impact on the quarter. I think we'll see, once we get a look at our accessions after the holiday week from Aetna, what the real impact is. But we didn't see, in my mind, an impact big enough in the month of June, for example, to really move the needle on our results, Adam.

Okay. And that's incorporated in the 2007 guidance, so the transition there is included in on the guidance. Correct?

Yes, it is.

Okay, great. Thank you very much, appreciate the detail, as always.

And our next question comes from the line of Bill Bonello with Wachovia. Please proceed with your question.

Great. A couple of follow-ups. Can you explain how the leakage accounting impacted margins relative to Q1? I had thought that was fairly straightline.

Yes, Bill, it is just we take a top line revenue reduction and so we reduce revenue off the top line but expenses remain the same. And that has an impact on the drop-down.

Okay. But are you reducing revenue by the same amount every quarter?

Bill, this is Brad, we've now lowered that amount but I think if you look at the term of the contract, it's a small impact in the results.

Okay. But just so I understand, though, is it still -- I thought it was being done sort of smoothly over a 10-year time period. Is that still the case?

Yes.

Over the life of the contract, it is being done smoothly. But again, remember, what it does is that in each quarter we take a top line revenue reduction. And whenever you reduce the top line without reducing the expense line, you are going to have an impact on margins.

Sure. Okay. And then just curious about your comments on the meetings with WellPoint. You have been pretty emphatic in the past that you are not out seeking single-source contracts. And the sort of conventional wisdom has been that given WellPoint's structure, they probably aren't seeking a single-source contract. I'm just curious if you would -- if either of those are sort of incorrect at this point?

Well, I can reiterate that we are not seeking single-source contracts. And certainly, we were very pleased that Cigna did not opt for a single-source contract but opted really to open the contract and give us an equal competitive position. The -- I'm not going to, obviously, comment in detail on meetings that I had with WellPoint executives. WellPoint has a new CEO, I thought it was important that I meet her and introduce myself. And to meet with other people there, simply to acquaint myself with them, because I haven't met a lot of them, either. So but it's -- we're not -- we haven't changed our philosophy on what we're looking for in contracting. And we continue to believe that in a competitive situation, given a fair opportunity to compete, that we're going to be very successful.

Okay. And then just a question on the break-out of the numbers. When I look at your PPA on a year-over-year basis, it looks like there's been about a 2.6% year to date increase in the core business but about a 3.6% decline in the esoteric and genomic PPA. And I'm just trying to understand why would there be a divergence between the two product areas in terms of how the price is trending?

Bill, this is Brad. The way I think about that is in the -- it depends on -- it also has to do with the geographical mix of testing and growth as well as the payer mix. So, if I think about the core and where our business has grown, we've talked about the New York market as being a source of opportunity, the United contract, and one that which we've obviously grown there. That is traditionally a higher priced market across the board than other markets when it comes to PPA. The other thing is, when I look at the payer mix schedule, a large source of our growth is in managed care, managed care fee per service, as well as capitated. So, I think both of those factors are increasing the core PPA.

If I turn to the second part of your question and then the genomic and esoteric testing lines, some of the same comments there is if you look at our capitated and the kind of growth that we've experienced from the new contract and as well as the other business, some is coming in the capitated payer mix that traditionally, before that growth, would not have been there. So, I think those are the dynamics that we see at work in those two lines.

Great, that is helpful. Thank you.

Our next question comes from the line of Ricky Goldwasser with UBS. Please proceed with your question.

A couple of questions. Firstly, from what you've seen in the marketplace today, do you expect most of the United gain going forward to come more from the smaller regional, as compared as from Quest? And secondly, year to date, what percent of your managed care business is still up for renewal for the year?

Your first question, which is; Do we expect most United business to come from smaller regionals versus from Quest?

From this point on.

Yes, I would say the answer to that is yes and no. And I'm sure you'll want some further explanation of that. Yes, in that, certainly for the balance of this year, we know that we've won a pretty significant portion of the Quest business. So, while there is still business that Quest has retained that we intend to pursue, the smaller regionals have also had some gains. And obviously, we're going to go after that business, as well.

The "no" part is, that in May of 2008, LabOne will go out of the United contract. So their United contract will expire in May 2008. And that will give us additional opportunity in the midwest to gain some business that currently is Quest business that is contracted with United. So, this year probably the balance of the year, there is opportunity with Quest, there is certainly other opportunity with other regional laboratories. Next year, again, there will be an opportunity with LabOne, as well as the continuing opportunity with other regional laboratories.

Your second question, which is; Year to date, what percentage of the managed care book is up for renewal? We haven't talked about it and we're not going to talk about it in terms of what percentage of business is or is not up for renewal. What I would say is, we're contracted with United, we're contracted with Cigna. The Aetna decision has been made.

So I think the major managed care plans, both the major national plans and the large regional plans, for the most part, have been recontracted and I feel very good about -- obviously I don't feel good about Aetna, but overall, I feel very good about where we've ended up.

Thank you.

And our next question comes from the line of Robert Willoughby with Bank of America Securities. Please proceed with your question.

Dave or Brad, United sends you a bill every quarter. How do you check it? Is there an opportunity to dispute some of the claims? And do they tell you which physicians are actually misbehaving and sending the samples elsewhere?

Well, they actually send us an invoice every month, Bob. And we do have a validation process where we review the claims and satisfy ourselves that the invoice is accurate. As I think we said on our first quarter call, the reason we didn't make any payments in the first quarter is that the first couple of months of the year, the -- it just took United some time to get the data, assembled in a way they felt was meaningful to present it to us. So we get a monthly bill, we validate the bill and then we make the payment. I am not going to go into detail about what they provide us in terms of detailed information because, I think from a competitive standpoint, that is something that I'm not anxious to talk about. But we do have a clear delineation of the claims that they paid that they consider to be leakage and an opportunity to validate those numbers.

And to an earlier question, the deals and the share repurchases to date, have represented some capital deployment here. But honestly, it is still modest relative compared to what a competitor is doing or what you actually have the potential to do. Is this just really the calm before the storm here? Should we expect you to be a bit more aggressive with the capital going forward, whether it is a share repurchase or an M&A opportunity?

Well, we were very aggressive with share repurchase in the first quarter because as we said, we were going to be opportunistic about the opportunity. And we're going to deploy our capital carefully and intelligently the balance of the year.

But there's no color in terms of timing? You've passed on some larger transactions. That doesn't motivate you to do anything near-term, at least from a share repurchase standpoint?

I just don't feel comfortable commenting about what we might do in the near term to mid term to the long term for the rest of the year, Bob. I would say that we're not going to stand pat for the balance of the year. We're going to continue to deploy our capital intelligently. We're going to be smart about what we do. And if there is, we don't want to put ourselves in the position where if an attractive opportunity comes along, that requires significant capital, that we've boxed ourself out of the market. At the same time, we recognize the value that we bring to shareholders by deploying our capital to repurchase shares and that is something that we remain intently focused on.

Lastly, you did mention Sonic briefly in your comments. Can you characterize their efforts there, their competitive opportunities, how you view them in the market?

Well, I think they've made three or four substantial acquisitions in the United States. I think they've shown that they have the appetite to continue to make acquisitions. I view them as an aggressive competitor and we're well aware that they're going to be interested in a lot of the opportunities we're interested in as well.

Okay. Thank you.

And our next question comes from the line of Kemp Dolliver with Cowen & Company. Please proceed with your question.

Hi, thanks and good morning. My first question is, what is -- where are we in the process with regard to network management? Are we going to start to see some activity this year with potentially some of the smaller labs moving out of the United network or is that really for next year, '09?

Kemp, good morning. We're working with United on the network management issue. I think probably that's going to be a 2008 event to get -- when we get that off the ground. There are some systems issues and other things that are -- that make it a little less simple that it might seem but we and United remain very committed to the network model. Obviously, the Oxford network model has been very successful in the New York market. And so, I think you should expect to see developments in the networks in next year.

Okay. That's great. And where are you -- how would you characterize where you are with the PSC rollout? And whether it is in new store clinics or new PSC's, is this expansion say 80% done, 100% done?

I think the in-store PSC model is a great model. And we're continuing to look at opportunities to create more in-store PSC's, both with Duane Reade and with others. I think the United PSC build-out -- I would never say anything is 100% complete because periodically, the numbers are going to show us that there is a need for a patient service center here, a need for patient service center there. But we're not building any significant number of patient service centers for the United business. That was really completed in the fourth quarter and very early in the first.

That's great. Thanks a lot.

Mr. King, there are no further questions at this time.

Great. Edison, thank you very much. Thank you all for listening to our conference call. And 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