Labcorp Holdings Inc (LH) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Laboratory Corporation of America earnings conference call. My name is Dan, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session for investors and analysts at the end of the call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. David King, Chief Executive Officer. Please proceed, sir.

Thank you, Dan. Good morning, everyone, and welcome to LabCorp's third quarter conference call. Joining me from LabCorp today 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 and Media Relations. This morning we will provide a review of our third quarter and year to date 2007 results and update you on achievements in key strategic areas during the quarter. Later in the call, we will update guidance for 2007, give preliminary guidance for 2008 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 that there will be a replay of this conference call available via the telephone and Internet. Please refer to our press release dated October 25th 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 the 8K and our website to review the supplemental information. Additionally, we refer you to our press release dated October 25th for reconciliation of EBITDA which is nonGAAP financial information discussed during the call. I would also like to point out that any forward-looking statements made during the conference call are made based on current expectations and are subject to change based upon various factors that could affect the company's financial results. These factors are set forth in detail in our 2006 10K and subsequent filings. Now, Brad Hayes will review our financial results.

Thank you, Brad. Our third quarter results are as follows. Net sales increased 12.2% to $120.6 million compared to the third quarter quarter of 2006, testing volume measured by accessions increased 11.9% and price increased .3%. We estimate that net sales increased by six percentage points due to our agreement with UnitedHealthcare. Before restructuring and other special charges recorded in the third quarter of 2007 and 2006, earnings per diluted share increased 27.4% to $1.07 for the third quarter versus $0.84 in the third quarter of 2006. During the quarter, we made adjustments to our cost structure to ensure our capacity and capabilities remain aligned with our volumes and service requirements. These actions were directed at reducing our workforce in nonoperational areas, along with eliminating redundant and underutilized facilities. These actions in the quarter resulted in a charge of approximately $31 million. We expect that these actions will reduce operating expenses by approximately $60 million in 2008. EBITDA was $272.5 million or 26.7% of net sales.

Operating cash flow for the quarter was $130.4 million which is net of $17.9 million in transition payments to UnitedHealthcare. Through the end of the quarter, the company had been billed $27.9 million in transition payments related to its agreement with UnitedHealthcare, with approximately $23.3 million paid. The $27.9 million billed represents the vast majority of claims activity through June. At the end of September, the company had cash and short-term investments of $35.2 million, and $100 million in borrowings under our revolving line of credit. Capital expenditures were $35.5 million of which $3.9 million related to our agreement with UnitedHealthcare. ESO at the end of September was 58 days. The primary drivers for the increase in our DSO were temporary delays in payment due to being out of network with Aetna, timing of cash receipts, and a slightly negative impact from our recent acquisitions.

During the quarter, the company repurchased $111.3 million worth of stock, representing 1.5 million shares. Approximately $329.2 million of repurchase authorization remains under our approved share repurchase plan. Our year-to-date results are as follows. Net sales increased 13.8% to $3.624 billion. Compared to the first nine months of 2006, testing volume measured by accessions increased by 12.8%, and price increased 1%. We estimate that net sales increased by 7.6 percentage points due to our agreement with UnitedHealthcare. Before restructuring and other special charges recorded through the third quarter of 2007 and 2006, earnings per diluted share increased 27.2% to $3.13 for the first nine months of 2007 versus $2.46 in the first nine months of 2006. EBITDA was $812.6 million or 26.5% of net sales in the first nine months of 2007. Operating cash flow for the first nine months of 2007 was $469.3 million. During the first nine months of 2007, the company repurchased $520.8 million worth of stock, representing 7.3 million shares. We are very pleased with our financial results for the quarter and first nine months of 2007. I will now turn the call back over to Dave.

Thank you, Brad. First I'd like to make a few observations about our third quarter. We are extremely pleased with 12.2% revenue growth and 27.4% earnings per share growth, which shows the impact of volume increases combined with effective expense control. Several noteworthy events affected our third quarter, the loss of the Aetna contract, the affected Cigna price reduction and the impact of conditions where immigration has not been completed. Of course, what we can best control are expenses. We pride ourselves on the discipline we have always brought to expense control and this quarter was no exception. We took decisive action to reduce our workforce in nonoperational areas, as well as to downsize or eliminate redundant and underutilized facilities. Our cost reduction initiatives will result in $25 million in end-year savings and $60 million in annual savings in 2008. Since the close of the quarter, we have announced the downsizing of our Louisville laboratory, which will result in a significant expense reduction in 2008 and a restructuring charge in the fourth quarter of 2007. We will continue to review our cost structure to make sure that our business is sized correctly to handle our volumes with the goals of continuing to be the most efficient provider and maintaining our high standards of customer service.

As many of you have heard me say, there has been a pricing reset in the laboratory industry. This should not be surprising to anyone who follows health care. Almost every other area of health care has seen or is seeing reimbursement reductions as a result of the consolidation of managed health care plans and the continuing increase in health care costs. Even though laboratories are only 3% to 4% of the total health care spend, we are not immune from pricing pressures. I, for one, do not believe that cutting reimbursement is the answer to reducing health care spending. This, however, is a matter that experts will continue to debate for the foreseeable future. Our industry needs to speak up in that debate, but in the meantime, we must also run our business in the existing environment. To that end, we will continue to leverage our cost base, forge innovative collaborative arrangements, continually evaluate our internal processes and provide clients and patients with high quality services. We are and will continue to be the most efficient and customer-friendly lab.

To return for a moment to health care policy, we are very pleased at the success of 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 healthcare system focused on prevention, cost efficiency and improved patient outcomes. Recently Results for Life released a video in which patients and policy makers speak about the value of laboratory testing. I encourage you to watch the video at www.labresultsforlife.org and see for example how rigorous use of the hemoglobin A1C test, one of critical 20 critical lab tests that costs less than changing the oil in our car, can help us reduce the $130 billion per year our healthcare system spends on diabetes.

I would now like to bring you up to date on the progress the company is making toward achievement of our key strategics objectives. In managed care we remain committed to the strategy of true partnership with managed care organizations. We believe that the three most important drivers of managed care business are: access, price and data. We have made great strides in the first area this year with the expansion of our PSC network.

We remain the industry leader in the other two categories because of our efficiency and our standard instruments and systems. Our innovative kidney stone program from Litholink is an example of how our data and systems provide our partners with true value, helping them reduce costs and improve wellness for their members. Kidney stones are the most common disorder of the urinary tract affecting 5% of Americans. The prevalence of stones is increasing. In 2004, stones accounted for 2.7 million physician visits and over 400,000 hospital stays. Treatment costs amounted to over $2 billion. The recurrence rate for kidney stones is 50% within five years. Yet by following our Litholink management program which is focused on providing physicians and patients with actionable data to improve outcomes, stone recurrence are -- is reduced by 80% at the cost of approximately $200 per patient encounter. This is merely one example of how -- of what LabCorp does every day to improve health care and reduce spending, benefiting doctors, patients and our managed care partners.

In science LabCorp continues to lead the industry in the introduction of new capabilities in areas where there is an unmet clinical need. During the third quarter, we added six new tests in disciplines including: coagulation, oncology, infectious disease and immunology. Additionally we achieved several milestones in pharmaco genetics and companion diagnostics, including a strategic agreement with Medco centered on the safe and effective use of the drug tamoxifen. Approximately 10% of women using tamoxifen do not fully benefit from the drug. Genotyping for the study will be performed using the FDA cleared Roche AmpliChip CYP450 test. A pharmaco genetics collaboration with Third Wave to develop a companion diagnostic to assist physicians personalizing therapy for heart failure patients. This announcement was the next step in our previously announced collaboration with ARCA therapeutics.

Additionally in August, the FDA announced the approval of updated laboring -- labeling for commonly used blood thinning drug warfarin to indicate that a person's genes may influence how they respond to the drug. Approximately two million Americans take warfarin, and it is one of the most commonly prescribed drugs in the United States. During the last 10 years, warfarin accounted for 15% of serious adverse drug events in the United States, most within the first 30 days of use. LabCorp's test for warfarin has been available since the middle of 2006, and tests all of the appropriate genetic markers. As you can see, companion diagnostics is not years away. It is here, and we are actively working with multiple partners on innovative solutions in the areas of cardiology, oncology and infectious disease. Furthermore, we recently announced that LabCorp is the first full-service national clinical laboratory to offer integrated serum integration and sequential screening tests.

In January 2007, the American College of Obstetricians and Gynecologists issued a practice bulletin recommending that regardless of age all pregnant women be offered combined first and second trimester screening. Through a license with Intema Limited, we have now made these recommended screening tests available. This will allow physicians to offer patients a broader range of tests for Down Syndrome and maternal screening with higher detection rates and fewer false positives than current screening options. The third component of our strategic plan is our customer focus culture. We recognize that we are here to serve doctors and patients. Our goal is to make sure that all of our valued front-line people use every tool available to serve our clients and their patients. We continue to invest in programs that will make LabCorp easier to work with and more customer-friendly, so that we can continue to enhance the experience of doing business with LabCorp.

Now I would like to update our guidance for 2007 and give preliminary guidance for 2008. Excluding the impact of any share repurchase activity after September 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 12.7% to 13.2%, EBITDA margins of approximately 26.0% to 26.5% of revenues, diluted earnings per share in the range of $4.11 to $4.18, 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 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 2008, our preliminary guidance is as follows: compared to 2007, LabCorp expects 2008 revenue growth between 6.5% and 8.5%, and diluted earnings per share of growth over 2007 in the range of 11% to 14%. We expect to achieve this revenue and EPS growth through the following initiatives: increasing revenues to organic growth and further shifts in our test mix, particularly in our esoteric and genomic business, which generate higher profits than the core business, realization of the $60 million in annual cost reductions that I mentioned earlier, and contributions from acquisitions made in 2007, and expected acquisitions in 2008. We expect to provide more definitive guidance for 2008 after we complete our internal budgeting process for next year. Now, Brad Smith will review anticipated questions and our specific answers to those questions.

Thank you, Dave. Can you update us on the mix of your business coming from esoteric testing? At the end of September, approximately 34% of our revenues were in the genomic, esoteric and anatomic pathology categories. As we have mentioned in previous conference calls our goal over the next few years is to increase our's esoteric test mix to approximately 40% of LabCorp's revenues. Our ability to increase the percentage depends on factors such as: continued adoption of existing esoteric tests, development and acceptance of new esoteric tests, acquisition and licensing opportunities in the mix of our new business.

Can you update us on your progress in image-guided pap and HPV? Adoption of the TriPath SurePath system and Cytyc ThinPrep Imaging System by our physician clients continues to increase. By the end of the third quarter, image-guided pap screening was being requested for approximately 56% of all liquid-based pap smear orders. We continue to experience growth in primary screening HPV testing. During the third quarter of 2007, HPV testing increased approximately 41% versus the third 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 acquisitions and licensing agreements, and second, through continuing our approved share repurchase program. The acquisition market remains attractive, especially in light of recent market credit corrections with a number of opportunities to strengthen our scientific capabilities, grow our esoteric testing franchise and increase our presence in key geographic areas. As you know, we closed on the DSI acquisition during the third quarter along with other smaller acquisitions. Additionally, our planned acquisition of PA Labs has passed HSR and should close by the end of this month. As Brad mentioned earlier, LabCorp repurchased $520.8 million of common stock during the first nine months of 2007. At the end of the quarter, $329.2 million remains under our approved share repurchase authorization. Our activity during the first nine months of the year proves what we have always said, we will be opportunistic when it comes to our share repurchasing.

What does the FDA's letter to EXACT Sciences mean to LabCorp and the relationship with EXACT? At this time it's too early to know what the FDA warning letter that EXACT Sciences received will mean to us. I can state that our interest in the PreGen-Plus tests remain aligned with EXACT, and that we are still offering the test. Can you update us on your negotiations with Humana? As you know Humana is the only national plan still in the contracting process, and we are working to remain contracted with them. Additionally, there are no major regional plans due for recontracting in the near future.

How will the new proposed accounting position on convertible debt affect your currently lines or EPS guidance? As you know, the [FAS B] issued a draft position relating proposed changes to the accounting of convertible securities. This staff position is still in draft, and the FAS B is currently evaluating comments from the financial community. However, based on our review of the requirements of the current draft, we believe that if enacted as written, the proposed FSP would not have any impact on our 2007 or 2008 interest expense or EPS, but would result in a restatement of interest expense in periods prior to 2007. Please note the changes to historical interest expense proposed by this new accounting standard are all noncash.

What is the status of the Medicare competitive bidding demonstration project? CMS recently announced at the San Diego Carlsbad San Marcos California Metropolitan statistical area will be the first of two sites for the Medicare competitive bidding demonstration project. While CMS appears to be determined to move forward with the ill-conceived project, the clinical laboratory community has been making significant progress in its efforts to stop the demonstration legislatively. Bills with bipartisan support have been introduced in the house and senate to repeal the requirement that CMS conduct this demonstration. The entire clinical laboratory community remains united in strong opposition to this demonstration, and we will continue to work together toward a legislative appeal.

Can you comment on efforts to regulate laboratory developed tests? In July, the FDA issued for public comment a revised draft of its guidance on invitro diagnostic multi-variant index assays in which it sought to further narrow and clarify the definition of IVDMIAs and how regulation would apply to such assays. The FDA noted it would exercise enforcement discretion for all requirements for currently marketed IVDMIAs for 12 months following publication of the final guidance and for an additional six months for IVDMIAs for which a 10K or pre-market application had been submitted during the initial 12 month period. We submitted comments to the American Clinical Laboratory Association urging the FDA to engage in a more interactive dialogue with the laboratory community, proceed under formal rule-making procedures, further clarify the definition of IVDMIAs, and provide further guidance on the application of quality systems regulations labeling an adverse event reporting requirements in the IVDMIA context. The FDA is now reviewing public comments on the IVDMIA guidance. We have no reason to believe at this time that this guidance will material -- materially impact our operations. Now I'd like to turn the call back over to Dave.

Thank you, Brad. In summary we have had a very good quarter and nine months. Thank you very much for listening. Dan, we are now ready to answer any questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Robert Willoughby from Banc of America. Please proceed.

Dave, I guess I'm not quite sure in the enthusiasm that you have on the quarter as well as the guidance for the year. I -- just looking at that guidance that you brought down the high end of the ranges here, I guess it assumes something has surprised you here relative to the prior expectations, and I guess I -- you knew what United was, you what Cigna pricing was. What really was the reason to bring the high end of the guidance range down for '07?

Bob, I think the primary reason is the uncertainty of what is going to happen with fourth quarter revenue. We obviously have spent a significant amount of time this quarter and will continue to spend a significant amount of time going forward looking at the expense base, but we have -- when we originally issued the guidances, you'll remember, we anticipated that United revenue would ramp very significantly through the third and fourth quarter. And instead what we experienced is that we got a lot of it in the first quarter and second and that the United revenue largely -- has largely flattened out. In addition, the loss of the Aetna contract, the shifting of a couple of regional-managed care contracts just creates some uncertainty around top line revenue, and we think the responsible thing to do is recognize and adjust our guidance appropriately.

Does the guidance for this year or '08 reflect the PA acquisition or anything else that you may do?

The guidance for the balance of this year does reflect the impact of PA, which actually is scheduled to close at the beginning of November. As to anything else we may do, no, the guidance doesn't reflect anything other than the typical small acquisitions that we'll do from time to time.

And anything in the way of share repurchases in that '08 expectation?

There's nothing in the guidance in terms of share repurchases, but as we have repeatedly said, we will be opportunistic in share repurchase, and I think we've demonstrated that over the course of this year.

All right. Thank you.

Your next question comes from the line of Ricky Goldwasser from UBS. Please proceed.

Good morning. Thank you. It's Ricky Goldwasser.

Good morning, Ricky. We knew that.

I'm glad. Just some questions on the cost-cutting initiative. Where should we take that when you talk about $25 million in '07 and $60 million in '08, is it all coming from the SG&A line, or should we -- should it be a combination of cost and sales and SG&A, because obviously in the quarter, you brought SG&A down significantly. And then if you can just talk more about the areas of cost cutting. Are they related to aligning the infrastructure to line up with what your expectations are for United going forward versus what they were earlier in the year, or does this also include cost-cutting opportunities in areas that are not related to United?

Well, start with the first part of the question, and Brad Hayes may have some additional color on this. Obviously, the SG&A line has been the primary focus, and as I said, the focus of the expense reduction was in nonoperational areas. So we did go hard at the SG&A line as well as looking at excess capacity and redundant facilities given the changes in the market. In terms of going forward, what we have to do is we, have to look at what we think the capacity requirements are going to be given, what we think the volumes are going to be, and we have to continue to rationalize the cost structure given what we believe the volumes to be. So for example, in the Louisville laboratory -- in the downsizing of the Louisville laboratory, we believe that we have sufficient capacity in our central division, particularly with the addition of PA labs to handle volume without the need for a full-service three-shift laboratory in Louisville, and that's the kind of cost rationalization that we're -- that we will continue to undertake. I -- it's not specifically related to United or not related to United, Ricky. It's more related to what we think the overall volumes are going to be in the business, and what is the capacity we will need to handle the volumes, and what is the level of nonoperational SG&A support that we're going to need to manage the business.

Now, a follow-up question on the volumes. Do you think that what you're seeing is just slowdown in industry volumes overall, or is it just more specific to contracts shifting hands?

I think it's partly contract shifting hands, but I think, in the third quarter of this year, there was an overall slowdown in volume. In the months of July and August, even adjusting for seasonality, were very slow compared to what we typically see. And, obviously, we have data going back for many years on what happens during the summer time, and this July and this August were just, from a volume standpoint, even below what we typically adjust for. So I think some of it is absolutely related to overall industry volumes, and some of it is related to the shifting of these regional-managed care contracts and the shift of the Aetna contract.

And obviously you -- we are now kind of at the end of October, so you have, at least like a month worth now of the fourth quarter. Are you seeing volumes -- industry volumes going back to more historical levels?

Well, I'm -- I don't think it's probably appropriate to comment on where we are in the fourth quarter. Now the month of September was a very strong month, and so we saw September going back to where we typically expect September to be, and even a little better. And that -- again, it's just hard to know in the summer, was it hot weather? Was it flooding? Was it few people -- fewer people going to the doctor? Was there something that affected the overall industry? And I wish we had better -- I wish we had the ability to have better analytics around that. Just we tried to look at it in a number of ways and not figure out anything in particular that would cause the volume decreases in July and August. But as I say, September returned to much more of what we think of as being the norm.

Thank you.

Your next question comes from the line of Adam Feinstein from Lehman Brothers. Please proceed.

Okay. Thank you. Good morning, everyone.

Good morning, Adam.

Good morning. Several questions here. I guess maybe just a start. In prior quarters you've given some feel for how much UNH contributed in the other quarter. Are there any metrics you can give, I know Dave had said it had flatlined, but any specific details that so that we could know what the impact was end of quarter?

I think we said in this quarter that total revenue growth -- I'm just going back here, Adam.

Adam, this is Brad. It was 12.2% in the quarter and 6.8 percentage points due to United.

Okay. Okay. And -- so, Dave, to your point earlier, you were just saying that in the fourth quarter of 2006, you got a bigger impact relative to what you would have thought, so some of the slowdown that you're forecasting in the fourth quarter is just a function -- you just paid off the business earlier. I mean, is that accurate? I just wanted to make sure --

That's absolutely right. We picked up -- as you remember going back to the fourth quarter of 2006, we picked up United business ahead of the contract and also from a top-line revenue standpoint, remember, that was at the prior pricing. So that's going to annualize in the fourth quarter of this year and that will account for part of the slowdown.

Okay. And then just -- and that totally makes sense, and would understand why there would be the impact there. But just, as we think about the margins, the margin lines for the fourth quarter is lower, and obviously, that would have an impact, but you talked some about the cost savings earlier, so -- and just as you were talking about on an annualized basis about $60 million, but you mentioned the Louisville site as well. Is that incorporated in the $60 million in annualized benefit from that?

No, it's not.

It's not included. Okay. So -- but the $25 million or so will benefit the fourth quarter?

Yes.

Okay. All right. And then just -- I guess, as we think about, you said there's some negative impact from the Cigna pricing, and just wanted to just make sure I was following you there. I mean, was the impact more severe than what you would have thought, and then I guess did you benefit on the volume line from the Cigna business, just anything that you can give us there?

I think the impact was probably about what we thought it was going to be, and I think we benefited a little bit on the volume line from additional Cigna business, but not -- not materially.

Okay. Okay. And just a final question. Just you guys break out your mix, and I guess it's the managed care fee for service side down about 8.7% versus the 7% in the second quarter. I guess I just wanted to get some more color there. I know that managed care capitated piece accelerated slightly from the second, but just on the fee for service side, what would have been the key drivers there? Was that all a function of just having Cigna now in on the mix, or were there other things?

Yes. I think having Cigna in on the mix and -- is probably the primary mover there, and that's the -- and that's going to -- the Cigna reduction will be the major driver, where you're going to see -- there's going to be some impact, obviously, as we continue to gain small incremental amounts of United volume. That will have an impact on pricing. But what you're seeing this quarter is most of the impact of the Cigna reduction.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Kemp Dolliver from Cowen & Company. Please proceed.

Hi. Thanks, and good morning. First, you didn't mention any change in your estimate for the potential liability to United. So I'm assuming that's unchanged?

We continue to look at the potential exposure to United, but we haven't materially changed our view of that, and we'll look at it again at the end of -- at the end of the year.

Okay. Secondly, Dave, your comments about July and August, I'm trying to reconcile with what you all have given for revenue guidance in '08, because your -- I think your '08 guidance somewhat implies continued industry growth in line with historical patterns. So my question is, is there something in that guidance that takes that -- is that a correct interpretation of how you've put together the '08 guidance, or have you built in some caution regarding volumes?

No. Kemp, we're thinking about it from the standpoint of what is historical industry growth and our ability to better historical industry growth for a variety of factors that we've talked about before. The comment on July and August was mostly directed toward questions about why this quarter top line revenue was not what the consensus with, and again, we just -- we saw a drop-off in July and August. We don't -- we don't have convincing data that shows why we had a drop-off in July and August. We know, next summer, that we'll see volume reductions during the summer, but what we think about for the full year continues to be that we'll grow slightly above the historic industry growth rate.

Okay. And last question is, you mentioned your budgeting process and then giving more definitive guidance. Any -- what are your plans with regard to timing and then also just the format for communicating anything more definitive?

Historically, we've given more definitive guidance on our first quarter call, and that's when we would expect to do it this year.

That's great. Thank you.

Thank you.

Your next question comes from the line of Ralph Giacobbe from Credit Suisse. Please proceed.

Hi. Thanks. Can we talk more about the assumptions for '08? And what I'm getting at is are you considering greater pull-through from UNH or are you considering steady state at this point? Additionally is the Cigna expansion with the marketing expansion considered in what you put out for sort of those -- that '08 number?

The ability to market with Cigna in those markets where we historically have been restricted is certainly considered in the '08 guidance, and some additional pull-through from United is considered in the '08 guidance as well. Along with the historical industry growth rate and the expectation that we'll -- that we have seen both the settling out of pricing and the settling out of the shifting around of some of these regional plans that has occurred in the last two quarters.

Okay. That's fair. And then when we do think about United, there's obviously the sort of ex Quest piece of the pie. Could you also maybe talk about the opportunity outside of Quest and taking share from the smaller regional groups? It's our understanding that UNH may be coming in and sort of undercutting some of the smaller guys even more as their contracts come up for renewal. So just wondering what the opportunity is there to gain market share sort of in the ex-Quest bucket.

Okay. Well, first let me say what United does with other laboratories is not something that we are really privy to. We know about it what we read, just like everybody else does. But in terms of the opportunity, ex Quest, I think certainly in some of the major metro markets like New York and New Jersey, there are other regional competitors that have benefited dramatically from the change that United has made, and I think the opportunity to win that business still continues to be promising. In terms of -- in terms of connectivity, in terms of test menu, in terms of turnaround times, I don't think the regional labs, over the long term, are going to be able to match our level of service -- our test menu, the electronic connectivity products that we offer, the access point. So I think that absolutely there's the opportunity to win business from the smaller regional players as the contract matures. I do want to comment again, because so much of this revenue came in in the fourth quarter of last year and the first quarter of this year, this is a 10-year contract with a lot of opportunity for us as we go forward, and both the pull-through and the ability to win business from other providers is very -- is very exciting to us.

Okay. Thanks. And just real quick on the -- in terms of the balance sheet, can you talk about your sort of appetite for potentially levering up the balance sheet and doing something more drastic, whether that be on the acquisition front or in terms of share repurchase, something bigger-scale?

Well, again I'll make a couple of preliminary comments and then if Brad Hayes has anything, he can add to it. We got a lot of questions over the past six months about shouldn't we really lever up the balance sheet and do something big, and I think where we are today given what's happened in the credit markets, we're very happy that we didn't lever up the balance sheet. I think our balance sheet is very attractive right now. So we like to keep the balance sheet -- we like to give ourselves the opportunity on the balance sheet to be able to lever up if we need to do something big or decide to do something big, but levering up just for the sake of getting more leverage is not something that has ever historically been attractive to us and doesn't look attractive at this point. Brad, if you have any further observations.

Well, I don't know about anything drastic. Again we've been consistent in saying we want to keep our investment grade credit rating, but certainly we have the room the do something further. So as Dave mentioned, for the right opportunity, I think we have the flexibility to add some leverage.

Great. Thanks.

Your next question comes from the line of Tom Gallucci from Merrill Lynch. Please proceed.

Good morning. Thanks for the information. I just had a few follow-up, more from a macro perspective. I think you sort of alluded to some macro factors that were pressuring price just in the health care industry in general. I was wondering, first, if you could expand on any other factors that you think might be affecting pricing within your industry. And how have you factored pricing into your '08 expectations?

I'll answer the second question first, Tom. In terms of our expectations for '08, as I mentioned, I think we feel that the pricing reset has pretty much occurred and that we've largely recontracted. This was a year in which basically all of the major -- well, not all, but a significant number of the major payers were up for recontracting, and we have recontracted with them or not recontracted in the case of Aetna. So we think the pricing reset has largely occurred, and we don't foresee significant price changes in what we look at for 2008. In terms of the macro factors, I mean, the -- I think -- just talk policy here for a second, I think there's a couple of realizations that people are coming to in health care. One is we're spending 16% of GDP on health care now, and there's certainly a very large school of thought that says that we're not getting particularly good outcomes for what we're spending.

The second thing is, and something I've been paying more attention to as an employer of 26,000 some people, is at the rate of premium increases we're seeing versus the rate of wage increase we're talking about within the next eight to 10 years, we're talking about the cost of benefits for employers being greater than salaries and wages, because benefits -- premium increase of 11% to 12% a year is doubling every seven years, and wages at 3% to 3.5% is doubling in [24] years. So I just think, from a policy standpoint -- now the answer that everybody is giving is, well, we have to cut reimbursement. We have to cut spending. We have to cut payment. And just if you want validation of what I'm saying, just go out and Google reimbursement reductions in health care, and you'll find 15 or 20 different groups of health care providers who have seen dramatic reimbursement reductions over the last several years. And I don't personally think that just cutting reimbursement is the right answer. I think the payment -- the problem with -- the right answer over time is to -- is to pay for appropriate course of treatment rather than episodic treatment and for better outcomes. And that's why I go back to our Litholink program as an example of how we can add value to the equation. But I just think the macro pressure is we can't afford to continue to spend on health care the way we're spending. And the easiest way to address that is to say we have to cut the way we're paying people.

Okay. And you were saying I guess some of your sort of bigger payers were sort of reset in 2007, but you also mentioned in your remarks some of the regional payers, we saw some turnover there from one lab to another. What do you think triggered that sort of turnover? And I think you said you sort of -- more visibility next year. So what kind of visibility do we have on that?

Well, we've recontracted, again, or not recontracted with most of our -- most of the major regional managed care plans in the 2006-2007 cycle. I think the principal reason for the shifts in regional plans that we saw in the last quarter largely were driven by price, and we obviously evaluate pricing every time we look at a -- at a proposed relationship to see whether we think it makes sense for us.

Okay. Thanks from the color.

Your next question comes from the line of Bill Bonello from Wachovia. Please proceed.

Good morning. A couple of questions. Just back on the guidance question. Just the implicit EPS guidance range for Q4 is pretty wide, and I'm just trying to get a sense of what would cause you to fall to one end of the range or the other, and why there's that much uncertainty at this point in the quarter.

Well, I don't think it's any wider than -- than our competitors' guidance, and I think the principal reason is, as I mentioned, that we have seen, in the last couple months, some changes in the couple of regional plans. And we also, although I think we've done a terrific job retaining Aetna business, we also have the continued uncertainty around how much of that Aetna that business are we going to retain going forward. So those are the principal reasons why the revenue range is less clear to us than one would normally expect it to be at this point in the year.

Okay. That makes a lot of sense. And then, just on the -- given your comments on UNH, is there any change to your long-term estimate of how much revenue you're going to generate? I think back when you announced the contract, you said -- you gave sort of an amount that you could generate over a 10-year time period. And just based on your experience thus far, does that still hold?

Yes, it does.

Okay. And then just a question on the specifics of the pricing. It looked like the price was down for the genomic and the esoteric testing. And I'm just curious receive that price decline is a function more of test mix, or to the extent that you've seen actual price pressure, is it more concentrated in certain types of tests?

Bill, this is Brad. I think it's mostly back to Dave's comment of overall pricing in the third quarter, specifically related to Cigna. And always we're fighting, as you called out, the kind of mix within mix, back to one of Brad Smith's comments about the growth of, for example, HPV which is a test that's lower than that category average, but continues to grow faster than the bucket in total. I think those two things in combination, when I analyzed the observations that you have, are what I came to.

Okay. That makes sense. So to the extent, though, that there's price pressure, I assume that's more kind of across the board as opposed to concentrated on specific tests?

Yes.

Okay. That makes a lot of sense. And just finally, I'm a little confused. I might not have understood your answer to Adam. Did you say that the $60 million of cost savings is not in the guidance for '08?

No, the $60 million for cost savings is in the guidance. The closure of the Louisville -- the downsizing of the Louisville laboratory is not in the $60 million.

It's not.

Right.

Okay. So that would be above and beyond that. And I don't suppose you want to take a stab on how much that can save you.

I do not want to take a stab.

Thanks a lot.

Thank you.

Your next question comes from the line of Arthur Henderson from Jefferies & Company. Please proceed.

Thanks. Dave, the $60 million, just coming off of Bill's question, it seems like that's kind of low hanging fruit. Is there more opportunity out there on the cost savings that you might not be talking about right now, but you can tap into?

There is definitely more on the opportunity of the cost savings, and we will be looking at it to make sure that we do tap into it.

Okay. Fair enough. And then going back to your comments on the acquisition market out there. Obviously, with the credit markets changing, are you seeing more people on the sideline now? Is it giving you a better opportunity to look at some things, at some reasonable prices that you haven't been able to look at before? And I'm wondering also what's really interesting to you from an acquisition perspective.

I think -- I think we're seeing -- I think some people have moved to the sidelines. I think multiples are still a little higher than they were 18 months ago, but they're starting to -- they're starting to come back to earth. And so I think, going back to the request about the balance sheet, that's part of what makes this attractive to us, is that we have the room in our balance sheet to do some things that might be attractive from an acquisition standpoint. What looks attractive to us continues to be strategic acquisitions where we can build out infrastructure where we have not had strong infrastructure previously, such as PA Labs in Indiana and such as the DSI opportunity because of that Naples market in Florida. And then also opportunities that are going to -- that are going to enhance our esoteric and genomic and anatomic and pathology franchises. And we continue to look at opportunities that we think are attractive.

Okay. That makes sense. Now just going back on the United, I remember last quarter, you talked about possibly not having to incur as much transition expense as you had originally thought. Am I clear -- did I hear correctly that you still feel comfortable saying that you could come in less than that $200 million?

Yes. We feel very comfortable saying that we could come in at less than $200 million. And I think, if you just look at for the first six months of the year with basically the vast majority of all June claims experience having been encountered, I think we're at 27.4%. So we said all along that we felt that the vast majority of the leakage was going to come in the first 12 to 18 month, and to be at six months and be at 27.4%, we're very, very pleased with that.

Okay. Okay. Makes sense. And then last question. I'll jump back in the queue. I know Ralph had talked a little bit about leakage and things of that nature related to the United volumes. I'm curious, have you had any discussions with United about strategies that you could employ to maybe pull that volume over quicker, or in a sort of rejuvenated way and then maybe the success that you had earlier this year, obviously, was surprising and great, but I'm just wondering if there's anything you feel you could do better out in the field that maybe you talked to United about driving those volumes over?

We've obviously talked to United about the opportunity to -- about what we see as the opportunity to get additional volumes, and, obviously, for competitive reasons, I'm not going to talk about specifics. One thing that I think clearly assists us in gaining additional volume is just the use of electronic communications devices and making it more convenient for physicians to order and receive test results. So that's something that we are -- I think that's a LabCorp initiative, but that's something that we absolutely are going to be out there doing to show physicians the convenience of our web-based product, the convenience of our stand-alone product to assist them in ordering their tests, getting the results back, dropping them right into their EMRs or practice systems, and making the lab experience easier and more customer-friendly.

Okay. That's helpful. Thanks, Dave.

Thank you.

Your next question comes from the line of Bill Bonello as a follow-up question from Wachovia. Please proceed.

Oh. Hey. Yes. I just want to make sure for modeling purposes to clarify on your comments about contracting. So does the fact that you've negotiated most of your big national and regional contracts already, does that mean that the -- whatever price impact there would have been was pretty much reflected in this quarter's results, or are there any contracts where you've negotiated a price hit that you know that it's there, but it hasn't taken effect yet?

Based on what we have concluded the negotiations of, I would say you've pretty much seen the price impact in this quarter.

Okay. Perfect. Thank you.

Your next question is a follow-up from Ricky Goldwasser from UBS. Please proceed.

Yes. Hi. Just one follow-up question. Regarding the cost savings of $25 million '07, is that all in the fourth quarter, or does that $25 million include already what you have seen in the fourth quarter, and if so how much did you realize in the third quarter?

It's $10 million in the first quarter and $15 million in the fourth, Ricky, assuming we don't do anything else, and I guess, also, not including any impact of the Louisville downsizing.

Right. So the $50 million '08, is that based on the $50 million run rate?

Yes.

Thank you.

Your next question is a follow-up from the line of Tom Gallucci from Merrill Lynch. Please proceed.

Thanks. Just a quick follow-up to, I think, it was just Kemp's question a second ago. When you do have those multi-year deals, I understand the hit now is in the numbers because they've been enacted, but when you have got a multi-year deal, what sort of rates do you have each successive year? Is it flat? Is it an increase? Is it a decrease? Or how do you think about that longer term, as again we're thinking about the modeling in the long run?

I think of it as it's a very important contracting point for us to receive price increases over the term of contracts, because the reality is that our labor expense, our rental expense, our auto and gas expense -- I mean, all of our expenses continue to increase. And so getting top-line price increases is a very fundamental part of our contract negotiations.

Okay. Thank you.

At this time, there are no further questions in the queue. I would now like to turn the call back over to Mr. David King, Chief Executive Officer. Please proceed.

Again, thank you very much for listening to our call this morning, and we hope you have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.