Labcorp Holdings Inc (LH) 2009 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2009 Laboratory Corporation of America earnings conference call. My name is Francine and I will be your coordinator for today. At this time all participants are in a listen-only mode. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. David King, Chief Executive Officer. Please proceed, sir.

Thank you Francine, good morning and welcome to LabCorp's 2009 first quarter conference call. Joining me today from LabCorp are Brad Hayes, Executive Vice President and Chief Financial Officer; Ed Dodson, Senior Vice President and Chief Accounting Officer; and Bill Bonello, Senior Vice President, Investor Relations. This morning we will discuss our first quarter results, highlight our strategic priorities and growth drivers and provide answers to several frequently asked questions. I'd now like to turn the call over to Bill Bonello, 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 today's press release for replay information. This morning the company will be filing a Form 8KA which includes additional information on our business and operations. This document supersedes the 8K previously filed this morning correcting an error in the specialty mix table on page eight. This information is also -- or will also be available on our website. Analysts and investors are directed to this 8KA and our website to review this supplemental information.

Additionally, we refer you to today's press release which is available on our website for a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. 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 2008 10K and subsequent filings. The company has no obligation to provide any updates to these forward-looking statements even if our expectations change. Now, Brad Hayes will review our financial results.

Thank you Bill. By now you should have had a chance to review our first quarter financial results. On today's call I will discuss four key measures of our financial performance, cash flow, revenue growth, margin and liquidity. First, cash flow. Our cash flow trends remain excellent. Free cash flow for the trailing 12 months ended March 31, 2009 increased 18.4% to $663.9 million. For 2009, we continue to expect operating cash flow excluding any transition payments made to UnitedHealthcare to be approximately $800 million. The operating cash flow guidance includes a $54.8 million reduction from the pension contributions. We continue to expect capital expenditures to be approximately $130 million. We are also pleased with our strong cash collection efforts in the quarter. DSO at the end of March was 52 days. Our bad debt rate was stable at 5.3%.

Second, revenue growth. During the quarter we achieved strong volume growth and continued mix shift to higher value test. Revenue increased 4.8% year-over-year in the first quarter. Total company volume increased 3.9% year-over-year despite a 20.1% year-over-year decline in the drugs of abuse testing business. Excluding the consolidation of the company's Ontario Canada joint venture volume increased 2.6% year-over-year with a drag of 160 basis points from the decline in drugs of abuse testing. Volume growth remained strong in esoteric testing where volume increased 9% year-over-year. Revenue per accession increased 0.8% year-over-year. Excluding the consolidation of the company's Ontario Canada joint venture, revenue per accession increased 3.2% year-over-year. The growth in revenue per accession is attributable to both mix shift and rate increases. Our 2009 guidance for revenue growth remains 2% to 4%. We continue to expect that 2009 could be a challenging year for volume growth given the economic environment. We believe that the job losses that occurred in late 2008 and early 2009 could have a more pronounce impact on volume and collections as these patients lose employer provided insurance coverage. On the other hand, our pricing outlook remains positive. We are pleased to have received price increases from both Medicare and several large managed care payors in 2009. Finally, I would remind everyone that Easter fell in the first quarter in 2008 and in the second quarter in 2009. That timing helped our year-over-year volume growth during the first quarter of 2009 and will reduce our volume growth in the second quarter.

Third, margin. For the first quarter, our operating income margin was 20.8%. Operating income margin declined approximately 100 basis points year-over-year due to increases in bad debt, pension expense and the impact of foreign exchange. In addition, due to the economic environment, we made the decision to hold the employee share of healthcare costs flat which increased the cost of employee benefits to the company. Excluding those items, margin would have been flat year-over-year. Given these factors we continue to expect that 2009 could be a difficult year for margin expansion. Nevertheless, we continue to lead the industry in operating income margin. We are focused on increasing automation and efficiency in our labs which should enable greater margin expansion in the years to come.

Fourth, liquidity. We remain well capitalized. At the end of March the company had cash of $373.2 million and approximately $300 million available under its revolving line of credit. At the end of March total debt was $1.7 billion including $70.8 million drawn on our revolving credit facility. I will now turn the call over to Dave.

Thank you, Brad. We are very pleased with the first quarter results especially our continued strong volume growth and cash flow. However, as Brad noted we remain conscious about volume growth and collections for the balance of this year. I would like to highlight some of the initiatives that we are pursuing to drive growth in 2009 and beyond. As we discussed in our fourth quarter conference call, our most important priorities for this year is to gain new customers, maintain pricing and control costs. Furthermore, we see opportunities to accelerate revenue growth through continued leadership and personalized medicine. So, we will remain focused on growing our esoteric testing platform, expanding our outcome improvement programs and developing and commercializing companion diagnostics. We are also optimistic about our ability to reduce fixed costs through facility rationalization and introducing robotics to (inaudible) front end solutions.

Let me discuss what we are doing to gain new customers, maintain pricing and control costs. On the volume front, we are continuing our efforts to target specialty physicians whose referral patterns may be less sensitive to the economy. Our ability to grow esoteric volume by 9% in the first quarter is a testament to this success of this strategy. On the pricing front we've received scheduled rate increases from both Medicare and large commercial payors. Price integrity is a top priority and we continue to review our pricing structure to ensure that we are being paid appropriately for more complex and higher value tests. On the cost front, we are working aggressively to reduce expenses without compromising quality or growth. For instance during the past quarter, we continued to generate supply cost savings by consolidating vendors for selected supplies and services. We continue to keep a tight lid on discretionary expenses such as consulting and travel. All of these efforts will be balanced against the spending that is necessary to accommodate our continued volume growth.

I would also like to spend a few minutes discussing some of the initiatives that we are pursuing to lay the foundation for future revenue growth and margin expansion. On the revenue front, our objective is to continue to be be the leading provider of personalized diagnostic medicine. We have three strategies that will move us towards that goal. Continued growth in esoteric testing, expansion of outcome improvement programs, and development and commercialization of companion diagnostics. Our goal is to increase esoteric testing to 40% of our revenue in the next three to five years. We will achieve this goal by continuing to introduce new esoteric tests, to respond to scientific discoveries, to improve patient care and outcomes and to satisfy unmet medical needs. We will also advance out important collaborations with academic institutions such as Duke University and Yale University to help us in identifying and commercializing new and innovative tests.

During the first quarter LabCorp became the first national clinical laboratory to offer HCV/PCR testing using a newly FDA approved assay, the the Roche COBAS AmpliPrep/COBAS TaqMan HCV Test. This assay is intended to be used as an aid in managing HCV infected individuals undergoing antiviral therapy. Also during the quarter LabCorp signed an collaboration agreement with Duke University related to LabCorp state-of-the-art biorepository in Kannapolis, North Carolina. The collaboration agreement focuses on the operation of the facility as well as the management of samples deposited by Duke University and its clients and collaborators. In terms of outcome improvement, during the quarter we introduced our unique outcome improvement for chronic kidney disease in several key markets and we will continue to roll the program out nationally throughout the year. We are in the process of developing additional programs for other chronic diseases and our goal is to introduce at least one such program each year. During the quarter we also made progress in development and commercialization of companion diagnostics. For instance, LabCorp was recently selected by UnitedHealthcare as one of just two clinical laboratories with whom UnitedHealthcare has contracted to perform KRAS testing to help guide therapy for colorectal cancer. Effective April 1, 2009, UnitedHealthcare began to require the submission of a pathology report documenting KRAS gene type to determine coverage for Erbitux and [Vectovix]. During the quarter we began to offer a companion diagnostic test for Plavix. Our test determines patients who are poor metabolizers of the most common CYP2C19 alleles, which is useful in determining risk for adverse cardiovascular events. On the margin front over time we believe there is opportunity to reduce our fixed cost base through automation and capacity rationalization. During the quarter we implemented proprietary robotics to automate front end processing for HPV testing in our largest lab. We will continue to roll out HPV robotics nationally throughout the year. This automation will result in savings from labor, more efficient use of reagents and test site consolidation. We are also in the process of developing robotics to automate other pre-analytical processes. In summary, we remain very excited about the growth opportunities that lie ahead and continue to believe that we are well positioned to capitalize on it. Now, Bill Bonello 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? In the first question approximately 35% of our revenues were in the genomic esoteric and anatomic pathology categories. Our goal over the next three to five years is to increase our esoteric test mix to approximately 40% of revenue.

What are your plans for uses of free cash flow during 2009? 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. However, given the economic environment, we may choose to retain a higher than normal cash balance throughout the year. The acquisition market remains attractive with a number of opportunities to strengthen our scientific capabilities, grow our esoteric testing franchise and increase our presence in key geographic areas. Historically we have been a consistent buyer of our own shares. Over the past three years, the company has repurchased $1.7 billion worth of stock. Approximately $95.4 million of repurchase authorization remained under our approved share repurchase plan at the end of the quarter.

Can you remind us of how drugs of abuse trended during the year? In the quarter, our drugs of abuse volume declined 20.1% year-over-year. This compares to a decline of 15.9% in the fourth quarter of 2008, 10.3% in the third quarter, 7.9% in the second quarter, and 4.4% in the first quarter of 2008.

What is the status of your transition payments to UnitedHealthcare? In the quarter the company was billed $5.5 million in transition payments and paid $5.5 million in transition payments. To date, LabCorp has been billed a total of $80.1 million and paid $79.9 million in transition payments to UnitedHealthcare.

Can you give us an update on the status of your managed care contracts? We have no national contracts up for renewal in 2009. Now, I'd like to turn the call back over to Dave.

Thank you Bill. In summary, we are pleased with our robust top-line growth in this challenging environment. We will work aggressively to gain new customers, maintain price and manage costs. Looking forward, we see great opportunities to accelerate revenue growth through continued leadership in personalized medicine. Thank you very much for listening. We are now ready to take your questions.

Thank you. (Operator Instructions) Our first question comes from the line of Ralph Giacobbe of Credit Suisse. Please proceed.

Great. Thanks. Good morning.

Good morning.

Good morning.

Just a couple of things here. One, I don't know if I missed it, did you guys give an impact for sort of one less day due to the leap year?

Ralph, it's Dave. The number of business days in the quarter from the the first quarter of this year and the first quarter of last year was the same. Because of the way the calendar fell -- the one --

The Easter shift?

Well no, the one fewer day from leap year will actually be seen in the third quarter of this year and we talked about it a good bit last year, but it's just the way that the calendar falls. That's where the extra revenue day fell.

Okay. And then I guess staying on volume, just given the kind of tough comp in sort of the first quarter just around drugs of abuse testing, I would think that comp should ease as we move through the year. Is that not the way to look at it or how should we think about that?

I think you are correct, that the comp will start to annualize because as Bill pointed out, it was -- it was a 7% decline in the second quarter of 2008 versus '07. So, we are starting off a lower base. The only caution I would give there is we saw 15.9% in the fourth quarter and then it was 20% in the first quarter and that was off a reduced base from the first quarter of 2008. So, it's hard to predict when we would see the absolute bottom of it but I agree with you that it will moderate over time because of the way that the volumes declined last year.

Okay . And then just on the pricing side on the organic sort of 3.2% growth and I think it sort of matched the fourth quarter, but this quarter sort of we saw the Medicare price bump come in so I would have thought maybe a little bit higher. Is there anything we should be thinking about in that line item, whether it's adverse mix shift or something on the pricing side that's a reason why we didn't see that sort of tick

Hello, Ralph, this is Brad. I think if you look payor by payor in our 8K, you will see it up where you would expect it to be up. It's hard to deny that the patient -- the decline in patient volume has a negative impact on the total pricing dynamic in terms of payor mix shift.

Okay. And then just the -- just the last thing. I just wanted to go back to sort of the kind of cost initiatives. You know, I know you said sort of a tough margin expansion sort of year or more challenging. I just want to go back to LabCorp 2010 and just understand sort of the time frame, I know its a sort of longer term strategy, kind of more of a kind of three year plan but it was supposed to start sort of in this year and I know we're not -- probably not going to get the benefits from bad debt that you initially thought but is there anyway we should think about the ramp of sort of when the initiatives start taking hold? Is it, you know second half of this year and I'm assuming you know the net $100 million of savings is still sort of the targeted goal for sort of the longer term period.

Yes, the $100 million in savings is still the targeted goal for the longer term period. As you noted Ralph, and as we've noted, some of that comes from reduction of bad debt over time. So, we do expect to see reduction of bad debt over time based on the number of the initiatives we're pursuing but being realistic, we'll be very happy to hold bad debt stable for the rest of this year just given what we see going on in the environment around us. We will start to see the impact of a number of the 2010 initiatives in the second half of the year, and then probably picking up in the fourth quarter. That is all incorporated into the guidance that we've given. So, you know, I think as we get out into the third and fourth quarter, you would see improvements in margin from 2010, but not necessarily anything that would cause the guidance to be different.

Okay. Thank you.

Thank you.

Our next question comes from the line of Jason Gurda of Leerink Swann, please proceed.

Good morning, thank.

Good morning.

As far as the quarter goes, how is -- when you guys lowered guidance in January, how the quarter turned out? Was it better than expected when you changed the guidance back then or was it sort of in line with expectations?

I would say the quarter was within the range of our expectations when we reduced the guidance. Obviously we are quite pleased with it. In terms of the volume and revenue growth, but it doesn't -- the guidance that we put out Jason, was intended to incorporate a wide range of what could happen and so we had a strong quarter from a volume and revenue standpoint but as Brad pointed out, there are reasons why we continue to feel cautious about the balance of the year, and why for that reason I would say the quarter was within the range of expectations of what we had in the January guidance.

Okay. So, with the idea that obviously with the recent unemployment increases that we may be facing more challenging quarters up ahead, is there flexibility in the guidance, do you think, to absorb some of that?

Well, the guidance is intended to incorporate a number of scenarios. And so, one of the things that we have mentioned is there are 6 million people drawing unemployment right now in the United States and the number of new jobless claims actually reported this morning, the consensus is, is going to go up. Our belief is that there are people who lost their jobs in the fourth quarter of last year and even into the first quarter who have some sort of severance or continuation of health benefits that, at some point during the year, that's going to transition to some other form of benefit, whether it's a government benefit, whether it's a COBRA benefit or whether it's uninsured and that's going to -- you know, our view, put some pressure on volume and also on collection. So, the guidance is intended to incorporate our view that that is a possibility going out as we get later in the year.

Okay, okay. And then just a final question. I noticed in looking at your mix of volumes and pricing, private patient volumes down about 10%. Is that a -- simply economic related or something more to that?

Well, that -- Jason, that's what we would speculate that those -- that category of number of patient may not be coming. But again, it would only be speculation on our part, there's nothing internal that we can point to to say its something that we've done that would cause that.

Okay, great. Thank you.

I think it's a little early to draw any definitive conclusions just based on one quarter. So, thats something we're obviously going to watch closely as we go through the year.

Thanks.

Our next question comes from the line of Jane Star of Longview.

Thank you. It's Jamie Star.

Good morning .

(Inaudible) had a interesting thought in one of the recent pieces and I wanted to ask you about it. He -- he noted that the economy has really has been stressing hospitals and he postulated -- or he's been hearing that there might be a dramatic cutback in capital spending at many, many hospitals which would translate to their labs and that might have an impact of course in the future on you. Can you comment on what you're seeing in this regard? Do you think that theory has andy -- or much validity?

I -- you know most of -- most of our information is similar to your information, which is there's a lot of anecdote. I do read and I certainly see and hear from colleagues and peers that hospitals are under some pressure and it's certainly been widely reported that a number of hospital systems are freezing all capital, freezing wages, some are even doing reductions in force. So, I think the observation is accurate that there's a lot of pressure on hospitals and in addition a number of hospital systems have reported that they're seeing a growing number of uninsured patients. I think that will put pressure on hospitals desire or willingness to invest capital in laboratory and outreach programs and I think over time that will be a benefit to our desire to continue to make sound acquisitions that are accretive to EPS and that you know, we can bring up to our level of margins .

Okay, thanks.

Thank you .

Our next question comes from the line of Darren -- I'm sorry, it's Amanda Murphy, please proceed.

Hello, good morning. A question on the core side of the business and volumes, it looks like the growth picked up a little bit sequentially. Is that purely the Easter impact or are you seeing maybe people using more benefits ahead of potential unemployment or is that a -- you know, is that not a clear trend?

Amanda, this is Brad. I don't think it's a clear trend. I think the Easter -- from a year-over-year first quarter, is definitely a benefit but to the other point that you asked about, it would be hard to determine exactly if that's a driver.

Okay. And then do you have any insight in to how COBRA adoption is trending, do you have any idea how many people are switching to COBRA versus becoming uninsured?

No. At this point we don't.

Okay, and then one more question on the volume side. It looks like the histology testing volumes ticked down a bit in the first quarter. Is this something to do with hospital related business or pathologist insourcing testing? Or is there something there thats driving that?

I think there's four things that are driving the histology volumes. One is just mix shift. So, higher volumes in lower priced testing, dermatopathology and also higher volumes in the technical component pice of the pathology business versus global pathology. The second is, certainly there's a trend for physicians to be internalizing labs for pathology and that has an impact on volume. The third is there was an issue with CMS over the medically unlikely edits in the first quarter that had a revenue impact. There were some denials based on some medically, unlikely edits that were put in that have since been withdrawn, and that will correct itself in the second quarter . And then the last thing is, you know this is a very competitive market. We see a number of small competitors using practices that we feel are noncompliant and that we're not willing to use and that certainly is having an impact on

Okay and then are you -- would you -- Is it fair to say that your -- in terms of growing the esoteric business, sort of more focus on the genomic side than maybe anatomic pathology or are they pretty intertwined at this point?

No, I think anatomic pathology is a very important part of our growth strategy in the esoteric market and I think particularly as we move more towards molecular testing and molecular pathology, it's going to continue to remain an important part of our strategy. So, they are quite thoroughly intertwined.

Okay, thank you very much.

Thank you.

Our next question comes from the line of Darren Lehrich of Deutsche Bank, please proceed.

Thanks, good morning everyone. A few things here. I just wanted to turn to your comments you've made for several quarters now about your sales efforts focusing on specialists and maybe you can update us on how you see that progressing and if you could just comment on any tangible benefit from redirecting your sales force that way.

Well, I -- you know, I think the most obvious thing I can point you to is the continued significant growth in the esoteric business, which is outpacing the growth in the core business and its been in double digits for the last several quarters and 9% in this quarter. Certainly the things we look at internally in terms of the types of areas of testing that are growing and the thing that you can see in the tables in terms of the amount of our price increase thats due to mix suggests that you know, we're continuing to do a good job of targeting these specialty physicians and selling the higher value tests. So, I think those are probably the couple of data points that are the most apparent from what we disclosed publicly.

Okay and if I could just go back to your prior response about histology, can you maybe size for us the impact of the unlikely edits that CMS was making and now withdrawn what -- you know, what basically would you expect to reverse out in the subsequent quarter?

I think its -- I think given all of the uncertainty around the medically unlikely edits and how long its going to take to reprocess the claims, I'm just reluctant to put a number on it, but we did have a significant number of claims that were fully denied because of the imposition of these medically unlikely edits that have been told by CMS will be reprocessed in the second quarter.

Okay. So, there potentially could be some catch up because there's retroactivity? Is that the right way to think about it?

Well, I would say -- I would say what you're seeing in terms of a decline in volume and price, there will be some catch up when those claims are reprocessed.

Fair enough. Okay, and then a couple of other things here. With regard to your collection trends, can you just update us there on what you're seeing? Obviously the bad debt has been pretty stable, but can you just give us more color on that and your up front collection process where you think you are in getting some of that rolled out in the [PSC's]?

Yes, Darren, this is Brad. We continue to work our initiatives in our patient service centers as well as in our in-office phlebotomist that we have in place in certain physician offices. They continue to show progress, we monitor and track to a very low level of detail how we're doing there. And it continues to go well. The other thing that I'd just point out is in the payor mix schedule and again (inaudible) it's too early to draw a trend but you know, our exposure to patient balances is -- is at least in the first quarter, lower relatively speaking than it was in the first quarter of last year given the volume decline and the uninsured. And then one other data point that we've talked about, we look at the third party -- the patient responsibility after a claim has been adjudicated by a managed care plan or other payor, and that, relatively speaking, in the first quarter is consistent with last year in the first quarter.

That's helpful. And I guess just one other thing. You did talk a little bit about your views on maintaining more excess cash in the business. I just wanted to revisit that topic a little bit. And -- you know, what is the right level of cash to keep in the business given the current environment sort of first of all, and then second of all, I don't think -- just looking at the cash flow statement there was really any buy back. So, maybe just share with us your views on how you think about buy back given the substantial free cash flow we'll see this year going forward.

Sure. From a working capital perspective there's a minimal amount of cash that we need to keep on hand. I think two things come to mind when we think about the current environment. One is acquisition opportunities which ties into our first use of cash, its consistently been our first use of cash, our acquisition opportunities and we continue to think that they are out there and holding cash in this environment for what we think may be different today than it was last year at this time just due to access to the capital markets. It comes and goes. We do have a revolving credit facility but again the uncertainty there around capital markets may cause us to keep more for acquisitions than we would have in the past. And then again acquisitions has always been our first choice and as Bill mentioned when they haven't been there and we don't think they are going to occur we've done a fair amount of share repurchase in the past few years. And our views really haven't changed that much on how we want to deploy our cash.

Okay, and in terms of the flavor of acquisition opportunities you see -- just one last thing here, can you remind us where you think that the best opportunities are? Are they hospital outreach labs, are they enhancing product capabilities, what is it at this stage of the game?

Well, I think there are several categories. The first is the traditional fold in acquisitions where in effect we are purchasing a set of customers, consolidating facilities, and gaining synergies from the acquisitions. The second is the more esoteric types of acquisition whether it's in esoteric testing, whether it's in genetic testing, whether its in genetic testing, whether its in pathology. And then the third would be, you know, something that historically we have not looked at because they've been so pricey, but those are more what I would describe as proprietary tester technologies, and you know, there -- pricing in all aspects of those -- of those potential acquisitions has come back to earth a little bit from where it was last year. I think the challenge continues to be, there were a lot of businesses that had great years in 2006 and 2007 and pretty bad years in 2008 in our industry, and you have to decide whether these are fundamentally sound businesses that had a bad year or whether they were businesses that just looked great in 2006 and 2007 because everything else looked great and thats why, you know, we are being very deliberate and cautious about the decisions we make on the acquisition front. I just want to add to Brads comment on share repurchase. I mean, we obviously are firm believers in share repurchase. We're firm believers in the stock in our company. In the fourth quarter we had the issue with the potential conversion that caused us to accumulate some additional cash and in this quarter, you know obviously there was a great deal of volatility in the markets and there was some volatility in our share price. And I don't want anybody to leave the call with the impression that we don't believe in the stock or that we don't believe in share repurchase because we firmly believe in both of those.

Great, thanks a lot.

Our next question comes from the line of Adam Feinstein from Barclays Capital. Please proceed.

Okay, thank you. Good morning, everyone.

Good morning.

Good morning.

So, just a few questions here. Just want to follow up. There was a question earlier, Brad, that you had answered based -- someone asked why pricing wasn't hire considering that is looks like, on average, managed care pricing was almost 6% and the Medicare was 4.5% for the quarter. You had mentioned something about -- just a mix shift. But can you just give us more details? I'm just trying to make sure I was following your point there.

Sure, Adam. I mean, if you look at our payor mix schedule and line it up quarter-over-quarter with prices, and I mean year-over-year, quarter-over-quarter. I mean, if you look down the line items, which I think you're alluding to, you see a pretty good growth on a revenue per accession basis and the individual lines add up more to the total, so, how can that be if you look at the patient line. So, we lost 10% in volume on an accession basis from a payor that has a very high price point, that has a drag on the overall total. So, I would call that a shift in payor mix that's affecting the 3.2% of our revenue per accession growth excluding the Canadian business.

Okay, so -- so, its just that direct patient bill piece is where you're seeing the biggest impact because the dollars are much higher?

Yes.

Okay, alright. And (inaudible), just trying to get a sense in terms of the impact the acquisitions had on the quarter. I know you guys aren't breaking that out, but I'm just trying to figure out what to think about. I know you did the Stanford deal. And so, just wanted to know which deals which should think about in terms of what was included in the numbers?

Adam this is Brad and you pointed it out. I mean, we don't break it out and there were a number of small deals last year. You mentioned one of the larger ones. Tandem was another, that we did earlier last year that actually annualized during the first quarter. So, again, too specific and we haven't broken it out to that level, but there wasn't anything to my knowledge worth mentioning in the first quarter that we closed.

Okay, great. And then just, on the esoteric pricing side, the number was pretty robust there. Just wanted to just get a sense was that any sort of mix shift that drove that? Just any thoughts in terms why esoteric pricing was so robust in the end of the quarter?

And, could you -- could you let me know, are you looking sequentially or are you looking (inaudible) year?

Yes, sure. Yes -- no -- so, just looking here, it looks like the pricing growth in the year-over-year basis was 8.3% in Q1 and that compares to about a 2% increase in the fourth quarter and then averaged about 2.5%, 3% in 2008. So, I just wanted to know why we saw the acceleration in esoteric pricing.

And Adam, may I ask, are you looking at the original 8K or the amended 8K?

Yes, lets see, that was from the original, I hadn't -- I haven't had a chance to go back.

I think it impacts -- the volume growth is bigger in the amended 8K in that category so I am not looking at -- on a corrected basis, quite the numbers that you're quoting.

Okay, well, I guess -- just conceptually there, was there any change in -- because I think even making some of the changes it seems like there would still be some improvement in the pricing. So, just curious if there was anything different in that business' quarter.

No.

Okay, alright. And then, just my final question just gets down to some of the costs. I just wanted to make sure, you had the (inaudible) pension cost and the benefit cost. Just wanted to see if you could size those items for us for the impact for the quarter?

Adam, this is Brad again. We're not going to size them specifically but the four that we mentioned in total get us to a flat margin. And so, just to review the four again, we've got bad debt still a drag year-over-year. We did raise slightly in the first quarter last year but not to the extent that we raised later in the year. We have the pension expense that we've talked about and I think you can go in and find those numbers in our filings. The employee benefit costs, again, we're not going to break out specifically and then foreign exchange. But again those four items get us to flat and one other thing I'll mention about those four items is that they're unusual in their occurrence for us. If we look back over the five years -- the last five years, we've never had anything in either one of those categories thats come close to the impact that they are having on us this year compared to last year. So, we think they are worth pointing out.

And Adam, its Dave. I would say no one is disproportionate to the other, lets put it that way.

Okay, great. Okay, thank you very much.

Thank you.

Our next question comes from the line of Robert Willoughby from Banc of America.

(Inaudible) most of my questions. Can you just comment on the article that you saw in the New York Times, I think it was last weekend, just on the expansion of state commitments to some of the DNA based forensics testing programs? That really seemed fairly pronounced, yet we really don't hear you guys talking about it or your competitors (inaudible). Its just still premature there -- for that opportunity?

I think it's people premature. There is -- there is a substantial increase of commitment of -- of desire to expand DNA databases and felon data basis. There's not -- there has -- there has yet to be the substantial increase in funding, and we know that there is a lot of significant backlogs and DNA testing and DNA analysis in state forensic labs but there hadn't been a great move yet toward outsourcing that. So, at some point Bob, I think there is potential opportunity there and we continue to be happy with our forensics and our identity business but its -- I think its still to come in terms of when that's going to develop.

That's great. Thank you.

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

Good morning.

Good morning.

Just a couple of questions. On the customer mix shift, it seems that Medicare accounts now for a greater part of your overall pie. Is this -- is there some fundamental shift in terms of customers that you are servicing or is this just a function of the better pricing that you are getting from Medicare this year? And then can you comment in the United relationships? Do you think that some of the trends that you might be seeing on the volume side is tied to kind of like the fact that United now is a bigger part of your revenue mix? And then if you could just comment on whether you're seeing any pull through from that -- from that relationship or not? Thank you.

Ricky, this is Brad. I'll address the payor mix shift. That category is a combination of government payors and when we look beyond the total there, Medicaid is growing larger than average as opposed to Medicare.

And is that because of the better pricing?

I don't think our Medicaid growth would have anything to do with the better pricing.

No. No, I mean Medicare. I thought I heard you say that Medicare was growing faster.

No, Medicaid.

Is that -- Medicaid, I see.

Medicaid -- I'm sorry if that was unclear.

And is that related to -- in your relationship that you have or what do you think are the drivers there?

We can only speculate, but I did read an article in today's paper that Medicaid rolls are growing as people lose their employer sponsored health benefits.

Okay, so, you think you might see some shift in volumes (inaudible) into the Medicaid bucket that might be associated with lower reimbursement?

That is possible.

Again I would say, you know, based on one quarter of experience, it's too early to draw any definitive conclusion. We did see an increase in Medicaid volumes this quarter, but we don't have a clear explanation for why that would have occurred or whether in fact, you know, increases in Medicaid rolls would translate into increases in Medicaid volumes for us. I think your second Ricky, had to do with the United relationship and we're very pleased decreased with the United relationship, and I think we continue to see obviously not the kind of volume growth that we saw you know, in 2007 but we continued to see volume growth year-over-year in the United business. I think as we continue to solidify relationships in the number of the -- the markets like the northeast, there is strong united presence and where we continue to grow our presence, that we are seeing better volume from United as well as better pull though. So, all in all, we continue to be very happy with that relationship.

Okay. Thank you.

Thank you.

Our next question comes from the line of Arthur Henderson from Jefferies & Company, please proceed.

Hello, good morning.

Good morning, Art.

How much of a factor was weather during the first quarter? It struck me that that might have impacted you in certain states.

Art, this is Brad.

Hello, Brad.

It did have an impact. It was about a 70 basis points drag on our revenue growth in the first quarter.

Okay. Okay, that's helpful.

(Inaudible) volume obviously.

Yes, okay, and then sort of following on Ricky's question on United. The transition payment end at the end of this year? Is that correct?

The transition liability ends at the end of this year, there's obviously -- because the liability ends at the end of this year there will obviously be a true up period that goes in to probably the first quarter at least of next year. So, you'll probably see us making a final payment either in the first or second quarter of 2010 as those claims run off.

Okay. Okay, that's helpful. And then, Bill, I know you had mentioned that there's no big managed care contracts coming up for renewal this year. But as we think about 2010, I know you've had a few renewals (inaudible) and of course United extends way out. What's the next big one we should be looking for and what's the time frame of that?

The only major contract that's up for renewal for us in 2010 is the Cigna contract Art, and we don't have anything -- any national contract beyond that.

And is that mid-year or what -- what sort of timing would that be? Do you recall?

I believe it's the end of 2010.

End of 2010, okay. And then last question. Dave, any thoughts on all the healthcare reform discussions I know laboratory services is not really being targeted, but there are some opportunities and I suppose some risks, I was just wondering if we could get a -- get a thought from you on what your impression of it is and what you're looking forward to?

Well we've been both through the American Clinical Laboratory Association and ourselves individually, you know, we have been very active in Washington in the last several months, making the point that laboratories offer the best value per dollar of anything in healthcare that the 2% -- or the spend or 3% of the spend drives about 80% of the healthcare decisions. This administration has repeatedly stressed that it's focused on prevention and screening and wellness, all of which, I think there's very little in the healthcare system other than the laboratory that is more important in the monitoring of prevention screening and wellness. Obviously any expansion of coverage would be a benefit to us. So, the kinds of programs that are being discussed that would provide expanded coverage would be helpful. There's nothing specific proposed in the budget that would equate to a cut for labs. But obviously this is a big project that congress is taking on. And so, certainly it's far too early to say how it's going to turn out. I guess the biggest concern that I have is that there will be a great deal of talk and a great deal of activity around prevention screening and wellness, and then at the end of the day, there will be a decision that these things are all great but we're not ready to pay for them. And so, you know, part of improving healthcare through prevention screening and wellness is a willingness to pay for prevention, it's a willingness to pay for screening and it's a willingness to pay the laboratory for helping physicians manage the patients in those aspects of their care.

Okay. Great. Thanks very much. Very nice quarter.

Thank you.

Our next question comes from the line of Anthony Vendetti of Maxim Group. Please proceed.

Okay, thanks. Most of my questions have been answered. But I just have two quick ones. The -- a number of health plans you said you've seen pick up in volume from UnitedHealthcare, but a number of the health plans are showing slowing growth in their membership or declining growth in some of their membership. Do you see that starting to impact overall -- overall volume for you in the second quarter or is that kind of factored into your guidance right now?

Well, I want to say that we are not going to talk about volume in the second quarter. Clearly as commercial plans -- clearly as managed care plans or health care plans lose commercial membership, that has an impact on overall laboratory volumes. You do have to remember that as much as we would like to be more, I mean, you know, we're about 9% of the total market. So, we're not going to be unduly affected by membership losses unless they really become you know, extremely large, but there will be -- we will have our share of the impact from losses of membership. To answer your second question, yes, the idea that we may see volume pressures as we go out later in the year is built into the guidance that we've given.

Okay, and lastly, can you tell us any HIT type initiatives that you have or anything in that arena that's giving you a competitive advantage over the smaller clinical labs that you compete with?

Well, I think the -- we have a number of HIT initiatives underway. I think the biggest one that gives us the advantage over smaller laboratories is the number of products that we offer. So, you know, a thick client product, a thin client product, products that are specially tailored for specialty practices. We also offer the ability to do interfaces into the -- you know, not only into the doctors office but also into electronic medical records, in to physician lab systems if they have their own lab. So, I would say its the scope of the product offering, the breadth of what we can do in terms of interfaces and electronic exchange. As you know, we don't attempt to have a proprietary platform for our IT so we're able to work with -- we work with over 300 different vendors to be able to create interfaces and build interfaces to deliver records and information to doctors in the way they want to see it as opposed to in some proprietary fashion. And then the last thing I would say is, you know, the fact that we are a one-stop provider where physicians can order all their laboratory testing, whether it's pathology, whether it's core testing, whether it's esoteric, genomic, through one IT system obviously is a significant advantage over labs that are not able to offer that full range.

Okay. Great. Thanks.

Thank you.

Our next question comes from the line of Bill Quirk from Piper Jaffray, please proceed.

Thanks and good morning.

Good morning.

A couple of questions. Understanding the goal of the whole bad debt flat this year but obviously balancing that with the fact that its an important metric for the longer term, under obviously LabCorp 2010. So, if we think about the planned improvement here guys, do we have additional metrics that we're going to be rolling out or is the expected improvement largely dependent on the economy and obviously the flow through there?

Well, we have a number of things that we're doing, that we've talked about previously to -- to -- as I think about it, Bill, to reduce the number of times that we extend credit to patients at the time that they receive services. So, one of the things we introduced this quarter is the patient discount program which obviously has a -- you know, patients get a substantially discounted price if they pay at the time of service. That obviously has an impact on our patient pricing but it also has an impact on the collectability of -- you know, of what -- it has an impact on the collectability when we do work for the uninsured and takes us out of the business of extending credit to the consumer. So, we are continuing to roll out improvements and enhancements to our collection efforts, but the metric that you are going to see that in is a reduction in the bad debt rate as a percentage of revenue.

I guess, is there anything -- and you know, I certainly understand and appreciate the metrics or the steps you've taken thus far. Obviously you're seeing results. Is there anything in particular that you want to call out in terms of what we should be thinking about for additional metrics going forward or is it a little bit of "stay tuned" here?

I would -- you know, we look at internal metrics very closely, how much cash did we collect during the patient encounter, how many opportunities did we have, how many opportunities did we miss, but those are not the kind of things that are going to be public metrics. I think the -- again the public -- the publicly disclosed metric is going to be bad debt as a percentage of revenue.

Okay, understood, shifting here a little bit on the esoteric side, any tests in particular that demonstrated strength in the quarter you'd like to call out?

Well, I think we continue to see good strong growth in vitamin D. We saw good strong growth in the C-reactive protein in the cardiovascular arena and KRAS was a strong positive for us in terms of Esoteric testing. Those are probably the top three that come to mind.

And actually thats a nice segway to my last one and thats talking a little bit about KRAS. Relatively new tests, we don't have a specific CPT code for that yet, but can you talk a little bit about how you guys are looking at this from an opportunity standpoint? And then candidly there's a little bit of discussion in the community over actually the best way to do this be it sequencing or arrays and I obviousIy would love to hear your opinion there? Thanks.

Well, I'm not going to give you my opinion on sequencing versus arrays, because I don't know the answer to that question. So, now we can -- you can take up -- we can take up offline if you want to do that and we can get our scientist involved into the discussion. KRAS has been widely accepted in Europe as a test for determining the appropriate treatment for early stage colorectal cancer for some time and there was a paper presented I believe at ASCO last year in the US that has really driven payor adoption and physician adoption of using KRAS to determine what drugs will be -- will be administered for early stage colon rectal cancer. I think KRAS is a -- it's an -- its a growth opportunity in and of itself. Now, there are other mutations that are already being looked at in colorectal cancer like NRAS, that are -- you know. So, every one of these mutations that gets discovered and then there are other aspects of that -- there are other mutations or there are other aspects that mutation that continue to be looked at. So, I think it's a nice opportunity in itself but I think what it points to more fundamentally is the correctness of our strategy which is that personalized medicine is going to continue to grow. It is the laboratory medicine of the future and its why we're so focused on growing the esoteric line, continuing to roll out the outcome improvement programs and continuing to develop and commercialize the companion diagnostics.

Understood. Thank you very much guys.

Thank you.

Our next question comes from the line of Gary Taylor of Citigroup. Please proceed.

Hi. Good morning. Just a few quick questions. On the histology issue with Medicare, is there anything there that's going to lead you to change how you code or bill for that I guess given you expect to recoup some of those dollars and the answer is probably, no?

Well, the short answer, Gary, is, no. I mean the medically unlikely edits are -- have really been a frustration to us because originally there was a collaborative process by which we address these with CMS and then this most recent round was really sort of imposed on us without any discussion and once we explained to CMS why these edits didn't make any sense and the impact that they would potentially have on very acutely ill patients, they made the decision to withdraw the edits. So, the short answer is no. There isn't anything that its going to change. The more complete answer is we continue to have concern about the process by which these types of decisions are made at CMS, and we continue to talk to CMS and to the administration about a better process for making this sort of a decision.

Is it an FI issue or is it at -- it in -- at CMS proper?

That was a CMS issue. That was not a issue with the intermediaries.

Okay, on your drug of abuse testing, which bucket does that come out of? Is some of that pathology because its here or is it all in core testing or where does it come out of?

It's all in core.

Okay, on the managed care side -- let see, you've had good results obviously with large national payors and nothing coming up there soon. What about on some of the smaller contracts, some of the state loose plans, et cetera. Some of the chatter in the marketplace is that the labs are still reimbursed better on those smaller contracts than they are in some of the national contracts and maybe the pricing updates there are not as good. That doesn't seem to be reflected in any of the results today but how are you doing on some of those smaller contracts?

I'm very happy on how we're doing on the -- on -- on the -- I mean, it's a little -- I don't want to insult anybody by saying some contracts are smaller and some contracts are larger. Some of the state (inaudible) plans are quite large and influential plans, but I would say generally, we are very pleased with where we are in terms of overall pricing, and obviously it's one of our focus areas for this year, is to maintain the integrity of our pricing. We continue to be, as I've mentioned and I think everybody around the industry mentions, we continue to be the best value for the healthcare dollar that you can find.

I want to go to just a patient payor bucket for a second, and you've addressed a couple of questions on this but I think I'm being a slow student today. So, I just want to ask a couple follow-ups and make sure I understand whats happening. So, if we look at -- and I don't think the amended 8K either, but if you look at just total number of sessions in the patient responsibility bucket, it's done about 10% year-over-year. Is that primarily being driven by you know, just less uninsured showing up at your physician partners or is that because of something that is actually happening with better screening at the patient service centers or both?

Gary, it's very difficult to say. But I do want to make sure that we're clear. That is for us the uninsured bucket -- the patient responsibility for managed care, stays in the managed care line. So, what you see there is the uninsured, the source of that decline or the cause of that decline, is really something that's hard to get at.

But you can't tell which channel its coming there through? Whether it's coming through docs or versus the patient service centers?

Haven't broken that out that further yet.

Okay, and then on the price per session, that bucket, the 157 versus the 155 year-over-year. I guess this is where you were talking about mix but I'm kind of missing what's happening there. Presumably, there's still some gross rate increases on your fee schedule but this is coming down because of why?

Well we don't typically raise this price so the majority of the decrease that you see there is related to what Dave mentioned earlier. We implemented in the first quarter, a discount for those patients who come through the channel of our patient service center or through our in office phlebotomist on a list -- certain lists of our test.

Okay.

So, that's the real drag in the price but I want to be clear on the payor mix impact. That's more driven by the volume decline than the price decline.

Okay, and my last would be -- I think you kind of answered this when you talked earlier about some of the -- the way you've analyzed AR, but if we go to the co-pay deductible piece thats in your -- reported in your managed care revenue mix, that number is stable year-over-year? You haven't seen an acceleration in co-pay deductible versus prior year?

That's correct.

Okay, good. Thank you.

Our next question comes from the line of Shelley Gnall of Goldman Sachs. Please proceed.

Thank you very much for taking my question. I'll try to be quick here. It sounds like the revenue per accession is down obviously because you lost some of your self pay mix. Was there any offset to that through a higher number of tests per accession? Can you tell us any trends you're seeing there?

Shelley, this is Brad. We don't measure that specifically by payor bucket for this schedule but we saw a slight uptick. Nothing significant.

Okay. And then I think a follow-up to Gary's question I mean, what I was going to ask and I think this has sort of been addressed, but what are you seeing overall from an industry perspective on physician office visits maybe, and the impact of high deductible healthplans industry wide. And my question here is how important has your ability to take market share -- how important has market share been in being able to put up these pretty good volume growth numbers?

Well, physician office visits -- it really depends on who you talk do. I mean you talk to some physicians, who say they've seen a dramatic decrease. If you talk to other physicians, they say it's relatively stable. Again, I think it's a bit early to draw any definitive conclusions there just because of the number of unemployed that were added to the rolls in the fourth quarter and even into this quarter. So, how is it -- how important is market share? Obviously market share is very important. We have to be taking market share to be able to grow volumes in this environment and we're growing faster than others in the industry so that means, you know, in my view we are gaining market share. And what I think is important, because you are going to be asking this question, is we're not gaining market share by taking low profit or low margin business. If you look at the year-over-year margins and you adjust for the items that Brad talked about, you know, we're continuing to acquire business at the same margins that we've acquired in the past. So, that's all to the good for us.

Okay. That's fantastic. Thanks for the color. And then I just wanted to clarify did the Canadian JV have any impact on the mix that you are reporting? Or is the -- I think it was a 7.4% self pay, is that comparable to the 9% that you had last year in the first quarter?

Yes. It's comparable. We put the Canadian business at the bottom of those schedules so they're not blended into the payor mix or the specialty mix schedules.

Perfect. Thanks very much.

Our next question comes from the line of Charles Rhyee of Oppenheimer.

Yes, thanks for taking the question. I'll also keep it quick. Just, really a follow-up really from a couple earlier questions and it gets to sort of your outlook here on volumes. You know with subsidies for COBRA, is there any way for you, as you're moving through this year to be able to track people as they shift maybe from one insurance to you know taking from an employer provided to going over to COBRA or are you able to see -- are you able to track an increase in people using COBRA? Is that something you can see at all?

I don't think so. The only way that we really know when a patient changes status is they give us a different insurance card, and so -- and that would be very difficult to track at the level of individual patients. I just don't think it's realistic to think that we'll be able to see that particularly because my understanding of COBRA is you continue to have the same insurance card that you previously had. You just have a different -- it's paid differently.

Okay, so from -- but from your standpoint you're just seeing that insurance card, so it would be difficult for you to know it all?

Right. I mean, what we -- the only -- you know, we would know if somebody previously had a commercial insurance card and they came in with Medicaid. That, we would see, but we can't see they went from commercial plan to a COBRA plan administered by the same commercial company.

Okay. Great. Thanks for all the comments.

Thank you.

Ladies and gentlemen that completes the Q&A portion of the presentation. I would now like to turn the call over to Mr. David King.

Thank you very much. We appreciate your listening to our call this morning. Have a good day.

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