Labcorp Holdings Inc (LH) 2009 Q2 法說會逐字稿

Welcome to the second quarter 2009 Laboratory Corporation of America earnings call. My name is Ms. Shayla and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Dave King, CEO, please proceed.

Thank you. Good morning and welcome to Lab Corp's 2009 second quarter conference call. Joining me today from Lab Corp are Brad Hayes, Executive Vice President and Chief Financial Officer, Ed Dodson Senior Vice President and Chief Accounting Officer, and Bill Bonello, Senor Vice President Investor Relations. This morning, we will discuss our second 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 would 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 filed a form 8-K that included additional information on our business and operations. This information is also available on our website. Analysts and are directed to this 8-K 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 10-K 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 second 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 June 30, 2009 increased 12.7%, to $668.8 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 June was 50 days, down two days sequentially. 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 tests. Revenue increased 3.6%, year-over-year in the second quarter. Total company volume increased 2.4% year-over-year. Excluding the consolidation of the company's Ontario Canada joint venture volume increased 1.6% year-over-year. Drugs of abuse testing declined by 19% year-over-year which reduced total volume growth by 150 basis points. Esoteric volume increased 10.8% year-over-year. Revenue per accession increased 1.1% year-over-year. Excluding the consolidation of the company's Ontario Canada joint venture, revenue per accession increased 2.6% year-over-year. The growth in revenue per accession is attributable to both mix shift and rate increases.

Third, margin. For the second quarter, our adjusted operating income margin was 21.4%. This margin declined approximately 90 basis points year-over-year due to increases in bad debt, pension expense and employee health benefit costs and the impact of foreign exchange. We remained focused on increasing automation and efficiency in our labs which should enable margin expansion in the future.

Fourth, liquidity. We remain well capitalized. At the end of June, the company had cash of $226.6 million and approximately $300 million available under its revolving line of credit. During the quarter, the company paid $289.4 million and issued approximately 430,000 shares to call 50% of its outstanding zero coupon convertible notes. This transaction strengthens our balance sheet and reduces future cash flow risk.

At the end of June total debt was $1.4 billion, including $70.8 million drawn on our revolving credit facility. During the second quarter, we entered into an agreement to acquire Monogram Biosciences for a total enterprise value of approximately $155 million. We expect to fund this transaction from cash on hand during the third quarter.

This morning, we announced updated 2009 financial guidance. We now expect revenue growth of approximately 4% versus our previous guidance of 2% to 4%. The increase is the reflection of our strong results in the first two quarters of the year. We now expect adjusted EPS of approximately $4.85 to $4.95 versus our previous guidance of $4.75 to $4.95. Our revised guidance excludes any impact from the monogram acquisition which is expected to be approximately $0.12 dilutive in 2009 including $0.04 of transaction related expenses. I would also remind everyone that the fourth quarter has historically been our lowest in the year in terms of revenue and net income. The current First Call consensus does not appear to reflect this historical trend. I will now turn the call over to Dave.

Thank you, Brad. We are very pleased with our second quarter results especially our continued strong volume growth, cash flow and cash collections. I would like to highlight some of the initiatives that we are pursuing to drive growth in 2009 and beyond. Our most important priorities for this year are to gain new customers, maintain pricing and control costs. Furthermore,, we see opportunities to accelerate revenue growth through continued leadership in personalized medicine. So, we will remain focused on growing our esoteric testing platform, expanding our outcome improvement programs and developing and commercializing companion diagnostics.

During the second quarter, we announced an agreement to acquire Monogram Biosciences, a leading provider of companion diagnostics for HIV and oncology. The expected acquisition will advance Lab Corp's leadership in infectious disease and oncology testing, companion diagnostics and personalized medicine. Monogram fits Lab Corp's profile for strategic acquisitions. It is accompanied with an excellent clinical reputation, a market leading product in personal medicine, established sales and a substantial growth opportunity. Lab Corp will use its sales force and national infrastructure to build on Monogram's already strong brand. On the margin front over time, we believe there is an opportunity to reduce our fixed cost base through automation and capacity rationalization.

During the quarter we continued to implement proprietary robotics to automate front end processing for HPV testing in our largest labs. We will continue to roll out HPV robotics nationally throughout the year. This automation will result in saving from labor, more efficient use of reagents and test site consolidation. We are also 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 them. 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 second quarter, approximately 36% of our revenues 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 revenues.

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 growing our business through strategic acquisitions and licensing agreements and second through continuing our approved share repurchase program. 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 volume trended during the year? In the quarter, our drugs of abuse volume declined 19% year-over-year. That compares to year-over-year decreases of 20.1% in Q1 of this year, 15.9% in the fourth quarter of 2008 , 10.3% in the third quarter of 2008 and 7.9% in the second quarter of 2008.

What is the impact of the CPI-U update? We generate approximately 12% of our revenue from the clinical laboratory Medicare fee schedule. And that is the revenue that would be subject to the CPI-U.

What is the status of our transition payments to United Healthcare? In the quarter the company was billed $12.4 million in transition payments and paid $10.5 million in transition payments. To date, Lab Corp has been billed a total of $92.5 million and paid $90.4 million in transaction payments to United Healthcare. Now, I would like to turn the call back over to

Thank you, Bill. In summary, we are pleased with our performance year to date. We will work aggressively to gain new customers, maintain price and control costs. Looking forward, we see great opportunities to accelerate growth through continued leadership in personalized medicine. Thank you very much for listening. We are now ready to take your questions.

(Operator Instructions) Your first question comes from the line of Adam Finestein. Okay, thank you. Good morning everyone.

Good morning.

Just everything looks very good here. Just a few questions, I guess. Maybe first on the guidance. Curious why you are not incorporating Monogram. I know you broke it out for us so we can know the impact. But wanted to see in terms of why you weren't incorporating that and maybe a few follow-up questions?

It is Dave. Good morning We haven't incorporated it because it hasn't closed yet. I think it would be somewhat confusing to incorporate it prior to the time that the transaction closes. And once it closes, then we will be in a position to have an exact idea of where we think it's going to come out.

Okay, And you still anticipate closing in Q3?

We have received notice from the FTC as we have disclosed that the transaction has cleared HSR. The tender offer is under way and it is proceeding in line with our expectations. So barring some unforeseen circumstance, yes, we would expect to close in Q3.

Okay, great. And then just as we look at the mix of cash, we have seen it turn for several quarters, but just wanted to get some more color here. In terms of the esoteric testing significantly out pacing the core volumes and clearly core volumes have been impacted by the economy somewhat but really have seen no impact it looks like on the esoteric side. Just curious to get your thoughts on that trend. Do you think we will continue to see such a big spread between the different segments for the rest of the year?

Hey Adam, It's Brad. Traditionally that group has grown faster than the core. I would add, and this is consistent with past quarters, vitamin D continues to be a big grower in that category. And even HPV as well continues to grow. We certainly expect that over time that category grows faster than the core.

Okay. Great. And then just my final question here. Bill, you had mentioned the CPI the impact in terms of Medicare. But there have been a lot of questions in the last couple weeks whether there is an impact in terms of escalators in managed care contracts, in terms of whether they are linked to CPI or other inflationary measures. Just curious to get some thoughts in terms of how should we think about the decelerating trend in most of the ways we track inflation and whether any of your managed care contracts will be impacted by that in the future? Thank you.

Adam, Brad again. As we look at the contracts there aren't any that are tied to -- I won't say that. The majority of them are not tied to a fluctuating number. They tend to be more in fixed types of increases as opposed to tied to a fluctuating number.

Dave, just one point of clarification, Brad said the majority. I think it is accurate to say the overwhelming majority are not tied in any way to a fluctuating number.

True.

So, our major contracts are the ones that account for the biggest portion of our managed care revenue are fixed increases.

Okay, great. Thank you for the details.

Your next question comes from the line of Kevin Ellich with RBC Capital Markets. Please proceed.

Good morning guys. Nice quarter.

Good morning.

Dave, I was wondering if you can give us an update on your thoughts on healthcare reform. How it might impact your business following President Obama's press conference from last night?

I think it is a bit obvious that the final chapter on healthcare reform is yet to be written, Kevin. What we keep coming back to are some key points in terms of the role of the laboratory. And I heard this a lot but these are the points we are making as we are very actively through our trade association and also ourselves. Engaging the relevant committees and staffers in the discussion about what should happen in healthcare reform with labs. We are 3% of the spend. We influence 70% to 80% of the healthcare decisions. If you look at the most recent numbers out, program administration costs for healthcare in this country are 7%. So more than double the amount than we are spending on laboratories. The average cost of labs to Medicare beneficiaries is about $122 a year. So my view continues to be labs are the biggest bargain in all of our healthcare spend. On top of that, we have only had two rate adjustments from the government of any kind in the last ten years. The 4.5% we got this year and it was less than 1% several years ago. So in real dollars laboratories are actually being paid substantially less than we were ten years ago. I think that distinguishes us from most other providers who do receive annual market basket or inflationary type updates. So, I think we have a very compelling position in terms of the value of labs in healthcare. Clearly, the focus on prevention and screening and expansion of coverage would be a positive for us. And although it is too early to predict what Congress ultimately will do, we are optimistic we will come out of healthcare reform in a position that is certainly no worse than the position we are in today.

Got it. Okay. Thanks for that information. Going back to the drugs of abuse testing, I think Brad said it was 150 basis point drag on volume. How much was it a benefit to pricing growth?

Kevin, we don't break that out but we definitely track its impact on the volume but we don't break out the impact on the price.

It would be safe to assume it has a net positive impact?

That's right. It is a lower price than the average business so yes it would be safe to assume.

And then if I did the math right it looks like the managed care business is down slightly and the price per accession is also down. Is there anything driving that?

A few things as we look at that trend. We had a few contracts that we terminated and that were all higher than the average price. We had some contracts that shifted from a capatated payment mechanism into a fee for service. That would have gone from that portion down to the fee for service portion. And then across some plans we noticed membership loss. Those are the three things that are behind the trend that you mentioned.

Anything significant or just kind of normal business?

I think normal business -- with the exception of the membership loss. That is probably something we would not have seen in the past. And I would not say that it is significant but certainly one of the drivers behind that trend.

Got it. Okay. Thanks, guys.

Your next question comes from the line of Amanda Murphy with William Blair. Please proceed.

Hi. Good morning. Just a question on your top line guidance. I'm curious, the 4% number. Is that because the esoteric business did better than you thought or is that really sort of better volumes on the core side? What is driving the shift to the 4% number?

Amanda, it is Dave. The biggest thing driving it is the first half performance. Obviously, we have all end done better than 4% in the first half of the year. As we look at the trends, we think it is sustainable in the second half.

Was there one area that, was it the esoteric side that exceeded your expectations relative to the beginning of the year?

I wouldn't say exceeded our expectations. I think obviously if we thought it could be in the 2% to 4% range and now we are saying it is going to be 4%, we have exceeded expectations in a number of areas. But I wouldn't point to any one thing and say that's the driver. I think it is overall top line performance that makes us feel comfortable with the 4%.

Shifting to the core volumes, it looks like if you look in the US that they were down a little bit more than in the first quarter. Number 1, is that accurate and also it looks like this is coming from physician and self pay volumes where as managed care in total looks like it had a little bit of an up tick. Just curious if that's in line of what you saw and is there anything in terms of first quarter to second quarter that is driving acceleration in core volumes?

Amanda, this is Brad. One would say one thing to remember is that Easter helped in the first quarter and was a reducer of volume growth in the second quarter. And that most of that would have been in the core line. Also to add to that, the drugs of abuse testing business as you know is in that line as well and continues to weigh on that growth rate. The way we think about the growth rate generally volume wise first quarter to second if you take into account the shift in the holiday from one quarter to the next, it is about the same in total.

Okay. So the growth is the same in the first and second quarter?

Yes.

Okay. And then you have talked also about your focus or your initiative to focus on specialty docks versus primary care docs. That seems to be working out for you pretty well. Can you just talk about do you plan on carrying that on throughout the year or how is that in your mind progressing for you?

Amanda, it is Dave. Obviously there is a balance because the primary care and front line physicians see by far the largest number of patients. On the other hand, there are many that do not order as many laboratory tests as some of the high end specialties like endocrinology and rhomotology. So, I would say we have been pleased with the success with the strategy of focusing on specialty physicians. We will continue to have our sales force focus on those specialty physicians and specialty physician offices. But we are not in any way ignoring the opportunity in the primary care sector.

Okay. Thanks very much.

Your next question comes from Robert Willoughby with Banc of America Merrill Lynch. Please proceed.

Can you speak to any exposure you might have in California, what the payment experience there has been for you and just any other states in general? Are you seeing problems emerging anywhere with budget issues?

I think we have said historically, Bob, that the Medicaid programs in general are reliable but inconsistent payors. I think that would be an accurate description of what we are experiencing. Remember that mediCal was less than half a percent of our total revenue in 2008. We don't have a tremendous amount of exposure there. Let's face it, most states are under some significant budgetary pressure and it wouldn't be surprising to see Medicaid rates in general starting to be reduced.

Well, the rates, one thing. Are you actually collecting as well on a timely basis?

This is Brad. Nothing that I'm aware of at this point that is slowing down that process. But It will be certainly something as we move through the rest of the year to keep an eye on.

Okay. Is there any one state in particular? Is North Carolina your biggest? Or where do we focus on, it is certainly not California.

I think it is pretty evenly distributed. I don't think North Carolina as a huge state in the way that's broken down. Just given our geographic distribution. Obviously some of the big states are Florida, Texas, New York. There is no one state I would say that we are over exposed in.

Okay. That's it. Thank you.

Your next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.

Thanks. Hi everyone. I wanted to talk a little bit about the lab consolidations. I think you referenced in your press release. Can you flush out a little bit more what you have done there in terms of consolidating any facilities?

Yes. It is Dave. The biggest consolidation has been the downsizing of our Harden, Virginia laboratory. And that accounts for the bulk of the charge of the UC both in facilities and in personnel. We continue to look at opportunities for facility consolidation and expect that we will progress on that throughout this year and next.

So, that has been an ongoing situation as I recall. That is not necessarily new. Is that consolidation for the most part completed at this point?

I would say it is substantially complete. There is some work left to do there but the major consolidation of the testing volumes and the major personnel impact has occurred.

Can you frame the annualized cost savings from the actions you have taken there thus far?

I don't think we -- I don't think I can break out the individual annualized cost savings for one consolidation. Obviously, we anticipate gaining significant cost savings any time that we reduce the size and staffing of a facility.

Okay. Just maybe a question or two regarding Monogram and that transaction. I guess what I'm wondering if you can help us with is the diluted affect in this calendar year. And I think the commentary in the original release is you expected it to become accretive, if I'm not mistaken in 2010. Can you talk about how you go from a deal being dilutive north of $0.10 with less than six months of impact to acreation?. Maybe talk strategically and operationally how you plan to absorb that and how we get there.

Sure. First of all, remember $0.04 of the dilution comes from the fact that we have to expense the transaction costs up front which we used not to have to do. We used to be able to capitalize those and recognize those over time. That's $0.04 of dilution right off the bat. Sure. Monogram is a small public company. So, they have the entire public company infrastructure in terms of the G&A. And any time that you acquire a small public company integrated into a larger public company, there are pretty substantial and immediate synergy opportunities from the ability to reduce that G&A component. Then there are, and I want to stress, we are not talking about reducing the science. We are not talking about reducing the innovation. We are talking about reducing what you would think about as back office functions and administrative functions in particular. Then, typically when we do an acquisition, we see that the acquired entity pays substantially more for things that we are able to pay less for. Supplies, instruments, even in the case of Monogram tissue samples they have to acquire for their oncology innovation and development. We see the opportunity for some relatively significant and immediate cost reductions there. So all in all, strategically, we would prefer not to do dilutive acquisitions. But you look at a company like this that has $70 million in revenue. They have a terrific suite of services that are in the market, terrific brand on top of that. And our ability to take the dilutive profile and turn it to an accretive profile is why we think this is the kind of acquisition that we should be making.

Okay. In terms of the public company costs, typically would you expect one to two quarters to get that synergy or is that in the first quarter?

I would -- I think you get -- you get an initial amount in the first quarter and then in the following quarter, you see the benefit of other amounts. For example, as a public company they pay auditors to prepare financial statements. That's an expense that goes away relatively quickly once they prepare the final statements they have to prepare. Some of the other ones, transition arrangements with their executives. That may take more than a quarter, less than a quarter, just depending on what they work out. But by the end of two quarters, we should see the overall G&A synergies pretty much realized.

Okay. Thanks a lot for that. Appreciate it.

Your next question comes from the line of Jason Gurda with Leerink Swan. Please proceed.

Good morning. Are you guys impacted at all or potentially impacted by UNH's win of the Tricare contract. Or is that separate?

Not in any material way I think.

Okay. Was there anything in this quarter where you benefited from or anything significant I should say. I think in the first quarter you had talked about being negatively impacted by some medically unlikely edits and you hoped to get them solved in the first quarter?

Well, first of all, I know that the medically unlikely edits are withdrawn and still withdrawn. Although, my understanding is CMS is still working on the medically unlikely edits. And I believe that the revenue impact in the first quarter did reverse in this quarter.

Okay. And the last question, which is just a little bit unusual and maybe I'm totally wrong here. But I recall you saying something maybe six months ago about how in the third quarter you would benefit from an extra business day. It was related to a conversation we had in the first quarter the impact of the loss of the leap year day and how it was not a benefit in the first quarter but you thought you would benefit in the third quarter for a reason. Is that the case?

I believe the number of revenue days in the third quarter is the same as last year. What we think about the strength of revenue days is the same as last year. There was an extra day in the third quarter last year as a result of leap year. But when we look at the strength of days, in the third quarter this year versus last, it is basically the same.

Okay, so simply, flat?

Yes.

Okay. Thank you.

Your next question comes from the line of Bill Quirk with Piper Jaffray. Please proceed.

Good morning. Nice quarter.

Thank you. Good morning.

Not a whole lot to pick on here. A couple of housekeeping questions. In terms of the Monogram deal, just to come back to that. What, from a revenue standpoint guys, you mentioned all three of the categories. Is there any particular you want to call out? Obviously, the HIV franchise is pretty well established, the tropeds and a few competitors out there, that's in earlier stage and obviously the (inaudible) replacement product is very very early stage. I guess, if you were to put any weight to the three products, where should we be thinking?

Well, I think you have ordered them essentially correctly. Although, I would make the observation that yes, the HIV products are clearly well established. The Trofile assay, that assay has been the basis of all the clinical studies that have been done. That assay is the basis of all the research that has been done on the ethicasy of the drug. So, I don't think in fairness there is anything comparable to that assay. And I think the opportunity for us is quite significant. Particularly given that there will be more drugs in this category coming to market is my understanding in the next couple years. I do agree that the oncology is quite early. It has only been on the market since October of last year. HerMark. It is very interesting but we don't ascribe a lot of revenue opportunity there until we see how the market develops. I would also make a comment I think Monogram has done some interesting work in hepatitis C. Again, it is in early stage and we have to evaluate it fully. But, I think that is also potentially really a nice opportunity for us. So, that's the combination of the existing products, what we perceive to be the industry leading position and the demonstrated of record of innovation is what makes this acquisition so attractive to us.

Yes, understood. Thank you for that. And then, just lastly for me, the accounts receivable and the inventory levels were not disclosed in the press release. Brad, are you willing to give us the absolute numbers there?

I think the accounts receivable balance is.

If it is, I'm sorry, I must have missed it.

On page six, the net accounts receivable is $655.3 million.

Very good and inventory please?

That is not in the press release and will be in the 10-Q.

Thanks a lot guys. Great work.

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

Thanks, Good morning. Did we anniversary some acquisitions from a year ago in 1Q maybe that didn't help in 2Q and may explain some of the sequential down tick in volume trend?

No, I don't think so, Ralph. I think the biggest reason for the sequential down tick is the shift of Easter from 2Q to 1Q.

Okay, so you said the way to look at that is just average the two quarters in terms of volume and split that in half and that is a run rate if you will?

The way I would like at it is, you take 50 basis points of the first quarter volume growth and you move it to the second quarter and that normalizes for the Easter shift.

Okay, that's 50 basis for Easter. Okay. that's fine. And then, can you tell us what percentage of your managed care contracts and or revenue comes up for renewal on any given year and maybe more specifically for 2010?

We don't really talk about specific percentages or contracts. I would go back to what we previously said which is that Wellpoint and United are contracted out for a significant period of time. We are in discussions with Signa. We have said previously that that contract if not extended does come up in the middle of 2010. The other -- those are the major ones obviously. We are out of network with Aetna but continuing to attempt to position ourselves to be back in network at the time that contract comes up for an opportunity. The rest of our contracts, there is not anything big enough to even -- there is nothing individually that is big enough to call out in terms of 2010 impact.

And then just going back to the guidance, can you help us or explain why you would earn less in the second half of the year relative to the first half of the year, just given the easier comps?

Ralph, it is Brad. The biggest impact one could point to is the fourth quarter revenue number. It is traditionally the lowest absolute revenue number based on primarily the holidays. So, if we look back to history, we would always see with very few exceptions that to be the case. And across the fixed cost base, we don't have the ability to take the cost base down, a dollar for dollar to match that. We see that. If you look back the last few years, you may see some exceptions to that rule. But I would say there has been weather, share repurchase, et cetera that have caused the quarters to be fairly even over the past few years. Even back to 2006 in the fourth quarter when we picked up united work ahead of the January 1 contract implementation date. In our base model of what we look at, the fourth quarter is always lower.

Okay

And that therefore drags down the second half and I think you will see also that the second quarter is always the strongest quarter

That's fair. Just my last one, do you guys plan to update guidance when you do close the Monogram Biosciences deal?

I think we will consider that when we actually get to the point of closing, Ralph. We will obviously try to give additional clarity once when we understand the exact impact of the numbers. Obviously, from an anti-trust standpoint, we are still operating as two separate companies. And there are still levels of detail we are not permitted to get into until we close.

Okay, Thank you.

Your next question comes from the line of Shelly Gnall with Goldman Sachs. Please proceed.

Thank you. Quick question on H1 N1, did you see any impact on volumes in the quarter.

Nothing material. Obviously H1N1, I would say, influenza volume testing is up but nothing material to the results.

Okay. And then on the drugs of abuse testing, are you seeing a bottoming here? It looks like it might be moderating a little bit. And I guess, which quarter would you expect us to see the affect anniversarying.

I don't think you will see the anniversary until the fourth quarter. Obviously, if you look at the numbers that Bill read as we stated, the fall off was much more dramatic in the third quarter of last year than it had been in the second quarter. So, you will start to see it anniversarying in the third quarter. You won't see the full impact of the anniversary until the fourth quarter. In terms of bottoming certainly the trend is that it is the drugs of abuse testing is declining at slower rate than it did last year. We also have to remember it is off of a lower base. I would be hesitant to put the word "bottoming" on it and if we don't see recovery from the hiring front, we don't see improvement.

Okay, thanks for that. On yourself pay revenue per acquisition, it looks like it is down. Can you talk a little bit where the key drivers are there? Is it a discounting or mix issue?

This is Brad. It is a discounting issue. You may recall from past calls we initiated a patient discount program for self pay in our patient service centers. For a select group of tests there is a pretty significant discount for cash pay at the time of service. And that is driving that revenue per requisition down.

Is there anything new in the quarter that wasn't done before or just a continuation?

I would say it is a continuation and gaining of momentum of something that has already been rolled out.

Okay, great. Okay. Thanks.

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

On the esoteric front, in addition to vitamin D and HPV, what is being included in that category?

A number of tests. First of all, the broad category is esoteric and genomic. So we have genomic testing at the top. Those are gene based tests. We have histology which is tissue and then we have the category of esoteric. Esoteric, for us, includes a list of tests that are specialized in nature and only performed in a few of our facilities. Vitamin D is a good example. Allergy testing is a good example. There are a number of tests in that group. I will say we don't move tests from one group to the other. So we don't move tests from esoteric down into core and core up into esoteric. So, we try to keep the group stable so the rates are meaningful to look over time.

Okay, well obviously cancer is in the genomic. HIV would fall into --

That would be a genetic test.

Okay, that would fall there as well. Okay. Lastly, on the transition payments, it is supposed to end by the end of this year but there will be a true up in the beginning of 2010. What do you think the impact of that true up is going to be? Is that immaterial?

It is not actually a true up. The measurement period ends at the end of this year. So the bills will continue to come to us after the measurement period ends because it is not real time. We still think of our exposure at the same level that we have in the past. It will just be a question of billing and payment but I don't foresee any sort of true up, as you say, that is beyond our expectation.

I would add to that, there isn't any reason to expect that the trend would accelerate. So if you look at the $10 million to $12 million in this quarter, there isn't any reason to expect that that will change in the third or fourth quarter of this year, which are the last two quarters that we have exposure. It is just timing of payment as opposed to a true up or any other kind of reconciliation.

And then lastly, on the acquisition front, obviously Monogram brings the specialized cancer and HIV. Is there any other category in terms of acquisitions, in terms of specialized testing that you are focusing on at this point?

No, there is nothing really. I mean, there are a number of very interesting areas out there, infectious disease, oncology testing. We have a terrific franchise in specialized endocrinology. We have a really terrific franchise in specialized coagiluation. So all of these areas are areas we going to continue to look to over time as areas where we can improve our position.

Okay, Great. Thanks.

Your next question comes from the line of Gary Taylor with Citi. Please proceed.

Good morning. Most of my questions have been asked already. I want to go back to just a couple quick clarifications. On Monogram for the second half of the year, does it make sense to think of the dilution as $0.08 and then $0.04 for the second half of the year assuming the transaction piece is all in the 3Q?

This is Brad. I think that is reasonable. The transaction costs will actually, will obviously be when we close and then the rest would be, again, it kind of depends on when the actual closing date as to how that flows.

That's the only other thing, Gary, depending on the closing, it may be less days in the --

Late in the quarter, early in the quarter sort of thing?

Right.

I want to go back to, it was mentioned but you had previously said you thought the deal would be slightly accretive in 2010. Is that still your belief?

Yes.

Okay. And then just going back to the genomic revenue in the quarter for a moment -- I don't think this was asked -- that number was down sequentially just a revenue number. That's occasionally down sequentially. So does it mean anything here in the quarter that that was off sequentially and I guess most of the reason was the price per session was weaker. Is there a mix issue? Is there anything there that changes your outlook for that what that business is going to do this year?

Gary, when I look behind that number, I see nothing but mix driving that. For example, HPV is in there and grows at a rate volume wise faster and at a price point lower than that average. Some of the other tests may be growing at different rates. I see nothing outside of a mix issue, nothing from a pure price perspective to speak of.

Any additional competition, anything there that is observable?

Not that has been observable to us.

Alright. Thank you.

We have a follow-up question from the line of Kevin Ellich with RBC Capital Markets.

Just a couple quick follow ups. You guys continue to keep doing a good job at keeping a tight lid on expenses. Brad, how much more room is there for margin improvement?

I think there is room for margin improvement. If you think of the things that are dragging on margin this year that we have talked about, bad debt, the pension and other bit costs and the exchange rate. I think that if they are able to grow our business in the mid single digits in the top line, there is definitely room for margin improvement as we move into the future and analyze some of the things we mentioned.

Got it. And then on the cash flow, it was pretty strong this quarter. Was there anything unusual in any of the moving parts?

Not that I can think of. On a year-over-year basis I think we had higher tax payments than last second quarter but nothing in terms of anything unusual. The big pension payment was in the first quarter. We had a smaller contribution in the second quarter than the first, but that was more than off set by the tax payments. So nothing unusual. Really what drove that are the strong cash collections in the quarter on the billing and collections side.

Got it. That makes sense. And then lastly, Dave, going back to the question about other testing areas that you find attractive, Quest announced they moved into the periodontal business. Wondering if you took a look at that and what your thoughts are behind that?

I think the best way to express that is to say there is, in our view, there is a tremendous opportunity for growing our esoteric business in well recognized areas like infectious diseases, like cancer testing, like endocrine, like special coagulation and some of the others I mentioned. So I think we will continue to focus growing our volumes as the things we view as high opportunity and we think we know how to do well.

Got it. Thanks guys.

There are no further questions in the queue at this time. I would like to turn the call back over to management for closing remarks.

Thank you very much. We appreciate your listening and participating in our second quarter earnings call.

Ladies and gentleman, this concludes the presentation. Thank you for your participation in today's call. You may disconnect and have a good day.