Labcorp Holdings Inc (LH) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter Laboratory Corporation of America earnings conference call. My name is Noellia, and I'll be your coordinator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Thank you, good morning and welcome to LabCorp's 2009 third 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 Steve Anderson, Director of Investor Relations. This morning we will discuss our third quarter results, highlight our strategic priorities and growth drivers, and provide answers to several frequently asked questions. I would now like to turn the call over to Steve Anderson 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 investors 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 we are making forward-looking statements during this conference call, and these statements 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, Steve. By now you should have had a chance to review our third quarter financial results. On today's call, I'll 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 September 30th, 2009, increased 13.5%, to $740 million. For 2009, we expect operating cash flow, excluding any transition payments made to United Healthcare, to be approximately $825 million. The operating cash flow guidance includes a $54.8 million reduction from the pension contributions. We expect capital expenditures to be approximately $115 million. We're also pleased with our strong cash collection efforts in the quarter. DSO at the end of September was 48 days. Down five days year-over-year, and down two days sequentially. Our bad debt rate was stable at 5.3%.

Second, revenue growth. During the quarter, we achieved strong pricing growth and to continued mix shift to higher value tests. Revenue increased 4.4% year-over-year in the third quarter. Revenue per excession increased 3.7% year-over-year. Excluding the consolidation of the Companies Ontario, Canada, joint venture, revenue per excession increased 4.3% year-over-year. The growth and revenue per excession is attributable to both mix shift and rate increases. Total company volume increased 0.7% year-over-year. Excluding the consolidation of the Company's Ontario, Canada joint venture, volume was equal to last year. Drugs of abuse testing declined by 15% year-over-year, which reduced total volume growth by 100 basis points. Esoteric volume increased 9.2% year-over-year.

Third, margin. For the third quarter, our adjusted operating income margin was 20%. This margin increased 60 basis points year-over-year due to strong growth in revenue per excession and cost-related initiatives. We remain focused on top line growth and increased automation and efficiency in our labs and patient service centers.

Fourth, liquidity. We remain well capitalized. At the end of September, we had cash of $126.8 million, and approximately $350 million available under our revolving line of credit. At the end of September, total debt was $1.4 billion, including $70.8 million drawn down on our revolving credit facility. During the quarter we acquired Monogram Biosciences. The transaction was funded from cash on hand. We recorded $0.01 per share Monogram transaction related expenses during the quarter. When we announced the Monogram acquisition we estimated total transactional related expenses to be approximately $0.04 per share. Because Monogram incurred and paid most of these fees prior to closing, they were treated as good will rather than expense.

Also during the quarter, we completed our prior share repurchase authorization of $500 million, and our board authorized a new program under which we may repurchase up to an aggregate of $250 million of our common stock from time to time. During the third quarter, we repurchased $165.1 million of stock, representing approximately 2.4 million shares. At the end of September, approximately $180.2 million of repurchase authorization remained under the program. On August 20th, Standard and Poors upgraded all of its ratings on LabCorp from triple B plus from triple B. Also, on September 21st, Moody's upgraded its outlook on LabCorp from positive to stable.

This morning, we announced updated 2009 financial guidance. We are maintaining our guidance of expected revenue growth of approximately 4%. We now expect adjusted EPS of $4.84 to $4.89, including the operating impact of Monogram. Please refer to the table within our press release this morning for a reconciliation of our previous 2009 adjusted EPS guidance, to our updated 2009 adjusted EPS guidance. We intend to provide investors with our 2010 guidance when we release our fourth quarter earnings in February. I'll now turn the call over to Dave.

Thank you, Brad. We are very pleased with our third quarter results and particularly our margin expansion which was driven by strong pricing, esoteric volume growth and cost control. As we predicted, volume growth slowed this quarter due to the economy, continued softness in the labor market, determination of two large government contracts and the annualizing of acquisitions. I would like to provide a few details all how these factors impacted our volumes in the quarter.

We have said throughout the year that volume growth in the second half of the year could slow, given declines in the number of insured lives and the timing of cobra and severance expirations connected to layoffs. While we cannot predict the performance of the broad economy, we remain focused on growing the components of our business that are less sensitive to it. As part of this initiative, we grew our esoteric volumes by 9.2% during the quarter.

The labor market remains soft. Our drugs of abuse volumes declined 15% in the quarter, versus a 10% decline in the third quarter of 2008. Declines in our drug testing business lowered volume by 1% this quarter. With respect to contracts, at the end of the second quarter, we chose not to renew a large state correctional contract in which pricing had fallen below our standards. In addition, after years of litigation, a high volume federal contract was terminated in the second quarter of this year. The impact of these two terminations lowered third quarter volume by approximately 1%.

I will mention three of our strategic priorities. The integration of Monogram Biosciences, expansion of our outcome improvement programs, and development and commercialization of companion diagnostics. First, in early August we completed our acquisition of Monogram Biosciences. The integration has been going as planned, and we expect the addition of Monogram to enhance our industry leadership in infectious disease, and oncology testing, and in companion diagnostics. With our sales force and national infrastructure supporting Monogram's virology, oncology and personalized medicine offers. We expect to drive profitable growth in these business lines in 2010 and beyond.

Second, we continue through our outcome improvement programs to help physicians diagnosis and optimally treat patients. We have expanded our Chronic Kidney Disease program into new markets and it has received a very positive response. The CKD program will be a gateway to other outcome improvement programs as we build on this strategic initiative. Our Litholink program for kidney stone management also continues to generate wide spread support among physicians, patients, and payers, and brings us premium reimbursement.

Third, we continue to develop and commercialize companion diagnostics as a key element of our leadership in personalized medicine. Our K-Ras testing that physicians use to guide therapy for colorectal cancer continues to gain acceptance. As a reminder that it beginning of the second quarter of this year, United Healthcare began to require the submission of a pathology report documenting K-Ras gene type to determine coverage for herbatox and vectibix. During the first quarter of this year, we introduced a companion diagnostic test for PLAVIX, and we are pleased with its uptake take. Our test determines patients who are poor metabolizers of the most common CYP2C19 alleles, which is useful in determining risk for adverse cardiovascular events.

Two years ago, we announced a strategic alliance with Medco Health Solutions to perform a collaborative research effort related to Tamoxifen. The drug deprives certain tumors of estrogen needed for their growth, but approximately 10% of women using Tamoxifen, do not fully benefit from the drug because of variations in genes encoding drug metabolizing enzymes. Our diagnostic test helps physicians identify the patients who will not respond, allowing use of an alternative therapeutic based on the patient's personal characteristics. We are working with Medco to expand the scope of this innovative program to other drugs and disease states.

Finally, our acquisition of Monogram brings us the Trofile coreceptor tropism test which helps physicians choose efficacious treatments for their HIV patients. In summary, we continue to execute on our strategic priorities and remain excited about the growth opportunities that lie before us. Now Steve Anderson 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 third quarter, approximately 36% 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 are 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, which currently has $180.2 million of authorization remaining. 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. Since the beginning of 2006, the Company has repurchased approximately $2 billion worth of its stock.

Can you remind us how of drugs of abuse volumes trended during the year? In the quarter, our drugs of abuse volume declined 15% year-over-year. That compares to year-over-year decreases of 19% in Q2 of this year, 20.1% in Q1 of this year, 15.9% in the fourth quarter of 2008, and 10.3% in the third quarter of 2008.

What is the status of your transition payments to United Healthcare? In the quarter, the Company was billed $6.8 million in transition payments and paid $5.9 million in transition payments. To date, LabCorp has been billed a total of $99.3 million and paid $96.2 million in transition payments to United Healthcare. Now I would like to turn the call back over to Dave.

Thank you, Steve. In summary, we are pleased with our performance for the quarter and the year-to-date. We thank you very much for listening, and we are now ready to take your questions.

(Operator Instructions) Your first question comes from line of Bill Clark with Piper Jaffray.

Thanks, good morning.

Good morning.

Thanks very much for the color on the volume impact from the termination of the two government contracts. I believe you indicated at least one of these was priced below the corporate average. Could you talk a little about what impact, and I assume it was slightly positive, that had on the revenue per requisition here?

This is Brad, we're not specifically breaking that out, but they were lower priced than the average.

So there was a positive if slight impact to that metric then?

Yes, I would say very slight.

And then just looking at guidance, if you take a look at the upside here in the quarter, on the bottom line, and then also just considering the integration of Monogram into the operations, no change to the revenue guidance. Is this a function of the government contracts? And then on the EPS side, if you could just give us a little color there. Thanks.

Yeah, Bill, this is Brad again. On the revenue side, I mean we say approximately 4%. We've obviously got the loss of the contracts are as you mentioned offset by Monogram, so, yes we're comfortable with maintaining that 4% on the revenue line.

On the EPS, there's a table in the press release, but I'll just talk up there how we think about it. Prior to Monogram, we were at $4.85 to $4.95 for the full year of EPS. Monogram operations, we estimated, and still believe will be $0.08 dilutive. So that brings us to an adjusted total of $4.77 to $4.87. This quarter, we are updating that guidance to $4.84 to $4.89. So that's the way we think about that guidance, and one thing I might add is that excludes all of the -- any estimates of the transaction-related fee.

Understood. Last question for me, and again, just kind of sticking on Monogram here, what was the contribution from both Monogram, as well as, for that matter, any of the other smaller lab acquisitions that you've done on a year-to-date basis? Or, sorry, specifically for the quarter.

Bill, this is Brad again. We're not, again, specifically breaking out acquisitions like monogram. That has been probably the only one of any size that we've done during the quarter. I would just say that it's very low on the volume side that you would see it show up. It's a very much above our average price per transaction, so it is helping on the price metric.

Specifically on the esoteric price, correct?

Yes, and on the overall as well.

Your next question comes from the line of Darren Lehrich with Deutsche Banc.

Thanks, hello, everyone. Just as it relates to the two clients you highlighted here in the quarter I just want to make sure we're thinking about that right, to the client revenues as you disclosed in your 8-K, we're down 4%, and so basically the entire amount would be related to those two contracts? Is that the right way to think about it?

Darren, one other thing, that's also where the drugs of boss testing business is. So as I look at the impact from that, and the contracts that we mentioned, it absolutely makes up what's going on in that line.

Okay. And so, as we think about that line, which is about 25% of your total business, are there any other government-type contracts that are up over the next few quarters that we should be thinking about having similar type of impact, and I guess the corollary question is, would you expect client revenues to be down until you anniversary this point next year, and any kind of commentary around that would be helpful.

Darren, it's Dave. The government contracts were sort of the in two different categories, so as we mentioned, the first one was the state correctional contract. It came up for renewal, and the pricing demands were not acceptable to us, and so we chose not to compete for it. The other one was a federal contract that my recollection is, has been literally under appeal and in litigation since I came to LabCorp in 2001, and so I would say the -- the -- what simply happened is that the timing of the process occurred that all of the appeals were resolved, unfortunately adversely to us in this quarter. We do have any number of federal and state contracts, probably -- probably we don't have many as large, in terms of a volume contributor, as these couple were. They do periodically come up for renewal.

There's nothing I can point to, that in the next quarter or six months or year, that I can predict is going to have a similar impact as this one. As I say, it was just the timing of two contracts in one quarter here. And in terms of the client revenue, the annualization of when the client revenue would be down, there will be some impact on the client revenue, obviously, as we -- for the next three quarters in terms of seeing these contract losses annualized. On the other hand, as Brad pointed out, the drugs of abuse testing is in there, hospital testing is in there, clinic trials testing is in there. So there are a lot of moving parts, and you will see some impact on client revenue as a result of this, but I don't think we should automatically decide that it's just going to be down for the next three quarters.

Okay. That's helpful. And I guess moving to the managed care book of your business. You know, we saw capitation down, but nice growth in fee for service, so looks like there's some moving pieces there. Could you just give us some commentary about how to think about that? I'm not sure we've seen capitation volumes down as big so far this year as we did in the third quarter?

Yeah, Darren, this is Brad again. Three things that we talked about last quarter we and as we look at this quarter, the same three things are driving the numbers that we're seeing there. We're seeing membership loss from plans that we have under capitation, so, we're seeing, because we pay a per member per month based on the membership, we're definitely in some geographies and with some payers seeing a membership lost. We have also lost a few contracts in that line as well, and there are some contracts that have converted from capitation to fee for service, so you see a fee for service line that's growing at above our Company average for sure and some of that is a transfer from capitation, but no one of those things bigger than the other, it's just a combination of those three items that are affecting that line.

Okay. That's good. And I just have one bigger picture question. You spent a lot of time in recent months talking to investors, really discussion some of the strategic merits of moving deeper into the pharma services sphere, and I guess I just wanted to get some commentary from you here about how you're evaluating those kinds of opportunities, and how we should think about that in terms of your M&A.

Well, Darren, it's Dave. You know, I think we always try to evaluate the M&A landscape, and what potential acquisition opportunities present themselves. And just, in a thumbnail fashion, obviously there's kind of two basic types of lab acquisitions. One is the smaller acquisition that we consolidated into our existing operations. The second is an acquisition like Monogram, which is a strategic acquisition because of the virology center of excellence, because of the capability to cross sell to the HERmark testing with our oncology and breast prognostic and Her-2 testing, and of then course the companion diagnostic with the Trophile test. And then we're always thinking about what our broader strategic opportunities, and as we -- as we look out into the future, and we look at how should the clinical laboratory be positioned for the evolution of health care in the next five to 10 years, we do see a potential fit with a broader expansion into pharma services. We have a terrific clinical trial, central laboratory business, that is, in our minds, the premier esoteric central laboratory business in the clinical trials arena. That allows us to do biomarker discovery, it allows us to bring up specific tests for pharma sponsors. It allows us to have the opportunity to commercialize companion diagnostics when they're discovered in clinical trials.

So it's an area that -- now having said that, we're not a CRO, we don't have a big international reach. As we've said many times, for our clinical trials central laboratory business, to really compete for large international contracts we do need more international scale in that part of the business. So this is an area that's of interest to us. It's an area that we continue to explore and think about, and it's one of the things, as we think about how strategically we're positioning ourselves for the future, that in our thinking makes -- potentially makes some sense.

That's real helpful. Thanks very much.

Thank you.

Our next question comes from the line of Ralph Giacobbe with Credit Suisse.

Thanks, good morning. Just a couple of things on the volume side going back. Dave, I think you mentioned sort of the economy. I guess would you say there's, at this point, maybe a little bit of a lag effect, we didn't see it as much sort of the the first couple of quarters? And we're starting to see it now, and you mentioned potential cobra roll-offs, any way to get more granular in terms of quantifying or thinking about that?

Ralph, this is Dave. There's really not much of a way to quantify cobra roll-offs or loss of severance. The IMS data continue to suggest, as we see it anyway, that physician visits are down year-over-year, and in some -- in some practice areas, like internal medicine and cardiology and women's health, even sequentially quarter over quarter, it appears that physician visits are down. So it is difficult to draw a straight line is and say, well physician visits are down because of cobra and severance benefits timing out, but this is something we have -- we have said was a potential in the second half of the year from the very beginning of the year. I would just say from the perspective of our overall volumes, I think it would be we again, naive to think there's not some impact given what's going on in the economy, but I think our volume growth continues to be pretty healthy.

And then I guess as we think about the fourth quarter, clearly we're going to comp some level of the drugs of abuse testing drag. We also sort of face a seasonally weaker quarter and you've got these terminations of these large government contracts, which I don't know if you said exactly the timing of when they hit in the quarter. Given all that, is there a way to think about, or can you direct us into how you think about Q4 volume? Do you think we could potentially go negative, do you expect positive, do you expect flattish?

Well, we have a pretty firm policy that we don't talk about volumes in the quarter, so I don't see anything that suggests huge differences one way or another in the trend that we saw in the third, but I'm not going to talk about it beyond that.

Okay. And then I just want to go back to -- go ahead, I'm sorry.

One over thing, I'm sorry. The timing of those contract losses, we basically saw the -- my recollection is both of them termed around the end of June, beginning of July, so you pretty much saw the full impact of them in the quarter.

And going back to the margins, a little bit of an uptick there after a little bit of pressure in the first half of the year. When you think about LabCorp 2010, I know there was a big push at the end of last year and even heading into this year, can you maybe give us an update on where you are there?

Yes. One of the principle components of Lab Corp 2010 was the ability to achieve bad debt reduction through improved efficiency and improved collection processes, and clearly we have not achieved bad debt reduction in 2009, given the overall economy, given what we've seen is around us. That's not terribly surprising to me. We have kept bad debt stable, and obviously you can see by the five day year-over-year and to day quarter-over-quarter improvement in DSO, we're doing a good job on collection. So we're not going to get the full impact of the bad debt reduction that was contemplated in 2010.

The rest of the 2010 program is very much on track and we're doing a number of the things we talked about, our collection processes and patient service centers, the automation of our HPV testing. Some additional lab automation that I'm not going to talk about in specific detail. Some additional patient service centers that I'm not going to talk about in specific detail, but all of those things are starting to work their way into the run rate as cost savings, and, you see them appearing in improvement in both gross profit and operating margin.

Okay. And then just my last one. Can you tell us what percentage of your business is Medicare advantage?

Ralph, this is Brad. I don't have that data point.

Okay. But would that -- would that -- would that fall to under Medicare, or within your managed care bucket?

That falls in our managed care bucket, and it doesn't come into us, at least that I can tell, identified that way.

And can you just -- is that -- can you tell us if that's reimbursed at Medicare or commercial rates?

I don't think we're going to talk about specific reimbursement rates within the managed care group, Ralph.

Okay. Thank you.

Our next question comes from the line of Arthur Henderson with Jefferies and Company.

Hi, good morning. Going back to this guidance question, maybe I'm not understanding. On the high end of the guidance range, it looks like, as you adjusted it from the Monogram Biosciences, it looks like you bumped it by $0.02 and yet the low end was $0.07. Brad, what is that swing factor right there that's causing that differential? If you could address that.

I think it's just our performance year to to date, would be simply the only thing driving the tightening of that range on the bottom, and the raise on the top, because essentially we're down to the fourth quarter here. We've got --

Right, I understand. I was just curious if there was anything in the in last, say, three months that you've seen, after Monogram Biosciences that would, that on the high end didn't meet your expectations.

Nothing specific.

Okay. And back on the Monogram Biosciences acquisition, as far as the integration is concerned, can of you kind of give us an update to what you're doing right now with respect to that integration and where you stand? And if you could remind me, I think you -- when you made the acquisition, you made some commentary that it would be dilutive this year, which obviously we see in the numbers, but next year did you indicate that it was going to be sort of break even? Just an update there would be helpful.

Art, it's Dave.

Hey, Dave.

We said that it would be slightly accretive in 2010, so operationally dilutive this year, but slightly accretive in 2010, and with regard to the integration, probably the biggest focus of the integration up to this point has been the integration of the sales capabilities, and the ability to -- from a selling and a test requisition form and an IT perspective to be able to -- physicians who were ordering tests from Monogram, but not using LabCorp , or using LabCorp , but not ordering testing from Monogram, the ability to order that -- order the testing in a consolidated -- order the testing in a consolidated fashion and the convenience of one-stop shopping, plus obviously, Monogram with it's premier array of tests complementing what we offer to the physician office.

So that's probably been the number one focus, the number two focus has been just evaluation of the capabilities and of what Monogram has been focusing it resources on, and making sure that those are consistent with LabCorp 's strategic priorities, so that together, we can advance Monogram as a center of excellence for virology, we can use our Her-2 and breast prognostic capabilities, integrate their HERmark capability into that, because the HERmark test is extremely important, as a reflex test, there are women who test -- who are positive by Her-2 or negative by Her-2, but falsely so, and the HERmark test is a more sensitive indicator of whether they should or not receive perceptance. So those are probably the two biggest things that we're focused on right now. And obviously number three, Monogram has the full public company infrastructure, which isn't necessary once we complete the integration. And so just eliminating the expense associated with the public Company infrastructure is the

That's very helpful. Last question, just on the commercial payer contracting front. Anything in the horizon over the next year, as far as opportunities for new contract opportunities, or anything that's coming up for renewal?

We did -- we did extend the CIGNA contract, and that documentation was completed this quarter. So that was the -- that was the nearest upcoming renewal in terms of a significant managed care contract. You know, I -- none of the major managed care contracts will be coming up for renewal, and I think the opportunity for us continues to be expanding our footprint and gaining share within the contracts that we -- that we participate in.

Okay. Great. Thanks very much.

Thank you.

Our next question comes from the line of Tom Gallucci with Lazard Capital.

Thanks for all of the color. Good morning. Thinking back to those contracts that you mentioned, the state and the federal ones, who is performing those services now?

I don't know with respect to the state one, Tom, and the federal one, the litigation centered around the government's desire, as I recall, to award the contract to a small business, and we didn't fit the definition.

Okay. And then we talked a little bit about the impact on those contracts from sort of a payer mix standpoint. As far as test mix, the way you look at the different buckets, where is the primary impact there? Whether it's routine or other?

Tom, this is Brad. Most of that impact is showing up in the core on our testing mix schedule.

Okay. And then histology is still under some pressure. Can you remind us how you're thinking about that business currently and of the issue you're seeing there?

Yeah, there are a couple of things that are -- that are going on in histology, and we've mentioned them before. One, primary one is insourcing of pathology work by large nonpathology practices, which is contributing to volume pressure, and it remains a highly fragmented and very competitive market, and so we -- we are, I think -- I think we're doing a good job in the histology market, but we recognize there are a lot of small competitors out there, the insourcing phenomenon seems to have continued to gain momentum, and that does have an impact on the results that we achieve.

So is there anything strategically that you can do differently, or operationally that you're doing in that business, given -- given that landscape?

I think the biggest opportunity for us is the -- the advantage of the IT capabilities and the -- and the one-stop shop capabilities that you can get with a larger provider like LabCorp. You probably saw the article recently, and I'm not sure where it came out, that said that about 30% of the women who should be getting Her-2 testing for -- before they're administered (inaudible) or not getting it, and in about half of the cases where it's been administered, it's not being correctly interpreted. I think smaller pathology labs, because they see fewer cases, because they don't have the resources or the capabilities of a larger provider, like us are going to be more prone to not going to be able to provide consistent high-quality results.

I think the second thing strategically is, physicians who are doing pathology/oncology have a lot of testing needs over and above the anatomic pathology. They have peripheral blood, they have toxicity testing, they have the need to determine whether companion diagnostics -- whether there's a diagnostic that will assist in determining which therapeutic to use, so I think strategically just continuing to focus on the full menu of LabCorp offerings, the range of our offerings, the IT capabilities to deliver it all in one consolidated report. We have brought up eight color flow cytometry, which has been extremely well received by our customers. The main thing is to continue to stay the course, and execute, and we're going to be fine.

Okay. On -- back on the payer mix, patient direct business has been down all year. You started talking about the economy, maybe some drop off of the cobra benefits. Do you think there's a risk to see more of those patients overtime, or do you to think those patients are going in other directions or just not getting any care at this point?

Certainly there's a -- there's a likelihood that if more people are becoming uninsured, that we would see more uninsured patients, and -- so part of the reason for our focus on collection at the front end and part of our reason for introduction of the uninsured patient discounts was to make sure, first of all, that we provide a viable alternative to get laboratory testing for people who don't have insurance, and second of all, to make sure that we get paid for the services that we perform.

Okay. Then finally, just to get back to your answer about your central lab business, maybe could you just give us an update on what the trends are there in your business today?

Like all clinical trials related business, Tom, it's been a -- it's been a tough year for our central lab business, not due to anything other than major pharma consolidations, a lot of -- a lot of even work for which we have signed contracts being deferred until pharma mergers close, so year-over-year the revenue run rate is down. It's not a huge part of the business. But the revenue run rate is down. On the other hand, I think we have started to see, in the -- even in the last month, as some of these mergers have closed, we're starting to see a better flow of work and of new -- of new projects being contracted out.

Do those -- last question, do those mergers maybe increase any pressure on you to get bigger, as is maybe those bigger companies are narrowing the number of players that they're using, or --

I don't think they put pressure on us to get bigger, because where we're positioned in the clinical trial central lab space is that we do a lot of esoteric testing, and with our tandem acquisition, we do a lot of marker discovery, and large and small molecule work that many of the bigger CROs don't offer. So I don't think it puts pressure on us to get bigger. As I have said, we would like to be able to age to compete for large international trials in addition to being an esoteric niche lab, and to do that we do need more international reach in the clinical trials business.

Right, right, great. Great. Thanks for all the color.

Our next question is coming from the line of Kevin Ellich with RBC Capital Market.

Good morning, thanks. Just going back to the two contracts, and Brad I think you might have mentioned it's but I missed, but which payer segment were those two contracts in?

In the client payer segment.

Client segment. Okay got it. Thanks. And I know you don't talk about volumes intraquarter, Dave, but could you talk in general about kind of then trends that you're seeing as you exited the quarter, and get your thoughts as you head into 2010?

We didn't see anything abnormal at any point in the quarter, so I think there were no major ups and downs, volume was -- the volume was consistent in terms of how it trended with what we had seen in the past. And a lot of the -- a lot of what's going to happen in 2010 in terms of volumes I think is very dependent on where does the economy go? I mean we are, obviously as you can tell by looking at our numbers, we are annualizing the drugs of abuse declines. It was -- it was 160 basis points in the first quarter. I think it was 150 in the second. It's a hundred in this quarter. So we're seeing that number decline, which means that we're from quarter to quarter, which means that we are annualizing it, and obviously the fourth quarter is where we really saw the drop-off last year. That's going to make -- that's going to -- that's going to suggest volume growth year-over-year because of the comp. But, that business alone is not going to pick up until we start to see some job creation in the economy. So I -- as I say, we're very satisfied with our volumes, considering what we see in the world around us, and when the economy returns to what I -- what I think is more normal environment, I think we'll see volumes return to what we think of as our normal expectations.

Okay. Thanks for that color. Going back to the -- Brad, you mentioned that some of the capsated contracts converted to a fee for service. What's driving that, and is it more of an opportunity given the pricing differential per test?

Well, and some of that is showing up in the price decline that you see there, too, because sometimes it's just a payment mechanism for some payers, so they may have been higher than the average on a capitated basis, and just as a payment mechanism want to switch to a fee for service mechanism. So that's one reason.

Another reason maybe, I typically think of the capitated business associated with HMO membership and eve IPA membership in some geographies, so as potentially plans phase out, their HMO plans are reduced, their HMO membership, we would see a shift to fee for service.

Okay. That makes sense. And then Dave, you talked about the -- I think you extended the CIGNA contract. Are there any details that you can provide, how long as that contract now?

I believe -- I believe we extended it to 2013, and, no, we're not going to provide any details other than that, except to so say that we're very pleased with the terms and conditions.

Is that exclusive?

No, it is not.

Not. Okay. Thanks. And then if I did the math correct, it looks like the Canadian price per session has been increasing. I think it came in around $28.50 per test. And we have seen this trend over the last couple of quarters. What is driving that increase? Because that's more like capitated business, isn't it.

Yes, Kevin, and the exchange rate is totally what you are seeing there. It has improved sequentially throughout this year, but in the third quarter, it's still a drag from what it was in the third quarter of last year. But it has been sequentially improving this year.

Okay. And then given the stability of that business, Dave, I think we've had conversations, you seem to like that business, is there any way you could expand up in Canada, or I guess -- I would also like to get your updated thoughts on the international market.

Obviously we -- we do like the Canadian business, and we continue to look at opportunities to grow that business in a -- in a way that's consistent with our overall growth strategies. I would say on the international market, the -- the international market, while there is a lot of opportunity, also involves multiple payments systems, many single payer government systems. So we continue to look at the international market. I should mention that in our -- in our collaboration with the Mubadala, the Abu Dhabi sovereign wealth fund around opening the national reference lab in the United Arab Emirates, that we are on track to open the first phase of that laboratory in Dubai, and that is on track to open in November. So next month. And we continue to be on track to open the second phase of it, which is the Emirates reference lab in Abu Dhabi in the spring of next year. So we are looking at international opportunities, we're particularly if the collaborative approach, we can test the international market without taking on a great deal of risk. But, we still see main obstacles to thinking about a significant international presence.

Got it. Okay. That's all I had. Thanks.

(Operator Instructions) Our next question comes from the line of Amanda Murphy with William Blair.

Hi, good morning, just a couple of follow ups on the esoteric business. First you spoke to the strong esoteric volume growth specifically, but if you look at revenue per requisition, it looks like that's down again this quarter. I'm just curious, is that mix related, or perhaps the insourcing trend you spoke to earlier.

Amanda, this is Brad, I consider that to be mix related. There aren't any major rate resettings that have gone on there. As I mentioned in the past, I think when we have tests like vitamin D that are lower than the average growing rapidly, and, for example, the histology volume going away, that is higher than the average, I think that's what is playing into what you see there in the total numbers.

So how do we think about, just in a longer term, the contribution of volume and revenue per requisition to overall esoteric revenue growth? You know, longer term trend perspective?

Amanda, it's Dave. I just think it's very difficult to predict. I mean, if you go back three or four years, the big driver of esoteric volume growth was cystic fibrosis, which was a substantially higher priced test. You go back two years HPV, which is a higher but not as high-priced test. Now vitamin D, which is a still above the Company average price per test, but still below cystic fibrosis and HPV. Obviously if we're able to sell more of the Monogram tests, that's going to drive higher revenue per requisition with a relatively low volume impact. As we start to see up take of our microarray testing, again, relatively high price growth per requisition, without a lot of associated volume growth. I think it's just difficult to predict what we're going to see as a trend there, other than we are going to continue to focus on growing the esoteric volumes and fully integrating the esoteric businesses into the test menu.

Okay. That's helpful. Last one. You know, clearly the focus on specialty had some positive impact. How much more traction do you think you can gain from that initiative going forward?

I think there's still ample opportunity in things like advance cardiolipid testing, the oncology specifically as opposed to anatomic pathology, rheumatology, endocrinology, we've seen very, very strong growth in our endocrinology business. Our allergy business is performing very well, so I still think there's plenty of opportunity in the specialty markets for us.

Okay. Thanks very much.

Our next question comes from the line of Bill Clark with Piper Jaffray.

Thanks, just a couple of quick follow-ups. One, just want to clarify, periodically, the tests that were once classified at esoteric are changing the core, and I think a good example might be amino assay a couple of decades ago, we didn't reclassify anything into core in the quarter did we?

No, we don't.

And then the last question for me, you called out K-Ras as well as vitamin D. Anything else on the esoteric side that helped drive that business?

Well, when we talked about K-Ras in terms of companion diagnostics, I wouldn't -- that by itself is not moving the needle on esoteric. I mean, it's vitamin D, it's HPV, it's prenatal genetics. Those are are the things that probably are accountable for the most growth there.

Very good, thanks.

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

Thanks for taking my question. Dave, you had mentioned in the past shutting down some of the lab facilities, central lab facilities, Hernan is the one that you've called out, but I think you told me once that there were three or four others that could ultimately come offline as well. Is that still in the cards? And your sense on timing on something like that?

We -- we have substantially down sized the Hernan facility, and you probably remember a couple of years now, we substantially down sized the Louisville facility, and we continue to look at these -- at these opportunities. You know, the challenges to maintain logistics and customer service around any sort of a facility down sizing or a facility shutdown. I think there still are some opportunities for us, Bob, and -- but I don't have a sense of when those things might -- might occur. We are all -- in the next couple of years, we will continue to look hard at all of our facilities, and seek opportunities for rationalization.

Okay. My understanding, also, you won a large paternity contract in Ohio from the mighty Orchid Cellmark there. Did that hit this quarter, or is that something that is to come?

We did. You are correct, we did win a large paternity contract in Ohio. And I believe we started seeing revenue from that at some point in the quarter.

Early, late? Do you know?

I just don't remember. I'm going to say in the middle of the quarter.

Okay. And then relative to what you lost, any sense of size on it, or --

It's considerably smaller than what we lost.

Okay. Okay. And then just lastly, given what's on then table for health care reform, I mean, I could see a scenario where smaller labs with more Medicare business might be under more pressure going forward. Is there any thought or logic in a strategy to maybe get a bit more agressive on price over the next year, to hasten some departures from the market, or just no interest on your end to shift the strategy?

I -- I don't think -- well, first of all, obviously, as you know, Medicare is fee scheduled based payment, so we don't -- we don't compete directly with labs that have a higher percentage Medicare on Medicare pricing. In terms of other pricing, I mean --

Yes, other pricing, yes.

Yes, in terms of other pricing, we evaluate every opportunity based on a number of factors. What is the potential volume opportunity? What is the pricing opportunity? What's the mix of testing? So I can -- I can say we don't have any intention of adopting a strategy of let's just go out there and cut price to gain volume. We'll continue to look at the -- at all of these opportunities based on what's the overall potential positive impact to the business, and is the business going to be consistent with the profitability profile that we look for when we bring new work on.

Got it. That's it. Thank you.

Thank

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

All right. Thank you. Good morning everyone.

Good morning.

Just a couple of final questions here, I know it's late in the call, so I'll try to be brief. Maybe just can you talk a little bit about just the pricing more here, in that you did see a really good number, obviously a more favorable mix shift. So how do you think about true pricing, and how do you think about benefit from mix as we look at the end numbers here? And I have a quick follow up. Thank you.

Hey, Adam, it's Brad. I think mix is a larger driver in the past currently and in the future than real pricing. So that is a general answer to that question.

Okay. But in another quarter here, revenue per session accelerated pretty meaningfully, and so you're saying that that would be primarily mix, the way you look at it?

Right, in test mix, and I might add in payer mix as well, as some other questions got around. I mean, we are losing capitated volume and revenue, which is lower priced, so I think that also test to mix, you have payer mix, and I think those are two contributors. I also mentioned one other factor is Monogram. And again, Monogram has very little volume, so we're seeing that in the the revenue per excession, much more so than we would see in the volume statistic. And again, around the contract losses, without specifically quantifying it, we mentioned those were also lower than the average price.

Sure.

So again we can be fairly certain what's going on with real prices in our business as we have take bite managed cares, government payers, as we have talked about some of our client business, see again, it just leaves it to the fact that it's the other two factors that drive it more so than real price.

Adam, it's Dave. I just don't want to leave the impression that there's no real price in the revenue per requisition trend that we're seeing, because, obviously there was a government price increase this year, and we have had price increases from a number of different payer groups. We -- every year we seek is to increase prices in our client sector, whether it's direct physician hospital, clinical trials, even in our drugs of abuse testing. And we have price escalators built into managed care contract. So they're -- I don't want to leave the impression that this quarter's revenue per requisition is wholly driven by mix, because there is some real price in there that has been the result of our pricing initiative.

Absolutely. Absolutely. Okay. All right. And then just a final question, just as you think about volumes, I guess a kind of pro forma volumes if you back out and of those items, you're saying it's about 2%. Qwest yesterday, or earlier in the week, they put a flat number, but after backing out some stuff, they were a little bit lower than that. So I guess do you think that the market is growing at that rate, between 1% to 2% in terms of volumes? And I guess what I'm getting at, you do think you're taking share, you do think share has been stable? Just curious to yourself to get your thoughts there.

Adam, it's Dave. I think right now the market is probably growing at about that rate. Think the market is growing more slowly than it hat historically, because of the factors that we've talked about, and I think we -- I think when we start to see, again, job creation in the economy, and a little more stability in the economy, we'll see a return to more traditional growth rates. I think it's hard ever to say -- to say that one is taking share. We are growing the top line, both in -- and we are growing the volumes. When you adjust for these somewhat unusual circumstances, and we're pleased about that, and again, I think a lot of it is just we're doing a good job focusing on doctors who are writing lab slips, and showing them the benefits of why ordering their testing from LabCorp with our fully integrated IT solutions, with the broadest test menu in the industry, is advantageous to them and to helping them treat their patients optimally.

Okay. Great. Thank you very much.

(Operator Instructions) Our next question come from the line of Shelley Gnall with Goldman Sachs.

Thanks for taking our questions. Just a little bit more on the volumes front, as you think about your run rate volume trends, do you get a sense that the demand is weaker coming from hospitals, or from physician offices?

I -- I don't -- I don't know the answer to that question. I mean, we don't -- the -- the -- when we see the -- I mean, when we see the volumes coming in, it's probably just very difficult to get to get to that level of granularity about where does it come from. When a patient comes into a patient service center with a lab rec, we don't have any ability to determine did that come from a doctors office, a hospital campus, did it come from a hospital clinic? I mean, so I think it would be -- I think it would be nothing more than speculation if I were to try to give you a direct answer to that. I would just say, again, we saw -- we didn't see anything in the quarter that was inconsistent with what we were seeing in past quarters in to terms of the trend, and we didn't see anything that kind of jumped out at us as a particular sector other than drugs of abuse being way up or way down.

Okay. Thanks. I guess on the drugs of abuse testing, just one follow-up, can you tell us where we are now with drugs of abuse as a percent of volume or as percent of revenue, or both?

I don't know that we could tell you specifically where we are today. Historically, we've said drugs of abuse and is about 3% to 4% of total revenue, and it's about 7% of total volume. Obviously drugs of abuse testing has declined, and total volume has gone up. I mean, those numbers are an approximation, but that's where we've been historically.

And am I right in understanding that the -- some of the feedback you've given on the call, to think it's realistic to expect a continued drag from the drugs of abuse testing beyond the anniversary effect in the fourth quarter?

Well, it's hard to know, because it's hard to know what would happen in the first quarter. I mean, the fourth quarter was when we saw the major decline last year, just to kind of quickly review those numbers for you. The drug of abuse testing, and I think Steve mentioned them in its comments, in the first quarter of this year, we saw a 20% decline, as year-over-year. It was 19% in the second quarter, and it was 15% this quarter. We go back to the fourth quarter of 2008. It was 16.9%. Remember, that's off a higher base, and then in the third quarter of 2008, it was 10.3%, again off of a higher base. So what you would see in the fourth quarter presumably is the annualization of the first real significant drop, big drop, and then you would see in the first quarter the annualization of a big drop that we had in the first quarter of '09. So that the comps will definitely get easier and, as I've noted, if you look sequentially at the drag from drugs of abuse testing in our results, the drag is getting smaller. Right? So I would expect the drag to continue to get smaller going forward. It's not a static number, but I can't predict what it will do as we get out beyond the fourth quarter and into next year.

That's very helpful. Thank you so much.

And at this moment, I'm showing there are no further questions in the queue.

Great. Thank you very much. We appreciate your listening to our call.

Thank you for your participation in today conference. This concludes your presentation, and you may now disconnect. Have a great day.