Labcorp Holdings Inc (LH) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Laboratory Corporation of America earnings conference call. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. David King, Chairman and Chief Executive Officer of LabCorp. You may proceed, sir.

Thank you, Jasmine. Good morning, and welcome to LabCorp's 2010 first quarter conference call. Joining me today from LabCorp are Brad Hayes, Executive Vice President and Chief Financial Officer; Ed Dodson, Senior Vice President and Chief Accounting Officer; and Steve Anderson, Director Investor Relations. This morning, we will discuss our first quarter 2010 results, highlight some of our strategic initiatives, 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 get started, I would like to point out 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 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 2009 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 first quarter results. On today's call, I will discuss four key measures of our financial performance -- cash flow, revenue growth, margin, and liquidity.

First, cash flow. Our cash flow trends remain excellent. Free cash flow for the trailing 12 months ended March 31, 2010 increased 17% to $777 million compared to $663.9 million in 2009 net of transition payments to United Healthcare. We're also pleased with our strong cash collection efforts in the quarter, as evidenced by significant improvement in DSO. DSO at the end of March was 46 days, an improvement of six days year-over-year. Although DSO increased two days sequentially, this increase is typical from the fourth quarter to the first quarter. As a result of our success in cash collections, we reduced our bad debt rate by 25 basis points.

Second, revenue growth. Revenue increased 3.3% year-over-year in the first quarter. During the quarter, we achieved strong growth in revenue per requisition, which increased 6.4% year-over-year. The growth in revenue per requisition is attributable to mix shift, increases in test per requisition, and rate increases. The revenue growth per requisition was also impacted by the Canadian exchange rate, Monogram, and the lost government contracts, which together improved revenue per requisition by 3.5%. Total Company volume decreased 3% year-over-year. Excluding Canada, volume decreased 3.3% year-over-year. Inclement weather had a significant impact on the first quarter, resulting in an estimated 1.3% reduction in our volumes. Also, the termination of two large government contracts at the end of the second quarter of 2009 reduced volume by 2.4%. Excluding these items, domestic volume increased 0.4% in the quarter. Esoteric volume increased 5.3% in the quarter. We estimate that bad weather lowered revenue by $23 million and EPS by $0.08 in the quarter.

Third, margin. For the first quarter, our adjusted operating income margin was 20.4%. This margin decreased 40 basis points year-over-year, due primarily to the impact of weather. Fourth, liquidity. We remain well capitalized. At the end of March, we had cash of $172.2 million and approximately $440 million available under our revolving line of credit. At the end of March, total debt was $1.3 billion, including $20 million drawn down on our revolving credit facility. During the first quarter, we repurchased $105.7 million of stock, representing approximately 1.4 million shares. At the end of March, approximately $216.1 million of repurchase authorization remained under our previously approved share repurchase program.

This morning, we reaffirmed our 2010 financial guidance. We expect revenue growth of 2.5 to 4.5%, adjusted EPS in the range of $5.35 to $5.55, excluding the impact of any share repurchase activity after March 31, 2010, operating cash flow of approximately $870 million, excluding any transition payments made to United Healthcare, and capital expenditures of approximately $135 million. I will now turn the call over to Dave.

Thank you, Brad. We are very pleased with our first quarter results. Despite severe weather, we grew revenue by 3.3%. We also grew Esoteric revenue by approximately 5.2%. Taking into account weather and the previously lost contracts, total Company volume increased by 0.5%. Revenue per requisition remained strong, increasing 6.4%. Our continuing focus on optimizing our business would have resulted in operating margin expansion, but for the impact of weather. In addition, gross profit margin expanded year-over-year by 20 basis points in the quarter, and would have expanded further, but for the weather impact. This is a good indicator of the success of our key initiatives to optimize our business. I will briefly discuss these initiatives, which are focused on enhancing the physician and patient experience.

First, we continue to improve the patient experience through online appointment scheduling and automating the workflow in our Patient Service Centers. More than 80% of the patients that visit our Patient Service Centers now have access to our online appointment scheduling, and they have responded favorably to it. Patients can now schedule appointment times that are convenient for them, and typically get in and out of our facilities within approximately 10 minutes. Later this year, we will introduce second generation online appointment scheduling, which will provide further improvements for our patients. We have also automated the workflow system in our Patient Service Centers to guide our phlebotomists through the specimen collection process via a pictorial touch screen interface. The system provides standardized processes across our Patient Service Centers, helping to eliminate unnecessary steps and improving speed and accuracy in the collection process.

Second, we continue to make significant strides in our lab automation through our Protedyne subsidiary. This automation improves throughput, speed and accuracy of testing and improved turnaround time, giving physicians and patients faster access to even more reliable results. Third, we continue to enhance our IT capabilities with a focus on online services, client connectivity and analytic tools. As part of our open platform strategy, we interface with thousands of EMR and EHR systems, enabling physicians to easily order testing and receive results. Later this year, we will roll out IT improvements that will make it easier for physicians to order testing and receive actionable diagnostic information rom LabCorp.

As we have said, our strategy is to be the leader in personalized diagnostic medicine. The realization of the potential of personalized medicine will be heavily dependent on the identification of markers and genetic characteristics of disease. Yesterday, we announced the formation of a joint venture with Duke University Medical Center to commercialize such biomarkers. The biomarker factory is designed to discover, validate and translate new biomarkers into widely available clinical tools that can measure individual therapeutic responses, predict the disease progression and evaluate biologic or disease-causing processes.

Biomarkers are currently being used in developing treatments for many forms of cancer, as well as for many diseases such as Alzheimers, cardiovascular, and Hepatitis C. The biomarker factory will position LabCorp squarely on the pathway from the research bench to the physician office. This venture will contribute to the realization of the promise of individualized medicine and will assist physicians in understanding how to use newly developed biomarkers to improve patient outcomes and reduce healthcare costs. In summary, we are pleased with our first quarter performance and remain very excited about our future growth opportunities and the strategic initiatives that will help us to capitalize on them. 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 first 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 plans for uses of free cash flow during 2010? 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 programs. 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 of how drugs of abuse volume trended during the year? In the quarter, our drugs of abuse volume increased 6.8% year-over-year. That compares to year-over-year decreases of 6.5% in Q4 of 2009, 15% in Q3 of 2009, 19% in Q2 of 2009, and 20.1% in Q1 of 2009.

What is the status of your transition payments to United Healthcare? In the quarter, the Company was billed $10.1 million in transition payments and paid $14.5 million in transition payments. To date, LabCorp has been billed a total of $118.8 million and paid $117.3 million in transition payments to United Healthcare. As a reminder, our obligation to reimburse United Healthcare for transition payments ended on December 31, 2009. We expect the final invoices for these payments to be processed over the next quarter, and we continue to expect the final amount to be in the range of $125 million. We will update you on these final payments next quarter. Now I would like to turn the call back over to Dave.

Thank you, Steve. In summary, we are pleased with our performance this quarter and are optimistic about our business in 2010 and beyond. Thank you very much for listening. We are now ready to take your questions.

(Operator Instructions). And your first question comes from the line of Adam Feinstein from Barclays Capital. Please proceed, sir.

Yes, thank you. Good morning, everyone. Appreciate all of the details there. Just -- maybe just if you could talk a little bit about just with weather, I guess, do you view that as -- so February wasn't weak. Obviously there was a lot of bad weather in February, but then do people go back to the doctor in March? So I'm just trying to figure out, did you see a bump-up in March as some of that volume came back, or did some of that just not come back? So just how are you guys thinking about that, I guess, just big picture question there? Then a quick couple of follow-ups.

Adam, this is Dave.

Hi, Dave.

The way that we think about it is that some of it comes back. Typically after a severe weather event, we do see a small increase in volume in the next several days, but clearly it doesn't all come back. And the reason I say that is if you think about who's getting testing, first of all, on days when doctors offices are closed, people are just not going to the doctor. And whether those patients all come back or don't come back, we have no way of knowing. Second of all, you have the person who goes to the doctor's office and gets a slip for a blood draw and then there's weather and they can't get to the Patient Service Center for two or three days, and they feel better, so they never -- they just don't go, and that volume doesn't entirely come back. So it -- you can't look at weather and say we lost this much, but we gained this much back. I think the way we quantify it is we look at what is the typical experience given the day of the week, the month, the strength of the day; how much did we see a decline, offset that by if we saw anything unusual immediately following, and that's how we reached the quantification.

Okay, great. And then I guess the only part that would be just the pathology piece if surgeries were pushed back and maybe they got rescheduled for the next month? I guess there may be some pick up there?

Yes, you could see a little bit of pick up there; but again, I think that -- I think the pathology and oncology business tend to be less weather affected just because of the nature of the illnesses, but they also are a smaller component of total volume.

Okay, fair enough. Okay, and then just with respect to volumes, obviously we've seen your volumes and others, and clearly there was impact from weather in the quarter. But even ex weather, there's been this continued softness with the anecdotes about less people going to the doctor and such. Just, I guess how are you guys thinking about your market share -- and so -- and certainly it's always hard to really gauge, but do you think with the slowdown that everyone's seeing the same slowdown outside of the two major companies, and so just trying to think about how you guys think about -- whether you think you have stable market share, or just any thoughts there.

Yes, I think we have stable to slightly growing market share. I do think -- and that's particularly in the core business, in what I would describe as the non-pathology Esoteric business. I think there our market share is stable, and even slightly gaining. I think the pathology business has -- we have not been gaining market share, and I think there's several reasons for that. One is the physician insourcing that we've talked about. The second is the very difficult competitive environment and the relative ease of entry into the market. So I kind of draw a circle around the pathology business and say our market share there has not been increasing. But the rest of the busy, I think, our market share is stable and even slightly growing.

Okay, great. And then just my final question is just on the guidance. You guys maintained guidance even with some of the data that impacted in the quarter. So just -- I guess just what are the -- is there some assumption of margins being better? Just trying to think about how you guys thinking about the guidance and what are the puts and takes there?

Adam, this is Brad.

Hi, Brad.

I think our guidance is a fairly wide range still at this point, and has a lot of likely outcomes. If I think about some of the puts and takes, I mean, obviously you can see we had a pretty significant increase in our revenue per recognition, up 6.4%. And there are some contributors to that that will more than likely annualize during the year -- the Monogram acquisition we mentioned. The Canadian exchange rate would be one that's hard to call. The lost contracts we will annualize for certain. So I would expect to see that number moderate over the course of the year, and then volume would need to be there to offset it, and some of the factors that I mentioned will also have counter impacts from annualization as well. So I think just after one quarter of results, we're still comfortable with our guidance where it is. And again, we'll be looking to perform for the rest of the year.

Thank you very much.

Adam, Dave. Just one thing to add to that. Our guidance does not imply the add-back of the weather, so in maintaining our guidance we're not -- it doesn't imply that we're adding back the sense of weather impact this quarter.

Okay, great. All right. Thank you for clarifying that.

Your next question comes from the line of Bob Willoughby of Bank of America. You may proceed.

Hey, Dave, you touched on it, I think, briefly; but I guess if I look at that histology business and the volumes and model that out at the current rate for the next ten years or so, you'll be completely out of the business by then. Is there a new approach or a new answer to why the attrition on the histology side is going to slow down here, but for acquisitions? I mean, what can you do organically to stop that attrition relative to the trend that's been on?

In the first place, Bob, I think the physician insourcing we've seen the largest impact of, and physician insourcing generally works with large physician groups and frequently with highly specialized physician groups. And so it's urology, it's dermatology that -- where we've seen a lot of that impact. And I think that for the most part, the big customers who were going to insource have insourced. I think in the competitive end, the rest of the -- and I should say there, I'm optimistic that as part of overall healthcare reform, there will be a hard look in Washington at what does insourcing and these types of activities do to utilization, and is that from a regulatory perspective, what should be permitted? So I don't think the insourcing trend is going to continue forever. We go back to the history of the Shell labs and the [Pop] labs and the -- these are not trends that I think go on indefinitely.

On the competitive environment, the landscape is difficult. There are a lot of strong competitors in the marketplace, and my answer to that would be, we just have to pick up our game competitively -- we have to pick up our game in terms of menu offering, we have to pick up our game in terms of customer service. I think the IT initiatives will make it easier for doctors to order that type of testing from us. So we're not giving up, and we have no intention of exiting the market. Part of it is not within our control, and part of it is.

Okay. And can you just -- the 25 bps improvement in the bad debt metric, is that the run rate for this year? You sounded somewhat optimistic there is more leverage on that front this year, but is that too much to hope for?

This is Brad. We're always looking to do better on that metric. So I think our initiatives are still working. They are still helping us, and I would expect over time -- I wouldn't say, give you a definitive time line, but we still think there's room for improvement in the bad debt rate.

Great. Thank you.

Your next question comes from the line of Kevin Ellich of RBC Capital Markets. You may proceed.

Good morning. Thanks for taking my questions. So just going back to the guidance, I want to make sure that -- the $0.08 weather impact is not included in the guidance, so basically we could theoretically look at your guidance as $0.08 higher?

Kevin, it's Dave. The $0.08 of weather is not included in the guidance. Now, you can look at our guidance as $0.08 higher -- that's not the way that I look at. I look at the guidance was intended to encompass a broad range of potential outcomes, and if if I look at the $1.30 that we recorded versus the $1.31 consensus in the quarter, what I see is by maintaining our guidance the same, we haven't taken back the $0.08 of weather, but that $0.08 of weather never really materializes in terms of what we report. So I look at our guidance as being what it previously was, and I don't look at it as we raised by $0.08. I look at it as we had an unusual weather impact, but we recorded $1.30, and for the balance of the year we are going to record exactly what we think we're going to record within the range that we've given you.

Okay. No, that's helpful. Thanks, Dave. And then another competitor reported today and they indicated that volume trends were kind of weak across the board, and they were pointing to physician office visits and script data. Just wondering what you think about that and how you think we should think about some of that data that's provided from sources like IMS.

Well, we have been busy preparing for our call, so we haven't really had an opportunity review what anybody else did today. But what I would say is I think the IMS data is directionally helpful -- not the script data, which I think really has very little relationship to the lab. I think it's directionally helpful, Kevin, but I don't think that it is in and of itself something you can draw a straight line and say lab volume follows IMS position office volume.

For example, this year in the first quarter, we had a very light flu season, so physician office visits may be down year-over-year because of flu comparables; and yet we know historically flu has very little impact on our reference lab business one way or the other. So we certainly see the same things, both anecdotally and otherwise. We see physician practices that are closings, we see physicians reporting fewer patients, we see hospitals buying physician practices because the physicians financially would rather not continue in their current state. But it's hard to put anecdotes and data into anything other than the volume we report, which I think we feel quite good about for the quarter.

Okay, and then looking at the strong pricing this quarter, it looks like the other Esoteric testing bucket increased 13%. How much of that was attributed to Monogram, or was Monogram a big factor in that?

Kevin, this is Brad. No, Monogram is not in that category. It's in the genetic category. So what you're seeing in the other Esoteric bucket is largely driven by Vitamin D.

Vitamin D, okay. And then going to the other genomic testing bucket, it looks like the number of assessions actually declined in the quarter. Was that weather related, or was there something else that impacted that?

Kevin, this is Brad again. I attribute it to weather -- up and down, the payer mix schedule, as well as the text mix schedule, there's going to be weather noise.

Okay, and just going back to the physician insourcing comment, Dave, do you think Medicare will do something or address this in 2010?

I think it's very optimistic to think that it would be addressed in 2010. We would certainly like it to be addressed in 2010, but there's a lot going on in -- at CMS and in Washington generally with health reform, and it just depends how high this gets on the list of regulatory priorities. So it continues to be something that we are concerned about. Again, from a healthcare cost and a public policy standpoint -- and we continue to emphasize to regulators that it should be a concern for them and that they should look at objective data and see if it is leading to increases in utilization or inappropriate utilization -- but I think for something to happen this year is not in our expectations.

Okay, and then last question. It looks like you guys might have a small investment in Nodality. Just wondering if you can talk a little bit about that and what you expect to see.

We do have a small investment in that company, and we think they have some very innovative cancer diagnostic assets. And as you know, and as we've said, we are very much focused on individualized and personalized medicine. I think oncology and the treatment of cancer is going to be a very, very substantial growth area, and I think it will be one of the areas in which we see the realization of the promise of personalized medicine most quickly. So our investment in Nodality is an attempt to further increase our leadership position in personalized medicine, and specifically in diagnosis and treatment of cancer.

Excellent. Thanks, and nice quarter.

Thank you.

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

Hi, good morning. So just as a follow-up to a previous question regarding Vitamin D, given that that's been such a driver of sort of the other Esoteric bucket, just curious how much more traction you can get there? And is there anything else coming down the pipe that you think could be as influential?

Amanda, it's Dave. I think there's still opportunity in Vitamin D. Obviously, we've seen very significant growth in this test. At the same time, if you look at some of the recent publications about Vitamin D, this was a -- originally was a test that was thought to be very highly correlated to Vitamin D deficiency, was thought to be highly correlated with bone disease and osteoporosis. But the papers that have been coming out show correlation with development of certain types of cancer and one of the most recent papers showed a correlation between Vitamin D deficiency and overall morbidity and mortality. There was also a recent paper that showed that even within the first two years of life, there's a substantial portion of the infant population that's Vitamin D deficient. So I think there's still opportunity for growth in Vitamin D.

Obviously it is not going to continue to grow at the rate that it has. In terms of what else is in the pipeline, I would just go back to the history of clinical laboratory testing, which is -- part of the reason that we offer over 4,000 tests, is that as scientific discoveries are made, as clinical practice advances, there is uptake in testing that may have been underappreciated for substantial periods of time. So Cystic Fibrosis several years ago, when ACOG made the recommendation for Cystic Fibrosis screening, that test had been around for a long time without a lot of utilization. Vitamin D, around for a long time without a lot of utilization. We continue to bring new tests to market, but we also continue to offer the broadest menu so that as clinical and medical practice and science advances, we have the ability to capitalize.

And I think one of the nice things about the collaboration with Duke on the biomarker factory is exactly that, that we will be involved with a first rate academic medical center in discovery and commercialization of new tests that will be focused on two things; better treatment of disease and lowering the costs of our healthcare system.

Okay, and just as a follow-on to that, I think in the past you've talked about your outcomes programs and seeing a strategic focus like with Litholink, and it seems parents have reacted well to those programs. I'm just curious if you can provide an update? And also to the extent that you're working to expand this type of program into other disease states as well.

The -- Litholink has been a great acquisition for us. We -- the kidney stone program has been very successful and has grown very, very nicely. The chronic kidney disease program has -- we have a terrific program. As we put it out into the marketplace, we discovered that there were some things about the workflow in the program that were causing physicians difficulties. So again, as part of the IT initiatives, we're talking about -- we're really retooling the chronic kidney program to make it fit more seamlessly into the physician office workflow, and then I expect that we will see very positive growth there. And we are continuing to work on outcome improvement programs for other chronic diseases that we think will be impactful. Again, come back to the same thing -- better treatment, lower costs.

Okay. Thanks a lot.

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

Good morning. This is Brent [Zimmerman] filling in for Darren Lehrich. I was wondering if you can talk a little bit more about the increased competition you referred to in the pathology segment. Where do you think the competition is coming for based outside of the hospital-based labs?

Well, first, there's a lot of competition from hospitals, because hospitals themselves have pathologists; and to the extent that they have owned clinics or affiliated clinics, they are very competitive for that, to bring that pathology work in-house. Second, there are independent community pathologists who may be individuals or in small groups who may have particular affiliations with medical groups that give them an opportunity to gain business. Third, there are other independent clinical laboratories that are focused on pathology, and many of them are very highly specialized, they are very highly pathology-focused.

Many of them have very good offerings, from both a service and a substantive perspective. I don't think their offerings are any better than ours; but again, we offer 4400 tests. They offer a very limited and highly specialized menu. And as I mentioned, the barriers to entry in the pathology business are relatively low. So I -- that's a fact of life in the marketplace. And as I said before, we're going to pick up our game to improve our performance here. But we're fully capable of competing head to head against anybody based on our capabilities and our service and our test menu.

Okay, thanks. And then I guess just one follow-up question. Can you elaborate a little bit more about the 9.3 million restructuring charge taken the first quarter? And also, do you see any further restructuring charges going forward this year?

Brian, this is Brad Hayes. Part of the 9.3 million restructuring charge related to severance, where we are consolidating some activities that are spread around the country into one facility or a smaller number of facilities. So there's some job loss associated with that. There's another portion of the 9.3 million that relates to some abandoned IT systems that we decided during the quarter we were going to abandon, and that's the charge that represents those activities. Hard to predict the future of those, but we are continually evaluate our footprint, our Patient Service Centers, our organization and opportunities for efficiencies, and sometimes the actions to change some of those things result in these type of charges.

Okay. Thanks a lot, guys.

Your next question comes from the line of Tom Gallucci with Lazard Capital Markets. You may proceed.

Thanks. I just have a handful of follow-ups, if I could. Not to beat a dead horse on the histology area, but just curious, are there any particular sub specialties that the pressure is more pronounced, or is it sort of generally within AP?

I think it's generally within AP, Tom. I don't think there's anything I would single out as being particularly pronounced.

Okay. In terms of your margins, I guess, if you add back the weather impact generating good margin trends, you outlined the three initiatives that you're focused on. Could you give us sort of maybe a big picture, longer term view of where you think margins can go? Maybe in effect sort of helping us frame or quantify the impact of some of those initiatives?

Well, I think the -- as we've said, our foundation model is on 4% to 6% topline revenue growth. We should get, all other things being equal, about 20 basis points of margin expansion. So that's how we think about the business going forward, including the leverage in the business. But it also includes the continued optimization efforts, because if you look at gross margin, for example, our gross margin is heavily labor and supplies. So as volume grows, supply cost has to grow; and the only way we can offset that is by becoming more efficient, which is what our lab automation programs are about. Labor -- there's always upward pressure on labor expense because of cost of living and wage rate adjustments. So again, our optimization programs are designed to offset some of those costs. So the way I would think about it is, the foundation model says 4% to 6% top line growth should get you 20 basis points of margin expansion, and included in the puts and takes are all the efforts that we're continuing to make to optimize the business.

Not necessarily over and above that, but sort of included in there?

That's the way I think about it.

Okay. That's helpful. Thank you. And then just a last one on the guidance, just to make sure I'm clear, you sort of had the $0.08 hit on the weather, and you mentioned that takes into account a variety of potential outcomes. I guess on the flipside, you don't necessarily include buybacks in there, right? So given you did some buyback activity in the quarter, that would have been something that would have been a positive versus the weather being negative to the original guidance, is that fair?

Tom, this is Brad. Yes, that's fair. But I think given the level of repurchase that we did, it still falls within the range.

All right, okay. Perfect. Thank you.

Your next question comes from the line of Karen (Inaudible) with Brave Warrior.

Hi, it's Glenn Greenberg, good morning. On the Duke biomarker factory, I wonder if you could talk about which tests or treatment guides you think are closest to market and how important they could be?

Good morning, Glenn. The closest thing to market right now is the IL 28 marker for Hepatitis C, which is basically ready and is in the licensing process, and that's a marker of responsiveness to Hepatitis C therapy for individual patients, and I think could be quite impactful. If you look at the epidemiologist predictions about the growth in Hepatitis C in the United States, it's going to far surpass what we saw with the HIV experience in terms of the infectious disease. There are -- there's another marker -- there are some markers relating to guiding physicians who are treating cancer in selection of chemotherapeutic agents. There was a separate company formed for the commercialization of of those markers, which is called cancer guide, which we're an investor in. So those are probably the closest things to market. I think there is a good deal of ongoing discovery work, and we'll continue to update you on what we're seeing in biomarkers and what we think is reasonably ready for commercialization.

And what about tests that would indicate presence of cancer at an early stage? Would that be part of the focus?

Absolutely. And we still are hopeful that at some point the FDA will let us bring OvaSure back to the market in some form or another.

Okay. And how much is the Hepatis C test going to cost?

We don't know at this point. As I stay, we'll still in -- the intellectual property is not owned by us and we're still in discussions about licensing.

Thank you.

Thank you.

Your next question comes from the line of Kemp Dolliver with Avondale Partners. You may proceed.

Hi, good morning. First question relates to Monogram. Could you discuss where you stand with both the infrastructure integration and then also progress on growing the revenue for the two main tests you have there?

Sure. First of all, I just want to reiterate that from a strategic perspective, Monogram is exactly the kind of acquisition we would want to do because of the personalized characteristic of the testing, because of -- obviously the Esoteric nature of the testing, the focus on both genetic testing and oncology and the focus on infectious disease. So we are very happy that Monogram is part of our family. In terms of the infrastructure integration, I think it's gone quite well.

We continue to do the Trofile testing at the Monogram facility and -- out in South San Francisco. And it's been nicely -- in terms of ordering and logistics, it's been nicely integrated into the LabCorp system. The HERmark test, which is the oncology test, is actually being moved into being sold by our oncology salesforce; and over time, we may -- we probably will move the performance of that test into one of the tests -- the laboratories that performs our oncology testing just so that we don't have specimen transportation and other issues with it. But again, we think there's very nice opportunity in the HERmark test for patients who either falsely positive or falsely negative by traditional HER2. So all in all, I'm very pleased. Revenue has probably been consistent with what we thought it would be. And once we fully integrate all of the IT capabilities and the test ordering and result delivery capabilities, I expect to see that revenue grow.

How much do you think you reduced the EPS drag relative to Q4's $0.08?

The guidance I think that we gave on the acquisition that would be -- that was that Monogram would be slightly accretive this year, and so Q1 was better than Q4 in terms of the drag. But we still are not to break-even to slightly accretive, which is where we expect to be by the end of the year.

Okay, thank you.

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

Thanks. Good morning, guys. First off, Brad, you mentioned the earnings impacting weather obviously several times now, and talked -- at least directionally -- the impact on the P&L. Could you give us a little more specificity to the extent that you have it on the expense impact for both cost of service, as well as in SG&A?

Sure, Bill. The revenue is, as you said, we quantify that by taking the volume that we estimate we lost times an assumed price. On the expense side, we know that we automatically get supplies, and bad debt would have been part of that expense base. And then to compute the ultimate dropdown, we have another small layer of variable costs. But when we lose revenue due to weather, it's a relatively robust dropdown, because -- and you may see it in the SG&A line, which was higher as a percent of sales than in the prior year first quarter. Those costs are basically fixed, and so are a lot of our other costs when we think about rental or maintenance of premises and couriers and things of that nature -- Patient Service Centers, phelbotomists -- all those costs are still in there. So we think it has a pretty high dropdown when we lose weather related business.

So is it safe to say then that it's going to be roughly two-thirds cost of service, roughly one-third SG&A? Is that the right way to think about it?

Well, I think of the all-in dropdown as about 70% of the revenue number --

Okay, understood.

-- roughly speaking, and a big chunk of that is related to supplies and bad debt -- we certainly don't have those -- and then some other costs as well factor into that calculation.

Okay, and then on the Canadian price per accession, if I'm doing my math correctly here, it looks like about 19% of the 23% gain (Inaudible), so we are seeing a little improvement year-over-year on the price per accession; is that the right way to think about that?

Absolutely.

Very good, and then just lastly for me, other than calling out Vitamin D earlier in the call, anything else to highlight from a testing standpoint?

Bill, it's Dave. Continuing to see good growth in HPV testing, and with more new tests coming to market out of the vial, we're continuing to see nice growth there. So -- but Vitamin D, HPV, some of our cancer diagnostic testing, [KRAS] and related testing, those are off a relatively small base, so you wouldn't see them particularly anyplace in the numbers. But we have a number of tests that are moving in the right direction. Obviously they are somewhat overwhelmed in total impact by the Vitamin D growth.

Understood. Thanks, guys.

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

Hi, good morning. I had a couple questions. You guys have been, I guess, really the most forthright is maybe the right way to say it, just in terms of talking about competitive activity in your businesses. I don't recall -- it was something you talked a lot about a year or two ago. So I guess can you help us understand, where are you seeing the most change in terms of competitive activity? Obviously hospitals have always had labs and outreach programs, et cetera. So in that equation of kind of the four factors, where there is competition in pathology in particular, where do you see the greatest degree of change?

Gary, it's Dave. I don't think the competitive landscape has changed very much in my time around the industry, which is going on 10 years. Obviously, there's been a lot of consolidation, which has changed the competitive landscape to some extent. I would say that the biggest change that I perceive in the competitive landscape is what I would describe as aggressive sales and marketing practices that we as a Company are not comfortable with. And so what I've seen in the last 18 months to two years is, I think, some practices by competitors -- and I'm not making excuses here, because as I say, we need to pick up our game -- but some practices by competitors that I think help them gain business in ways that from a legal and regulatory perspective, we're not comfortable replicating. And that -- and again, as I mentioned, the physician insourcing -- are the two biggest changes in the competitive dynamic.

And -- thanks. Looking back -- looking I guess at kind of overall just core volumes, I mean really, at least in my model, you haven't had this period of extended weakness. If you go back to kind of '04 and '05, you had a period that was similar, but certainly not as lengthy. So what do you think is the key factor that recovers for volume growth? Is this purely employment growth and growth in the insured workforce driving increased utilization? Is that really what probably the key macro swing factor needs to be?

Yes, I think when you look at loss of commercially insured lives, I think United reported another 4% loss in commercially insured lives this quarter. So you look at the continuing loss in commercially insured lives and you look at the lack of job growth in the economy, which means as long as people are not getting jobs, they are not going to be insured. Those are the big factors. I mean, interestingly to me, we haven't seen a big increase in uninsured or in patient-paid testing, either from a volume or a revenue perspective, which suggests to me that people who are not insured are fundamentally staying home.

Okay. Thank you very much.

Your next question comes from the line of Ricky Goldwasser of Morgan Stanley. You may proceed.

Good morning. Can you give us some additional color on, first, what was the impact from acquisitions on topline growth in the quarter? You've made a couple of folding acquisitions in the fourth quarter; just wanted to understand the impact on the .5% volume growth that you provided us on the call. And then also on the pricing growth, obviously very strong growth, some of it I'm assuming is coming from Monogram and in Vitamin D. What was the impact of the weather on pricing? So when we think about modeling pricing for the remainder of the year, should we assume some step down in pricing, and to what level? That's it for now.

Ricky, this is Brad. Good morning. First one, acquisitions, we don't typically break those out, especially the size acquisitions that we've done, with the exception of Monogram. And on Monogram, what I will say -- and I included it in our prepared comments -- not specifically, but I'll -- specifically now, that's about a point of our pricing growth. And you would not see it on the volume front, because it's much higher than our average price test. So it's not noticeable in the volume growth number, but about a point of the pricing number. So we don't break that out. Weather has a very much -- a typical profile of our pricing, so the 1.3% we reported I think for revenue and volume. So there's very little in the pricing front by way of weather.

Okay, and just on the acquisitions as a (inaudible), but can you confirm that you've made a couple of acquisitions in the fourth quarter, just as we model we know when to assume the year-over-year anniversary? And then also, what is the revenue contribution for Vitamin D? I know you highlighted it as the key area of growth for other genomics (inaudible) and the impact of -- or what percent of total revenue it is?

Ricky, it's Dave. We don't break out individual tests by their percentage of revenue or their revenue contribution. Vitamin D is not only a significant grower, but is a significant test in terms of overall utilization for the Company, and that's as much as we would say. We did -- excuse me -- we did -- I think it was reported that we did a couple small acquisitions in the fourth quarter, and we did. They are not material in terms of topline accession or revenue growth. But as we have always said, part of our foundation model is small fold-in acquisitions that involve increasing topline revenue and being able to take costs out post close.

Okay. Thank you.

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

Thanks, good morning. Just a couple of quick ones. One, Dave, I guess on the volume side, going back to what Gary was sort of talking about, obviously volume is up half a percent when you sort of exclude some of the nonrecurring, if you will. What do you think about sort of volume growth going forward outside of some of the near-term head winds? I mean, do you still think of it as sort of the historical growth rate, or is it a sense of, you guys are obviously much bigger now, it's going to be harder to drive that type of volume? So I'd love to get your just big picture take on where you see normalized volumes in the future.

I think it's going to be hard to know when we return to the quote, unquote, normal environment, just because there are a couple of new normals, one being economic and the other being healthcare reform. But my belief is that there's still 2% to 3% volume growth that we should be seeing in the industry and that we should be getting our share of, and that that should be our assumption as part of the foundational model.

Okay. All right. That's helpful. And then just in terms of near-term, can you talk about maybe what actions you could take to help sort of reinvigorate volumes? I know in the past you've talked about sort of the sales focus on the Esoteric business and maybe areas that aren't as tied to economic factors. Any more sort of color there or what you're doing to drive better volume?

Yes, I think we're continuing to do the same things -- focus on specialty physicians who may have reason to use more lab testing for their diagnosis, treatment, and monitoring of patients; I think continuing to enhance the IT capabilities to make it easier to order tests, receive results, look at results over a period of time. All of these things just -- if we continue to improve the physician experience and improve the patient experience, we continue to have a robust menu of tests, I think volume will take care of itself.

Okay, and then just my last one, can you remind us again, on the cost reduction side, where exactly costs are sort of coming from, maybe aside from just the layoffs? And any way to quantify -- you talked about automation. Any way to sort of quantify sort of the impact that may be having?

I think it's pretty hard to quantify the impact. I do want to take exception to layoffs. We didn't have any layoffs in 2009. We managed our personnel and our headcount very, very well. And the charge that you saw in this quarter is the result of consolidation of operations in which we've basically offered our employees the opportunity to continue with the Company in other roles, and some have chosen not to. So the -- what you're seeing, particularly in gross margin improvement, is greater efficiency in our service centers, greater efficiency in our collection process -- which means less back end work on collecting -- greater efficiency in the laboratory, improvement of our performance in the supply chain, and you're going to see all those costs continuing to come out. This is an ongoing process, and bad debt reduction in this quarter comes from some of those processes. So it's going to e an ongoing process that we think is going to continue to help us offset some of the upward pressure that comes from labor, supplies, the other big components of our cost of sales.

Okay, and then just real quick, last thing, is there any way to quantify sort of drugs of abuse. Sounds like it bounced back a little bit. Is there a way to think about, was it sort of incremental off an easier comp that sort of helped the underlying volume number? Right? Because last year obviously we were able to strip it out. Is there any way to think about it as sort of what it added to volumes this quarter?

Ralph, this is Brad. I think Steve said it was up a little over 6% on its own on a volume basis, and in the fourth quarter, it was down 6%. So if you looked back at that component, I mean, it definitely helped on the volume side.

Okay. All right, thanks, guys.

Your next question comes from the line of Shelley Gnall of Goldman Sachs. You may proceed.

Thanks so much for fitting me in. A couple of questions. First a follow-up on the restructuring charge. It sounds like you're consolidating your workforce. Is it fair to assume that that's rationalizing the workforce in response to weaker volume trends relative to historical trend?

No, it is not.

Okay. Is there -- are there other parts of your labor force that are growing? For example, the salesforce?

Without referring specifically to our -- to the composition of any particular part of our business, yes. Generally, our labor force is growing in a variety of areas -- phlebotomy, couriers, sales. So, yes, we are continuing to hire people so that we can continue, as we've said, to improve the physician and patient experience and be prepared for the return of volumes. Again, the volumes that we lost, particularly the government contract and the prison contract, didn't involve a lot of people. They involved a lot of pretty automated testing. So we didn't reduce a lot of people as a result of that. And net of that, we are still seeing volumes growing.

Okay, great. Thanks. And I guess on a related question, your volume trends continue to outperform your peer. I'm just wondering, it sounds like you're also getting a little bit of market share in the testing outside of histology. So can you talk about -- a little bit about maybe strategic initiatives or salesforce initiatives or salesforce expansion that may be driving the better volume in the market share grab? What do you think is some of the most important factors that drive the better volume trend?

I think first of all, let me say that our peer is a very strong competitor, and the differences in these volumes are not enormous. So I think we should keep perspective on this. I think, as I said earlier, our market share is stable to slightly up outside of the histology business. I think the biggest thing is the continued initiatives to improve the patient and the physician experience, the continued focus on making it easier for doctors to order and receive, to order testing electronically, receive results electronically, integrate them into any electronic medical records system or electronic health record system that they choose as opposed to proprietary systems. We want to make it easier for physicians and patients to do business with LabCorp, and those are the things that I think are going to help us continue to grow our volumes.

Okay, great. Thanks. And then just one more quick question. I'm just wondering if broadly you're seeing any change in the dynamics of your conversations, your contracting discussions with the health plan?

No, I don't think so. I mean, there's always -- the health plans are always looking for ways that they can save money, and we're always looking to show them the value of laboratory testing at 2% to 3% of healthcare spend, driving 70% to 80% of decisions. So I think that conversation is a pretty consistent one.

Okay, great. Thanks so much.

Your next question comes from the line of Gary Lieberman with Wells Fargo. You may proceed.

Thanks for taking the question. You noted that the total payments to United would end up being about 125 million. Can you just remind us in terms of where that comes out versus what your initial expectations were and how that evolved over time? And then also maybe to what extent there's still some opportunity to increase volumes through that contract.

Gary, it's Dave. The initial cap was $200 million. So I cannot do the math quickly in my head, but we're coming in at 125 million against the initial expectation of 200. So we've done substantially better. Is there opportunity to increase volume through the United contract? Absolutely. And we continue to focus on the opportunity to gain volume, reduce their out of network utilization in collaboration with them, and continue to grow the business with a very, very valuable partner.

Great, and then maybe if I could ask one quick follow-up. On the Medicaid front, Medicaid enrollment grew pretty dramatically in parts of the country last year and overall. Is there any way you can sort of quantify what kind of impact that had on your business, either from a volume or pricing perspective?

Gary, this is Brad. Not really noticeable in the quarter. I reviewed the Medicaid growth rate, as well as the percent of sales, and still pretty, pretty small for us at about 4% of sales.

Okay, great. Thanks a lot.

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

Okay, thanks. So I want to just try to dig a little more into the drug and abuse testing, which was up 6.8%, which is a very nice number for the first quarter. Is there any regional impact or any particular payer mix that's contributing to that?

Anthony, it's Dave. Drugs of abuse is reported in our third party or our other category, so it's all one payer. It's reported in Client on the 8-K. And in terms -- and obviously it's part of core, whether we report core versus Esoteric. I'm not aware we're seeing any particular regional trend in drugs of abuse testing that would be worthy of mention.

Okay, and is the pricing -- pricing comps seems like they would get more difficult as we go through the year. Is there anything that you're seeing that would cause pricing to either slow or remain the same as we move through the year?

Well, as Brad mentioned, we will annualize Monogram in August, so that's 1 percentage point of price. We will annualize the impact of the lost contracts in June. So that will make the volume comp easier, but that will detract from price. We will be subject to fluctuation in the Canadian exchange rate, which has been strongly in our favor year-over-year, but no assurance that that's going to continue. And if it starts going the other way, that could have an impact on pricing. So there are some things that we know are going to change, and there is at least one that is variable.

And lastly, are there any large contracts that you're currently bidding on that could be a positive sometime this year?

Nothing that we are in a position to discuss at this point.

Okay, great. Thanks.

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

Thanks, guys. Just a quick follow-up. Dave, I know you guys like the Canadian business. I was just wondering what your thoughts are regarding the funding environment up in Canada, as it looks like the cap increase might slow down in 2011 once that contract expires? Any thoughts or color on that?

The funding environment in Canada has always been a year-to-year proposition. I mean, they have a different healthcare system from ours. They have different drivers of what they pay and what they are willing to pay. Again, I think of it as fundamentally a capitated system in Ontario. So if we continue to become more efficient, we should be able to continue to be successful in the business. And I don't look at the Canadian funding environment as being particularly impactful to the overall business of the Company. We like the Canadian business. We've been successful with it. We continue to look to expand our opportunities there.

Okay, and then just one last question for Brad. With the Medicare cut of 1.9%, was that about a 40 or 50 basis point impact on pricing growth?

I get a little south of there. Probably in the 30 range.

30 basis points, okay. Thanks.

Your next question comes from the line of Bob Willoughby with Bank of America. You may proceed, sir.

Dave, there's been some positive headlines -- even from Obama, believe it or not -- on the need for DNA-based forensics testing. Has that translated into any renewed fervor or activity among the states at this point, or is it still just rhetoric and we're waiting for that market to open up?

Bob, the challenge -- and the identity business for us is doing quite well, as is the forensics business. The challenge is the states all want to do more of it, but they have no budgetary resources for it. And so I -- we're not seeing anything changing in that dynamic.

Okay. Thank you.

At this time, there are no further questions. I would like to turn the call back to Mr. David King for closing remarks. You may proceed.

Thank you very much, Jasmine, and thank you all for listening to our first quarter 2010 earnings conference call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.