Labcorp Holdings Inc (LH) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Laboratory Corporation of America earnings conference call. My name is Jeff, and I'll be your operator for today. At this time all participants are in a listen-only mode. Later, we will facilitate a question and answer session. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

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

Thank you, Jeff. Good morning and welcome to LabCorp's first quarter 2011 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, Vice President Investor Relations.

This morning we'll discuss our first quarter 2011 financial results, highlight our progress on our five pillar strategy, and provide answers to several frequently asked questions. I'd 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 that there will be a replay of this conference call available via the telephone and Internet. Please refer to today's press 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. These non-GAAP measures include adjusted EPS excluding amortization, free cash flow, and adjusted operating income.

I would also like to point out that we are making forward-looking statements during this conference call. These forward-looking statements include among others, statements about our expected financial result. These statements are based upon current expectations and are subject to change, including based upon various important factors that could affect the company's financial results. Some of these factors are set forth in detail in our 2010 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 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 remains strong. Free cash flow for the trailing 12-months ended March 31, 2011 was $735.9 million, which was reduced by approximately $20 million due to delays in the Genzyme Genetics enrollment process. We expect that these delays will be resolved in due course and are reiterating our 2011 operating cash flow guidance of $900 million. We remain pleased with our cash collections. DSO increased 1 day year-over-year to 47 days at the end of March and increased sequentially by two days. Excluding the impact from Genzyme Genetics, DSO improved 2 days year-over-year to 44 days at the end of March, and increased sequentially by 1 day. Our bad debt remains stable at 4.7%.

Second, revenue growth. Revenue increased 14.6% year-over-year in the first quarter. Genzyme Genetics accounted for approximately 8% of this growth. During the quarter, we achieved strong growth in revenue per requisition which increased 8.2% year-over-year. The growth in revenue per requisition is attributable to acquisitions, rate increases, test mix shift, and increases in test per requisition. Genzyme Genetics accounted for approximately 6.5% of the growth in revenue per requisition. Total company volume increased 5.9% year-over-year during the first quarter. Genzyme Genetics accounted for approximately 1% of this volume growth. Esoteric volume increased approximately 11% in the quarter.

Third, margin. For the first quarter our adjusted operating income margin was 19.3%, compared to 20.4% in the first quarter of 2010. Recent acquisitions that we have not yet fully integrated caused a 180-basis-point drag on margin. Over time as we integrate the businesses, we expect margins to improve.

Fourth, liquidity. We remain well capitalized. At the end of March, we had cash of $195.4 million and approximately $420 million available under our revolving line of credit. At the end of March, total debt was $2.2 billion, including $40 million drawn down our revolving credit facility. During the first quarter, we repurchased approximately $265 million of stock, representing approximately 2.9 million shares. At the end of March, approximately $469 million of repurchase authorization remained under our previously approved share repurchase program. This morning we updated our 2011 financial guidance. We expect revenue growth of 9.5% to 11.5%. Adjusted EPS, excluding amortization, in the range of $6.17 to $6.32, excluding the impact of any share repurchase activity after March 31, 2011. Operating cash flow of approximately $900 million, and capital expenditures of $140 million to $150 million.

I will now turn the call over to Dave.

Thank you, Brad.

We are extremely pleased with our first-quarter results. We generated strong revenue growth of 14.6%. Volume increased a solid 5.9%, and esoteric volume increased approximately 11%. Importantly, our organic volume increased more than 3%, which reflects the continuation of the positive trends we saw beginning in the fourth quarter of 2010. Revenue per requisition remained strong, increasing 8.2%. Genzyme Genetics accounted for approximately 6.5% of the revenue per requisition growth. Similar to last year, inclement weather negatively impacted revenue by $22 million and EPS by $0.08.

Our continuing focus on optimizing our business would have resulted in operating margin expansion excluding the impact of recent acquisitions. The impact of weather further weighed against our margins in the quarter. Excluding the impact of Genzyme Genetics, our DSO declined on a year-over-year basis to 44 days, reflecting the continued exceptional performance of our operational and billing personnel. And Genzyme Genetics had an impressive quarter, recording one of its strongest historical performances.

I would now like to update you on our progress on our strategic initiatives, which are focused on providing the highest quality laboratory services at the most reasonable cost, thereby providing the highest value for each dollar of laboratory spend in the healthcare system. The first pillar of our strategy is that we deploy our cash to enhance our footprint in test menu through acquisitions and to repurchase shares. As I just mentioned, our recent major acquisition, Genzyme Genetics, is performing well. We are extremely pleased and appreciative of the skill and dedication we observe among the Genzyme Genetics personnel who are now part of our LabCorp family.

Earlier this month, we announced our intended acquisition of Orchid Cellmark, an international provider of DNA testing services primarily for forensic and family relationship applications. The transaction is subject to regulatory approval and if received, we would expect it to close later in the second quarter. While not material, we expect the transaction to be neutral to GAAP earnings and slightly accretive to cash earnings in 2011. Finally, in 2010 we repurchased $337.4 million of our shares, and we have repurchased approximately 265 million of our shares thus far in 2011.

The second pillar of our strategy is to enhance our IT capabilities to improve physician and patient experiences. We have already incorporated Genzyme Genetics result delivery into our Beacon platform. We are also implementing Beacon order entry functionality nationally and deploying specialty modules so that healthcare professionals can order all LabCorp services and receive results through a single online portal. We are also developing and introducing the Beacon patient portal, an android version of Beacon mobile, and the Beacon hospital edition to meet the needs of our clients and patients.

The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. We are continuing to improve automation in our laboratories, which allows us to lower our cost structure, increase through-put, and redirect personnel to customer facing positions. We are expanding our Touch and AccuDraw order entry systems throughout our network to improve the physician and patient experience. Touch is an on-screen draw tool that allows us to fully accession specimens and patient service centers, reducing paperwork and labor.

The fourth pillar of our strategy is to continue scientific innovation at reasonable and appropriate pricing. Adding the Genzyme Genetics scientists to our strong scientific team at LabCorp will allow us to continue to lead the industry in scientific discovery and initiatives in personalized medicine for years to come. We will continue to introduce new tests and collaborate with leading companies and academic institutions to provide our physicians and patients with the most scientifically advanced testing in our industry. In 2011 alone, we intend to bring at least 15 new tests to market in the area of women's health, genetics and oncology.

The fifth pillar of our strategy is to consider alternative delivery models. We believe there will be incentives to our industry and healthcare in general to move way from traditional fee-for-service models. We will continue to work on these alternative delivery models to provide the highest value for each dollar of laboratory spend in the healthcare system.

These five pillars will allow us to continue to execute on our foundation model, enhance customer service and patient care, provide cost-saving opportunities to the healthcare system, and create value for our shareholders. In summary, we are pleased with our first-quarter performance, and we remain excited about the opportunities on our horizon and the strategies we employ to realize them. Now Steve Anderson will review anticipated questions and our specific answers to those questions.

Thank you Dave.

Why are you not adjusting your guidance higher, given your performance and weather? Our guidance encompasses a wide range of potential outcomes, and we are only one quarter into 2011. That said, in reviewing the most recent analyst estimates for 2011, we continue to note that the diluted share count estimates differ considerably from our own and from each other. It appears to us that many of the components of the first call estimates include future share repurchase, and our guidance does not. We would like to remind you that our original guidance included $234 million of share repurchase that occurred in January.

Finally, in reviewing the analyst models, we do not believe the seasonality of our business is captured within many of the published estimates. We have previously noted that the fourth quarter tends to be the lowest quarter from a revenue and earnings perspective due to seasonality, weather and holidays. However, this is not currently reflected in most of the analyst models we have reviewed.

Can you update us on the mix of your business coming from esoteric testing? In the first quarter, approximately 40% of our revenues were in the genomic, esoteric, and anatomic pathology categories. As we mentioned on our fourth-quarter call, our new goal is to increase our esoteric test mix to approximately 45% of our revenue within the next 3 to 5 years.

Does acquiring Genzyme Genetics limit your ability to repurchase shares or act upon other acquisition opportunities? We repurchased approximately $265 million of our shares in the first quarter and have $469 million of authorization remaining under our previously approved share repurchase program. While we do not comment specifically on share repurchase, we have historically been a consistent buyer of our shares. We do not believe we are precluded from making acquisitions as usual or from pursuing our strategic goals.

Can you are remind us of how drugs of abuse volume trended during the year? In the quarter our drugs of abuse volume increased approximately 14% year-over-year. That compares to a year-over-year increase of 12% in Q4 of 2010, 13.9% in Q3 of 2010 15.4% in Q2 of 2010 and 6.8% in Q1 of 2010. Now I would like to turn the call back over to Dave.

Thank you, Steve. Thank you very much for listening. We are now ready to take your questions.

(Operator Instructions) Our first question comes from the line of Bill Bonello with RBC. Please proceed, sir.

Hi, thanks for taking my question. I got to follow up on the guidance even though Steve gave some explanation of where you are at relative to where analysts are. But I'm still a little puzzled. You grew EPS by more than 8% year-over-year in Q1, and at the high end of guidance you are looking for less than 5% growth. At the low-end you're looking for EPS of less than 2% growth. So I appreciate the conservatism, and one quarter doesn't make a year, but I just want to make sure that I understand if there is anything in particular you are looking at over the next three quarters that would make the comps more difficult than they were in the first quarter. Because intuitively, if anything it would seem like the comps would get easier as Genzyme becomes less of a drag.

Bill, good morning. It's Dave. I'll start, and then I'm going to let Brad give you some specific details. Let me first say that we do not see any major clouds on the horizon or bumps in the road that cause us to be concerned about the guidance. As you say, one quarter does not make a year. And the guidance that we gave, as we always say, is intended to encompass a broad range of potential outcomes. So there is nothing out there that is a concern to us that we see coming down the road. But the quarter was in line with our internal expectations, and as Steve mentioned the share count and the seasonality do have an impact on where we see the estimates versus what we look at internally. So with that I will turn it over to Brad to add some color.

Dave, and I can't think of much to put on top of that, Bill, other than just to reiterate. We don't see anything in usual in the model going forward. And I think our first quarter was in line with our own expectations, and as Steve said, the fourth quarter tends to be our lowest quarter in terms of revenue and earnings, and we don't think that is incorporated. Also, the share repurchase in our model does not occur. So I think again, looking at expectations externally versus our own, that is a major driver.

Okay that makes sense. It seems like share repurchase maybe contributed 300 basis points or something like that to the EPS growth. So just one follow up and I'll hop back in the queue. Quest has discussed on its calls the need to make incremental investments in its business. And in particular in phlebotomists and patient service centers. I'm just curious if you're seeing anything out there in terms of sort of increased competition in terms of access to draws and in particular, if you're seeing any significant uptake -- excuse me -- any significant uptake in the demand for in-office phlebotomists.

Bill, it is Dave. I think if you look at our year-over-year patient service center numbers, you'll see that they are probably up by a total of about 100, and most of that is due to the Westcliff acquisition. So our patient service center numbers are relatively stable, and I think in terms of access for patients and access to draws, we are not seeing anything that would cause us to feel that there is an increase in competition. Obviously it's always a very competitive business.

In terms of in-office phlebotomy, that's been an area in which we have certainly seen growth over time. I would say it's relatively stable at this point. So as we've said many times, our strategy here is to use the efficiency gains that we are making in the laboratories and the patient service centers to redeploy our personnel into customer facing positions. So we are continuing to invest in the business. A lot of that investment goes into IT and automation and better efficiency. And that allows us to basically put more people in front of the customers without having to increase our headcount

Got it. Thank you very much.

And Bill, one more thing I'd like to add your EPS question. I'm looking at some detail here. Operationally we definitely don't see anything unusual. I think it is goes to looking at the diluted share counts over the quarters of last year, compared to our assumptions of this year. So we started off Q1 2010 with a higher share count obviously that we ended. So that the lower share count Q1 2011 drives a greater growth rate. So I think as the shares came down in 2010, that's what's driving, in your question, the lower growth rate going forward and our sort of no share repurchase guidance.

Yes. Makes sense. Thank you.

Our next question comes from the line of Bob Willoughby with Bank of America Merrill Lynch. Please proceed.

Hi, Dave, you mentioned Genzyme had a very impressive quarter. Year-over-year can you give us any kind of data how it did. We know what it contributed to your volume and revenues but internally, what was the performance there year-over-year for the Genzyme asset in isolation?

Without making reference to specific year-over-year performance, Bob, what I would say is from a revenue perspective, my understanding is this was the best quarter that Genzyme has recorded in its history in terms of revenue performance. And we also were pleased with the profitability of the business.

But didn't we move to LabCorp managed care contracts, or is that not happened as yet? I would've thought revenues would have taken a bit of a dip before rebounding.

All of that is in process but is not fully implemented. So that's part of the reason as we get into the second half of the year, we expect to see more of that impact in both our pricing and the overall price.

I got you. And just from a consolidation standpoint, it's early but anecdotally can you cite any activities that have happened that have resulted in some savings?

Yes. The major activities as we said from the beginning, what we started out with was the kind of SG&A stuff, so FedEx, logistics, the overlapping personnel, for example financial staff which we didn't need. There has been -- we made some move to consolidate the sales forces, particularly in the oncology business. And we continue to look at all the areas of overlap. To make sure that we are moving toward optimizing the business. But, as I have said from the very beginning with regard to this acquisition, the number one priority is maintaining and growing the revenue and that is why I'm really very pleased with the revenue performance this quarter. Obviously as the revenue grows, that enhances the profitability of the business and makes it less necessary to look at operational cuts. So we are continuing to look hard at the opportunities that we have in SG&A and facilities and other overlapping areas, but at the same time, making sure that top line revenue is stable and growing is number one for us.

And on the valuation for the Orchid deal, visionary by the way, what have you assumed for the federal and state NOLs in terms of the availability with the change of control?

Bob this is Brad. Those are fairly limited because they are based on purchase price and go out over some amount of time. So I don't think we are getting specific on what our assumptions are related to that. But it's cash flow entirely in its benefit.

Right. And the accessibility of those NOLs, you don't lose them in the change of control?

We don't lose them, but they get limited as, again I said, quite a bit by purchase price and other factors in the calculation.

And quickly on the strategy there, is it the intention to keep the Orchid facilities open, or will you consolidate those revenues with your existing business?

Bob it's Dave. We have not made a final decision on that, either -- well, in the US. In the UK the intention is to keep the Orchid business essentially as is, and I think that's actually the Cellmark brand over there. We are still subject to regulatory approval on the US transaction, and so we have not even begun to do any planning on what the businesses would look like after our close.

Okay. And lastly Brad, you had mentioned there would be some new disclosures this quarter. I see what is missing. What have you added? I guess we're waiting for the Q, is that it?

Bob, I'm not sure exactly what you are referring to. The 8-K is filed, so that has information, and when the Q is filed, it will have the traditional information, which has some detail around revenue, volume and revenue per requisition for our core esoteric and other businesses.

Okay, so that is in the Q. That's all we are looking for. All right. Thank you.

Our next question comes the line of Brendan Strong with Barclays Capital. Please proceed, sir.

Hi, good morning. Maybe just first, going back to the question around guidance. You've got Genzyme delivering 8% this quarter. You look at the other acquisitions that are annualizing, that's another 1.5%, 2% of revenue. You've got 3% organic revenue growth this quarter. What's going to result in revenue being below the top end of your guidance for the year?

Brendan, it's Dave . I don't know what we could really say beyond what we've said already, which is that this is one quarter, obviously we're very pleased with the quarter, but one quarter does make a whole year. We know that in the second half of the year, the Westcliff and DCL acquisitions will annualize starting in the third quarter. And we get 11 months at Genzyme, not 12 months of Genzyme, because that deal closed in December of last year. So obviously we are optimistic that we are going to perform well, but at the same time, we have one quarter under our belt, and we want to be realistic in terms of the way we think about the business. And as Brad said, and Steve said, the share count matters, and the seasonality matters. We don't give quarterly guidance, but the numbers that are out there for the fourth quarter just on a historical basis are not squaring with the seasonality that we see in the

Sure. Okay. And then maybe on the Empire contract, have you started to -- you mentioned in the past that there was a slow ramp-up there, but I'm curious if you are starting to gain additional traction there. And then as part of that, I don't know if you have a number in your mind is terms of what the total revenue opportunity is, not necessarily what part of it you can capture, but what the total revenue from Empire that goes to reference labs is?

I don't have a number in mind in terms of the total revenue. I think my recollection is about 1.5 million members who have a lab benefit. And so that is the base. We have seen a market improvement in our Empire volumes this quarter, and very pleased about that. We expect that to continue to improve.

And just a last question on that, is it -- so it's growing off of a small base, but is it big enough that it's actually moving some of your metrics and actually driving some of that 3% organic growth?

Well, every encounter with a patient matters in terms of driving growth. So it is off a small base, but at the same time anytime you see share gains within a new contract, that's a good indication that we are getting organic growth. So it's small but it still contributes.

Fantastic. Thanks.

Our next question comes line of Gary Lieberman with Wells Fargo Securities. Please proceed, sir.

Thanks, good morning. Maybe if there's any insight into any restructuring charges throughout the remainder of the year. You guys were kind enough to give us what the charges were in the quarter, but how are you thinking about it through the remainder of the year?

Gary this is Brad. I think as we continue to integrate Genzyme Genetics and some of our other acquisitions from the middle of last year, there is the possibility that you will continue to see some other activity in that line.

Okay in line with kind of what it was in the first quarter or should it diminish over the period of the rest of the year?

I wouldn't want to go as far as estimating amounts.

Okay. And then just given what sounds like the strength in Genzyme, any change in your thoughts of when that might be accretive? Do you think might be accretive a little bit sooner so maybe towards this year as opposed to into next year?

Gary, it is Dave. Again, traffic quarter for Genzyme. We are very appreciative of the effort of the Genzyme leadership team, starting right from the top, and the sales leadership as well, all the way down to the individual employees, the salespeople, the lab employees, the genetic counselors who have just done a terrific job and really put their shoulder to the wheel in terms of making this business successful.

Again I think it's too early to make a statement that it's going to be better than we thought that it would be. As we noted in response to Bob Willoughby's question, there will be some managed -- we expect that there will be some managed care pricing implications later in the year. So I'm delighted with where we are, and I have every hope that it will be better, but I don't think we're prepared to incorporate that into any of the financial metrics.

Okay thanks a lot.

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

Hi, thanks. I just had some more volume questions, if I may. I guess just a follow-up to Brendan's earlier question. If you look at the 3% organic volume growth number, is there any way to get conceptually just how much of that is really due to true underlying improvements and utilization as correlated to the physician office visits versus, say, Empire or drugs of abuse?

Amanda, it's Dave. I think you can try to slice this down to a very fine set of numbers. But I think the better way to look at it is, we saw -- what I would say is, we saw strength in all aspects of the business. We saw strength in esoteric, we saw strength in the core, we saw strength in Empire, we saw better volumes in OB/GYN practices than we've been seeing for the last couple of quarters. So I don't think it's -- and we saw better drugs of abuse volume -- so I don't think it's necessarily easy or productive to slice every little piece apart as opposed to saying, we had good volume growth and continued the trend that we saw the fourth order, and we are cautiously optimistic that is the trend we are going to continue to see throughout the year.

Okay, fair enough. And I guess, just trying to get you to slice it more maybe. On the esoteric side of the business that was obviously pretty strong and seemed to be strong sort of ex-Genzyme as well. Can you maybe talk to, and I know you're not disclosing the specific segments anymore, but maybe the histology side of the business is that in-sourcing still moderating as you talked to last quarter?

Yes. The histology side of the business was -- we continue to see the moderation of in-sourcing. I will say, we are starting to see in-sourcing now in the dermatopathology business, which is concerning for all the reasons that we have articulated -- utilization concerns, quality concerns. But the in-sourcing trend has definitely moderated from where it was a year ago, and we continue to work for legislative and regulatory resolutions to what we consider to be a matter of concern, continuing concern.

Again, I guess this last one on Genzyme, again just a follow-up to your comments about their quarter. Any way to get a sense of what sort of drove that? Is it market share gains? Is it the OB/GYN visits coming back? Any better sense there?

What drove it is a terrific effort and performance by the Genzyme leadership team and by the LabCorp leadership team in terms of the collaborative way in which we are integrating the business. What drove it is a terrific performance by the Genzyme sales reps, the Genzyme genetics counselors, the lab people. I mean it's just -- it was a great performance. They came into the organization energized, they have had strong leadership from the top about why it is important to retain the business and continue to be successful. We have had great leadership on the LabCorp side and collaboration in terms of the steps we've taken in the integration. So those are the real reasons. I think, as I said before, it's a people effort, putting their shoulder to the wheel and just doing a tremendous job.

Okay. Thanks very much.

Our next question comes from the line of Steven Valiquette with UBS. Please proceed.

Hi, thanks. A couple things here. I guess first the official guidance last quarter on the Genzyme deal was, you have the $0.16 to $0.26 dilution to the cash EPS. I'm wondering -- if somebody asked about would it be accretive, can you at least give us a flavor for do you see it being less dilutive, or do still see it within this range? Just trying to get more color around that, and also how much of the upside in the quarter really is from Genzyme versus other factors? Just trying to get from your sense, what were the true drivers of the upside in the quarter if you had to rank order them. Thanks.

As Dave said earlier, it's too early to -- while it we are pleased with how things have gone today, it's too early to call. So I would say we still believe that range of $0.16 to $0.26 dilutive is the right rate. On the contribution to the quarter, again slightly better performance than we had modeled. But I would not say that that was a major contributor to the quarter that we reported.

Okay. All right, thanks.

Our next question comes line of Ralph Giacobbe with Credit Suisse. Please proceed, sir.

Thanks, good morning. Just going back to the esoteric business, you had said it was up 11%. That's exclusive of Genzyme?

No, that's including, Ralph. It was 7% excluding.

Okay, all right. That's helpful. And then, just in terms of Westcliff, can you give us a sense of what had been in your guidance previously, and maybe what's changed given the developments there?

Ralph, it's Dave. My recollection is that we had expected that we would be able to integrate Westcliff, I think beginning in June. And so up until that time, I think we had assumed that we would continue to lose about $0.01 a month there, and that it would basically turn break-even in the second -- I'm sorry, in the third to fourth quarter time frame. So we got a little bit of a head start, but nothing that's going to materially change the numbers.

Okay . And then maybe get into the margin opportunity going forward a little bit more? Obviously margins are depressed now just given some of the recent acquisitions. Can you give us a sense at all where you think margins can go, and I don't know if you want to consider a normalized environment or once we get through some of the recent acquisitions you guys have

I think what we've said and continue to believe is that with the foundation model, if we are growing the top line sort of in the 4% to 6% range, that that should lead to 20 basis points of margin expansion, all other things being equal. So, there is a lot of noise in this quarter because of Genzyme, Westcliff, DCL, weather obviously. But to me what's instructive here is that if you take out all the revenue and all the expense associated with the acquisitions, gross margin would have been up, operating income margin would have been up. So what that says is that kind of on 3% volume growth and 5% revenue growth, we would've achieved margin expansion, which is exactly what we say the foundation model should lead to.

Okay. And then, just the last one, can you maybe just get into a little bit more, you talked about one of the five pillars being an alternative delivery model. Maybe just give us a little bit more details around exactly what that kind of encompasses and how to think about that?

I think it encompasses a whole variety of initiatives that are out there in the marketplace. I mean obviously people have been -- they have been writing about pre-authorization to molecular testing and genetic testing. There's been a good deal of discussion about accountable care organizations and what that is going to mean. There is -- there has been a fair amount of discussion about the mandatory MLRs and how managed care companies are going to deal with the need to achieve the mandatory MLR. So our goal is to understand all of these opportunities, work in a collaborative way with managed care and even with the government as appropriate, and try to develop options for those that want to move away from traditional fee for service. And these are important strategic considerations, but I will say, having spent some time even studying the ACO regulations, none of this is clear or well formulated at this point.

Okay and just to follow up on that. In those scenarios, I'm assuming the ultimate goal from you, do you see a way that you can preserve and expand margins within those sort of alternative models?

Yes. I think the idea is there is the opportunity to gain volume and share over time. And with improved volume and share, again pushed through the fixed cost base, we should see the opportunity to expand our margins.

Okay thank you.

Our next question comes line of Tom Gallucci with Lazard Capital Markets. Please proceed.

Good morning. Thank you very much. You have obviously done a good job on the acquisition front, pretty consistent, a couple big ones, but lots of smaller ones along the way. Just wondering what your outlook is there? And obviously with Orchid there's some international exposure. Is international any more attractive to you these days generally speaking or higher on the radar screen at all?

Good morning Tom. It's Dave. So in terms of the domestic acquisition market. Again there are a lot of opportunities. We continue to focus on, number one, being very disciplined and selective in what we want to buy and paying an appropriate price and multiple for it. Number two, with Genzyme and Westcliff we have two fairly sizable acquisitions that we're integrating. So the smaller acquisitions are the easier ones to integrate, and you should probably expect that those are the ones that we will focus on. That's not to say that we don't have the appetite to do something significant if it comes along, but we've got a job on our plate to fully integrate those businesses and continue to make them successful, and that's taking obviously quite a bit of management focus. So I would say the acquisition market is attractive. There are going to be assets coming along; we are going to look hard at the assets that do come along. And within our pricing discipline, we are going to choose the ones that we want, and likely they will be smaller than the last couple of sizable ones that we have done.

On the international market, we have the lab in Dubai. We have the Clearstone joint venture, which gives us exposure to some international markets, including China, Singapore, and some other places. At this point that's just for our clinical trials business, but it kind of gives us a window into those markets, which I think is helpful. And I think with respect to the UK, the opportunity that Orchid Cellmark presents in forensics is quite attractive. So what I would say about the international markets is again, don't have the expectation that we are going to do anything big in the international markets. Don't have the expectation that we are going to do anything game-changing, but certainly we are going to continue to look at international opportunities, and in those that are attractive, whether it's from a demographic perspective, whether it's from a growth perspective, or whether it's from a clinical trials perspective, we will continue to participate.

Okay, that's great. And then, obviously your commentary around the seasonality and the quarterly progression is pretty clear. At the risk of beating a dead horse a little bit, I just did want to understand a little bit about Genzyme. You're not changing your dilution estimates for the year, which is fair enough at this point, but I would expect that it gets better throughout the year? And just wondering, you've got share count sort of maybe working against if you are not assuming share repurchases, you've got seasonality working against you, but will we expect a little less seasonality than normal given that Genzyme is theoretically should be ramping up a bit over the course of the year? I know you have some managed care pressures, but there should be some integration too, I would think. Can you help us understand the quarterly progression on Genzyme?

Tom this is Brad, and you've nailed all the right points. Managed care compression that we've talked about a couple of times hasn't really started to happen yet. It happens based on different contracts at different times throughout the year. So that will bring the revenue down. And then there are integration activities that are necessary to offset that. So I wouldn't necessarily describe it as a, in year one, clear ramp as the year goes on. I think in the out years that begins to be true as the revenue impacts annualize and the integration activities continue. So no, I wouldn't think about it as a material progression throughout the year on Genzyme.

Okay, what about even as we get into the first half of next year, just sort of thinking out a little bit further? If you've got some managed care pressures that start later this year, do you really start to see the bigger ramp later in 2012, or could we be thinking about it earlier than that?

Tom, it's Dave. Just one other thing I want to add to what Brad said, which is obviously, if we continue to retain the customer base and grow the revenue, then you could see better in the second half of this year than our expectation, but it's too early to tell what is going to happen there. But that remains our focus, is the top line customer growth and revenue growth.

With respect to next year, assuming that there is some managed-care compression that kind of starts in the second and third quarters, obviously it will take us some time to annualize that. And so again, I wouldn't, there's always opportunity to do better. If we perform well from a revenue perspective, I wouldn't -- we have a very well thought out and well planned approach on the cost perspective, and I wouldn't expect that to go any faster.

All right. Thank you very much. I appreciate you sort of keeping the bar low, and maybe you can beat that over time. Thanks.

Our next question comes in the line of Darren Lehrich with Deutsche Bank. Please proceed.

Hi, thanks and good morning. This is Brian Zimmerman in for Darren. I was wondering if you could give us an update on what the next step with the FTC process is regarding Westcliff?

Yes, Brian, it's Dave. So just to recap, there was a federal court hearing at which the federal district judge determined on an FTC request for an injunction that in his view this was not an anti-competitive situation. So he denied the FTC's injunction, and the Court of Appeals did not do anything to disturb that ruling. So as a result, we have basically filed a -- first of all we filed a request to take the scheduled May administrative proceeding off the docket, which was granted by the administrative law judge. And we have filed a request to dismiss the administrative case, which I think is presently under consideration. That actually has to be done by the commission, so it's their decision.

Okay, and any sort of time for when you expect to hear a decision from them?

We don't have a time frame on that.

And then, could you make any comments on specific facility closings you've had in regards to Genzyme Genetics

No.

No? Okay. And then, you talked a little bit about Orchid Cellmark and some of the opportunities you saw, especially in the UK. Can you give us some sort of an idea of how you size up those revenue opportunities? Or potential market opportunities?

The biggest market opportunity is the forensics business in the UK. And I'm going from memory here, so my recollection is that up until March of this year, the bulk of that business was handled by a government agency called the FSS, and that the FSS has basically determined that it is not going to do forensics anymore. It is going to do outsource that to private companies. My recollection is that the FSS was approximately $150 million a year in revenue, and I believe that's dollars, not pounds, so about $150 million a year in revenue that the Orchid Cellmark business will have the opportunity to compete for. That doesn't guarantee any business but it gives Orchid Cellmark the opportunity to compete for. So the revenue opportunity in the UK is attractive, assuming that again -- assuming we get regulatory approval to closure. A very solid management team over there. And so the UK opportunity is attractive and that's where we are really focused.

Okay, thanks a lot.

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

Sorry, caught me just choking on a drink. Just a couple questions at this point. Brad, I just wanted to make sure on the disclosure, are you -- did you suggest that all of the segment metrics that we're used to having will be in the Q? Because I thought that you said before some of that was going to be trimmed down?

It will be consolidated and consistent with what was in the Q -- the Qs and K of the past. In the MD&A section on how we describe the revenue performance. So it does not have it exactly as it used to be in the 8-Ks but we think it has adequate information, and we talk about it as such in our MD&A section to understand how the business is doing, core versus genomic and esoteric.

Okay, I just wanted to make sure I understood. And the Q is not out yet, correct?

No, that's right.

And then I think the only other question I just want to think about -- so I apologize, I'm not familiar with how you guys put it in the Qs and Ks, because we were used to before just pulling it out of those 8-Ks. But for example, will we be the able to see the core business separately or not?

Yes.

Okay, so I guess maybe the answer is, just wait until the Q comes out. I was just trying to think about the total volume to 5.9%, you said up 4.9%, excluding Genzyme, and more than 3%, excluding other acquisitions. And I guess I'm still trying to parse it down. It looks like drugs of abuse may have added 80 BPs and esoteric added 70 BPs, which would put core maybe in the 1.5% range. Am I in the ballpark or can you tell me at this point?

One thing to consider is that in the reported number our lost contracts have now annualized.

Right.

So that was about a 1 point drag in the past that is no longer with us. So that's why when we take out all of those things, when Dave referenced the 3% earlier, we try to take out all of those different moving parts and the reported number did get better. But the organic number taking out all the moving parts that we mentioned of just over 3 is a little bit up from Q4 of last year. And if we go back a little bit, the first half of last year was very challenged, even neutralizing for all those parts, started to gain some strength in Q3 and Q4 and it continued into Q1.

Right. So you lost that drag, and that's part of why the number looks better. And that kind of more than 3% number, what you think that number looks like adding back your estimate of weather impact?

Weather is taken into account.

Right, I know it's in there. But -- well, you have added that back already, so the real number wasn't up that much? Or that's the number including the impact of the weather?

No, well let's go to this, year-over-year for us, weather wasn't an issue. So in any year-over-year comps for us, we're not thinking about whether.

So you called out $0.08 of weather -- am I thinking of the wrong quarter? During this quarter you called out $0.08 of impact from weather, but you're just saying you had a similar impact a year ago?

We called out -- our EPS was impacted by $0.08 in this quarter compared to for example our expectations, but on a year-over-year basis, it was exactly the same.

The weather impact was roughly the same year-over-year?

Yes, that's exactly right. And to revenue, it's neutral, because we lost the same amount of revenue in the first quarter of last year.

Right. Got it. And then finally, just still around the volumes, regionally is there any color that would be helpful for us to think about, given that I'm sure everyone is trying to ascertain sort of where we are in the cyclical or the modest cyclical recovery we might be beginning here on some of these volume metrics. Is there any regional color you have that might help us think about that?

No. We really saw pretty consistent performance all around the country.

Okay that's all I have thanks.

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

Thanks. Good morning, everybody.

Good morning.

Couple of questions. First up, as a follow to Amanda's questions, it sounds like we have fairly well rounded volume improvement across several of the business lines. I think you specifically called out OB/GYN. Anything else to point out here, and then secondly, can you help us think a little bit about the trend as we moved over the balance of the year here, and I guess what I'm trying to get at is, did the trends that we see in the quarter, were they fairly well rounded throughout the quarter, did we see some sporadic -- January's crummy because of weather and things improved in February and March, et cetera. Thanks.

Gosh, no matter how many times we say we don't give month-by-month guidance, you guys keep trying. So I got to give you credit for persistence.

I'll take it.

So the answer is that obviously there was severe weather in a couple of months, January and February, that has an impact on the overall quarter. However, the trend was pretty consistent, and we are not going to break it down month by month because the minute we start doing that, then you're going to want it week by week or day by day. So it was a consistent performance in terms of volume during the quarter. As I mentioned, it was consistent across the business lines. We didn't see any area of great strength or great weakness. Obviously esoteric did well. Some of that was helped by Genzyme. Some of that was just helped by good growth in several lines of esoteric testing.

And what I would say, Bill, is the trend in 1Q was very consistent with what we saw in 4Q of 2010, and our guidance assumes that the trend is not going to get measurably better throughout the year, and it assumes that is not going to get measurably worse. So it assumes that the trend is going to be relatively the same from a volume perspective throughout the year. And again, we would love to do better, and if we see recovery in things like commercial managed care lives and job creation, it's conceivable we could do better. But we are not building any of that into our expectations.

Great, thanks for the color. And then, Brad, at the risk of getting too granular on the fourth quarter organic number, you mentioned obviously it was lower than 3% we saw in the first quarter. About 2%, is that the right way to think about it?

In the fourth quarter of 2011 or 2010?

Fourth quarter of 2010.

I think we said 2.7%.

Got it. Must have missed that. Thank you very much.

Our next question comes from the line of Kemp Dolliver with Avondale Partners. Please proceed.

Thanks, and good morning. Your competitor yesterday in discussing Q1 volumes felt that there was an extra business day in the quarter around the timing of the New Year's holiday. Is that a factor in your thought process regarding how much we should extrapolate Q1's performance?

Kemp, this is Brad. Not a factor for us. Our days were the same in the first quarter this year versus the last. You may ask how can that be? All days are not created equal, and we weight our days based on strength, and when we add that up for the first quarter this year versus last, we see the same number.

Okay, fair enough. And everything else is covered. Thank you.

Our next question comes the line of Ricky Goldwasser with Morgan Stanley. Please proceed.

Good morning.

Good morning.

I have a couple of questions. The first one, on the pricing side, just to confirm, I think you mentioned in the prepared comments that Genzyme accounted for 6.5% of the growth, so should we think of the base business or the core growth at about 1.7%? And are there any moving parts in that number that we should normalize for?

Ricky, this is Brad. You are right on the math of what the base business is. No moving parts to normalize for, other than, I would say, back to the volume questions. We did annualize the loss of the lower priced contracts. So while in the past that's been a detractor from volume and an aid to price, on a year-over-year basis, now it's not as much a detractor from the volume number and it's actually showing up as a negative in price. So other than that, and again we've annualized that, other than that I can't think of anything. The acquisitions were the largest impact by far.

Ricky, it's Dave. The only thing you should factor into your thinking there is that because of growth in drugs of abuse testing, which obviously is at a lower price point, that's going to be a bit of a damper on overall pricing growth.

Okay. And can you quantify the impact of drugs of abuse? Should we add on to that 1.7% number?

We don't quantify it in terms of the price impact. I think Steve in the prepared remarks did go over the volume impact.

Right. Okay. And then, clarify on Genzyme. Based on what you expect today, what percent of Genzyme revenues or volume, whatever you're comfortable with, do you expect will be under the LabCorp managed care contract pricing umbrella by the end of the year?

It's really too early to tell. These are ongoing discussions with the managed care plans, and we just don't have a way of making a prediction there.

Is this really the key swing factor to kind of like the guidance of kind of like leading guidance versus you coming in line?

I would say it is a swing factor; I wouldn't call it the swing factor, because obviously we've built in some assumptions into our expectations.

Okay and then just one follow-up question on the OB/GYN. I might have missed it early on. Can you just talk about the trends that you are seeing there and kind of a specific growth for the women's health tests like HPV?

I think what we said is that we did see improvement in our volumes coming from OB/GYN offices in this quarter, both year-over-year and sequentially. And so that obviously led to some overall improvement in our women's health portfolio. As you know, we don't break down growth in specific tests. So HPV continues to grow on a year-over-year and a sequential basis, and there is nevertheless still more opportunity there.

Okay thank you.

Our next question comes the line of Dane Leone with Macquarie Capital. Please proceed.

Hi. Thanks for taking the questions. Congratulations on the quarter. Can you just remind me if there's any larger contracts coming due in 2011 that could lead to be renegotiated outside of any Genzyme Genetics discussions.

Good morning, it's Dave. I think what we've said is the Horizon Blue Cross Blue Shield plan in New Jersey does come up this year. And so those discussions are obviously underway. Other than that we don't have any sizable contracts in 2011.

Okay, great, thank you. And just quickly on additional efficiency programs that are scheduled for the rest of 2011, are there any outside of just the acquisition related integrations?

Acquisition related integrations, and as we mentioned at the beginning, the continued implementation of the AccuDraw and the touch systems moving from patient service centers into in-office phlebotomy and also to the doctors office through the Beacon platform. So those are probably the key initiatives in terms of our efficiency programs.

Okay, great. Thank you. I think everything else has been covered.

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

Thank you. Going back one more time to the esoteric , the organic esoteric testing growth of around 7%. Is it fair to say that's largely market share capture, or are you seeing an improvement

Shelley, it's Dave. I just think it's too hard to -- I don't think we have any way of answering that question.

Okay.

So I really couldn't give you a good assessment. But obviously we are pleased with the growth there in whatever form it's coming.

But it's fair to say that it's still a challenging environment and we are not back to the sort of pre-2008 underlying demand environment for either routine or esoteric? We're still in a pressured environment. Is that fair to say?

I think the environment is clearly improved in the last two quarters. We are not back to where we were. Obviously, if you look at the newspaper and you see the unemployment numbers and you see the Standard & Poor's view of the governments that at all the other factors out there, we are not a robust period of economic growth. So sure there are still challenges out there. But we have a couple quarters of what we think are at least pretty good trends, in terms of utilization and growth.

Okay. Great. And on the pre-employment drug screening, which is clearly in double-digit territory, what is the margin on that business relative to the rest of your book of business?

Again, it's very hard to talk about margin by business line in our business. The drugs of abuse business uses most of the existing infrastructure for the core business, so it uses the patient service centers, it uses the logistics in transportation. But on the other side of that, it doesn't fully bear the costs of the SG&A function, it bears it's own S function, but it doesn't fully bear the cost of the G&A function. It doesn't bear the cost of the corporate resources. It doesn't bear the expenses of the divisional , their utilization of patient service centers or couriers. So I just prefer to think of it overall as the incremental margin on just about everything that comes in the door is very good. Whether it's drugs of abuse testing, esoteric testing

That make sense. Okay, and then a last one on FDA regulation, the lab developed tests, I think we're still expecting to hear something. Do you have the guidance on when we might hear something from the FDA?

I was at a meeting yesterday where Dr. Gutierrez presented, and his statement was, it is his hope that there will be something from the FDA by the end of the year. However, there is no certainty of that, and when he put up his slide about the next steps, he commented that it was the same slide that he has been putting up for at least two years. So, I would say that we know the FDA's thinking is that they would like to get something out this year. Whether that will happen is really anybody's guess.

Okay great thanks very much.

Our next question comes line of Tony Vendetti with Maxim Group. Please proceed.

Thanks. I know you're not giving out the exact growth rates of the genomic and esoteric tests, but some of them have been growing pretty rapidly. I guess the question is, when would you expect the growth for things like HPV and vitamin D to slow in terms of year-over-year growth? And then on the goal of getting to 45% of your revenues from genomic and esoteric testing, I didn't catch if you gave a timeframe of when you expect you to 45% and then lastly, on gross margins, is the gross margin that you're at today, do you think that's a stable number? And if it's going to vary in any material way, why so?

Okay, so first always said 3 to 5 years on the 45% from esoteric . Second of all, on the particular test within the esoteric category, yes, clearly some of them like vitamin D are slowing on a year-over-year basis because you're off of a much higher base, some of them like IL 28-B are growing dramatically on a year-over-year basis, again because you're off a small base. So there's a lot of -- this is it's important for us to continue to bring new tests to market, particularly new tests that are reasonably priced in the esoteric category, so that as -- and again, vitamin D is still growing, but it's not growing as fast year-over-year because you're off of a bigger base. So as growth slows those areas, we can replace with growth in other testing. As to gross margins, obviously gross margins were dragged by the acquisitions this quarter. But if you actually our gross margin perspective, I think over the last couple years, gross margin has actually been improving as the efficiency initiatives have taken hold, so there isn't any reason why gross margin should go down over time.

Okay great. Thanks.

Our next question is a follow-up it comes line of Bill Bonello with RBC. Lease proceed.

Hi, thanks a lot for taking my follow-up. It's kind of a two-biscuit morning. I am wondering - GenPro yesterday announced that it received FDA approval for its trick test. Is that something that you can anticipate seeing some pretty substantial demand for? I mean where we could think about physicians who are checking for chlamydia and gonorrhea going ahead and checking the box for trick?

As you know, Bill, and I appreciate the fact that you are talking about checking different boxes, because as you know , we feel quite strongly about the need not to jam these things together in a way that encourages odd ordering patterns. So I think the answer to your question is it's an option that we will offer. I do think that there will be a good deal of physician interest in the test. And my belief is that we have been offering the test in some form already as have a number of other of labs, but certainly the fact that GenPro got the approval should bring some further focus to physicians

Okay. And then the investment that you wrote off in the quarter, care to tell us what that was?

So that's two follow questions, so now it must be a three-biscuit morning, and no, the only thing we are going to say about it is we periodically make investments in two ideas that we think are interesting, opportunistic, and strategic and have the potential to work out well for us. This was an opportunity that was interesting and opportunistic and strategic and did not work out well for us. And in my recollection , in my 10 years at LabCorp it's the first time that we've sort of had anything like this. It just was not successful. But I view it purely as a one-time event and not something that there is a

Okay, and then a final, at risk of being into an 18-biscuit morning, the CPT coding initiative, I know in the past you have sort of indicated you are not really worried about it, but I continue to get a lot of questions from investors about it. I'm hoping you can give us some rationale for why you're not really worried about it. Is it just, you look out and you say, gosh, we're hard-pressed to see that rates would actually come down, or is it more of, when we add up the amount of revenue we get from stacked coding, it just not that much

Okay. This is a complex question. Let me try to address the various component parts of it. First of all, there's developed this kind of idea that somehow stacked coding is a bad thing, and that could not be more inaccurate, because the way -- CPT stands for current procedural terminology, and the P is procedure, and so we bill by procedure. So if we perform in a particular molecular test, if we perform a particular procedure like a DNA amplification 20 times, then it is absolute appropriate to bill 20 units of DNA amplification and bill 20 units of a CPT code. There's nothing wrong with quote unquote code stacking. However, what has been pointed out to the lab industry is a couple things.

One, there are some labs that use CPT coding to generate, and the way that they code their tests, to generate higher revenue for testing than other labs. This is a concern, because you can look, at as we are shown in a meeting one time, you can look at four different labs billing Medicare for the same test for four different test of CPT codes. So there is a concern that coding in general, and it's not code stacking, it's just coding in general can be used in a way that maximizes reimbursements. We don't do that and obviously we do not support it.

The other thing that is a concern is, there is very little transparency in what the payer sees from a CPT coding perspective. So they look at , to go back to my example, 20 units of DNA amplification, and they don't know what they are buying. They don't know if that's a cystic fibrosis test, fragilis -- they really don't know what the test is. So there has been a push for greater transparency in coding, which has led to the idea that we should have a single code for highly utilized molecular tests like cystic fibrosis and fragilis and some others. We support transparency in coding and billing and obviously that's a laudatory goal.

So, the reasons that, in our view, this is not a particularly big issue is at least at present, is, first of all, this is a Medicare initiative, and the amount of molecular testing particularly in these categories like CF and fragilis that we do for Medicare, is really immaterial. Second of all, we don't have any indication that there is any considerations of major changes to reimbursement as a result of this initiative. So nobody has said, well, cystic fibrosis reimbursement is going to be dramatically cut as a result of this. And usually, and we don't know how this or these tests are going to be reimbursed, but our expectation is that reimbursement levels are going to be relatively consistent with what we have seen in the past, and that would be the fair way to handle it and the appropriate way for CMS to handle it. So I realize it's a long answer, Bill, and I'm sorry for having gone on, but I think it's important that people sort of really understand what's going on here, which is, we do support transparency in coding and we do support payers knowing what they're paying for. We don't have a huge amount of revenue at risk, and believe me, we are through ACLA and individually, and our partner labs in ACLA are doing the same thing. We are going to fight to make sure that there is not a native impact on reimbursement as a result

Thank you very much.

All right ladies and gentlemen this concludes the Q&A portion of the call. I would like to turn the presentation over to management for closing remarks.

Thank you, Jeff. We appreciate you taking the time to listen or first quarter earnings call and hope you have a great day. Good day.

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