Labcorp Holdings Inc (LH) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 Laboratory Corp. of America Holdings earnings conference call. My name is Katie and I will be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions). I would like to now hand the call over to your host for today, David P. King, Chairman and CEO of Laboratory Corp. of America. Please proceed.

Thank you. Good morning and welcome to LabCorp's second-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 will discuss our second-quarter 2011 financial results, highlight our progress on our key strategic initiatives 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 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 release for replay information.

This morning, the company filed a Form 8-K that included additional information on our business and operation. 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 results. These statements are based upon current expectations and are subject to change based upon various 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. 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 remains strong. Free cash flow for the first half of the year was $325 million, which is in line with our expectations and historical performance. Cash flow has been reduced by approximately $20 million due to expected delays in the Genzyme Genetics enrollment process, which we have previously discussed. We expect that these delays will be resolved in the ordinary course and are reiterating our 2011 operating cash flow guidance of $900 million excluding the Hunter Labs settlement.

We remain pleased with our cash collections. DSO increased one day year over year to 46 days at the end of June due to the Genzyme Genetics acquisition, and decreased sequentially by one day. Our bad debt remained stable at 4.7%.

Second, revenue growth -- revenue increased 13.3% year over year in the second quarter. Genzyme Genetics accounted for approximately 7.6% of this growth. During the quarter, we achieved strong growth in revenue per requisition which increased 8.1% year over year. The growth in revenue per requisition is attributable to acquisitions, rate increases, test mix shift, and increases in tests per requisition. Genzyme Genetics accounted for approximately 6.4% of the growth in revenue per requisition.

Total company volume increased 4.8% year over year during the second quarter. Genzyme Genetics accounted for approximately 0.9% of this volume growth. Esoteric volume increased approximately 10% in the quarter.

Third, margin -- for the second quarter, our adjusted operating income margin was 19.9% compared to 21.8% in the second quarter of 2010. Acquisitions that we have not yet fully integrated caused an approximate 180 basis point drag on margins. Over time, as we integrate the businesses, margins will improve. Margins expanded sequentially by 60 basis points, which is in line with past experience.

Fourth, liquidity -- we remain well-capitalized. At the end of June, we had cash of $118.9 million and approximately $463 million available under our revolving line of credit. During the second quarter of 2011, we receive notices to convert a portion of our zero-coupon subordinated notes. The total conversion value of approximately $231 million was settled by cash payments of approximately $143 million and by the issuance of approximately 900,000 shares of stock. At June 30, the remaining accretive value of the zero-coupon subordinated notes is approximately $140 million. At the end of June, total debt was $2 billion and there were no borrowings outstanding under our revolving credit facility.

During the second quarter, we repurchased approximately $60.5 million of stock, representing approximately 600,000 shares. At the end of June, approximately $408.5 million of repurchase authorization remained under our previously approved share repurchase program.

This morning, we reaffirmed 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 June 30, 2011. Operating cash flow of approximately $900 million, excluding the Hunter Labs settlement. And capital expenditures of $150 million.

I will now turn the call over to Dave.

Thank you, Brad. We are very pleased with our second-quarter results. We generated strong revenue growth of 13.3%. Volume increased 4.8% and esoteric volume increased approximately 10%. Importantly, despite economic headwinds, our organic volume grew by approximately 2% year over year.

Revenue per requisition remained strong, increasing 8.1%. Genzyme Genetics accounted for approximately 6.4% of the revenue per requisition growth. Excluding the impact of Genzyme Genetics, our DSO declined on a year-over-year basis to 43 days, reflecting the continued strong performance of our operational and billing personnel.

We continue to make significant progress on each aspect of our five-pillar strategy, and I will now provide specific updates on each pillar.

The first pillar of our strategy is that we deploy our cash to enhance our footprint and test menu through acquisitions and to repurchase shares.

Genzyme Genetics is performing well. We are pleased with revenue performance and are on track with planned cost reductions.

LabCorp and Genzyme employees continue to work together to combine the businesses without disruption to our customer base, as evidenced by the very limited customer attrition we have experienced to date.

the Genzyme acquisition has allowed us to introduce significant customer benefits given the complementary nature of our services.

With respect to the genetics business, our customers now have broad access to novel testing technologies, such as the SMA molecular genetics assay and the whole chromosome SNP array, part of our combined Reveal family of SNP microarrays.

On the oncology side, LabCorp's broad molecular oncology test menu, such as BRAF mutation testing, which has applications in a variety of cancers including colorectal cancer and melanoma, complements the strong pathology expertise of Genzyme Genetics. Further, LabCorp's broad test menu has allowed us to internalize approximately 50 tests that Genzyme had previously referred to other labs.

Last month, we acquired Clearstone Central Laboratories, a leading global provider of central laboratory services for late-stage clinical trials. The acquisition provides LabCorp with Clearstone's global network of central laboratories and clinical trials management system, APOLLO CLPM, which provides clients with real-time access to global data, strengthened chain of custody, automated sample stability monitoring, and guaranteed consistency across all lab sites. The combined entity will have the largest available biomarker assay portfolio with globally harmonized and state-of-the-art testing platforms in areas such as pharmacogenetics, microbiology, immunohistochemistry, allergy testing, cytogenetics, and flow cytometry. We have stated for some time that our clinical trial Central Lab business needed broader international reach and with laboratories in China and Singapore, Clearstone accomplishes that goal.

In April, we announced our intended acquisition of Orchid Cellmark, an international provider of DNA testing services primarily for forensic and family relationship applications. The transaction remains subject to regulatory approval, and we are working with the FTC to complete the process. We continue to expect the transaction to be neutral to GAAP earnings in 2011.

Finally, we have repurchased approximately $325.5 million of our shares thus far in 2011.

The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. We continue to make progress on our LabCorp Beacon product. This quarter, we launched several new modules, migrated half of our Westcliff customers and surpassed 15,000 users on Beacon.

We also plan to introduce our Beacon order entry system nationally in the third quarter, which will allow our customers to place electronic orders for all LabCorp brands and services.

On the Genzyme front, we have converted billing, report delivery, and other key IT systems onto LabCorp platforms.

The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. The national rollout of our Touch and AccuDraw order entry systems should largely be completed by the end of the year. We're also progressing well with lab automation projects that will lower our cost structure, increase throughput, and allow us to more efficiently manage personnel. These automation projects, improvements throughout our logistics network, and other enhancements in our supply chain operations have allowed us to increase the per-employee throughput in our core laboratories by 30% over the last four years.

Further, our service metrics, customer satisfaction ratings and turnaround times are at all-time highs.

The fourth pillar of our strategy is to continue our scientific innovation at reasonable and appropriate pricing. We continue to introduce new tests and collaborate with leading companies and academic institutions to provide our customers with the most scientifically advanced testing in our industry.

In women's health, we have enhanced our menu of tests for sexually transmitted diseases. Our testing from the liquid-based Pap file now includes cervical cancer screening, HPV testing including genotyping, and detection of four of the most common sexually transmitted diseases -- Chlamydia, gonorrhea, herpes, and trichomonas, which recently received FDA approval.

CDC reports that there are over 7 million new cases of trichomonas in the United States each year. We are pleased to be one of the first labs to offer the only FDA-approved test for this treatable sexually transmitted disease.

Also, to simplify specimen collection for our physicians, we are simplifying our collection devices adding HSV1 and 2 to the same collection swab we offer for our other molecular STD testing.

At Monogram, we have launched the first in a series of HCV drug-resistance assays that have been developed to support the clinical evaluation of HCV direct-acting antiviral agents and their effective use in the management of HCV infection. Identification of certain mutations may be important for long-term drug treatment strategy. These tests add to LabCorp's industry-leading suite of HCV testing.

The fifth pillar of our strategy is to consider alternative delivery models. We continue to discuss alternative models with our managed-care partners as we believe that our health care system will continue to move away from traditional fee-for-service payment. Health care reform will likely bring changes to our payer mix and reimbursement systems and our goal in serving our customers will always be to provide the highest value for each dollar of laboratory spend.

In summary, we are pleased with our second-quarter performance and remain optimistic about our position in an ever-changing health care system. As the most efficient and highest-quality provider in the laboratory industry, we believe our services will be increasingly in demand through the era of health care reform. We are excited about the opportunities ahead and remain focused on executing our five-pillar strategy to enhance shareholder value.

Now Steve Anderson will review anticipated questions and our specific answers to those questions.

Thank you, Dave.

Can you update us on the status of the Hunter Labs settlement?

As previously announced, to avoid the uncertainty and costs associated with the prolonged litigation, the company has reached an agreement in principle with the State of California and the qui tam relaters to settle the Hunter Labs litigation. The settlement in principle provides that LabCorp will pay $49.5 million without an admission of liability to the State of California and qui tam plaintiffs to resolve all claims against LabCorp. As a result of the agreement in principle the company recorded a pretax charge of $34.5 million, $20.7 million of which is after tax.

The settlement is subject to completion of a settlement agreement accessible to all parties. The Medi-Cal program continues to reimburse LabCorp for services rendered.

Why are you not adjusting your guidance higher given your performance?

Our guidance encompasses a wide range of potential outcomes and we're only half way through 2011. We continue to note that the diluted share count in analyst 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.

Furthermore, in reviewing the analyst models, we continue to believe the seasonality of our business is not 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.

Can you update us on the mix of your business coming from esoteric testing?

In the second quarter, approximately 40% of our revenues were in the genomic, esoteric and anatomic pathology categories. As we reiterated last quarter, our new goal is to increase our esoteric test mix to approximately 45% of our revenue within the next three to five years.

Do recent acquisitions and other uses of cash limit your ability to repurchase shares or act upon other acquisition opportunities?

We repurchased approximately $325.5 million of our shares in the first half of 2011 and have $408.5 million of authorization remaining under our previously approved share repurchase program. While we do not comment specifically on share repurchase, we have 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 remind us of how drugs of abuse volume trended during the year?

In the quarter, our drugs of abuse volume increased approximately 8% year over year. That compares to a year-over-year increase of 14% in Q1 of 2011, 12% in Q4 of 2010, 13.9% in Q3 of 2010, and 15.4% in Q2 of 2010.

Now I would like to turn the call back over to Dave.

Thank you, Steve. Thank you very much for listening.

We're now ready to take your questions.

(Operator Instructions). Brandon Strong. My apologies. Your first question comes from the line of Bill Bonello from RBC.

Thanks. Just first a couple of housekeeping questions. Can you tell us where the restructuring charges that are excluded from the adjusted EPS show up in the income statement? You talked about some of them but not all of them in the footnotes.

Bill, this is Brad. $18.3 million appears in the income statement that's in the press release. That's the combination of the severance and facility-related restructuring charges. And Hunter Labs settlement and the Orchid legal costs are part of SG&A.

Oh, I see. I'm sorry. So the $18.3 million, right, is broken out separately. Okay. What a stupid question. Maybe my second one is just as dumb.

Organic volume growth? Is that truly organic or does that include tuck-in acquisitions?

Bill, it's Dave. The approximately 2% organic growth is truly organic, so it's everything -- it's all acquisitions backed out.

Okay. That is helpful. And then I want to make sure I understand the margin impact of the acquisitions. Tell me if I'm thinking about this right. If I just take second-quarter revenue and I add 180 basis points to operating margin and tax-effect that, that's $0.15, which would say if you could get these acquisitions up to corporate averages, there's close to $0.60 of earnings power from these deals. Am I thinking about that correctly?

Bill, this is Brad again. I haven't worked through the math exactly that way, but it's hard to find problem with the logic. I mean I think we've been, in the past, clear about what Westcliff was doing, and we've recently started to integrate that business, given the clearance that we received. Still very early in the Genzyme process, but absolutely, if all things being equal in our business, we should see that start to be upside.

Okay, fabulous. That's all. I'll get back in queue. Thank you.

Amanda Murphy, William Blair.

Good morning. Thanks. So just a question on Genzyme -- obviously that business is doing well. I'm just curious -- I think you have talked in the past about some sort of cross-selling opportunities between the two business lines. Have you seen any benefit from that at this point? And then also just a question on sort of your plans of branding for that business going forward.

Amanda, it's Dave. Yes, I think the cross-selling efforts have been quite successful. The Genzyme reps have been very much in demand in terms of introducing new testing into existing LabCorp customers. And, as we mentioned on the call, we've been able to internalize a lot of the testing that Genzyme was sending out so that the Genzyme customers basically have one-stop shopping for services that they were ordering from other laboratories.

I think as we progress with the IT integration and particularly the rollout, the national rollout of Beacon order entry, this will be a further enhancement because it will allow all our physicians to order all of the various LabCorp services from one platform. So you'll be able to order DIANON, ordered Genzyme, order LabCorp, order esoterics from one Web portal as opposed to having to use multiple methods of order entry.

On the branding, we have the right, under the purchase agreement, to continue to use the Genzyme Genetics brand for a certain period of time. And we are engaged in a review of all of our brands at this point -- the Genzyme Genetics brand, esoterics, DIANON, US LABS -- we have a lot of brands as a result of our historical growth by acquisition. And I expect that that by the end of this year, we will have a good deal more clarity in terms of where our long-term branding strategy will be going.

Okay, thanks.

And then just switching topics to in sourcing for a minute, I know that you are not breaking out the histology piece anymore, but I'm just curious if you can provide some perspective on -- it seems like that for you guys had been I guess improving or the rate had been -- growth had been slowing. Are you still seeing that dynamic?

I think you're always hesitant to say that the -- that you are on the bottom because we don't know, but the trend of in-sourcing absolutely has leveled off in our business where we are just not seeing the kind of in-sourcing that we were last year and the year before.

Our histology volumes -- we actually had a little year-over-year growth, which we were happy to see, and an improvement sequentially. So the challenge with in-sourcing is that as you get through a wave of one set of physicians in sourcing, other physicians start at least exploring the behavior if not imitating it. And so I think we are kind of at the -- we have weathered the major part of the storm, and we feel pretty good about where we are.

Okay, that's helpful. And this is kind of a question that's I guess pretty high level, but given the sizable PBM transaction announced this morning, maybe that combined entity will have a third -- access to a third of the prescription drugs out there. I'm just curious as lab testing becomes more and more important part of therapeutics and health care, precise medicine, if you will, how do you kind of envision the labs working together with the PBMs and other players in the health care sort of value chain?

Well, we have a terrific relationship with both Express Scripts and Medco, and we admire both of those companies in their leadership a lot. We have had a long-standing pharmacogenomic project with Medco around several drugs and associated diagnostic tests -- tamoxifen, abacovir, and we've actually been expanding that program.

So, I think that you will continue to see a tighter link between utilization -- between drug utilization, particularly expensive drugs, particularly oncology drugs and what I would describe as gate-keeper-type lab testing. So before some of these drugs can be prescribed, a diagnostic test would be required to assess either safety or efficacy.

I think as the -- as we see consolidation in PBMs, this will only increase the momentum because the goal of the PBM industry, obviously, is to make the provision of therapeutics both more efficient and more cost-effective. And the labs will have a significant part in that.

Okay. Thanks a lot.

Adam Feinstein, Barclays.

Thank you. Good morning, everyone. Dave, maybe just to get your point of view in terms of -- so the 2% organic volume growth is a pretty good number in the current environment, very strong relative to the peers.

Maybe just -- curious to get your thoughts in terms of what's going on; do you guys assume you are taking market share with that type of growth rate? So just how do you think about the 2% relative to the industry?

A couple things, Adam. It's Dave. I think the 2% is a very strong performance, given -- to reiterate what we said in the press release, what we perceive to be some mounting headwinds on the economic front. We are not seeing the unemployment rate come down in any significant way. We're not seeing a lot of job creation in the private sector. We're not seeing a lot of increase in enrollment in managed care plans. And as the IMS data suggests, and they are directional, but nevertheless they are out there, utilization in a number of physician specialty areas seems to have declined from 1Q to 2Q. So I think the 2% is a very strong performance and we're very pleased with it.

I'm always reluctant to claim that we are taking share or that somebody else is losing share or that we are performing better than the industry. What I would say is a lot of the investments that we have been making in our business and continue to make in our business in IT, in logistics, in automation, in efficiency, are manifesting themselves in the marketplace through better service, improvements in quality, better turnaround time, more satisfied customers. And I think that's what you are seeing.

I think what you're seeing is, as other peers have essentially reduced investment in their business as a result of the economic headwinds, and we have continued to invest, our metrics are improving and as a result of our metrics improving, we are becoming the lab of choice.

Okay. All right. And then I guess the second question, Dave, would just be so, with Genzyme, you guys have laid out expectations for us at the time the deal closed. Would you say it's running better than what you anticipated? Or is it running in line? How should we think about the integration thus far?

I think in terms of the integration, we are doing very well. In terms of the financial performance, I would say we are doing a little better than our expectation. The one thing we have not seen yet is the impact on managed care pricing that we had talked about earlier on. And, as a result of negotiations and contractual discussions, I think we have done a good job in demonstrating the value proposition of Genzyme, but as we get into the second half of the year, we will see a little bit of that compression, and that's going to have an impact on overall performance. Nevertheless, financially, I'm very happy with where we are -- customer retention, very happy with where we are. And in terms of what we outlined to improve the cost structure, I think we are doing very well.

Okay. And then just a final question for me, is this -- with everything going on in Washington, clearly a lot of moving parts, but just curious to get your thoughts in terms of what we are hearing about cuts for labs. And we talk about this copayment every couple of years, but certainly just curious to see how you guys are thinking about that and any thoughts.

Yes, obviously, the situation is very fluid, and literally changes by the hour. I mean what I would say is we at LabCorp, and I think we as an industry continue to be adamantly opposed to this idea of a co-pay or co-insurance. And we -- way back in the -- at the time of [Deathrop], there was 20% lab co-insurance. And we made an agreement with the government that in exchange for taking a significantly lower fee schedule, the co-pay would be eliminated. So that was the deal that we made, and that is the deal that we have had for more than 20 years. If you look at the clinical laboratory fee schedule update from 1995 to 2011, we have had cumulative -- now this is not average -- this is a cumulative update of 7.7%. And we have agreed over the next four years to take a 1.75% cut per year, plus a productivity adjustment to offset the CPI as the laboratory industry's contribution to health care reform.

Contrast that with, in that same period, inpatient hospitals are cumulatively up 51.4%. Outpatient hospitals, cumulatively up 35.6%. Physicians cumulatively up 27.9%. DME cumulatively up 13.6%. So we have received less than half of the cumulative updates of other health care providers. We have agreed to take a reduction. And to me, imposing a co-pay and just the government saying we got savings by shifting costs onto senior citizens and private lab companies would really be an unconscionable outcome.

So as you could tell, Adam, I have some very strong feelings about this, and I think they are shared throughout the industry. The consequences of a co-pay on smaller labs and particularly those who serve nursing homes and indigent populations would be catastrophic. And so I'm hopeful that the politicians will see that this would just not be, from a financial or a policy perspective, a good long-term solution.

All right. Very good. Thank you, guys.

Ralph Giacobbe, Credit Suisse.

Thanks. Good morning. Dave, just wanted to go back to sort of your comments on the sort of mounting economic headwinds. You know, we've obviously seen better results beyond the volume side over the last several quarters, and I think the hope had been that kind of the worst was behind when we think about sort of the last couple years.

So I guess maybe it would help to just put sort of the mounting economic headwinds that you talk about in the context of maybe what you're seeing, what you are thinking going ahead. Is there a -- has your mindset changed a little bit as we move through the quarter?

And maybe it would be helpful -- I know you don't typically do this, but did the progression of the volumes moving through the quarter sort of change your views as you have seen things fall off at all?

Yes, I think, talking about the progression of volumes in the quarter is not helpful to anybody because it's just a -- what was yesterday as opposed to how are we doing cumulatively? And cumulatively, at 2% organic growth and close to 5% total growth, I think from a volume perspective, I think we had a terrific quarter.

Obviously, you could look at the numbers and see that the rate of volume growth on a year-over-year basis, trended down a little bit this quarter. You can also see that physician office visits, according to the IMS data, trended down a little bit this quarter, and at least if you believe the June data, trended down fairly dramatically in June.

But, our basic outlook remains the same, and remains what it has been, which is that I think we are through the worst of it. I think that -- I think we are -- I think part of the impact that you always see in the first part of the year is as private insurance patients are working through co-pays and deductibles, you see impacts on utilization. So we're not changing our perspective or our outlook for the balance of the year. And as I have said for months, if not quarters, we expect the volume trend to basically continue as it has been since 4Q of 2010, and don't see anything dramatic happening there.

Okay. All right, that's helpful.

And then, just in terms of some contracts, obviously last year you got yourselves into the Empire contract. Any update from what you are seeing there? And then maybe any update on Horizon and when a decision could be made?

Well, Horizon goes through December of this year, and we continue to be in discussions with the plan and are hopeful that a decision will be sooner rather than later. A lot of that obviously is not in our hands, but I think we have a very good partnership with Horizon. I think we've had a very constructive and productive relationship over the course of the contract and feel good about where we are.

On Empire, we are seeing significant volume gains there, so I think we are starting to execute the opportunity, and much improved over where we were in 4Q, and we just need to continue the momentum.

And then just my last one -- any greater interest from managed care around trying to get more volumes sort of out of the hospitals into some of the independent labs? Any increased discussion there or interest from them on that front?

Well, there was an analyst note that highlighted some of the disparities in payment, which I think caught the attention of some managed care companies, and validated a lot of what we have been saying historically, so I think there's a greater degree of attention. On the other hand, the same considerations remain, which are the managed care companies' broader relationships with the hospitals and their need for other services from the hospital.

So, I think there's a sharpened focus on it. And I also think what we will start to see in 2012 is, we will start to see some pilot programs by managed care companies in various markets to see if there are ways that they can influence hospital utilization and moving work out of hospitals.

Okay, great. Thank you.

Darren Lehrich, Deutsche Bank.

Thanks. Good morning, everybody. So, I wanted to just go back to Steve Anderson's prepared remarks around the seasonality topic, and obviously you have driven that point home a lot in the last couple of quarters just from a modeling and guidance perspective.

I guess from the analyst perspective, my own at least, one of the things that we are trying to reconcile is the progress that you are making from an integration standpoint and you've obviously called out the 180 basis points of margin impact in this quarter alone.

So I guess maybe Brad, if you can just help us think about that in the context of how the rest of the year progresses, there's been a lot of integration activities. We can see it in the severance charges, etc.

So, will some of that activity just not show up in the second half of the year? Or does the managed care pricing that you have referenced from Genzyme more or less offset some of that? Can you just help us think about it a little bit more in the context of what normally we understand as seasonality?

Right. Here's the way I think about it -- is most of the things that you mentioned were in our original thinking for the year, so there is nothing in the back half of the year at this point that is any different than we thought going in. So, we are comfortable at the midpoint of our guidance, but we look out at what's out there and everything is higher. And Steve also pointed out in his comments that it tends to be -- and when I detail reviewed this last quarter, the operating metrics were very close -- but the share count was what was the difference.

And so when we compare what those expectations are to what our own models suggest, it pops out in the fourth quarter. And the fourth quarter of kind of the average of what's out there is maybe slightly higher than the third quarter, which, if we look back over time, is just something that is not achievable in terms of reality, taking out some things that have happened in the past in the UnitedHealthcare contract year announcement and some other acquisitions or things of that nature. So that's really the basis of Steve's comments and the way we think about the rest of the year.

That's real helpful. And then, if I could, just on the triggering of the conversion rates, I know you laid that out as 900,000 incremental shares. Can you just maybe remind us or clarify on a year-to-date basis, and then any reasonable assumption or estimate that you might have post Q2, in terms of the impact of that on the share count.

Right. Well one thing to consider is those numbers are already in the share count when it comes to fully diluted EPS. So, from the beginning of that security, that's always been in there. So it's really just an exchange between outstanding and that line item in the reconciliation of shares to diluted shares.

Got it.

So it's really not an impact on the EPS that we report.

Got it. Okay.

And then Dave, your comment, I just want to go back to around Genzyme; you said limited attrition. And I think you were referencing either revenue or clients. I'm not sure if you could just clarify, but maybe just compare that to the last couple of quarters where I think you were saying there wasn't really much attrition at all. And is there any real change at all with regard to attrition?

Darren, no; no change. Just different words, but our customer retention has been extremely high, and we are very pleased about it. Nothing has changed between first and second quarter here.

Okay. And I guess my last question just would be on the Medco relationship, and you have highlighted it a lot in the past. Can you maybe just frame for us how significant that relationship is at this point? And I don't think there's anything to read into the security of that relationship if anything gets bigger, but can we put that into context or some financial context for the company at this point?

Yes, it is not material to any of our numbers, so the hope would be over time and particularly with assuming that this transaction gets approved, that with the combined power of the two entities, that it does become material. But at present, it's not -- you wouldn't see it show up anywhere that would make a meaningful difference in the numbers.

Great. Okay. Thanks for that.

Kevin Ellich, Piper Jaffray.

Good morning. A lot of my questions have been answered, but I do have a few more. Dave, just going back to the 2% organic growth, which is a very good number relative to some of the competition in the industry -- do you actually think the industry is growing at this point? Or is that all market share gains?

Kevin, that's a hard question to answer. I do think the industry is growing. I think for all the reasons we have articulated, demographics, new test offerings, better understanding of utilization of test by physicians -- I do think the market is growing.

At the same time, obviously, the peer comparisons suggest that we may be growing faster than the industry, and we feel great about that. But I don't think we are in a declining industry at all.

I think there is great -- I mean the Medco relationship, which hopefully will become the Medco-Express relationship, as that transaction proceeds, is one of many examples where there's a tremendous opportunity for diagnostics to grow in the system and at the same time, contribute to reductions of overall health care spend. So, I think the industry is in a terrific position for growth.

Okay. That's helpful.

And then thinking about expectations going forward, do you think 2% can hold up? We all look at IMS physician office visit data which might not be the greatest data point. Just wondering what your view is on that correlation between physician offices of data and volumes? And also, United, a few days ago, indicated utilization trends are expected to increase in the back half of the year. I think they actually had commercial recovery lives increase by about 4 million I think. So, how does that play out relative to your business?

Do I think a number in the neighborhood of 2% is sustainable for the rest of the year? Absolutely. Will it be exactly 2% into the third and fourth quarter? Can't say that. That's -- we just can't -- we don't have that level of visibility, but a number in that neighborhood? Yes, that is sustainable.

United's suggestion that utilization will increase in the second half of the year -- it's welcome news that people think that utilization and particularly physician office visits would increase because diagnostics and lab testing obviously are a key component of not only how we treat sick people, but of how we keep people well and how we improve people's health. So, that's -- it's encouraging to hear.

Obviously, it conflicts a little bit with the data that we at least are seeing from IMS. But it's a -- we are -- I'm not telling you anything you don't know. It's a very bumpy economic time. And I think from our perspective, we're going to continue to invest in the businesses we have been. We're going to continue to execute on the key initiatives, and I think we are well positioned to continue to grow.

I understand. Okay.

And then, a couple days ago, the Institute of Medicine came out with their recommendations for women's health, preventative screening, including HPV testing. Have you had a chance to look at that and what sort of impact do you think that will have on the lab business? It should be good, right?

I have not had a chance to look at it. I think -- so, yes, I think any recommendations that would suggest that we should be increasing the use of diagnostics for screening for diseases like cervical cancer would be beneficial to the labs.

And again, I think as a matter of sound policy, I'll go back to what I said about the co-pay, would you rather discourage people from getting screening by imposing copayments on tests and pay for the cost of acute care for cervical cancer later on? And I realize that Pap screening is not a key Medicare test, but from a policy perspective, the point is, if you discourage people with copayments and beneficiary obstacles from getting screened, diabetes -- cardiovascular disease, then what you're going to end up doing in the long run is paying more for acute care.

Got it. And then when you issued your guidance originally this year, did you guys know that EmblemHealth, the regional plan, was going to terminate its agreement with Monogram and also Genzyme Genetics?

I don't think we knew that. I believe that is a -- let me say that the termination of Monogram and Genzyme Genetics by Emblem has nothing to do with their performance or with LabCorp's performance. My understanding is that is a health plan that has an exclusive contract with Quest, and that when those entities were acquired by LabCorp, they are contractually obligated to terminate us per their contract with Quest. So it's not a reflection on the performance of Monogram or the performance of Genzyme in any fashion.

I don't think our guidance incorporated that, but I also don't think that the financial impact there is material enough to impact the guidance one way or the other.

Got it. And then just one last question for Brad -- in your prepared remarks, you said that acquisitions not completed was a 120 basis point drag on margins?

180.

180. Did that -- was that only the Orchid Cellmark deal that hasn't closed? Or was it something else?

No, that wouldn't be impacting it, Kevin. It's just the Genzyme and LabWest or (technical difficulty) Westcliff.

Got it, got it. Okay. That's helpful. Thanks.

(technical difficulty)

Tom, your line is open. You may proceed with your question.

I didn't hear her introduce me. I'm sorry about that.

Anyway, a lot of questions have been answered. I appreciate all the detail. Just sort of two follow-ups I guess -- that 2% organic growth, as you sort of think about the country and your markets, is it fairly evenly spread? Maybe can you identify anything that may be unique in one market versus another? I know it's hard to understand market share, but maybe thinking about it that way could be helpful.

Yes, we really can't break it down. It's -- we don't see any marked regional differences.

Okay. So pretty consistent.

Yes.

And then you obviously are talking about the macro environment. What about smaller deals? You've been very successful over the years of sort of doing the tuck-in-type deals which I think can be pretty helpful over time. Are those types of labs maybe any more willing to sell, any more desperate to sell, to use a different term? And sort of, do you think that environment maybe is even more compelling than it has been or sort of status quo?

I think the acquisition environment continues to be attractive. There are lots of opportunities in the market. As you know, we try to be very disciplined about the deals that we do and particularly the fold-in deals, but we will continue to be active in that market and to look for opportunities, as we have said, to execute on the first pillar, which is to enhance both our geographic footprint and our test menu.

Okay. All right. Thanks a lot.

Gary Taylor, Citi.

A couple of questions. Is there any material difference in that organic revenue -- organic volume growth between commercial and Medicare? Anything you can comment on?

No, nothing that we see.

Okay. Another question for Dave. You know I was intrigued by a comment you made early in the call just about health plans interested in exploring -- or I guess fee-for-service kind of going away and health plans interested in exploring alternative payment arrangements, or maybe I'm not quoting you properly. But could you add a little color around what's happening there?

Sure; and I don't mean to suggest that fee-for-service payments are going away or are going away anytime soon because that's sort of the standard payment model. But, if you look at everything from accountable care organization rules to bundled payments to many of the things that are on tap in the CMS innovation center, everybody is trying to look at ways to make the delivery of health care more cost-effective and improve quality.

I saw a write-up yesterday about one insurance managed care plan that is proposing premium differentials based on whether patients are willing to accept a menu of what they describe as higher-quality, lower-cost hospitals. And if patients are willing to -- if the insurers are willing to accept that menu of hospitals and they pay a lower premium than people who want to be able to go to any hospital that they want.

So in my view, the point is we're going to see a lot of pilot programs, we're going to see a lot of efforts to move away from a per-procedure basis for the payment of health care services and move more toward -- whether it's bundled payments, whether it episodes of care, whether it's a flat rate to take care of the patient for the whole year -- these are the things that are going to be tried out. And obviously we need to be engaged with our managed-care partners, and with the government as well, in the way that these ideas are being thought about, to make sure, number one, that the value of lab services is recognized, and how much we contribute to effective health care and high-quality, lower-cost health care; and second, to make sure that our interests are protected so that we don't end up being financially compromised by something like a bundled payment or an ACO system.

Right. And how -- I guess it's not -- it's not obvious that historically when you have had capitated contracts that the value of diagnostics was recognized, so is there a new way to bridge that gap? Or was capitation really a California-specific, heavy, managed-care situation, and it's going to be viewed differently?

I guess my concern is, can you get the commercial guys to recognize that value under alternative payment model when I guess capitation is the best example we have of one and the rates are materially lower?

(technical difficulty)

Ladies and gentlemen, please stand by. Once again, ladies and gentlemen, please continue to stand by. The speaker will be back with us momentarily. Thank you. Once again, ladies and gentlemen, please continue to hold. The speaker, Mr. King, will be back with us momentarily. Thank you. (Operator Instructions).

Please proceed.

Hi; is it still with Gary Taylor?

Hi, Gary. Sorry about that. We had a little technical problem.

That's Okay. I'll just tighten it up. We're getting a little maybe theoretical there. I just had one more quick questioning. How much of your commercial business renews just annually, evergreen?

You know, I don't know the answer to that off the top of my head. We probably have 3,000 different managed care contracts and the vast majority of them renew annually. But obviously when you look at -- in terms of size, the sizable plans, United, WellPoint, Cigna, Horizon, the top payers are on fixed-term contracts that renew at periodic dates.

Right. So I guess I'm just trying to think about when is kind of the next year where you've got say 20% of your fixed contract renewals coming due? Is that like a 2014, or is it even later than that?

I hesitate to go with the 20% number only because is it revenue or number of contracts? The big renewal year for us is going to be 2013. As we have said, that's the year WellPoint and Cigna are the major renewals. So that's the next year where we have a couple of sizable contracts up for renewal.

Okay. That's helpful. Thank you very much.

Sandy Draper, LabCorp (sic).

Asked and answered, so I appreciate it, guys.

Ricky Goldwasser, Morgan Stanley.

Hi, this is Claire Diesen, actually, filling in for Ricky. Thanks for taking the questions. Just a couple of quick questions for you -- first, I was just wondering if you could provide a little bit more information on the phasing of the Genzyme business coming under your managed-care contracts. I know you mentioned we might start to see some impact in the second half of the year. Is this something you could roughly quantify in terms of what percent of the business might be coming under these contracts and what the impact on your pricing metric might be?

Almost all of the businesses already under our managed-care contracts and any pricing or financial impact is already quantified in the guidance that we have provided.

Okay, great. Thank you. And then lastly, not to beat a dead horse here, but obviously the 2% organic revenue growth is really impressive. Could you say anything more in terms of what you are doing to achieve this? Is it increased sales and marketing? Are you taking share or are your customers taking share? Thanks.

Well I think obviously we provided a good deal of commentary on this.

First of all, we have talked for a considerable number of quarters about the investments that we are making in the business -- the investments in increasing our geographic footprint, whether it's through acquisitions or through opening new patient service centers; the investments in improving the physician and patient experience through IT, through improvement of throughput in our patient service centers, through simplification of our practices, through automation in our laboratories to improve turnaround times and throughput.

So, my view is what we have done is we have set out a clear set of initiatives. We have executed well on those initiatives, and we are now seeing the benefit in those initiatives, which is that our service metrics are better than they have ever been. Our customer satisfaction is better than it's ever been. And what we need to do is to continue to invest in the business and execute the initiatives that we have underway, and I think we will continue to see positive results.

Great. Thank you.

Dane Leone, Macquarie.

I just wanted to ask, I think last quarter you cited the women's health business is an area of core growth, and you know, there's been impressive rollout of products and what you highlighted this quarter. I'm just curious, given a more challenging macro environment, how did women's health specifically do this quarter, I guess maybe fundamentally and then in terms of some market share gains.

It's very hard to quantify or think about market share gains. Just I think in terms of the way we look at the business, women's health grew in the quarter, which is good. Obviously, we are happy with that.

There is continuing fluctuation in Pap volumes, which we have talked about for better than a year now. And the Pap trend drives a lot of the women's health trend. But overall, we're very pleased with the progress in women's health. And again, one of the key initiatives there is to simplify collection -- the collection devices; make it easier for physicians to do business with us; and for us to provide high-quality results to the physicians and the customers.

Okay, thank you.

And then just out of curiosity, in terms of the Clearstone acquisition, could this be an entree into more of a clinical testing model in Asia?

I think it's too early to tell. We need to understand those markets. And the goal, the specific goal on Clearstone was to serve the needs of the pharma companies and the CROs who send us laboratory business by having laboratories in China where there are very complex restrictions on being able to move blood or other human specimens out of the country. And also, the market presence in Singapore, because it is a hub for clinical trials, lab testing for all of South Asia. So we will look at that, but it's way too early to reach a conclusion on whether that will be an entry point in the long term or not.

Okay, great. Thank you for taking the questions.

Lisa Gill, JPMorgan.

Hi; this is actually Gavin Weiss in for Lisa. Thanks for taking the question. I was just wondering if you could give us any additional details on the Orchid transaction and the FTC inquiries?

We really can't give much more in the way of details. We did receive a second request from the FTC. We have responded to that request. We are cooperating with the FTC in desire to see this transaction concluded because we think it would be beneficial, not only to LabCorp and Orchid employees, but also to LabCorp and Orchid customers. And we hope to get it resolved promptly.

Thanks.

And then, CMS held its public meetings on the 2012 Medicare payment rates for new codes this week. Is that material to you guys? And can you provide us with any outlook on how those meetings went?

My understanding is that the major topic at the public meetings was the molecular CPT coding initiative. And I believe that CMS made the determination that as to molecular codes that were to be placed on the clinical lab fee schedule, that that -- the decision on coding and payment has been deferred for a year, at least a year, so at leads into 2012. So generally, we view that as a positive outcome.

That's a very complex process, both the coding and the setting of the payment rates. And I think it's commendable that CMS has decided not to rush into any decisions there. I think generally, the lab community views are well-regarded at CMS and they listen to our input, and we are hopeful that we will continue to have a collaborative working relationship with them.

Okay. Thank you, again, for the questions.

Bill Bonello, RBC.

Hey, guys, thanks for staying on so long and taking this follow-up call. I guess I just wanted to one more time follow up on one of the guidance questions and maybe ask the question that Darren asked slightly differently in terms of seasonal progression, and then just get clarification on something Brad said.

So, if I look at last year and I just do the exact same split of EPS between the first half and the back half of the year, then, and put that onto this year, EPS would be at $6.42. And you maybe got about a nickel from share repurchase last year, so take that out and you're still at the very high end of the guidance. Was there anything unusual about the progression of earnings in 2010?

Bill, not that I recall. And I am looking at just specifically to the Q3, Q4 comment, $1.47 in Q3 and $1.34 in Q4. Are we tracking the same numbers?

Yes, no -- I think so. I don't know. I just -- I did -- literally, I just took your adjusted EPS for what you said it was for 2010 and what you said it was for the first half of the year and did the math.

Yes. And I've done that same math, and I get that we did 49.7% in the first half of 2010 to the total; 51.5% in 2009; 51.7% in 2008; and 50.6% so far in this year. So I don't think it's materially different in terms of a progression.

And I go back to -- just to reiterate what we said -- operationally, when I look at what's out there, we were very close. It all comes down to shares, and when you see where it's off, it's Q4.

No, that's fine.

And then just the only other thing, the stock sort of dropped like a rock, Brad, when you made the comment that you were comfortable at the midpoint of the guidance, and I am glad you are comfortable there. But I just want to make sure that we weren't supposed to read anything more into that. I mean you are comfortable with the whole range of guidance, I would hope. Or is that (multiple speakers)

That's exactly right.

Okay. That was all.

Just needed to pick some point to answer the question on.

Yes, no. Great. Thank you.

At this time, we have no further questions. I would like to now hand the call back over to Mr. David King for closing remarks. Thank you.

Thank you very much. We thank you all for joining us on our second-quarter earnings call, and hope you have a good day.

Ladies and gentlemen, thank you very much for your participation in today's conference call. You may now disconnect. Have a wonderful day.