Labcorp Holdings Inc (LH) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 Laboratory Corp of America Holdings earnings conference call. My name is Keisha, and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. David King, Chairman and CEO of LabCorp. Please proceed.

Thank you, Keisha. Good morning and welcome to LabCorp's third-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 third-quarter 2011 financial results, highlight our progress on our five-pillar strategy, and provide answers to several frequently-asked questions.

I would now like to turn the call over to Steve Anderson who has a few comments before we begin.

Before we get started I would like to point out that there will be a replay of this conference call available via the telephone and Internet. Please refer to today's press release for replay information.

This morning the Company filed a Form 8-K that included additional information on our business and operations. This information is also available on our website. Analysts and investors are directed to this 8-K and our website to review this supplemental information.

Additionally, we refer you to today's press release, which is available on our website, for a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. 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 and K and subsequent filings. The Company has no obligation to provide any update 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. Excluding the Hunter Labs settlement of $49.5 million, free cash flow for the first nine months of the year was $510.9 million.

Cash flow has been negatively impacted by approximately $28 million due to delays in the Genzyme Genetics enrollment process and billing conversion, which we expected and had previously discussed. We expect that these delays will be resolved in the fourth quarter 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 2 days year-over-year to 46 days at the end of September due to the Genzyme Genetics acquisition and was unchanged sequentially. As a result of continued success in our billing and collection activities, we reduced our bad debt rate to 4.5% during the quarter.

Second, revenue growth. Revenue increased 10% year-over-year in the third quarter. Genzyme Genetics accounted for approximately 7% of this growth.

During the quarter we achieved strong growth in revenue per requisition, which increased 7.8% 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% of the growth in revenue per requisition.

Total Company volume increased 2.1% year-over-year during the third quarter. Genzyme Genetics accounted for approximately 0.9% of this volume growth. Esoteric volume increased approximately 7% in the quarter.

Third, margin. For the third quarter our adjusted operating income margin was 18.8% compared to 19.6% in the third quarter of 2010. Year-over-year margin decline was due entirely to recent acquisitions that we have not fully integrated.

Excluding these acquisitions margins would have increased year-over-year. Margins will improve as we continue to integrate these businesses.

Fourth, liquidity. We remain well capitalized. A at the end of September we had cash of $85.8 million and approximately $463 million available under our revolving line of credit. At the end of September total debt was $2 billion, and there were no borrowings outstanding under our revolving credit facility.

During the third quarter we repurchased $152 million of stock, representing 1.8 million shares. At the end of September $256.5 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 10.5% to 11%; adjusted EPS excluding amortization in the range of $6.28 to $6.33; 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 third-quarter results. We generated strong revenue growth of 10%, volume increased 2.1%, and esoteric volume increased approximately 7%.

Despite continued economic headwinds, organic volume grew by 1.2% year-over-year. Revenue per requisition remains strong, increasing 7.8%. We reduced our bad debt rate to 4.5% during the quarter, reflecting the continued exceptional performance of our operational and billing personnel.

We continue to make significant progress on each aspect of our five-pillar strategy. 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.

The integration of Genzyme Genetics is going well, and we are retaining revenue and realizing cost savings as expected. We remain confident that the transaction will be neutral to slightly accretive to our 2012 earnings. We remain extremely pleased and appreciative of the skill and dedication we observe among the Genzyme Genetics personnel, who are now a strong component of our LabCorp team.

The integration of Westcliff is in line with our expectations, and the integration process should be fully completed in the first quarter of 2012. We are pleased to increase our presence in the California market, where we have historically been underrepresented.

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 expect the transaction to be slightly accretive to GAAP earnings in 2012.

Finally, we have repurchased approximately $478 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 introduced Beacon order entry nationally in the third quarter, which will allow our customers to place electronic orders for essentially all LabCorp brands and services. With the previously released Beacon Results delivery capability, customers can now place orders and receive results through a simple, customer-friendly portal. We also launched the Android version of the Beacon mobile application.

We also completed development of the Beacon patient portal. This portal is a secure and easy-to-use online solution that enables patients to receive and share lab results, make appointments, pay bills, set up automatic alerts and notifications, and manage health information for the entire family. We expect to release a pilot of Beacon patient portal later this quarter.

The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. In the third quarter we rolled out our Touch AccuDraw systems to an additional 207 sites.

As previously noted, we have over 1,000 sites on Touch AccuDraw, accounting for 76% of our Patient Service Center volume. By the end of the year we will have an installed base of over 1,100 sites accounting for approximately 80% of our PSC volume. Touch AccuDraw has helped us improve accuracy and workflow at our Patient Service Centers, enhancing the patient experience and improving turnaround time.

We have consolidated five call centers through the first three quarters of 2011. Over the past several years we have reduced our core clinical call centers from 55 to 18 locations, decreasing our cost per call by 39% while increasing our average speed to answer by 5%.

Finally the expansion of our Burlington lab is scheduled for completion in the first quarter of 2012. This expansion will enable our current volume to flow more efficiently and allow us to consolidate satellite locations. We will continue to review our national footprint, seeking consolidation opportunities where appropriate.

The fourth pillar of our strategy is to continue scientific innovation at reasonable and appropriate pricing. We 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 the industry. To this end we introduced important offerings in women's health and personalized medicine during the third quarter.

In women's health we have simplified specimen collection for physicians by offering a single swab device. This device tests for bacterial vaginosis, Candida, differentiation of the most prevalent organisms, Chlamydia, gonorrhea, Trichomonas, and HSV 1 and 2. Our single swab device provides the comprehensive actionable information physicians need to deliver the best care to their patients.

In personalized medicine we recently added to our industry-leading suite of companion diagnostic testing, offering tests that can help physicians appropriately prescribe the drugs Zelboraf and Xalkori. The drug Zelboraf and the cobas 4800 BRAF V600 mutation test companion diagnostic, both from Roche, were approved by the FDA on August 17 for use in patients with inoperable or metastatic melanoma that carry the BRAF V600E gene mutation. The companion diagnostic test is essential for identifying patients who have this mutation and may benefit from therapy. We are the first national lab to offer this test.

The drug Xalkori, available from Pfizer, was approved by the FDA on August 26 for use in the subset of non-small cell lung cancer patients classified as ALK-positive. A clinically validated companion diagnostic was also approved by FDA for identifying these ALK-positive patients that will benefit from Xalkori. Again, we are the first national lab to offer this test.

The fifth pillar of our strategy is to develop alternative delivery models. The extension of the UnitedHealthcare contract is an important step forward in our fifth pillar, as we will continue to be the sole national laboratory for UnitedHealthcare through the end of 2018.

For nearly 5 years our partnership has delivered high-quality laboratory services to UnitedHealthcare's customers and lowered their laboratory spend. Over the next seven years both organizations will continue to make investments to improve management of UnitedHealthcare's laboratory networks and their associated costs.

In summary we are pleased with our third-quarter and year-to-date performance and the progress we have achieved on our strategic initiatives. We remain excited about the profitable growth opportunities on our horizon and the five-pillar strategy we employ to realize them.

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

Thank you, Dave. Can you describe the potential impact from Medicare reform?

The Budget Control Act of 2011 passed by Congress this summer did not include direct cuts to laboratory reimbursements. However, as many of you know, this new law established a Super Committee tasked with recommending a $1.5 trillion deficit reduction plan over 10 years. If a majority of the Super Committee reaches agreement on a recommendation, Congress must vote on it by December 23 without any opportunity for amendments.

Congress must also address scheduled reductions to the Medicare physician fee schedule sustainable growth rate. There are numerous proposals circulating to address these issues. Some of these proposals include further reductions in the clinical lab fee schedule or coinsurance or copayments for laboratory services.

It is too early for us to predict the impact of these potential reforms. We believe that across-the-board reductions to reimbursement, cost-sharing proposals, or arbitrary exclusion of services are bad policy. Such proposals will increase administrative costs to providers, deter patients from seeking early and appropriate care, and ultimately increase the cost of healthcare.

We are working closely with the American Clinical Laboratory Association and members of Congress to explain our position on these matters and will continue to press for responsible reforms and appropriate reimbursement for our services.

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

In the third 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.

Can you remind us of how drugs of abuse volume trended during the year?

In the quarter our drugs of abuse volume increased approximately 9% year-over-year. That compares to a year-over-year increase of 8% in Q2 of 2011; 14% in Q1 of 2011; 12% in Q4 of 2010; and 13.9% in Q3 of 2010.

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

We repurchased approximately $478 million of our shares in the first three quarters of 2011 and have approximately $256.5 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.

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) Adam Feinstein, Barclays.

Good morning, everyone. Wanted to just get some more thoughts just on volumes. Certainly you guys showed volume growth. I guess -- what are your thoughts these days in terms of industry volumes?

Clearly you guys have done a great job taking market share. Just curious in terms of just some of your overall thoughts there.

And then at the same time just wanted to get an update in terms of your thoughts around managed care contracting. You guys talked about the renewal of the UNH contract during the quarter, and just wanted to get updated thoughts in terms of other additional opportunities.

Okay. Adam, it's Dave. Good morning. Obviously we are pleased with the 3Q volume growth of 2.1% and year-to-date volume growth given the economic conditions. Our third-quarter volume growth obviously included some help from Genzyme, 90 basis points; some help from drugs of abuse; and some organic growth. So it was a nice mix of contributors to the growth of volume.

At the same time you can obviously see that organic growth was 3% in the first quarter, 2% in the second quarter and 1.2% in the third quarter, and it was 3% in the fourth quarter. So the volume trend in general is slowing.

And I don't think I'm the first person to be saying that in the healthcare services industry. I think we are seeing that across-the-board.

I guess my overall observation would be that we are not seeing significant job growth in the broader economy. We are not seeing across-the-board increases in commercially insured covered lives, although I'm sure you noted that United did say that they had seen a positive trend in their commercial lives. So I think overall volume growth is going to continue to be muted until we see recovery in the economy, job creation, and growth in people who have insurance of one form or another.

In terms of the managed-care perspective, obviously we've talked about the extension of the United contract, which we are very pleased about and think gives us the opportunity to continue working with United towards some long-term goals that we share. Generally beyond that I would say the managed-care environment is relatively stable.

I would summarize it by saying there are really three things that are on managed care's radar screens in terms of lab. One is unit cost, and we have consistently been the lowest cost provider and we work hard to maintain that position.

Two is trend. So that is utilization. I think that means that managed-care plans are very much focused on leakage and work going outside the network, because that drives both trend and cost.

And third is the broad concern that expensive molecular testing, particularly if it is being proposed as screening testing for the asymptomatic population, can drive both cost and trend in extremely negative directions. So I think there is a lot of concern about what new tests are coming to market. Will labs be able to show specific applications for those tests like the companion diagnostics that we launched in the third quarter that address utilization of particular therapies and patient response to utilization of those therapies?

So I think those are the three high-level issues that managed care is thinking about as it thinks about labs, and I think we are well positioned to respond to all of them.

Okay, great. As always, appreciate your detailed answer. I will get back in the queue. Thanks, Dave.

Bill Bonello, RBC.

Good morning. Just a couple of questions. So first of all historically you have talked about a foundation model that resulted in at least 10% EPS growth. Can you achieve that kind of growth if organic volume growth is just 1%?

Bill, it's Dave. I think we've put out there that you need 4% total growth to really achieve the foundation model -- and that is, of course, all other things being equal. So we had more than 4% growth this quarter, but we also have the drag of the acquisitions that are being integrated that are detractors.

I think if volume growth is 1%, unless you are going to see 3% price growth it is going to be tough to achieve consistently that kind of 8% OI growth and 10% EPS growth.

Okay, that makes sense. Steve did a nice job of summarizing the facts about what is going on in Washington. I'm wondering, Dave, just because you are so close to it, if you can give us just a sense of feel.

I mean, I'm out here in a conference I think that you were at -- well, I know you were at last night. And the feel I'm picking up here is that people seem to be more worried about the risk of a lab cut actually getting implemented this year than they have at any time in the recent past. I don't know if that is your read. I would love to hear your sense.

Well, as I said last evening, I think we as an industry have to be aware that everybody is again being asked to contribute to savings. So unfortunately what is being considered in Washington is not policy-driven; it's savings-driven. And a lot of ideas are floating around that -- for reasons that we've articulated -- I think are really bad policy and contrary to the idea of generating long-term savings in healthcare.

So I think if you impose co-pays, the likelihood is that in addition to shifting costs to the beneficiaries and ultimately to the lab industry for people who don't pay, you are also running the risk of deterring utilization, of people not getting screening done, and of as a result creating more acute incidences of care that are going to be more expensive.

I mentioned last night the study came out on heart failure and hospitalizations and how much progress we've made on hospitalizations for heart failure. Those heart failure hospitalizations cost $18,000 apiece. You got to collect a lot of co-pays from customers to offset that one single $18,000 incident.

Again, one of the reasons in my view that heart failure hospitalizations have gone down among seniors is there is much better testing of cardiac markers. There is much better understanding among physicians of what those marker means. There is broader utilization statins when people need them.

So all of these things have a cascade effect. And if you start implementing bad policies, ultimately it doesn't reduce cost; it increases cost.

That was a -- do I think there is risk? Absolutely I think there is risk. And it is not because it has anything to do with labs. It is because there is risk to everybody in healthcare and everybody in healthcare services.

Everybody who got cut in 2010 to make healthcare reform work is -- or, I'm sorry, to make the numbers work in the healthcare reform bill, is looking at getting cut again. We would be naive to think that we are not being looked at as well.

Okay, that's helpful. I'll hop back in the queue. Thank you.

Bob Willoughby, Bank of America.

Brad, you mentioned that the margin decline in the quarter was entirely due to acquisitions. I guess if I look at the second-quarter margin deterioration versus the prior year versus this quarter, it was a much more pronounced effect. Can you speak to what drove that, the magnitude of the margin hit there?

Bob, when you say much more pronounced effect, you mean better in the third quarter; correct?

No. I think the margin fell a little bit more year-over-year in the third quarter that what the experience was in the second quarter.

I think we were down 80 basis points in the third quarter year-over-year and 190 in the second quarter year-over-year.

All right. Then I am doing something with my numbers here rather unsavory.

And be sure to look at the adjusted numbers, because we obviously have in our adjusted numbers backing out restructuring and one-time things that we call out to you. So I am using the numbers on the adjusted operating income side that we talk about.

All right. I will check that. My other question, just the tax rate in the quarter was somewhat low. Is there any revision to the guidance for the year then from a tax perspective?

Not at all. I think it is up quite a bit over the last year third quarter. Since we implemented -- and the rest of the world should look the same -- FIN 48 several years ago, we have a tax rate that typically is lower in the third and fourth quarter than the first and second due to the reversal based on statutes of our uncertain tax positions.

Okay. And just --

No revision to the guidance based on tax rate.

Okay. Just lastly on the M&A pipeline, can you -- is there a desire to look at more pathology businesses that are out there? Or are you seeing some impact on valuation from some nontraditional buyers looking into that market? Is there any change in your perspective on the pipeline?

Bob, it's Dave. No change. We remain interested in pathology acquisitions, and particularly ones that fit well into our core pathology strengths, including hemato-pathology.

Obviously you can't minimize the fact that Caris traded at $725 million, which is a big price and a high multiple. So again, it is just discipline in the acquisition environment and not overpaying are as important as making sure we get the right acquisitions.

All right. Thank you.

Ralph Giacobbe, Credit Suisse.

Thanks. Good morning. I want to go back to the margin just a little bit, just to understand the different components. When I look at the model it looks like revenue 2Q, 3Q was roughly the same. Your SG&A was roughly the same. But the big spike came in cost of services. So I'm just wondering if you could help us explain why the just in the COGS line.

Ralph, a couple of factors that come to mind there. You obviously know about Genzyme Genetics, as well as Westcliff, and those are going as expected.

We also closed in June an acquisition of a clinical trials organization called Clearstone. So we have a new acquisition that is in the third quarter that is not fully integrated, so that is causing a drag and you are seeing some of that in the cost of sales line as well.

One other thing that comes to mind when I look back at historical relationships between Q2 and Q3 is two years ago the Company moved from an anniversary date for each employee for merit increases to a common review date; and that occurs early in the third quarter. It doesn't change the overall yearly numbers and our expectations, but on a sequential view of margin experience Q2 to 3, it is obviously a factor.

Okay. Then any hurricane impact or anything else worth calling out in the quarter?

Ralph, it's Dave. Certainly not from an earnings perspective. We probably lost a little volume based on the hurricane, but not to the point where I think it is material to talk about it.

Okay. Then just my last one. I wanted to get into pricing a little bit more.

If you back out the Genzyme contribution, each of the last two quarters pricing has been in the 1.7%, 1.8% range. I think if we look back in time it is a little bit slower than what we've historically seen, maybe closer to that 3-ish-% level.

So I'm just wondering if you could maybe talk about what is going on there as it relates either to pure pricing or the mix and contribution of mix, and whether we should ratchet down expectations going forward. If you think there is a slowdown that we should consider -- as the esoteric piece continues to grow but maybe not at the rates that we've seen in the past.

Ralph, it's Brad. One thing that comes into mind as we look at our moving parts in that calculation is the growth of our drugs of abuse testing business has a natural pressure point on that price as well.

Sure.

Then -- and we've talked about this on several calls, one of our largest growers in the esoteric category has been vitamin D. That test, while it is still growing, is not at the rate of growth that it has been since its inception because of basically the Law of Large Numbers. It just gets bigger and the percentage goes down, and the impact on price on a year-over-year basis is not what it once was.

Those are two of the moving parts that we look at when we are looking at that metric.

Okay, that's helpful. If I could squeeze one last one in. Any update on Horizon Blue Cross Blue Shield of New Jersey? And could you remind us when that contract is up?

The contract, Ralph, expires at the end of the year. We don't have an update other than to say that I believe the plan is actively considering where it is going. And we feel very comfortable that we've made them a strong proposal.

Okay, great. Thank you.

Amanda Murphy, William Blair.

Hi, thanks. I had a question first on Genzyme Genetics. It seems like that is going at least in line with your expectations, maybe even better from an attrition standpoint. Is that still the case?

Also curious if the -- you had talked previously about potential managed-care contract changes for Genzyme in the third quarter. Curious if that had any meaningful impact on revenue per requisition growth; and if so, how do we think about that over the next four quarters?

So, Amanda, it's Dave. We feel very good about revenue retention at Genzyme Genetics. Again, I think both the Genzyme and LabCorp teams have done a terrific job in keeping those customers happy and maintaining a level of service -- and actually in many cases improving the overall level of service.

There is some pricing compression that occurred in the third -- beginning in the third quarter. And you will see it over -- there will be a four-quarter impact on the comparables. There will probably be a little bit more; but again nothing outside of our expectation in terms of compression, and we feel good about where we are.

Okay. Then just a follow-up on some of the volume discussions. The 1.2% organic volume growth, is that purely organic or does it also include some tuck-ins in there?

When we talk about organic growth, I mean our organic growth always contemplates -- I mean when we give guidance we always contemplate that some of our growth is going to come from small, tuck-in acquisitions. So talking about organic growth, it would be -- because those tuck-in acquisitions basically involve billing and customer conversion almost on Day One after the acquisition closes, it would be next to impossible for us to talk about what is volume ex-fold-ins. So that 1.2% does include some impact from the tuck-ins.

Okay, got it. Any commentary that you can make on just I guess utilization trends? I think the IMS data just came out for September and implies sequentially an improvement.

Is that something you saw? In other words, is it getting -- deteriorating through the year, getting better, worse, the same sort of thing?

Again, I don't mean to pooh-pooh the IMS data because I think directionally it is useful. But we were hearing numbers in July and August like 16% declines in physician office visits. And now all of a sudden when they added September in sequentially it has improved quarter-over-quarter.

So this is a very small data set. It is based on physician surveys. I would suggest that even things like doctors going on vacation can have a major impact. Who picks up the phone and answers their questions?

I think I don't really have much to add in terms of volume to what I said in response to Adam's question, which is all of healthcare services is encountering volume softness. And until we see economic growth and job creation, I don't think we are going to see a lot of change there.

Okay. Then just last one. If you look at the guidance changes, can you talk a little bit about what drove that, specifically the EPS increase? Is that buybacks that you did relative to Q2 or acquisitions or what-have-you?

Amanda, it's Brad. I think it is just basically the realization that there is one quarter left. So it is the tightening of the range given one quarter, and it includes everything in our experience. Our operations, the volume and price growth that we've talked about, the margins, and share repurchase obviously.

Okay. Thanks very much.

Darren Lehrich, Deutsche Bank.

Thanks. Good morning, everybody. I wanted to just go back to your commentary about managed-care recontracting. I just want to make sure I am hearing you clear, or if you can just clarify for us what your pricing outlook is.

Has it changed based on some of the recontracting activities you have this year and anticipate coming up? Or should we expect managed-care pricing updates to be relatively similar? Just any commentary there would be helpful.

Darren, it's Dave. I think pricing continues to be relatively stable. So I don't expect that we are going to see significant price movement in renewals. As I say, I think the big concern is trend -- and I would say trend and expensive testing are higher on the list for managed-care than unit cost right now.

So those are the things where plan renewals are focused. And we historically have been the lowest cost provider. We are doing a lot of things to make sure we can continue to be the lowest cost provider. But I don't see a downward price movement coming from these renewals.

Okay. Then just so I'm clear on what you're saying, is there any new type of activity that concerns you with regard to preauthorization, or even outright denials on the managed-care front for some of these more expensive tests?

I think all the managed-care plans are struggling. And employers too, by the way, because employers who self-insure are struggling as well with how to manage the potential growth of expensive lab testing.

I think a lot of things are being tried. There certainly have been some attempts at preauthorization, and that's not new. I mean Aetna had an across-the-board policy on preauthorization of genetic tests probably four years ago that they implemented. It didn't work out very well and they ultimately withdrew it.

So I think this is a trend that we are going to see, and it is going to go through pilots. There will be fits and starts in terms of how it works.

But ultimately there is a real focus on making sure that testing that is being ordered, particularly expensive testing, is the right test for the right patient at the right time. And I don't think there is anything that we should be concerned about in that respect.

Okay. Then just on United, can you just help us think about whether there is anything new structurally with regard to how United manages their lab network and preventing leakage? Is there anything that you can say to what you've been able to do in the new contract terms?

I think as we said in the announcement there are some performance-based incentives. So it would be reasonable to hypothesize that reduction of leakage is one of the things that could allow us to realize those performance-based incentives. Otherwise structurally within that contract I don't think there is anything that is particularly different from what we've historically had.

Okay. Then my last question here. I just wanted to ask you -- obviously the US Preventive Services Task Force has been working on a number of changes to screening guidelines for cancer. I'm just wondering if you can give us some of your commentary about how you think that is going to impact your volumes looking out over the next year, whether you think that is something that we should be seriously considering in terms of the growth rate of the Company as providers react to that.

I do not think that it is going to be terribly impactful. I think the controversy over PSA testing has been going on since time immemorial and will continue. I don't think the US Preventive Task Force recommendations are going to change a lot of physician or patient behavior.

On HPV, going back to 2003 the US Preventive Task Force has never endorsed HPV, which is a bit mystifying to me because there are studies upon studies upon studies that demonstrate the value of HPV particularly in conjunction with the Pap for diagnosis of cervical cancer.

But if you look at ASCCP and ACOG, they strongly support to HPV co-testing with Pap. And there are 11 governing bodies that have positive recommendations for HPV testing -- with the US Preventive Task Force as the one that stands outside.

So I don't think we will see a significant impact on volumes as a result of the US Preventive Task Force recommendations on either of those tests.

Okay. Thanks a lot.

Gary Lieberman, Wells Fargo.

Thanks. With regards to the 6% impact that Genzyme had on the revenue for acquisition in the quarter, once the new pricing schedules are in place what should I go to? Does that go to zero? Could that go to negative? How should we think about that number?

Gary, this is Brad. I think by the time those are all fully baked we will have a year-over-year anniversary of Genzyme. So I think it wouldn't be right to talk about it in terms of that particular number.

Okay. Well then maybe in that vein, I guess, what should the run rate be once it's anniversaried?

I mean, obviously I think the MCO impact will have an impact on our year-over-year pricing growth. But again, not something that we haven't anticipated and wouldn't be baked into our thinking for any future period.

Okay. Then maybe just back on the volumes, you talked about overall volumes. Could you talk maybe a little bit about share?

Is your share stable? Are there areas that you are gaining or losing share by different test type?

Gary, it's Dave. I think overall share is pretty stable. I think -- gosh, we've been talking about for many quarters our focus on some key markets -- endocrinology, rheumatology, and I think we've had strong performance there.

Obviously the launch of our single swab women's health test is going to help us in terms of retaining a growing share in that market. So I don't think there is anything in particular that jumps out in share gain or share loss.

Okay. What is the competitive environment light on the anatomic pathology front? Is it still as strong from physician practices as it has been, or has there been any change there?

I think the volumes are stabilizing for us. I think again we actually were slightly up in the third quarter year-over-year.

There is still in-sourcing going on. It hasn't abated. But I would say the very large practices completed their in-sourcing some time ago. So probably the biggest volume impact is behind us.

Okay, great. Thanks a lot.

Gary Taylor, Citigroup.

Good morning. Just a couple questions I wanted to -- I guess that haven't been hit. One, just going back to revenue per a session, ex-Genzyme, the 1.8%. I know you talked conceptually about pure price versus mix, and I was following that discussion.

But can you actually numerically break that down? Are you willing to?

No.

What you (multiple speakers) ?

No.

Okay; no. I think historically you have said there is very little pure pricing in that number, and that is the way we should think of it. Is that still fairly accurate?

That's true, Gary. Historically we've said it is zero to 50 basis points of unit price; and the rest is mix driven.

Got it. On the Clearstone acquisition, what was the exact closing date on that?

It was in June. I don't remember the exact date. We can go back and get that to you.

That's okay. We had it in our model in June; and I know -- I think there was $29.6 million of net acquisition spend in the cash flow statement in June. So that would have been only for Clearstone?

Yes.

Can you tell us annual revenue on that?

I don't think we've spoken about the annual revenue for Clearstone individually.

Okay. Then on just going back to United just for a second, what was the -- I mean can you give us a little color just on the catalysts for the early renewal? I guess clearly it is in your interest to push out the contract, and that should be well perceived by the market. And I guess clearly it is in their interest to lock in some certainty around a component of their medical spend. Is there anything else to the timing of this than that?

Gary, it's Dave. No, you know, I think you've identified a couple of the big drivers. One was our desire for continued certainty in the relationship; and two was their desire to get two more years of visibility into what their spend would be, at least with us.

Over the years with United we've talked about a number of potential opportunities, including expansion of lab networks and redirection of leakage and some other things. I think there was a general view on both sides that this was an opportunity to give ourselves a couple more years and be able to put the focus on those strategic initiatives and make some investments.

And with two more years you're really looking at a seven-plus-year time window to see those investments realized. So I think it was a combination of all those factors.

Great. My last question, could you just remind us your next national HMO renewal is who, and when?

I think Humana is up at the end of 2012. So we are already obviously in discussions about the renewal terms of that contract.

Great. Thank you very much.

Tom Gallucci, Lazard Capital Markets.

Good morning, everyone. This is actually Andrea calling in for Tom. I just had a quick follow-up on utilization. Could you perhaps discuss a little bit what you are seeing thus far in October?

In the past you've discussed how the impact of high-deductible plans have shifted some of that seasonality to the back half. Is that -- should we still expect that type of pickup in Q4?

No, we cannot discuss what we've seen so far in October. I think it has been widely hypothesized -- and there has been some support in the numbers over the last couple years -- that there have been pickups in fourth-quarter utilization. The hypothesis has been that is driven by high-deductible plans.

I don't know, given this economic environment and the general utilization trend that we are seeing in healthcare services broadly, whether we'll see that again this quarter or not.

Okay, great. As a follow-up, I recognize you haven't provided 2012 guidance yet, but in the past you've discussed how improvement in Westcliff and Genzyme combined can represent a $0.40 swing at the 2012. Is this still your general expectation?

Well, as you said, we haven't provided 2012 guidance, and we will do that on our fourth-quarter call in February. We have said that, given the guidance on Genzyme being $0.16 to $0.26 dilutive this year and being neutral to slightly accretive next year, that we should expect a positive swing there.

I'm not quite sure how you get to $0.40, because I don't think Westcliff was that dilutive. And remember it was -- we closed in May, so we were allowed to integrate starting in May. So we only had five months of dilution.

Next year we should -- Westcliff should be profitable next year, and so there should be a positive swing there. But I wouldn't -- I'm not subscribing entirely to the number that you've put out.

Okay, great. Thanks very much.

Kevin Ellich, Piper Jaffray.

Thanks, guys, for taking my questions. A lot of them have been answered, but just going back to the managed-care contracts and the United contract, Dave, in the press release you guys talked about economic incentives for helping with leakage and maybe shifting volume to lower-cost settings, so you're helping United on their lab costs.

Could you talk a little bit about that? I guess maybe what are those incentives? And do you have other contracts in place, or do you see that going forward with any of the other managed-care providers?

I think everybody will move toward the idea of performance-based incentives. I think that is the nature of what everybody is seeing, whether it is pay for performance, pay for quality, pay for lack of hospital readmissions. I mean that -- so I think performance-based incentives will be probably a component of all managed-care contracts.

Now the performance metrics will undoubtedly be different for each one. But I think we'll see that going forward.

With United, without talking about specific details of the contract, obviously the biggest performance-based incentives are for reducing overall spend. So that would mean leakage reduction. It would mean more volume in the network. I mean those are the things that obviously would allow us to realize the performance-based initiatives.

Okay. Understood. I guess just following up on that, thinking about the pay for quality, pay for performance, one of the things you talked about last night at the conference was the future of lab testing and changes in the payment model with some demos going on, bundling, and accountable care organizations.

Could you give us your thoughts as to how the landscape is going to change for you? I guess, what do you think this will mean for the clinical lab business going forward?

I think it's very early to know or to hypothesize. Right now I think the general reception to the ACO guidelines has been rather chilly from providers because of, one, the complexity and, two, the perception that providers are being asked to assume a lot more risk than the government.

I think in the long run, as I said last evening, labs deliver for the dollar absolutely the highest value in the healthcare system. Labs deliver -- for 2% to 3% of the spend and for 41.6% of the Medicare spend -- information that drives 70% to 80% of healthcare decisions. So there are not going to be a healthcare system -- whether it's an ACO, whether it's a bundled payment, whether it is -- any system is going to be -- labs will be the linchpin of that system. I think the industry generally, while we may see changes in the way that payments are allocated and while we may see changes in the way that labs participate in these types of networks, we are absolutely the most essential piece of healthcare services.

And I think LabCorp in general, LabCorp in particular and the industry in general are very well positioned to respond.

Got it. Understood. Then just going back to the competitive landscape and the M&A environment, we've seen some of the nontraditional players come in, and there has been more discussion about the genetic benefit managers with Medco and Caremark.

Is there anything that you are thinking about doing in the future? Partnerships with any of them that we could talk about?

I think the new entrants into the market is not surprising to me. Again, as I have talked about, I think a lot of these are companies looking for new channels, whether it's a channel to get in front of oncologists to sell drugs, or a channel to get in front of pathologists to sell digital pathology, or a channel to sell nutraceuticals, these are the kinds of acquisitions that are being made.

I don't see these companies having a desire to get into a big lab services operation. I see them looking at businesses that will give them a channel into places that they want to be, and in particular physicians who they want to be in front of.

I think in terms of benefit management we would be naive if we didn't think that there is going to be some sort of benefit management over time, as I said yesterday and talked about. And I feel very strongly about this.

To me the fundamental here is decision support and helping physicians choose the right test for the right patient at the right time. So I don't think of it as we are going to -- the industry is going to be in a position where health plans are going to be saying no to tests that patients should have. I look at it as a position where health plans and payers generally are going to be saying -- show me the objective facts that justify a patient getting a particular test.

Particularly for expensive tests. Obviously there is a lot more concern about genetic testing and molecular testing than there is about CBCs and cholesterol testing.

But you know -- show me the objective facts that demonstrate that that patient should get the test. And then show me how that is going to be integrated into the care the physician is delivering. And I don't think there is anything that should be a great concern to responsible lab industry participants in that kind of thinking.

Okay, excellent. Thanks.

Lisa Gill, JPMC.

Good morning. I just had a question around guidance for the fourth quarter. If I look at the slides that you put out today, it says that your actual for the nine months was $4.80. But if I add up the three quarters of what you reported, that is $4.77.

So Brad, can you maybe just help me think about how I should be looking at the fourth quarter as far as your guidance range goes?

I'll have to go back and do the math on the $4.77, because we've certainly got in our tables to the press release and all our other numbers $4.80, so I feel pretty good about that number without going back and looking at the previous reports.

So if you do the delta between the top end of the range and that $4.80, you get a $1.53 fourth quarter. If you go to the bottom end of the range a $1.48 fourth quarter.

And as we look at our expectations for the fourth quarter, we are comfortable across the entirety of that range. So it all makes sense to us. And again I will go back and double-check your $4.77 versus $4.80. But I'm fairly confident in the $4.80.

Okay. No, again I just wanted to check. If I look I thought the first quarter was $1.52; second quarter $1.64; and third quarter $1.61. I just didn't know if there was something in the reconciliation as you get to that nine months that would differ from what you actually reported in the last three quarters.

I know it is only a couple of pennies; but again, it does have a swing factor in the fourth quarter depending on which number you are going with.

Okay, thank you.

Thanks.

Isaac Ro, Goldman Sachs.

Thanks for taking the question. First off, on the legislative side of things, there is some -- I think a new building proposed regarding lab developed tests. Just wondering how you are looking at the regulation of those types of products going forward, and how that might impact your planning next year.

Could you repeat, Isaac? I'm sorry, but there is a lot of background noise. (technical difficulty)

(technical difficulty) legislation out there for lab developed tests. Just wondering how you are looking at that for next year and what your plans are for those types of products.

Dr. Burgess introduced a bill in the House -- introduced a series of bills on FDA modernization, one of which deals with lab developed tests. LabCorp and the American Clinical Laboratory Association are strongly supportive of that approach, which we think is a reasonable and appropriate and prudent approach to regulation of lab developed testing.

In the meantime, we continue to be engaged in discussions with FDA and other stakeholders about how lab developed testing will be regulated. But we remain concerned that the approach that FDA has tentatively talked about and has discussed in some guidance is really a wrong-headed approach and will actually lead to stifling innovation, lack of development in clinical testing, and ultimately detrimental to patient care.

So we support the Burgess legislation and will continue to hope and do our best to advance that through the House and the Senate.

Steven Valiquette, UBS.

Thanks. Just a general question here in the guidance range, which is obviously positive. But it seems the organic volume growth has decelerated a little bit throughout the year. You are not really changing the dilution range for Genzyme.

So I guess if you had to just touch on the two to three primary points on what has gone better than the low end of the previous EPS range, how would you characterize it?

I think we were ahead for the first half of the year. That is definitely one thing that is going on. Again, I think it is just as we forecast the fourth quarter those are the results that we see. And the closer you get to the end of the year, then there the range has to be. So it is forcing the numbers to be what they are.

Should we assume that Genzyme is coming in at maybe the better end of the range? $0.10 (multiple speakers) this is kind of wide for -- with one quarter to go. But just within that range how would you characterize it?

I would characterize it as the guidance is intended to encompass a broad range of outcomes, and it would be counterproductive to break down every individual component of the guidance. So I don't think -- if we left the guidance at $6.17 people would say -- you guys are not being realistic. And that would be true.

What we've done is tried to make the guidance realistic, given where we are and what we see in the quarter ahead.

Got it. Okay, thanks.

Dane Leone, Macquarie.

Thank you for taking the questions. I just wanted just a point of clarity. Does the updated 2011 guidance include share repurchases in the fourth quarter?

Dane, it's Dave. I think as Brad said in response to Amanda's question that the updated 2011 guidance includes everything.

Okay, so it assumes a completion of the outstanding $250 million in share repurchase authorization?

No, it does not. It assumes that the share repurchase that we've done year-to-date is done; and it assumes that we will likely repurchase some shares. But it does not assume that we will repurchase $250 million worth of shares in the quarter. Again, our year-to-date -- you can look at our year-to-date repurchase and see what the trend is; and it would not contemplate $250 million of repurchase in one quarter.

Okay. Under the scenario of continued adverse market conditions, could there be an option to use some of the flexibility that you have on the balance sheet to augment the current share repurchase authorization?

There is always the ability to use the balance sheet and use our ability to take on leverage to do a variety of things, including acquisitions and share repurchase.

Okay, great. Then following up on UNH contract, is there any near-term pricing impact from that contract extension?

What we've said is that pricing over the life of the contract remains stable and that we are very pleased where we've come out from a pricing perspective. And that is all we are going to say about pricing.

Okay. Then finally for me, can you just provide some commentary like you do every quarter on the growth in your women's health business?

Yes. I think the women's health business and particularly the OB/GYN market have continued to be positive for us. Obviously Genzyme is helping in reproductive testing, and it is helping with us getting into -- with LabCorp getting into accounts that Genzyme had served and with Genzyme getting into accounts that LabCorp had served.

I think the introduction of the single swab test will give us a boost in being on a level playing field with some of the things that competitors have introduced. So I think it's a good market for us and it's going to continue to grow.

Okay, so there has been -- there was year-on-year and quarter-on-quarter growth in that business?

I don't think we've broken that down specifically.

Okay, thank you.

Ricky Goldwasser, Morgan Stanley.

Good morning. I have a couple of questions here. So first of all, when I look at top-line growth, right? So third-quarter top-line growth was about 10%. And then backing into fourth quarter, implied top-line growth is 4.5% to 6.4%.

So can you walk us just through the components of the sequential step-down? It was around 360 to 450 basis points of decline.

I assume that Genzyme volumes account for part of it, right? Because of the timing of the acquisition. But is the remaining of it really kind of like reflects the step-down in Genzyme and maybe United pricing? Can you give us color around that?

Ricky, this is Brad, and you've got the numbers all correct. I mean, we will have only two months of incremental Genzyme; so that is a component.

And then one other thing I think is the driver there, as we think about something that Dave went over earlier, were the organic growth rates of the last four quarters. Q4 last year was 3%. So I think it is a tough comp, and the annualization of Genzyme is what we see in that analysis.

Okay, and any pricing impact from either United or Genzyme in that analysis that we should think of?

Ricky, it's Dave. There is no pricing impact from United, and the only pricing impact from Genzyme is, again, remember you are annualizing at the end of November; so you are going to have one month in which you are not seeing the year-over-year price lift.

Okay. Then two other questions. One on drug of abuse market. I mean, is my math correct? Did it account for about half of the organic volume growth in the quarter?

I think it is less than half, but it is a contributor.

Okay. Is it around 5% of revenues for you still, or less than that?

No, I would say it's less than that.

Okay. Then lastly just touching on anatomic pathology, I know we spoke about the acquisition. But can you just share with us what you're seeing in terms of the in-sourcing trends for the business?

Yes, I think as we said previously, the in-sourcing is continuing. The big -- the in-sourcing in the big practices has largely been completed. So volume year-over-year was up sequentially, was a little better.

But in-sourcing has not abated and it is going to continue, in our view, until there is a regulatory resolution.

Okay. Thank you very much.

A.J. Rice, Susquehanna Financial Group.

Thanks. Hello, everyone. Two questions. One is sort of a detail question. To hit the fourth-quarter and your full-year cash flow targets, I guess you are assuming the Q4 cash flow is obviously a nice pickup. You talked about the fact of the Genzyme enrollment delays, figuring you will get that in the fourth quarter. Have you quantified how much is tied up with that?

Yes, we said $28 million.

Okay.

Earlier in the call.

All right. Thanks. Then maybe just another, a big-picture question. Obviously your biggest peer has talked about doing a big further cost-reduction program over the next three years. I won't ask you to comment on that specifically.

But one thing they pointed to in thinking they could take some costs out of the system was that they had felt like the industry may be over-servicing the clients now. That the client base is getting -- doesn't demand everything that the industry is offering, and that present an opportunity for some cost savings.

I would be interested to see whether you guys have any kind of view on that or looked at that at all, and what your thoughts would be.

I have not heard that said, and I'm not going to comment on what Quest is doing in terms of running their business. I would say that we have stated for several years that we continue to invest in the business to improve the physician and patient experience. Some of that improvement is by automating and doing things that do reduce costs.

But we continue to provide a high level of service and a high-quality service to physicians and patients. And we are going to keep doing that, and we are going to keep investing to make sure that we do that.

Okay. All right. Thanks.

Anthony Vendetti, Maxim.

Thanks. I was just wondering if you can provide some of the growth in some of the genomic and esoteric testing that sometimes you provide, like HPV or vitamin D or anything. Any one of those tests particularly strong this quarter?

Well, we continue to see good growth in HPV, vitamin D, some other -- testosterone, some other tests have been strong growers. But we are not going to provide specific percentages or comparisons.

How about with Genzyme Genetics? Obviously that is an area that they are providing growth in some of those tests. Is there any particular test that Genzyme Genetics has contributed that you look at as a stalwart or as one that has particularly been helpful for you?

I think reproductive genetics in general has been a positive. I think that we've seen -- we have continued to see good growth in SMA testing. But again, across the board Genzyme has provided strength in reproductive testing.

We've see nice growth in infectious disease with the IL-28B and the hepatitis C test that we brought out. We've already seen good adoption, even though we released them in August, of the companion diagnostics that we talked about earlier on the call. So we are seeing nice pockets of growth across the board in the esoteric portfolio.

Then lastly on Genzyme Genetics, is the integration largely complete? What -- is there anything that needs to be done on a cost basis or facility basis, or anything else before the end of the year that is significant?

The integration is not largely complete. The integration is ongoing. There are still some significant activities that are going to continue.

That is why we've said that it will be 2013, sometime during the year 2013 or exiting 2013 that we see the full completion of the Genzyme Genetics integration.

Okay, great. Thanks.

Ashim Anand, Natixis.

Thanks for taking my question. Most of the questions are answered but what I wanted to comment on is and know more about the progress you have made in personalized medicine, especially companion diagnostics with Zelboraf and Xalkori, and then monitoring on HCV protease inhibitors.

Obviously that protease inhibitor, GenoSure, is your own test, so that must be exclusive. But I wanted you to comment on -- is there exclusivity in terms of BRAF and ALK also?

No, there is not exclusivity. Obviously our view has been for some time that getting to market first is very important because of physician adoption and creation of physician loyalty. So while these are not exclusive tests, we are the first national lab to offer them and among the first two or three labs to offer them. The others are much smaller, niche labs, if you will. So we are very pleased with the position that we are in there.

In that regard if you can comment on generally about marketing of these companion diagnostics. Like especially for example Zelboraf has done pretty good ramp up, considering it was just released.

So you guys -- the marketing strategy is that someone from the lab goes to co-market, let's say with Roche? Or Roche is essentially doing your job?

And in the same case with Xalkori and Pfizer, if you can generally comment on that.

I think is a combination of a variety of things. I think there is -- we market; the drug companies market. There is co-marketing. There is outreach through physician education, through influential physician groups and thought leaders.

So there is a whole variety of ways in which those tests are introduced to the market.

Finally, I know it's a small component along with HCV protease inhibitors, but going forward in terms of just contribution to the esoteric, you foresee this being a big complement? Like especially in terms of your goal of increasing total revenue contribution to 45%. Anything you can comment on that regard?

I think companion diagnostics are going to continue to be -- we are going to continue to see an increasing number of them. I think they are going to over time be significant contributors to esoteric growth.

It's not going to be next quarter. It's not going to be next year. But as we move toward new technologies in testing, as we learn more about the genetics of disease, companion diagnostics absolutely will be a strong contributor to our growth and I think growth of the industry in general.

Thank you very much.

Bill Bonello, RBC.

Thanks a lot for taking my follow-up call. I just wanted to clarify your responses to a couple of questions, because I was a bit confused.

First of all, Amanda asked if the organic growth included tuck-in acquisitions. Dave, you gave the answer that you used to always give about that it does, and hard to break those out. But last quarter when I asked the question about whether organic growth included tuck-ins, your response was -- the approximately 2% organic growth is truly organic, so it is everything. It is all acquisitions backed out.

So if we think about the approximately 2% organic growth of last quarter and the 1.2% of this quarter, am I correct that that is not really an apples-to-apples trend?

Bill, no. It is an apples-to-apples trend. It's the exact same comparison. So if we said that last quarter, then that was erroneous. Because this is the same comparison quarter-over-quarter, year-over-year.

Okay. That is helpful. Then just -- Brad answered a question that somebody had asked on the price per accession, thinking about it on a normalized basis going forward. I thought you said something about MCOs having a negative impact on revenue per accession growth. But I didn't exactly hear what you were saying.

So am I right that you were saying there is going to be some kind of negative impact on revenue per a session growth for managed care? Or did I mishear that?

You misheard that. I think maybe if I'm to the right place in the call, it was the impact of drugs of abuse testing on our revenue per requisition growth.

Okay, but that has had a negative impact, right, I would assume? The growth in drugs of abuse?

Yes. So it has helped volume and compressed price for a very minor impact on total revenue.

Okay. So as we think about normalized revenue per accession growth, you are not saying to think about anything different on the price front than we normally think?

That's right.

Okay, good. Just wanted to make sure I understood that. Thank you.

This concludes the question-and-answer session for today. I would now like to turn the call back over to Mr. David King for closing remarks.

Thank you very much for joining us this morning on our third-quarter earnings call. We hope you have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.