Labcorp Holdings Inc (LH) 2011 Q4 法說會逐字稿

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

I would now like to turn the conference over to your host for today, Mr. David King, Chairman and CEO of LabCorp. And you have the floor, sir.

Thank you, Jeff. Good morning and welcome to LabCorp's fourth quarter and full year 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 fourth-quarter and full-year 2011 financial results, provide 2012 guidance, update you on our Genzyme Genetics integration, highlight our progress on our five-pillar strategy, and provide answers to several frequently asked questions. I'd now like to turn the call over to Steve Anderson who has a few comments before we begin.

Before we get started I would like to point out that there will be a replay of this conference call available via the telephone and Internet. Please refer to today's press 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, the implementation of our business strategy, and the ongoing benefits of the Genzyme Genetics and other acquisitions. 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 review four key measures of our financial performance -- cash flow, revenue growth, margin, and liquidity. I'll also review our 2012 guidance.

First, cash flow. Our cash flow remains strong. Excluding the Hunter Lab settlement of $49.5 million, free cash flow for the year ended December 31, 2011 was $759.4 million. Cash flow has been negatively impacted by approximately $17 million due to delays in the Genzyme Genetics enrollment process, which we expected and have previously discussed. The impact from these delays has improved by $11 million since the third quarter of 2011. And we expect to continue to make progress in resolving these issues. We remain pleased with our cash collections. DSO was 46 days at the end of December, unchanged year-over-year and sequentially. Our bad debt remained 4.5%.

Second, revenue growth. Revenue increased 5.5% year-over-year in the fourth quarter. Genzyme Genetics accounted for approximately 4.8% of this growth. During the quarter, revenue per requisition increased 4.2% year-over-year. Genzyme Genetics accounted for approximately 4.1% of the growth in revenue per requisition. Total Company volume increased 1.2% year-over-year during the fourth quarter. Genzyme Genetics accounted for approximately 0.6% of this volume growth. Esoteric volume increased approximately 3.5% in the quarter.

Third, margin. For the fourth quarter, our adjusted operating income margin was 18.9% compared to 19.5% in the fourth 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 remained stable year-over-year. Margins will improve as we integrate these businesses. And our guidance for next year implies margin expansion.

Fourth, liquidity. We remain well capitalized. At the end of December, we had cash of $159.3 million and approximately $400 million available under our revolving line of credit. During the fourth quarter, we replaced existing credit facilities with a new $1 billion revolver. We borrowed $560 million under the new facility and repaid all amounts outstanding under our previous term loan and revolving credit facility. In addition to the cash generated by operations, we believe the new $1 billion revolver will provide us with ready liquidity to carry out strategic initiatives. At the end of December, total debt was $2.2 billion.

During the fourth quarter, we repurchased $172.1 million of stock representing 2.1 million shares. At the end of December, $84.4 million of repurchase authorization remained under our previously approved share repurchase program. This morning, we announced that LabCorp's Board of Directors authorized a new $500 million share repurchase program. This authorization reflects our continued commitment to return capital to and create value for our shareholders. This morning, we also announced our 2012 financial guidance. We expect revenue growth of 2% to 3.5%; adjusted EPS excluding amortization in the range of $6.75 to $7.05, excluding the impact of any share repurchase activity after December 31, 2011; operating cash flow of approximately $950 million, and capital expenditures of approximately $155 million.

I'll now turn the call over to Dave.

Thank you, Brad. We are very pleased with our fourth quarter and 2011 results. Before discussing progress on our five-pillar strategy, I would like to update you on Genzyme Genetics. The integration of Genzyme Genetics continues to go extremely well. And we are very pleased with our retention of Genzyme's clients as well as our realization of cost savings. The continuing success of the integration will remain a top priority for us throughout 2012 and we remain confident that Genzyme Genetics will be slightly accretive to earnings this year.

In January 2012, as our right to use the Genzyme Genetics name ended, we began rebranding Genzyme Genetics as part of a broader rebranding of LabCorp's specialty testing capabilities to create a consistent market-facing structure. To this end, we adopted the name Integrated Genetics for the reproductive portion of Genzyme's business and LabCorp's legacy genetics business. We adopted the name Integrated Oncology for Genzyme's oncology business and LabCorp's legacy oncology businesses. This rebranding effort is an important Company-wide initiative that will further the second pillar of our strategy in that it will simplify and enhance the physician experience in dealing with LabCorp's many specialty businesses and assets. Response to the branding has been positive and we look forward to continuing to streamline and focus our brands.

Now I'd like to update you on the 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. In December, we closed our acquisition of Orchid Cellmark, an international provider of DNA testing services, primarily for forensic and family relationship applications. This acquisition strengthens LabCorp's capabilities in forensics and identity testing, and establishes our presence in the United Kingdom. With respect to the US portion of Orchid's business, we are pleased to add to our strong forensics and private paternity business. As we disclosed, we were required to divest certain assets of the government paternity business upon closing the transaction.

With respect to the UK portion of Orchid's business, known as Cellmark, we are pleased to expand our forensics business to a new market. As many of you know the UK government has decided to close its forensic crime testing operations. Thus, Cellmark has a solid market opportunity in the UK and will also enable us to evaluate the opportunity to extend our forensics business into Europe. The integration of Orchid is going well and we expect the transaction to be slightly accretive to our 2012 earnings. We welcome the talented employees of Orchid both here and abroad to our LabCorp family. Finally, we repurchased approximately $644 million of our shares in 2011.

The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. Last year we introduced Beacon Order Entry nationally which allows our customers to place electronic orders for almost 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 have seen strong growth in adoption of Beacon in 2011, making it our fastest growing external software ever. With Apple and Android versions, we have also brought Beacon capabilities to our growing mobile user base. Additionally we completed development of the Beacon Patient Portal. The 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 currently have an active pilot program and we plan to launch the Portal nationwide later this year.

We continue to improve our electronic medical record connectivity. LabCorp connects to more than 500 EMRs, working closely with leading EMR partners to streamline connectivity and enhance lab work flow, assisting clients in seamlessly integrating lab services into their EMR solutions. We added over 6,000 new client EMR interfaces in 2011. We continue to pursue our differentiated open platform strategy, allowing our customers to connect to LabCorp directly or via their EMR of choice. We made a conscious decision to pursue this open platform approach because it is what our customers want. Going forward, we will continue to enhance our Beacon platform by providing more and better patient- and physician-facing IT solutions.

The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. In the fourth quarter, we continued our Touch Accudraw system implementation to an additional 76 sites. The system is now deployed in more than 1,100 sites across the country and is processing over 1 million accessions per month. We continue to enhance the system that allows our phlebotomists, a critical link in our sample flow, to improve accuracy, work flow and processing time to enhance the patient experience in our patient service centers. In December, we opened a 110,000 square foot expansion to our Burlington lab campus. This state-of-the-art facility will provide an improved work environment for our employees and will allow us to consolidate satellite locations and enhance specimen flow. Additionally, it provides significant capacity for future growth.

The fourth pillar of our strategy is to continue scientific innovation at a reasonable and appropriate pricing. We introduced 104 new tests in 2011. I would highlight two key companion diagnostics that we brought to market in the fourth quarter because they demonstrate our continued leadership in personalized medicine. The first was a new FDA approved companion diagnostic for use in patients with advanced ALK positive non-small cell lung cancer. The Vysis ALK break-apart FISH probe test detects all ALK gene rearrangements and is the only available diagnostic assay that's been clinically validated to predict response to the targeted therapy, XALKORI. The second is an FDA approved diagnostic for melanoma patients whose have inoperable or metastatic melanoma. The test determines the presence of the B-RAF V600E gene mutation within the tumor sample, and identifies patients eligible for treatment with Zelboraf.

Last month, we added to our ovarian cancer management tools with a new FDA cleared assay, ROMA, or Risk of Ovarian Malignancy Algorithm. This is a risk stratification tool that combines the results for HE4, Architect CA 125 and menopausal status into a numerical score that, along with clinical and radiological evaluation, can aid in evaluating whether a woman over the age of 18 who presents with an ovarian mass and for whom surgery is planned is at a high or low likelihood of having a malignancy. ROMA provides equal sensitivity to other commercially available risk stratification tools, with improved specificity for determining the risk level of malignancy.

LabCorp continues to be a leader in the field of chromosomal microarray analysis. In addition to our pediatric, prenatal and conception test offerings we recently added oncology applications. The LabCorp SNP microarray has been shown to be superior to traditional technologies for the detection of genetic alterations, having greatly improved copy number resolution and the capacity to detect clinically significant gene conversion associated with pediatric syndromes and clonal evaluation in cancer.

The fifth pillar of our strategy is to develop alternative delivery models. The Director of the CBO recently pointed out that the results of recent Medicare demonstration projects on disease management and value-based payment, quote, suggests that substantial changes to payment and delivery systems will probably be necessary for such programs to significantly reduce spending and either maintain or improve the quality of care provided to patients, end of quote. We are preparing ourselves for these changes and continue to discuss alternative models with physicians and our managed care partners so that we will be well-positioned in the future. As we mentioned last quarter, the recent extension of the United Healthcare contract was an important step in our fifth pillar, as we will continue to be the sole national laboratory for United Healthcare through the end of 2018.

Over the next seven years both organizations will continue to make investments to help reduce healthcare costs and improve patient care. In summary we are very pleased with our fourth-quarter and full-year performance and the progress we have achieved on our strategic initiatives. Although current macroeconomic conditions cause our outlook for volume growth in 2012 to remain muted, we believe that the long-term outlook for our industry is excellent and that over time, volume growth will return to historical levels.

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?

As we all know, the Super Committee failed to reach agreement on a $1.5 trillion deficit reduction plan over 10 years. Absent any Congressional activity, mandatory sequestration, including a 2% reduction in the Medicare fee schedule will be implemented effective January 1, 2013. Congress must also address scheduled reductions to the Medicare physician fee schedule sustainable growth raise by March of this year. There are numerous proposals circulating to address these issues.

It is too early for us to predict the impact of any potential reforms. We believe that across-the-board reductions to reimbursement, cost-sharing proposals and 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 fourth 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 how drugs of abuse volume trended during the year?

In the fourth quarter, our drugs of abuse volume increased approximately 10% year over year. That compares to a year-over-year increase of 9% in Q3 of 2011, 8% in Q2 of 2011, 14% in Q1 of 2011, and 12% in Q4 of 2010.

Now, I'd like to turn the call back over to Dave.

Thank you, Steve. Thank you very much for listening. Before we take questions, I would like to note that we now have 25 analysts covering our Company. So that we may do our best to accommodate everyone, please make your questions brief and to the point, and we will endeavor to answer them in the same fashion. We are now ready to take your questions.

(Operator Instructions) Adam Feinstein with Barclays Capital.

Maybe a question would just be, as you think about 2012, you talked about the five pillars, but how are you thinking about 2012 relative to last year? What are the big themes? And clearly you guys always just see yourself as an operating company and doing the blocking and tackling and following the same strategy. But just curious as you're messaging around 2012. And what are you thinking about this big picture for LabCorp and the industry?

Adam, it's Dave. Good morning. The beginning of your question cut off a little bit so I think what you asked is high level themes for 2012 and beyond?

Yes.

Again, I would repeat that the first message is, we think that the volume outlook is muted for 2012 because of broad macroeconomic conditions. But still the long-term outlook is excellent. And over time, we believe that we'll return to the historical volume growth rates that we've seen in the industry. So, that's probably one high level theme.

Second is the importance of continuing the Genzyme Genetics integration. And I would say that has two components. The first is growing that Business. We spent a lot of effort this year protecting the client base, making sure that the levels of service remained at expectations, particularly placing value on the genetic counselor network and the importance of that to the clients and to the Business.

So, growing Genzyme Genetics is a very important priority for all of the reasons that we've articulated, the genetics franchise, the oncology franchise, the importance of reproductive and oncology testing to our business model of the future.

On the other side of that, of course, is continuing to rationalize the cost structure in that business, which will allow us to, as we've said, make it slightly accretive in 2012. And then, as we move through 2013 and beyond, get it to Company margins and really start to see the earnings power of that business. So, both growth and cost rationalization there are going to be extremely important.

Third, I would say is continuing to develop and enhance the focus on our specialty businesses. We haven't talked a lot about this but underneath all of the Genzyme acquisition and the rebranding is a -- I would say some changes to the structure with the way we go to market with our specialty businesses and the way that we message the market, the way we interact with physicians.

And I think all of those things, the growth in the future, the core business, is very important and fundamental to what we do. But growth in the future is increasingly going to come from specialty and esoteric testing. And so I think continuing to enhance our market-facing capabilities there is going to be very important in 2012.

And then the fourth thing is allocation of capital. We continue to look for attractive acquisitions. We continue to buy shares. We continue to consider all other aspects of capital allocation. And I think that's going to be an important priority.

And then I would say, last of all, I think that we're going to start to see an acceleration of payers looking at different kinds of models. And so I think continuing to invest resources in and collaborate with payers on what other ways are lab services of this care generally going to be delivered, will be an important priority for us in 2012.

And congruent with that, continuing to improve our own internal efficiency so we can be best-positioned in the marketplace. I know that was a lot and I failed in responding to your question in a brief and concise fashion but I hope it was helpful.

It was wonderful, thank you, David.

Bill Bonello with RBC Capital Markets.

My question has to do with pricing and mix. It looks like, excluding Genzyme revenue, per requisition was essentially flat. I don't think I recall that ever happening in the past, even in 2007 after the big United contract implementation. Can you give us some color on what's happening on that front?

Are you seeing less mix shift? Are you losing some of the esoteric testing? Is price coming down? How should we be thinking about that? And then I have one quick follow-up to that.

Bill, this is Brad. And I think about that metric from three different ways. First of all, year-over-year growth is important but we also look at what those revenue per requisitions are doing sequentially. And they were sequentially up in Q4 compared to Q3. And especially across payers, across testing, managed care was up sequentially. So, that's the first thing we do when we're looking at that, is say what happens sequentially.

Second on a year-over-year basis we took two looks. One was by payer and the other was by test, to your specific point. By payer, our client category is experiencing the fastest volume growth. And our client category has the lowest revenue per requisition. An example of a business that's growing in our client category, that Steve Anderson mentioned, is our drugs of abuse testing business. So, as we see volume growth accelerate above the average in those businesses, it's putting some pressure on the overall price metric.

The second is, in our patient and our uninsured population, that volume is our highest price in terms of revenue per requisition. That volume year-to-date in 2011 was 6.5% lower than 2010. And in the fourth quarter 8.7% lower than 2010 in the fourth quarter. So we're seeing some acceleration of lower price point payer categories and also some deceleration in higher price point categories. On the test mix side, we're also seeing the flattening of Vitamin D, and also flattening in our Histology business. So, that's also putting pressure on the overall metric.

Okay, that's extremely helpful. And then just as a follow-up to that, can you help us feel confident, then, in your ability to reach the 2% to 3.5% revenue growth in 2012? All in, I think you were less than 1% this quarter. I know you were facing extremely hard comps on the volume side. But just tell us what gives you confidence, how we should think about that.

Yes, Bill it's Dave. So first of all, not to be overlooked, we're going to get about 1 percentage point of growth from Orchid, the full year impact. So that gets us a reasonable head start toward the number that we put out there. We did have a very difficult volume comp in 4Q of this year versus 4Q of last year. As we went and looked back at 4Q of last year, it was the single largest organic growth quarter in at least the prior eight quarters.

So, we're just going up against a tough comp here which makes the volume growth look less than it was. And I think with what we're hearing in the commentary from the payer community, from WellPoint on their call, from United on their call, they are expecting utilization improvement, particularly in the second half of 2012. So, we feel pretty good that all those things in combination will comfortably get us into the revenue guidance range that we've given you. And obviously, again, as I've said, we have a pretty muted expectation in terms of volume for 2012. But if volume is better, it gives us additional opportunity.

Thank you very much.

Robert Willoughby with Bank of America Merrill Lynch.

Can you give us a quick update on the attack plan for Orchid in terms of how the consolidation will proceed? And maybe an update in the UK. Is that FSS Business getting any closer to you? And then just quickly for Brad, the $0.51 hit from amortization expense in 2011, do you have a guess what that would be for 2012?

It's Dave, and I'll start with the Orchid question. As we said, we divested the state government Paternity business, or we're in the process of divesting it as part of the resolution of the FTC inquiry. With respect to the Private business, I think our current plan is that most of that, most of our existing forensics business will actually move into the existing Orchid facilities.

So, what we're doing at our Center for Molecular Biology and Pathology, I think we'll be moving toward their facilities. I'm sure there will be some rationalization, but I think, generally, the businesses are very complementary and give us a nice growth opportunity in private paternity.

In terms of the UK business, my understanding is that most of the tenders have been resolved and have essentially a two-year time frame. There are still, I believe, a couple that are waiting to be decided. There's a nice market opportunity as those come up. We've been successful in winning those tenders. The government has closed their government forensics lab, so it's basically open to private competition.

So we do see some growth opportunity there as the tenders are decided and then as they come up for rebid. And then also the potential of looking at being able to expand the forensics business outside the UK into Europe. No firm plans there but a good beachhead in the UK, as we consider that expansion opportunity. And now I'll turn it over to Brad on the amortization.

Bob, on the amortization it looks to be roughly the same.

Perfect. Thank you.

Gary Lieberman with Wells Fargo.

Maybe just to follow-up on some of your pricing comments. You had made comments regarding the transition of some of the Genzyme contracts onto some of the legacy LabCorp contracts. And at some point that would put pressure on the pricing. Did you see some of that in the fourth quarter? And if so, how much was in there?

Gary, this is Brad. We did not see any change in the fourth quarter compared to what we had been experiencing throughout 2011.

So how far along in that process are you and how much additional pricing pressure, if any, would you expect to see from that transition?

We're pretty well along given that we're over a year now from the actual acquisition. So, we're pretty far along in that process. There still are some transitions that are scheduled to occur in 2012, but it's definitely baked into our guidance and our thinking for 2012.

Gary it's David. We'll obviously reflect in the price metric as you look at 2012 on a year-over-year comparison because, to the extent that we have further adjustments into our contract levels, that will show up as, quote-unquote, negative price.

Okay. But it sounds like there's not that much more of that? Is that what I'm hearing?

I think that's fair to say.

And then could you just give us an update on where you are on the Horizon contract?

We don't really have an update on the Horizon contract. We continue to discuss a longer-term extension with Horizon but no final resolution.

Okay, thanks a lot.

Amanda Murphy with William Blair.

I actually had a follow-up on the volume questions that have been asked. I'm curious, if you look at the underlying business, what are you guys seeing in terms of seasonality? Typically Q4 was the worst given the holiday season. But I'm curious if the whole deductible factor has meaningfully changed that pattern over the past couple of years?

Amanda, it's Dave. I think that it does have an impact. Obviously, we're dealing with pretty sizeable volume, so it's hard to point to particular facts and figures. But I think it does have an impact.

I think if you look at the historic trends for Q4, and you look at what's happened the last three years, really, you don't see a pick up but you see more stability between 3Q and 4Q than we've seen in the past. So I think it has some impact. It would be hard to quantify.

So we should just expect a similar progression through 2012 as we saw last year basically?

Yes, I would agree with that.

Okay. And then just a question on Genzyme. You talked to the branding. I'm curious, how meaningful is the Genzyme brand to the business? Is this something that could impact the underlying Genzyme attrition rate, which seems to have gone better? But just curious about 2012.

I think the Genzyme Genetics brand is a valuable brand, make no mistake. Pursuant to the asset purchase agreement, we had a certain time in which we were allowed to use the brand. And then the name Genzyme now belongs to somebody else. So, the name that we adopted, Integrated Genetics, is actually a legacy brand that was part of Genzyme Genetics, and that Genzyme Genetics acquired. So, it's familiar to the customers, it's something that they know. There's strong brand recognition within the Genzyme Genetics reproductive business.

So I actually think that the Genzyme organization has welcomed the brand in that it really completes the separation from Genzyme and is now part of the LabCorp family. And Integrated Oncology just seemed like a good consistent market-facing brand to adopt once we went with the Integrated Genetics brand. So, I think that, I don't mean to in any way underestimate the value of the Genzyme Genetics brand, but I think we've made a very smooth transition here.

Okay, thanks very much.

Ralph Giacobbe with Credit Suisse.

In the past I think you've talked about needing 4% top line to have leverage to increase margin. So, maybe help us understand where the cost savings is being generated in 2012 to allow you to expand margins at a fairly decent clip despite some of the lower top-line expectations.

I think the place where the cost savings are coming are within the Genzyme business, within Orchid, within the remnants of Wescliff and DCL. The integration of the acquisitions is a key line of cost savings, as well as Clearstone, the Clearstone acquisition in clinical trials, and then the continuation of all of the efficiency programs that we have been working on. So, lab automation, patient service center automation, improvements in the throughput of instrumentation. Those are probably the two big categories of cost improvement.

And so it's largely all SG&A related, if we think about the model on where we would see the greatest opportunity?

You'll see some in SG&A but I think you'll also see some in the gross profit line because that's where the efficiency programs and facility rationalizations and those types of activities will show up.

And then just my follow-up. Remind us again the large contracts that are coming up for renewal in 2012, aside from Horizon that you already talked about.

I don't think we have anything sizeable in 2012. We go out to 2013 with Cigna and WellPoint.

Okay, thank you.

Darren Lehrich with Deutsche Bank.

My question is really just about volume. I hear you; you're not making any call on the economy or any real big improvement for 2012. So we get that part of the guidance. What I wanted to just focus on is the deceleration that we did see throughout 2012.

And I'd be curious just to get your comments on where you saw the weakness, whether you think there's anything new competitively that's emerged in your markets that's led to some of this organic weakness in recent quarters. Or, you just chalked it up to a tough comp. Maybe just some framework for thinking about the trend.

Darren, it's Brad. I would say that definitely you touched on something that we've said earlier and want to continue to stress, is the tough comp, especially in Q4. I think looking back across the year, the deceleration, I would say, was around in the summer months. And then we saw stability in the fourth quarter compared to that deceleration, at least in terms of absolute levels of volumes, setting aside the year-over-year comp. Again back to the tough comp for Q4. So, that's the way we think about what happened in 2011. And again, 2012 will be up to the macro environment, as well as what things we can do internally to offset and outpace that.

Yes, Darren, it's Dave. Just to add to that, again, when we came out of 2011, Q4 was very strong and Q1 of 2012 also started out strong. Then, as everybody knows, we saw deterioration in the macro environment. We saw, for those who have forgotten, we saw real complete political gridlock for months over Medicare, over the SGR fix, over the debt ceiling.

And all of those things, I think, played into the macro environment, which in turn played into people's confidence in going out and spending discretionary dollars on healthcare. Q3 was the low point. I think Q4 was a strong volume quarter for us, given the comp. And we feel that that is sustainable going forward. But we're waiting on the economy to improve for us to feel like we can be more confident in our expectations about volume.

Okay. And if I could, just to clarify on revenue guidance for '12. Have you contemplated any impact from molecular diagnostic coding changes? Any comments there would be helpful.

No, we have not. Our understanding on the coding changes is that in terms of Medicare, the coding changes, whatever they turn out to be, are not going to be implemented in 2012. And the earliest those will be implemented is 2013. And I think in terms of the private payer community, our sense is that, although they may implement some of the coding, it doesn't lead to structural pricing changes.

Okay, thanks a lot.

Tom Gallucci with Lazard Capital Management.

Good morning, thanks for all the color. Maybe following on one of Darren's questions there, as we think about '12 then, I know you don't give quarterly guidance but just maybe from a high level. It seems like a fair amount of the earnings growth is coming from the ramp up of acquisitions or synergies related to the acquisitions.

And inverse to '11, it seemed like the volume comps get a little easier as the year goes on. So, can you give us any high-level thoughts about first half versus second half, or stronger and weaker type quarters, given those dynamics?

No. We don't give quarterly guidance so I don't think it would be reasonable to try to give you anything more than at a very high level. Yes, the comps will get easier in the third and fourth quarter, so that will help volume. The integration synergies from Clearstone and Orchid, there will be more probably at the beginning of the year, but Genzyme will be relatively stable throughout the year. I think the earnings pattern is likely to follow the historical pattern, is really about what we can say there.

Okay, good. That's helpful. And then one follow-up on the competitive environment and pure pricing. Was curious what your perspective is there. And also, Dave, was wondering if you could follow-up on a comment that you made earlier, in '12 maybe seeing payers toy with some new types of payer type models. Wondering what types of things you may be thinking about.

Sure. I think in terms of the competitive environment generally, it's what it's always been, which is it's quite tough. And that's the nature of our industry. It's a very competitive industry. There are a lot of players, so there's competition for volume. There's competition on service levels. There's competition on price. And there's competition from our customers, as we know, in histology with the insourcing. And I don't think we see that changing much.

In terms of the alternative models, Tom, what I would say is if you look at, just even within the last week or two, WellPoint is talking about paying physicians in different ways. United came out with a pretty comprehensive announcement that they were going to look at a whole different methodology to start paying physicians. And they called it transforming the way they pay their provider network, in their statement.

So if we think that physicians are the only ones who are going to be affected by this, I think we're helping ourselves to a healthy dose of rose-colored glasses. There's clearly going to be different ways in which lab services are going to be paid for. Whether it's bundled payments, whether it's payments based on quality of services delivered, whether it's narrowing of networks, I think all of those things are going to come into play. And I think we're very well-positioned to participate in that. And I think in the long term it will be a benefit to LabCorp. But I don't think we should underestimate the fact that the payments models are going to be changing.

Could I sneak one more in? What was the ultimate Genzyme dilution for '11? Thanks a lot.

We're not going to talk about that. We gave you the guidance and I think that's what we're going to stand on. Thank you.

Gary Taylor with Citigroup.

Just a couple questions. First, I've been listening, I don't think you've parsed this out. But for 2012, I heard your comments on expectations for margin improvement from improved integration of the acquired assets. Is the implied organic revenue growth that you're anticipating, is that at a level that's going to allow you to maintain organic margins? Or would you expect improvement, would you expect them down slightly? Do you have a general view around that?

Gary, this is Brad. I think without the help of some of the efficiency programs that we've talked about before, organic volume at the low end would make it challenging on margins. But again, we had the help of the acquisition integrations in 2012. And as Dave has said several times on the call, we expect growth to accelerate from where we're seeing growth now. So, I think looking out into the future, there are margin expansion opportunities for us.

I think we stand by, that it takes in the range of 4% top-line growth to generate real organic margin expansion. So, we're going to get margin expansion next year from what we're doing with the acquisitions and from the efficiencies. And we've always got to be making our business more efficient. That's just fundamental. But, in our perspective, as volume improves over time, we'll see a return to organic margin expansion.

Yes, I appreciate that. I just wanted to drill into '12 specifically in a little more detail. My last question, and I apologize, I'm not exactly sure how to ask this. But I was reading about a new initiative the Company has to create an esoteric test benefit manager, so to speak. And build a network of other esoteric labs and present this management potentially in a capitated model to payers. And I've forgotten the name of that venture. But is that something that you're willing to talk a little bit about at this point, or is it too early?

At a high level, we call it Beacon LBS, and at a high level Beacon LBS is a multi-faceted offering for both physicians and health plans that has a very simple goal. And the simple goal is to get patients the right test from the highest-quality laboratories at the most effective cost. So, there is an option to have narrower lab networks for some esoteric services. There is an option to have physician decision support in test selection and in guiding care pathways.

But the goal is to -- and there's a lot of these models out there, as you know, being offered by others who are not labs and therefore don't have the expertise to provide these services. But the goal is, again, right test for the right patient from the highest-quality laboratory network, at the most effective cost. And this is something that, again, is part of how are we going to look at payment for lab services and how lab services are provided over time. And we think it's very important that we not only participate but lead in initiatives in this area.

Got it. Sounds interesting, so we'll keep an eye on that. Thank you.

Sandy Draper with Raymond James.

Most of my questions have been asked and answered so I appreciate it. Maybe one follow-up on Genzyme. I appreciate you not specifically calling out where the dilution came in, in 2011. So, you may not be willing to give a target accretion for '12. But if you're not going to do that, one of the things you're talking about is the incremental growth or benefit in '13. Maybe just remind me of some of the things of why you think '13 you actually see more of a step up in terms of the accretion and the growth there as opposed to '12. Thanks.

Yes, we're not going to give target accretion numbers for any of the businesses because, as we've always said, the guidance, we give you a range of guidance because there's a range of outcomes within the guidance. And the minute we start giving individual targets, then we start breaking the guidance down into pennies and nickels. And frankly, with a company that's talking about earnings power of $7 a share, it just doesn't make sense to go through it and try to tell you penny by penny how we get to where we get.

So what I would say about Genzyme is it will be slightly accretive next year, as we've said. I think in 2013, one, we'll realize the full impact of the synergies, which will significantly help in terms of the margin. Two, a lot of the investments that we've been making, in the IT, for example, when we acquired Genzyme, there was no electronic order and result delivery capability in that business. They just didn't have it.

So, if you think about it, they've done a terrific job of growing the business without one of the most fundamental basics which is allowing physicians to order electronically and get their results delivered electronically. So, the investments in the business, the investments in the sales force, the investments in the branding and all of the things that that will allow physicians to do in terms of ordering other specialty tests in the LabCorp core menu from a single order entry and result delivery portal, all these things, I think are going to lead to strong top-line growth as we get through 2012 and 2013. And the improvement on the expense side, will lead to real earnings power as we get in the out years.

Okay, great. I appreciate the color, thanks.

Lisa Gill with JPMorgan.

Thanks very much. I just had a follow-up question around Genzyme. Am I looking at the numbers correctly? I'm just trying to understand what the organic growth in Rx were for Genzyme in the fourth quarter. Either Brad or Dave, can you help us to understand that? And then my second question, Dave, would just be, do you have any update at all around the congressional hearings or congressional inquiry that you've submitted documents to in December?

Lisa, this is Brad. I'll start with the organic growth rate. We reported volume up 1.2%, with Genzyme attributing 0.6% of that. So, if we go to that organic number, it's 0.6%.

So that's organic? Because last year in the fourth quarter, didn't you have some level of Genzyme in the fourth quarter, as well?

We did. So, it's apples-to-apples. When we backed it out of the fourth quarter last year, even backing out Genzyme, we were at 3.2%.

Okay. But when we look at our numbers, it looks like that has slowed, it has slowed sequentially. Is that the right way to look at it? And if that's the case, is there something behind that slowing growth rate?

I think we got two things confused here. We don't break out the Genzyme volume specifically. So, I don't know if you're trying to back into that from the numbers that we've given you for Genzyme's contribution to our overall volume growth.

That is what we're trying to do. And you're saying that it's not possible to do that based on the information you gave us?

I'm just saying, remember, that in the fourth quarter of 2012, we had three months of Genzyme, and in the fourth quarter of 2011 we had one month of Genzyme. So you don't have a--

Apples-to-apples?

Exact comparison. And that's probably why you're seeing something that we're not seeing.

Okay, that's helpful. And then, Dave, do you have any update on have you heard anything further from this congressional inquiry?

All I would say on that is that we continue to believe that this is based on the allegations of the qui tam that was filed, the NPT case. We are working cooperatively with the Senate Finance Committee staff to respond to their questions. And, obviously, we'll update you as matters progress.

Okay, perfect. Thank you.

Kevin Ellich with Piper Jaffrey.

Dave, just thinking about what Palmetto is going to do with McKesson Z-codes, I'm just curious what your take is on the whole matter and how big of a deal you think this is for LabCorp, and how prepared you are for the changes?

First of all, let me reiterate that we are strong supporters of transparency in billing and coding, and always have been. So I think anything that creates greater transparency for payers in billing and coding is a good thing. I think, Kevin, that Palmetto is in the process of re-evaluating their program. My understanding is they've delayed the implementation date of the program until May. And they are looking at some other options for how they would evaluate these tests.

And so we're working with them to try to devise -- and ACLA, by the way, it's not LabCorp alone. LabCorp, ACLA, all of the ACLA members, the CCLA, too, are working with them to try to devise a system that is going to be fair. That's going to respond in a reasonable time frame to requests for coding for new molecular testing. That's going to lead to fair payment with transparency on their side of what they're paying for.

No, I appreciate that. And the bigger question is why would they add another level of complexity? I understand the transparency issue but obviously you've got a lot of moving parts now. How much exposure do you guys have? Have you applied for any of the Z-Codes yet?

I don't think it would behoove us to talk specifically about the actions that we've taken. I will say that, I think our exposure -- remember this applies, so far, just to the California region where they're the Medicare carrier. Our exposure is relatively limited, both because of the number of tests and because of the region.

But we're trying to work with Palmetto in a collaborative way to do something that's fair and equitable for all of the labs and allows the labs to get coding and reimbursement that's satisfactory to Palmetto and satisfactory to the labs, and fair payment. I don't think we should get hung up on the individual parts of the process. We should think about, as a long term process, billing and coding transparency will be a positive thing.

Understood. And then just my follow-up is, given the current environment and organic growth coming in a little bit, and your outlook for 2012, what do you think about the strategic acquisition environment? Are there some good deals out there? And then how do you manage or think about using free cash flow? And at what point will you consider paying a dividend versus continuing to buy back stock?

As I mentioned in response, I think, to the very first question, one of the things that we're always looking at is capital structure and how we deploy capital. I think there are some attractive acquisition opportunities. As always, there are plenty of things in the market. We're very selective about what we're interested in, and so we'll continue to look at acquisitions.

We always evaluate in terms of allocation of capital, whether it makes sense to pay a dividend. That's something that is always under consideration and that we talk about a lot. And we'll continue to talk about it. Some of it will depend, obviously, on are we right about our view of return to historic volume growth over time, because if we are not right, it suggests a different sort of capital allocation.

Understood. Okay, thanks, Dave.

We're going to try to finish up in about the next five minutes. So we promise we'll be brief in our responses if we can be brief in our questions and not re-ask.

Ricky Goldwasser with Morgan Stanley.

My follow-up question on Genzyme. And I'm just trying to look at it from a little bit of a different perspective. Based on the data points that you gave us, we calculated about 7% to 8% step down in top-line contribution once you annualize the contribution from 4Q '11 to 4Q '12. So, one, are we in the ballpark?

And if so, is this how we should think? Is this the run rate we should think of for 2012, factoring in the changes in commercial reimbursement, et cetera? Should Genzyme top-line contribution be down on a run rate by about 7% to 8% in '12 versus '11? Just trying to break down the top-line growth component.

Ricky, it's Dave. We don't see that math at all. So, what I would suggest is, get with Steve and Brad afterwards if you want to walk through the math. Because I don't think it's going to be productive to try to walk through it on the call. But I will say we don't see anything like that kind of step down. And, in fact, Genzyme had a very strong year 2012 versus 2011 and a very consistent rate of growth year-over-year.

So just to clarify, the pricing reduction from managed care contracts, which you've talked about, you expect to be completely offset in some more by volume growth. Is that how I should read your comment?

No, I don't think I said that. I think what I said is that, although that would be my hope. But I think what I said is that the contribution throughout the year in terms of revenue stability was quite stable. And that the growth throughout the year, year-over-year in terms of revenue, was quite stable.

Okay. And that's your expectation for '12?

Yes. As Brad commented earlier, incorporated in the guidance is some managed care compression that hasn't fully shown up in the numbers. But our expectation for '12 is, and I think we said this in response to the very first question, the growth of the Genzyme business year-over-year from a volume perspective is a very important priority for us.

I understand that, but my question is does guidance factor in that growth, or is it upside to your guidance number?

The guidance incorporates all of our assumptions and expectations about all of the components of the Business.

Okay, I'll follow-up after.

Dane Leone with Macquarie.

Just quick questions for me. Your view of 2012, is histology as a mix of revenues up, down, or flat? And then, finally, all-in for 2011, how many bolt-on acquisitions did you do? And if you could, parse out the organic revenue growth attributed to those bolt-on acquisitions and what's your outlook for '12, the smaller acquisitions. Like customer lists, et cetera. Thanks.

Histology in 2012, our expectation is basically flat. And we don't break down the individual acquisitions or the number of acquisitions, as we've said. Small acquisitions are a part of what we believe to be our organic growth and we expect we'll do a similar number in 2012 to what we did in 2011.

Okay. And actually one more follow-up, if I could. Any competitive share shift you're seeing from Quest given the turmoil at the top of the management team there?

I'm not going to associate myself with any comments about our competitor. I think they are a tough competitor. They continue to be a tough competitor in the marketplace. I think we've done a great job over the last multiple years in attracting business away from them with IT improvements and service improvements, and we're going to continue to stay focused on that.

Thank you.

Ashim Anand with Natixis.

Thanks for taking my question, guys. My question was regarding the ROMA algorithm for ovarian cancer. It is actually quite exciting to see that only with two markers, HE4 and CA125, you are able to achieve a 92% sensitivity, which is equivalent to OVA-A by Quest and Vermillion, which have five markers.

So if you can comment more on that test. And also, related, if there is any commentary from American College of OB-GYN or Society for Gynecological Oncologists in terms of ROMA. And finally, for this test to become a screening test, is that a goal? And if that is a goal, do you think addition of more markers would achieve that goal?

Okay. That was a lot and we'll try to answer it all. First of all, it's cleared by the FDA for assessment of malignancy in patients presenting for surgery. It's not cleared for screening and we don't market it for screening. Over time, if the assay would become cleared for screening, or if with the addition of additional markers it could be re-presented to the FDA for screening, that's certainly something we would be interested in.

Remember, because of the low incidence of ovarian cancer in the population, it's challenging to get a screening test that is going to have the sensitivity and specificity that we would like. But we've been working on that for a long time and will continue to do so. In terms of the science behind the test and the Vermillion test, what I would say is, obviously, FDA was satisfied in terms of clearing the test with the sensitivity.

What we like about it is the greater specificity than the competitive test. And so overall, think it's a very attractive market opportunity. But recognize it's part of an evaluation along with radiological and clinical signs and symptoms of a relatively small population, which is women presenting with an ovarian mass for surgery and trying to assess malignancy. So I hope that answered it.

And I think that's about all the time that we -- we have one more question? We have one more question.

Anthony Vendetti with Maxim Group.

You said you had 104 new tests in 2011. Can you just compare that to what you had in 2009 and 2010?

It's probably about comparable to 2010, and probably a little more than 2009. We think about 20 to 30 new tests a quarter being introduced as being our expectation and our goal.

And same thing for 2012?

I would expect so, not having a whole list in front of me. But that's just what we've historically seen as the typical output.

Okay, great. Thanks a lot.

Ladies and gentlemen, that will conclude the question-and-answer portion for our event. I'd now like to turn the presentation back over to Mr. David King for closing remarks.

Thank you, Jeff. Thank you all for listening to our earnings call. And we look forward to speaking to you again next quarter. Good day.

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