Labcorp Holdings Inc (LH) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Laboratory Corp of America Holding earnings conference call. My name is Keisha, and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later we will conduct 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 Mr. David P. King, Chairman and CEO of LabCorp. Please proceed.

Thank you, Keisha, good morning, and welcome to LabCorp's first-quarter 2012 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 first-quarter 2012 financial results, reaffirm our 2012 guidance, highlight our progress on our five pillar strategy and provide answers to several frequently asked question. 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, 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 from 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 2011 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 will also review our 2012 guidance.

First, cash flow. Our cash flow remains strong. Free cash flow for the trailing 12 months ended March 31, 2012 was $686.9 million. We remain pleased with our cash collections. DSO was 48 days at the end of March, an increase of one day year over year and two days sequentially. During the quarter, we reduced our bad debt rate to 4.4%. Second revenue growth, revenue increased 4% year over year in the first quarter. During the quarter, revenue per requisition increased 1.2% year over year. Total Company volume increased 2.8% year over year during the first quarter. Esoteric volume increased 4.8% in the quarter. The quarter benefited from an easier weather comp which increase the revenue and volume growth rate by 1.5%. Although there was an extra calendar day in the quarter, the strength of days in the quarter was approximately the same as last year.

Third margin, for the first quarter our adjusted operating income margin was 19.9% compared to 19.3% in the first quarter of 2011. We are very pleased with the margin improvement, which reflects a positive impact from our integration activities. Fourth, liquidity, we remain well capitalized. At the end of March, we had cash of $129.9 million and $500 million available under our revolving line of credit. During the first quarter, we repurchased $122.3 million of stock, representing 1.4 million shares. At the end of March, $462.1 million of repurchase authorization remained under our share repurchase program.

This morning we also reiterated 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 March 31, 2012. 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 first-quarter 2012 results. We generated strong revenue growth. We delivered solid increases in core and esoteric volume. Revenue per requisition increased 1.2%. We lowered our bad debt rate to 4.4% 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 acquisition market is attractive, and we continue to see promising opportunities. As always, we will balance our execution of the first pillar of our strategy with good discipline around valuation.

The integrations of Genzyme Genetics and Orchid Cellmark are going well and are in line with our expectations. Our rebranding of the Genzyme Genetics business has been well accepted by our customers. As a reminder, we adopted the name Integrated Genetics for the reproductive person of Genzyme's business and LabCorp's legacy genetics business, and we adopted the name Integrated Oncology for Genzyme's oncology business and LabCorp's legacy oncology business. Finally, we repurchased approximately $122 million of our shares in the first quarter.

The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. We continue to see strong growth in the adoption of our Beacon platform. LabCorp Beacon order entry capability is now deployed to more than 11,000 sites and approximately 56,000 providers. We also have approximately 4,000 Beacon mobile users. We added a number of new features to Beacon in the first quarter, and we continue to receive positive feedback from users for its flexibility and functionality. We recently initiated our 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 have seen fast adoption and are on track with our plan to launch the portal nationwide this year.

We continue to improve our electronic medical record connectivity. We added over 6,000 new client EMR interfaces in 2011 and are on pace to exceed that number in 2012. We continue to pursue our open platform strategy, allowing our customers to connect seamlessly to LabCorp directly or via the EMR of their choice. Over the course of 2012 we will continue to expand our IT offerings with decision support, report improvement and additional patient and physician facing solutions.

The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. In the first quarter, we continued our Touch Accudraw system implementation to more than 200 additional sites. The system is now deployed in more than 1,300 sites across the country and is processing over 1.3 million accessions per month. We recently introduced Iris digital pathology to improve pathology work flow. Instead of reviewing glass slides on a microscope is scoring them manually, this advanced diagnostic method allows our pathologist to read in score digital slides using image-based algorithms. This digital model allows creation of virtual centers of excellence, fosters collaboration with peers and remote locations and increases both efficiency and quality. The expansion of our Burlington lab campus continues to grow well. We have begun to consolidate several satellite locations into this state-of-the-art facility and will realize additional rationalization opportunities over time. We continue to move testing into this facility over the next several months to enhance specimen flow and streamline our process.

The fourth pillar of our strategy is to continue scientific innovation at reasonable and appropriate pricing. We introduced new tests and collaborate with leading customers and academic institutions to provide physicians and patients are the most scientifically advanced testing in our industry. We recently enhanced our women's health initiatives by introducing a series of tests that are derived from a single collections swab making collection of samples convenient. Our new swab tests offer clinically validated profiles for targeted clinical conditions, are configured to be cost effective for payers and patients and provide high-quality results to guide diagnosis and treatment. Further, we offer panels as well as individual tests to give physicians appropriate choice in addressing patient needs.

We also launched four additional tests to detect species of candida within our new swab portfolio. These additional tests are for patients with problematic or recurring yeast infections and can be used when the most prevalent species of yeast infections are negative. This approach to our offerings again emphasizes physician of choice so testing is targeted and cost effective. We also recently launched additional HPV test offerings. LabCorp now offers multiple HPV testing options to aid in the detection of cervical cancer, allowing physicians to choose the method for paplid HPV DNA testing that they deem best for their patients.

Last month, we signed an exclusive agreement with Opko Health for intellectual property associated with a potential Alzheimer's disease diagnostic. Opko has identified unique antibodies that appear to be elevated in Alzheimer's patients. We will be exploring these markers and their potential to help guide and improve patient care through a diagnostic test.

The fifth pillar of our strategy is to develop alternative delivery models. We continue to discuss alternative models with our managed care partners. Though healthcare reform will likely change our payer mix and reimbursement systems, our goal remains to provide customers with the highest value for their laboratory spend. To this end, we are developing our Beacon lab benefit solution to provide payers, healthcare systems and physicians a variety of options to improve laboratory quality and assist patients in receiving the right test at the right time. We intend to discuss these initiatives in more detail over the next several quarters. In summary, we are very pleased with our first-quarter performance and the progress we have achieved on our five pillar strategy. Now, Steve Anderson will review anticipated questions and our specific answers to those questions.

Thank you, Dave. Can you describe the impact of the SGR fix in 2013? As part of the SGR fix enacted in February, labs are slated to receive a 2% reduction to the clinical lab fee schedule effective January 1, 2013. Further, absent any congressional activity, mandatory sequestration, including an additional 2% reduction in the Medicare fee schedule, will be implemented effective January 1, 2013.

Can you update us on the status of the inquiry you received from the Senate Finance Committee? LabCorp continues to work closely with the staff of the Senate Finance Committee to respond to their request for information. We were the first company to meet with the committee staff shortly after receiving their letter asking us to provide a responsive overview of how our contracts with managed care organizations work. We have provided the staff with hundreds of pages of documents responding to their request. We were disappointed by some recent comments reported in the press, which are not accurate, and we will continue to work closely with the committee to answer their questions and provide all appropriate information.

Can you update us on the mix of your business coming from esoteric testing? In the first quarter, approximately 41% of our revenues were in the genomic, esoteric and anatomic pathology categories. As we reiterated last quarter, our goal is to increase our esoteric test mix to approximately 45% of our revenue within the next three to five years. Now, I'd like to turn the call back over to Dave.

Thank you, Steve. Thank you very much for listening. Again, I would remind you that we have a large number of analysts covering our stock at this time and so we asked that we make your questions brief and please try not to repeat questions have already been answered. We are now ready to take your questions.

(Operator Instructions) Your first question comes from the line of Adam Feinstein with Barclays Capital. Please proceed.

Thank you, good morning, guys. Maybe just a question to start out here. It seems like between seeing the test results and your results, it seems like volume trends appear to be stable, here. Do you think that is a fair way to think about volume trends?

Yes, Adam, I think it is.

Okay, great. And then just as a follow-up and I'll be brief, here. Just, I guess just as you think about the industry environment, Dave, with some of the backdrop in Washington and some of these cuts coming, how are you thinking about that in terms of creating M&A opportunities, and what are the implications of some of these cuts that are coming in the future?

Well, I could speak for a long time about this and negate my own admonition that we should be brief. So, let me just say, Adam that I think that the reimbursement environment from the government, everybody knows we are facing a 2% cut that was implemented, that will be implemented as part of the SGR fix. And it is mystifying to me that an industry that accounts for 1.6% of the total Medicare spend is bearing 15% of the savings that are generated from Medicare in that most recent SGR fix. So, it is obviously going to be difficult on the industry. It is going to be difficult on smaller competitors, and that will provide some M&A opportunities.

I would also say, though, and I will wear my chair of the ACLA hat here for a moment, there are thousands of small independent labs in this country, and many of them serve niches such as nursing home and long-term care facilities that the major laboratories don't serve. Our model is an ambulatory model where people come to see us or specimens arrive from the doctors office through our couriers, and going out and doing nursing home draws and the number of stats required just doesn't fit within our model. So, I have a serious concern that some of these cuts, particularly when you look at the operating margins of some of these smaller laboratories that serve long-term care facilities are going to start to create real beneficiary access issues and cost issues for the Medicare program. So, yes, there will be M&A opportunities, but there also will be long-term consequences for seniors if this trajectory of reimbursement cuts continues.

All right, thank you very much, I'll get back in the queue here.

Your next question comes from the line of Bill Bonello with RBC. Please proceed.

Great, thanks a lot for taking my question, I will try to be brief. So, trying to understand a little bit the movement in gross margins year-over-year. The decline was the biggest it's been in a while despite Genzyme's annualizing and the synergies that you noted in the proxy from Genzyme. I'm just trying to understand if that is due to the fact that volume growth was so strong in Q1 of last year or if it

Hey, Bill, it is Brad. I think it has more to do with the acquisition. So, as you recall, we closed Orchid at the end of fourth quarter of last year. So, it's new basically in the first quarter, and we have -- we're early in the integration there. So, we do have Genzyme integration and past acquisition integration acquisition that is benefiting some new acquisitions, and one that we are still integrating also is from last year is Clearstone, in the clinical trials space. So, I think it is a bag of -- a mixed bag of improvement in some relative newness and still progress being made in others that is resulting in what we see there.

And Bill, Dave, just to follow on that. Clearstone in particular, because of some of the European operations until the synergies are fully realized, is a sizable -- has a sizable impact on gross margins.

Okay, and is that really most of it? Because I would just think that the contribution from those two acquisitions would have to have been relatively minimal. So, even if they were at a huge discount to what your corporate gross margin is, it still seems like you would be seeing a lot of gross margin pressure.

Well, the thing is, if you look all the way down the P&L, most of the savings that we're realizing for Genzyme are coming in the SG &A. So, the gross margin profile of Genzyme is still not vastly superior to the -- our typical corporate margin. And then when you add a sizable gross margin expense component with Orchid and Clearstone, it actually does drag it down pretty fast, so I would say that is the vast majority, if not the single explanation, for the gross margin decline.

Okay, that sounds great. I have a bunch of other questions, but I'll hop in the queue.

Your next question comes from the line of Robert Willoughby with Bank of America. Please proceed.

Hey, Dave. The digital technology that you mentioned for the pathology sector, that sounds like the answer to what has been a nightmare process, I guess, of manual preparation and monitoring. Is this -- am I correct in viewing that as a material savings and capacity reduction opportunity, or will we not be able to see that in your numbers going forward?

Bob, I think it is a material opportunity to generate savings for a couple of reasons. One, which is not insignificant, it is just moving that glass slides around to different specialty pathologists. And the other is our ability to create virtual centers of excellence where pathologists can review slides either individually or in collaboration without necessarily having to all be present. So, I think there is savings opportunities there. Obviously, we have to scale it to the entire organization, but we've made a very solid start.

But it doesn't save you in the prep time, that manual process of receiving, cutting and staining?

We are working on some automation tools for the prep, but it doesn't directly impact prep at this point, it just impacts review and scoring and reporting.

Got you, got you, got you. Okay, that's perfect. Thank you.

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

Thanks, good morning, one housekeeping question, big picture question. First, just on the housekeeping side, your noncontrolling interest essentially gone here due to the by up in Canada. The question is, do you expect to retain full ownership going forward there, or is the plan to sell equity to a local partner?

Darren, this is Brad. We do have people that are interested in that business and think it is important to have a local partner. So, too early to call how that is going to end, but definitely something that we are interested in.

And for modeling purposes, just timing, should we keep minority or noncontrolling interest basically the same as what we saw in Q1? Any thought there, Brad?

I just think it is all incorporated in our range of guidance and wouldn't want to guide on a specific assumption like that.

Okay, and that is fair. And my big picture question, Dave, is, you're at 1.5 times leverage, basically. You've hovered around 1.5 to 2 times since doing Genzyme and basically have maintained that leverage despite a lot of cash flow with fairly consistent buyback that we've seen over the last year or so. I guess the question here is how are you thinking about optimal leverage? Is 1.5 to 2 times the right range? And if so, shouldn't we really expect your share count to shrink in the high single-digit percentage range going forward?

Darren, it is Dave. So, I think the optimal leverage is 1.5 to 2 times, and I think when you model 1.5 to 2 times leverage and you model the cash that we generate, I think it is a reasonable assumption that either we are going to continue to do acquisitions with that cash or we're going to continue to repurchase shares. Or, depending on the circumstances, obviously, we could consider the initiation of a dividend or other means of returning capital to shareholders. But, yes, the optimal leverage is in that 1.5 to 2 times range, and our deployment of that -- of the cash generated over time as it has traditionally been would be first toward acquisitions and second towards share repurchase absence some change in our capital philosophy.

And just as far as buyback goes, because that is where the focus has been over the last year in large part in terms of your free cash flow, is there a way to help us think about the deployment to keep that 1.5 to 2 times leverage that you are referring to?

Well, I'll let Brad comment on this. I mean, we're not paying down debt to de-lever. So, the only -- the de-levering comes naturally as EBITDA grows. I don't know that there is a good way to think about the amount of share repurchase, because we have tried to be consistent, other than to say that it seems to me that the amount of share repurchase that we did in this quarter is sort of what we would think about as a fairly typical amount in environment where we're not doing a lot of acquisitions.

Darren, I will just add to that. Our philosophy is unchanged, as Dave alluded to. Our first goal is to grow this business, and a lot of that growth can come from acquisition, given the market share that we have in the number of the other players that are out there. We alluded to that earlier a little bit in the industry commentary about the cuts. So, that is still number one. I think when those opportunities are not present, you see us go more to share repurchase. And yes, we do have additional leverage that we could take on to be at optimal levels, but we'd like to reserve that right to do for opportunistic situations.

Okay, that's real helpful, I appreciate the comments.

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

Hi, thanks. I had a question on the revenue per requisition growth in the quarter. I'm curious, is there -- were there any moving parts there? So, for example, acquisitions impacting it or Genzyme related contract changes impacting that metric this quarter?

Amanda, it is Dave. I mean, there is always moving parts. The two probably biggest moving parts here were payer mix so we had, again, strong growth in the drugs of abuse testing, which is not at the average price point of the Company and then test mix in that, obviously, as we have said for some time, vitamin D has flattened, histology is under pressure. So, it is a combination, I would say, of payer mix and test mix that is -- we're not getting as much of a lift as we traditionally have gotten from mix. But I'm very pleased with the revenue per requisition result in the quarter.

Okay, got it. And then I know you don't give guidance specifically for the breakdown between revenue per rack and volume growth, but is there anything we should be thinking about in terms of nuances other than the comp situation and as we progress through 2012 on both of those metrics?

Well, since we don't give guidance on it, it would be hard for me to give you anything to think about.

Okay, fair enough. And then last question, you talked about Beacon in terms of the benefit management side of it. Curious, just if you could talk to that offering and are you getting traction in the marketplace at this point, or is it early? If you could provide some more color on that offering?

Sure, the idea of the Beacon lab benefit system is to essentially combine a variety of options and provide a menu that, whether it is a managed care plan, whether it is a health system or whether it is a physician practice, can select from. So, it runs the range from decision support to help physicians select the right test to decision support at the time that we provide reports to help the physicians manage the patient optimally to credentialing of providers to be able to order tests. There's a whole range of services within the lab benefit system that are -- that can be offered, depending on the desire of the customer. I would say it is early, there certainly is very strong interest in the market. Again, ranging -- spanning the range from managed care plans to health systems to large physician practice groups, for some tools that will help them select the proper test, select the highest-quality and most efficient, most effective cost effective laboratory to perform it and provide support for the decision-making process at the time the results are delivered so that the patient can be treated better.

Got it, thanks a lot.

Your next question comes from the line of Kevin Ellich with Piper Jaffray. Please proceed.

Good morning, just a couple questions. First, could you give us the drugs of abuse testing growth? I don't think Steve mentioned that in his prepared remarks.

Kevin, it is 6.4%.

Okay, thank you. And then, Dave, just wondering what the pricing environment is like now. We've heard a lot of comments about downward pressure coming from commercial payers, just wondering if you had anything to add about that?

Yes, Kevin, I think we all know the government pricing environment. Frankly, I was a bit surprised by the commentary yesterday on pricing. We, since 2007, 2008, when we had the pricing reset, I think we at LabCorp feel that we have been very disciplined on pricing, and we've been successful in gaining real price increases over time. Now, they are not gigantic real price increases, but we never said they would be.

But unit price over time has improved and so, I guess any time that you are in a negotiation, people are -- we're trying to get more price and the managed care plans, certainly, are not saying we want to pay you more. But, one, I don't think the environment has changed; two, I think the environment is pretty stable. And three, I hope that the commentary yesterday didn't indicate that there is going to be some dramatic price-cutting on the competitors' side in search of volume because what we've seen over time is that you -- the industry is growing. Volume is growing and for the entire industry, pricing discipline is very important, and we will continue to maintain pricing discipline here at LabCorp as we've done for the last five, six years.

Got it, and then suffice to say that you guys still continue to be the low priced provider in the industry.

We do, and everything that we do around here in terms of innovation and efficiency is designed to maintain that position.

Understood, and then just last follow-up on that is, how are the efforts with the managed care plans going to shift volume from the high cost setting? Is it too early to say anything, or do you have any data points you can give us?

I think there is a renewed level of attention to it or greater level of attention to it. One of the comments that you do hear when you talk to people at managed care plans is that lab is really the only unmanaged area of spending, so everything else, there is preauthorization, there's radiology, mental health, hospital inpatient, emergency room. There's preauthorization or there's some kind of gatekeeping function. There is not and has not been that in lab. So, that is part of what the lab benefit -- the LBS is designed to address, but it is also, even aside from the LBS, collaboration with the managed care partners to help them redirect costs to the more efficient providers. And it is going to require some lifting on their side, and I think we've see more interest than in the past, but I think it is too early to say whether they are going to be tangible results.

Got it, and then just one last quick one. The 1.2 -- or the 2.8% volume growth, if we back out the 1.5% is organic volume growth of 1.3%, or was there any tuck-ins in that?

Well, there's no tuck-ins. Remember there was Orchid, so the organic volume growth, we would say is approximate 1%.

Excellent, thanks, Dave.

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

Good morning, thanks a lot. Two quick ones for you, Dave. Just first come on SG&A, I think you mentioned that you were getting some of the benefit of integration sort of below the line. Can you maybe just update us on some of the details in terms of the types of things that you are embarking on now, whether it is Genzyme or where Westcliff stands operationally to just make sure we know where the -- what is going on in the ground these days?

Yes, I mean, the big areas that you are going to see an impact from in SG&A are corporate support functions, billing, back office, bad debt expense, exactly, those are probably the major areas in which you would expect to see and we are seeing improvement in both of those that you've called out, and Genzyme and Westcliffe.

Okay, so I recognize there's some quarterly volatility, naturally, but relatively speaking in the types of numbers that we're seeing this quarter are relatively sustainable on an SG&A front, if not improved over time?

Yes, I would think so, Tom.

Okay, and then just thinking back to your comment earlier on the Medicare front. You noted that you were surprised that as a percent of the healthcare spend, I guess you are bearing a larger burden of the cost or the savings for the government on the SGR. Do you have any idea why you think that happened? And you've got the senate inquiry, if you will, you took a disproportionate share the burden on the SGR. How do you view the environment in Washington for the labs right now?

Well, I think the environment in Washington for healthcare right now is pretty tough to begin with. And I think that when we were up on the hill and asking for the rationale behind the 2% reduction, the fundamental thing that kept being raised was that MedPAC had "recommended" a 10% reduction in the clinical lab fee schedule. Now, if you look at the MedPAC recommendations, what they actually say is, if you had to fix the SGR over 10 years for $300 billion and it all had to come from Medicare, here are the things that would be cut. And they did say the lab fee schedule would be one of those things and there were a whole variety of other hospital cuts. So, I think that, and MedPAC specifically said that is not a recommendation, that is just if we had to do it, this is one way you could. I think that got translated, and if you look at the conference report on the legislation, that got translated into, well, MedPAC recommended a 10% cut. So, we are meeting with the MedPAC to try and clarify their position and clarify the position for the hill.

The other thing I would point out, not to suggest that -- we are very disappointed by the reimbursement reduction, but I think if you talk to the hospitals, they feel like they got hit pretty hard in the SGR fix. So, there was a lot of pain for healthcare providers, and it's -- we need to deal with the SGR fix as a long-term issue, not as a every year, there is a number that we have to find to stave off reductions in the physician fee schedule, which we know are never going to happen. And so every year we know these reductions are never going to happen, and yet we make long term changes in the law regarding reimbursement for other providers that have consequences.

Yes, and just to close up a topic, you mentioned that maybe some of the press reports on the senate issue were a little disappointing to you all. Do you have any better insights on when we might see something wrapped up relative to that investigation or next data points or milestones we should be watching for?

I don't, Tom. I think we've tried to be very cooperative, we've met with a staff, we've turned over documents, they've given us a new request for information which involves some pricing questions and obviously, it is sensitive because it involves our contracts with other people. And they've made those requests not only of us, but of others, and I think everybody who has received those requests is evaluating them in terms of what it's appropriate to provide. So, I don't have any timeframe for when we are likely to see this resolved or when anybody else who has received the inquiry is likely to see a result.

Okay, thanks for the insights.

Your next question comes from line of Gary Lieberman with Wells Fargo Securities. Please proceed.

Thanks a lot. Dave, I'd be interested to get your thoughts on some of the recent FTC decisions regarding some acquisitions that have been proposed and what you think the applications might be for the lab industry.

Do you have anything in mind, Gary?

No, just the two big ones that people have been watching that are out there.

Yes, I mean, I think -- it is hard for me to provide more commentary than the FTC provided. Obviously, they are -- as they define the market, in MedCo express they found that the transaction was not anti-competitive and as they looked at the market, or as they perceived the market in -- on the Care For America, they felt that the transaction was anti-competitive, which I guess would leave me to say that the definition of market is the critical factor in these determinations and if the market is defined broadly, transactions have an easier chance of succeeding than if the market is defined narrowly.

Okay, fair enough. And then question, Brad, maybe on the bad debts. It looks like you had some -- made some good progress in the quarter, although it looks like that DSOs actually increased year-over-year and sequentially. So, could you maybe just explain the dynamic there?

Yes, sequentially is historic. We typically see about a two-day rise between Q4 and Q1, just given the sales flow between the two quarters and the cash collection dynamics at the end of the year. So, the sequential is sort of historical and in line. The one-day year-over-year, I would say, is due to several factors. One would be we're having some experience from the implementation of 5010, the new electronic filing requirements, both on ourselves on the impact on our customers. On our physicians who end up paying us for laboratory services, they've had slowdowns. Another one would be, we still have, not to the magnitude that we talked about last quarter, but a few lingering impacts of the Genzyme acquisition and conversion, but much, much smaller than the numbers we called out in the last several quarters. And last, but not least, as we reduce the bad debt rate, it has some increase on DSO. But all in all, we look at our agents, we look at our allowance, we look at all of that and DSO in combination, we're comfortable where we are.

Okay, great, thanks a lot.

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

Thanks, good morning. Can you give us the contribution of Orchid and Clearstone to revenue in the quarter and whether that would have a disproportionate impact to pricing versus volume?

Ralph, it is Dave. I don't think it is material to either pricing or volume. Clearly, Clearstone is not, and I don't think Orchid is material to pricing or volume either. We've already basically given you the volume contribution, which was about in the range of 30 basis points, so I don't think it is material to pricing.

And just the revenue, overall revenue for these two in the quarter?

Ralph, it is Brad. We said last quarter that Orchid for the year would contribute a point to overall revenue. Clearstone was immaterial to call out,and we haven't done that.

Okay, all right, sure. And I guess my second question, it is our understanding that Aetna recently made Genzyme Genetics out-of-network. Is there is any way you can give us any sense of contribution there, maybe how we should think about that and your ability to retain that if it does go out of network and maybe even how we should think about volume and pricing stat for the balance of the year, if you think that would have any impact if that volume shifted?

Well, it is true that Genzyme was terminated from the Aetna contract. Just to give you some background there, post the acquisition, Aetna did extend the contract with Genzyme, which we were very pleased about. I don't think that Aetna was jumping up and down and turning cartwheels about the fact that this termination was going to occur, but I think they were contractually required to do it and they felt that that was their contractual obligation. I think at the same time, the providers and patients, the Aetna providers and patients who use Genzyme services recognize the unique and differentiated value proposition. I disagree with the comment made yesterday that Genzyme doesn't offer anything that our competitor offers, I think that is just not the case. We are going to continue to serve the Aetna patients and providers to want to use us, and we hope that that will be most of them. And we are going to continue to offer our test menu, our genetic counseling and our overall expertise in reproductive genetics and oncology, and we will be honored and pleased if those providers and patients will continue to use us.

Okay, and any willingness to give a sense of what the run rate of that -- of the Aetna contribution is?

No.

Okay, and then just my last one. I wanted to go back to, you had talked about the somewhat uncontrolled costs on the lab side within the managed care realm and not a lot of pre-authorization our medical policy in place. Is there -- have you guys looked at or is any way you can estimate either what percentage of your either overall tests and/or the esoteric or genetic or molecular test that you would estimate now have any preauthorization and medical policy? And then to that end, can you tell or do you think that that has any impact on the pricing/mix figure as we go forward and more of these things are put in place?

Now first of all, I did not say uncontrolled costs, I said unmanaged utilization, there is not utilization management. That does not mean that managed care is not aggressively trying to control lab costs and working to control lab costs. So, what I said is there is no utilization management in place for laboratory services and that most other services in healthcare do have some form of utilization management. We have a very small number of situations in which we are subject to preauthorization for a very limited number of tests, and I think this is something that is likely to increase over time.

I don't think the issue is over utilization, I think the issue is not ordering the right test for the right patient at the right time and I think, in fact, there are some circumstances in which better decision support would lead to more utilization of things like prenatal genetic screening where it is not being properly utilized today. So, I think long-term, the likely implications for us are relatively small. The hope is that it will encourage physicians and health systems to use testing more wisely and also to be cognizant of the cost of the testing that they are ordering when they make those decisions.

Okay, thank you.

Your next question comes from the line of Dane Leone with Macquarie. Please proceed.

Thanks for taking a questions, I'll try to be quick. Just for Dave, I guess if you could provide a high level outlook or change in thinking, perhaps, for 2012 than where you started the year, it would be helpful. Because the original guidance, EPS guidance for the year, I guess, did not include share repurchases. You did $122 million in the quarter and I guess presumably did not forecast the weather comp that I think added somewhere between $0.04 to $0.05 in EPS. By kind of reaffirming the guidance range, I guess there is potentially a view from the markets that you may become inherently more bearish on the 2012 outlook. So, I guess any color you can give to that. And then I guess for Brad, just a quick question on operating cash flow. It seems like for the first quarter, it's the lowest it's been since 2008, and I was just curious what the reason for that was. Thank you.

So Dane, this is Brad. We will go ahead with operating cash flow and I'll let Dave come back to the outlook. As we look at the operating cash flow for the quarter, it is entirely impacted by some working capital timing items. We are maintaining our guidance for the year and feel like that is still appropriate guidance on the cash flow. So, entirely working capital timing related on that metric.

So Dane, on the guidance, let me first -- this notion that somehow the weather accounts for a beat of guidance does not make any sense to me. It does affect the year-over-year comp, but our guidance doesn't assume that we are going to have terrible weather, our guidance assumes that we are going to have good weather. And your model I don't think assumes that we would have $0.05 negative of weather in there. So, I don't think the weather has anything to do with the beat this quarter. I think what has to do with the beat this quarter is good volume, good pricing, good discipline around expenses.

I'm not any more bearish than I was at the beginning of the year. I feel exactly the same way. We have one quarter in the book. We've always said that our guidance encompasses a wide range of outcomes, and we started out with what we feel is very realistic guidance. We didn't give you low guidance and allow ourselves a lot of room. We gave you very realistic guidance, and we are well within the range of outcomes that we expect. So, we will revisit the guidance next quarter, but I feel very, very comfortable. I think the year is going to shape up just as we've talked about. There's going to be better utilization trends, there is going to be better year-over-year comps for us because the comps get easier as we go along. And we are looking forward to a great year.

Great, thank you.

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

All right, thanks, good morning David and Brad. Just a quick follow-up on the pull-through whistle blower lawsuit. I'm obviously not going to ask you to comment on the merits of the overall case, because I doubt you want to do this on this call, but just procedurally, could the DOJ potentially still join this suit? And is there any deadline by which they either have to join or not join? Or should we just assume that if they haven't done it by now, they're not going to? Just really any color and how to think about that would be helpful as we ponder the -- this overall case. Thanks.

Sure. I think the fact that the government has chosen not to intervene and allowed the lawsuit to be unsealed is significant, because the suit was under seal for some period of time, the government, my experience did a thorough investigation and determined that they did not want to intervene in this suit. And I believe they reached the same conclusion with regard to a related suit that had been filed against Quest. However the government is never precluded from coming back and revisiting its decision not to intervene. So, when the papers are filed, when a judge makes a ruling, the government, up until the time the case is finally resolved, the government always had the opportunity to reconsider its position and advise the court said it would like to intervene. And obviously, we are hopeful that the government has done a thorough investigation and made a sound decision, but I can't rule out that they could change their mind.

Okay, that is helpful. Thanks, Dave.

Your next question comes from the line of Gary Taylor with Citigroup. Please proceed.

Hello, good morning, guys. Just two quick clarifying questions, first just going back to volume. When you talked about a 30 basis point contribution, you were talking about total acquired contribution. So, your view of the quarter is volume was 2.8 less 30 bips acquired, less 1.5 point weather is how you got to the 1% organic number you talked about earlier, is that right?

Yes.

Okay, and then second for Brad, there was a question earlier about G&A levels, and you had said something along the lines of considering this level as the right way to think about it forward. I wasn't sure if you are talking about as a percent of revenue on a dollar basis. Obviously, you had about a $10 million step down in the fourth quarter that very nicely carried through to the first. So, I guess on a dollar basis, should we assume that that grows modestly with revenue growth, but generally at these new lower levels, or is there anything through the year that might bounce that up?

Nothing through the year that I can think of. So, I would think of it on an absolute dollar basis before I would as a percent of sales because sales can vary. And bad debt would be the only thing I can think of that would make the absolute dollar value grow as sales change. And I would say that there are integration activities that are ongoing that are working to further help that metric. But I would be careful also with the overall dollars because there can be things like payroll days them vary quarter to quarter, but generally speaking, I think absolute dollars ability are something that we would strive for.

Sure, I just -- we had that nice step down in the fourth quarter that was kind of maintained, I just want to make sure that there is nothing material to that run rate that might be not contemplated, but it sounds like the answer is no.

Nothing we can think of.

Okay, thank you.

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

Good morning. Just a couple of follow-up questions. First of all, so obviously, we know what the weather impact was in volume, but by can you provide us with the same store growth excluding weather was for core?

No. We've given you the volume number, that is what we give, Ricky.

So, when we back into, based on the information that you've provided, I think you get to 2% core volume. Should I make the assumption that weather has more impact on one segment versus the other or more impact on core versus esoteric?

No. Look, the number we gave was 2.8%, 1.5% benefiting from weather in about 30 basis points benefiting from Orchid. So, that is 1% core volume growth. We also gave you the year-over-year esoteric growth. My view is weather is weather, it affects volume indiscriminately and largely equally, and I don't think there is anything in the 1% number that can be further chopped are refined to get at a better sense of volume.

Okay.

And certainly, I just -- we can pick apart these numbers all day long, but the reality is, the core business grew, the esoteric business grew, we feel good about both of them.

Okay, and then secondly, I know that you said in response to a question before that you feel exactly the same as you felt before. But, I actually get the sense that you feel better because you said that you actually expect better utilization trends for the remainder of the year, which I think in past quarters you said that the environment utilization, environment actually continues to be, to some degree, challenging. So, I actually see that the tone is more positive. So, is there something that you are seeing like Q2 to date or something that you see in terms of share shift that makes you more optimistic as to how volumes are progressing for the remainder of 2012?

Obviously, we're not going to talk about Q2 today. Again, I feel that we have been very consistent from the fall forward that we felt that we would see better utilization in 2012. We felt that over the year, utilization would pick up and return to what we hope will be a more normal environment as we get late in 2012 and into 2013 and that the comps would improve because last year we had deceleration. We feel exactly the same way. Don't feel better, don't feel worse, feel very confident and comfortable with the guidance range that we've given with the performance in the quarter and with the fact that we are executing well on our priorities.

Okay, thank you.

Your next question comes from the line of Lisa Gill with JPMorgan. Please proceed.

Hi, this is actually Gavin Weiss in for Lisa, thanks for taking my question. Just a quick one. To clarify your comments on the extra calendar day, I just want to make sure I heard you correctly. I know it was a leap year, but there was a timing around New Years. Your revenue days for the same, correct?

Well, the way that we analyze that, Gavin, is strength of days, and what Brad said is the strength of days was approximately the same year-over-year.

Okay. And then on Palmetto, and know it's set to go into effect May 1, are you still actively fighting this?

I think the -- we and ACLA have been working very closely with Palmetto. We feel like they have made some major improvements to their program, and we're hopeful that we're going to be able to have a collaborative effort in their endeavors to do a better job pricing and paying for molecular testing in our endeavours to make sure that we get fairly paid for the valuable service we provide.

Okay, great, thank you very much.

Your next question comes from the line of Anthony Vendetta with Maxim Group. Please proceed.

Hi, this is actually Brian in for Anthony, thanks for taking the question. I guess just first, could you elaborate a little bit more on -- sorry, you did answer that question. So, the drugs abuse testing, you captured share of drugs abuse testing over the last quarter for -- almost every quarter for the last couple of years, now. What is driving that share capture, and are you seeing strength of drugs abuse testing in areas -- in regional areas where you are stronger? Or how is pricing in that business?

Pricing in the business is quite stable. Obviously, as we have said many times, it's below our average price point per requisition. I think we've done a good job in drugs of abuse testing. Again, all of the underlying investments we've made in improving the quality of service at our patient service centers, all of the investments we've made in the touch system and Accudraw and all the things that we are doing, have led to, in my view, better and more consistent levels of service facing the patient, and that is what drugs of abuse testing is all about. So, I think it is -- the drugs of abuse testing game is great. The game is great. Leverage in synergy from the core business, from the patient service centers, from the transportation, the couriers, and I think all the investments we've made to improve service are why we are seeing positive results there.

Thanks, and then also, could you quantify or somehow frame the margin impact from the European operations of Clearstone? And what is the timeframe of the integration of those ops so that when will we start to see that margin improvement?

I don't think we want to get into that level of detail about that business.

Okay, not even on the timeframe of the integration?

Not even on the timeframe of the integration.

Okay, thank you very much.

Your next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed.

Good morning, thanks for taking the question. Just had one question to ask on the long-term picture for cash deployment. If you look at consensus estimates, it does appear that the street is more or less assuming that you sit on the majority of the cash that you're going to generate. Based on what you said in your previous commentary here, my question is, if you guys don't find a compelling acquisition opportunity, would it be conceivable that you would deploy all of your free cash share repurchase or dividends, particularly if the volume environment remains tepid beyond this year?

Well, yes, it is conceivable. I don't think it is likely, because I think there will be attractive acquisitions. But if we -- if there are not attractive acquisitions to make, we are certainly not going to sit on the cash and let it build.

Fair enough. Okay, thanks a bunch, that's all for me.

We are right at an hour, so we are try and be done here in the next five minutes, if we can.

Your next question comes from the line of Art Henderson with Jefferies & Company. Please proceed.

Hey, Dave, good morning. Can you remind us just what contracts are up for renewal this year on the managed care side? If you have any big national ones and how the outlook is there?

The only contract that is up for renewal this year on the national level is Humana, and we are engaged in discussions with them and feel quite comfortable about where we are. So, that's it for managed care in 2012. Major national managed care.

And what is the outlook in 2013 on that?

We have some renewals coming up in 2013 and again, obviously, it is very early in discussions and again, feel good that we will be in a good position to tell you more as things progress.

And Dave, did the Horizon/Blue Cross/Blue Shield, did that contract get resolved, or is that still ongoing as well?

Yes, we did renew their contract over a multiyear period on the same terms and conditions that were previously in place.

Okay, great. And then earlier you were talking about the HPV assay, is that a new DNA test? Is that -- refresh my memory on that.

What has happened is that other competitors have entered the market and normally, Art, we don't offer multiple versions of testing for the same analyte. But in this case, because of Roche being in the market and some other competitors having entered the market, we're offering multiple options for the physician to choose the HPV assay that they would like.

I see. Okay, and last question for Brad, the DSO, I know you talked about it ticking up, does it go back to the levels that we saw in the previous quarters?

I think so, yes.

Okay, thanks very much

Your next question is a follow-up from the line of Bill Bonello with RBC. Please proceed.

I will made a quick. I didn't know how to zero out.

Oh, are you done?

That is my question.

All right, thank you. Okay, well, thank you very much for listening. I want to make one additional comment. As you know, at the end of April, Dr. Mohapatra will be retiring from Quest, and I wanted to say that although a competitor, Surya has been a strong collaborators in our activities in ACLA and for the broader industry, and he has been a stronger advocate for diagnostics and for our industry. So, we will certainly miss Surya and wish him well in his future endeavors. And we wish you all a good day. Thank you all for listening.

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