Labcorp Holdings Inc (LH) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2012 Laboratory Corporation of America Holdings conference call. My name is Shenay, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today, Mr. David King, Chairman and CEO. Please proceed, sir.

Good morning and welcome to LabCorp's third-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, Adam Feinstein, Senior Vice President - Corporate Development and Strategy; and Steve Anderson, Vice President Investor Relations.

This morning we will discuss our third-quarter 2012 financial results, update our 2012 guidance, highlight our progress on our five-pillar strategy and provide answers to several frequently asked questions. I would now like to turn the call over to Steve Anderson, who has a few comments before we begin.

Before we get started, I would like to point out that there will be a replay of this conference call available via the telephone and Internet. Please refer to today's press release for replay information. This morning the Company filed a Form 8-K that included additional information on our business and operations. This information is also available on our website. Analysts and investors are directed to this 8-K and our website to review this supplemental information.

Additionally, we refer you to today's press release, which is available on our website for a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. These non-GAAP measures include adjusted EPS, 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 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 update our 2012 guidance.

First, cash flow. Our cash flow remains strong. Free cash flow for the trailing 12 months ended September 30, 2012, was $723.3 million. DSO was 48 days at the end of September, an increase of one day sequentially, and an increase of two days year over year. During the quarter, our bad debt rate was 4.3%. Cash receipts at the end of the quarter were lower than anticipated, but we expect them to recover during the fourth quarter.

Second, revenue growth. Revenue increased 1.1% year over year in the third quarter. During the quarter, total Company volume increased 1.4% year over year. There was one less revenue day in the third quarter, compared with last year. On a per-day basis, volume increased 3.1% and organic volume increased 0.5%.

Esoteric volume per day increased approximately 2.2% in the quarter. Revenue per requisition decreased 0.3% year over year. Revenue per requisition was negatively impacted by the MEDTOX acquisition and continued challenges in histology.

Third, margin. For the third quarter, our adjusted operating income margin was 18.2% compared to 18.8% in the third quarter of 2011. One fewer revenue day compared to last year had a 50-basis-point negative impact on operating margin. Also, the MEDTOX acquisition negatively impacted the year-over-year comparison.

Fourth, liquidity. We remain well capitalized. At the end of September, we had cash of $466 million, and $1 billion available under our credit facility. During the third quarter, we repurchased $127.8 million of stock, representing 1.4 million shares. Year to date, we have repurchased $380.4 million of stock, representing 4.3 million shares. At the end of September, $204 million of repurchase authorization remained under our share repurchase program.

In August, we completed a $1 billion bond offering that consisted of two tranches, $500 million of 2.2% senior notes due 2017, and $500 million of 3.75% senior notes due 2022. As previously disclosed, the proceeds were used to repay the balance of our existing credit facility, and for general corporate purposes.

Finally, we benefited from a lower tax rate in the quarter, bringing our year-to-date tax rate in line with the first three quarters of 2011. This morning, we updated our 2012 financial guidance. We expect revenue growth of 2.5%, adjusted EPS excluding amortization in the range of $6.88 to $6.93, excluding the impact of any share repurchase activity after September 30, 2012. Operating cash flow of approximately $915 million, and capital expenditures of approximately $145 million. I will now turn the call over to Dave.

Thank you, Brad. We are pleased with our performance, given that we continue to face a very difficult economic environment. During the quarter, on a per-day basis, volume increased more than 3% year-over-year and organic volume was positive. Taking into account one fewer day in the quarter, operating income margin was essentially flat.

We continued to generate strong operating and free cash flow, which we both invested in the business and returned to shareholders through share repurchase. We grew adjusted earnings per share 9.3% and 9.8% year-to-date on a year-over-year basis and we continued to measurably reduce selling, general, and administrative expenses as a percent of revenue.

We continue to make progress on each aspect of our five-pillar strategy. The first pillar of our strategy is that we deploy our cash to enhance our presence in key markets and our test menu, and to repurchase shares. In July we closed our acquisition to MEDTOX Scientific, a premier forensic and clinical laboratory with a diverse test menu, and a reputation for exceptional quality, dependability, and customer service.

We were excited about the opportunity to grow MEDTOX's specialized toxicology testing business, and we welcome the talented MEDTOX employees into our LabCorp family. The integrations are going well and in line with expectations. We continue to realize synergies on schedule and to offer new services in genetics, oncology, and esoteric toxicology. Finally, we have repurchased 4.3 million shares at a cost of $380.4 million year to date.

The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. After a successful pilot of our Beacon patient portal early in the year, we expanded the rollout to three of our six divisions nationwide. 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 have experienced fast adoption, maintaining growth of more than 2,100 new patient registrations per week, and we remain on track to launch the portal to the remaining divisions this year.

Our electronic medical record connectivity continues to expand. We have added over 6,000 new client EMR interfaces year-to-date, and are on pace to exceed our goal of 7,500 new connections in 2012. We remain committed to our open platform strategy, allowing our customers to connect seamlessly to LabCorp directly, or via the EMR of their choice

The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. During the quarter, we made significant progress in the rollout of our Vantage Positive ID system, which is now implemented in more than 40% of our core histology sites. This system standardizes work flow, eliminates waste, and positively identifies specimens throughout processing.

In the fourth quarter, we will complete the rollout of our new hand-held courier communication devices. This enhancement provides greater visibility into specimen collection, enables more robust route engineering, and increases courier efficiency. Given the persistently weak volume environment, we continue to closely review our cost structure.

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

During the quarter, we broadened the options for genetic carrier screening among our women's health offerings. We launched the Inheritest carrier screen, which allows us to provide relevant genetic screening for many inherited diseases, found throughout the pan-ethnic US population. The panel represents a collection of common diseases in the US general population, and we expect it to address needs from multiple ethnic-based testing scenarios. In addition, our genetic counselors will provide telephone or tele-video support for patients using our Inheritest carrier screen.

Sequencing is an emerging tool to support molecular diagnostics. Due to the rapid evolution of next-generation sequencing technology, we are well underway in our plans to support the launch of new testing panels. The transition of current testing to this platform will offer a more comprehensive content, relative to our current platforms.

As part of these ongoing efforts, we participated in a recent financing round for Foundation Medicine. Foundation is a leader in the use of next-generation sequencing to assist in treatment decisions for cancer patients by looking at patient-specific molecular changes in tumors. The information is used to report targeted therapies and relevant clinical trials specific to individual patients.

The fifth pillar of our strategy is to develop alternative delivery models. We continue to discuss alternative models with managed care partners, health systems and physician groups, so that we will be well-positioned in the future.

As part of our Beacon LBS implementation, we were pleased to announce the introduction of our first-generation point-of-care decision support product, which interfaces with our lab test ordering system. Providing physicians with convenient point-of-care decision support tools will facilitate evidence-based test selection, helping them choose the right test for the patient at the right time.

Physicians, patients, and our managed care partners will benefit from this product innovation, which has been designed to improve quality and more effectively manage costs without disrupting work flow. We have conducted three physician pilots in Florida, and these physician offices overwhelmingly told us that our decision support product was easy to use, beneficial to patient care, and made their practices more effective.

Health systems provide outstanding lab services, but most of these businesses make a small profit or operate at a loss. Changes in test mix, reduced reimbursement from government and private payers for all services, not just lab, and increasing costs of providing services make health systems more interested than they have been in the past in broad collaborations.

LabCorp offers a broader test menu, greater affordability for patients and payers, and the highest levels of quality and service to health systems and the communities they serve. We will continue to pursue this key initiative to offer an enterprise-wide solution that will provide health systems, patients, physicians and payers with the highest-quality diagnostic testing through the lowest-cost delivery model.

In summary, we are pleased with the quarter and the progress we 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 Medicare reimbursement cuts you will face in 2013? Absent any additional congressional action through the end of the year we would anticipate an approximate 2.75% reduction to the clinical lab fee schedule, beginning January 1, 2013.

The Affordable Care Act baseline for the 2013 update to the clinical lab fee schedule will be a negative 0.75%, effective January 1, 2013, based upon the recently published CPIU and productivity adjustment figures. As part of the Middle Class Tax Relief and Jobs Creation Act, the clinical lab fee schedule will be re-baselined an additional 2% lower, effective January 1, 2013. Separately, if mandatory sequestration is carried out, we will receive a 2% payment reduction in the clinical lab fee schedule, effective February 1, 2013.

Together, these reductions sum to an approximate annualized 4.75% total reduction to the clinical lab fee schedule, which represents approximately 12% of our revenue. On an annualized basis, we estimate that these reductions will lower our 2013 EPS by approximately $0.20.

In addition to the reduction in the clinical lab fee schedule, mandatory sequestration will impose a 2% reduction in the physician fee schedule, effective February 1, 2013. The physician fee schedule represents approximately 2% of our total revenue. On an annualized basis, we estimate that this reduction will lower our 2013 EPS by approximately $0.02.

Can you update us on the mix of your business coming from esoteric testing? For the year, approximately 40% of our revenues were in the genomic, esoteric, and anatomic histology categories. As we reiterated last quarter, our goal is to increase our esoteric test mix to approximately 45% of our total revenue, within the next three to five years. Now, I would like to turn the call back over to Dave.

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

(Operator Instructions)

Your first question comes from the line of Tom Gallucci with Lazard Capital Markets.

First question, with all the focus on volumes these days, Dave, do you guys have a view or what is your view towards what underlying market growth is out there?

I think it would be hard to characterize underlying market growth, just given all the different sites of care. Obviously, the market is growing more slowly than it has historically. I'd be reluctant to put a specific number on it. But my general sense from colleagues and peers is that the rate of growth has definitely slowed, and that the growth rates that you are seeing from independent labs across the board is probably somewhat impacted by shifting in sites of care, particularly hospital acquisitions of physicians.

So what you're seeing in terms of growth and obviously you're not seeing hospitals publicly reporting their lab numbers, but what you're seeing in terms of overall market growth is somewhat impacted by shifting in market dynamics.

Right. Okay. Then maybe on that topic as a follow-up, since the physician employment by hospitals seems to be shifting the lab testing over, what is your sense? There seems to be two pieces to this equation. What's your sense of where we are in that shift? Number two, you also mention, I think in your prepared remarks, that health systems are maybe more interested in working with you or others to put that testing in the most efficient setting. So where are we on both of those sides of the equation?

I think there has been, really over the last couple of years, a sizable movement toward hospital acquisition of physician practices, and we certainly see it in the marketplace. It started with what I would characterize as smaller practices, and now it's probably more moved into mid-size practices.

There's also a lot of consolidation going on even among physician practices, and when physicians consolidate their practices to get scale, many of them think about a physician office lab to do some on-site testing. So that has been, I would say, an accelerating trend.

I've seen numbers thrown around that say 50% of physicians work for hospitals, or 50% of new physicians coming out of medical school are going to work for hospitals. I think those numbers are on the high side. But there's definitely movement toward more hospital or health system employed or integrated delivery network employed physicians. And that's definitely -- that's a headwind. It's not a gale force headwind but it's a headwind for us in terms of growth, because we're seeing a shift in site of testing.

Right.

The other side of that is, that shift in site of testing also brings a significant increase in cost of lab services. And so, I think, over time there will be increasing pressure on the health systems to reduce the cost of lab services, indeed to reduce the cost of all of their non-core services, and that will be to the benefit of large independent laboratories and certainly to our benefit.

Just one clarification, and then I will hop off. On your revenue growth guidance it was 2 to 3. Now it's sort of 2.5, but I know before it didn't specifically include MEDTOX but you do include some acquisitions in there, generally speaking. So how do you guys view the adjustment to guidance when you put those moving parts together?

It does include MEDTOX. I would say given there's not far to go here in the quarter, that wouldn't assume much else.

Okay, but if we take the old 2 to 3, which didn't include MEDTOX, I don't think, and now the new 2.5, which does include MEDTOX, did you shift your underlying expectations at all, or how do we think about that piece of it?

I think if you went back and looked from the original guidance, and as you say, let's go back to the second-quarter guidance, it was 2 to 3, excluding, if we're now 2.5 including, it's pretty easy to do the math on what MEDTOX is likely contributing, about a point there, so that's 2.5 is 1.5 excluding any acquisitions, any major acquisitions like a MEDTOX. So, yes, I'd say we're below that 2 to 3 from the second quarter.

Good, just wanted to make sure there wasn't any other moving parts. Thanks a lot.

Your next question comes from the line of Gary Lieberman with Wells Fargo.

I believe one of the comments was that the average volume per testing day was up 3%. Can you give a little bit more color around that?

Obviously it was driven by, again, MEDTOX, which contributed, because of the nature of that business, a high amount of volume, and also had a negative impact on price. We did also say that our organic volume, which would have excluded MEDTOX and Orchid was 0.5% per day in the quarter. So that actually, and Dave mentioned this in his prepared remarks, was better than what we saw in Q2 on an organic basis, which was, I think, negative 0.5%. But we do analyze the business on a per-day basis. It rarely makes a difference in the quarter, but in the third quarter we needed to call it out.

That's helpful. Then going back to the comments and the discussion around the potential opportunities for partnerships with hospitals. There's been discussions for a long time. It sounds like it's coming to a head. Could you anticipate the rate with which opportunities or deals may happen, or is this still something that is pretty long-term in nature?

I think there's a much higher level of interest in collaborative models with hospitals than there has been historically. That said, these things do not move quickly, so when you think about when does the revenue impact come from a -- when do you sit down to start having these conversations, and when is there actual revenue impact? It's not unusual, particularly if there's a joint operating model, it's not unusual for transactions like this to take a year, to take 18 months to come to fruition. So, something we continue to work on.

I think there's a greater sense of urgency on the health system side now. Obviously, they are looking at some payment reductions at the first of 2013. They're looking at sequestration. The same headwinds that we have. So I feel good about where we are in terms of capitalizing on the opportunity, but they take a while to develop.

And then just maybe one final follow-up. In terms of thinking about the structure of those partnerships, would they be essentially LabCorp purchasing the business from the hospitals, or would they be some kind of joint venture partnership with the hospitals? How are you thinking about that?

I think there's a wide variety of options. Historically, we've had sizable lab management relationships with hospitals, where we run their laboratories. We've had sizable joint venture relationships where there's an ownership percentage that the health system owns, and we've had outreach acquisitions as well. So we're flexible, and a lot of it depends on the needs of the health system when we sit down to talk to them.

Okay, great. Thank you very much.

Your next question comes from the line of Robert Willoughby of Bank of America Merrill Lynch.

Dave, there's a lot of focus on the near term. There's been some talk in the industry, however, about a long-term return to historical growth rate in the 5% to 6% range. Is that remotely a realistic possibility now, with some of the reimbursements and other challenges you face? If so, how and when do you get to that kind of an experience?

Bob, I still believe in that in the long term, we are a 4% to 6% top-line growth industry, and for a variety of reasons. First of all, the technological developments, and the advances that we're making in laboratory testing are -- we say we're 3% of the spend, driving 70% of the decisions. We are increasingly becoming a smaller percentage of the spend, as other expenses go up at a more rapid pace, and yet we're driving more and more of the decisions.

I look at things like cancer diagnostics, next-generation sequencing technology for prenatal genetics, and for targeted therapies for cancer patients. I look at HCV and the opportunity in HCV screening with the new therapies that are being developed, with matching HCV patients to the right therapy. The list just goes on and on and on, in terms of where the growth opportunities are for our industry.

I don't think it's any secret that right now, given a very tough economic environment and a very tough utilization environment and a lot of pressure to reduce costs, we're struggling to grow, as are all healthcare services businesses. So I'm not discouraged about the long term. As I sit and look at the things that we're working on and the opportunities that are ahead of us, I'm more encouraged than ever about the long term and about being able to return to 4% to 6% growth.

But I think I've been pretty clear that it's not going to be next year, and we should start to see some improvement in 2014 and in the years beyond. And a lot of what we're doing in terms of capital investments and IT investments, and investments in partnerships is building the platform for where we think the business is going to go in the future, when we do return to that growth environment.

Do you think you're well-positioned if it's this higher-end testing opportunity which I agree with you, is significant. But can that really offset some of the hospital in-sourcing, histology changes? You mentioned a few things here. Do you have the assets in place to enable you to grow when that market does turn or will this be a continued focus on deals to bolster your capabilities there?

I think we have done a great job of building ahead. If you look back a couple of years ago and think about the initiatives that we undertook, we've always been about efficiency in the cost structure. We've been standardized for longer than I can remember, and when we make acquisitions, we standardize them right away and integrate them right away.

We implemented the touch system for our patient service centers, not only to improve the patient experience, but our phlebotomy experience. So we've made the investments in core infrastructure, to make the labs run better and be at the right point from a cost perspective. We're never done with that. There's always more that one can do from a cost perspective.

On the other side of the equation, where have we put our capital to work, when we started saying two years ago that we were investing in the ability to help physicians, with decision support at the point of care and better test management and test selection, we got some raised eyebrows, because that's not traditionally been the role of the lab.

But as you think about more and more molecular testing, physicians being more and more overwhelmed with test selection at the point of care, in my view, we've built exactly what we need. We're well ahead of the market in terms of the services that we offer, and something that I think in the long run really has the ability to move the needle for us. And then the investments in things like next-generation sequencing, and the investment in Genzyme Genetics, and all the things we've done to enhance the test menu.

Even MEDTOX, which looks like a routine acquisition, and in some ways is a routine acquisition, has the broadest menu in the industry of esoteric toxicology, which is going to become more and more important in things like clinical trials and I'm sure you have not missed that drug testing in sports and athletics is getting bigger and bigger.

So I think we've made all the right choices. We haven't been perfect. Not every decision has been perfect, but we've made the right choices, we've built the right structure, and we're where we need to be to -- when the market returns, we'll be right on the front edge of the wave.

Thanks, Dave. And if it makes you feel vastly better, you're growing faster than my business, so congrats on that.

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

So let me just start with one question around the organic volume. I know that on a per diem basis organic volumes grew 0.5%. There are just a lot of numbers here. On an actual basis, as reported, what would have been same-store volume?

Organic, not taking into account the extra day?

Correct.

Rather than trying to do this math on the phone, why don't we just take this up separately?

Sure. So then, moving on to my next question, when you think about the headwinds around Medicare reimbursement next year, based on the math that you provided us, and Street numbers, it is going to cost you about 3% in growth next year. So can you talk about how you plan to offset? I think it's built a little bit on the prior question, but how will you offset this headwind around reimbursement next year on the operational side? That's first.

Then second, if you can give us an update on your capital deployment strategy. I know we talked in the past about coming back to us with your plans around dividends versus buyback by year-end.

Yes. There isn't any really good way to offset $0.22 in earnings, especially when it's all price driven, because it's a flat reduction to the clinical lab and the physician fee schedule if the all happens. This assumes that sequestration happens. The 2.75% is in the books, and that's not going to change, unless Congress does something else. But if you assume both sequestration and the 2.75%, you get about $0.22 of earnings loss. And being realistic, there's not a lot we can do to offset that.

We've got some favorable pricing coming from other managed care contracts. We have some things that we can do on the cost side but most of that is just -- we've got to manage the business and do the best we can to find expense savings to make up for as much of it as possible. But we're not going to make up for all of it. That's just not realistic.

In terms of capital deployment, so far this year we've returned 82% of our free cash to shareholders through share repurchase, and I feel like we've done a very nice job of that over time. We continue to study the merits of how we would allocate our capital. Obviously continue to watch the political environment very closely, because of tax rate issues that may take effect at the beginning of the year. So we don't have a final decision yet, but in the meantime, we're going to continue to do what we have been doing in terms of returning value and returning our cash to the shareholders.

Okay. Thanks.

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

Dave, I was wondering maybe you could just give us some thoughts about how you see the lab industry post-reform. There's a lot of question about what these accountable care organizations will look like, and where lab testing will be done. I know you talked a lot about physicians already being known by hospitals, but can you just talk about 2014 and where you see opportunities and maybe challenges?

Then secondly, can you also size the opportunities around hospital reference labs, and how big of an opportunity do you think that is? And is there any way to quantify the number of opportunities over the next couple of years?

I think it's too early to predict what 2014 is going look like, Lisa. I'm not trying to be elusive, but I think there's no -- at least from what I've seen, and from what we've experienced so far with ACOs, there's very little commonality in the way that they're organized, in the way that they're structured, and their affiliations with health systems. I think it would be very hard to make a broad prediction about how ACOs are going to work in conjunction with labs.

I won't repeat the discussion earlier on health systems and integrated delivery networks and the need to reduce costs across the board, but I think the low-cost opportunity and the low-cost providers will have great opportunity in whatever environment healthcare reform ends up looking like. The other side of that is a lot of the 2014 calculations are premised on a sizable population moving into Medicaid. That's premised on Medicaid expansion, and it's not clear that Medicaid expansion is going to occur, or that it's affordable. I think 2014 remains a large question mark at this point.

As we think about hospital reference labs, and we think about that opportunity to work together, is there any way to size that opportunity, for us to say, okay, yes, there's challenges over the next couple of years, reimbursement, et cetera. But there's X percent that you think out in the marketplace you could have a relationship with or work together to be able to replace some of that revenue and increase volume to offset some of the pressure on reimbursement? Is there a way for us to all think about that?

There's a lot of numbers out there about how much volume is going through hospitals, how much of it is reference work versus work that has to be done in the hospitals. The single number that to me demonstrates the size of this opportunity is that, according to the Medicare Trustees Report, just for Medicare, which is paid to hospitals at basically the same fee schedule that we get paid.

Just for Medicare, in the last Medicare Trustees Report there was over $5 billion of lab work that went through hospitals. Not in the DRG, not in part A, but just outpatient lab work that was paid off at the clinical lab fee schedule that went through hospitals. So there's no revenue compression in that opportunity, there's no premium pricing for hospitals. That's just what hospitals are getting from Medicare beneficiaries that could be redirected to independent labs that could partially be redirected to independent labs, there could be joint ventures around.

Remember, that's where the cost differential is most noticeable to the health systems, because they're not getting premium reimbursement. They're not getting multiples of what independent labs are getting reimbursed. There's no number that I can give that you that says this is what we can gain in the next three years or this is what we'll be able to redirect.

But that's a number that you can look at and say there's a lot of volume going through hospitals that could more efficiently be performed by independent laboratories, and the key is figuring out how to make the hospitals the partner in that endeavour.

Oh, great. Thanks for the comments.

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

This is actually Sylvia in for Amanda this morning. I just had a follow-up on your previous comment, on HCV. I'm curious if you have seen any benefits of that guidance in your volume this quarter or how do you expect overall benefits or impact to fall in the short term or longer term?

I think the HCV opportunity is a longer-term opportunity. We haven't seen anything material, certainly in the quarter. But the CDC recommendation is that all adults, all US adults in the, quote unquote, baby boomer population be screened. The key will be to get that screening done at the primary-care physician point of service, because that's where the education needs to take place.

The HCV screen is not a hugely expensive test. That's one of the nice things about it. It's a low-cost test that can identify a long-term chronic disease with very negative health consequences. So I think we'll see it migrate into the numbers over the next three years, but I don't think you are going to see enormous jumps in HCV screening or HCV utilization in any one particular time frame.

Okay. Then I just had a follow-on on the sequencing panel you mentioned earlier. Can you give us a little more color on -- in terms of what disease types, or are your platform agnostic at this point, and do you have a preference for desktop of large box sequencers there?

At this point we're platform agnostic, and I think the determination of -- is it desktop or large box sequencer depends on the model and the volume expectations. So we've actually owned a sequencing business for quite a few years now that specifically developed sequencing panels around cardiovascular disease, and was built on a big box model. I think cardiovascular, obviously prenatal genetics and oncology are the biggest markets where we would look at the sequencing methodology.

Got it, thanks.

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

A couple questions. First of all, could you provide any color behind what was behind the lower cash flow guidance? I think in the prepared remarks, you talked about the cash receipts being lower this quarter but recovering in Q4. Just wondering also what was behind that.

It really goes back to the discussion we had earlier, I think near the beginning of the Q&A, around the top line. The cash flow generation I think starts with, and the reduction of our guidance the numbers we talked about, about our revenue guidance now being 2.5 with a point of that being MEDTOX. So that's below our Q2 revenue guidance, which excluded MEDTOX. We had not closed at that time. So it starts there, and acquisitions don't contribute immediately the same kind of cash flow that our regular business does. That's the first and foremost thing behind the cash flow revision.

Got it. Appreciate that. What about the cash received?

Oh, sorry. That was definitely a highlight for the quarter, and as I said, we expect that to turn around in the fourth quarter.

Okay. And then, Dave, adjusted operating income has been steadily declining this year. Obviously a challenging environment. You have done a great job over the years with cutting costs. Just wondering what can be done as we head into 2013? It sounds like you think this is going to be another tough year.

Yes. Kevin, I think in some sense, it goes back to the question Bob asked about how we feel about the long term. So if we believed that we're going to be in a 2% world forever, then looking at geographic -- looking at lab footprint and other things would be very high on the agenda, versus if you believe you are going to return to growth, you can cut yourself to the point where you're not ready to grow when the market returns to growth.

Given that, however, and given the general environment, we are basically reviewing every dollar of expense that we spend around here, and where there are opportunities for us, and that includes, as I think I've said often, our three biggest expenses are labor, supplies, and rent. When you start looking at the expense base, it's facilities, it's people, and it's the efficiency of your testing operation, and we're spending a lot of time looking at things that we can do to improve the cost structure, without a negative impact on customer service.

Again, for all the things we've done from a cost perspective over the last three or four years, we watch the customer service ratings very carefully, and our customer service ratings that we just received for the last quarter continue to be at all-time highs for the Company. So the last thing we want to do is cause a deterioration in service, which is only going to lead to further deterioration in our growth.

Exactly. Okay. And then we've seen a lot, or heard a lot from the payers about narrower network use, and then you are obviously the low-cost provider. Just wondering if you've seen or do you think there will be increased activity or movement by state and Medicaid programs shifting to more exclusive arrangements with low-cost providers such as yourself?

If I were to identify what I think is the biggest trend in state Medicaid, it's managed Medicaid. It's moving completely away from the idea that the state is going to run these programs and moving them instead into programs that are run by private companies. And it again there, you're negotiating with a private insurance company just the way you are when you're negotiating a health system -- sorry, when you're negotiating a standard contract. I wouldn't be surprised to see that continue.

Medicaid does not pay particularly high rates, Kevin, and they pay -- there is sort of no in-network, out of network. There's no premium for people who are out of network the way there are for some of the managed care plans. I don't know about narrower networks so much as ways they can reduce the overall unit cost.

Got it. Thanks, Dave.

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

This is Dana Vartabedian in for Darren. Can you comment on whether or not you've experienced any sort of pricing pressure in anatomic pathology, especially as it relates to prostate? And if you can, about how much of your pathology business does prostate represent?

I don't think we've experienced pricing pressure. As we've talked about historically, the physician in-sourcing has been volume pressure, but I don't think we've experienced pricing pressure, and nothing specific with respect to prostate biopsies, no.

And can you comment about how much of the pathology business that makes up?

I could not tell you off the top of my head, sorry.

No problem, thanks.

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

A few quick questions. Brad, this is the third year in a row where that 3Q tax rate is lower than the other quarters, so obviously that's starting to look pretty recurring. Would that be your expectation for 2013 as well?

Yes.

Okay. And that's just seasonal, state or --?

Gary, it goes back to, without getting into a lot of discussion about accounting, the adoption of FIN 48, which was several years ago. It really has led to your observation.

Got it. Then you commented that both MEDTOX and histology were the drivers of the negative aggregate revenue per requisition. Can you quantify the MEDTOX impact on that?

No. We're just not going to break it down to that level. MEDTOX, because of a lot of the routine toxicology testing, employer drug testing is a lower price point than our average price point, and that's why it creates some drag.

And you had said -- what about on margin? You said 50 basis points -- I'm sorry, actually you said 50 basis points from the one less revenue per day but you also called out MEDTOX as an impact on year-over-year margin. Can you quantify that?

No.

Okay. I'm striking out here.

You're one out of three. You're still at hall of fame numbers.

Those were just yes or no questions, so this last one will put me either at 0.250 or at 0.500, I guess. I'm going ask you the question that investors ask me the most. I know it's something that you've given some ongoing consideration to, but given the environment and the lower growth rates, one of the compelling characteristics of the business is the robust free cash flow generation.

And so over and over again, investors say why not a dividend? And most people would understand the pros of giving a dividend and some of the premium valuation that's afforded to stocks that have one. What's the obvious stuff on the counter side to why not to institute a dividend in the future?

I think you can make a convincing argument for both sides, and that's why it's not an easy answer. If the were an easy answer it would be -- we would have answered it a long time ago. If I think about the reasons why one would not pay a dividend. First of all, we look back at the last, since 2008, we look back at our share repurchase and the stock is up about $20, so about 30% since the beginning of 2008.

And the delta between what we've paid for the shares and the current price, or the price as of the beginning of the week, was another 15%. On a five-year time frame, that's pretty impressive performance for return to shareholders based on share repurchase, and I'm not sure that you add much to that type of performance by paying a dividend. And I think that's -- the issue is the long term.

If you look at the last year or the last two years, and where the stock has been, obviously you can make an easy case to say you would have gotten more total shareholder return out of a dividend. But our job is to look at what's in the long-term best interest of our Company and our shareholders.

And it's not self-evident that companies that pay a dividend actually maintain premium pricing over time versus share repurchase, or that they end up providing a greater level of return to their shareholders than companies that use share repurchase. So those are the considerations. Again, if this were a slam dunk, we would have made our decision a long time ago.

I appreciate that. Thanks.

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

This first question, you said that because of one fewer revenue day you had a 50-basis-point operating margin impact. Is that in line with the benefit that you saw in the first quarter, given the extra day and due to the leap year? I'm just trying to reconcile that.

Dane, if I go back to our first-quarter comments, I think we said the days were approximately the same as Q1 11.

Right.

This is revenue days as opposed to calendar days. It's just how many days of revenue do you generate, and the fact that there was a leap day in the first quarter doesn't necessarily lead to an additional revenue day. If you look back at the first-quarter transcript, obviously we covered this, where the holidays fall and where the January 1 holiday fell this year make a difference in terms of revenue days.

Got it. Okay. The macro question here is something that we haven't touched on yet. But looking at the past three years, or the last two years specifically, 2011 and year to date this year, it's clear that there seems to be an underlying trend of lower medical utilization, and we spoke about unemployment, but something that we get a lot of questions about is around the consumer-driven health plans impacting lower medical utilization and consumers just avoiding or being more conscientious about the testing that's done in the physician office.

I was just curious if there was any data points that you had that could either confirm, deny, or shed some light onto this trend as, under current healthcare law, or under the healthcare reform, it seems like this trend is going to continue for some years, as it relates back to the Cadillac tax that corporations are trying to avoid. So I'm not sure if you have any data points, but that would be helpful.

I think the biggest data point we have is that the percentage of our billings that end up being the responsibility of the patient continue to increase. And they particularly continue to increase in the first and second quarters of the year. So it's clear that consumer-driven health plans are causing patients to have more responsibility. It's clear that consumer-driven health plans are dampening utilization. Hard to point to a statistic, but just anecdotally.

If you look at the Kaiser Family Foundation studies on patients, people who are surveyed who have decided to forego care, that's a pretty compelling statistic about what the consumer-driven health plans are doing. I do think, as we get to the next phase of the consumer-driven health plans, which is pricing transparency for patients, again, the lower cost, more efficient providers are going to benefit, and that's where we'll be in an excellent position.

Great. Thanks.

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

One follow-up question on volume. Just wondering if you could comment on the pacing throughout the quarter, did it improve or decline when you adjust for seasonality?

We don't talk about the pacing of volume within the quarter.

Okay. Then on the Foundation medicine investment, interesting technology, obviously same time frame, uncertainty on how these tests are going to be regulated over time. Just wondering what your expectations are for how the regulatory and reimbursement process will evolve in that market in 2013.

I don't think you will see a lot of activity in regulatory or reimbursement with the Foundation in 2013. Obviously we're passive investors, so we're not running that business. But the reason that we invested in the Foundation is because we like the technology, we like the leadership, we like the other investors, and we think it has the potential to be where cancer diagnostics goes, particularly complex diagnostics over time.

So it gives us a good opportunity to get a look at how cancer diagnostics is evolving without having to make huge capital commitments within LabCorp. That's the reason why we made that investment and look forward to seeing it evolve over time.

And maybe if I could be a little more specific, not just on Foundation but in the category of genetic testing in general, you have obviously a lot of changes being proposed through TMS and some of the parties with whom they work. Just wondering, again in general, if you look at genetic testing as a category do you have a specific view on how that market will evolve? That's obviously a source of potential upside given the contribution of those type of tests to your business. That's why I ask.

The market clearly is going to evolve toward more genetic testing through a sequencing platform, which means there's going to be a considerable amount of more information provided at a lower cost, and part of the challenge is going to be the interpretation of that information by physicians who are delivering services.

But I just point you toward -- I think it was within the last three weeks, there was an extensive article in the Wall Street Journal about the genetic research that's being done on autism, and the sequencing methodology for the different academic institutions that are using sequencing methodology to try to get the genetic as opposed to the environmental bases of autism.

This is going to be an area that's going to continue to grow. The sequencing methodology is going to continue to grow. We've invested in it directly in our business, but we also will continue investing in it through partners.

And with that, ladies and gentlemen, I think we're going to wrap it up for this morning. We appreciate your listening to our call today and hope you have a great day. Thank you.

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