Labcorp Holdings Inc (LH) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first-quarter 2014 Laboratory Corporation of America Holdings earnings conference call. My name is Glen and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session.

(Operator Instructions)

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

Thank you. Good morning and welcome to LabCorp's first-quarter 2014 conference call.

Joining me today from LabCorp are Brad Hayes, Executive Vice President and Chief Financial Officer; Ed Dotson, Senior Vice President and Chief Accounting Officer; and Steve Anderson, Vice President, Investor Relations. This morning we will discuss our first-quarter 2014 financial results, update 2014 guidance, highlight our progress on our five-pillar strategy, and provide answers to several frequently asked questions.

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

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

Additionally, we refer you to today's press release, which is available on our website, for a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. These non-GAAP measures include adjusted EPS excluding amortization, free cash flow, and adjusted operating income.

I would also like to point out that we are making forward-looking statements during this conference call. These forward-looking statements include, among others, statements about our expected financial results, the implementation of our business strategy, and the ongoing benefits 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 2013 10-K, and will be included in subsequent filings with the SEC. The Company has no obligation to provide any updates to these forward-looking statements, even if our expectations change.

Now Brad Hayes will review our financial results.

Thank you, Steve. On today's call I will review four key measures of our financial performance: cash flow, revenue growth, margin, and liquidity. I'll also update our 2014 guidance.

First, cash flow: our cash flow continues to be solid. Operating cash flow for the quarter ended March 31, 2014, was $142.3 million. We estimate that weather had a negative impact on operating income and a corresponding impact on cash flow of $32 million. DSO at the end of March was 52 days, which was up three days sequentially, and up two days year over year. We continue to experience claims being subject to higher deductibles and co-insurance. Accordingly, we raised bad debt by 25 basis points in the quarter, and continued to focus on initiatives to improve patient collections.

Second, revenue growth: revenue decreased 0.7% year over year in the first quarter. Excluding the impact of weather, revenue would have grown approximately 2% compared to last year. During the quarter, total Company volume increased 2.6%. Excluding the impact of weather, volume growth would've been approximately 5%, and organic volume would've increased approximately 2.5% year over year. Revenue per requisition decreased 3.3% year over year, primarily accounted for by Medicare payment reductions, test mix, and the Canadian business. It is important to note that managed care revenue per requisition was flat sequentially.

Third, margin: for the first quarter, our adjusted operating income margin was 14.7%, compared to 18.7% in the first quarter of 2013. During the first quarter weather reduced the Company's margins by approximately 180 basis points.

Fourth, liquidity: we remain well-capitalized. At the end of March, we had cash of $338.9 million, and no borrowings outstanding under our $1 billion credit facility. During the first quarter we repurchased $106.2 million of stock, representing 1.1 million shares. At the end of March approximately $946.3 million of repurchase authorization remained under our share repurchase program. Our share repurchase activity during the first quarter reflects our continued disciplined capital allocation program, and commitment to return capital to our shareholders.

Despite losing $42 million of revenue and $0.22 of earnings to weather in the first quarter, we raised our 2014 earnings guidance. Our updated guidance is for revenue growth of approximately 2%, adjusted EPS, excluding amortization of $6.40 to $6.70, operating cash flow of approximately $780 million to $820 million, and capital expenditures of approximately $185 million to $205 million. The guidance excludes the impact of any share repurchase activity after March 31, 2014.

I will now turn the call over to Dave.

Thank you, Brad.

We are pleased with our first-quarter results. During the quarter we delivered volume growth of 2.6%. Excluding the impact of weather, volume growth would've been 5%, and organic volume would've increased approximately 2.5% year over year. We continue to execute well on our key growth initiatives.

Although our revenue per requisition was down 3.3% year over year, managed care revenue per requisition was flat sequentially. During the first quarter, inclement weather negatively impacted revenue by an estimated $42 million, and EPS by approximately $0.22, yet we raised our full-year 2014 earnings guidance. In addition to our continued development of Beacon LBS, we significantly expanded the fifth pillar of our strategy by introducing Enlightened Health during the first quarter.

I would now like to update our progress on each aspect of our five-pillar strategy. The first pillar of our strategy is that we deploy capital to investments that enhance our business and return capital to shareholders. We repurchased $106.2 million of stock during the first quarter, representing 1.1 million shares. Our share repurchase brings us almost to our stated target leverage ratio of 2.5 times debt-to-EBITDA, and demonstrates our continued commitment to return capital to shareholders.

Our acquisition pipeline remains robust, and acquisitions should continue to provide an attractive way to expand our test menu and geographic footprint for several years. We will maintain a disciplined approach to valuation as we seek optimal strategic opportunities.

The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. We continue to see strong customer adoption of our enlightened health care intelligence platform for managing practice and population health data. This platform helps clients unify the multiple components of population health management, providing primary care physicians with complete access to their patients' health care picture, rules for monitoring gaps in care, and reporting that addresses more than 600 quality measures.

Enlightened Healthcare Intelligence helps providers reduce expenses, improve outcomes, and enhance patient satisfaction. The robust rules engine is highly customizable, and provides compliance with meaningful use requirements, as well as ACO, JACO, and PQRS reporting requirements. These industry-leading, data-driven services position LabCorp as a trusted partner to health care stakeholders, providing knowledge to optimize decision-making, improve health outcomes, and reduce treatment costs.

We continue to improve tools that assist physicians and patients in understanding test results and optimizing decision-making. We are pleased with the recent HHS ruling which provides access to lab results for all patients. Our patient portal, which has over 475,000 patient registrations and is growing daily, is well-positioned to support this need, and we can also deliver results directly to physician and health system portals, where patients can conveniently review them.

Looking ahead, we will focus on providing additional content to our patient portal to further assist patients in understanding their lab testing results and needs. We will assist our customers in analyzing their population health and clinical practice data with new tools for hospitals, physician practices, and ACOs, supplemented with insights derived from our extensive patient database. We are working with clients to use our data to benchmark ordering patterns, and to determine pre--clinical markers in specific diseases. Insights gained from these efforts help payors and physicians better manage health care expenses and optimize patient outcomes.

The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. We are in the assessment stage of our comprehensive enterprise-wide cost structure review. It is too early for us to estimate the magnitude of opportunities to further streamline our operations and reduce costs. We will provide additional color on these initiatives on our second-quarter earnings call in July.

The second installation of our Propel robot is live in our major laboratory in Tampa, and is now processing approximately one third of the facility's volume. We intend to begin the next installation of Propel in our Dublin, Ohio, facility early next year. Propel continues to drive expense reduction, increased throughput and accuracy, and enhanced specimen management at our Burlington lab. We continue to consolidate facilities into our new Phoenix campus, and we are now processing more than 23,000 specimens per day at this state-of-the-art facility. As part of our cost-structure assessment, we will evaluate our potential to consolidate additional facilities.

The fourth pillar of our strategy is to continue scientific innovation at reasonable and appropriate pricing. We introduce 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.

We recently announced the availability of Thermo Scientific ImmunoCAP allergy testing products from Thermo Fisher Scientific, Inc. Allergies affect approximately 60 million individuals in the United States annually, and this population is growing. There is also a well-documented relationship between allergies and asthma. LabCorp offers an extensive test menu to assist medical practitioners in determining whether a patient's systems support or rule out an allergy diagnosis, thereby suggesting other etiologies.

We continue to see strong growth across our suite of BRCA tests for the assessment of breast cancer risk. Our BRCA testing menu includes a comprehensive panel of BRCA1 and BRCA2 complete gene-sequence analysis and deletion-duplication testing, targeted analysis tests for other family members once a mutation is identified and a panel for mutations prevalent among people of Ashkenazi Jewish descent.

In combination with our care coordination pre-authorization service, LabCorp offers an end-to-end program that includes compliance with insurance requirements, comprehensive testing, and expert interpretation for our licensed directors -- from our licensed directors -- and a team of 123 board-certified genetic counselors and nine medical geneticists.

In addition to our next-generation sequencing offerings for familial cardiac diseases, and the pre-clinical and clinical development of new HIV and HCV antiviral drugs, we recently announced the launching of our first multi-gene oncology panel, primarily for solid tumors on the NGS platform. Over the next several quarters, we will continue to expand our NGS offerings.

To support this growth in next-generation sequencing opportunities, we recently acquired the former Covance Genomics Lab in Seattle, Washington. The capabilities of this leading next-generation sequencing laboratory include whole-genome and whole-exome sequencing, RNA-seq, MIRNA-seq, and other specialty NGS sequencing technologies.

The fifth pillar of our strategy is to develop knowledge services. We are now just a few months from launching Beacon LBS across United Healthcare's physician and patient base in Florida. Beacon LBS provides decision-support tools to help guide lab and test selection, access to a lab of choice network, and clinical and administrative rules engines for claim adjudication. Beacon LBS assists physicians in managing lab ordering, leading to better management of patient conditions and lower costs. We are excited about the valuable services that Beacon LBS offers physicians, patients, and payors, and we will provide updates on this important initiative later this year.

Last month we launched Enlightened Health, which offers multiple capabilities to patients, physicians, health systems, and pharmaceutical companies. Enlightened health will include our patient-facing capabilities, including ambulatory monitoring and the patient portal; physician and health-system-facing capabilities, including clinical decision support, care intelligence, and advanced analytics; pharmaceutical capabilities, including our clinical trial, central laboratory, and data management businesses, and several capabilities that touch multiple stakeholders such as our genetic counselors.

Enlightened Health will continue to build capabilities organically and through acquisition to capitalize on our unique assets, diversify our revenue base, and meaningfully differentiate LabCorp from the competition. We look forward to providing updates on these initiatives over the next several quarters. We have positioned LabCorp to grow and excel through health care reform, an era in which quality, efficiency, scale, and a central role in improving patient outcomes will be the key measures of success.

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

Thank you, Dave.

Can you elaborate on LabCorp's capital allocation policy?

As we have stated, we are committed to achieving a 2.5 times debt-to-EBITDA ratio. Based on our capital allocation history, we target half of our free cash flow for acquisitions, and half for share repurchase. We have a strong history of returning capital to our shareholders. Over the last decade we have repurchased $5.6 billion of our stock, representing 78.1 million shares, at an average price of approximately $71.

Can you provide us with an update on your MOPATH payment issues?

We are engaged with a number of states and Tricare to receive payment for these tests, most of which have long been covered, are standard of care, and are included in physician practice guidelines. We are making progress with some states, but the process is slow, and resolutions are still uncertain. The MOPATH code changes, system problems, and the complex procedures in some states have led to unconscionable delays in reimbursement. As ACLA noted, these coverage denials for standard of care tests establishes a second-class health care system for Medicaid and military beneficiaries.

The refusal to pay laboratories for these critical tests is not sustainable, and patients will ultimately suffer. In addition, we will continue to raise these non-payment issues with members of Congress that have key interests in the health care needs for, and appropriate treatment of, active duty personnel and their families. We are finally starting to see recognition by some payors that they have to constructively address this situation. We will update you on these important initiatives on future earnings calls until they are resolved.

How big of an opportunity is the recently released Alberta RFP?

The size of this opportunity is approximately $200 million annually, and the RFP is for a sole-source private provider. DynaLIFE is currently the sole-source private provider in Alberta, and we are a minority partner in this business. The performance of this joint venture is captured on the equity method income line item on our P&L, and is not consolidated in our revenue line.

Can you remind us of how drugs-of-abuse volume trended over recent quarters?

In the first quarter, our organic drugs-of-abuse volume increased approximately 10% year over year. This compares to year-over-year organic increases of 15% in Q4 of 2013, 14% in Q3 of 2013, 10.6% in Q2 of 2013, and 10.2% in Q1 of 2013. We also delivered strong year-over-year growth this quarter in our wellness and pain management businesses, which fall within our occupational testing services operations. We believe wellness and pain management testing will provide a great growth opportunity for LabCorp over the next several years.

Now I'd 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)

Robert Willoughby, Bank of America Merrill Lynch.

Hi Dave and Brad, can you comment on specific M&A in the quarter, what you may have acquired, and perhaps after the quarter what kind of activity have you participated in?

Hi Bob, it's Brad.

Nothing significant in the quarter to talk about in terms of its contribution, especially. We take all of that out when discussing our organic volume growth number. Then on the future, and what's in the pipeline, I'll defer to Dave.

Good morning, Bob. Obviously there have been some transactions. We've looked at a number of things that we, for a variety of reasons including valuation, have not been -- have not felt were good opportunities for us. But the pipeline is quite robust, and we're looking at a number of opportunities that we think are both exciting for the long-term, and have the potential to continue on the growth trend that we've established here.

I guess I'm a little surprised, Dave, this magnitude of the share buy-back wasn't bigger, given where the stock was, and the absence of many deals. Why wouldn't have that -- you taken advantage of the stock price at the lower levels?

Our philosophy is we try to be consistent in terms of share repurchase. Yes, the stock was at a lower point throughout much of the quarter. I will say, however, that also for much of the quarter there was quite a bit of overhang from the potential for significant government reductions, the CMS administrative proposal to be able to cut the fee schedule, the looming SGR fix.

I think there was a lot of concern about how the share price was going to perform. We don't try to be market timers. We try to take very consistent approach to -- we buy more when the price is down. We did buy more this quarter given that the price was down, than we would have bought if the price was higher.

Okay, last one, Brad. Can you just remind us what's in the guidance and what's excluded from the guidance? There's no incremental share repurchase or incremental acquisitions, but do you have the Brock analysis in there now and the oncology panels in the guidance?

Yes, and you're right on share repurchase and it excludes anything after March 31, 2014.

Okay. Any other items out there that you're still excluding?

I think some of our stance on some of the items that we said in the past was similar, so MOPATH, for example, no assumption of any recovery there. Steve, there's I know a laundry list of things we went over, but I can't think of a significant change from the last time we updated.

No significant --

(multiple speakers) of those items.

Correct.

Okay. Thank you.

Bill Bonella, Craig Hallum

Dave, I have a question. You spent a lot of time talking about Beacon Health, and especially Enlightened Health. I'm just wondering if you can give us a little bit more color on how those programs actually generate revenue, and maybe some sense of the magnitude of the opportunity with those programs, the kind of profit margin that they have? Anything that lets us get our arms around whether this is a significant new driver of revenue and profit for you? Then I have a follow-up.

Sure. The answer to the question is, today they are not significant drivers of revenue and profit, other than the clinical trial central lab business will reside within Enlightened Health. As we've said I think a number of times, that's approximately a $150-million revenue business and that's a business that is evidenced by our acquisition of the genomics lab in Seattle, which we are very pleased about that opportunity we continue to grow.

The other aspects of Enlightened Health -- I would describe them as internal start-ups. They are businesses that we are starting to capitalize on. For example, our genetic counselors and the asset we have with genetic counseling, and ways in which the genetic counseling capabilities can be independent revenue generators, for example, with interpretations of genetic testing results with interpretations of sequencing.

Obviously, we will continue to give you more color around this, Bill, as these turn into revenue-generating businesses. But I think this is a terrific opportunity for us from a strategic perspective, putting all the data analytics capabilities, all of the assets that we already have into a business that's focused on capitalizing them, facing the patient, facing the physician and health system, and facing the pharmaceutical sponsors is a great long-term opportunity for us.

On the Beacon LBS side?

Yes. I think Beacon LBS is -- again, in the long term, is a terrific opportunity. Because as I think is fairly well recognized, lab is one of the last aspects of ancillary services in health care that basically has very limited management.

The management tools that are there, such as blanket pre-authorization policies for all molecular testing that we're seeing from some payors, are the proverbial blunt instrument using the sledgehammer to address a much more targeted concern. I think Beacon LBS will be a significant tool that will not only help with trend management, but will also help with selecting the correct test for the patient at the correct time.

I will say parenthetically with regard to Beacon LBS, there is no question that the margin in that business will be a lot different from the margin in our core testing business, because it's not a testing business, it's more of an administrative, decision support, and management business. We need to think about that as we roll it out over time. But I think in terms of generating revenue and enhanced opportunities for the Company, it's a terrific long-term opportunity.

At this point, are you prepared to give us any more specifics about how you actually generate revenue? What the source of that revenue is?

Let us get it up and running, and then we'll give you more detail around exactly how the revenue is generated, but we will be prepared to address that once we get the pilot up and running.

Okay, thanks. Thanks a lot.

David Clair, Piper Jaffray

I was hoping to get some additional color on the MOPATH reimbursement issue we've see? So what was the impact in the quarter? When you say you're making progress, are you getting paid on the backlog in some of these states?

David, it's Dave.

The impact on the quarter was not terribly significant. It was probably a little bigger than the impact on the quarter last year, just because in the first quarter of last year we didn't see a huge denial rate. When we say we are making progress, we are engaged with some of the key states where we have been experiencing difficulties. Of course we've been heavily engaged with Tricare, which is one of the real pain points for us.

I think there is increased receptiveness from their perspective. There have been some commitments made about payments of going forward and retrospective payments, but commitments made and dollars delivered are two different things, and we haven't seen the dollars delivered. This is a high-priority issue for us.

Unfortunately, this is an issue where, at some point I think the industry and ACLA has been very much engaged in this. At some point the industry is going to have to make a decision about providing free services to these beneficiaries, given that the payors are simply indicating that they decided not to pay for tests that are standard of care, that have always been covered, and that are critical to delivering appropriate and proper health care to the patient population.

Okay. Thank you. Just a quick question on BRCAssure and your NIPT business. Maybe you can give us an update on how these are performing compared to your original expectations?

I would say BRCA is performing, in terms of volumes, very well, and probably better than our original expectations. NIPT at this point has been in the mix for quite some time. We're continuing to see strong growth there in terms of volumes, so we're pleased with both of those businesses.

Okay, thank you.

You next question comes from the line of Darren Lehrich, Deutsche Bank.

Thanks, good morning, everybody.

My question really is about the guidance. You absorbed a little over $0.20 of weather impact, which wasn't in the original outlook, and you're adding $0.05 back in. Dave, if you could maybe step back and help us think about what is in the outlook that has changed versus where we were, and if there's any things that you feel like need to be called out around what were in your original assumptions would be helpful, to square that over-$0.25 differential?

Darren, good morning. It's Dave.

Obviously there were a couple of positives during the quarter. The SGR fix was resolved in a way that did not have any near-term impact. ICD-10 was postponed for a year, so some expenses that we expected that we were going to have to absorb this year, we don't have to absorb. Then obviously we had a pretty significant weather impact.

The positives, we have some expectation that BRCA is going to be positive from a volume and a price perspective. We have not changed our assumptions on MOPATH -- that is, we assume it will be about the same. We continue to exclude the impact of any significant M&A transaction that might occur. We continue to exclude the impact of share repurchase. We haven't factored anything in for the cost reduction program.

There was, in the quarter, a gain on an investment that we made in a publicly traded company that benefited us. All of those things -- and we still own some shares in that company, so there is the potential for us to realize an additional gain if we sell those shares during the balance of the year.

Obviously, the full-year impact of the repurchase that we did in the quarter also is in whatever we are going to do, even if we didn't do any more share repurchase. I'm not saying we're not going to do any more share repurchase, but the full-year impact of that share repurchase is something that we take account of. Although again, we don't assume any further share repurchase in the numbers.

If you just look at our reported EPS, which is $1.51 net of the $0.22 of weather, and you look at what the expectation was, which was $1.60, we are quote unquote $0.09 under. What we're saying is that we feel given the strength of the business in the quarter and given what we see unfolding for the rest of the year, that we will be able to make up that $0.09 differential, and add an additional $0.05 of earnings. That's how we come up with the revised guidance, which basically raised the top and bottom end by $0.05.

I hope that's a sufficiently thorough accounting of how we get there. Again, the guidance is a range, it's not a point. The guidance is a range, and we're looking at the entire range of outcomes that might occur during the year in trying to provide you with a accurate expectation of where we think we're going to come in.

That's very helpful. Just so my math is close on the gain, it looks like it comes out to about a $0.05 gain in the period. Is that about right?

That's right.

Okay. Maybe just to follow-up and I will jump off after this, just to clarify. In your mind the biggest sort of swing factor now in the guidance, aside from M&A and buy-back, which we generally are used to seeing, but the biggest swing factor would be some resolution of this molecular pathology issue. Is that the right way to think about it?

I don't really think about it that way. I think the biggest factor in where we come out in the guidance range is the underlying growth of the business and the price. We had a terrific -- from a volume perspective, we had a very strong quarter. The pricing, a combination of we had the impact of sequestration -- which we didn't have in the first quarter of last year. We had a little bit of MOPATH. We have a small -- well, we have a reduction in the physician fee schedule based on some code revaluation and a reduction in the clinical lab fee schedule, which is a part of the original ACA. We still have the 1.75% reduction.

We had some test mix issues with big growth in toxicology, which depresses price. We had the impact of the Canadian business, which both the government price cut, increasing utilization and the exchange rate all dragged on price. Certainly if we get paid for MOPATH that will help us in terms of the guidance, but what will also help us is continuing to grow the business and seeing some positive movement in the pricing.

Got it. Okay, great. That's helpful.

Your next question comes from the line of Gary Taylor, Citi.

Not to be redundant -- I just want to go back to the guidance for a second. I certainly understand all the mechanics and the pluses and minus.

Just broadly, when you think about you gave guidance, weather was certainly much worse than the guidance had anticipated. You had a gain in some repurchase, a couple other things, but still generally to raise the guidance in the face of that weather headwind, you just generally have to feel better about something. It just sounds like there wasn't any explicit singular item, but just in general when you look at the total range you feel good about where you're at. Is that fair?

I think that's fair. I think we have answered the question in great detail in terms of what the components are. Obviously we wouldn't be raising guidance if we didn't feel there was a reason why we would do better than the initial guidance that we put out.

Yes. I couldn't understand in that what isolated got better, but I know it was a very detailed answer.

On the gain in the public company, could you share with us what that was, or is that private?

It's Foundation Medicine, and we were an original investor in the company. When it went public our shares obviously became public shares, and when the lockup expired we had the ability to sell them.

Okay, great. One more small question. I just wanted to make sure -- on the 2.5% organic growth adjusted for weather and so forth that's pretty close to our number -- but I think Brad had said that excludes all tuck-in acquisitions. I apologize -- I know this has been asked in prior quarters, but I was under the impression that some of the small tuck-ins were kind of captured in that number.

I just want to make clear, that 2.5% excludes any of even the small tuck-ins you do?

Gary, it's Brad.

That was probably back in Bob Castello's question. The small tuck-ins we don't go through the exercise of excluding those. What's excluded from that number are the larger-type acquisitions where they have an impact on the -- especially on the volume.

Great. Last question for Dave. Just going back to the new lab pricing methodology that was in the doc-fix legislation. I know the ACLA was in favor of that. A couple of the other lab lobbies voiced some opposition to kind of how the final rule came down. It's very clear that the new pricing that would be developed would apply to any hospital billings under a clinical lab fee schedule.

But what is a little less clear is if the legislation explicitly mandates that hospital pricing information be captured in that. I just wondered, do you agree that that latter part is less clear? What's your view as CMS develops the rates around that?

No. I don't agree that it's less clear. I think it was explicitly stated in many discussions that we had with Congress and with congressional staff that market pricing has to include the entire market. Market -- if what you want to do is make sure that Medicare laboratory testing is priced at market, then you can't look at three or four examples, as the flawed OIG study did, and say that that is market. Market is market, and that includes large independent labs. It includes small independent labs. It includes hospital outreach labs.

I think the intent of Congress is very clear. I think obviously the devil will be in the details when the rule is promulgated. But I think the rule should be very clear that the market has to include -- the determination of market pricing has to include all components of the laboratory services market, not selected or cherry-picked components, and that certainly includes hospital outreach pricing.

Okay, appreciate that. Thank you.

Gary Lieberman, Wells Fargo

This is Ryan Halsted on for Gary.

I appreciate all the detail on the guidance, but I was hoping you could speak specifically to any change on your views on impact from health care reform, especially considering the better-than-expected enrollment?

It's Dave.

I think our view on health care reform is that it's still basically not material to 2014, that it's basically a net neutral. We are not counting health care reform as a positive as we think about the guidance. We will -- obviously if our views change, we will update that perspective, but that is where we are today.

Okay, thanks. On your cost structure, I realize you are not prepared to provide any guidance on that, but just curious if any improved visibility on your reimbursement outlook -- does that potentially change how you're thinking about your cost structure and timing on -- as you're re-evaluating your cost structure?

No.

Okay. All right, thank you.

Amanda Murphy, William Blair.

I just had a quick question on M&A. I think you guys have been pretty consistent in terms of the types of assets that you've pursued over the years. I'm just curious going forward, should we expect you to pursue a similar strategy?

Also, have you seen a change at all in maybe the types of assets that are coming to market, just given all the reimbursement pressure over the past few years here?

Amanda, it's Dave.

I don't think you should expect us -- you should expect to see us do anything dramatically different. Obviously with Enlightened Health there are some aspects of those businesses as we start them up that there may be acquisitions that are a little bit different from core diagnostic testing; however, those will be small exploratory-type transactions. They're not going to be anything significant in there.

In terms of assets coming to market, I think the mix is pretty much the same as what we've historically seen. There's nothing in my mind that looks very different from what we've seen over the last several years. Again, I think it's what are the right assets from a strategic perspective for us, and then what's the right valuation?

Got it. Then a question on next-gen sequencing. You're bringing in a number of tests to market now. Just curious, what are your -- do you have any insights into how payors may look at paying for those tests? It doesn't seem like there's -- well, there isn't really an infrastructure in place for payment around those tests, for the most part. Any insights as to how that might evolve over time?

No. I think it's -- I think your question is -- has exactly the right premise, which there isn't really an infrastructure for payment of the testing using that methodology, and there isn't an established payment system. You can't just send somebody a bill and say we performed next-generation sequencing.

Currently, obviously we will continue to bill using the procedure codes that apply to the testing we're doing. I think there are very robust discussions going on with some of the payor community right now about how they might think about paying for those tests in the future. We will continue to keep you updated on the developments there.

Okay. Thanks very much.

A.J. Wright, UBS.

A.J. Rice, actually, but thanks. Hello, everybody.

Two quick questions. First of all, comment on Hep-C testing -- how big that is for you, if you're seeing any change because of the new drug capabilities? We're hearing people want to get tested maybe more now since they have an option that could potentially cure them. Any thoughts on that?

Yes, A.J. It's Dave.

We've highlighted Hep-C for the last -- really since the CDC put out the screening guidelines as a growth opportunity, and we have seen nice growth there. I think the -- and that's been probably for 12 to 18 months.

I think these targeted drugs do give us additional opportunities, both in our clinical trials business because of the expertise we have at Monogram, which is probably the leader in development of hepatitis C testing; as well as the cost of these drugs means that efficacy really needs to be demonstrated, and we think the diagnostic test is an excellent way to show which patients are going to benefit from the drugs, and which patients are probably not going to gain as much benefit. We like hepatitis C as a long-term opportunity, and think we have the assets in place to build that.

Okay. I was just going to ask a little bigger-picture question. I don't know if I've heard you guys comment in a while about the nature of the competitive landscape and whether you see it having changed much between the competition for hospital outreach labs, the small labs, and then competition among you and your biggest competitor.

I did notice -- I think I saw a press report that maybe you had wanted an exclusive contract with independent Blue Cross/Blue Shield this quarter. I wonder, wrapping that in to the comments about broader competitive landscape, is there any update to offer there?

I think the industry remains extremely competitive. It remains highly fragmented. There are still many thousand clinical labs that we compete with on a daily basis. I don't think that there is a lot that has changed. We have a lot of respect for our competitors, large and small, and we do some things better than some of them, and they do some things better than we do.

We're always trying to improve our levels of service. We're always fanatical about our commitment to quality. But it's a tough industry, and obviously there's a lot of competition, and our job is to go out there and grow the business and excel in what we do. I think our front-line people and our operational people have done a terrific job in doing that.

Okay, thanks.

Lisa Gill, JPMorgan.

Dave, I noted in your comments that you talked about managed care pricing was flat sequentially. But can you give us an update of what it looked like year over year would be my first question? Secondly, do you have any major managed care contracts that are up for renewal this year?

Lisa, it's Dave. We don't have any major contracts that are up for renewal this year. Year over year, the managed-care pricing was down very slightly, not materially at all.

Okay, great. My second question would be I know a lot of people are asking about acquisitions. I know in the past you've talked about not having as much interest in some of these out-sourcing deals with hospitals or outreach programs. I'm just wondering if that has changed at all, especially as we think forward and think of you as being a lower-cost provider than some of these hospitals as we move towards ACA. Are they looking more enticing?

It's Dave, again.

I think that all other things being equal, we would prefer to do a more comprehensive deal with a hospital than -- or with a health system -- than just buy an outreach program. We would like to work with them on their internal lab. We would like to work with them on rationalizing where the testing is performed in the utilization.

We'd like to work with them on population health management on delivering the tools that we deliver in terms of analytics and decision support. That has been our preference, and most of the hospital deals that we have done recently have focused on more comprehensive, a more comprehensive global approach.

Part of the challenge in acquiring a hospital outreach program is because of the pricing that the hospital outreach labs typically command from the managed care payors, when that pricing moves to our fee schedule, there is significant revenue compression, which also leads to significant profitability compression, which makes it hard to pay the multiple that those outreach programs are looking for, because of how those businesses look when they move over to our pricing structure.

Again, that's why our focus, Lisa, is more on the comprehensive partnership with the health systems than it is on individual hospital outreach lab acquisitions.

Great, thank you.

Isaac Ro, Goldman Sachs

Clearly an area of focus for the business. At a high level, can you just walk us through your market and pricing strategy versus competition for these tests? Just trying to frame how you're thinking about pricing schemes, either versus entrenched player in bracket testing, or a new developing market -- for example, like tumor profiling, where formal reimbursement hasn't been established yet?

Isaac, I'm sorry, but the first, probably 15 seconds of your question got cut off. Maybe you could just recapitulate.

Yes, no problem. It's actually Joel in for Isaac this morning. Just genetic testing -- I'm trying to get an idea of your overall pricing and go-to-market strategy versus the competition. I'm just trying to frame how you're thinking about going against an entrenched player, for example in BRCA, or a new developing market like tumor profiling, where we just haven't seen formal reimbursement?

I think it's hard to comment in a lot of detail on those areas, because obviously they are strategic, and we assume there is competitors who listen to our calls. I think generally our go-to-market approach is that we try to come to market with a high-quality, reasonably priced, comprehensive test offering.

With BRCA, we're especially proud of the capabilities that we've been able to build around the database and around the pre-authorization, so that we can help to make sure that patients are getting the services, and that the services are going to be paid for. I don't know that there's much more to say than that is our consistent philosophy in terms of go to market it fits exactly within the fourth pillar of our strategy, and we're going to continue to follow that.

Thanks. A quick one on capital allocation. Any updates from the Board regarding the dividend?

The decision about how to allocate capital is management's decision. Obviously we speak to our Board about it quite a bit, but it's management's decision. Our view continues to be at this point that acquisitions and share repurchase are appropriate deployments of capital, and we're going to continue to deploy them that way.

Great, thanks.

Ricky Goldwasser, Morgan Stanley.

Good morning. I have two follow-up questions here.

First one on the volume. I might've missed it, but when you talked about same-store volume growth of 2.5%, can you just help us understand what was the contribution for that for drug of abuse? I know you talked about the year-over-year growth rate, but also at 2.5%, what was drug-of-abuse testing?

Ricky, it's Brad.

I don't think we're going to get into that much detail, but we did have an acquisition that contributed, but that was stripped out of the organic. Our regular drugs-of-abuse testing business, I think Steve went over earlier was 10% growth in that business.

Right. I understand that, but I'm just trying to understand, is it half of the 2.5% same store? It's just it's very clear --

No. Small contributor, but not close to half.

Okay. Then Dave, going back to the hospital system question. You talked about more a holistic type relationship with the hospital as a preferred partnership. What do you think is the appetite of the health care systems, given the fact that over time we are moving, or we will be moving toward episodic care-type reimbursement, and we're hearing not-for-profit hospitals talking a lot about that.

Are you being involved in these type of conversations, because I think that changes the whole approach toward reimbursement?

Yes, Ricky, I know it's been your thesis that we are rapidly moving into a bundled payment world, and I would simply say that even within payment bundles there are clear fee-for-service components, and the movement towards payment bundles is going to be incremental and evolutionary. It's not -- we're not going to be in two years in a 100% bundled-payment environment. It is not going to work that way.

Certainly, we're involved in many conversations with health systems, with large physician practices about how they think the payment system is going to evolve, and how the diagnostic testing is going to play into that. We welcome those conversations, because again, given our cost position, I think we are in a great position to be a huge contributor of value there, and to show integrated delivery networks and large health systems that we can really help them move the needle, not on the cost of their lab services, but on the quality of the results they are delivering and on the analytics and the data and all of the things we can do that will make them winners in whatever the new models are.

One, I think bundled payments will go slowly and incrementally, because there are a lot of questions about how those payment systems are going to work, and whether they are going to work, and how providers are going to be rewarded. Two, yes, we are very much engaged in those conversations and look forward to the opportunity to demonstrate our value.

Okay, thank you.

Glen Santangelo, Credit Suisse.

Dave and Brad, I just wanted to follow up on the revenue per requisition, down another 3.3% this quarter. I don't think that's really surprising, but if you look at the different components, I think you cited Medicare test mix in the Canadian business.

I'm wondering if you could sort of break down those different factors, and maybe give us a sense for what's really driving that revenue per requisition the most? Ultimately, as you think about that in the little bit longer-term basis, obviously we have greater clarity on the Medicare side, but how do you think about the other factors driving revenue per requisition throughout the balance of the year and into next year?

Glen, it's Brad.

I'll start with the 3.3% that we reported. We talked about the impact there as being mix, our Canadian business and the government. We're not going to break that down any more specifically, but if you think back to the mix, the drugs-of-abuse testing business is having an impact there, as well as an acquisition in that space.

Then also we have the Canadian business that we speak of where the exchange rate is about 8% lower this Q1 than last Q1, so we've had some erosion there. Plus there's volume growth in that business, which is essentially a capitated model, so that drives down the price per. Then the government reductions that we've already talked about, the physician fee schedule, the clinical fee schedule, and sequestration are all year-over-year impacts to that number that we see.

Our goal is to have that number be more positive than 3.3% negative, and I think we look at that by focusing on the test mix in our business, and trying to grow the higher value tests that we've spoken about several of those on this call. We certainly know with a little more clarity what's ahead in the government reimbursement world, but we realize that to be successful we need to have solid and growing revenue per requisition, as well as volume of requisitions.

Thanks for that comment, and maybe I can just follow up, Brad, on the margin side. I think if I heard you correctly, you seemed to suggest that margins were impacted by about 180 basis points due to weather, which kind of implied an incremental margin of about 70% on that weather-related lost revenues. I'm kind of curious is that the right number?

As we think about the margins throughout the balance of the year within the context of your full-year guidance, kind of sounds like to get to that mid-point of the range based on what you talked about in terms of revenues where we are assuming margins are down about 150 basis points year over year? How should we think about that ramp throughout the balance of the year?

Yes, you're right on the weather. It's probably a little higher drop-down than you computed. We take out the cost of our supplies and our bad debt to get there. If you think about our original guidance for the year, it would imply some margin compression, as well. I don't think of any -- besides not having a negative weather impact, I don't think of any ramping of the margin performance over the course of the year.

We will get better as we lap some things and we have growth, continued growth, in our business. As some of the cost items and opportunities potentially start to contribute, that will help as well. But nothing significant counted on in guidance for that. I think you've got it about right, generally speaking on the margins. Again, given our guidance for the year that we initially gave, we expected those margins to be under pressure.

Okay, thanks very much.

Michael Cherny, ISI Group.

One last quick question from my end. When you think about the increase in the market, I know you talked about a little bit of ACA over the course of the day, but we've seen a big rise in consumer-directed health plans. How does that factor into the way you see your business performing, and what impact has that had, at least both recently as well as in your expectations for the next maybe few quarters or couple years?

Michael, it's Dave.

The plus of consumer-directed health plans is that with greater consumer responsibility and with greater pricing transparency, our price point will be much more attractive. The minus is it puts pressure on patient collections, because we have to collect more and more dollars from the patient, and that's the reason that you saw the bad debt increase in the quarter.

Got it, thanks.

Bryan Brokmeier, Maxim Group.

Hi, thanks for taking the questions.

You previously stated that the IC-10 expenses this year would probably be in the $5 million to $10 million range. Are those the expenses that you're now pushing off to 2015, or were some of them already spent this year?

Bryan, it's Dave.

Some of them were already committed and some of them we're able to defer.

Given the longer time frame, will you be able to better work those costs into the regular work flow, or should we not expect all of those, I guess let?s say you spent a couple million, should we not expect all of that $5 million, $10 million to be additive to 2015 expenses?

I think it's too early to tell with certainty. It gives us more time to work on some of the things that we'd like to do in a more automated and less manual fashion. We will know about that as we get closer to the compliance.

Okay. You discussed the possibility previously of some significant expense reductions that you are currently evaluating which were also excluded or continue to be excluded from guidance. Has that decision progressed at all?

I think we've answered the question three times that we'll update it on the July call.

All right, and last quick one. You said that volume ex-weather would have been 5%, so weather negatively impacted volume by about 2.4%. Could you remind us what the weather impact in the fourth quarter was?

Fourth-quarter weather was actually on a year-over-year basis to the fourth quarter of the previous year a better comp, an easier comp. I don't remember the specific weather number in Q4.

Okay, thanks a lot.

Whit Mayo, Robert Baird

Thanks are squeezing me in.

I just wanted go back for second to the fee schedule repricing. ACLA has been very supportive of the doc-fix legislation. It seems like you guys concur. One thing that they have highlighted is a study that was performed by Avalere that attempts to illustrate that average Medicare pricing is probably not too dissimilar from commercial pricing when you actually do include hospitals.

They also seem to suggest that when CMS establishes these private payer rates that in some instances, some of the non-hospital lab test rates could actually increase. I just wanted to get your broad perspective on that study, and whether or not you agree or disagree with their conclusions?

With the Avalere study's conclusions?

Yes.

Yes, it's Dave.

Yes, I think the Avalere study was a very comprehensive look at a large number of data points in multiple MSAs, as big as New York City, as small as I think Boise, Idaho. What Avalere did was look at paid claims data, look at pricing data, look at a variety of sites of service, independent labs, small labs, nursing home labs that were paid under the fee schedule, and hospital labs, commercial pricing, Medicare pricing. I think what the study demonstrated quite clearly is that Medicare is at or below market for almost all the tests that were reviewed, whether routine testing or esoteric, high complexity, low complexity testing.

I think the Avalere study was a very detailed and comprehensive approach to determining what is market, and I think it rebutted the notion that's been going on for a long time that somehow Medicare is above market in the way that it pays for lab tests. Obviously, how CMS implements this rule is going to be significant, and we at LabCorp and I trust ACLA are going to be very significantly engaged in the rule-making process.

I do think that the way -- there was a very strong policy view in Congress that they wanted Medicare pricing to be compared to and based off of market pricing. There was a very strong policy view from the ACLA and from LabCorp and from the constituents that the market had to be a true market, not a manufactured market to make it look like Medicare was overpaying. The Avalere study shows that in the true market, Medicare's pricing is very competitive.

I think that in the long term this was a policy-driven decision by Congress. I think it's great that we have policy-driven decisions, as opposed to financially-driven decisions. We're going to be very much involved in making sure that the policies are implemented in accordance with the way that Congress wanted them to be carried out.

Great. Very helpful.

We have no further questions. I will now turn the call over to Mr. David King for closing remarks.

Thank you all very much for listening this morning, and good day.

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