Labcorp Holdings Inc (LH) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Laboratory Corporation of America Holdings earnings conference call. My name is Glenn, and I will be your moderator for today. At this time, all participants are in listen only mode, and 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. Steve Anderson, Vice President of Investor Relations. Please proceed, Mr. Anderson.

Good morning, and welcome to LabCorp's second-quarter 2014 conference call. I am Steve Anderson, Vice President of Investor Relations, and with me today are Dave King, Chairman and Chief Executive Officer; Glenn Eisenberg, Executive Vice President and Chief Financial Officer; and Ed Dodson, Senior Vice President and Chief Accounting Officer This morning we will discuss our competitive and strategic environment, highlight progress on our five pillar strategy, discuss our second quarter 2014 financial results and update 2014 guidance. 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 the Form 8-K that included additional information on our business and operation. 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, 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 I'll turn the call over to Dave King.

Thank you, Steve, and good morning. Before Glenn discusses our second quarter results, I would like to provide an overview of the competitive and strategic environment and of the steps LabCorp is taking to thrive in that environment. Although the last three years have been difficult, the lab industry is in an enviable position to grow in the years ahead due to population demographics both in the US and abroad, test menu innovation and the critical role of laboratory medicine in the healthcare system. LabCorp is particularly well-positioned as our size, scale, and platform provide an anchor for our business and give us great penetration into the broader healthcare system.

Our lab and PSC infrastructure logistics network, EMR connectivity, interfaces into physician offices and health systems and reach to consumers through our billing and collection system and our patient portal are unparalleled among healthcare services companies. Now we must build off this platform to address the needs of a changing market. Given changes in benefit plan design, reimbursement reductions and pricing pressure, sustained utilization may remain lower than historical trends and price across all of healthcare services will likely continue to be under pressure, particularly driven by mix and payment policies. This dynamic creates opportunities for LabCorp because we believe the consolidation will accelerate, lower-cost settings will be incentivized and scale will be rewarded.

We are seeing this across healthcare services with transactions designed to increase scale, create vertical integration, expand capabilities and leverage existing assets. Along with opportunity, we can reasonably expect that interlopers will try to disrupt our business model. To be among the winners, we know that LabCorp must excel in five ways. Improve the quality and reduce the cost of care, help manage the total cost of care, serve as a performance management partner to our customers, serve a broad range of customers in multiple settings, and build scalable platforms with replicable processes that can create value at many points along the continuum of care.

In recent years, LabCorp has taken meaningful steps to address these systemic changes through our five pillar strategy. With respect to our first pillar, we have continued to increase our scale and competencies in clinical laboratory medicine through acquisitions, ranging from routine capabilities to high Esoteric Testing. We have also focused constant attention on building and growing our managed care base, leaving us with a managed care portfolio that is unparalleled in the industry. These initiatives give us greater opportunity to deliver value in a $60 billion market where we have approximately 10% share. Under our second pillar, we have invested significantly in information technology infrastructure and capabilities to improve the customer experience for providers and patients who order and receive testing from us. Relative to the third pillar, we have relentlessly focused on optimizing our operations to maintain our position as the most efficient provider, offering the highest quality and greatest value for the healthcare dollar spent.

We have also invested heavily in improving every customer's experience with LabCorp. We take great pride in our significant and continuing progress in this area which is due to the efforts of our more than 30,000 dedicated people. Under our fourth pillar we have actively pursued opportunities to bring significant new tests to market through licensing and internal development. We are pleased that our partners have repeatedly expressed how impressed they are with LabCorp's science, test development capabilities and innovation. As an example as our innovation, our monogram center of excellence in infectious disease recently received two NIH grants to study and develop new approaches for HIV detection.

With respect to our fifth pillar, we have undertaken two internal strategic initiatives to support our customers at critical points, Beacon LBS and Enlightened Health. Each of these initiatives was built on the premise that we can use our existing infrastructure as a channel to provide more value to our customers. Like other companies that have used their infrastructure to extend their market reach, we want to use our market penetration to offer new and value-added services. We undertook Beacon LBS in 2011 because we understood that providers need assistance in selecting the right test for their patients and payers need help in appropriately managing the utilization of expensive diagnostic testing. After an extensive market analysis and an enormous amount of hard work, we invented a tool that helps our clients choose the right test at the right time and helps payers thoughtfully address concerns about both unit cost and trend. In the fall of 2014, this innovative model will be implemented in Florida in partnership with United Healthcare.

We started Enlightened Health as an outgrowth of four initiatives, our Litholink clinical decision support program, our care intelligence data analytics program, our patient portal and our clinical trials business. These tools serve different customers from Beacon LBS. To assist physicians, we have developed data and analytics tools that help them understand their metrics of care delivery and improve compliance with pay-per-performance and population health metrics.

To assist physicians and patients, we have developed disease-specific expertise in kidney stone, chronic kidney disease, cardiovascular disease and coagulation, adding more programs every year. We have also developed a web portal to deliver lab results, decision support and additional content to patients. We have greatly expanded the size and capabilities of our clinical trial central lab business to serve physicians and patients by taking advantage of the opportunity created as biopharmaceutical companies recognize the need to go deep in specific disease states and create vertical alignment from drug design to identification of unique patient populations that will respond to therapy.

We are focused in Enlightened Health on four key areas of opportunity, personalized genomics, informatics, new channels to capitalize on our competencies, and our clinical trials business. We will provide more details on these opportunities in the coming quarters.

This quarter we continued our progress on all of our five pillars. Let me mention several key initiatives. Under pillar three, the installation of our Propel robot at our major laboratory in Tampa is complete and is now processing all of the facility's volume. We remain on schedule to install Propel in our Dublin, Ohio facility at the end of this year. Propel continues to drive expense reductions, increased throughput and accuracy and enhanced specimen management in our Burlington and Tampa labs. We continue to streamline our operations and reduce expenses through facility rationalization. In addition to our new Phoenix campus, which consolidated four LabCorp facilities, we recently announced the consolidation of our facility in Monrovia, California into our Santa Fe laboratory and the consolidation of our facility in Mitchell Field, New York into our Connecticut laboratory.

We are reengineering our business to provide a better operating platform, sustainable long-term savings and a world-class customer experience. To that end, we remain focused on our enterprise-wide cost structure review, and we will discuss this initiative in more detail in the coming quarters. Under pillar four, we launched our BRCA next-generation sequencing assay which provides complete gene sequence analysis of BRCA1 and 2 and better equips us to meet the strong demand for this test.

In combination with our care coordination preauthorization service, LabCorp offers end-to-end -- an end-to-end program that includes compliance with insurance requirements, comprehensive testing and expert interpretation from our licensed directors and team of 123 board-certified genetic counselors and 9 medical geneticists. LabCorp continues to see robust growth in companion diagnostic assays that help physicians guide targeted drug therapy. For example, our HCV GenoSure, NS3/4A assay is the first commercially available test to provide drug resistance data for new HCV antivirals. With respect to the drugs simeprevir, the assay is required prior to its use as it tests for the Q80k polymorphism that impacts the efficacy of the drug.

We have positioned LabCorp to grow through the era of healthcare reform, a time in which quality, efficiency, scale, and a central role in improving care delivery and patient outcomes will be key measures of success. Our five pillar strategy will enable us to excel in all of these areas, generating shareholder value for years to come. We are very pleased to have Glenn Eisenberg, our new Chief Financial Officer, in place. Glenn is going to be a terrific contributor to our executive team and our Company. And now I'll turn the call over to him to review our financial results.

Thank you, Dave. Sales for the quarter were $1.5 billion, an increase of 3.3% over last year. The increase in sales was the result of test volume, measured by requisitions, and fold-in acquisitions, which was partly offset by test and payer mix. Total test volume increased 5.3% over last year with approximately 3% coming from organic growth. Revenue per requisition decreased 2%, but was up slightly versus the first quarter of 2014.

Similarly, managed care revenue per requisition was also up sequentially. Gross profit for the quarter was $569 million, or 37.5% of sales. This compares to gross profit of $577 million, or 39.3% last year. The decline in gross profit was due to unfavorable test and payer mix and cost inflation, partially offset by higher volume and productivity. SG&A for the quarter was $298 million, or 19.6% of sales, compared to $281 million, or 19.1% last year. The increase in SG&A resulted primarily from an increase in that bad debt reserve, consulting fees and merit increases.

The increase in bad debt reflects increased patient responsibilities for the cost of healthcare services due to higher deductibles and coinsurance. For the remainder of the year, we expect the bad debt rate to be back to approximately 4.5%. Consulting fees were incurred as part of the Company's enterprise-wide cost structure review that Dave mentioned earlier. During the quarter, the Company had $7 million of restructuring and special items, which was comparable to last year. The breakout of this year's amount has $2 million in restructuring and other special charges and approximately $5 million in SG&A. Excluding these items, operating income was $253 million, or 16.7% of sales compared to $276 million, or 18.8% last year. The Company also sold its remaining shares in an investment, realizing an approximate $9 million gain in the quarter that was recorded in other income.

Interest expense for the quarter was $26 million compared to $23 million last year. The increase was driven by higher debt balances as a result of the Company's debt financings in the fourth quarter of last year, partially offset by the benefit of the Company utilizing fixed-to-floating interest rate swaps on a portion of its debt. The tax rate for the quarter was 39.1%, unchanged from last year. As a result, net earnings for the quarter were $141 million, or $1.64 per diluted share. This compares to $152 million, or $1.62 per diluted share last year. The increase in EPS over last year benefited from the $0.06 per share gain on the sale of an investment, as well as the Company's share repurchase program. Adjusted earnings per share, which excludes amortization, restructuring and special items, was $1.84 in the second quarter compared to $1.80 a year ago.

The Company continued to generate strong cash flow. During the quarter, our operating cash flow was $207 million compared to $138 million last year as the Company benefited from improved working capital, including a one-day improvement in DSO to 49 days. Capital expenditures totaled $48 million in the quarter, which was essentially unchanged from last year. As a result, free cash flow, or operating cash flow after capital expenditures, was $159 million compared to $89 million last year.

During the second quarter, the Company repurchased $56 million of its stock, bringing its year-to-date share repurchases to $163 million. The Company ended the quarter with approximately $890 million remaining under its board authorized share repurchase program. Liquidity at the end of the quarter was approximately $1.5 billion, comprised of $480 million in cash and a $1 billion of availability under our revolving credit facility.

The Company's guidance for 2014 is for sales growth of approximately 2%. Given our performance in the second quarter and outlook for the year, we have increased our 2014 adjusted EPS guidance to $6.50 to $6.75. Operating cash flow was targeted at $780 million to $820 million while capital expenditures are projected to be $185 million to $205 million. As a result, free cash flow is projected at $575 million to $635 million. This ends the Company's formal remarks and we'll be now happy to answer any questions. Operator?

(Operator Instructions)

Robert Willoughby, Bank of America.

Good morning. Glenn, with the inclusion of the full financial statements of the quarterly results for the first time since we started asking for them in 1996, you're already my favorite at LabCorp CFO, so congratulations there. Can you build on that momentum and actually speak to what an organic volume number growth number was in the quarter, or is that -- or are we still not able to break that out?

Well, the good news is if -- and I appreciate your comments. We did break that out, actually, in our comments, if you will. As you know, the volume for the Company year-over-year was up over 5%, and we said around 3% of that was organic. The other 2% were from acquisitions that had been done and were timing related. So, the Company is continuing to seek some very good organic top line growth.

Excellent. Sorry, I missed that. And Dave, we've asked on prior calls, your portfolio of investments there, are there anymore good guys in there? And it didn't sound like there was a tremendous amount of opportunities left, but this was obviously a good one. I guess it's a continuation of a prior investment here, divesting the last. But are there likely -- are we likely to see more investment gains this year, or is it -- are we pretty much done for the year there?

Bob, we never know the exact timing of our investments. You are correct that the gain recorded in this quarter was the balance of what you saw in the first quarter, the disposition of that asset. We do have some other good guys in the portfolio. They're not at present as big a good guy as this particular investment, and again we don't have a good sense of the timing of how these investments will liquidate.

Okay. Thank you.

Bill Bonello, Craig Hallum.

Good morning. Thanks a lot. So, just a couple of questions.

I guess the first one is just trying to get a handle on how you guys are thinking about profitability. You had a $48 million growth in revenue with a $22 million decline in operating income. Not much color at this point on your reengineering efforts.

Just what's your commitment to returning to operating growth that -- can you not grow operating income with 3% plus revenue growth? Are these reengineering efforts necessary just to hold the line? How should we think about this?

Let me, Bill, take the first cut of it. To your point, obviously it's disappointing to see our top line growing, but at the expense of our earnings. We've talked about the pricing pressure, if you will, that's essentially the mix between our test and payors that as we now get through, call it the first half of this year, maybe a little bit into the second half, you'll start to see the year-over-year comps now start to level off. So, effectively our operating margins should effectively be leveling off.

Going forward, especially with taking out some of the unusual items, as we continue to see the good top line growth, we would expect to leverage our cost structure better. So, if we can hold, call it the price mix, relatively flat for comparable periods, additional volume we should be able to get the leverage from.

I think the recognition that the Company is looking at this overall, call it cost structure review, really speaks to the fact that we know there are pressures. We know there's mix pressures, payor pressures that Dave alluded to in his opening remarks. And as a result, we believe that, given this Company, we should be able to, as any company, continue to improve our cost structure, improve the way we do our business, and that should either help mitigate the pressures that we're seeing or hopefully help improve our operating margins going forward.

Yes, Bill, it's Dave. I would just add that the challenge here is test and payor mix and payor payment policies. We see very strong volume growth. At the same time we know, with MoPath for example, that some of that volume is just not getting paid for. So, that has a negative impact on price, negative impact on margin. It goes up and down the P&L. And in fact, you could even argue that has a negative impact on expenses because we are performing molecular testing and not getting paid for it. So, there's a double whammy effect.

I agree with Glenn. I think between a combination of continuing to have strong top line growth, looking at the expense side of the ledger, and also either resolving through getting paid or resolving through testing process, the process of not doing testing that we're not going to get paid for, we do have opportunity. And we've said we are strongly committed to operating income growth in 2015, and we continue to believe that we can accomplish that.

Okay. That's helpful. And then just a second follow-up question. In your prepared remarks, Dave, you noted interlopers trying to disrupt the business model, and lately there's been a lot of press about Theranos as a potentially disruptive force in the lab industry. Yesterday there was someone even saying you ought to short the big lab stocks because of it.

Can you give us your thoughts on that assessment? Not the shorting, but that Theranos will be disruptive to the lab industry? And if so, how at all you might be responding to that threat?

Yes, Bill. I'm not going to comment on any specific competitors in any way. I don't think that's an appropriate thing for me to do.

We are always interested in and evaluating potential innovation opportunities for our business. As everybody knows, point-of-care testing has been extremely challenging over the years from the perspective of the sensitivity and specificity of the testing, the reproducibility of the testing, how the results were delivered, particularly in a more electronic era. Having a test strip that prints out of an instrument is not going to be helpful to physicians. And so we continue to evaluate every potential opportunity for changing the model. That's what reengineering the business is about.

I would simply say that if there's going to be any kind of a successful point of care testing model, with our 1,700 patient service centers, with our in-office phlebotomists, with our electronic interfaces into physician and hospital systems to provide results seamlessly into electronic health records, we're going to be extremely well positioned to capitalize on whatever developments occur in that framework.

Again, I'm not going to talk specifically about any one thing or another. A lot of people are working on innovation. It's great. That's part of what our venture fund is designed to do is to invest in those innovations and see how they play out. But we welcome innovation and think it provides LabCorp with great opportunity over time.

Thanks a lot.

Gary Lieberman, Wells Fargo.

Good morning. Thanks for taking the question. Maybe if you could just update us on the -- some of the payment issues that you mentioned on the molecular pathology front and some of the resolution and where you are on the states. And then to your comments about, at some point you've made these comments in the past, that you reached a decision of maybe not doing the test. Where are you with all that?

Gary, it's Dave. I think we're seeing recognition by payors that they need to address this situation. And we have recovered some of the outstanding balances of some states, particularly some state Medicaid programs, and we've not made progress with others. It continues to be a mixed bag, specifically with Tricare.

On June 18, DHA indicated that they were initiating a three-year demonstration program to pay for some molecular testing that they had stopped paying for in 2013, including extended coverage for prenatal and preconception cystic fibrosis carrier screening. The complete list of tests has not been published, and so can't give you any further clarity there. But we are encouraged that Tricare has recognized that they have a responsibility to their patients and to the physicians who serve those patients to cover that molecular testing.

In terms of not performing the testing, obviously that's a complex decision. And what I would point you to there is the idea behind Beacon LBS is to let the physicians know at the point of service that testing is not going to be covered or is not going to be paid for and to let the labs know at the point of service that the testing is not going to be covered or paid for. We actually have a tool that will allow payors to implement these policies in an appropriate way at the front end as opposed to the lab performing the service and then simply getting a denial and not being paid at the backend.

There are a lot of ideas in flight as to how we can execute on this, but we remain very much committed to resolving MoPath either consensually with the payors, and if not, then by explaining to the physician community that we can't continue to do significant amounts of high-value testing that we are not going to be paid for.

Any better visibility into the timing of resolving that? Is it likely this year, or we have to wait longer for that?

I think it's just going to be a long process. We've recovered money against some of what we were not paid last year. We've started getting paid by some payors that were not paying us last year. But we've not seen any material overall improvement in the landscape, and so we continue to work hard to try to accomplish that improvement.

Is there any dollar amount that you've kept track of what you have not gotten paid for or what you have not accrued that you would have otherwise accrued if there hadn't been these issues?

Gary, the only thing that we've said is that the run rate last year was approximately $52 million in uncollected MoPath payments. And to repeat what I said previously, we haven't seen any material improvement in that situation.

Okay, great. Thank you very much.

Darren Lehrich, Deutsche Bank.

Thanks. Good morning, everybody. Welcome, Glenn. I wanted to just follow on actually to the molecular pathology denial question.

I guess just as it relates to the Tricare announcement itself, is it fair to say that you are waiting for them to publish their list so you have certainty around what you'll be able to bill and collect? Is that what we're now waiting for? That's the first question on Tricare. And then the other part of it is when we think about the $52 million, Dave, is Tricare a material part of that?

Darren, with respect to the list, yes. We do know that they have agreed to cover cystic fibrosis, which was probably the single largest test that was not being covered. And we don't know what the other test on that list will be, and we are waiting to determine that.

In terms of whether they were a material part of the $52 million, they were a significant part of the $52 million, and so we're optimistic that as payment policies are put in place, that will improve on a prospective basis. I don't think that we've resolved the question -- with them the question of what they're going to do with respect to the payments that were not made from January of 2013 to April of 2014.

Okay. But I thought there -- it was reported in the press more than anything, but I thought that they had made the decision to go back to Jan. 1, 2013. So, is that not your interpretation?

I think if they have made that decision, we're still waiting to see the full impact of it.

Got it. Okay. We -- do you think we'll see some resolution to all this related to Tricare in Q3? Is that a reasonable expectation?

I would hope so. They have said that they are working on the list, and through ACLA and directly, obviously we have been encouraging them to provide the list as soon as possible so that we and the other laboratories in the industry can take appropriate steps to make sure that we're going to get paid for the services.

Okay. Thanks for clarifying that. I guess the one other question I had for you is with regard to revenue diversification. We'd noted in your proxy that the incentive comp programs are putting higher weight on diversification. The question here is, what qualifies as a diversified revenue source for you guys? And can you just talk a little bit about the types of things we should be thinking about in that context?

Sure. There's a long list of things that could qualify, in my view, as revenue diversification, starting with share gain from hospital laboratories, which is an area in which we have a significant amount of revenue. But as everybody knows, there's a lot of revenue going through hospital labs that from an economic perspective could be served at lower cost and at very -- in my opinion, at higher quality by going through independent laboratories. So, that's one area.

Our clinical trials central lab business is an important business for us. It's a business that's grown significantly over time. It doesn't -- we don't get paid there by managed care or by the government. We get paid by different parties, and so that certainly is a revenue diversification opportunity.

More direct interaction with consumers is a revenue diversification opportunity. International is a revenue diversification opportunity. The Beacon LBS and the Enlightened Health platforms are revenue diversification opportunities because within each of those, there are ways of generating revenue that are not going to be subject to either direct payment for managed care -- from manage care or direct payment from the government.

As we think about revenue diversification, Darren, I would not characterize it as -- and I want to be clear that we don't characterize it as we are going to go do something that is vastly outside the scope of our core competencies. I think of revenue diversification of how can we take those core competencies and how can we generate revenue from different payors sets from the payor sets that are generating the bulk of our revenue today. And if we can do that, we can use our core capabilities, but we can generate different streams of revenue that over time will allow us to offset some of the pressures that you're seeing in the business today.

Got it. That's helpful. Okay. Thank you.

Lisa Gill, JPMorgan.

Thanks very much, and good morning. Dave, I was wondering if you could talk about anything you saw specific to ACA volumes in the quarter and your expectations as we move throughout the year?

Good morning, Lisa. Yes. I said at the end of last year and the beginning of this year that we felt that ACA would probably be a net neutral to us. I think from a volume perspective, it's hard to argue that we're not getting a benefit. I think we are getting a volume benefit from ACA just because if you look at the enrollment numbers in Medicaid and managed Medicaid and private exchanges, the data clearly suggests that enrollment is up. Our uninsured -- the number of uninsured patients coming to see us is down, so I think we are getting a volume benefit.

Obviously from a pricing perspective, one of the consequences of the ACA is you are seeing very rapid growth in the Medicaid population. You're seeing very rapid growth in the managed Medicaid population. That has an impact on price, not so much from a unit price perspective, but from a mix perspective and also from a payment policy perspective.

Particularly managed Medicaid payment policies tend to be very restrictive for molecular and high-value testing, and that's part of why you're seeing the pressure on price. Net/net, clearly in my mind, ACA is a benefit to our volume growth and it has been somewhat of a weight on price.

And then just going back to early comments talking about disruptors, talking about your potential shares in the hospital market, can you maybe just give us some indication as to what you think will be the key drivers? For example, in the hospital market finally getting that business out of the hospital lab?

Is it as hospitals take more risk and ACO-type relationships? Is it managed care driving that? And over what time frame do you think that you could really show meaningful market share movement?

Well, as you know, we've -- this has been the biggest opportunity for independent labs pretty much for the history of the industry, and I think it remains the biggest opportunity. It's certainly going to be -- market share moves slowly. I do think that hospitals are relooking at all of their ancillary services, and you're seeing in a number of areas ambulatory surgery, wound care. You are seeing hospitals forming partnerships with other companies to provide those services in a lower cost and less acute side of care. And I think we'll see that over time with the hospital labs, but again, it takes time. These are complex transactions, and we just have to be aggressive and patient.

Great. Thank you.

Amanda Murphy, William Blair.

I just had a question on the legislation that just came out around future Medicare reimbursement. There was obviously a meeting earlier, and there was a lot of different discussion around on how CMS should look at the lab space in terms of collecting data and who should be involved in that. I'm curious, just how are you thinking about the puts and takes there, and how LabCorp is positioned, if you think about Medicare reimbursement, 2017 and on?

Well, so the legislation requires CMS to engage in a rulemaking, and my understanding is the first rulemaking is about how they're going to conduct the market surveys. And that rule is due to be published at some point next year. Then, the market surveys will be conducted in 2016 basically, and toward the end of 2016, there will be a clinical lab fee schedule rule in which they will propose, subject to notice and comment, the changes to the fee schedule.

From my perspective, the rule that determines how they're going to define a market is going to be very important. And ACLA and LabCorp and all lab constituencies, I think it's fair to say, are very much engaged with CMS in trying to create a survey that will be fair, but that will accurately represent the market for laboratory testing. Then once the surveys are done and completed, CMS will have the opportunity, not the way that the fee schedule has been addressed before, which was with the blunt instrument of across-the-board cuts, but CMS will have the opportunity to, on a CPT code by CPT code basis, address individual testing that they want to adjust valuations.

And I would say that I'm sure CMS's view is that there are some tests on the clinical lab fee schedule that should be reduced in price. And the industry feels very strongly that there are a lot of tests on the clinical lab fee schedule, particularly complex molecular testing. A lot of CPTs that need to be increased in price, because they don't reflect what the commercial market pays. It's very hard to predict what will happen in 2017.

But I think, again, it's fundamental to highlight that the agreement between the laboratory industry and Congress was that these surveys were to consider the entire marketplace. Senator Hatch specifically stated during passage that the intent of the bill was to ensure that Medicaid rates reflect true market rates and that all commercial payment rates to all sectors of the lab market should be represented, including independent laboratories and hospital outreach laboratories.

So, we expect that the industry and CMS will work together to faithfully execute the intention to bring laboratory, clinical lab fee schedule pricing to market price, and we think that ultimately will lead us to a fair outcome.

Got it. That's helpful, and then just a follow-up on some of the discussions around mix. Obviously, you've launched some new genetic tests and have maybe an increased focus there with BRCA and some of the cancer panels. At what point, or is a point in your mind where mix could eventually become a positive for you to the extent that those tests start to contribute some real growth to volumes?

Yes. I think if you look historically, up until probably even 2012, mix was always a positive for us. You look at the innovations in testing, cystic fibrosis, vitamin D, micro rays, prenatal genetic screening. Mix was -- we could pretty much count on about 1% to 1.5% of mix improvement, which was reflected in price over the years.

It's been in the last couple of years that mix has turned, and again, there's two parts of mix. There's test mix. So, what tests are we performing and getting paid for? And then there's payor mix. So, who's the ultimate entity that's paying for the services?

Test mix has been heavily influenced by the growth in toxicology, as we've said on a number of occasions, and has also been reflected in price by the fact that we're not getting paid for the molecular pathology testing, which is at a higher price point. Payor mix is affected by the move from uninsured to the exchanges, where people are moving into high deductible plans. And it's also affected by the move from uninsured to managed Medicaid, or from commercial -- from fee-for-service Medicaid to managed Medicaid, and even from commercial into managed Medicaid.

So, all of those things have been what you've seen, and what is reported as the weight on price, particularly in the last couple quarters. Obviously, test like BRCA and the cancer panels and the ACB testing that I referenced in the prepared remarks, all of these things have the potential to be positive impacts on mix, and BRCA has a very strong potential to be a positive impact on mix. So, we, as Glenn said earlier, we expect that we will see the leveling off of the price decline, and we will start to see improvement in the mix-driven price.

Okay. And then just, I'm sorry if you said this, but in terms of the MoPath and guidance, are you just assuming then just status quo there with MoPath payments for 2014?

Yes. We are.

Okay. Thank you.

AJ Rice, UBS.

First of all, just let me try to make sure I understand. When we're talking about the cost structure review, I know at one point, there was a sense that maybe you would have a significant announcement where you talk about a restructuring. I guess you mentioned a couple of things in the prepared remarks that are ongoing cost restructuring. Are you still thinking that at some point in time, you're going to lay out a grander cost restructuring program, or is it going to be incremental from here?

Yes. AJ, this is Glenn. We are currently in the process of looking at all of the opportunities in the Company to streamline, to potentially restructure where we feel we can be more efficient and take out costs. What we're looking at it is a fairly comprehensive program.

So at the appropriate time, we would expect that we would announce this comprehensive program, which would be all of the costs that we'll incur to achieve it, as well as what we believe the long-term benefit of the program is. It's just premature to talk about it currently, as we are continuing to go through the work ourselves.

Okay. And then on -- with you coming on board, Glenn, the capital deployment -- thinking regarding capital deployment, I know on the share repurchase front, it looks like there was a moderation in the current quarter in the pace of buybacks. Are you taking a review of capital deployment strategies as well? Is that what's going on? And maybe tie that into relative priorities for capital deployment going forward.

Yes. Obviously, one of the very attractiveness of this Company is we tend to generate fairly significant free cash flow. Obviously, we have to use that capital wisely, and there are a lot of opportunities to do it.

Historically, the Company has used a fairly balanced approach of acquisitions as well as share repurchases, utilizing our balance sheet. We are currently in that, call it, 2.5 times debt to EBITDA targeted range, albeit that will fluctuate a bit. I wouldn't get to focused necessarily on what we're doing quarter to quarter in particular.

Again, the second quarter was probably a little bit lighter on share repurchase then historically. But we'll continue to evaluate where we can put it, again, acquisitions and buybacks being the two principal modes outside of just organic needs. And so, over time, you'll continue to see us redeploy it where we feel we'll get the best return for the shareholders.

And any thoughts on the current status of leverage, the 2.5 times? Is that your comfort zone, or do you think you can take on more? I know there's been some talk about taking that up.

Yes. Effectively, the 2.5 is just one metric that we would look at. It's really more the philosophy of the Company that we want to maintain an investment grade balance sheet, so 2.5 times is roughly that proxy. Having said that, we have additional liquidity we're able to go higher than that, we believe, and still maintain investment grade, with the understanding that going forward we would use the free cash flow of the Company it to bring it back down to that level.

So as an example, should there be an acquisition or a larger buyback, that ultimately would take us higher than that level, with the commitment that we'll use the future cash flows to bring it back down. So it's, again, a proxy for us. It gives us some flexibility, but we do think that it's utilizing the balance sheet well, and redeploying capital in an appropriate fashion.

Okay. All right. Thanks a lot.

Isaac Ro, Goldman Sachs.

Thanks for taking the question. I wanted to spend a minute on bad debt, the comments you made there. If I think about the year-on-year comp into in the middle part of the year, you have fewer uninsured people in the system. Those people obviously tend to draw the majority of your bad debt, so theoretically that should improve.

But it sounds like on a year-over-year basis, at least in 3Q, you're expecting bad debt to go up. So I would be just curious if you could talk a little bit about how the rise of ACA coverage is impacting bad debt relative to your expectations?

Isaac, it's Dave. First of all, what we said in the prepared remarks is that in 3Q and 4Q we expect bad debt to go back down to 4.5, so we are not expecting bad debt to go up. Second, part of the impact of transition of patients from uninsured, or from their prior insurance into exchanges is that, although there are premium subsidies in the exchanges, there is very limited deductible subsidies, so you actually have people transitioning into plans where although they're getting premium subsidies, the average deductible, that is, before the patient gets one dollar of payment, in a silver-level plan is about $3000.

So there's more dollars going out to patient, as these high-deductible plans take effect and in the first and second quarters of the year, before patients get through the deductibles, you see more dollars of responsibility going out to patients. That's why we topped off the bad debt rate in this quarter. But over time, as Glenn said in his prepared remarks, we expect bad debt to go back to the 4.5% for the balance of this year, and to decline with the overall impact of ACA, with more patients gaining coverage.

Got it. Okay. I was looking at the bad debt year-on-year, but the sequential trends and the comment there make sense. Thanks.

And then just second on testing categories, just wondering if you could call out any areas of unusual strength or weakness in 2Q with regards to mix, and then how your expectations there maybe shape up for the back half. I'm just trying to make sure that I understand any specific dynamics around testing mix that could factor into your margins?

Well, we had strong growth in core testing. Obviously, on a year-over-year basis, we had strong growth in BRCA, in our new swab testing, in our Hepatitis C, both the screening and the reflex testing. So there's a good solid mix of growth in both the core business and in esoteric testing. And then we did continue to have strong growth in the toxicology, pain management, and drugs of abuse area as well.

Got it. Okay. Thanks.

Frank Morgan, RBC Capital Markets.

You just mentioned your commentary about the bad debt outlook in the second half of the year. I was hoping you could just hit on other items that are implied in your updated guidance. What you think for both volume and pricing, and do you expect to see any investment gains in the balance of the year? Is that contemplated in your guidance?

Frank, this is Glenn. Let me take a cut at that. First, with the latter part of the question, no investment gains are forecasted in the second half. And obviously, to the extent that we would have any, we will break that out for you.

As you think just more broadly about the implied guidance for the second half, we're looking at relatively comparable top line growth in the Company, so in order to hit that 2% rate, we are going to go close to 3% growth at the top line of through the second half of the year, and there is obviously seasonality, as you look first half to second half, with fourth-quarter historically a low quarter for the Company. Similarly we expect from a profitability, to be comparable. So again this goes back to the comment that Dave and I mentioned that we're leveling off, plus or minus, on the operating margins with where we are.

The big positive though is that despite second half, first half being comparable, we expect to see very improved free cash flow in the business, which again, this tends to be more seasonal for us as well, as we tend to generate cash from working capital in the second half of the year versus the first half. But nothing frankly unusual that we would expect to see in the second half, other than again continued top line growth, trying to leverage that, but realizing that we can still have some of the headwinds from the test and payor mix issue.

And Frank, this is Dave. Just again agree with everything Glenn said. Excluded from the guidance is any share repurchase after June 30, any benefit from the enterprise reengineering that we've mentioned, and any improvement in the MoPath position. Those are all not included.

And acquisitions or would acquisitions be included?

No significant acquisition is contemplated in the guidance. We, as you know -- we do tuck-in acquisitions and we do them regularly, and so we might do some of those, and that would affect where we come out in the range, but there's no material acquisition contemplated.

I got you. One more and I'll hop. How do you see the margin profile playing out in these new areas with Beacon and Enlighten, and what kind of margin profile would that business have, and how do you think it would be before it would really have an impact? Thanks.

I think it's early to say what the margin profiles would be for those businesses. I mean, for example, we know what the margin is the clinical trials business but other parts of Enlightened Health that we're developing, we have some expectations, but I don't think we have anything that we are prepared to say. Beacon, we need to get it up and working, and then we'll be able to talk more about the margin profile over time. So I think it'd be premature to make any estimates there.

Okay. Thanks.

We're at about 5 minutes before the hour, and so we'll have time to take a couple more questions. I'd encourage you please not to repeat questions that have already been asked and answered.

Glen Santangelo, Credit Suisse.

I apologize in advance, but I do want to follow-up on this revenue per requisition. In the current quarter you are clearly only down 2%, which is a little bit better than the 3.3% in the first quarter. So I'm wondering if you could dimensionalize a little bit exactly, I think you gave us some of the payor mix changes that may be weighing on that pricing component. Could you give us -- and you did give us some color on test mix, but as I dimensionalize that 2%, could you split it out between what's payor mix and what's test mix?

Glen, we don't split out the payor mix and test mix. We haven't historically, and I don't think it'd be a good practice to start. So we are still resting on our laurels from Robert Willoughby and putting the full financial statements in. That's as far as we'll go.

Okay, and then maybe I'll just ask a second quick question. I think in your prepared remarks, you suggested that you're not willing to go vastly outside of the scope of your core competency, but you did sort of mention from a strategic perspective that international maybe something that could be interesting to you. Are there any markets that you're sort of keeping your eye on, that could be interesting for LabCorp?

I think that the most interesting markets, and we outlined this a little bit in our investor presentation, the most interesting markets are going to be markets where there's growing attention to provision of healthcare to the middle class. There's growing private wealth.

There's infrastructure to support the kind of business that we run. So roads, airports, transportation infrastructure. And there's a recognition of the importance of diagnostics, and I think largely those are going to be what I would characterize as developing markets, but higher-end developing markets, as opposed to mature markets.

Okay. Thanks.

Ricky Goldwasser, Morgan Stanley.

This is Zach for Ricky. I just wanted to check on market growth versus your organic growth, and I think in the first quarter, your organic was 2.5%. This quarter, 3%. So we implied that you're stealing share, or that the market is growing faster?

Zach, it's Dave. These numbers are always subject to interpretation. I think from the perspective of looking at our business and looking at the markets around us, and looking at what I think is a really excellent job of execution that we are doing at the operational level, I think it's hard to look at these numbers and say that share gain is not a big component of how we're growing. So we are pleased about that, and obviously, our goal is to continue it.

Okay. Thanks. And a quick one, just on the tuck-ins. Is it fair to assume that those are dilutive to price per requisition, so they're a negative mix impact?

No, I don't think that's fair to assume.

Okay. Thanks.

David Clair, Piper Jaffray.

So I was just hoping you could give us any metrics on the type of cost savings you are seeing after installing Propel in the lab? And how big of an opportunity is this as you roll that out?

In terms of metrics, the only metric I would give you is that we see completion times significantly improved, so when we're getting the results out to the physicians, we see reagent costs being reduced as a result of less retesting and more accurate placement of the specimens on the instruments. And we do see a reduction in labor costs, just because we have automated the front end.

We haven't specifically spoken to, and don't intend to specifically speak to the exact impact of any given initiative like this. As we say, we are always looking at the cost structure. We're comprehensively reviewing the opportunities to reengineer. Propel is a for perfect example of how we went out and reengineered the front end to make it work better, and that's what we're going to do with the rest of the Company as well.

Okay. And then what are your plans to roll out Enlighten, beyond the initial launch here?

Well, I think the answer to that is stay tuned, because we'll roll out specific -- some of those components like the [Caron Intelligence] platform, the decision-support platforms and the clinical trials business are already out, and the question is our ability to grow them. Some of the components like the genetic and genomic focus and applying our competencies to new areas, we'll continue to evolve over time, and we'll talk about them as we get them up and running.

Okay. Thank you.

At this time, we have no further questions. I would now like to turn the call over to Mr. Dave King for his closing remarks.

Thank you again for listening this morning. I'd like to again reiterate what I said in the prepared comments, which is, we have positioned LabCorp to grow and thrive in this era of healthcare reform. We are confident that quality, efficiency, scale, and the role that we are playing in improving care delivery and patient outcomes through our core business, through our specialized testing, through Beacon LBS, and through Enlighten Health will be key measures of success over time.

We are excited about the opportunities ahead, in our ability to excel and generating shareholder value in the years to come. Thank you, and good day.

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