Labcorp Holdings Inc (LH) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 Laboratory Corporation of America Holdings' earnings conference call. My name is Chantilly and I will be your facilitator for today's call.

(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. Please proceed, sir.

Good morning and welcome to LabCorp's third-quarter 2014 conference call. I'm 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 highlight our progress on our five pillar strategy, discuss our third-quarter 2014 financial results and update our 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 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, 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. Good morning. We are pleased with the strong revenue and volume growth that we have generated this year and believe that the long-term growth prospects for our business and industry remain great. We employ our five pillar strategy to capitalize on these opportunities and I would now like to highlight our key initiatives within this strategy.

With respect to pillar one, we deploy our capital to investments that enhance our business and return capital to shareholders. Last month we announced our acquisition of LipoScience, a premier esoteric laboratory focused on personalized diagnostics for cardiovascular and metabolic disorders. The NMR LipoProfile test is the only FDA cleared test for measuring LDL particle numbers offering actionable information for physicians and patients in the management of cardiovascular disease.

Hence this acquisition will enhance our innovative clinical decision support programs allowing us to provide broader differentiated knowledge services to physicians and patients. Furthermore the novel application of nuclear magnetic resonance technology furthers our leadership in scientific innovation. This transaction is expected to be accretive to LabCorp's earnings in year one and to earn it's cost of capital by year three. Earlier this month, the Federal Trade Commission granted early termination of the HSR waiting period for this acquisition and we expect it to close during the fourth quarter.

During the quarter we repurchased approximately $66 million of our shares bringing our year-to-date total to $228 million. Our cash balance at the end of the third quarter was $576 million, but this cash balance does not reflect any change in our capital allocation philosophy. We anticipate reducing this cash balance in future quarters continuing to make strategic acquisitions as well as returning capital to our shareholders.

Under pillar two, we aim to enhance our IT capabilities to improve the physician and patient experience. We continue to improve our tools that assist physicians and patients in interpreting test results and optimizing decision-making. To this end we are partnering with Wolters Kluwer to develop up-to-date advisor for labs, a decision support resource for clinicians interpreting test results. This partnership equips clinicians with real-time contextual laboratory decision support content delivered while the clinician is reviewing results.

Similar content will be made available to patients which will help them to review and understand their lab results. That content will be available through our patient portal where registrations now exceed 625,000 patients and these patients currently review over 120,000 reports via the portal each month. We believe that providing patients with tools that help them understand their health is fundamental to reducing costs and improving outcomes.

With respect to pillar three, we continue to improve efficiency to offer the most compelling value in laboratory services. Our Propel robots in our Burlington and Tampa laboratories continue to drive expense reductions through improvements in throughput an accuracy and to enhance service levels. We remain on schedule to begin the installation of Propel in our Dublin, Ohio facility at the end of this year and we plan to install Propel in five additional facilities over the next two years.

We continue to streamline our operations and reduce expenses through facility rationalization. The consolidations of our facilities in Mitchel Field, New York and Monrovia, California into our Connecticut and Santa Fe laboratories respectively are now complete. Also we continue to consolidate services, expand our test offerings and leverage increased capacity in our center for specialty and clinical testing located in Phoenix, Arizona.

We are building significant momentum on our enterprise wide business process improvement initiative and we have initiated several projects that will begin to bear fruit in 2015. We are reengineering our business to provide a better operating platform, sustainable long-term savings and a world class customer experience. We plan to discuss this initiative in detail when we report our year-end results and provide our 2015 guidance in February.

Under pillar four, we continue our scientific innovation at reasonable and appropriate pricing. We recently launched our InformaSeq prenatal tests, an advanced noninvasive next generation prenatal screening assay that assess risk for multiple fetal chromosomal abnormalities from a single maternal blood draw. There are testing options for several additional common sex-related abnormalities as part of InformaSeq.

We have also recently launched our BRCA next generation sequencing assay which provides complete gene sequence analysis of BRCA 1 and 2. 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 from our licensed directors and our team of 123 board-certified genetic counselors and 9 medical geneticists.

We also continue to see growth in our 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 pillar five, we continue our progress in developing knowledge services. Last month we announced the launch of Enlighten Health Genomics, and later this quarter Enlighten Health Genomics will introduce ExomeReveal, a whole exome sequencing testing service. ExomeReveal will provide genome wide interpretation for children with serious genetic diseases as well as additional diagnostic information for patients of any age.

Because evidence increasingly suggests that early genetic diagnosis can improve clinical outcomes, patients with serious genetic conditions require a thorough interpretation of their genome. We will offer innovative and affordable diagnostic solutions that make genomic testing accessible to support critical clinical diagnoses. We continue to develop all aspects of our Enlighten Health Initiative. Our decision support programs, our care intelligence data analytics programs and our clinical trials business.

Our data and analytics tools help physicians understand their metrics of care delivery and improve compliance with pay for performance in population health metrics. Our disease specific expertise in kidney stone, chronic kidney disease, cardiovascular disease and coagulation help physicians taylor specific treatment programs for their patients.

Finally our clinical trial central lab business serves physicians and patients by working with pharmaceutical companies to create vertical alignment from drug design to identification of unique patient populations that will respond to therapy.

As discussed on our last earnings call, we invested in BeaconLBS 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 laboratory testing.

After extensive market analysis and an enormous amount of hard work, we invented a tool that helps physicians choose the right test at the right time and helps payers improve quality of care and thoughtfully address concerns about unit cost and trend. UnitedHealthcare launched the innovative laboratory benefit management program with BeaconLBS in Florida on October 1 and we are pleased with the rollout thus far.

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 the 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. Now I'll turn the call over to Glenn to review our financial results.

Thank you, Dave. Sales for the quarter were $1.6 billion, an increase of 6.1% over last year. The increase in sales was the result of strong volume measured by requisitions and acquisitions which was partially offset by price mix and currency. Total volume increased 6.9% over last year with most of the growth coming organically.

Revenue per requisition decreased 0.7% of which 0.3% was due to foreign currency translation. Top line growth was spread evenly across our core and esoteric businesses. From a payer perspective, managed care revenue increased the most at roughly 10% while pricing remained relatively flat. The increase in managed care revenue was driven in part by the Affordable Care Act.

Gross profit for the quarter was $571 million, or 36.8% of sales. This compares to gross profit of $548 million, or 37.5% of sales last year. The increase in gross profit was due to volume and productivity which was partially offset by price, mix, personnel costs and depreciation.

SG&A for the quarter was $306 million, or 19.7% of sales, compared to $279 million, or 19.1% last year. During the quarter we incurred $5 million of special charges primarily related to our business process improvement initiative. The remainder of the increase was due to personnel costs, acquisitions and an increase in bad debt expense. While the bad debt rate was higher than last year, it was down from last quarter and we expect to continue to make progress on lowering this rate in the future.

During the quarter we had $6 million of restructuring and special items primarily due to facility closures and related severance compared to $4 million last year. Operating income was $241 million, or 15.6% of sales, compared to $245 million, or 16.7% of sales last year. Excluding restructuring and special charges totaling $11 million, adjusted operating income was $253 million, or 16.3% of sales compared to $248 million, or 17% last year.

Interest expense for the quarter was $26 million compared to $25 million last year. The increase was driven by higher debt balances as a result of our debt financings in the fourth quarter of last year partially offset by the benefit of fixed to floating interest rate swaps on a portion of our debt. The tax rate for the quarter was 37.2% compared to 35.3% last year. The increase in the tax rate over last year was the result of benefits related to discrete items realized in the third quarter of 2013.

As a result, net income for the quarter were $137 million, or $1.59 per diluted share. This compares to $148 million, or $1.63 per diluted share last year. Excluding amortization, restructuring and other special items, adjusted EPS was $1.80 unchanged from last year.

We continue to generate strong cash flow. During the quarter operating cash flow was $176 million compared to $234 million last year as we used working capital to support strong top line growth. Capital expenditures totaled $53 million which was essentially unchanged from last year. As a result, free cash flow or cash from operating activities after capital expenditures was $123 million compared to $182 million last year.

As Dave mentioned, during the third quarter we repurchased $66 million of our stock bringing our year-to-date share repurchases to $228 million. We ended the quarter with approximately $824 million remaining under our Board authorized share repurchase program.

Our full-year guidance for 2014 is for sales growth of approximately 3%. Given our performance in the third quarter and outlook for the year, we have increased our 2014 adjusted EPS guidance to $6.70 to $6.80. Operating cash flow is targeted at $760 million to $780 million while capital expenditures are projected to be $200 million to $205 million. As a result, free cash flow is now projected at $555 million to $580 million. The lower free cash flow range is reflective of additional working capital needs to support our strong top line growth as well as investments associated with our business process improvement initiative and restructuring activities.

This ends our formal remarks and now we'll be happy to take any questions. Operator?

(Operator Instructions)

Robert Willoughby, Bank of America.

Hey, Dave, can you speak to your expectations for Enlighten Health Genomics and how the money will flow there, what kind of payer support we should see? And also just what are your plans for the Canadian infrastructure with some business moving away from you there?

Good morning, Bob, it's Dave. The plans for Enlighten Health Genomics at least initially are that the offering will be directed largely toward the self-pay market. So part of the reason that it's under Enlighten Health and part of the reason that it's a broader whole [ex] on [warfarin] than our traditional reproductive genetics business is, as we indicated, is targeting the market for early childhood development, developmental delay and early childhood severe genetic diseases.

I'm sure over time there will involve to be a commercial payer component of that and our expectations are given the severity of the disease states that we're looking at that we'll have a successful payment experience even with the commercial payers.

With regard to Canada, I'm going to ask Glenn to comment on that as he is directly involved in the day-to-day handling of that situation which as you know is the Alberta RFP.

Yes, Robert this is Glenn. To your point, we currently are servicing the Alberta Health System and they did an RFP a while ago and have chosen to go with another company at least at this stage to now negotiate a new transaction with them. As you know we're a minority investor in that company DynaLIFE. And while the results are not material to us obviously we're very disappointed with the decision that's been made by AHS.

Having said that, we've not been debriefed yet by them as far as why we didn't go ahead and have our business re-upped. And then there's an appeals process that follows that should we elect to do that. So, again disappointed with it, we feel Canada is a very attractive market. We're already there outside of just this minority joint venture that we have elsewhere in Canada and we'll continue to pursue all the options we have to continue to perform business up there.

All right, thank you.

Darren Lehrich, Deutsche Bank.

Hi this is Josh in for Darren. Hoping you can shed some light on your operating leverage and with the increased volume you've been getting is there any reason why you haven't been getting better operating leverage out of the operating income?

Josh it's Dave, I'll start and then turn it over to Glenn. I think the obvious answer is that when -- the difference in operating leverage is the decline in price. So if you look at versus last year, we're down 70 basis points in price. If you add that price differential back in, our operating leverage is basically about the same.

When you think about the foundation model, which we've talked about for years, the assumption in the foundation model is that price is flat to slightly up. You may recall with the benefit of positive mix we used to get 50 to 100 basis point points of positive price from the -- just from mix driven price. So when price is flat to increasing, there's great leverage and obviously as price is declining it's more difficult to get leverage because every incremental specimen that comes in the door requires reagents, requires labor, requires infrastructure costs, and in a declining price environment it's difficult to get leverage.

But we are very pleased with the price improvements sequentially from the second quarter to the third quarter and from the beginning of the year through this point in the year and have every reason to expect that that would continue. Glenn?

No its -- maybe I'll just add just a little bit of color because I think that addresses it pretty well. I think where we're pleased is the amount of organic growth that we're experiencing in the Company. Pleased with the amount of productivity that we're getting through that as we leverage our lab. But as Dave said, when you have price and mix issues obviously that falls down to the bottom line.

In addition, we've had some bad debt rate increase and expense that again we think we've peaked out on. So as we go forward, we would expect to see that start to show favorable comps which will help. Again, I don't know if you're looking at it on an as adjusted basis, but we also had some restructuring and special items.

And to that point in recognition of the fact that we are seeing the margin squeezed because of pricing, we're really looking at this business process improvement initiative and restructuring in order to continue to leverage our cost structure which will continue to benefit the Company as we go forward.

Okay great, thanks. And if I could just one more. Can you guys give us an update on the progress with molecular pathology payment and outside of state Medicaid programs?

Yes, it's Dave. We continue to work with the state Medicaid programs we have and there is some managed Medicaid programs as well that have been challenging for us. While we have made some progress there the progress has been slower than I would like.

So we have now undertaken a review of accounts that are generating large amount of MoPath volumes and high write-offs and relatively small amounts of other business and we're starting to shed those accounts. Because they are generating large amount of MoPath volumes, high write-offs and there's a significant amount of expense in performing the MoPath.

So we're attacking the problem on both sides. One is continuing to work with the payers and the other is pruning accounts that are basically, in our view, just using the opportunity to send us MoPath with the recognition that we're not going to get reimbursed for it.

Okay. Thanks, guys.

Per Ostlund, Craig-Hallum.

Just wanted to ask quickly about the cash balance, it's grown here the last couple of quarters quite nicely. I'm sure some of that here in Q3 you've got that set aside for the LipoScience transaction. But just wondering if we could get your most current thoughts on the appropriate leverage for the Company and share repurchase? Thanks

Sure, Per Ostlund. As Dave made a comment in his opening remarks, we do recognize that our cash balances have increased. The good news is obviously we continue to generate good free cash flow that's providing that while we continue to pursue acquisitions and do share repurchases. We've not changed our, call it targeted leverage, the 2.5 times to EBITDA which we realize that on a net basis we would be below that level right now given our cash balances. So we continue to look at opportunities. We continue to expect to redeploy our capital and we would continue to at least expect that that cash balance will decline over future periods.

Okay. Thank you.

Lisa Gill, JPMorgan.

Dave I know I asked about this last quarter around BeaconLBS, but just given the things you've highlighted today around the doctor making the right test decision at the right time et cetera, I'm just curious if you compare those doctors that are using this versus a similar doctor, are you seeing them doing more lab tests, less lab tests? And what do you think that means for the future if you continue to see this rollout to other physicians?

Morning, Lisa, it's Dave. I think it's too early to draw any conclusions about more lab tests or fewer lab tests from the population of users of BeaconLBS. I would point you to the slide in our investor deck that talks about 20% over utilization of lab tests in certain circumstances and 45% underutilization in other common disease states.

So the point is BeaconLBS is really less about over utilization/underutilization than it is about choosing the right test for the patient at the right time based on a Q&A that's presented to the physician. So I think as we think about over time, and again refer you to the investor deck, the slide that shows the growth in number of lab tests per patient in the population from 1997 to 2008 and also the increase in lab tests per patient per year as patients age, I don't think we're talking about dramatic decreases in volume of laboratory testing as a result of trying to manage costs in trend.

I think what we're talking about is exactly what we've always talked about which is better use of lab testing for diagnostics, better use of the tools to get at the disease state and better use of lab testing and support of precision medicine and personalized care. And that's the goal not only of BeaconLBS but also of our decision to support programs.

It's all about how do we get the right tests to the right patient at the right time, because we are here for the patient. And how do we use lab testing to integrate with other data that will enhance the care that the physician is able to provide to the patient.

And then just thinking about the right test, can you maybe just give us any update you have around BRCA as far as what you're seeing around test volumes there? Thank you.

Sure. We're very pleased with BRCA volumes, we've seen very nice steady growth since the time that we launched it. Moving to the NextGen sequencing platform has enabled us to significantly increase the speed of performing the test. So most of the, quote-unquote, BRCA backlog that we have is due to pre authorization requirements and we wait for pre authorization. But volume continues to grow, the throughput in the lab is excellent and we're very, very pleased with where we are in the market.

Thanks, Dave.

Bryan Brokmeier, Maxim Group.

Last quarter you mentioned that it was hard to identify the benefit from ACA but there was a slight benefit. Now about three months later, it seems that it may have been a greater impact in the quarter. As we look to people getting more coverage next year, should we think about it taking us about three months for members to get their benefit cards and to start utilizing benefits or any thoughts on what benefit you'll get next year?

Bryan, it's Dave. I think the benefit from ACA has been greater than we have expected from a volume perspective this year. I think if you go back and look at what we said starting in the fourth quarter of last year that we expected ACA to be relatively neutral maybe at slight net positive. I mean obviously from a volume perspective, I think ACA has contributed to our growth and particularly to the very strong organic growth.

I think it's hard to know next year because there are many factors up in the air. Medicaid, the potential of Medicaid expansion in some of additional states, some of the grandfathered plans or the plans that were allowed to be grandfathered for one more year that were non-compliant going away and people moving to the exchanges. Patients, pre-Medicare patients moving to exchanges and even some managed Medicare moving to the exchanges.

So I'm hesitant to forecast what it would be particularly given the inaccuracy of my earlier forecasts. But we do see ACA as a net positive in terms of volume. And again as we have mentioned, there is somewhat of a drag on price due to test mix and also due to payer mix.

All right, thanks. And I know that your guidance does not include feature share repurchases or M&A but could you talk a little bit about what other assumptions are built into your outlook is terms of healthcare utilization, molecular pathology reimbursement or other key issues that are being built into your outlook?

Bryan this is Glenn. You're right for the share repurchases in M&A we don't after the third quarter so project that out. But obviously we continue to be in a market and again have an acquisition that we announced albeit would not be material to our fourth-quarter results albeit hopefully we do close it in the quarter.

The rest of the guidance is based upon just essentially the organic growth that we're seeing. We've given guidance at the top line for the year, so you get an implication of what that means for the fourth quarter. Similarly we expect to have good operating performance and results in the fourth quarter.

I think this was a question earlier with the pressures that we've been having from price and mix. You can see that the comps for the quarter compared to the quarter a year ago each time the margin differential is narrowing. So we're starting to see that price mix abate a bit. So hopefully with good volume we'll start to see good leverage with pricing and mix not impacting it as much where now hopefully we'll see start to see some favorable comps on margins year over year.

And Bryan, one other thing. So we're not assuming any improvement in the MoPath specifically. We're not assuming any improvement in the MoPath payment experience and we also have not factored in any financial benefit from the enterprise wide re-engineering, although obviously the cost side of that is factored in.

Okay, great. Thanks

Amanda Murphy, William Blair.

Just a follow up on the mix conversation. So just given all of your new test introductions specifically the NGS testing, is there -- what are your expectations longer term around mix? I know obviously not expecting guidance commentary, but do you think that possibly we could see an improvement in the -- at least from a test mix perspective in 2015?

Amanda, it's Dave, good morning. Yes, I think that if you look at the test that we're launching, the InformSeq, the various NGS methodologies, the -- all of the infectious disease related tests that follow on the HCB screening, the Exome business, all of these are high value. We also were pleased to see that from a mix perspective we had an increase in pathology volume this quarter which as you know has been a challenging area for us. So all of these things help mix and I think over -- again all other things being equal we would expect to see mix improve next year.

The unknown in that is that the mix component particularly of the ACA/managed Medicaid is a mix that is more driven towards the -- or more weighted towards the core testing. And so that offset some of the benefit and partly that's because of payment policies of not paying for molecular pathology and genetic testing and partly it's just because of patients new in the system are getting tested that are more weighted toward core testing.

So there are a lot of moving parts in there but we continue to strive to return to that 40% esoteric mix and obviously over time we've said 45% and we think that's a realistic aspiration for ourselves.

Got it. And then just again on the NextGen topic. I'm wondering how close are you guys or how much visibility do you have into some of the pricing of the new NextGen codes for 2015? I guess I'm wondering is there risk around that side of the business similar to what we saw with MoPath where you see new test codes come on line and maybe payers are more reluctant to pay for them?

I don't think we have a lot of visibility into NextGen codes. So far our experience with payment for NextGen methodology has been fine because again it's a different methodology for performing testing that already has codes assigned. So it's too early to tell at this time, but I will tell you that we're working very hard to avoid a repeat of the MoPath situation in terms of payer policies and utilization.

Got it, thanks very much.

Gary Taylor, Citi.

A couple questions just to follow up on your ACA volume comments. I just wanted to see, are you suggesting as the year progress that you've just continued to see more Medicaid volume coming through or are you seeing more healthcare exchange volume or is the answer both?

Gary it's Dave. The Medicaid volume was a much bigger percentage of growth in the earlier quarters than it is now, so that's actually abated over time. And it's very hard to attribute that with any precision, but you could argue that that was people who were getting coverage for the first time under the ACA and were going to the doctor at the beginning of the year. That has -- the percent -- Medicaid make no mistake, managed Medicaid has grown significantly this year but the percentage of overall growth that it accounts for has declined from the first quarter to the second quarter and declined again from the second to the third.

In terms of the exchanges, we don't have a lot of visibility about who are exchange patients because again they just come to us with an insurance card and that insurance card says that they have XYZ insurance. It doesn't say that they're exchange patients. So we are seeing, as Glenn mentioned, strong revenue growth from the managed care payer set. And some of that undoubtedly is exchange-based and some of that is growth in commercial lives.

Okay, thanks. Second question just looking at the gross profit this quarter, which you guys did touch on, but what's interesting to me is I think as far back as our model goes I don't think we've ever had gross profit dollars up sequentially from 2Q to 3Q. And so I just wondered if you could -- obviously the revenue growth from the quarter was part of that dynamic but even the sequential gross profit margin decline was much less than we would typically see. So I just wonder is there anything else from that dynamic worth discussing? And it doesn't look like much of that was really carried into what's left for the fourth quarter in terms of gross margin assumption. So, any extra on that?

Yes. Just as a general comment to your point, gross profits growing because of the benefit of the volume that we're getting. We talked earlier about just the price mix while it's a little bit of a headwind has been mitigating. So the additional volume we're getting is helping the gross margin.

As we look forward again, we've got -- given implied numbers for the fourth quarter so we actually expect to see a pretty good comparison year over year. Still having a bit of the headwinds but when you look sequentially, the fourth quarter normally would be a lower volume period for us compared to the third. So from a trend, if you will, expect that.

But we're pleased with the volume there, with the productivity that we're getting, gross profit is going to be holding into that kind of range and that we should start to see now even better leverage on our cost structure as we go forward especially. And now this is on the S&A side as the bad debt now starts to compare favorably from period to period.

Okay, great. Last question, big picture from an investment perspective and going back to the foundation model that you talked about. But when you look at overall operating income margins have declined since 2008. We all know the reasons for that. But as we look into 2015 Dave you talked about an expectation that mix would improve.

I don't know if that yet means that revenue per [rep] actually can grow in a material way in 2015 or not. But really it seems like with volumes having recovered that the bulk of the margin outlook from here is really predicated on that pricing outlook. So as we look into 2015, you've got a new cost saving program you're going to talk about, you're expecting mix to improve. So is it fair to have expectations at this point that operating margins actually grows in 2015?

Gary we obviously are in the process of working through our budget which leads to our guidance in February. So I'm not going to answer the question directly because I think it'd be unfair to do so. But what I will say is when we think about 2015, at least what we're seeing in the trends, we have no major managed care renewals. We have a trend of volume strengthening through 2014. Now again some of that could be one time because of ACA, but obviously we're very pleased with the volume and particularly the organic volume contribution in this quarter.

Price has been moderating and no guarantee that that continues but we've lapped some of the major pricing events, the doc fix cut sequestration, the major impact of MoPath. So what I would say is there aren't any obvious reasons as I think about the performance in 2014 why we shouldn't see operating margin improvement in 2015. There's no obvious headwinds that are blowing in our faces at the moment.

But, and we feel good about that, but things can change and so I'm not going to put a stake in the ground right now and say yes you should expect to see operating margins improve. That would be our hope based on the continuation if we see the continuation of these positive trends.

Great, that's helpful, thank you.

Ricky Goldwasser, Morgan Stanley.

I had some follow-up questions on the growth you're seeing for your managed care business and really how it compares to total. So I think Dave you mentioned 10% growth in the managed care business. And if you think about it as being about 45% of the revenues, is it fair to assume that it contributed about 4.5% to top line growth? And then maybe the rest of your payers and businesses are growing more in line with the market at the 1.5%-ish to 2% revenue growth? Is that a fair way to look at it?

Hi Ricky, this is Glenn. Overall again we did comment that managed care was the strongest growth of the payer groups that we have, but it is a little bit of a mix. So some of that growth is coming out of other areas as opposed to just natural growth such as patient, if you will, and third party, that may have moved into that.

But overall when we look at from a test perspective, we saw pretty broad growth really across both the core and the esoteric parts of our business. But from a shift to your point, managed care is coming in at roughly around 45% of the business that we have. So from a mixed standpoint it increased greater than our other payer categories. But again with the exception of client that would have been up a fair amount as well, others would have come down and moved into those categories.

Okay, so just as a follow up to tie it to the margin discussion because I think this is one of the areas that are a little bit confusing to us. Should we assume that given the moving parts in that managed care bucket with ACA lives, et cetera, that maybe for the time being that managed care payer segment might be lower margin than some of the other payers and that's why you haven't seen the leverage in the margins yet?

Ricky, it's Dave. Again managed care is a very large -- we have over 2,000, 2500 managed care relationships and contracts. So it's not accurate to paint managed care as having a particular margin. We don't have margins within our business. As I think we've said on a number of occasions when a specimen goes through the instrument, the instrument doesn't care if it's a Medicare specimen, a Medicaid specimen or a managed care specimen, we don't have margins by payer.

What I would say is the growth in managed care, particularly what you saw in the first quarter and to some extent in the second quarter of the year, was overweighted toward movement of patients who previously were uninsured into managed Medicaid. That, just from a pure price perspective accounted for a lot of the drag that you saw and you saw that starting to abate in the third quarter.

Okay, that's helpful. And also just lastly I noted in the past you talked about an average 2% to 3% top line growth is kind of a base growth. And once you've past it, you can start seeing the leverage to the margin. Again not assuming the moving parts around Medicaid population, is that -- does that still hold?

Yes as long as price is flat to up, that still holds.

Thank you.

David Clair, Piper Jaffray.

So first one for me, I'm just curious if maybe you can give us your thoughts on FDA regulation of LDTs and how that might impact your business?

David, it's Dave, good morning. My perspective on FDA regulation of LDTs is quite clear and I've been pretty vocal about it. Diagnostic testing is not a device, it's a medical service. LDTs the FDA in our view does not have the authority to regulate LDTs as medical devices. They don't have statutory authority to do that because medical tests are not devices.

On top of that, the attempt to make this regulatory change through a guidance document, which on its face says that it's not binding on the FDA and only reflects their current views, and yet in this document lays out a 10-year regulatory plan with registration requirements and penalties for those who don't register, to me is just incomprehensible. So my perspective is this is one of the biggest land grab attempts in the history of regulation, and from my perspective we intend to vigorously oppose it.

What could it do to our business, first of all it could dramatically affect the practice of medicine and it is the practice of medicine when doctors select what tests to use. And I don't understand how FDA thinks that somehow creating this great regulatory system around laboratory developed test is going to help doctors practice medicine. It interferes with the practice of medicine where doctors make rational choices about the test that they want to use.

Furthermore there's been no study of the economic impact on our industry, on patients or on the practice of medicine related to this because FDA has not followed the proper administrative procedure for doing what it's trying to do. So I think you can tell that I feel very, very strongly about this and my perspective is that we as an industry need to oppose this attempt at regulation as strongly as we possibly can.

Okay, thank you. And then I was hoping to get an update of the noninvasive prenatal testing business. And do you think that right now we're primarily -- you're seeing primarily high-risk volume or do you think we're starting to see some average risk volume there?

Well my understanding is that the test is approved and being offered for high-risk patients. Now there's no question that, again let's go back to the last question you asked which was LDTs and the practice of medicine. Some physicians in the course of the practice of medicine are choosing noninvasive prenatal screening for average risk patients, that's the physicians' choice. We are certainly not marketing the test or presenting the test that way. I will say that most of the payers have policies against payment for noninvasive prenatal testing for average risk. And I think to get a payment in place, the test is going to just need more data to support its use on the average risk population

Thank you.

Isaac Ro, Goldman Sachs.

Wanted to just talk a little bit about utilization in the context of fourth quarter. I think we've seen a relatively steady uptick in seasonality into fourth quarter the last few years and was wondering if your guidance assumes that we'll see another seasonal uptick versus past years?

Isaac, it's Dave. The guidance assumes that the fourth quarter will be much like prior fourth quarters in the sense that major contributors to our performance are holidays, weather, limited -- a fewer number of revenue days because of Thanksgiving and obviously the Christmas and New Year's season. So what we do is obviously we build the guidance off the full year model and we look at prior fourth quarter experience and incorporate that in, and I can't say that it does or does not include seasonal upticks in volume or seasonal down ticks in volume. It's -- the guidance as we always say encompasses a wide range of outcomes and it's built on a model based on past experience.

It's helpful, thank you. And then just secondly a question on bad debt, I think earlier in your comments you said that you thought the bad debt dynamic has peaked here. I was hoping you could help us understand the reasoning for that process.

Yes, Isaac, this is Glenn. Again it's just a very proactive approach to doing it. Bad debt just given the volumes we have will go up. But what we've seen is that from a rate standpoint based upon historical performance, we saw our rate rise. We now have seen a trend for -- this current quarter is now down from the prior quarter around 20 basis points. If we maintain that level currently, which is at least our expectation, now that'll start to comp favorably to the rate that we would have had the same period a year ago.

We continue to be very proactive. Part of our business process improvement initiative as well encompasses how we go about our efforts to collect, and we're encouraged about the initial progress that we're seeing and we would expect that to continue.

Got it, thanks so much, guys.

Michael Cherny, ISI Group.

Good morning, guys, and thanks for all the details. So Glenn one quick question, and I apologize if I missed this, did you give the actual contribution from nonorganic revenue in the quarter?

We did not. We gave that from a volume standpoint, we were up 6.9% with most of that coming from organic. You're looking at a little over, call it, 5.5% give or take would come from organic and, call it, 1 point, 1.5 points coming from acquisitions.

Thanks, that's quite helpful. And then Dave, question for you and going back to a topic that I know has been one your focused on from a government perspective. Now that we're a little bit ways past the doc fix and the clinical lab fee schedule review push out, how do you start to think about the positioning ahead of the review that's going to go into place for the 2017 adjustments?

How are you positioning yourselves with CMS and going about again proving your point as to the value you provide relative to the review that's going to come up and the market-based pricing that will be put in place. I just want to get a sense now that we're six months past now, so maybe you have a differentiated view versus where you had been before.

Sure, so we've actually -- quite recently the ACLA membership went and met over at CMS with the folks who are working on how the market survey is going to be formulated and how they're going to evaluate market pricing. And I think the good news coming away from that discussion is that first of all CMS recognizes it's a complex task that they've been assigned.

And I think second of all they genuinely want to do a good job because I think the understanding of the -- of all of the parties was that what was intended was, yes, market base pricing but it had to be based on true market. It's not just independent lab market. It's not just select market pricing or select test pricing, it's the true market. And the true market has to include commercial payer pricing to hospital laboratories that are paid on an average basis or paid off a commercial lab fee schedule.

So obviously there's a lot of work to be done here and there will be, my understanding is there'll be a proposed rule on how those surveys will be conducted that's going to be coming out from CMS later this year. We are working collaboratively with them as an industry to try to make this a fair process and to get the outcome that the Senate Finance Committee and the Government and we agreed, which was the right outcome which is a market-based pricing benchmark. But again representative of the true market for laboratory services including all competitors in the marketplace

Thanks, Dave, appreciate the color

A.J. Rice, UBS.

Real quick, so if we took your 6% revenue growth this quarter and you maintain it your full year guidance at 3%, I think that implies that your fourth quarter year-to-year growth steps back down to 3%. I know I understand about the -- that every year the fourth quarter has some seasonal issues in it. But I guess is there any reason to think that the pace of year-to-year growth that you're seeing in the third quarter would moderate in the fourth quarter?

A.J., this is Glenn and then ask Dave if he wants to share on the color. You're right, our expectation for the fourth year of year is the call it the 3.3% based on the implied guidance. So that would take the seasonality out, if you will, from a year over year. So clearly it's a reason why sequentially that our fourth-quarter estimate is down from the third quarter for the reasons that Dave alluded to earlier.

Again we still feel that there's good strong organic growth that's in that. We're still seeing some negative implications from price mix that will affect it but it's becoming less and less. So the good news is that while the growth on the volume is now at that three 3% plus or minus growth, we're starting to now get leverage even off of that level. So that we'll continue to see comparability in our margins and earnings, if you will, year over year at that 3% level of revenue growth and hopefully even -- we'll see even better leverage than that.

A.J. it's Dave, the only other comment I'd make is back to an earlier observation about we did see a relative spike in the fourth quarter of last year. So again as the year-over-year comp that you're looking at we think about the sequential comp as being reasonably consistent in terms of the growth rate.

Okay and then maybe if I could ask you, I think you mentioned the Alberta contract and I think we know how much in volumes that is, but is there any commentary about how much revenues and when would that roll off if you're not successful in your appeals?

So just to be clear A.J., we don't consolidate the revenue, so it does not have any revenue impact. It only has an impact below the line and it's quite immaterial.

A.J., the contract that we currently have I believe takes us through 2016. And as Dave said, given that we're a minority investor and we don't consolidate it, so revenues don't show in the earnings obviously we take below the line, which again we don't want to give up but it's not material.

Okay. All right, thanks a lot.

At this time, I would like to turn the conference over back to Mr. Dave King for closing remarks. Please proceed, sir.

Thank you very much. We thank you all for joining us on our call this morning and we hope that you have a great day. Good day.

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