Labcorp Holdings Inc. (LH) Q3 2007 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Third Quarter 2007 Laboratory Corporation of America Earnings Conference Call. My name is Dan and I'll be you coordinator for today. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. David King, Chief Executive Officer. Please go ahead sir.

Thank you Dan, good morning everyone and welcome to LabCorp's third quarter conference call. Joining me from LabCorp today are Brad Smith, Executive Vice President, Corporate Affairs; Brad Hayes, Executive Vice President and Chief Financial Officer, Ed Dodson, Senior Vice President and Chief Accounting Officer; and Eric Lindblom, Senior Vice President, Investor and Media Relations. This morning we'll provide a review of our third quarter and year-to-date 2007 results and update you on achievements in key strategic areas during the quarter. Later in the call we will update guidance for 2007, give preliminary guidance for 2008 and cover a few anticipated questions. I would like to turn the call over to Brad Smith who has a few comments before we begin.

Before we begin, I'd like to point out that there will be a replay of this conference call available via the telephone and Internet. Please refer to our press release dated October 25th for replay information. This morning, the Company filed an 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 our press release dated October 25th for a reconciliation of EBITDA, which is a non-GAAP financial information discussed during the call. I would also like to point out that any forward-looking statements made during this conference call are based upon current expectations and are subject to change based upon various important factors that could affect the Company's financial results. These factors are set forth in detail in our 2006 10-K and subsequent filings. Now Brad Hayes will review our financial results.

Thank you, Brad. Our third quarter results are as follows. Net sales increased 12.2% to $1.206 billion compared to the third quarter of 2006 testing volume measured by accessions increased 11.9% and price increased 0.3%. We estimate that net sales increased by 6.8 percentage points due to our agreement with UnitedHealthCare. Before restructuring and other special charges recorded in the third quarter of 2007 and 2006, earnings per diluted share increased 27.4% to $1.7 for the third quarter versus $0.84 in the third quarter of 2006. During the quarter we made adjustments to our cost structure to ensure our capacity and capabilities remain aligned with our volumes and service requirements. These actions were directed at reducing our work force in non-operational areas along with eliminating redundant and underutilized facilities. These actions in the quarter resulted in the charge of approximately $31 million. We expect that these actions will reduce operating expenses by approximately $60 million in 2008. EBITDA was $272.5 million or 26.7% of net sales. Operating cash flow for the quarter was $130.4 million which is net of $17.9 million in transition payments to united health care. Through the end of the quarter the Company had been build $27.9 million in transition payments related to its agreement with UnitedHealthCare with approximately $23.3 million paid. The $27.9 million billed represents the vast majority of claims activity through June. At the end of September, the company had cash and short term investments of $35.2 million and $100 million in borrowings under our revolving line of credit. Capital expenditures were $35.5 million of which $3.9 million related to our agreement with UnitedHealthCare. DSO at the end of September was 58 days. The primary drivers for the increase in our DSO were temporary delays in payment due to being out of network with Aetna, timing of cash receipts and a slightly negative impact from our recent acquisitions. During the quarter, the company repurchased $111.3 million worth of stock representing 1.5 million shares. Approximately $329.2 million of repurchase authorization remains under our approved share repurchase plan. Our year-to-date results are as follows. Net sales increased 13.8% to $3.624 billion. Compared to the first nine months of 2006 testing volume measured by accessions increased 12.8% and price increased 1%. We estimate that net sales increased by 7.6 percentage points due to our agreement with UnitedHealthCare. Before restructuring and other special charges recorded through the third quarter of 2007 and 2006. Earnings per diluted share increased 27.2% to $3.13 for the first nine months of 2007 versus $2.46 in the first nine months of 2006. EBITDA was $812.6 million in or 26.5% of net sales in the first nine months of 2007. Operating cash growth for the first nine months of 2007 was $469.3 million. During the first nine months of 2007, the Company repurchased $520.8 million worth of stock representing 7.3 million shares. We're very pleased with our financial results for the quarter and first nine months of 2007. I'll now turn the back over to Dave.

Thank you Brad. First I would like to make a few observations about our third quarter. We're extremely pleased with 12.2% revenue growth and 27.4% earnings per share growth which shows the impact of volume increases combined with effective expense control. Several noteworthy events effected our third quarter. The loss of the Aetna contract, the affect of the Cigna price reduction and the impact of recent acquisitions where integration has not been completed. Of course what we can best control are expenses. We pride ourselves on the discipline we have always brought to expense control, and this quarter was no exception. We took decisive actions to reduce our work force in non-operational areas as well as to downsize or eliminate redundant and underutilize facilities. Our cost reduction initiatives will result in $25 million in in-year savings and $60 million in annual savings in 2008. Since the close of the quarter, we've announced the downsizing of our Louisville laboratory which will result in a significant expense reduction in 2008 and a restructuring charge in the fourth quarter of 2007. We will continue to review our cost structure to make sure that our business is sized correctly to handle our volumes with the goals of continuing to be the most efficient provider and maintaining our high standards of customer service. As many of you have heard me say there has been a pricing reset in the laboratory industry. This should not be surprising to anyone who follows healthcare. Almost every other area of healthcare has seen or is seeing reimbursement reductions as a result of the consolidation of managed care health plans and the continuing increase in healthcare costs. Even though laboratories are only 3% to 4% of the total healthcare spend we are not immune from pricing pressures. I, for one, do not believe that cutting reimbursement is the answer to reducing healthcare spending. This however is a matter that experts will continue to debate for the foreseeable future. Our industry needs to speak up in that debate but in the meantime we must also run our business in the existing environment. To that end we continue to leverage cost base for generative collaborative arrangements, continually evaluate our internal processes and provide clients and patients with high quality service. We are and we'll continue to be the most efficient and customer friendly lab. To return for a moment to healthcare policy, we are very pleased at the success of the Results For Life campaign sponsored by LabCorp and our trade group, the American Clinical Laboratory Association. This campaign is designed to educate patients, policy makers, the media and others about the value of clinical laboratory testing as a key component of a 21st century healthcare system focused on prevention, efficiency and improved patient outcomes. Recently Results For Life released a video in which patients and policy makers speak about the value of laboratory testing. I encourage you to watch the video at www.labresultsforlife.org and see for example how rigorous use of the hemoglobin A1C test, one of 20 critical lab tests that costs less than changing the oil in our cars can help us reduce the $130 billion per year our healthcare systems spends on diabetes. I would now like to bring you up-to-date on the progress the company is making toward achievement of our key strategic objectives. In managed care we remain committed to the strategy of true partnership with managed care organizations. We believe that the three most important drivers of managed care business are access, price, and data. We have made great strides in the first area this year with the expansion of our PSC network. we remain the industry leader in the other two categories because of our efficiency and our standard instruments and systems. Our innovative kidney stone program from Litholink is an example of how our data and systems provide our partners with true value helping them reduce cost and improve wellness for their members. Kidney stones are the most common disorder of the urinary tract affecting 5% of Americans. The prevalence of stones is increasing. In 2004, stones accounted for 2.7 million physician visits and over 400,000 hospital stays. Treatment cost amounted to over $2 billion. The recurrence rate for kidney stones is 50% within five years. yet by following our Litholink management program which is focused on providing physicians and patients with actionable data to improve outcomes, stone recurrence is reduced by 80% at the cost of approximately $200 per patient encountered. This is merely one example of how lab -- what LabCorp does everyday to improve healthcare and reduce spending, benefiting doctors, patients and our managed care partners. In science, LabCorp continues to lead the industry in the introduction of new capabilities in areas where there is an unmet clinical need. During the third quarter we added six new tests and disciplines including coagulation, oncology, infectious disease and immunology. Additionally we achieved several milestones in pharmacogenetics and companion diagnostics including a strategic agreement with Medco centered on the safe and effective use of the drug tamoxifen. Approximately 10% of women using tamoxifen do not fully benefit from the drug. Genotyping for the study will be performed using the FTA cleared Roche AmpliChip CYP450 test. A pharmacogenetics collaboration with Third Wave to develop a companion diagnostic to assist physicians personalizing therapy for heart failure patients. This announcement was the next step in our previously announced collaboration with ARCA Therapeutics. Additionally, in August, the FDA announced the approval of updated laboring... labeling for the commonly used blood thinning drug warfarin to indicate that a person's genes may influence how they respond to the drug. Approximately 2 million Americans take warfarin and it is one of the commonly prescribed drugs in the United States. During the last 10 years warfarin accounted for 15% of serious adverse drug events in the United States most within the first 30 days of use. LabCorp test for warfarin has been available since the middle of 2006 and cast all of the appropriate genetic markers. As you can see companion diagnostics is not years away. It is here and we are actively working with multiple partners on innovative solutions in the areas of cardiology, oncology and infectious disease. Furthermore we recently announced that LabCorp is the first full service national clinical laboratory to offer integrated serum integration and sequential screening tests. In January 2007 the American college of nutritionists and gynecologists issued a practice bulletin recommending that regardless of age all pregnant women be offered combined first and second trimester screening. Through a license with Intema Limited, we have now made these recommended screening tests available. This will allow physicians to offer patients a broader range of tests for Down Syndrome and maternal screening with higher detection rates and fewer false positives than current screening options. The third component of our strategic plan is our customer focus culture. We recognize that we are here to serve doctors and patients. Our goal is to make sure that all of our valued front line people use every tool available to serve our clients and their patients. We continue to invest in programs that will make LabCorp easier to work with and more customer friendly so that we can continue to enhance the experience of doing business with LabCorp. Now I would like to update our guidance for 2007 and give preliminary guidance for 2008. Excluding the impact of any share repurchase activity after September 30 and excluding restructuring and other special charges recorded in 2007, our guidance for 2007 is as follows: Compared to 2006 LabCorp expects 2007 revenue growth of approximately 12.7% to 13.2%, EBITDA margins of approximately 26.0% to 26.5% of revenues, diluted earnings per share in the range of $4.11 to $4.18, operating cash flow of approximately $690 to $710 million excluding any transition payment related to the Company's agreement with UnitedHealthCare, capital expenditures of approximately $100 million to $110 million excluding any additional capital expenditures related to the Company's agreement with UnitedHealthCare, net interest expense of approximately $45 million and a bad debt rate of approximately 4.8% of sales. For 2008 our preliminary guidance is as follows: Compared to 2007, LabCorp expects 2008 revenue growth between 6.5% and 8.5% and diluted earnings per share growth over 2007 in the range of 11% to 14%. We expect to achieve this revenue and EPS growth through the following initiatives: Increasing revenues through organic growth and further shifts in test of mix particularly in our esoteric and genomic businesses which generate higher profits than the core business, realization of $60 million in annual cost reductions that I mentioned earlier and contributions from acquisitions made in 2007 and expected acquisition in 2008. We expect to provide more definitive guidance for 2008 after we complete our internal bludgeoning process for next year. Now Brad Smith will review anticipated questions and our specific answers to those questions.

Thank you Dave. Can you update us on the mix of your business coming from esoteric testing? At the end of September approximately 34% of our revenues were in the genomic, esoteric and anatomic pathology categories. As we've mentioned on previous conference calls our goal over the next few years is to increase our esoteric test mix to approximately 40% of LabCorp's revenues. Our ability to increase this percentage depends on factors such as continued adoption of existing esoteric tests, development and acceptance of new esoteric tests, acquisition and licensing opportunities in the mix of our new business. Can you update on your progress in image guided pap and HPV? Adoption of the TriPath SurePath system and Cytyc's ThinPrep Imaging System by our physician clients continues to increase. By the end of the third quarter image guided pap screening was being requested for approximately 56% of all liquid based pap smear orders. We continue to experience growth in primary screening HPV testing. During the third quarter of 2007 HPV testing increased approximately 41% versus the third quarter of 2006. What are your plans for uses of free cash flow during the remainder of 2007? We remain committed to returning value to our shareholders. First by using our free cash flow to grow our business through strategic acquisitions and licensing agreements and second through continuing our approved share repurchase program. The acquisition market remains attractive especially in light of recent credit market corrections with a number of opportunities to strength our scientific capabilities, grow our esoteric testing franchise and increase our presence in key geographic areas. As you know we closed on the DSI acquisition during the third quarter along with other smaller acquisitions. Additionally our planned acquisition of PA Labs has passed HSR and should close by the end of this month. As Brad mentioned earlier, LabCorp repurchased $520.8 million worth of common stock during the first nine months of 2007. At the end of the quarter, $329.2 million remains under our approved share repurchase authorization. Our activity during the first nine months of the year proves what we have always said, we will be opportunist when it comes to our share repurchasing. What does the FDA's letter to EXACT Sciences mean to LabCorp and the relationship with EXACT? At this time it's too early to tell what the FDA warning letter that is the exact science scientists receive will mean to us. I can state that our interest in the PreGen-Plus tests remain aligned with EXACT and that we are still offering the test. Can you update us on your negotiations with Humana? As you know Humana is the only national plant still in the contracting process and we're working to remain contracted with them. Additionally there are no nature regional plans due for re-contracting in the near future. How will the new proposed accounting position on convertible dept affect your current lines or EPS guides? As you know the FASB issued a draft staff position relating to proposed changes to the accounting for convertible securities. This staff position is still in draft and that FASB is currently evaluating comments from the financial community. However based on our review of the requirements of the current draft, we believe that if enacted as written, the proposed FSP would not have any impact on our 2007 or 2008 interest expense or EPS, but would result in a restatement of interest expense in periods prior to 2007. Please note the changes to historical interest expense proposed by this new economic standard are all non cash. What is the status of the Medicare competitive bidding demonstration project? CMS recently announced at the San Diego Carlsbad San Marcos California Metropolitan statistical area will be the first of two sites for the Medicare competitive bidding demonstration project. While CMS appears determined to move forward with this ill-conceived project, the clinical laboratory community has been making significant progress in its efforts to stop the demonstration legislatively. Bills with bipartisan support have been introduced in both the house and senate to repeal the requirement that CMS conduct this demonstrations. The entire clinical laboratory community remains united in strong opposition to this demonstration and we will continue to work together toward a legislative repeal. Can you comment on efforts to regulate laboratory developed tests? In July FDA issued for public comment to revise draft of its guidance on invitro diagnostic multi-variant index assays in which it sort to further narrow and clarify the definition of IVDMIAs and how FDA regulation of medical devices would apply to such assays. The FDA noted that it would exercise enforcement discretion for all requirements for currently marketed IVDMIAs for 12 months following publication of the final guidance and for an additional six months for IVDMIAs for which a 510-K where pre-market application have been submitted during the initial 12-month period. We submitted comments to the American clinical laboratories association urging the FDA to engage in a more interactive dialogue with the laboratory community, proceed under formal rule-making procedures, further clarify the definition of IVDMIAs and provide further guidance on the application of quality systems regulations labeling an adverse event reporting requirements in the IVDMIA context. The FDA is now reviewing public comments on the IVDMIA guidance. We have no reason to believe at this time that this guidance will materially impact our operations. Now I would like to turn the call back over to Dave.

Thank you Brad. In summary we have had a very good quarter and nine months. Thank you very much for listening. Dan we are now ready to answer any questions. Question And Answer

[Operator Instructions]. Your first question comes from the line of Robert Willoughby from Banc of America. Please proceed.

Hey Dave, I guess I am not quite sure in the enthusiasm that you have for the quarter as well as the guidance for the year. I... just looking at that guidance that you brought down, the high end of the ranges here. I guess it assumes something has surprised you here related to prior expectations and I guess you knew what United was, you knew what Cigna pricing was. I mean what really is the primary reason to bring the high end of the guidance range down for '07?

Bob I think the primary reason is the uncertainty of what is going to happen with fourth quarter revenue. We obviously have spend a significant amount of time this quarter and will continue to spent a significant amount of time going forward, looking at the expense base. But we have... when we originally issued the guidance as you'll remember, we anticipated that united revenue would ramp very significantly through the third and fourth quarter and instead what we have experienced is that we have got a lot of it in the first and second quarter and that the United revenue has largely flattened out. In addition the loss of the Aetna contract, the shifting of a couple of regional managed care contracts just creates an uncertainty around top-line revenue and we think the responsible thing to do is recognize and adjust our guidance appropriately.

Does the guidance for this year or '08 reflect the PA acquisition or anything else that you may do?

The guidance for the balance of this year does reflect the impact of PA which actually is scheduled to close at the beginning of November. As to anything else we may do, no, the guidance doesn't reflect anything other than the typical small acquisitions that we will do from time to time.

And anything in the way of share repurchases in that '08 expectation?

There's nothing in the guidance in terms of share repurchases but we have repeatedly said we would be opportunistic in share repurchase and I think we've demonstrated that over the course of this year.

All right. Thank you.

Your next question comes from the line of Ricky Goldwasser from UBS. Please proceed.

Hi, good morning. Thank you. It's Ricky Goldwasser.

Good morning Ricky. We knew that.

I am glad. Just a follow-up question on the cost-cutting initiative. Where should we take when you talk about $25 million in '07 and $60 million in '08. Is it all coming from the SG&A line or should be... should it be a combination of cost of sales and SG&A because obviously in the quarter you brought SG&A down significantly. And then if can talk more about the areas of cost-cutting. Are they related to aligning the infrastructure to line up with what your expectations are for United going forward versus what they were earlier in the year? Or does this also include cost-cutting opportunities in areas that are not related to United?

Well, I will start with the first part of the question and Brad Hayes may have some additional color on this. obviously the SG&A line has been the primary focus of this as I said. The focus of the expense reduction was in non-operational areas. So we did go hard at the SG&A line as well as you're looking at excess capacity and redundant facilities given the changes in the market. In terms of going forward, what we have to do is we have to look at what we think, the capacity requirements are going to be given what we think the volumes are going to be and we have to continue to rationalize the cost structure given what we believe the volumes to be. So for example, in the Louisville laboratory... in the downsizing of the Louisville laboratory, we believe that we have sufficient capacity and our central division particularly with the addition of PA Labs to handle volume without the need for a full service three-shift laboratory in Louisville and that's the kind of cost rationalization that we will continue to undertake. It's not specifically related to United or not related to United, Ricky, it's more related to what we think the overall volumes are going to be in the business and what is the capacity that we're goanna need to handle those volumes, and what is the level of non-operational SG&A support that we're going to need to manage the business.

Now, a follow-up question on the volumes. Do you think that what you're seeing is just a slowdown in industry volumes overall or is it just more specific to contract shifting hands?

I think it's hardly contract shifting hands but I think in the third quarter of this year there was an overall slowdown in volume. In the months of July and August even adjusting for seasonality were very slow compared to what we typically see and obviously we have data going back for many years on what happens during the summer time and this... this July and this August were just from a volume standpoint even below what we typically adjust for. So I think some of it is absolutely related to overall industry volumes and some of it is related to the shifting of these regional managed care contracts and the shift of the Aetna contract.

And obviously we're now kind of at the end of October. So you... kind of you have at least like a month worth now of the fourth quarter. Are you seeing volume... industry volumes going back to more historical levels?

Well. I'm... I don't think it's probably appropriate to comment on where we are in the fourth quarter. Now the month of September was a very strong month and so you know we saw September going back to where we typically expect September to be and even a little better. And that... again this... it's just hard to know in the summer, was it hot weather, was it flooding, was it few people... fewer people going to the doctor, was there something that affected the overall industry. And I wish we had better... I wish we had the ability to have better analytics around that. It just... we've tried to look at it in a number of ways and not figure out anything in particular that would cause the volume decreases in July and August, but as I say September returned a much more what we think of this being the norm.

Thank you.

Your next question comes from the line of Adam Feinstein from Lehman Brothers. please proceed

Okay thank you, good morning everyone.

Good morning Adam.

Severalquestions here, I guess maybe just to start, entire quarters you've given some feel for how much UNH contributed in the quarter. Are there any metrics you can give us. I know David said that it have flat lines but just any specific details just so we could know what the impact was in the quarter.

I think we said in this quarter that total revenue growth... I am just going back here Adam.

Adam, this is Brad. It was 12.2% in the quarter and 6.8 percentage points due to United.

Okay, and... so Dave, to you point earlier, you were just saying that in the fourth quarter of 2006, you got a bigger impact relative to what you would have thought. So just from the slowdown that you are forecasting in the fourth quarter, it's just a function of... you just picked up the business earlier. I mean isn't that accurate, just wanted to make sure.

That's absolutely right, we've picked up, as you remember going back to the 2006, we picked up United business ahead of the contract and also from the top line revenue standpoint remember that was at the prior pricing. So that's going to annualize in the fourth quarter of this year and that will account for part of the slowdown.

And then just... and that's really make sense, and would understand why there would be the impact there. But just as we think about the margins, margin guidance for the fourth quarter is lower and obviously that would have an impact, but you had talked some about the cost savings earlier. So in... just as you were talking about on an annualized basis about 60 million. But you mentioned there really the offside as well. Is that incorporated in the 60 million in annualized benefit from that.

No it is not.

It's not included. Okay. So... but the 25 million or so will benefit the fourth quarter.

Yes.

Okay, all right. And then just, I guess as we think about... you had said some negative impact from the Cigna pricing and just wanted to make sure I was following you there. I mean was the impact more severe than what you would have thought or... and then I guess did you benefit on the volume line from the Cigna business, just anything you can give us there?

I think the impact was probably invaluable. We thought it was going be and I think we benefited a little bit on volume line from additional Cigna business but not materially.

Okay. And then just a final question. Did you guys break out your mix, and I guess the managed care fee for service side down about 8.7% verses the 7% in the second quarter. I guess just wanted to get some more color there. I know that managed care capitated piece accelerated slightly from the second quarter but just on the fee for service side, just what would have been the key driver there. Was that all a function of just having Cigna now in on the mix or were there other things?

Yes, I think having Cigna in on the mix and it is probably the primary mover there. And that's the... that's going to... the Cigna reduction is going to be the major driver where you are going to see some of the... there's going to some impact obviously as we continue to gain small incremental amounts of United volume, that's going to have an affect on pricing. But what you are seeing in this quarter is most of the impact of the Cigna reduction.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Kemp Dolliver from Cowen & Company. Please proceed. Kemp Dolliver - Cowen & Co., LLC: All right, thanks, and good morning. First you didn't mention any change in your estimate for the potential liability to United. So I'm assuming that's unchanged?

We continue to look at the potential exposure to United but we haven't materially changed our view of that. And we'll look at it again at the end of the year. Kemp Dolliver - Cowen & Co., LLC: Okay. Secondly Dave your comments about July and August; I'm trying to reconcile with what you all given for revenue guidance in '08 because you're... I think your '08 guidance somewhat implies continued industry growth in line with historical patterns. So my question is; is there something in that guidance that takes that... is that the correct interpretation of how you put together the '08 guidance or have you built in some caution regarding volumes?

No. We're thinking about it from the standpoint of what is historical industry growth and our ability to better historical industry growth for a variety of factors that we've talked about before. The comment on July and August was mostly directed toward questions about you know why this quarter top line revenue was not what the consensus was in. Again we just... we saw a drop off in July and August. We don't have convincing data that shows why we had a drop off in July and August. We know next summer that we'll see volume reductions during the summer but what we think about for the full year continues to be that will grow slightly above the historic industry growth rate. Kemp Dolliver - Cowen & Co., LLC: Okay. And last question is you mentioned you budging process and then giving more definitive guidance of any, what are your plans with regards to timing and then also just the format for communicating anything more definitive.

Historically we've given more definitive guidance on our fourth quarter call and that's what we would expect to do it this year. Kemp Dolliver - Cowen & Co., LLC: That's great, thank you.

Thank you.

You next question comes from line of Ralph Giacobbe from Credit Suisse. Please proceed

Hi, thanks. Can you maybe talk some more about the assumption for '08 and what I am getting at is are you considering greater pull-through from UNH, are you assuming sort of steady state from this point. Additionally is the Cigna expansion with the marketing expansion considered in what you put out first one of those... that '08 number?

The ability to market with Sigma in those markets where we historically have been restricted is certainly considered in the '08 guidance and some additional pull-through from United is considered in the '08 guidance as well along with historical industry growth rate and the expectation that we've seen both the settling out of pricing and the settling out of the shifting around of some of these regional plans that has occurred in the last two quarters.

Okay, that's fair. And then when we do think about United, there's obviously the sort of ex-Quest piece of the pie. Could you also maybe talk about the opportunity outside of Quest in taking share from the smaller regional groups to understanding that UNH may be coming in and sort of undercutting some of the smaller guys even more as their contracts come up for renewal. So just wondering what the opportunity is there to gain market share sort of in the ex-Quest bucket?

Okay, well first let me say that what United does with other laboratories is not something that we really are approving to. We know about what we read just like everybody else does, but in terms of the opportunity ex-Quest, I think certainly in some of the major metro markets like New York and New Jersey and there are other regional competitors that have benefited dramatically from the change that United has made and I think the opportunity to win that business still continues to be promising in terms of connectivity, in terms of test menu, in terms of turnaround times. I don't think that regional labs over the long term are going to be able to mach our level of service or test menu the electronic connectivity product that we offer, the access points. So I think that absolutely there's the opportunity to win business from the smaller regional players as the contract matures. I do want to comment again because so much of this revenue came in, in the fourth quarter last year and first quarter of this year. This is a 10-year contract with a lot of opportunity for us as we go forward and both the pull-through and the ability to win business from other providers is very exciting to us.

Okay, thanks. And just real quick. On the -- in terms of the balance sheet, can you talk about your sort of appetite for potentially levering up the balance sheet and doing something more drastic whether that be on the acquisition front or in terms of share repurchase, something bigger scale.

Okay, I make a couple of preliminary comments and then if Brad Hayes has anything, he can add to it. We got a lot of questions over the past six months about, shouldn't we really lever up the balance sheet and do something big. And I think where we are today given what's happened in the credit markets, we are very happy that we didn't lever up the balance sheet. I think our balance sheet is very attractive right now. And so we like to keep the balance sheet, we like to give ourselves the opportunity on the balance sheet to be able to lever up if we need to do something big or decide to do something big. The levering up just for the shake of getting more leverage is not something that has ever historically been attractive and doesn't look attractive at this point. Brad you have any observation?

Dave, I will just add... well I don't know about anything drastic. I mean again we've been consistent in saying we want to keep our investment grade credit rating. But certainly we have the room to do something first. So... as Dave mentioned, for the right opportunity, I think, we have the flexibility to add some leverage.

Thanks.

Your next question comes from the line of Tom Gallucci from Merrill Lynch. Please proceed. Tom Gallucci - Merrill Lynch & Company, Inc.: Good morning, thanks for the information. I just had a few follows-ups more from a macro perspective. I think you sort of alluded to some macro factors that were pressuring price just in the healthcare industry in general. I was wondering first if you could expand on any other factors that you think might be affecting pricing within your industry and how have you factored pricing into your '08 expectations.

I'll answer the second question first Tom. In terms of our expectations for '08 as I mentioned I think we feel that the pricing reset is pretty much occurred and that we've largely re-contracted. This was a year in which basically all of the major... well not all, but a significant number of the major payers were up for re-contracting and we have re-contracted with them or not re-contracted in the case of Aetna. So we think the pricing reset is largely occurred and we don't foresee significant price changes in what we look at for 2008. In terms of the macro factors, I mean... I think just top policy for a second here, I mean I think there's a couple realizations that people are coming to in healthcare. One is we're spending 16% of GDP on healthcare now and there's certainly a very large school of thought that says that we're not particularly good outcomes for what we're spending. The second thing is and something that I've been paying more attention to as an employer of 26,000 some people is, at the rate of premium increase that we're seeing versus the weight of wage increase, we're talking about within the next 8 to 10 years. We're talking about the cost of benefits for employers being greater than salaries and wages because benefits... premium increase of about 11% to 12% a year is doubling every 7 years and wages at 3% to 3.5% is doubling in 24 years. So I just think from a policy standpoint, now the answer that everybody is giving as well and we have to cut reimbursement, we have to cut spending, we have to cut payment and just... if you want validation of what I am saying just go on Google reimbursement reductions in healthcare and you will find 15 or 20 different groups of healthcare providers who have seen dramatic reimbursement reductions over the last several years, and I don't personally think that just cutting reimbursement is the right answer. I think, the payment, the problem with the right answer overtime is to pay for appropriate course of treatment rather than episodic treatment as for better outcomes. And that's why I go back to... our Litholink program is an example of how we can add real value in that equation. But I just think the macro pressure is we can't afford to continue to spend on healthcare the way that we are spending and the easiest way to address that is to say we got to cut the amount we are paying people. Tom Gallucci - Merrill Lynch & Company, Inc.: Okay. And then you said that... I guess some of your bigger payers were sort of reset in '07 but you also mentioned in some remarks, some of the regional payers. We saw some turnover there from one lab to another. What do you think triggered that sort of turnover and I think you said you sort of accept most stability there next year, so what kind of visibility do we have on that?

Well we've re-contracted again or not re-contracted with most of our... most of the major regional managed care plans in the 2006-2007 cycle. I think the principle reason for the shifts in regional players that we saw in the last quarter largely were driven by price and we obviously evaluate pricing every time we look at the... at a proposed relationship, just see whether we think it makes sense for us. Tom Gallucci - Merrill Lynch & Company, Inc.: Okay, thanks for the color.

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

Good morning. Couple of questions, just back on the guidance questions. Just the implicit EPS guidance range for Q4 is pretty wide and I am just trying to get a sense of what would cause you to fall to one end of the range or the other and why there is that much uncertainty at this point in the quarter.

Well I don't think it's any wider than our competitors' guidance and I think the principle reason is as I mentioned that we have seen in the last couple of months some changes in the couple of regional plans and we also, although... I think we have done a terrific job retaining Aetna business. We also have the continued uncertainty around how much of that Aetna business are we going to retain going forward. So those are the principle reasons why the revenue range is less... clearly less than one would normally expect it to be at this point in the year.

Okay that makes a lot of sense. And then just on the... given your comments on UNH, is there any change to your long-term estimate of how much revenue you are going to generate? I think back when you announced the contract you said... you gave sort of an amount that you could generate over a 10-year time period, and then just based on your experience thus far, does that still hold?

Yes it does?

Okay. And then just a question on the specifics of the pricing. It looked like the price was down for the genomic and the esoteric testing and I am just curious if that price decline is a function more of test mix or to the extent that you've seen actual price pressure, is it more concentrated in certain types of tests?

Bill this is Brad. I think it's mostly back to Dave's comment about overall pricing in the third quarter, specifically related to Cigna. And then always we're fighting as you called out the kind of mix within mix back to one of Brad Smith's comments about the growth of, for example, HPV which is a test that's lower than that category average but continues to grow faster than the bucket in total. I think those two things in combination when I analyzed the observations that you have or what I came to.

Okay, that makes sense. And to the extent so that there is price pressure I assume that's more kind of across the board as opposed to concentrated on specific tests?

Yes.

Okay. That makes a lot of sense. And then just finally I am a little confused I might not have understood your answer to Adam, did you say that the $60 million of cost savings is not in the guidance really?

No the $60 million in cost saving is in the guidance. The closure of the Louisville... the downsizing of the Louisville laboratory is not in the $60 million.

It's not, okay. So that would be above and beyond that and I don't suppose you want to take a stab at how much that can save you?

I do not want to take a stab.

Thanks a lot.

Thank you.

Your next question comes from the line of Arthur Henderson from Jeffries & Company. Please proceed Arthur Henderson - Jeffries & Company, Inc.: Thanks. Dave the $60 million that's coming off of Bill's question, it seems like that's kind of low hanging fruit. Is there more opportunity out there on the cost savings that you might not be talking about right now, but you could tap into?

There is definitely more opportunity on the cost savings and we will be looking at it just to make sure that we do tap into it. Arthur Henderson - Jeffries & Company, Inc.: Okay. Fair enough. And then going back to your comments on the acquisition market out there, obviously with the credit markets changing, are you seeing more people on the sideline now? Is it giving you a better opportunity to look at some things, at some reasonable prices that you haven't been able to look at before? And I'm wondering also what's really interesting to you from an acquisition perspective?

I think we're seeing; I think some people have moved to the side lines. I think you know multiples are still a little higher than they probably were 18 months ago but they're starting to come back to earth. And so I think going back to the question about the balance sheet I mean I think that's part of what makes this attractive to us is that you know we have the room in our balance sheet to do some things that might be attractive from an acquisition stand point. What looks attractive to us continues to be strategic acquisitions where we can build out infrastructure where we've not had strong infrastructure previously such as PA Labs in Indiana, and such as DSI opportunity because of that Naples market in Florida. And then also opportunities that our going to enhance our esoteric, and genomic and anatomic pathology franchises and we continue to look at opportunities that we think are attractive. Arthur Henderson - Jeffries & Company, Inc.: Okay. That makes sense. Now just going back on the United. I remember last quarter you talked about possibly not having to incur as much transition expense as you had originally thought. Did I hear you correctly that you still feel comfortable saying that you could come in less than that 200 million.

Yes. We feel very comfortable saying that we could come in at less than 200 million and I think if you just look at for the six months of the year with basically the vast majority of all June claims experience having been encountered, I think were about 27.4. So we said all along that we felt that the vast majority of the leakage was going to come in the first 12 to 18 months and to be at 6 months and be at 27.4, we are very, very pleased with that. Arthur Henderson - Jeffries & Company, Inc.: Okay, makes sense. And then last question, I will jump back in the queue. I know Ralph had talked a little bit about leakage and things of that nature related to the United volumes. I am curious, have you had any discussions with United about strategies that you could employ to maybe pull that volume over quicker or in a sort of rejuvenated way that maybe, the success that you had earlier this year obviously was surprisingly was great. But I am just wondering is there anything that you feel like you could do better out in the field that maybe you've talked to United about driving those volumes over?

We obviously have talked to United about the opportunity to... about what we see as the opportunity to get additional volumes and obviously for competitive reasons, I am not going to talk about specifics, one thing that I think clearly assists us in gaining additional volume is just the use of electronic communication devices and making it more convenient for physicians to order and receive test results. So that's something that we are... that's a lab core initiative but that's something that we absolutely are going to be out there doing to show physicians the convenience of our web based products, the convenience of our standalone product to assist them in ordering their tests, getting their results back, dropping them right into their EMRs or practice systems and making the lab experience easier and more customer friendly. Arthur Henderson - Jeffries & Company, Inc.: Okay. That's helpful. Thanks Dave.

Thank you.

your next question comes from the line Bill Bonello as a follow-up question from Wachovia. Please proceed.

Hi. I just wanted to make sure for modeling purposes to clarify on your comments about contracting. Does the fact that you've negotiated most of your big national and regional contracts already? Does that mean that the... whatever price impact there would have been was pretty mush reflected in this quarter's results or are there any contracts where you've negotiated a price hit that you know that it's there but it hasn't taken a effect yet?

Based on what we have concluded the negotiations of I would say you've pretty much seen the price impact in this quarter.

Okay. Perfect. Thank you.

Your next question is a follow up from Ricky Goldwasser from UBS. Please proceed.

Hi. Just one small question. Regarding the cost savings of $25 million in '07, is that all in the fourth quarter or does that $25 million include already what you've seen in the third quarter, and if so how much have you realized in the third quarter?

It's 10 in the third and 15 in the fourth, Ricky, assuming that we don't do anything else. And I guess also not including any impact of the Louisville lab downsizing.

Right. So then the $50 million in '08, is that just based on that $50 million run rate?

Yes.

Thank you.

Your next question is a follow-up from the line of Tom Gallucci from Merrill Lynch. Please proceed. Tom Gallucci - Merrill Lynch & Company, Inc.: Thanks. Just a quick follow up to, I think it was just Kemp's question. A second ago when you do have those multi-year deals, I understand the hit now is in the numbers because they've been enacted. But when you're got a multi-year deal, what sort of rates do you have each successive year, is it flat, is it an increase, is it a decrease, so how do you think about that for longer term is again we're thinking about sort of the modeling in the long run?

I think about it as... it's a very important contracting point for us to receive price increases over the term of contracts because the reality is that our labor expense, our rental expense, our auto and gas expense, all of our expenses continue to increase and so getting top line price increases is a very fundamental part of our contract negotiations.

Okay, thank you.

At this time, there are no further questions in the queue. I would now like to turn the call back over to Mr. David King, Chief Executive Officer, please proceed.

Again thank you very much for listening to our call this morning and we hope you have a great day.

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