Labcorp Holdings Inc. (LH) Q1 2008 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Laboratory Corporation of America First Quarter 2008 Earnings Conference Call. My name is Savoya [ph] and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes. I'd now like to turn the presentation over to your host for today's conference, Mr. David King, Chief Executive Officer. You may proceed, sir.

Thank you Savoya. Good morning and welcome to LabCorp's 2008 first quarter conference call. Joining me today from LabCorp 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 first quarter 2008 results, discuss our 2010 plan, and update you on achievements in key strategic areas during the quarter. Later in the call we'll review guidance for 2008 and cover a few anticipated questions. I'd now 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 prefer to today's press release 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. Analyst and investors are directed to this 8-K and our website to review this supplemental information. Additionally we refer to today's press release for a reconciliation of EBITDA which is non-GAAP financial information discussed during this 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 2007 10-K and subsequent filings. Now Brad Hayes will review our financial results.

Thank you Brad. Our first quarter results are as follows; net sales increased 10.5% to $1103.2 million. Compared to the first quarter of 2007 testing volume measured by excessions increased 8.6% and price increased 1.9%. Excluding the consolidation of our Ontario Canada joint venture, revenue increased 4.1% with volume increasing 1.6% and price increasing 2.5%. Earnings per diluted share increased 16.3% to $1.14 versus $0.98 in the first quarter of 2007. EBITDA increased to $285.5 million or 25.9% of net sales compared to $260.5 million or 26.1% of net sales in the first quarter of 2007. The 20 basis point margin contraction reflects the impact of the consolidation of our Canadian joint venture business. Operating cash flow for the quarter was $176.5 million net of $13 million in transition payments to United Healthcare. In the quarter, the company was billed $9.6 million in transition payment. Today the company has been billed $47.9 million in transition payments with approximately $45 million paid. The $47.9 million billed represents the vast majority of claims activity through December 2007. DSO at the end of March was 58 days. During the first quarter we increased our bad debt rate which reduced our EBITDA margin by 20 basis points. The increase in our bad debt rate was a result of the increased patient responsibility to the higher deductibles and co-insurance combined with the impact we believe the economy is having on the collectibility of those balances. We are disappointed with the increase in the bad debt rate and continued to implement initiatives designed to improve our performance in this important area. At the end of March, the company had cash and short term investments of $50.1 million and $20 million in borrowings outstanding under our revolving line of credit. Capital expenditures in the quarter were $37.9 million which included several non-recurring instrument investments to enhance our laboratory platforms and performance. During the quarter the company repurchased $55.7 million worth of stock representing approximately 700,000 shares. Approximately $370.1 million of repurchased authorization remained under our approved share repurchase plan at the end of the quarter. We are pleased with our financial results for the quarter. I will now turn the call over to Dave.

Thanks, Brad. We had a very good first quarter. Our U.S. business grew 4.1% in challenging economic conditions adjusting for the effects of the loss of Aetna contract in the Easter Holiday. Our U.S. business grew healthy 6.2% in the quarter. Although volumes were below expectations, improved pricing and disciplined expense control led to both EBITDA and earnings per share growth. Before I discuss progress on our key areas of strategic focus I want to talk about our LabCorp 2010 plan. As you know we have invested substantial amounts over the past 10 years in standardizing our lab and billings systems, our laboratory instruments, and other key parts of our operations such as information technology. These investments have enabled us to become the most efficient provider in the industry. The 2010 plan is the next step in optimizing our enterprise to enhance company performance. When complete, the 2010 plan will provide a robust platform for continued organic growth and will facilitate integration of strategic acquisitions. It will allow us to enhance the customer experience, provide better tools to our valued employees, we invest some of our savings in growing the business and improve our overall efficiency. Think of the 2010 plan as the refinement of our existing platform so that it provides a broader and deeper foundation for sustainable long term growth. We are well into the process of improving our supply chain management and optimizing our logistics which have already generated substantial cost savings that are in our run rate. We have undertaken a number of pilot projects to test core concepts of the 2010 plan, refine assumptions, and develop precision around the investment and return estimates associated with the plan. Examples of the pilot projects underway include web based appointments and patient check in, self check in at patient service centers for walk in customers, real time decision support tools to ensure appropriate draws at the time of service, improved bar coding to reduce the number of human touches required to transport and process a specimen, robotic specimen preparation and splitting, and automated tube sorting at our laboratories. All of these tools are designed to improve customer service and extend our operational capabilities, allowing us to handle more volume with greater speed and accuracy. Again, because of our standardized platforms and systems, we will be able to take all of the tools that are successful in the pilot phase and rapidly deploy them through our entire network of facilities. Capital investment in the plant during 2008 will not be significant as we'll primarily fund these pilot projects and build out core foundational elements such as information system improvements. We expect to begin seeing returns on these investments in 2009, but believe it prudent to complete a thorough assessment of these critical pilot projects before providing estimates of the 2010 plans overall financial impact of the company. I would now like to bring you up-to-date on the progress the company is making towards achievement of our key strategic objectives. In managed care, our strategy of partnership continues to be successful. I'm pleased that year-over-year we've seen an increase in our United volumes. As you know Lab One becomes non-contracted in May of this year, providing us with an additional growth opportunity. We are pleased that Wellpoint, Cigna, Humana, and Horizon have shown year-over-year growth. Regarding Aetna, we continue to retain a significant amount of the business, demonstrating that physicians and patience continue to select LabCorp for innovation, quality, and convenience. All of our managed care partners have stressed the importance of redirecting work from higher cost labs to more efficient providers. This is a significant opportunity for us because approximately 80% of clinical laboratory services in the United States are performed by laboratories other than LabCorp and our principal competitor. We are working with our managed care partners on a number of initiatives that we believe will ultimately redirect work away from higher cost, less efficient providers. In science, LabCorp continues to lead the industry in the introduction of new capabilities when there is an unmet clinical need. During the first quarter we added two new tests in disciplines including, I am sorry we added ten new tests in disciplines including companion diagnostics, genetics, oncology, and toxicology. We also announced an exclusive license from OncoMethylome Sciences to perform commercial MGMT methylation laboratory testing services in the United States and Canada. MGMT methylation has been shown to be a common event in many cancers and is predictive of response to certain cancer therapies. We close our acquisition of Tandem Labs and we are pleased with its performance to date. We continue to believe that biomarker discovery and clinical trials will be critical to our long-term strategy of being the leading laboratory in personalized medicine and companion diagnostics. We remain excited about our partnerships with Affymetrix, Duke University and Yale University and we will keep you updated on the progress of the innovative tests that we are developing and offering through these relationships. We will continue to seek out new and important scientific discoveries and develop them through partnerships such these. Although I discussed our LabCorp 2010 plan earlier I want to remind you that the critical reason we are embarking on this project is to position ourselves for future growth and to better serve physicians and patients. We believe that we must help return physicians to their deserved central role in managing the health outcomes of their patients. Our leadership position in personalized medicine and companion diagnostics will bring the laboratory closer to doctors and their patients. We will provide educational and prognostic tools that will enable both doctors and patients to make more informed decisions about wellness and about the diagnosis, treatment, and monitoring of disease. This in turn will lead to better outcomes for patients and for our healthcare system. LabCorp for 2010 and our strategy for leadership in personalized medicine will provide the foundation for our valued employees to better serve our physician and patient customers. Now, I would like to review our guidance for 2008. Excluding the impact of any share repurchase activity after March 31, 2008 our guidance for 2008 remains. Compared to 2007 LabCorp expects 2008 revenue growth of approximately 13.0% to 14.3%. EBITDA margins of approximately 25.6% to 26.0% of revenues, diluted earnings per share in the range of $4.74 to $4.90, operating cash flow of approximately $775 million to $800 million excluding any transition payments to United Healthcare, capital expenditures of approximately $120 million to $140 million, and net interest expense of approximately $66 million. We expect to achieve this growth through the following initiatives; organic growth and further shifts in our test mix particularly in our esoteric and genomic business, managed care opportunities previously discussed, contributions from acquisitions, and continued disciplined expense control. 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 March approximately 34% of our revenues were in the genomic, esoteric, and anatomic pathology categories. Our goal over the next three to five years is to increase our esoteric test mix to approximately 40% of revenue. 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, and the mix of our new business. Can you update us on your progress and image guided path in HPV? Adoption of the Tripath, Surepath system and Cytec ThinPrep imaging system by our physician clients continues to increase. By the end of the first quarter, image guided Pap screening was being repressive was approximately 61% of all liquid based Pap smears ordered. We continued to experience growth in primary screening HPV testing. During the first quarter of 2008, HPV testing increased approximately 11% versus the first quarter of 2007. What are your plans for uses of free cash flow during 2008? 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 improved share repurchase program. The acquisition market remains attractive with a number of opportunities to strengthen our scientific capabilities, grow our esoteric testing franchise, and increase our presence in key geographic areas. As you know, we purchased additional shares in our Ontario based Canadian joint venture and acquired Tandem Labs during the first quarter. We also made several smaller acquisitions. As Brad mentioned earlier, LabCorp repurchased $55.7 million worth of common stock during 2007. At the end of the quarter, $370.1 million remains under our proved share repurchase authorization. Have economic conditions affected your volumes? The clearest impact from the economy was in our drugs abuse testing business which during the quarter saw a 4% decline in volumes compared to quarter one of 2007. What is the status of the Medicare competitive bidding demonstration project? On April 8th, the Federal District Corp for the southern district of California, issued a preliminary injunction in joining the Medicare competitive bidding demonstration in San Diego, Carlsbad, and San Marcos. The preliminary injunction will remain in effect until there is a trial on the merits. The important findings of the court in connection with the ruling included first that the plaintiffs demonstrated a likelihood of irreparable harm both to laboratories and to patients and second that they were likely to win the trial on the merits of their claim that the agency improperly sought to implement the demo without proceeding through rule making under the administrative procedure act. The agency is currently reviewing the decision to determine what action it will take. Our traders organization, the American Clinical Laboratory Association or ACLA has contacted key Congressional staff to update them on the status of the litigation and to emphasize that the injunction does not eliminate the need for legislative appeal of the demo but bolsters the case for appeal, as the judges findings and conclusions in the preliminary order back up with the lab community has been arguing all along. We are continuing to work toward inclusion of a provision revealing the demonstration project. Now I would like to turn the call back over to Dave.

Thank you Brad. In summary we had a very good quarter and through continued focus on our strategic priorities we are well positioned for continued success. Thank you very much for listening, we are now ready to answer any questions you may have. Question And Answer

[Operator Instructions]. And our first question comes from the line of Art Henderson from Jefferies & Co. You may proceed sir. Arthur Henderson - Jefferies & Co.: Hi, good morning, nice quarter. Couple of questions for you, Dave or whoever can answer this one, your cost of goods as percentage of revenue declined and I assume that there is some cost savings initiatives that you guys are working through. This maybe tied to your LabCorp 2010 initiative. But can you could talk a little bit more about what you are doing there to kind of drive those costs down?

The real reason for the decline in cost of good sold has to do with the Canadian consolidation and while we have a number of cost saving initiatives that are as you know both in the run rate from last year and part of the 2010 plan, I don't think they had any material impact on cost of goods sold in this quarter. Arthur Henderson - Jefferies & Co.: Okay, do you have some... certain amount of cost savings embedded in your guidance here for the year.

We've not... the guidance for the year doesn't include any additional cost savings beyond the $60 million that we told you we had saved through cost reduction efforts last year that are in the run rate for this year. Any further cost saving that we've recognized this year would be in addition to what we've guided to. Arthur Henderson - Jefferies & Co.: Okay, that's helpful. And can you remind us again how much the drug testing business is of your revenue?

In total its about 3% of revenue. So, we should have Brad read that question, we should have provided the clarification that although we did see a 4% year-over-year decline in the drug testing business, it is not material to our revenue or to our guidance. Arthur Henderson - Jefferies & Co.: Okay and you don't have any other sort of risk assessment revenues that could be impacted as well, do you?

No, we do not. Arthur Henderson - Jefferies & Co.: Okay, one last question and I will jump back in the queue. You talked a little bit about the uptick in bad debt expense, what are you doing to sort of address that issue and what should we think about in terms of the DSOs going forward? Thank you.

We have a number of initiatives underway to improve collection of our bad... of our existing bad debt and I'll start out by saying that the fundamental bad debt issue is patient bad debt. The amount of bad debt from the government and from managed care and from the third party payers is minimal. So, we have patient bad debt that comes from two areas, one is original patient which is the uninsured population of the underinsured population. As you can see from the pie chart we provide that's in the range of 9% of revenue. Then the second component of patient bad debt is, bad debt that is originally billed to a third party such as managed care but then becomes patient responsibility through either deductibles or co-pays. And with the growth in high deductible plans we are seeing particularly in the first quarter of the year when people's deductibles reset, we are seeing more dollars going into that patient responsibility bucket. And that we think is somewhere in the range of 6% to 7% of total revenue. Now what are we doing to address the fact that patients are paying more slowly, we have initiated a number of projects for getting paying it from patients at the time of service. Unlike the pharmacy where the patient knows specifically and the pharmacist knows specifically at the time of service whether the drug is a formulary drug, how much the patient's co-payer deductible is, we don't have that information real time. So we are taking payment information from patients through credit cards, debit cards, HSA cards or otherwise in patient service centers to be able to build patient responsibility after service. We also have initiated a number of programs around creating additional incentives for our frontline employees to collect past balances from patients when they present at our patient service centers and overtime we'll be moving those tools into physician office for placements as well. And then of course, eventually as we get to the self checking and the kiosk and the web checking we will be able to handle all of that directly with the patient without immediate human intervention. And of course we have our standard process of collection through letters to patients, outgoing phone calls, and various other techniques that we use to secure payment of patient balances. Brad Hayes has some additional comments.

And Art, this is Brad. On your DSO question I expect to see DSO in the mid 50s. We historically see a tick up in the first quarter, so we think of it sort of in a normal state basis being in the mid 50s. Arthur Henderson - Jefferies & Co.: Okay, great. That's very helpful. Thanks a lot.

Thank you.

And the next question comes from the line of Adam Feinstein from Lehman Brothers. You may proceed sir.

Great, thank you. Good morning, everyone.

Good morning, Adam.

Just a few questions here. Maybe just talk a little bit more about volumes. I guess, as we look at the volumes excluding the consolidation of Canada, it was a little bit lower than what I would have thought. I just wanted to get more clarity there and then converse to the pricing was stronger than I would have thought. So, just wanted to get you to provide some more details?

Sure. Obviously we had some impact from the loss of the Aetna contract because that's going to be annualizing this quarter and next quarter and that was approximately 1.5% of volume. And then we think Adam that were was probably somewhere in the range of 6/10th of a percent due to the impact of the Easter holiday falling in the first quarter versus the second quarter. So if you add those back in, then we end up instead of at 1.6, we end up at about 3.7 volume growth. And then in terms of pricing, we're getting some positive pricing impact obviously from the annualization of price reductions last year as well as small positive impact for pricing improvements that are built into contracts that rolled over at the first of the year. And we're continuing to see positive pricing as a result of mix. One of the comments that Brad Smith made with HPV being up 11%, primary HPV screening being up 11% year-over-year, obviously, that's the driver, both the volume and price, and that's affected by the fact that it looks like that number declined but again if you look at that number in light of the Easter holiday, we still think HPV's testing both in terms of volume and prices continuing to grow very, very robustly.

Okay, great. Thanks for the details. Maybe one quick follow up question here, so, you know as we think about the U&H contract that you guys have been at the run rate for a while, so Dave, you said that there is still growth there and then you talked about the Lab One piece coming on, but just curious, is there a price escalator that kicks in at some point later in the year. So, just how do we think about the pricing for that business?

There is a contractual price escalator that does take effect later in 2008 in the United contract, yes.

Okay, thank you very much.

Thank you.

And the next question comes from the line of Ricky Goldwasser from UBS. You may proceed, sir.

Good morning.

Good morning.

Just some follow-up questions. On the bad debt expense side, can you give us a little bit more detail as far as the slow down in collection. Are you seeing it more in specific geographic region or potentially seeing it more in kind of the esoteric test valid and routine i.e. that are kind of more high priced different items?

We haven't seen anything geographically or test mix base. What we have just seen is a general slowing in patient collections combined as I mentioned with the resetting of deductibles in January that more dollars are going into the deductible bucket and patient collections are coming in at a slower pace. I will say, I mean, if you look at the raw numbers year-over-year we are continuing to collect a higher percentage of the total patient responsibility than we collected in 2007. But the patient responsibility bucket is growing faster than our collection success is growing and that's the real reason behind the bad debt increase.

And then on the volume side, obviously when you add back Aetna it gets you to around 3.1% but do you think that there is some softness in volume as a result of the economy as well as you are saying that's not related. And also if you can comment on what's the impact you are seeing on volumes from Cigna?

I absolutely think there is an impact on volume from the economy. I think it would be naïve to think otherwise. We've gone out and spoken with large customers and a substantial majority of them say that they are seeing fewer patients. And when physicians are seeing fewer patients we are going to be being seeing lower volumes. So, again I think it would be naïve to think that given the current economic conditions and given the way that consumers are being affected that it not gone have an impact on our volumes. That said we think there are still substantial opportunities to grow volume, the managed care opportunities that we discussed, continued focus in our sales force on the attractive opportunities in the marketplace particularly esoteric testing, attractive opportunities in key markets such as the Northeast, such as Chicago, such as California, and our continued focus on hospital redirection. On Cigna Ricky we are seeing year-over-year increase in volumes and I would describe it as consistent with kind of the mid-range of our expectations. So I think that there is still more upside for us with Cigna. We are happy with where we are but I still think there is more opportunity to excel there.

Thank you

And the next question from Robert Willoughby from Banc of America Securities. You may proceed.

Buenos dias.

Oh, yeah. Hey Dave, if you look at... I'm trying to just grasp the drug testing business, its never been go, go, growth or unmitigated disaster though I'd probably lean one way on that business. Are you billing the employers directly for that service, I'm trying to figure out what the synergy for you to be in there from a customer stand point would be.

Yes, we typically bill the employer directly for the service. And the reason it's a good business Bob is that the... while the pricing is not as favorable as the overall business, the leverage in the business is that it takes advantage of our existing gross stations, our existing logistics, our existing infrastructure, and to some extent, our existing laboratory network and logistics network. So, unlike our principle competitors that just do drugs of abuse testing work or do substantially drugs of abuse testing work who have to pay other people to do contract draws, you have to pay other people for logistics. That's all just bolted right on top of our existing system and that's why the business even in... we have seen healthy volume growth over the last couple of years but even in circumstances like this one where volume is off, the business is still a nice business for us.

And would you argue the same then for kind of prison testing and forensics in paternity or is there at some point a competitor who would pay you more maybe to get you out of those businesses?

Well I think forensics and paternity we like the business, we have never taken a very aggressive position on prison testing because there the pricing is historically extremely low and the hassle factor of doing the testing and collecting it and transporting it is relatively high. So we're always looking for opportunities to grow in strategic areas and strategic opportunities and we're always also looking at are there opportunities to refocus our business on areas where we can see greater growth.

Okay, thank you.

Thank you.

And the next question comes from the line of Ralph Giccobbe from Credit Suisse. You may proceed.

Thanks, good morning. Just in terms of bad debt, I may have missed it but so going forward this sort of 5% level seems like its sort of here to stay at least for the rest of this year, is that fair?

I think that's fair. Obviously we're going to be... we are going to continue to be aggressive in coming up with ideas and finding ways to pursue better patient collections and certainly we want to see that bad debt number decrease. But we also have to be realistic that if the consumer continues to be affected by the economy where there's a house payment and a car payment and a credit card payment, the lab payment is not necessarily rising to the top of the pile Ralph. So, I think its realistic to think about this as continuing probably throughout the year.

And what about I guess, you sort of commented that you increased the reserve going forward. I mean is there a risk that the increase is sort of significantly from current level, I mean what is the risk in that I guess?

I don't think there's a risk that increases significantly. I mean this, we've had a very successful historic run of reducing bad debt from the 12% range to the 5% range, and I don't see bad debt returning to any significantly higher level.

Okay, that's helpful. And then, I guess, is there something we need to keep in mind and as we head toward the rest of the year, effectives you guys comfort and sort of maintain that top line guidance because I guess even after adding back at then Easter the revenue run rate if you will is a little bit lower than that 13 to 14 in change percent growth that you have in your guidance. So I guess what should we expect in the back half of the year that should get us a little more, sort of comfortable in that rang given your comments around the economy, etcetera?

Well, honestly there is opportunity as lab one goes out of the contract and there is opportunity to continue to grow these managed care opportunities. We have a very focused sales force on volume growth, and we have a number of activities underway to make sure that we continue to have the sales force focused on volume growth and on capitalizing on the opportunities from significant sized accounts where currently we are getting some of the volume but not all of the volumes. We continue to think we have opportunities in some key markets as I mentioned in the North East, Chicago, St. Louis, California where we are again going to focus on the growth opportunities and particularly in the ability to sell esoteric and genomic testing to existing accounts. And we continue to work with the managed care partners on hospital redirection which we think is as they are looking for opportunities to reduce their overall spend, they have to be they have to have an increasing level of seriousness about moving work out of the higher price less efficient providers into the more efficient providers. So, I we are not changing our top line guidance. We still feel very comfortably with it. It would be easier if the economy were not where it is, but we are very determined to deliver on those numbers.

Okay. Can you remind us if there is any thing from Sierra built into your guidance?

There is nothing from Sierra built into the guidance.

Okay. And then my last one just is there a timeframe from when you will quantity LabCorp to any time?

Yes there is. And I had hoped that we would be able to have some quantification on this call, but I as I think I have said to you and to a number of other people who have asked I mean I feel very, very strongly that we have to have a very solid, precise and detailed number supported by a very solid, precise and detailed plan. And I have seen a precise and detailed plan. I don't think we are at the number yet. Certainly by the time we talk to you again in the call at the end of the next quarter we will have precise and detailed numbers.

Great. Thank you very much.

Thank you.

And the next question comes from the line of Bill Bonello from Wachovia. You may proceed.

Thanks, good morning.

Good morning.

Couple of follow-up questions. The first one just has to do with the trends that we're seeing out of some of the large insurers. It looks like we're seeing pretty healthy enrollment growth at Aetna and pretty substantial enrollment declines at United, and then within the united growth that they do have it tends to be in some of these higher deductible sort of patients directed kinds of products. And so, I am just curious as you think about where your contracts are with the large payers? Whether you are concerned at all that that those enrollment trends could have some kind of a noticeable or meaningful impact on your volume growth going forward?

Bill I don't see the changes in enrollment, at least the ones that I have read about as being big enough to really move the needle for us one way or the other. And, with respect to growth in Aetna lives, we had some thoughts about ways in which we can address that that we are already in the process of implementing. So, I don't look at what I consider I mean obviously the managed care plants are never happy to lose lives, but I don't look at what I see as being some loss of lives by the larger plants as the margins is having any great impact on our overall volumes.

Okay. And then the second question is again on the bad debts which is sort coming at it a little bit different and was helpful that you had clarified that you are actually seeing an improvement in the collections. I guess I am wondering if you can give us any color around the kind of assumptions that you make on sort of what you collect on dollar for a patient's out of pocket component on the co-insurance or deductible and maybe when a patient is just a 100% responsible for the bill, what kind of assumptions you may?

Hey Bill, this is Brad. I'm not going to give out the specific assumptions but we do make that delineation and the co-paid deductible folks tend to pay at a greater rate than the uninsured folks. And we are able to split out our experience that way and model and estimate that way.

Okay. And I mean how confident are you around those numbers? I mean, obviously the hospital guys that was a huge chunk of their bad debt problem. I mean part of that was the growth in the uninsured but a huge part was they just way over estimated how much of that out of pocket they could collect and how much of the uninsured they could collect. I mean how comfortable are you that you are estimating that collection appropriately?

Well, it's based on history. So, we have a pretty good historical database that tells us what we have collected. The trick would be anticipating any changes economically that could impact that number. So, I don't think we are starting out from scratch on our thinking and self-paid because it really started to take shape in the late night 90s to early 2000s. As Dave mentioned earlier I think it has grown in terms of what is going to the patient. So, again we have some good history. The challenging part would be to estimate any changes in that experience based on external factors.

Okay. And then just to one of the questions that was asked earlier. I mean, I guess I'm not sure that I understand if we are only one quarter into sort of another big increase and move towards out of pocket expenditures, a lot of those people probably haven't even been to the doctor yet or etcetera. I mean why wouldn't we think that you would see some upward pressure on that bad debt number that the mix would sort of continue to get worse?

Well, again the initiatives and they always have been designed to have those headwinds offset by the help from the initiatives. And without going into great detail we have some that are taking place that are being fully implemented in the first quarter that we think will be able to offset anything that we might see.

Okay. That's helpful. And then, the only other question just is the tax rate in the quarter. It was a little bit higher I guess than sort of what we had expected and that might have just been their modeling, but was there anything unusual all about the tax rate this quarter?

Nothing unusual. I think on the year-over-year basis it was very consistent. It's probably up from the fourth quarter, but if you look at how last year went with the adoption of FIN48, we have some the way that happens is pretty much higher in the first, two to three quarters and then as adjusted in the fourth.

Okay. Yes, that's helpful. Thank you.

Thank you.

And the next question comes from the line of Amanda Murphy from William Blair. You may proceed.

Hi, good morning. Just a couple of quick questions. In terms of the hospital redirection, have you seen any additional interest on how plans in terms of implementing specific benefits to the plan changes in 2009?

Yes, we've seen interest from health plans in both the benefit design and also use of tiered co-pay and deductible structure. So, this is an area that we are getting a lot of attention from our managed care partners on, and then we're going to expect to see some progress in the back half of the year and into 2009.

Okay, and then how about your efforts to educate employers this year and next year, how is that progressing?

Well, the process of educating employers is a collaborative process with the managed care plan. So, we have initiatives underway with a couple of large employers to cooperate with them or collaborate with them in educating the employees about the additional cost of testing at the higher price providers. But again I think the real opportunity here continues to be as we design specific programs with our managed care partners to be able to jointly educate employers and employees about the additional cost of testing, going through the higher cost providers.

Okay, thank you.

Thank you.

And the next question comes from the line of Bill Quick from Piper Jaffray. You may proceed.

Great, thanks. Good morning.

Good morning.

Hi.

Given the impact of the incremental United Health price benefits later this year, is it reasonable to assume that's the positive pricing benefits in terms of first quarter is sustainable through the balance for the year?

Well, we always desire positive pricing and with both I don't want you to think that just because there is an increase build into United Healthcare that that has an overall significant impact on pricing. Because if you think about the total, our total book of business managed care in total is less than half and if you have a price increase with one managed care plan it's not enough to drive pricing across the whole book of business. But that said, I mean we are on the one hand we don't get price increases from the uninsured patients, and we don't get price increases from the government. We have some price increases build in with managed care contracts. We have some price positive priced opportunity with our client billing book and then we have the positive impact of mix. So we have annualized most of the price reductions other than the Cigna reduction which annualizes in July, and we do think we'll see positive pricing throughout the year.

Understood. And then I know you probably do not want to get down this granular, but to the extent that non presumably your contract business help downturn pricing of some type of indication as whether or not there was a significant contributor or not?

It's not a significant contributor to overall price growth.

Understood. Thanks very much.

Thank you.

And the next question comes from the line of Mathew Borsch from Goldman Sachs. You may proceed.

Hi. Thanks for taking our question this is Shelley Knoll in for Matt Borsch this morning. Just a couple of more follow-ups on the bad debts issue, to help us kind of understand how the economy might impact demand for lab testing? Could you describe the average commercial insert patients? What they are paying for a lab test as far as is it a percent of the cost? This is not the high deductible health plan. This is the average just what is the average co-pay or deductible for a lab test?

I don't think I could really answer that question in a meaningful way because it depends on what tests are ordered and how many tests are ordered. Just in the first quarter of the year with the high deductible plans, basically everything is going to patient responsibility. And then that's the reality until you get up to a $1,000 or $1,500. And that's the deductible. Now the co-pay fees depends plan by plan and also depends on the amount that's the amount of testing that's ordered. It's not unusual that a patient has a 20% co-pay or a 30% co-pay from lab testing services but it depends on what the overall services are to be able to figure out with the co-pay is.

Okay. And do you have any sense of what mix of your commercially injured patients are in high deductible health plans?

We don't have anything other than anecdotally. I believe it's increasing certainly, our employees here at LabCorp there is an increasing number and percentage that are high deductible plans, and I suspect that's true of most large employers.

Okay. And on the... sort of another side of the story, can you tell us what your self-pay mix is, the uninsured mix and maybe what it was last quarter?

It's consistently about 9% of revenues and I don't think that it's materially changed quarter-over-quarter.

Okay. And then I think you just answered this question, but you are not assuming in your revenue guidance out payer mix changed to as I guess maybe as we see some job loss, you are not assuming that self-pay mix increase with benefit revenue growth?

No, we are not.

Okay. And then, just one final follow-up on the revenue guidance, given this deeper ramp in the later part of the year, I understand the guidance incorporates since small scale acquisitions. Is that reflected in the revenue growth number?

Our guidance always includes some revenue growth as result of fold-in acquisitions. So, it doesn't include any major acquisitions, but there is always some acquisition impact and in our top line revenue growth. Yes.

And is that part of what helps you think that that the affirmed revenue guidance maybe reflects acquisitions in the later part of the year?

Yes.

Okay, okay, great. Thank you. That's it for questions.

Thank you.

And the next question comes from the line of Tom Gallucci from Merrill Lynch. You may proceed.

Thank you. Just wanted to clarify a couple of things if I could. First, I think you had said earlier that your collections of patients of sort of the so called patient's direct bucket are getting better but the bucket is growing. So, what's the size of that bucket this year versus last year?

Well, I'm not going to talk about the specific size of the bucket but

Well, maybe not dollar but in terms of percent of the business or something?

Yes. In terms of percent of the business, the total percent of revenue that comes from patient, if you add the 9% uninsured and the 6% or 7% that's patient responsibility through managed care; it's about 15% or 16%.

And then last year it might have been, you said the nine is pretty steady, so the 6 to 7 was less?

It's probably up about 1% of that managed care over to page it original managed care because over the patient is probably up 0.5% or 1% year-over-year.

Okay. And then what percent of your volume is going through your PSE's these days?

It depends on the State in States where in office phlebotomy is prohibited. It's probably in the 30% to 40% range that would be Florida and New York, Pennsylvania and several others that I can't name of the top of my head, California. In States where in office Phlebotomy is permitted, it's probably more in the range of 20%.

So, on average it's maybe in the range of?

I would say probably 20%, 25% total.

Okay. I'm just taking that's probably the place where you have the best ability to sort of get that upfront information at banks.

I would say there an also with the in-office Phlebotomies replaced in the doctors office which actually is one of the we've had significant growth in in-office Phlebotomy over the last couple of years. So, that's another opportunity where we see the patient face-to-face.

Those are LabCorp's phlebotomist in the doctor's office?

Yes. And if you add those together you are probably are close to half the patients are seen by our LabCorp employee even either in a patient service centre or in a doctor's office.

Okay. That's great. In terms of the volume I think you got up to about 3.7% when you add back some of the negatives, maybe just trying to really get an understanding of organic volume. I know you didn't do any big acquisitions but you did a bunch of small ones overtime. So what is that adds to your volumes that 3.7 number that we are talking about before?

Say it again. I'm sorry. I didn't quite catch it. What is the

Well, I'm just wondering what contribution of acquisition was the volume growth. I know you didn't do any big deal last year but you did a bunch over the course of the year, so just trying to get more of that organic number. So you took your 1.6% volume is sort of added back and impact of Aetna adding back the negative impact of Easter and got 3.7. I am wondering what that would be if you haven't done any acquisitions over the course of last year?

Hey Tom, this is Brad. We are not breaking it out that way but I think about that acquisition activities is probably in terms of number was greater but in terms of size, I wouldn't expect it to be that much greater than what we would have expected to see in our performance.

So, all together they didn't even grow half a percent of volume?

Well,I think they may have been that.

Okay. And then on the acquisition front, you mentioned I guess in response to the last question or two probably expecting deals over the course of this year. How are you seeing sort of the availability out there and the pricing? And is there any particular geographic or niche that we should be thinking about you are focusing?

I would say the availability is high; there is a lot of sale. The pricing is high and so we are going to be very selective about what we are interested in. In terms of a particular geography, I don't think there's anything that jumps of the page at us. We're always looking to enhance our infrastructure and places where we feel that we're under represented. So, again some of the large markets that I discussed earlier, California, St. Louis, Chicago, the North East outside of New York and New Jersey, I mean those are places that we certainly would think about acquisition opportunity. In terms of niches, I mean we did some esoteric acquisitions last year in the coagulation area, in endocrinology area. We like those businesses. We think they are very attractive and continue to look at them. I would say, the anatomic pathology business, there's quite a bit for sale. It's richly priced and so that's going to be somewhat of a constraint on our willingness to make further significant acquisitions there.

Okay. And then one last question, I think you mentioned about $48 million of United related transition payments billed to-date. What were your expectations there as we think about the next year dealing with that total number might be given sort of the trends you've seen?

Well, we haven't changed the expectation this quarter. And, so I think the number that we're looking to is in the $115 million to $120 million range. Now, if you look at the first year and you say well the first year was 50, 115 to 120 to me seem nothing as 115 seems to have some conservatism and built into it because the trend is clearly downward and as I think we mentioned I mean in the fourth quarter, we were billed $9.6 million, so less than 10. And we continue to see the trend going downward and we view that as a positive.

Okay, great. Thanks for the color.

Thank you.

And the next question comes from the line of James Star Longview Asset Management. You may proceed. Mr. Star, your line is opened. If you would like to ask a question please unmute your phone.

Yes.

Mr. Star, do you have a question?

Yes. Can you hear me?

Yes we can hear you.

Okay. Sorry about that. Good morning, when do you see the managed care deeper service price per acquisition trend leveling out or stopped declining?

I think the decline Jamie in the first quarter is basically mix related rather than price related as we've taken a preliminary look at it. So, I don't think we are seeing real price declines there. I think we are just seeing a small change in mix and I think the total decline there was $0.25 or so. So, we expect to see that turn in the positive direction going into the second quarter and going forward.

Great. Okay, thanks.

Thank you.

And the next question comes from the line of Ricky Goldwasser from UBS. You may proceed.

Yes, just a few follow-up questions. First of all, as far as bad debt expense, what percent of bad debt expense percent of revenue is embedded into guidance?

Well, we know we didn't guide the bad debt for the year. So, but obviously we didn't, when we gave guidance we did not anticipate increasing bad debt. So, what you can see in the quarter Ricky is that through control of other expenses we were able to offset the impact of the bad debt increase and that's what we expect to be able to do throughout the year. So, to answer the question directly, we are not reducing guidance because of the increase in bad debt.

So, would it be fair to say that as long as you have other way to door, to offset the increase in the cost that you feel comfortable within the guidance range. Are you doing and that's for moving parts for you to maintain guidance?

Absolutely.

Okay. And then, just as far as the exposure to States where patients actually go to your patients at service centers, full services for the total LabCorp in terms of market share, do you have more exposures to States where phlebotomist are permitted in physician offices?

I don't have the list off the top of my head the vast majority of states permit phlebotomist in physician offices. We have obviously for those states that do not permit it. We have a substantial market share in Florida. We have a substantial market share now and then in the New York metro, we've always had a substantial market share in upstate New York. We have a reasonable market share in Pennsylvania. We have a very little on Rhode Island which I think is on that list, and you know California, we have a decent business but we're clearly not the largest provider there.

So is it basically to States that don't allow for those experiences to physician just to patients in manage care? Are those in States?

No. I think New Jersey and New York are the major and non-direct bill and California's anti markup. But there is not complete congruence.

Okay. Is New Jersey another state where Phlebotomists are not permitted?

No they are permitted in New Jersey.

Yes, okay. And then lastly as far as the given guidance, what are your assumptions regarding to biology reimbursement in the second half of the year? Are you assuming that Congress basically allows for the just about the physician fee schedules to remain unchanged into the second half?

Yes. The guidance assumes that the physician fee scheduled fix gets implemented in July.

Okay,great. Thank you.

Thank you.

Our next question comes from the line of Kemp Dolliver from Cowen & Co. You may proceed. Kemp Dolliver - Cowen & Company: Hi, thanks. Couple of questions, first, any sense as you look back, say back to 2000-2001, what's the mix of your patient responsibility dollars would have been compared to this 15% to 16% mix now?

Because of the I mean the company was a very different size then and it was a very different managed care environment. I think it's not meaningful to do those comparisons Kemp. I mean what I would say is that the patient responsibility bucket for managed care has been growing and we look at it regularly obviously. And it has been growing. It continues to grow largely as a result of the plant designed. And we don't see any likely near-term change in that trend. Kemp Dolliver - Cowen & Company: Okay. And just to be clear you indicated that your self-pay collections are up but that the obligations are up more so, at least initially the rate of collection might is down a bit?

Yes. So, the bucket is growing although we are doing a better job collecting and we are collecting a greater percentage of what's going into the bucket. The bucket is growing faster than the increase in our rate of collections. Kemp Dolliver - Cowen & Company: Okay. I guess it still sounds like the dollars collateral are still lagging even though you are making some progress.

Yes, I would agree with that. I mean if you think about it this way if $100 goes into the patient bucket and we collect and I am making up the numbers. So, please understand I'm making up the numbers. And we collect 30% of it, we collected $30. If $200 goes into the patient bucket and we collect the 32% of it, right, we collected a higher percentage but we had more write-offs because the bucket was bigger. Kemp Dolliver - Cowen & Company: Okay right. Okay, it seems to me a percentage in the absolute dollar amount.

Right. And that's the position we are in. We are doing better job in terms of a percentage of what's going into that bucket which means we are collecting more absolute dollars. But what's going in there is growing faster. Kemp Dolliver - Cowen & Company: Understood. Separate question is with Sierra any sense of timing from United at this point with regard to when they think they will be able to at least give you some sense of your plans?

We don't have a sense of timing. My understanding is that they are in a standstill situation until this spin-off of some of that work, whatever they have to spin-off to Humana is completed. And so we don't have a sense of when that timing is going to occur. Kemp Dolliver - Cowen & Company: Okay.My last question related to the histology business. The revenue per session there is up year-over-year, but it looks like it's balanced around. Is that just a function of the mixed quarter-to-quarter?

Kemp, this is Brad. The mix as well as the contract changes. So, for example in the year-over-year we don't have the Aetna contract and that line I think was disproportionately impacted by the Aetna contract change. So, you see volume down but price up. Kemp Dolliver - Cowen & Company: Got you.Thank you. Thank you.

And there is no further questions in the queue. I will turn the call back to Mr. David King for closing remarks.

Thank you very much. Thank you all for listening to our first quarter conference call. We hope you have a great day.

Thank you ladies and gentlemen. This concludes the presentation for today. You may now disconnect.