Labcorp Holdings Inc. (LH) Q3 2008 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2008 Laboratory Corporation of America Earnings Conference Call. My name is Sandy and I will 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 today’s conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference, Mr. David King, CEO. Please proceed.

Thank you, Sandy. Good morning everyone, and welcome to LabCorp’s 2008 third quarter conference call. Joining me today from LabCorp are Brad Hayes, Executive Vice President and Chief Financial Officer; Ed Doddson, Senior Vice President and Chief Accounting Officer; and Eric Lindblom, Senior Vice President, Investor and Media Relations. Brad Smith is unable to be with us today, due to a special company project. As you know, Brad and Dr. Myla Lai-Goldman recently announced that they will retire at the end of 2008 to spend more time with their families and pursue other interests. Myla and Brad have been stalwarts at LabCorp and its predecessors for 19 and 27 years respectively, and Brad has served with distinction for the last two years as Vice Chairman of the Board. During her tenure, Myla has been largely responsible for establishing and maintaining LabCorp’s position as the industry leader in science and innovation. She has been on the cutting edge of medical, clinical and technological developments in everything from infectious disease and cancer, and has helped us implement and execute our successful esoteric testing strategy. We will all miss her forward-looking leadership and commitment to LabCorp. During his tenure, Brad has played a critical role in helping the company achieve success in ways too numerous to mention. We will all miss Brad’s judgment, leadership, positive attitude and unflagging loyalty to the company. On a personal note, Brad brought me to LabCorp in 2001, and has helped me immeasurably in assuming my current role through his support and through his work with our shareholders and the analysts who cover our company. I’m grateful to him for that, as well as for his trusted counsel and advice, and I will miss him greatly. This morning we will provide a review of our third quarter and year to date 2008 results, and then talk about growth drivers and how we intend to capitalize on them. Later in the call we will review guidance for the remainder of 2008, give preliminary guidance for 2009 and cover a few anticipated questions. I would now like to turn the call over to Eric Lindblom, who has a few comments before we begin.

Before we begin, I would like to point out that there will be a replay of this conference call available via the telephone and internet. Please refer 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, and also... and investors are directed to this 8-K and our website to review this supplemental information. Additionally, we refer you to today’s press release for a reconciliation of EBITDA, which is a non-GAAP financial information discussed during in 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, Eric. Our third quarter results are as follows. Net sales increased 11.2% to $1,135.1 million. Compared to the third quarter of 2007, testing volume measured by accessions increased 10.6% and price increased 0.6%. Excluding the consolidation of our Ontario, Canada joint venture revenue increased 5.4%, with volume increasing 3.1% and price increasing 2.3%. 1.6 percentage points of the increase was due to the extra day in the quarter. Weather in the quarter negatively impacted volume by 0.7 percentage points. Adjusted for these two items revenue grew approximately 4.5%, with volume increasing 2.2%. Before restructuring and other special charges recorded in the third quarter of 2008 and 2007, earnings per diluted share increased to $1.10 versus $1.07 in the third quarter of 2007. The $1.10 is net of lost accession volume as a result of weather in the quarter, without which we would have reported $1.13. During the quarter, we recorded pretax restructuring and other special charges of $17.7 million, primarily related to work force reductions and the closing of redundant and under-performing facilities. EBITDA was $265.8 million or 23.4% of net sales. Operating cash flow for the quarter increased 49% to $194.4 million, net of $8.4 million in transition payments to United Healthcare, compared to $130.4 million in the third quarter of 2007. In the quarter, the company was billed $12.3 million in transition payments. The $12.3 million billed represents the vast majority of claims activity through June 2008. DSO at the end of September was 53 days, an improvement of one day, and our bad debt rate was stable at 5.3%. Cash collections were strong in the quarter, and we continue to make progress on our initiatives to move the collection process closer to the front end. At the end of September, the company had cash of $49.4 million and $70.8 million in outstanding borrowings under our revolving line of credit. Capital expenditures in the quarter were $41.5 million. During the quarter the company repurchased $263.9 million worth of stock, representing approximately 3.7 million shares. Approximately $95.4 million of repurchased authorization remained under our approved share repurchase plan at the end of the quarter. Our year to date results, are as follows. Net sales increased 10.6% to $3,386.1 million. Compared to the first nine months of 2007, testing volume measured by accessions increased 9.4% and price increased 1.2%. Excluding the consolidation of our Ontario, Canada joint venture revenue increased by 4.3%, with volume increasing 2% and price increasing 2.3%. Before restructuring and other special charges recorded through the end of September 2008 and 2007, earnings per diluted share increased 11.1% to $3.48 versus $3.13 in 2007. The $3.48 we reported is net of lost accession volume as a result of weather in the third quarter, without which we would have reported $3.51. EBITDA increased to $852.4 million or 25.2% of net sales, compared to $812.6 million or 26.5% of net sales in 2007. Operating cash flow for the first nine months increased 21% to $565.6 million, net of $29.9 million in transition payments to United Healthcare, compared to $469.3 million in 2007. Since the beginning of the United Healthcare agreement, we have paid $65.6 million in transition costs and have been billed $69.3 million. During the first nine months of 2008, the company repurchased $330.4 million worth of stock representing approximately 4.6 million shares. I will now turn the call back over to Dave.

Thank you, Brad. We are pleased that we delivered strong results this quarter in a challenging environment. We saw solid revenue growth coming from, both volume and price, very strong operating cash flow and great progress in our actions related to bad debt. Our strategy of focusing selling efforts on wellness testing and on physicians whose patients’ care is less discretionary paid off, as esoteric testing volume grew 8.4% in the quarter. Our margins through nine months, excluding the consolidation of our Canadian joint venture, increased 20 basis points in spite of the headwind from bad debt. Operating cash flow increased 49% in the quarter to $194.4 million, and year to date has increased by 21% to $565.6 million. Our operating cash flow per share for the first nine months of the year is $5, an increase of 31% compared to last year’s $3.82 per share. We continue to lead the industry in free cash flow yield and free cash flow per share. I’m also pleased that during the quarter we stabilized our bad debt rate at 5.3%, improved our DSO to 53 days and continued to make progress on moving the collection process to the front end. Now let’s talk about why the lab industry and LabCorp are fundamentally sound and poised for continued growth. First is the ongoing expansion of our managed care partnerships. We are pleased that volume has grown year-over-year for all of our major plants including United, Wellpoint, Horizon and Signa. We are encouraged by current conversations with all of our partners about enhancing our relationships, helping improve patient outcomes, and helping reduce treatment costs through better use of laboratory medicine. Second is consolidation. Although our strong revenue growth this quarter is fundamentally organic, acquisitions remain an important part of our strategy. We continue to evaluate acquisition opportunities, and see our liquidity in the current market as an opportunity to make strategic acquisitions at appropriate prices. We see three additional growth drivers, all tied to our strategy of leadership in personalized medicine. Many of you have heard me say I believe healthcare will always be physician-centric, but that increasingly patients will expect and require treatment based on their specific personal characteristics, including their genetic makeup. The next 10 years will see the evolution of the clinical laboratory from a provider of numbers to a provider of diagnostic intelligence, and LabCorp will lead that transformation. The three drivers that will move us forward for personalized medicine are esoteric testing, our outcome improvement programs, and companion diagnostics. I already mentioned our 8.4% volume growth in esoteric testing in this quarter. Our goal is to increase esoteric testing to 40% of our revenues in the next three to five years. In fact, this quarter alone esoteric testing as a percentage of revenue increased 50 basis points over last quarter, an impressive statistic considering this growth was all organic. We will continue to introduce new esoteric tests to respond to scientific discoveries, such as the importance of the K-ras gene for colorectal cancer drug selection, to improve patient care and outcomes and to satisfy unmet medical needs. We will also continue our important collaborations with academic institutions such as Yale and Duke to help us in identifying and commercializing new and innovative tests. Our outcome improvement programs from our Litholink division are the second growth driver. The Litholink program for kidney stone management has been extremely well received, and we are seeing double-digit revenue growth, uniform acceptance from payers and premium reimbursement. This quarter, Litholink began offering our unique outcome-improvement program for chronic kidney disease, or CKD. An estimated 26 million adults in the United States have CKD. It is the 9th leading cause of death in the United States, and is estimated to cost the healthcare system in excess of $37 billion per year. The kidneys perform many functions to keep the blood clean and chemically balanced. Most kidney diseases cause the kidneys gradually to lose their filtering capacity. Often the deterioration in kidney function takes place over a number of years, during which the patient will have laboratory values within the accepted normal range yet be losing significant kidney function. The major comorbidities of CKD are diabetes, hypertension, and cardiovascular disease. Litholink’s CKD program focuses on identification of patients who have reduced or deteriorating kidney function. Through collaboration with local nephrology groups, we focus on educating primary care physicians about the importance of identifying CKD through laboratory testing of EGFR, albumin, parathyroid hormone and other accepted measures of kidney function. Our sophisticated report, developed based on input from an international panel of CKD experts, guides the physician on how to use appropriate medication, dietary modifications and procedures to slow the process of the disease and prevent further damage to the kidneys. The response to our CKD program has been enthusiastic among physicians. Several nephrology groups are actively assisting us in outreach to primary care physicians so that we can identify patients with diminished kidney function and help treat them appropriately. The payer response has likewise been positive. In fact, one of our managed care partners has assigned internal resources to assist us in physician and patient recruitment. Furthermore, the Medicare Improvements for Patients and Providers Act of 2008 instructed CMS to establish demonstration projects to improve the treatment of CKD in the Medicare population. We are working to have our CKD outcome improvement program qualified for this important CMS and Medicare demonstration project. Our final growth driver is companion diagnostics. Our clinical trial division continues to help pharmaceutical companies develop diagnostic tests that provide guidance on administering the proper dose of the proper drug to the proper patient at the proper time. Our tandem division is a leader in biomarker discovery, and is seeing strong growth year-over-year as pharmaceutical companies seek markers to assess drug safety and efficacy. Additionally, drug repositioning has emerged as a corporate strategy, with companies such as ARCA Biopharma and Vanda Pharmaceuticals focused on in-licensing existing compounds that have not performed well in broad trials, then developing tests to target patient populations in whom the drugs are effective. We have entered into relationships with both of these companies to develop companion diagnostics, and are excited about these and other opportunities in this rapidly-growing field. Finally, we continue to be excited about our collaboration with Medco on both Tamoxifen and Warfarin. A significant number of employers who secure their pharmacy benefit management from Medco have enrolled in this innovative program, which provides specific lab testing to assess the safety and efficacy of these drugs prior to dispensing them to patients. In summary, we remain very excited about the growth opportunities that lie ahead, and continue to believe that we are well positioned to capitalize on them. Now I would like to update our guidance for 2008. Excluding restructuring and other special charges and share repurchase activity after September 30th, 2008. We are reaffirming our prior full-year diluted earnings per share guidance of between $4.57 and $4.61. This guidance is negatively impacted by an estimated $0.03 per diluted share, due to revenue loss as a result of hurricanes in the third quarter. We expect revenue growth of approximately 11%, EBITDA margins of approximately 25%, operating cash flow of approximately $750 million to $770 million excluding any transition payments to United Healthcare, capital expenditures of approximately $140 million to $160 million, and net interest of approximately $70 million. For 2009, our preliminary guidance is revenue growth of 3.5% to 5.5%, and diluted earnings per share in the range of $5 to $5.25. As always, we will give updated guidance on our fourth quarter call. Now Eric Lindblom 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? In the quarter and year-to-date, approximately 35% 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. How were collections in the third quarter, and what do you see for the future? Our bad debt rate in the quarter was stable at 5.3%, and our DSO improved to 53 days, both good signs. Overall our actions related to improving collections are progressing well. What are you plans for uses of free cash flow during the remainder of 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 agreement, and second, through continuing our approved 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 Brad stated earlier, we repurchased $263.9 million in stock during the quarter and had $95.4 million in share repurchase authorization remaining at the end of the quarter. What is your current approach to share repurchase? Our philosophy has not changed. We continue to see share repurchase as an important tool in enhancing shareholder value. Do you expect any impact from the financial markets? We believe our demonstrated ability to generate strong cash from operations, combined with our revolving credit facility, will provide ample liquidity in these uncertain times. Our bank facility is in place through October of 2012, and is made up of a large number of banks. With the exception of the revolving line of credit, we are not exposed to the recent volatility in short-term borrowing rates. We continue to monitor the credit market and assess any impact that changes may have on our company. What is the status of OvaSure? At the request of the FDA, we are voluntarily discontinuing the offering of OvaSure effective October 24th, 2008. Please refer to our 8-K filing of Monday, October 20th, for more information. What impact did the drugs-of-abuse testing have on your business? In the quarter, our drugs-of-abuse business saw volumes decline year-over-year by 10.3%. This was greater than the second quarter, where we saw a 7.9% decline. This decline negatively impacted revenue in the quarter by 40 basis points and volume by 110 basis points. On a year to date basis revenue has been negatively impacted by 30 basis points and volume 70 basis points. What is your view of the M&A market? The M&A market is very attractive. We believe that a combination of factors has caused many lab owners to explore their options. We remain committed to our discipline of making strategic acquisitions at appropriate valuations. Now I would like to turn the call back over to Dave.

Thank you, Eric. In summary, we had a solid third quarter in a challenging environment. For the reasons discussed earlier, we believe that our future is promising. We see terrific opportunities for revenues growth, and these, along with disciplined cost control, will continue to drive shareholder value. Thank you very much for listening. We are now ready to answer any questions you may have. Question and Answer

[Operator Instructions]. Your first question comes from the line of Adam Feinstein of Barclays Capital.

Okay. Thank you. Good morning, everyone.

Good morning.

Good morning.

Just had a few questions here. Maybe just starting with volumes. Just curious to get your thoughts in terms of what the biggest change relative to the second quarter... you spoke about the extra business day, but even backing that out it is still better than what we would have thought. I guess curious to get your thoughts in terms of how you compare Q3 relative to Q2 on the volume front? And then a couple follow-up questions.

I think a couple things happened. One, as you remember, we annualized the loss of Aetna in the beginning of Q3, so that provided some volume improvement. Second, as I mentioned I think going back to our first quarter call, when we began to see impact on volume, we began re-deploying our sales force and focusing very heavily on wellness testing and also on physician specialties that we felt the patients would have less discretion in coming to see the doctor. So areas like cancer, endocrinology, rheumatology and I think what you are seeing in this quarter, is that those efforts have been productive, and we are very pleased obviously with the volume improvement.

Okay. Good. And just maybe with respect to UNH just curious there, any update on the Sierra business? Just curious in terms of pricing escalators I believe you had for that contract that would kick-in over time? Just curious if we will start to see that in the Q4?

I don’t have any update on the Sierra business at this point. We did have a price increase that took effect on October 1st. So we will see some positive price impact from that United increase in Q4.

Okay. Great. And then just generally speaking in terms of pricing, it seems like the outlook is definitely better than it was a year... this time last year, and just curious to get your thoughts in terms of managed care contracting in a general... obviously last year was a very big year. It seems like things are very stable now. Just curious to get any updates in terms of what you guys are hearing, and as you look it up a year... look forward to future rate increases.

I would agree with your characterization, Adam, that pricing is relatively stable, and I would say for the most part we have now lapsed at the end of this quarter the pricing impact of last year’s reductions. So that’s positive. Also positive, we are contractually going to receive escalators from a couple of the contracts that we renegotiated at the beginning of 2009. So... and in our continuing discussions with managed care, we are cautiously optimistic as we talk about further contract extensions beyond what we have already implemented. We are cautiously optimistic we are not going to see the kind of pricing reset that we saw in 2007. So generally I would agree with the comment that pricing seems to have stabilized, and we should see some real price improvement in 2009.

Okay. Great. Just one final question and I will get back into the queue. I appreciate all the detail there. I know you guys simply don’t comment on monthly data, but just due to the fact that this past month has been an abnormal environment, and just we are hearing about slowdown in pretty much every part of the economy. Just curious in terms of whether things have been normal for you guys so far in the first month of the new quarter or if things have changed? And to the extent you I can’t comment, I totally understand but wanted to throw that out there.

I really don’t feel comfortable about commenting about fourth quarter volumes at this point, so I’m going to defer that until our fourth quarter call.

Okay. I understand. Thank you very much. Good quarter.

Thank you.

Your next question comes from the line of Art Henderson of Jefferies & Co. Please proceed. Arthur Henderson - Jefferies & Co.: Hi. Good morning, and thanks for taking the question. The gross margins this quarter were a bit lighter than what we had expected and I was wondering if that partially might be due to the hurricane, but wanted to get your take on that?

Hi, Art. This is Brad. Absolutely the hurricanes we estimate had about a 40 basis point impact... negative impact on that margin. Arthur Henderson - Jefferies & Co.: Was there anything else that might have pressed that down a bit more?

Embedded in our margin guidance for the full year was a... we went over this quite a bit after the second quarter call, was a second lower than the first half in terms of our margins. And that would be pretty much all the way down the line from gross margin to EBITDA. So it is something we expected it to be down by. I think it is a little... besides the weather lower than we expected, due generally to rising costs and nothing specific, but across our cost base. As we have mentioned a number of times, the impact of fuel which is not individually significant, but we think in the third quarter some of those costs... some of the transportation costs showed up in other lines. The good news is, at least for now, that the price at the pump has moderated and even going down, so we hope to see that benefit in the future. But yes, a little lower than we thought and for the reasons that I have just mentioned. Arthur Henderson - Jefferies & Co.: Okay. That’s helpful. And then Dave, could you give us an update on the LabCorp 2010 initiative?

Yes, the 2010 initiative, basically as we mentioned in our earlier calls, is a comprehensive plan to drive service quality and operational improvements, and to optimize our growth platform. To date, everything in the 2010 plan is on track with the exception, I would say, of part of the 2010 plan focused on initiatives that would allow us to reduce bad debt in 2009. And realistically I think we have to recognize that bad debt reduction in 2009 is not likely if the economy continues in the current environment. We did recently announce that we will be closing our Herndon, Virginia laboratory by the end of the year, and that closing and the transfer of all the associated business should be completed by the end of the first quarter. Arthur Henderson - Jefferies & Co.: Okay. All right. That’s helpful. One last question, then I will jump back in the queue. I was looking at the histology revenue. It looked like it was down a bit. I was wondering, could you give us an update on what is going on in that part of your business?

Yes. Art, this is Brad. If you look at the first and second quarters, that business was down quite a bit, so actually we saw the third quarter as quite an improvement in the trend there. And we believe the anniversary of the Aetna loss is what helped it come back up to near even, as opposed to mid single-digit losses in the previous two quarters. Arthur Henderson - Jefferies & Co.: Okay. That’s very helpful, thanks. Very nice quarter.

Thank you.

Your next question comes from the line of Robert Willoughby of Banc of America Securities. Please proceed.

Thank you. Dave, can you give us an update on the deal activity specifically in the quarter? I know you said they are immaterial in the grander scheme of things, but can you give number transactions, potential spend in the aggregate, and maybe anecdotally of something about the assets that you’ve brought on board? And then maybe just lastly anything kind of, since the quarter, since that seems to be a focus?

Sure, the biggest acquisition that we did in the quarter was the Stanford Outreach Program. And the second substantial acquisition that we did in the quarter was PathNet, which is a women’s health-focused laboratory in southern California. We think both of those will be terrific acquisitions for us. Stanford because of the patient service center infrastructure, and giving us a foundation for further growth in Northern California and PathNet because of the women’s health focus and the enhancement that will provide to our already robust women’s health offering. We did a couple other small acquisitions, Bob, nothing that really is material, and we generally don’t comment on what we pay for acquisitions, other than to say we think the valuations were very reasonable. We have had every expectation that we will be able to get those businesses to our margins in a short amount of time. I don’t think there is anything since the end of the quarter to report, although we continue to look at several opportunities.

And the guidance for next year probably reflects zero acquisitions, is that correct?

Bob there is always a little bit of acquisition activity built into the revenue guidance, but it does not assume any significant acquisition. I think what we usually say is that we assume somewhere in the $50 million range for acquisitions, but again, not... we don’t assume anything big in the guidance.

Okay. Just the balance between the share repurchases and deal spending going forward, deals are clearly going to take precedence?

Yes.

Okay. And just looking at the guidance range you guys have thrown out from an EPS standpoint, $5 to $5.25, could you just remind me the top two or three variables there that seems quite broad?

It is broad, and I think the major variable is going to be the performance of the economy and the volumes. We feel pretty good about pricing. Obviously we are expecting an increase from the government on January the 1st, and we don’t have any reason to think we won’t get that increase. We don’t consider that to be a moving piece, but dealing with the government is never an absolute certainty. But the biggest determinants of where we will be in that range are going to be volumes, our bad debt experience, and what happens in terms of the overall cost structure, as Brad mentioned. I mean, we are seeing some inflationary pressure across all the lines.

Okay. And just lastly, any update on the lung cancer assay, is that on track or are you guys thinking of a different approach to launch that one with what has happened with OvaSure?

It is on track, and we don’t see the experience with OvaSure as changing anything fundamentally in the way that we look at test development and test launching.

That’s great. Thank you.

And your next question comes from the line of David MacDonald of SunTrust. Please proceed.

Good morning, guys. In your comments you talked about growth across all your major managed care payers. I was wondering are you seeing any increased appetite by the payers in general to move out of network business, in network, you know an opportunity for yourself and really quest to pick up some share there? I mean is there any appetite increased from that out of the big payers?

I would say there is increased focus on it. I think it has always been something that managed care has wanted to do. I think there has been increased focus on it among our managed care partners. On the other hand, I would say managed care has had a lot on its plate this year, so increased focus has not necessarily led to increased activity. But in general, we do see a strong desire from our managed care partners to move out of network business into a network. And even to move in network business to higher-cost providers to lower-cost providers.

But you know, nothing earth shattering in terms of over the last couple of quarters relative to what you were seeing, say, a year ago?

Nothing earth shattering, I would agree.

Okay. On the bad debt on some of the initiatives, can you guys give us a sense of where we are in that process? I mean maybe what percentage of your locations you now got the capabilities in place to collect up front, do credit cards, whatever? Where are we in that process relative to where you hope to be?

Hi, Dave, this is Brad. I would say we are in the mid-to-high 90s in terms of where the tools are rolled out, and we are seeing increasing compliance with work flow and procedure. So we are really in terms of tool development, with few exceptions, we have the tools. It is execution of the tools that we are now focusing on. But every metric that I look at, and I get them pretty regularly on the compliance rates, is headed in the right direction. And again, one of the things that we think helps with that is the incentive plan that we talked about in the past of rewarding that behavior with additional pay.

Okay. Thanks very much.

And your next question comes from the line of Ralph Giccobbe with Credit Suisse. Please proceed.

Great. Thanks. Good morning, guys.

Good morning.

Is it fair to say, I guess when I look at next year’s topline guidance, sort of the midpoint, the 4.5%, sort of assumes steady state from the trends we saw in 3Q?

Yes, I would agree with that.

Then, just in terms of the Canadian JV, it just looks like there was negative pricing pressure there. Volume is a little bit better. Can you just talk about the pricing side, what is going on there, and how we should think about that going forward?

Ralph, this is Brad. That’s a government contract that is in the renegotiation phase, and within that contract there are bonuses and negotiations of rate changes based on volume. And I know there was a little bit of a dip from the first quarter compared to the first half, but we are working through that and expect to be made whole there, so I don’t think it is anything that is out of the ordinary. It is just the first time you have probably seen it as we have consolidated.

Okay.

Although we have had a little bit of impact in the exchange rate through the quarter, not as much because I think when I looked at that, it was later in the quarter that it really started to turn on us, and we are looking at that as we budget for next year as well.

Okay. And then in terms of the LabCorp 2010, is the $35 million number still fair as an assumption for 2009, given what you said sort of on the bad debt side? One, and then two, if it is, does it assume some type of volume growth or underlying growth of the business, or is that just straight-up cost savings that is sort of not dependent on anything?

The number is cost savings that is not dependent on volume growth. And I would agree with you that out of that $35 million, the taking out what we forecast for bad debt improvement will reduce that number. The exact amount is a little bit unclear because many of these initiatives that... such as the kiosks, have some bad debt reduction built into them. So we will... again, when we update guidance, we will give you greater clarity on exactly what the savings we expect from 2010 are.

Okay. Any, I mean... that’s fair. Any estimation or anything you could put out now in terms of just what bad debt was as a piece of that $35 million all-in, granted that you will be able to take some out?

I’m just not prepared to do it at this point again. We have to look at all the factors that we planned on for next year in the 2010 plan, and figure out what are we realistically going to achieve against the original $35 million number.

Okay. Fair enough. Thank you.

Thank you.

And your next question comes from the line of Bill Quick of Piper Jaffray. Please proceed.

Thank you. Good morning.

Good morning.

First question, anything in particular to call out in terms of strengths in the portfolio of assets, such as vitamin D and HPV for example, or perhaps something else you want to call out?

Vitamin D continues to be a major driver of growth. As you probably know, our... our vitamin D we run on the DiaSorin platform. It is the gold standard for vitamin D, very accurate and very scalable, and so we think that’s going to be a continued driver of growth. I don’t have anything else that really stands out, Bill, in terms of volume growth. We just saw nice growth pretty much across the whole esoteric portfolio. And as Brad Hayes already mentioned, we saw a rebound in the histology business from what we were seeing in the first half.

All right. Very good. Then second question for me, last question for me actually, is concerning your involvement in whole genome analysis and high density arrays. Can you just give us an update on the segment? I seem to recall that you guys are processing this for one of the providers. And then also just talk a little more forward-thinking here just in terms of the opportunities around sequencing as the cost of this obviously has declined dramatically over the past couple years and I think most expectations are for this to continue.

I think, as we have said, we are doing sequencing for two of the... what I would describe as the direct-to-consumer genetic testing providers, and we think the opportunity is great not only because of. As we previously mentioned, the importance of genetics... genetics [ph] and genetic sequencing to our personalized medicine strategy. But also, because it provides us the opportunity to evaluate instruments and chips and arrays in a terrific setting, where we are seeing good specimen flow. So we continue to see this as a nice and important compliment to our personalized medicine strategy. And in terms of the longer term, with the cost of sequencing coming down, you probably saw that one of the providers we work with dramatically reduced the cost of their offering, I believe, within this quarter. And so I think that we are going to continue to see growth here. I also think that as we become more adroit and adept at figuring out what genes to look at on these arrays, it is going to offer a really significant opportunity to improve both the expense and the accuracy of healthcare. So, for example, now, if you think about pre-natal screening, the physician has to figure out based on genealogy, family history and some other things, what testing should the physician should screen for. What shouldn’t be screened for, what a payer is likely to pay for? If you think about doing that kind of pre-natal screening based on a chip that would just look at the... I will makeup a number... the 25 most common pre-natal diseases... the 50 most common pre-natal diseases that are driven by genetics. You can see that we could offer a broader array at a very, very attractive price that would provide more information and take some of the hypothesis and some of the built-in inaccuracy out of an area like pre-natal screening. So we think of this as a... it is a growing area, and we are pleased to be working with the two largest providers and helping to move this forward.

Very good. Thank you, and congrats on the quarter.

Thank you.

And your next question comes from the line of Tom Gallucci of Merrill Lynch. Please proceed.

Thanks for all the color. Just a few follow-ups and maybe one or two others. You mentioned earlier the October 1 price increase. Was that United specifically or was that sort of across-the-book more broadly?

That was United specifically. I think we also mentioned that we... we have mentioned that we received a price increase from Wellpoint in certain markets in September, so that will also be reflected in the 4Q.

Okay, great. And then you had mentioned a few of the drivers of the sequential improvement in volume, the un-annualization [ph] and the re-deployment of sales force. You did a couple of acquisitions, so is there a little something there, too, that would probably help a little sequentially?

I don’t think so, Tom, because we had acquisitions last year in the third quarter. So I think net-net we didn’t see any major impact that would account for year-over-year volume increases.

Okay, good. And then on the hurricane impact, it seems like if you sort of do the back of the envelope, it hurt revenues by around $7 million, but I guess the 40 basis points on the margin that Brad mentioned is probably somewhere around $5 million. That’s a pretty big margin. Is that just the natural leverage of the business, or was there something to the mix of testing that you lost that maybe is a factor as well?

Tom, we think about that when we lose that volume, I mean the costs don’t change throughout most of the infrastructure. So what we take off to estimate the profit impact or the true variable cost of bad debt and supplies. So that’s the way we think about it. Again, the other costs would not change, and if we had those accessions, they would have roughly a 20% totally variable costs on them and the rest would be lost profit.

Got you. Thanks. So that’s really, again, the natural leverage of the business, I guess there?

Yes.

And then the last one, here you mentioned new tests being obviously an important piece of the equation in the future. You sort of mentioned OvaSure, voluntarily taking that off the market for now. We have read the letter. There is clearly a disagreement of interpretation there between you and the FDA. How do you sort of see the FDA involvement in the future? Is this a sign of things to come? Do you think OvaSure is sort of a one-off experience? Can you just sort of talk about maybe the outlook there more generally?

Yes. And I don’t want to try to do legal analysis of the various positions on the call. What I would say is as I read the letter Tom, the FDA believes that this is a medical device and that it gives them regulatory jurisdiction. We believe it is a laboratory-developed test, which FDA has traditionally exercised discretion not to assert jurisdiction over. So I think there is just a fundamental disagreement about what OvaSure is. And obviously if you have read the letter you know that we disagree with the FDA’s position. You also know that FDA has asked us to withdraw the test from the market and that we have done that. And we are continuing to pursue discussions with the FDA regarding when we can return the test to the market in a way that the FDA finds acceptable. I would reiterate we think OvaSure is valuable for high-risk women. There is no current screening test for ovarian cancer. There are more than 21,000 new cases of ovarian cancer every year, and more than 15,000 women die of it. And at the early stage the five-year survival rate is over 90%, but we only catch about 20% of the cases at the early stage. Later discovered ovarian cancer, the five-year survival rate is less than 30%. So we still think the data regarding OvaSure for high-risk women is sound and robust, and we want to convince the FDA that we can return the test to market in a way that they find acceptable. Now, with that rather lengthy introduction, I would say no, we don’t see this as a change in the FDA’s regulatory philosophy. We do view it more as a one-off response to a particular test offering and to a particular data that they have some questions about, rather than an overall philosophical change in their view of laboratory testing.

Okay. Great. Thank you.

And your next question comes from the line of Jason Gurda of Leerink Swann. Please proceed.

Good morning. Thank you.

Good morning.

Are you guys... do you have any sense for regional variances in the economic impact on volumes that you are seeing, if it is significant?

I don’t think we have seen anything significant in volumes by region. We look at volumes every day, and I certainly haven’t seen anything that tells me that... other than the impact of the hurricanes obviously... that there has been anything regionally significant here.

Okay. And Dave, I was wondering if you had an opinion on how maybe the tighter credit environment would impact maybe the hospitals industry, either their interest in either expanding their hospital outreach programs or maybe using them as a source of cash and selling them? I know it is early. I was just curious if you had a view at this point.

It is early. I guess what I would say is we have seen a number of hospital outreach programs that are for sale, which suggests to me that some hospitals are wanting to monetize their outreach programs. And again, we will continue to look at that market and see... assess whether valuations are reasonable, given the opportunities and given what other opportunities there are. So it is certainly possible. As you know, a number of hospitals have undertaken large capital initiatives and construction projects, and it is certainly possible that monetizing the labs would be something that they would consider to offset some of the credit market impact.

Okay. And just a minor follow-up question. In your guidance for 2008, what earnings per share number are you using for the first three quarters? I want to confirm that.

348.

Okay, thank you.

Thank you.

And your next question comes from the line of Kemp Dolliver of Cowen and Company. Please proceed.

Thanks, and good morning. With regard to 2009 and bad debt, what I guess visibility do you have on, say, plan design changes for next year, and you did mention you don’t think you will see bad debt improvement next year. What type of increase do you think is likely then?

I didn’t say we would see an increase in bad debt, and we don’t typically guide on bad debt. But I think, given the economic environment we are in, that a reduction in bad debt is unlikely. In terms of plan design at the moment, we are not seeing anything other than what you read anecdotally in the trade press and in newspapers and other publications. Suggesting that there are more employers who are going to be raising employee premiums and deductibles and that there will probably be more employers who are increasing co-pays. But we are not seeing it directly but I am sure that will be part of the environment next year.

That’s super. And with the Herndon consolidation, what is, I guess quickly, the background on that? Where will those volumes go? How are you maintaining service levels, et cetera?

Most of the Herndon volume will either go to Raritan or here to Burlington, which are two of our larger laboratories, and we actually think that as the Louisville consolidation that we did at the end of last year. We actually think that turnaround times and service levels will probably improve because the specimens will be... although there will be longer transportation time in some cases. They will be run in laboratories that are higher throughput and greater efficiency. So the background is, you know, we have a major laboratory in Raritan. We have various day laboratories in the area, and then we have a major laboratory in Burlington that by aircraft is less than an hour away from Herndon. And it just doesn’t make sense for us to continue to have a full service laboratory at that location.

That’s great. Thank you.

Thank you.

And your next question comes from the line of Matthew Borsch of Goldman Sachs. Please proceed.

Hi, thank you. It is Shelley Gnall on for Matt Borsch. I’m just trying to understand your availability of cash. Can I just confirm that I understood correctly, the Stanford Outreach and the PathNet acquisitions occurred during the third quarter?

Correct.

And it sounds like you have availability on your term loan of about $400 million?

On our revolver.

On your revolver, I’m sorry.

And you would need to subtract out what we have drawn down. So the way that works is it a $500 million revolver. We have at any point in time about $100 million of letters of credit outstanding against it, and we have about $70 million outstanding of cash borrowings against it. So you are really down closer to the $330 million available from the revolver right now.

Okay, great. And then I am just wondering if you have to hold or restrict any cash for the converts, the zero coupon converts?

We are not required to hold any cash related to that.

Okay. Great. Thanks very much. That’s it for our questions.

Thank you.

And your next question comes from the line of Amanda Murphy of William Blair. Please proceed. Amanda Murphy - William Blair & Co.: Good morning. I just had a follow-up on Adam’s question on utilization trends. Could you talk about the trends through the third quarter perhaps? Were they stable, did they get worse or better as you progressed through the quarter?

Through the quarter? I would say we always see seasonality in July and August because of vacations, school is out. We always see improvement in September because summer vacations are over, and after Labor Day we typically see a pickup. So we saw... so obviously if you looked at it month-by-month, September would be stronger than July and August. But in terms of overall... you know, was September way bigger than last September versus July and August being about the same, no we saw a pretty... I would say we saw pretty consistent volume year-over-year through the quarter. Amanda Murphy - William Blair & Co.: Okay. That’s helpful. Also, then also can you help us understand if there was any material impact from acquisitions on volume growth in the quarter?

Yes. As I said earlier, we had two acquisitions of some size. Stanford I think closed on the end of July, the beginning of August. PathNet actually closed considerably later. And we wouldn’t have seen anything significant from that in the quarter. We also had acquisitions last year in the third quarter, so year-over-year, I don’t think there is anything that... I don’t think any of the volume growth is significantly acquisition-driven. Amanda Murphy - William Blair & Co.: Okay. And then on the esoteric side, you talked about focusing on some of the less discretionary areas of testing, and perhaps some of the longer term initiatives you have in place. Can you provide some color on the tools you have to drive increases in esoteric testing utilization in the shorter-term?

Well I think obviously the biggest tools are... we know what specialties most of our customers are in. We have a sales force that we can direct to customers and specialties where we think they are going to see less impact from patients not coming to the doctor. And we have internally provided our sales force with a number of tools to focus on some of the esoteric tests in oncology and endocrinology and rheumatology, and other specialized areas that we believe physicians are going to want and need. So the major things that we have, other than introducing new tests or other than things like K-ras, which I mentioned. Are our ability to focus the sales force, our ability to provide the sales force, and from the sales force to physicians, information about testing that they might consider for these... what I would describe as more chronically ill patients and our identification of physicians by specialty, so we know where to target. Amanda Murphy - William Blair & Co.: Okay. And the last question, can you remind us what percentage of your volume runs through the patient service centers? And then some of the things you have... some of the things you can do to improve collections on the physician office side?

Amanda, this is Brad. About 25% runs through our patient service centers. I would actually like to follow-up from Dave MacDonald’s question earlier. I have limited my response to the patient service center activities. Outside of that, we have our own phlebotomists in certain physician accounts, and that picks up about another 15% of our business. So we think about our own employees seeing about 40% of our business. So again, if I could follow-up from the Dave MacDonald question, I did focus my answer there on the patient service centers. We do still have work to go on our own employees that are in physician’s offices, and that’s one of our initiatives that we are pursuing aggressively. Outside of that, we also have the ability to look at our write-offs by physician account where they came from, and we are also pursuing aggressively a number of initiatives there to try and steer patients to patient service centers. Put an employee phlebotomist in where it makes sense, or at the end of the day losing that business, because we have seen some cases where it doesn’t make sense to do business with a particular account. So there are some initiatives we continue to work, and they are not as far along as the patient service center initiatives, to cover the part of our write-off and bad debt experience that comes outside of our patient service centers. Amanda Murphy - William Blair & Co.: Okay. Thank you.

And your next question comes from the line of Gary Taylor of Citigroup. Please proceed.

Hi. Good morning.

Good morning.

I have three questions, but I think they are pretty quick. One, could you give us the balance sheet allowance?

Gary, this is Brad. That will be in our Q when we file it.

Okay, I will wait for that. On the bad debt side, I just wanted to run through a few of the elements. It looks like, given that the percent of revenue from patients was down again sequentially, un-insured volumes must have been down again year-over-year?

They were not down as much as in the second quarter.

Okay.

They were about 8% down in the second quarter and in the third quarter, year-over-year, they were down 1.6% on a volume basis.

Okay. If I’m correct, your deductible and co-pay revenue is not categorized in that patient revenue number?

Yes. It is not, it is not in there. But I can tell you it did go down sequentially in the third quarter, as we have seen it do... as we have seen it come down historically as people work through their deductibles.

Great. I know that was your expectation.

Yes.

So I’m pleased that came through. Can you remind us again, ballpark, what that number is as a percent of revenue?

7%. So we think of the combined two as being about 17% of our book on an annual basis, minus the quarterly fluctuations being collectable from the patient.

All right. And then my last question, just on the $17 million of restructuring charges, can you just run through cash, non-cash, and then I assume the bulk of that is severance and maybe leases, is that...

That’s exactly right. The bulk of that is severance and leases. The timing of the cash of that I don’t have in front of me, but it will be mostly cash.

Okay. Great. Thank you.

Thank you.

And your next question comes from the line of Dawn Brock of JPMorgan. Please proceed.

As most of my questions have been answered. Just one quick one on guidance. The $5 to $5.25, would you be willing to just give us any of the I guess backup or any of the parameters between... or I guess between that gap of 5 to $5.25? Would you be comfortable with us basically taking some of the metrics that you are using or reiterating for 4Q and having us extrapolate them forward?

Well I think you are going to decide based on your model what metrics to use and I think, as I responded earlier to Bob. The major factors that are going to determine where we fall in the range, is what happens to volume? How does the economy perform? How does bad debt perform? What overall inflationary pressure do we see versus the positive pricing that we expect? And I would say at this point historically, traditionally, we are not going to change it, we haven’t guided to anything between topline revenue and our EPS expectations.

This concludes the question-and-answer session, and I would now like to turn the call over to Mr. David King, CEO, for any closing remarks.

Thank you very much for listening to our call this morning. We hope you have a great day.

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day. .