Labcorp Holdings Inc. (LH) Q2 2009 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the second quarter of Laboratory Corporation of America earnings conference call. My name is Michaela 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 this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Dave King, CEO; please proceed.

Thank you. Good morning and welcome to LabCorp’s 2009 second quarter conference call. Joining me today from LabCorp are Brad Hayes Executive Vice President and Chief Financial Officer; Ed Dodson, Senior Vice President and Chief Accounting Officer; and Bill Bonello Senior Vice President, Investor Relations. This morning we will discuss our second quarter results, highlight our strategic priorities and growth drivers and provide answers to several frequently asked questions. I would now like to turn the call over to Bill Bonello, 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 a Form 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 you to today’s press release which is available on our website for a reconciliation of non-GAAP financial measures discussed during today’s call to GAAP. 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 2008 10-K and subsequent filings. The company has no obligation to provide any update to these forward-looking statements even if our expectations change. Now, Brad Hayes will review our financial results.

Thank you, Bill. By now you should have had a chance to review our second quarter financial results. On today’s call, I’ll discuss four key measures of our financial performance; cash flow, revenue growth, margin and liquidity. First, cash flow: Our cash flow trends remain excellent. Free cash flow for the trailing 12 months ended June 30, 2009 increased 12.7% to $668.8 million. For 2009, we continue to expect operating cash flow, excluding any transition payments made to United Healthcare to be approximately $800 million. The operating cash flow guidance includes a $54.8 million reduction from the pension contributions. We continue to expect capital expenditures to be approximately $130 million. We are also pleased with our strong cash collection efforts in the quarter. DSO at the end of June was 50 days, down two days sequentially. Our bad debt rate was stable at 5.3%. Second, revenue growth: During the quarter, we achieved strong volume growth and continued mix shift to higher value tests. Revenue increased 3.6% year-over-year in the second quarter. Total company volume increased 2.4% year-over-year. Excluding the consolidation of the companies Ontario, Canada joint venture, volumes increased 1.6% year-over-year. Drugs of abuse testing declined by 19% year-over-year, which reduced total volume growth by 150 basis points. Esoteric volume increased 10.8% year-over-year. Revenue per accession increased 1.1% year-over-year. Excluding the consolidation of the company’s Ontario, Canada joint venture, revenue per accession increased 2.6% year-over-year. The growth in revenue per accession is attributable to both mix shift and rate increases. Third, margin; for the second quarter, our adjusted operating income margin was 21.4%. This margin declined approximately 90 basis points year-over-year due to increases in bad debt, pension expense and employee health benefit costs and the impact of foreign exchange. We remain focused on increasing automation and efficiency in our labs, which should enable margin expansion in the future. Fourth, liquidity; we remain well capitalized. At the end of June, the company had cash of $226.6 million and approximately $300 million available under its revolving line of credit. During the quarter, the company paid $289.4 million and issued approximately 430,000 shares to call 50% of its outstanding zero coupon convertible notes. This transaction strengthens our balance sheet and reduces future cash flow risk. At the end of June, total debt was $1.4 billion, including $70.8 million drawn on our revolving credit facility. During the second quarter, we entered into an agreement to acquire Monogram Biosciences, for a total enterprise value of approximately $155 million. We expect to fund this transaction from cash-on-hand during the third quarter. This morning we announced updated 2009 financial guidance. We now expect revenue growth of approximately 4% versus our previous guidance of 2% to 4%. The increase is a reflection of our strong results in the first two quarters of the year. We now expect adjusted EPS of approximately $4.85 to $4.95 versus our previous guidance of $4.75 to $4.95. Our revised guidance excludes any impact from the Monogram acquisition, which is expected to be approximately $0.12 diluted in 2009, including $0.04 of transaction related expenses. I’d also remind everyone that the fourth quarter has historically been our lowest of the year in terms of revenue and net income. The current first call consensus does not appear to reflect this historical trend. I will now turn the call over to Dave.

Thank you, Brad. We are very pleased with our second quarter results, especially our continued strong volume growth, cash flow and cash collections. I would like to highlight some of the initiatives that we’re pursuing to drive growth in 2009 and beyond. Our most important priorities for this year are to gain new customers, maintain pricing and control costs. Furthermore, we see opportunities to accelerate revenue growth through continued leadership in personalized medicine. So we will remain focused on growing our esoteric testing platform, expanding our outcome improvement programs and developing and commercializing companion diagnostics. During the second quarter we announced an agreement to acquire Monogram Biosciences, a leading provider of companion diagnostics for HIV and oncology. The expected acquisition will advance LabCorp’s leadership in infectious disease and oncology testing, companion diagnostics and personalized medicine. Monogram fits LabCorp’s profile for strategic acquisitions. It’s a company with an excellent clinical reputation, a market leading product in personalized medicine, established sales and a substantial growth opportunity. LabCorp will use its sales force and national infrastructure to build on Monogram’s already strong brand. On the margin front overtime, we believe there is an opportunity to reduce our fixed cost base through automation and capacity rationalization. During the quarter, we continue to implement proprietary robotics to automate front-end processing for HPV testing in our largest labs. We will continue to roll out HPV robotics nationally throughout the year. This automation will result in savings from labor, more efficient use of reagents and test site consolidation. We are also developing robotics to automate other pre-analytical processes. 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 that. Now, Bill Bonello 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 second quarter, approximately 36% 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 revenues. What are your plans for uses of free cash flow during 2009? We remain committed to returning value to our shareholders, first by using our free cash flow to growing our business through strategic acquisitions and licensing agreements; 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. Historically, we have been a consistent buyer of our own shares. Over the past three years, the company has repurchased $1.7 billion worth of stock. Approximately $95.4 million of repurchase authorization remained under our approved share repurchase plan at the end of the quarter. Can you remind us of how drugs of abuse volume trended during the year? In the quarter, our drugs of abuse volume declined 19% year-over-year. That compares to year-over-year decreases of 20.1% in Q1 of this year, 15.9% in the fourth quarter of 2008, 10.3% in the third quarter of 2008, and 7.9% in the second quarter of 2008. What is the impact of the CPIU update? We generate approximately 12% of our revenue from the Clinical Laboratory Medicare fee schedule and that is the revenue that would be subject to the CPIU. What is the status of your transition payments to United Healthcare? In the quarter, the company was billed $12.4 million in transition payments and paid $10.5 million in transition payments. Today, LabCorp has been billed a total of $92.5 million and paid $90.4 million in transaction payments to United Healthcare. Now, I’d like to turn the call back over to Dave.

Thank you, Bill. In summary, we are pleased with our performance year-to-date. We will work aggressively to gain new customers, maintain price and control costs. Looking forward, we see great opportunities to accelerate growth through continued leadership in personalized medicine. Thank you very much for listening. We are now ready to take your questions.

Okay, thank you. Good morning, everyone.

Good morning.

Just everything looks very good here. Just a few questions, I guess. Maybe just first on the guidance, just curious why you are not incorporating, Monogram? I know you broke it out for us, so we can know the impact, but just wanted to see in terms of why you weren’t incorporating that and then I’ve got a few follow-up questions.

Adam, its Dave. Good morning. We haven’t incorporated it because it hasn’t closed yet and so, I think it would be somewhat confusing to incorporate it prior to the time that the transaction closes. Once it closes, then we’ll in a position to have an exact idea of where we think it’s going to come out.

You still anticipate closing in Q3?

We have received notice from the FDC as we disclosed that the transaction has cleared HSR. The tender offer is underway and it’s proceeding inline with our expectations. So, barring some unforeseen circumstance, yes we would expect to close in Q3.

Okay, great. Okay and then just as we look at the mix of cash, and we’ve seen it turn for several quarters, but I just one I wanted to got some more colors here, but in terms of the esoteric testing significantly outpacing the core volumes and just clearly core volumes have been impacted by the economy somewhat, but really have seen no impact; it looks like on the esoteric side. So, just curious to get your thoughts in terms of that trend, do you think we’ll continue to see such a big spread between the different segments through the rest half of the year?

Hey Adam, it’s Brad. Traditionally, that group has grown faster than the core. I would add and it’s consistent with past quarters, vitamin D continues to be a big grower in that category and even HPV as well continues to grow. So we certainly expect that over time that category grows faster than the core.

Okay, great. Okay and then just my final question here and Bill you had mentioned the CPI impact in terms of Medicare, but there’s been a lot of questions in the last couple weeks about whether there is an impact in terms of the escalators in Managed Care contracts, in terms of whether they are linked to CPI or other inflationary measures. So just curious to get some thoughts in terms of how we should think about just the decelerating trend in most of the ways we track inflation and whether any of your Managed Care contracts will be impacted by that in the future? Thank you.

Adam, Brad again. As we’d look at the contracts, there aren’t any that are tied to; I won’t say that. The majority of them are not tied to a fluctuating number. They tend to be more in fixed types of the increases as opposed to tide to a fluctuating number.

I’m Dave. Just one point of clarification that Brad said majority, but I think it’s accurate to say the overwhelming majority are not tied in anyway to a fluctuating number. So our major contracts and the ones that account for the biggest portion of our managed care revenue are fixed increases.

Okay, great and thank you for the detail.

Your next question comes from the line of Kevin Ellich with RBC Capital Markets; please proceed.

Good morning guys. Nice quarter.

Good morning.

Dave, I was wondering if you just give us an update on your thoughts on Health-Care Reform, how it might impact your business following President Obama’s press conference from last night?

I think it’s a bit obvious that the final chapter on Health-Care Reform is yet to be written, Kevin. What we keep coming back to some key points in terms of the role of the laboratory and I heard these a lot, but they are the points that we are making as we are very active through our trade association and also ourselves, engaging the relevant committees and staffers in a discussion about what should happen in Health-Care Reform with labs. With 3% of the spend we influence 70% to 80% of the healthcare decisions. If you look at the most recent numbers out, program administration costs for healthcare in this country are 7%. So more than double the amount that we are spending on laboratories. The average cost of labs to Medicare beneficiaries is about $122 a year and so, my view continues to be labs are the biggest bargain in all of our healthcare spends. On top of that, we’ve only had two rate adjustments from the government of any kind in the last ten years, the 4.5% we got this year and then it was less than 1% several years ago. So, in real dollars laboratories are actually being paid substantially less than we were ten years ago and I think that distinguishes us from most other providers, who do receive annual market basket or inflationary type updates. So I think we have a very compelling position in terms of the value of labs in healthcare. Clearly the focus on prevention and screening and on expansion of coverage would be a positive for us and although it’s too early to predict what Congress ultimately will do, we are optimistic that we are going to come out of Health-Care Reform in a position that is certainly no worse than the position we are in today.

Got it, okay thanks for that information. Going back to the drugs of abuse testing, I think Brad said it was 150 basis point drag on volume. How much was it a benefit to pricing growth?

Kevin, we don’t break that out, but we definitely track its impact on the volume, but we don’t break out the impact on the price.

That’s right. It’s a lower price than the average business. So, yes it would be safe to assume.

Got it and then if I did the math right. It looks like the Managed Care captivated business was down slightly and the price per recession is also down; anything driving that?

Yes, a few things as we look at that trend. We had a few contracts that we terminated and that were all higher than the average price. We had some contracts that shifted from a capitated payment mechanism into a fee for service. So that would have gone from that portion down to the fee for service portion; and then across some plans, we noticed membership loss. So those are the three things that are behind the trend that you mentioned.

Okay, anything significant or just kind of normal business?

I think normal business, with the exception of the membership loss. I mean that’s probably something that we would not have seen in the past and I would not say that it is significant, but certainly it’s one of the drivers behind that trend.

Okay, thanks guys.

Your next question comes from the line of Amanda Murphy with William Blair; please proceed.

Hi, good morning. Just a question on your top line guidance, I’m curious. The 4% number, is that because the esoteric business did better than you thought or is that really sort of better volumes on the core side? What’s kind of driving the shift of the 4% number?

Amanda, its Dave. The biggest thing driving it is the first half performance. I mean obviously we have all-in done better than 4% in the first half of the year, and as we look at the trends, we think that’s sustainable through the second half.

Was there one area; was it the esoteric side that kind of exceeded your expectations relative to the beginning of the year?

I wouldn’t say exceeded our expectations; I think obviously if we thought it could be in the two to four range and now we’re saying it’s going to be four, we’ve exceeded expectations in a number of areas, but I wouldn’t point to any one thing and say that’s the driver. I think its overall top line performance that makes us feel comfortable with the 4%.

Okay and then shifting to the core volumes. It looks like, if you look to some in the U.S. that they were down a little bit more than in the first quarter. Number one, is that accurate? Also it looks like this is really coming from physician and self pay volumes, where as Managed Care just in total looks like it had a little bit of an up tick? I just curious if that’s inline of what you saw and if there’s anything that’s in terms of first quarter to second quarter that’s driving a little bit of deceleration in core volumes?

Amanda, this is Brad. I would say one thing to remember, is that Easter helped in the first quarter and was a reducer of volume growth in the second quarter; and that most of that would have been in the core line. Also to add to that, the drugs of abuse testing business as you know is in that line as well and continues to weigh on that growth rate. So, the way we think about the growth rate, generally volume-wise, first quarter to second, if you take into account the shift in the holiday from quarter to the next, it’s about the same in total.

Okay. So the growth is the same in the first and the second quarter?

Yes.

Okay, and then you talked also about your focus or your initiative to focus on specialty docs versus primary care docs and that seems to be working out for you pretty well. Can you just talk about, do you plan on carrying that on through the year or how is that in your mind progressing for you?

Amanda, its Dave. Obviously there is a balance, because the primary care and frontline physicians see by far the largest number of patients. On the other hand, there are many that do not order as many laboratory tests as some of the high end specialties like Endocrinology and Rheumatology and some others. So I would say we’ve been pleased with the success of the strategy of focusing on specialty physicians. We’ll continue to have our sales force focused on those specialty physicians and specialty physician offices, but we’re not in anyway ignoring the opportunity in the primary care sector.

Okay, thanks very much.

Your next question comes from Robert Willoughby with Banc of America/Merrill Lynch. Please proceed. Robert Willoughby - Banc of America/Merrill Lynch: Can you speak to any exposure you might have in California? What the payment experience there has been for you, and just any other states in general are you seeing problems emerging anywhere with budget issues?

I think we’ve said historically Bob that the Medicaid programs in general are reliable, but inconsistent payers and I think that would be an accurate description of what we’re experiencing. Remember that medical was I believe, less than half a percent of our total revenue in 2008. So we don’t have a tremendous amount of exposure there, but let’s face it, most states are under some significant budgetary pressure and it wouldn’t be surprising to see Medicaid rates in general starting to be reduced. Robert Willoughby - Banc of America/Merrill Lynch: Well, the rates are one thing. Are you actually collecting as well on a timely basis?

This is Brad. Nothing that I’m aware of at this point that’s slowing down that process, but it’ll certainly be something as we move through the rest of the year to keep an eye on. Robert Willoughby - Banc of America/Merrill Lynch: Okay, and is there any one state in particular; is North Carolina you’re biggest or where do we focus on; it’s certainly not California?

I think it’s pretty evenly distributed. I don’t think of North Carolina as a huge state in the way that’s broken out. I mean just given our geographic distribution. I mean obviously some of the big states are Florida, Texas, New York. So, there’s no one state I’d say that we’re over exposed in. Robert Willoughby - Banc of America/Merrill Lynch: Okay. That’s it. Thank you.

Your next question comes from the line of Darren Lehrich with Deutsche Bank; please proceed.

Thanks, hi everyone. I wanted to just talk a little bit about the lab consolidations, I think you referenced in your press release. Can you just flush out a little bit more, what you’ve done there in terms of consolidating any facilities?

Okay, so that’s been an ongoing situation as I recall, so that’s not necessarily new. Is that consolidation for the most part completed at this point?

I’d say it’s substantially complete. I mean there’s some work left to do there, but the major consolidation of the testing volumes and the major personnel impact has occurred.

Okay and can you frame the annualized cost savings from the actions you’ve taken there thus far?

I don’t think I can breakout the individual annualized cost savings for one consolidation. Obviously, we anticipate gaining significant cost savings anytime that we reduce the size and staffing of the facility.

Okay and then just may be a question or two regarding Monogram and that transaction. I guess what I’m just wondering if you can help us with is, the dilutive effect in this calendar year and then I think the commentary in the original release was that you expected it to become accretive, if I’m not mistaken, in 2010. Can you just talk about how you go from a deal being dilutive north of $0.10 with less than six months of impact to accretion, maybe just talk strategically and operationally on how you plan to absorb that and how we get there?

Sure. First of all, remember $0.04 of the dilution comes from the fact that we have to expense the transaction costs up front, which we used not to have to do. We used to be able to capitalize those and to recognize them overtime. So that’s $0.04 of dilution right off the back. Monogram is a small public company. So they have the entire public company infrastructure in terms of the G&A and anytime that you acquire a small public company integrated into a larger public company, there are pretty substantial and immediate synergy opportunities from the ability to reduce that G&A component. Then there are and I want to stress, we are not talking about reducing the science, we are not talking about reducing the innovation, we are talking about reducing what you would think about as back office functions and administrative functions in particular. Then, typically when we do an acquisition, we see that the acquired entity pays substantially more for things that we are able to pay less for; supplies, instruments, even in the case of Monogram, tissue samples that they have to acquire for their oncology innovation and development. So, we see the opportunity for some relatively significant and immediate cost reductions there. So all in all, I mean strategically, we would prefer not to do dilutive acquisitions, but you look at a company like this that has $70 million in revenue. They have a terrific suite of services that are actually in the market, terrific brand on top of that and our ability to take the dilutive profile and turn it to an accretive profile is why we think this is that the kind of acquisition that we should be making.

Okay and just in terms of the public company costs, typically would you expect one to two quarters to get that synergy or is that in the first quarter?

I think you get an initial amount in the first quarter and then in the following quarter you see the benefit of other amounts. I mean for example, as a public company they pay auditors to prepare financial statements. That’s an expense that goes away relatively quickly once they prepare whatever final statements they have to prepare. Some of the other ones, transition arrangements with there executives, that may take more than a quarter or less than a quarter, just depending on what we work out, but by the end of two quarters we should see the overall G&A synergies pretty much realized.

Okay, thanks a lot for that. I appreciate it.

Your next question comes from the line of Jason Gurda with Leerink Swann. Please proceed.

Good morning.

Good morning.

Are you guys impacted at all or potentially impacted by UNHS win of the Tricare contracts or is that separate?

Not in any material way I think.

Okay and then, was there anything in this quarter where you benefited from or anything significant I should say? I think in the first quarter you had talked about being negatively by some Medically Unlikely edits and that are hoped to get those solved in the second quarter?

Well first of all, I know that the Medically Unlikely edits were withdrawn and at the moment are still withdrawn. My understanding is CMS is still working on the Medically Unlikely Edits and I believe that the revenue impact in the first quarter did reverse in this quarter.

Okay and the last question, which is just a little bit unusual and maybe I’m totally wrong, but I recall you saying something maybe six months ago about how in the third quarter you had benefit from an extra business day? It was related to a conversation we had about I think in the first quarter; the impact from the loss of the leap year day and how that was not a benefit in the first quarter, but you thought that you’d benefit in the third quarter for a reason; is that the case?

I believe that the number of revenue days in the third quarter is the same as last year. What we think about is the strength of revenue days is the same as last year. So there was an extra day in the third quarter last year as a result of leap year, but when we look at the strength of days in the third quarter this year versus last, it’s basically the same.

Okay, so simply flat? Okay.

Yes.

Okay, thank you.

Thank you.

Your next question comes from the line of Bill Quirk with Piper Jaffray. Please proceed.

Good morning, nice quarter.

Thank you, good morning.

Not a whole lot to pick on here, just I guess a couple of housekeeping questions. In terms of the Monogram deal, just to come back to that. From a revenue standpoint guys, you mentioned kind of all three of the categories, is there anything in particular you want to call out?

Well, I think you’ve ordered them essentially correctly, although I would make the observation that yes, the HIV products are clearly well established. The Trofile Assay, that assay has been the basis of all the clinical studies that have been done. That assay is the basis of all of the research that has been done on the efficacy of the drug. So, I don’t think in fairness there is anything out there comparable to that assay and I think, the opportunity for us is quite significant. Particularly, given that there are going to be more drugs in this category coming to market, is my understanding on the next couple years. I do agree that the oncology is quite early. It’s only been on the market since October of last year. It’s very interesting, but we don’t ascribe a lot of revenue opportunity there until we see how the market develops. I’ll just also make a comment that I think Monogram has done some very interesting work in Hepatitis C. Again, it’s in early stage and we have to evaluate it fully, but I think that is also potentially really a nice opportunity for us. So, the combination of the existing products, what we perceive to be the industry leading position and the demonstrated record of innovation or what makes this acquisition so attractive to us.

Understood, thank you for that. Then just lastly for me, the accounts receivable and the inventory levels were not disclosed in the press release. Brad, are you willing to give us the absolute numbers there?

I think the accounts receivable balance is.

If it is, I’m sorry I must have missed it.

Yes, on page six, the net accounts receivable is $655.3 million.

Very good; and inventory please?

That is not in the press release and it will be in the 10-Q.

Yes great. Thanks guys. Nice work.

Thank you.

Your next question comes from the line of Ralph Giacobbe with Credit Suisse; please proceed.

Good morning. Did we anniversary some acquisitions from a year ago in 1Q maybe, that didn’t sort of help in 2Q and may explain some of the sequential downtick in the volume trend?

No, I don’t think so Ralph. I think the biggest reason for the sequential downtick is the shift of Easter from 2Q to 1Q.

Okay and you said the way to look at that is just average the two quarters in terms of volume and then sort of split that in half and that’s sort of a run rate if you will?

The way I would look at it is, you take about 50 basis points of the first quarter volume growth and you move into the second quarter and that normalizes for the Easter shift.

Okay, so 50 basis for Easter, okay, alright that’s fine. Then can you tell us what percentage of your managed care contracts and/or revenue comes up for renewal on any given year and maybe more specifically for 2010?

We don’t really talk about specific percentages or contracts. I’d go back to what we previously said, which is that WellPoint and United are contracted out for a significant period of time. We are in discussions with CIGNA. We have said previously that contract, if not extended does come up in the middle of 2010, and those are the major ones. Obviously we are out of network with Aetna, but continuing to attempt to position ourselves to be back in network at the time that contract comes up for an opportunity. The rest of our contracts is just there is not anything big enough to even, there’s nothing individually that’s big enough to call out in terms of 2010 impact.

Okay and then just going back to the guidance, can you just help to sort of explain why you would earn less in the second half of the year relative to the first half of the year, just given the easier comps?

Ralph, its Brad. The biggest impact that one could point you would be the fourth quarter revenue number. I mean it is traditionally the lowest absolute revenue number based on primarily the holidays. So, if we look back to the history, we would always see with very few exceptions that to be the case and across the fixed cost base, I mean we don’t have the ability to take the cost base down a dollar for a dollar to match that, we see that. If you look back the last few years, you may see some exceptions to that rule, but I would say there’s been weather, share repurchase, etc that have caused the quarters to be fairly even over the past few years. Even back to 2006 in the fourth quarter when we picked up United work ahead of the January 1 contract implementation date, but in our base model of what we look at, I mean the fourth quarter is always lower, therefore drags down the second half and I think you’d see also that the second quarter is always the strongest quarter.

Okay, that’s fair and then just my last one. Do you guys plan to update guidance when you do close the Monogram Biosciences deal?

I think we’ll consider that when we actually get to the point of closing Ralph, but we will obviously try to give additional clarity once we understand the exact impact of the numbers. Obviously from a [Nani] trust stand point, we’re still operating as two separate companies and there are certain levels of detail that we’re not permitted to get into until we close.

Okay. Thank you.

Your next question comes from the line of Shelley Gnall with Goldman Sachs. Please proceed.

Hi, thank you. A quick question on H1N1, did you see any impact on volumes in the quarter?

Nothing material, I mean obviously H1N1, I would say influenza testing volume was up, but it’s not anything that would be material to the results.

Okay, and then on the drugs of abuse testing, are you seeing a bottoming here? It looks like it might be moderating a little bit and then I guess, which quarter would you expect us to really see the effect anniversary?

I don’t think you’ll see the anniversary until the fourth quarter, that’s where we saw the really drop-off last year. Obviously if you look at the numbers that Bill read as we stated, the fall-off was much more dramatic in the third quarter of last year, than it had been in the second quarter. So you’ll start to see it anniversary in the third quarter and you won’t see the full impact of the anniversary until the fourth quarter. In terms of bottoming, I mean certainly the trend is that it is, the drugs of abuse testing is declining at a slower rate than it did last year, but we also have to remember that that’s off a lower base. So I’d be hesitant to put the word “bottoming” on it and then see that if we don’t see some recovery on the hiring front, that we don’t see improvement.

Okay, makes sense. Then just on your self-pay revenue per acquisition, it looks like it’s down and can you talk a little bit about where the key drivers there are? Is that a discounting or is it a mix issue?

Shelley, this is Brad. It is a discounting issue. You may recall from past calls, we initiated a patient discount program for self pay in our Patient Service Centers. So for a select group of test, there is a pretty significant discount for cash pay at the time of service and that is driving that revenue per requisition down.

Is there anything new that was done in the quarter that wasn’t done before or just is a continuation?

I would say it is a continuation and a gaining of momentum of something that’s already been rolled out.

Great, alright. Thanks.

Your next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed.

Thanks. On the esoteric front, in addition to vitamin D and HPV, what else is being included in that category?

A number of tests; I mean first of all, the broad category is esoteric and genomic. So, we have genomic testing at the top, those are Jean based tests; we have histology which is tissue and then we have the category of esoteric. Esoteric for us includes a list of tests that are specialized in nature and only performed in a few of our facilities. Vitamin D is a good example; allergy testing is a good example, that there are really a number of tests in that group. I will say we don’t move tests from one group to the other. So we do not move tests from esoteric down into core and core up into esoteric. So we try to keep the group stable so the rates are meaningful to look at over time.

Okay, well obviously cancer is in the genomic, HIV would fall into…

That would be a genetic test.

Okay, that would fall as well. Okay, lastly on the transition payments, it’s supposed to end by the end of this year, but there’ll be a true up in the beginning of 2010. What do you think the impact of that true up is going to be, is that immaterial?

Well, it’s not actually a true up. The measurement period ends at the end of this year, so the bills will continue to come to us after the measurement period ends, because it’s not real-time. We still think of our exposure at the same level that we have in the past. It will just be a question of billing and payment, but I don’t foresee any sort of true up as you say, that’s beyond our expectation.

I would just add to that, there isn’t any reason to expect that the trend would accelerate. So if you look at the $10 million to $12 million in this quarter, there isn’t any reason to expect that’s going to change in the third quarter or fourth quarter of this year, which are the last two quarters that we have exposure. It’s just timing of payment as opposed to a true up or any other kind of reconciliation.

Then lastly on the acquisition front, obviously Monogram brings the specialized cancer and HIV. Is there any other category in terms of acquisitions, in terms of specialized testing that you are focusing on at this point?

No, there’s nothing really. I mean there are a number of very interesting areas out there; infectious disease, oncology testing, we have a terrific franchise in specialized endocrinology and we have really traffic franchise in specialized coagulation. So all of these areas are areas that we are going to continue to look to overtime, as areas where we can improve our position.

Okay, great. Thanks.

Your next question comes from the line of Gary Taylor with Citi; please proceed.

Good morning. Most of my questions have been asked already. I just want to go back to just a couple of quick clarifications. On Monogram then for the second half of the year, does it make sense just to approximately think of the dilution as $0.08 and then $0.04 for the second half of the year, assuming the transaction piece is all in the 3Q?

Gary, this is Brad. I think that’s reasonable. I mean the transaction costs will obviously be when we close and then the rest would be. Again, it kind of depends on when we the actual closing date as to how that will flow.

Right, that’s the only other thing Gary. Depending on the closing, it may be less days. Gary Taylor – Citi: Late in the quarter, early in the quarter sort of thing?

Right. Gary Taylor – Citi: Okay and I just want to go back to; it was mentioned, but you had previously said you thought the deal would be slightly accretive in 2010. Is that still your belief?

Yes. Gary Taylor – Citi: Okay and then just going back to the genomic revenue in the quarter just for a moment. I don’t think this was asked, but that number was down sequentially, just the revenue number, that’s occasionally down sequentially. So does it mean anything here in the quarter that was off sequentially and I guess most of the reason was the price per session was weaker. So is there a mix issue? Is there anything there that kind of changes your outlook for what that business will do this year?

Gary, when I look behind that number, I see nothing but mix driving that. So for example, HPV is in there and grows at a rate, volume wise faster and is at a price point lower than that average. So some of the other tests may be growing at different rates, but I see nothing outside of a mix issue, nothing from a pure price perspective to speak of. Gary Taylor – Citi: Any additional competition; anything there that’s observable or just …?

Not that has been observable to us. Gary Taylor – Citi: Alright, thank you.

We have a follow-up question from the line of Kevin Ellich with RBC Capital Markets; please proceed.

Yes, just a couple of quick follow ups. You guys continue to do a good job on keeping a tight lid on expenses. Brad I was wondering, how much more room is there for margin improvement?

I think there is room for margin improvement. Again, if you think about the things that are dragging on margin this year that we have talked about, bad debt, the pension and other benefit costs and the exchange rate. I think that if we are able to grow our business in the mid single digits on the top line, there is definitely room for margin improvement as we move into the future and annualize some of the things that I mentioned.

Got it, and then on the cash flow, it was pretty strong this quarter, was there anything unusual in any of the moving parts?

Not that I can think of. On a year-over-year basis I think we had higher tax payments than last second quarter, but nothing in terms of anything unusual. The big pension payment was in the first quarter. So we had a smaller contribution in the second quarter than the first, but that was more than offset by the tax payments, so nothing unusual. I mean really what drove that are the strong cash collections in the quarter on the billing and collections side.

Got it, that makes sense. Then lastly Dave, going back to the question about other testing areas that you find attractive; quest announced they moved into the periodontal lab business. Just wondering if you guys took a look at that and what’s your thoughts behind that?

I think the best way to express that is to say that in our view, there is a tremendous opportunity for growing our esoteric business in well recognized areas like infectious diseases, like cancer testing, like endocrinology, like special coagulation and some of the others that I mentioned. So I think we’re going to continue to focus on growing our volumes on the things that we view as high opportunity and that we think we know how to do well.

Got it. Thanks guys.

There are no further questions in the queue at this time. I would now like to turn the call back over to management for closing remarks.

Thank you very much. We appreciate your listening and participating in our second quarter earnings call.

Ladies and gentlemen, this concludes the presentation. Thank you for your participation in today’s call. You may now disconnect and have a good day.