Laboratory Corporation of America Holdings
Q4 2009 Earnings Call Transcript
Published:
- Operator:
- Good day, ladies and gentlemen and welcome to the fourth quarter 2009 Laboratory Corporation of America’s earnings conference call. My name is Rankin and I am your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions). I would now like to turn the presentation over to your host for today’s call, Mr. David King, Chairman and Chief Executive Officer. Please proceed, sir.
- David King:
- Thank you. Good morning and welcome to LabCorp’s 2009 Fourth 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 Steve Anderson, Director Investor Relations. This morning we will discuss our fourth quarter and full year 2009 results, highlight our 2009 accomplishments, outline our priorities for 2010 and provide answers to several frequently asked questions. I’d now like to turn the call over to Steve Anderson who has a few comments before we begin.
- Steve Anderson:
- Before we get started, 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 Web site. Analysts and investors are directed to this 8-K and our Web site to review this supplemental information. Additionally, we refer you to today’s press release, which is available on our Web site for a reconciliation of non-GAAP financial measures discussed during today’s call to GAAP. I would also like to point out that we are making forward-looking statements during this conference call and these statements 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 updates to these forward-looking statements even if our expectations change. Now, Brad Hayes will review our financial results.
- Brad Hayes:
- Thank you, Steve. By now you should have had a chance to review our fourth quarter and year-end 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 year increased 19.8% to $747.7 million compared to $624.2 million in 2008, net of transition payments to United Healthcare. We’re also pleased with our strong cash collection efforts in the quarter and throughout 2009 as evidenced by significant improvement in DSO. DSO at the end of December was 44 days, an improvement of seven days year-over-year and down four days sequentially. Our bad debt rate was stable at 5.3%. Second, revenue growth, excluding the special charge in 2008, revenue increased 3.4% year-over-year in the fourth quarter. During the quarter, we achieved strong growth in revenue per requisition which increased 4.3% year-over-year. The growth of revenue per requisition is attributable to both rate increases and mix shift. Total Company volume decreased 0.9% year-over-year. Excluding the consolidation of the Company’s Ontario, Canada joint venture, volume decreased 1.5% year-over-year. As we have previously discussed, the termination of two large government contracts at the end of the second quarter reduced volume by 1.5%. Declines in our drugs of abuse testing business reduced volume by 40 basis points. Also, weather accounted for a 30 basis point reduction in our volume. Excluding these items, volume increased by 0.7% in the quarter. Esoteric volume increased 6.8% in the quarter. Third, margin, for the fourth quarter, our adjusted operating income margin was 19%. This margin decreased 50 basis points year-over-year due primarily to our acquisition of Monogram Biosciences. Fourth, liquidity, we remain well-capitalized. At the end of December we had cash of $148.5 million and approximately $386 million available under our revolving line of credit. At the end of December, total debt was $1.4 billion, including $75 million drawn down on our revolving credit facility. During the fourth quarter, we repurchased $108.4 million of stock representing approximately 1.5 million shares. At the end of December, approximately $71.8 million of repurchased authorization remained under our previously approved share repurchase program. Today, the company announced that its board of directors has authorized a new stock repurchase program under which LabCorp may purchase up to an aggregate of an additional $250 million of its common stock. This morning we announced 2010 financial guidance. We expect revenue growth of 2.5% to 4.5%. Adjusted EPS in the range of $5.35 to $5.55, excluding the impact of any share repurchase activity after December 31, 2009. Operating cash flow of approximately $870 million, excluding any transition payments made to United Healthcare and capital expenditures of approximately $135 million. We expect volume growth to remain challenging during the year, given the headwinds from previously mentioned contract losses and the economic environment. Our pricing outlook is positive, despite the 1.9% reduction in the Medicare clinical lab fee schedule. We will receive price increases from several large payers in 2010. I’ll now turn the call over to Dave.
- David King:
- Thank you, Brad. We are very pleased with our fourth quarter and 2009 results and I would like to highlight our accomplishments over the last year. During 2009, we grew our revenue by 4% despite the challenging economic environment. Importantly, we also grew our esoteric revenue by approximately 9%. We accelerated our cash collections and kept our bad debt rate at 5.3%. Our DSO improved 7 days from the fourth quarter of 2008. We continued to invest strategically, purchasing Monogram Biosciences in August to enhance our industry leadership in companion diagnostics, infectious disease –and oncology testing. The integration of Monogram remains on track. We strengthened our capital structure by redeeming half of our zero coupon notes, eliminating uncertainty related to potential future conversion of these securities. We repurchased nearly 4 million shares of our stock for $237.5 million. And we kept a tight lid on expenses and implemented important steps in automation that yielded improvement in our gross margin. I will now address our volume growth. Consistent with our commentary throughout the year, we saw volume growth slow in the second half of the year. Job losses leading to declines in the number of commercially insured lives, fewer physician visits and the timing of cobra and severance expirations had a negative impact on our fourth quarter volumes. Also, as Brad mentioned, our fourth quarter volumes were negatively impacted by lost contracts, declines in our drugs of abuse testing and weather. After adjusting for all of these factors, volume increased by 0.7% in the fourth quarter. I would now like to highlight our priorities for 2010. First, we will continue to focus on generating profitable revenue growth with a continued emphasis on growing our esoteric testing. Second, we will continue to enhance our IT platforms with a focus on online services, client connectivity and analytic tools. We will also continue to improve the patient experience through such initiatives as online appointment scheduling and automating the work flow in our patient service centers. We will introduce a number of additional IT enhancements throughout 2010. Third, we will maintain scientific leadership. We will continue to introduce new tests to respond to scientific discoveries, improve patient care and outcomes and satisfy unmet medical needs. Fourth, we will maintain pricing discipline. Finally, we will continue our aggressive management of costs. In summary, we remain optimistic about the growth opportunities that lie ahead and we are well-positioned to capitalize on them. Now, Steve Anderson will review anticipated questions and our specific answers to those questions.
- Steve Anderson:
- Thank you, Dave. Can you update us on the mix of your business coming from esoteric testing? In the fourth quarter approximately 37% of our revenues were in the genomics, esoteric and anatomic pathology categories. Our goal over the next three years to five years is to increase our esoteric test mix to approximately 40% of revenue. What are your plans for uses of free cash flow during 2010? We remain committed to returning value to our shareholders. First, by using our free cash flow to grow our business through strategic acquisitions and licensing agreements. And second, through continuing our approved share repurchase programs. 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. Since the beginning of 2006, the company has repurchased approximately $2 billion worth of its stock. Can you remind us of how drugs of abuse volume trended during the year? In the quarter, our drugs of abuse volume declined 6.5% year-over-year. That compares to year-over-year decreases of 15% in Q3 of this year, 19% in Q2 of this year, 20.1% in Q1 of this year and 15.9% in the fourth quarter of 2008. What is the status of your transition payments to United Healthcare? In the quarter, the company was billed $6.7 million in transition payments and paid $3.9 million in transition payments. To-date, LabCorp has been billed a total of $108.7 million and paid $102.8 million in transition payments to United Healthcare. As a reminder, the end of the fourth quarter marked the end of our obligation to reimburse United Healthcare for transition payments outlined within the United Healthcare contract. We expect the final invoices for these payments to be processed over the next two quarters and we continue to expect the final amount to be in the range of $125 million. We will update you on these final payments going forward. Now I’d like to turn the call back over to Dave.
- David King:
- Thank you, Steve. In summary, we are very proud of our performance in 2009 and are optimistic about our business in 2010 and beyond. Thank you very much for listening. We are now ready to take your questions.
- Operator:
- (Operator instructions). And our first question comes from the line of Kevin Ellich of RBC Capital.
- Kevin Ellich:
- Thanks, guys. Good morning. Thanks for taking the questions. Just a couple of questions on the competitive landscape. Dave, I was wondering if you could talk maybe about what you’re seeing in the market, especially with the Spectrum deal being done and also Sonic has been pretty active recently in the U.S. and what are your thoughts given your competition?
- David King:
- Good morning, Kevin. I think the competitive landscape, fundamentally, remains what it has been during my tenure, which is, this is a competitive business. Obviously, there are two larger laboratories, ourselves and Quest and then there are a large number of smaller laboratories. Certainly, Sonic has been active on the acquisition front. The Spectrum transaction and then the Spectrum (inaudible) announcement indicate that this is an attractive business and people want to get into it and so we should expect a competitive landscape to continue pretty much the way it’s been and obviously, we continue to look for logical and appropriate acquisitions that will enhance our competitive position.
- Kevin Ellich:
- Okay, thanks. And then if we can go back to the margin comment, that margins were down 50 basis points year-over-year due to Monogram, is that something we should expect going forward and I guess can you remind us one that annualizes?
- Brad Hayes:
- Yes, Kevin, this is Brad, Monogram closed in early August of 2009, so that will annualize, but as you know that was a dilutive acquisition in the 2009 year and we’ve been consistent in saying that we expect that to be slightly accretive in 2010, so that drag on margin, until the synergies are fully implemented will continue to occur.
- Steve Anderson:
- Kevin, that obviously it’s going to lessen as we go through the year. It will not be the same because we will be achieving the cost reductions.
- Kevin Ellich:
- Sounds good. And then could you talk about what type of pricing increases we should expect? You mentioned that you have several large pairs that you expect increases from in 2010, just wondering if you have some color behind that. And then lastly on the IT enhancements what are we looking at for 2010 and should we see any increases in CapEx? Thanks.
- Steve Anderson:
- We’re not going to talk about the price increases specifically other than to say what we’ve said which is that we have contractually agreed price increases with several large payers. On the IT enhancements, this is part of the capital expenditure that is built into our guidance, so there won’t be any extraordinary CapEx and our IT enhancements focused really on two areas, improving the physician experience in dealing with LabCorp and improving the patient experience. And for competitive reasons, we’re not going to talk a lot more about those enhancements, but that will be the focus.
- Kevin Ellich:
- Sounds good. Thanks, guys.
- Steve Anderson:
- Thank you.
- Operator:
- Next question comes from the line of Robert Willoughby of Banc of America/Merrill Lynch.
- Erin Wilson:
- Hi, this is Erin Wilson in actually for Bob today. What one time item specifically will not occur in 2010? Just provide us a little more detail on pension fund contributions, Monogram related charges, Canadian exchange rates, to name a few.
- Brad Hayes:
- Hello, Erin, this is Brad. The ones that come to mind and I’m assuming you’re talking about the non-restructuring type events, so we had, as you know, a couple of tax credit in the fourth quarter we don’t expect that to continue. But in terms of the operating items, you mentioned pension, we had about $55 million in cash contributions to our pension plan in 2009. We do not expect that to be the case in 2010. The expenses I think around that particular part of our business should be flat is what we are expecting. The exchange rate is difficult to predict, but I do not expect to see the dramatic changes that we saw over the last part of 2008 and early 2009. And those are really the big items I believe that we mentioned going into 2009 that were going to be challenging from a margin perspective is the pension and the employee benefits, the exchange rate and also Monogram.
- Erin Wilson:
- Great, great, thank you very much.
- Operator:
- We have a question from the line of Ricky Goldwasser from Morgan Stanley.
- Ricky Goldwasser:
- Good morning.
- David King:
- Good morning.
- Ricky Goldwasser:
- Just a couple of questions. First of all, if you can provide some detail on kind of what were the moving parts around the pricing metric that you reported? I noted you backed out the one-time items from the volume metric, if you can do the same on the pricing?
- Steve Anderson:
- Yes, Ricky, we’re really focused on the larger items there in a volume way, we don’t provide the same impact on price, but I can tell you the things that are contributing to price, Monogram would be one, that acquisition is of higher value to us and very little on the volume contribution side, so that is one item. And then, obviously, our continued growth in the mix of our normal test when we have our esoteric testing growing at 6.8% volume in the quarter and the core actually going down is going to contribute to our overall total pricing. The pricing that we actually got, the real pricing from some of our payers in 2009, and then obviously as we’ve lost some of the contracts that we mentioned in our drugs of abuse testing business, those are going to be positive on the price calculation as well. But we don’t provide those specifically, but I think in order of magnitude, that’s what is driving the number.
- Ricky Goldwasser:
- Okay. And when we tried to do kind of a back of the envelope we get to an aggregate impact of around 1% to 1.3%. Is that kind of like in the ballpark of drug of abuse and Monogram?
- Steve Anderson:
- Drugs of abuse and Monogram?
- Ricky Goldwasser:
- Yes, combined.
- Steve Anderson:
- Monogram is basically about a point by itself.
- Ricky Goldwasser:
- Okay, that’s helpful. And just in terms of the government contracts, when are you going to anniversary those?
- Steve Anderson:
- The biggest part in the beginning of the third quarter of 2010 and then there was another traunch of that loss that happened during the fourth quarter of 2009. So part of it third quarter, part of it fourth quarter.
- Ricky Goldwasser:
- Okay. Thank you very much.
- Operator:
- Our next question comes from the line of Ralph Giacobbe from Credit Suisse.
- Ralph Giacobbe –Credit Suisse:
- Thanks, good morning. Can you maybe go through and just bridge the gap between when we look at the guidance revenue mid-point 3.5% growth, 11% EPS growth, seems like there’s a lot more coming from the cost side of the business. Is this reflective of LabCorp 2010 initiatives that you’ve talked about in the past and maybe if you can give any more details on where the cost savings are going to come from, I know you talked about automation, so any details there would be helpful.
- David King:
- Ralph, good morning. I’ll start it and Brad can go through the detail. Yes, as you see in the improvement in gross margin in the year-over-year numbers, the impact of the 2010 initiatives is starting to take hold. And what I think is significant there is that in spite of the one-time items that we previously mentioned, we still demonstrated an increase in gross margins. So the things we’re doing around laboratory automation and the work flow improvement are starting to show up in the numbers. I don’t think it’s particularly helpful to talk about where exactly the dollars are coming from because I think what you see is the aggregate dollars that are reflected from the 2010 programs in the cost run rate. I will say, obviously, we haven’t reduced bad debt. That was part of the 2010 initiatives. It is still our goal to be able to reduce bad debt and we’d like to do that in 2010, but that will depend on how we see the payment side of the equation developing over the year, because we had a terrific year from a cash collection standpoint and a terrific year in terms of reducing DSO, but we want to make sure that’s going to be sustainable as we continue in this pretty tough economic environment.
- Brad Hayes:
- Ralph, this is Brad. I’ll just add as I look at my model in the middle and look at the number that you are talking about to get to the middle of the EPS range. It’s not a dramatic kind of number that we’d need to move the needle on cost.
- Ralph Giacobbe –Credit Suisse:
- Okay. And then, I did want to ask a little about top-line guidance as well for 2010. You’ve talked about the Monogram deal closing in the August timeframe, you had centrics at the end of 2009, you had consolidation in JV, so, if I run the numbers back of the envelope it would appear that if you exclude all of that and normalize for organic growth, if you will, the guidance calls for a 2% growth number. So just trying to understand exactly what you’re seeing, are you baking in greater deterioration in terms of volume and/or pricing or does it speak to maybe some level of conservatism on your part in terms of the guidance?
- David King:
- The guidance is designed to encompass, obviously, a wide range of potential outcomes. I guess I take a little bit of exception to the idea that we back the growth factor of acquisitions out of guidance because those are in our numbers now. So to me, the guidance includes Monogram, but Monogram is part of our company and the guidance includes centrics, but centrics is part of our company. So, I always hesitate to put labels like conservative or liberal on anything, whether it’s politicians or financial guidance, but the guidance is intended and that’s why we give a range to encompass what we see as the potential range of outcomes and it’s going to be dependent on what happens from an economic perspective, what happens from jobs perspective, what happens from the how many commercially insured managed care lives are growing or decreasing in 2010. And I think all of those things will have a good deal of impact in determining where we end up in the guidance range.
- Ralph Giacobbe –Credit Suisse:
- Okay. And then just my last one, in terms of going back to volume, I know you talked a little bit about just the economic slowdown and if we normalize volume up 0.7, it has been decelerating throughout 2009, so, any more detail, you mentioned the economic back drop, I guess do you expect volume to grow in 2010? And do you think industry growth is in line with where you are or do you think there could be some share losses?
- Steve Anderson:
- I think industry growth is in line with where we are. I think if you look at what’s generally being reported by laboratories or size, you see that, I think, we’re right in line with the industry. We did see a deceleration in 2009. I think we said throughout the year that that was something that we expected, partly because of annualizing of acquisitions, partly because of the overall economic environment. I think any numbers that you look at, Ralph, support the proposition that the economic environment is having a significant effect on health care in general. Physician office visits down, according to IMS pretty significantly in the fourth quarter year over year, especially among specialty physicians and just looking at managed care commercial membership as reported by the managed care companies, Sigma down 5.5%, United down 6%, WellPoint down 3.8%, Humana down 5.8%. So that’s 44% of our revenue comes from managed care and four of our largest payers have significantly negative experience during the year on commercial lives. You have to have the expectation that that’s going to have an impact on overall volumes.
- Ralph Giacobbe –Credit Suisse:
- Sure. Okay. That’s helpful. Thank you.
- Operator:
- Next question comes from the line of Amanda Murphy from William Blair.
- Amanda Murphy:
- Hi, good morning. Questions on the esoteric bucket. Based on our math, I think the other esoteric segment seems to be driving a lot of the growth in the broader esoteric segment. Can you just remind us what’s in that bucket and what’s driving growth specifically if anything?
- Brad Hayes:
- Yes, Amanda, this is Brad. And this would be consistent with what we’ve said about that category of testing for many quarters is Vitamin D is a test that has been growing within that bucket, that is the main contributor to that category.
- Amanda Murphy:
- Okay. And then you mentioned also looking at licensing and acquisitions in terms of growing the esoteric business. I’m just curious, given Monogram are you looking more at acquiring proprietary content or is it sort of status quo there?
- David King:
- Morning, Amanda, its Dave. I think it’s both. I think the Monogram acquisition in terms of the companion diagnostic for sales entry and there are other diagnostics out there, but the companion diagnostic the Trofile test is the test that was used in the trials of sales entry you probably aware sales entry has received an indication for naive patients now and FDA is permitting it to be marketed for naive patients, so there’s a nice opportunity to see some growth in that market. As a general proposition, I think our experience has been that there are pluses and minuses of proprietary technology and we evaluate each license or acquisition opportunity based on the merits of what we think the growth opportunities are and again, we always start with the proposition that we’re here for patients. So is there an unmet medical need? Is it going to improve patient health and outcomes? Those are the things that we think about before we think about whether it’s a proprietary or not a proprietary test.
- Amanda Murphy:
- And is there a specific disease state that you may be focused on or again a bit more opportunistic?
- David King:
- I would say it’s more opportunistic. I think Monogram is infectious disease and oncology focused, those are two very interesting growth opportunities in my judgment, but there are other important disease states where testing and technology are developing and we certainly are close to those as well.
- Amanda Murphy:
- Okay, thanks a lot.
- Operator:
- Our next question comes from the line of Bill Quirk from Piper Jaffray.
- Bill Quirk:
- Thanks, good morning, guys.
- David King:
- Good morning.
- Bill Quirk:
- First off, can you talk a little bit about the specific contributions from acquisitions in the quarter and then I guess ideally I’d love to see what the Monogram contribution was?
- Brad Hayes:
- Bill, this is Brad. I previously mentioned that Monogram had about a 1 point impact on price and that it’s not much contributed from volume, it is mostly price. Other than that, I think that’s the biggest acquisition we’ve done in a while. So the smaller ones, we haven’t historically nor will we break out the impact of those, but the Monogram was the big one.
- Bill Quirk:
- It’s safe to say, though Brad, that that’s tracking to your expectations?
- Brad Hayes:
- Yes.
- Bill Quirk:
- Okay, very good. And then, secondly, I was hoping you could give us a little additional color around the genomic excisions. It looked like it was fairly flat both year-over-year and up slightly sequentially. Did you reclassify any test out of this category in the quarter or is there something else going on here? Thanks.
- Steve Anderson:
- No reclassifications out. That’s a type of testing that’s gene based, so we keep the method in there and nothing specific that I can point to that would be driving the flat performance there other than just the overall volume that we’ve seen.
- Bill Quirk:
- Okay, understood, thank you.
- Operator:
- Our next question comes from the line of Tom Gallucci of Lazard Capital Markets.
- Tom Gallucci:
- Good morning. Thanks for all the color. Just a couple of housekeeping items. I guess, one, just to be sure, the revenue guidance for this year doesn’t include any unannounced or anticipated acquisitions, right?
- David King:
- Tom, good morning, it’s Dave. Our revenue guidance generally assumes that we will do some small fold-in acquisitions throughout the year, but first of all, it clearly does not include any unannounced acquisitions and second of all it doesn’t include any material acquisitions.
- Tom Gallucci:
- Just I want to make sure I understand that. So it does include maybe some small fold-ins that you might do overtime?
- David King:
- That’s right. In revenue growth, we always think about, we may gain $20 million or $30 million in top line revenue from small acquisitions throughout the year and that is incorporated into what we guide to, but we don’t incorporate any major acquisitions, large deals or things that might be out there.
- Tom Gallucci:
- Okay, good. Maybe this is a hard question or a real time question, but since you mentioned the weather impact in the fourth quarter, obviously, in the east coast we’ve had a lot of weather so far this quarter, how would you compare what we’ve seen this quarter maybe compared to the impact last quarter? Are we at a similar pace; is it maybe bigger or smaller at this point?
- David King:
- Without having specific numbers, my view is it’s going to be bigger. The weather in the northeast over the last few days has been unprecedented. We had a pretty substantial snowstorm even down here in North Carolina, although substantial for us is five inches compared to what you guys have received up there. So I think we have every expectation that when we report the first quarter the weather impact will be larger than it was in the fourth quarter.
- Tom Gallucci:
- Okay, that makes sense. And then maybe just one last thing. I know you had some turnover, but you had a sales position late last year. Is there any update on having filled that position or your thoughts about that in general?
- David King:
- As I think I mentioned when asked before, our former Chief Operating Officer and then Head of Sales Don Hardison expressed a desire to me that he really wanted to run his own company again. As you may recall, he was previously the Chief Executive Officer at EXACT Sciences and so it was his decision and obviously, we respect it. Rather than filling the position immediately, we’re taking a good, long look at our sales structure and our sales organization and then we’ll determine how we want to staff that position and who the right person is.
- Tom Gallucci:
- Okay, sorry if I missed that before. Thanks a lot.
- David King:
- No problem.
- Operator:
- Your next question comes from the line of Kemp Dolliver from Avondale Partners.
- Kemp Dolliver:
- Hi, thanks and good morning. Couple of questions. First, on the several million dollars of restructuring charges taken in the quarter, what were the specific actions is general headcount reduction or did you actually close any significant labs?
- David King:
- The bulk of it, Kemp, was the severance related to Don’s departure, as I mentioned in response to the last question. And just to clarify, Tom, I don’t mean to suggest that you missed anything. That question was asked at some point and I responded to it. I don’t know that it was on a call. So I’m not sure that you missed something as opposed to me thinking that I had answered it for somebody else.
- Kemp Dolliver:
- Great. Could you talk a little bit more about the plans for Monogram this year in that it looks like beside cost cutting, the real driver to hitting your accretion goal is going to be increasing the revenue from those tests pretty substantially. Can you just talk about the timetable for the various steps for what I would basically describe as a launch even though these are existing tests?
- David King:
- Yes. Once we closed the acquisition, one of the first steps that we took was to obviously compare the list of accounts that we’re sending to Monogram with a list of accounts sent to LabCorp, so, our first targeted approach has been approach accounts that are sending infectious disease testing to Monogram, but are not sending the peripheral blood testing or other types of testing to LabCorp and, likewise, customers that are sending testing to LabCorp and including infectious disease testing, but are sending their high end esoteric testing elsewhere. So that is already in process and has been part of our sales initiative since the point that we closed. For the rest of the year, as I mentioned, the naive indication for sales entry, the launch of the Vive [ph] partnership for the selling of sales entry will be catalysts for growing the selling and the utilization of the Trofile test. Other major initiative is the incorporation of the HERmark test into our oncology sales force so that now representatives who are selling HER2 testing will also have the ability from that same tissue, same specimen from the physician to sell the HERmark testing. So those are probably the three key initiatives. What we need to achieve with Monogram this year is not only expense reduction, but top-line revenue growth.
- Kemp Dolliver:
- Super. My last question relates to the patient mix in 2009. In contrast to the what we would have expected from the economy, the volumes there were actually down and do you have any color with regard to how much of this may reflect your own efforts to appropriately triage folks or anything else you see going on in that line item?
- Brad Hayes:
- Kemp, its Brad. Very hard to quantify what causes that decline, but to your point, I can only think that the work that we’re doing in our own patient service centers and even in our physician accounts who send us work that doesn’t come to our service centers around collecting upfront before the service occurs is having an impact there.
- Kemp Dolliver:
- Fabulous. Thanks very much.
- Operator:
- Next question comes from the line of Shelley Gnall from Goldman Sachs.
- Shelley Gnall:
- Hi. Thanks for taking my questions. The first one would be just going back to the top-line guidance again. Is it fair to assume that we could see a continued drag, obviously, more modest in size from pre-employment drug screening?
- David King:
- Yes.
- Shelley Gnall:
- Okay, and then I apologize if I missed this in the prepared remarks, but can you give us an update on the timing and the size of the Canadian JV put payment?
- David King:
- Yes. That was scheduled to close in the first quarter. And size was approximately $148 million Canadian.
- Shelley Gnall:
- Okay. Thank you.
- Operator:
- And our next question comes from the line of Gary Lieberman from Wells Fargo.
- Ryan Halstead:
- Good morning. This is Ryan Halstead on for Gary. I was wondering if you could comment on, I guess, histology in the past you’ve had some pressure coming from the in-sourcing, some of the hospital labs. Is that still been a case this quarter and do you view any opportunities going forward this year to help offset that?
- Steve Anderson:
- I think the biggest source of loss of histology volume has been in-sourcing down. It’s in-sourcing by physician office labs as opposed to hospital labs. I do think that it is decelerating because the in-sourcing really makes sense only when there is a fairly large size practice that’s doing enough biopsies to justify hiring their own pathologists. So I think it’s decelerating, but that was the principle drag on the histology business this quarter as it has been throughout the year.
- Ryan Halstead:
- Okay, thanks. Do you think there’s any, I guess, opportunities going forward this year that I know you mentioned it’s decelerating, but is there a way that this market, which you mentioned is pretty fragmented. Is there any opportunities I guess, on the acquisition front?
- Steve Anderson:
- I think there are certainly potential acquisition opportunities in the pathology space. So the answer is yes. I think in terms of countering the trend of physician in-sourcing, I think that’s more of a regulatory and utilization issue than it is of a tactical issue. And so I don’t know that there will be any change in that dynamic this year.
- Ryan Halstead:
- Okay, thank you.
- Operator:
- And we have a question from the line of Charles Rhyee from Oppenheimer.
- Charles Rhyee:
- Yes, thanks for taking the question. Dave, maybe if we can just go back to Monogram real quick and I apologize if you might have answered this question. I think one of the things that you had talked about in this acquisition was revenue synergies, as you can merge two different types of requisition forms allowing physicians to order a whole slate of tests that Monogram wasn’t able to maybe do on its own. Can you talk about that progress there and have you seen an uptick relative to where Monogram might have been on a standalone basis?
- David King:
- Yes. As I mentioned our first point of attack was the accounts that we’re sending to LabCorp and not sending to Monogram or we’re sending to Monogram, but not sending to LabCorp. I think we have made a lot of progress there in terms of gaining additional referral work and I think Monogram’s performance in the last quarter from a revenue perspective was probably better than we had initially projected going in. I think obviously there’s still work to be done in terms of harmonizing the IT systems, the billing systems so that we can make sure that the physicians can order the tests conveniently, but also that the claims are processed in an orderly way by our payers that patients don’t end up getting large bills. So, there are still some things that are in process for us, but I think we’re well on track with all the things we talked about in terms of integrating Monogram. And continuing to capitalize on its value as an asset, which is very important to us.
- Charles Rhyee:
- Thanks. And maybe a follow up, can you maybe remind us what was the initial range of dilution to expect from Monogram in the first year and your view of that changed, now that we’re about a quarter or so into the acquisition?
- David King:
- I think we initially said $0.08 to $0.12 dilution in 2009 and I think we ended up pretty much in that range as we talked about on the third quarter call. We had a little less in terms of deal expenses or there was a little less of a charge for deal expenses than we had initially expected. What we said about 2010 is we expect Monogram to be slightly accretive and I think we’re on track to accomplishing that, but to go back to the earlier question that was asked, you don’t go from dilutive in November and December to accretive in January, so it will be a process throughout the year to both grow the revenue and continue to rationalize the costs.
- Charles Rhyee:
- But certainly, as you see the progress that you’re making, which you gave us was some an expectation of a trajectory that ramp may be steeper or flatter than maybe what you initially expected or where you thought it would be?
- David King:
- I think it’s pretty much where we thought it would be.
- Charles Rhyee:
- Okay, great. Thanks, guys.
- Operator:
- We have a question from the line of Ricky Goldwasser of Morgan Stanley.
- Ricky Goldwasser:
- Yes. Just as a follow-up question. Dave, if you can just talk a little bit about the acquisition strategy and how strategically you think about acquisitions? Are you thinking of just sticking to core operations, i.e. acquisitions that are continuing either pathology or genomic and folding or are you still looking to explore opportunities outside the diagnostic services area?
- David King:
- I think to be very clear, our acquisition focus is on things that are in the fair way for us, so that means acquisitions that are complimentary to our existing infrastructure on the core side, means acquisitions from an esoteric perspective that are either complimentary to the services that we offer or that expand our esoteric portfolio, so, if you think about our esoteric portfolio with the specialized endocrinology, the specialized coagulation, the oncology, the specialized infectious disease to continue to expand the portfolio there is a very important strategic focus for us. Expand the portfolio in genetic testing is something that we would be very anxious to do. So that’s where our acquisition focus lies. We certainly have looked not only in the past year, but in the past many years at a number of potential opportunities outside the diagnostic services space and, Ricky, I think what we keep coming back to is that we know the diagnostic services space, we like to think of ourselves as pretty good operators in the space and so that’s where we’re going to continue to focus our business and our acquisition strategy.
- Ricky Goldwasser:
- Okay, great, thank you.
- Operator:
- Our next question comes from the line of Brian Sakino [ph] from Barclays Capital.
- Brian Sakino:
- Quick questions. Does your guidance include any repurchase of stock in the year?
- David King:
- No, it does not include any repurchase other than what was completed through December 31st 2009.
- Brian Sakino:
- Okay, got it. And how about the exercise that put on the Ontario joint venture? Is any accretion from that included in your guidance as well?
- Steve Anderson:
- No. Because it had not closed by the end of the year.
- Brian Sakino:
- Okay, perfect. Thank you very much.
- Operator:
- We have no further questions.
- David King:
- Very well. Thank you so much for listening to our fourth quarter 2009 and full year conference call.
- Operator:
- Ladies and gentlemen, thank you for your participation in today’s conference. That concludes today’s presentation. You may now disconnect. Have a good day.
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