Laboratory Corporation of America Holdings
Q3 2010 Earnings Call Transcript

Published: 21 Oct 2010

[Operator:]

Welcome to the Third Quarter 2010 Laboratory Corporation of America Earnings Conference Call. My name is Diana and I will be your operator for today. (Operator Instructions) I would now like to turn the call over to your host for today, Mr. David King, Chairman and CEO. Please proceed.

[David King:]

Thank you. Good morning, and welcome to LabCorp's 2010 Third 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, Vice President, Investor Relations. This morning, we will discuss our third quarter 2010 results, highlight our progress on our key strategic initiatives 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 website. Analysts 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 we are making forward-looking statements during this conference call, and these forward-looking statements include among others, statements about our expected financial results, financing activities and our ability to close the acquisition of Genzyme Genetics. These statements are based upon current expectations and are subject to change, including based upon various important factors that could affect the company's financial results. Some of these factors are set forth in detail in our 2009 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. Thank you, Steve. By now, you should've had a chance to review our third quarter financial results. On today's call, I will discuss four key measures of our financial performance

[David King:]

Thank you, Brad. We are very pleased with our third quarter results. We grew revenues 7.7% in the third quarter. We grew Esoterix revenue by approximately 10.1%. Taking into account, the impact of lost contracts, volume increased year-over-year by 3.3%. We are encouraged that we have achieved volume growth in a difficult economic environment and believe this reflects the effectiveness of our growth strategies. Revenue per acquisition growth remains strong at 3.2% after adjusting for the impact on revenue per requisition from the lost contracts and differed revenue. Thus, the pricing environment remains stable. I will now like to update you on our recent progress on four of our strategic initiatives; acquisitions, expanding our managed care relationships, growing our clinical trials business and enhancing our IT capabilities. First, we’ve consistently stated that the primary use of our free cash is to grow our business with strategic acquisitions. This quarter we made a significant strategic acquisition when we announced a definitive agreement to acquire Genzyme Genetics, a business unit of Genzyme Corporation and one of the premier specialized medical testing laboratories in the United States, in an all cash transactions valued at $925 million, net of expected income tax benefits less acquisition-related expenses. The acquisition is expected to have a net cash cost to LabCorp of approximately $795 million. We are very excited about the opportunities that the combination of Genzyme Genetics and LabCorp presents for future growth. The acquisition fit squarely in to our key strategies, expanding Esoteric Testing capabilities and enhancing our leadership in personalized medicine. Combining Genzyme with our businesses will allow us to capitalize on two emerging trends; increasing importance of diagnostics to healthcare and the evolution of personalized medicine in to the mainstream of patient care. The acquisition will expand our capabilities in reproductive, genetic, hematology, oncology and clinical trial, central laboratory testing and provides us with an attractive opportunity for future Esoterix revenue growth. As we have previously stated, we expect the transaction to be diluted to LabCorps adjusted EPS for the first year after closing by $0.25 to $0.35 primarily attributable to financing cost and amortization. However, we expect the transaction to be slightly accretive to operating cash flow with year one, excluding transaction cost such as bridge financing, legal and advisory fees and restructuring costs. We continue to expect the transaction to be accretive to LabCorp’s adjusted EPS, beginning in the second year after closing. The transaction is subject to the satisfaction of customary closing conditions set forth in the agreement, including the expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 as amended. Our goal is to close the acquisition by the end of this year and we look forward to welcoming the employees of Genzyme Genetics to our LabCorp family upon completing the transaction. On June 16, LabCorp acquired certain assets of Westcliff Medical Laboratories, a clinical lab in California, pursuant to an asset purchase agreement and an order of the bankruptcy court administering the bankruptcy in Westcliff. The acquisition furthers our strategy to grow our footprint in the California market where we have historically been under-represented. LabCorp was notified by the Federal Trade Commission that it intended to review the acquisition and on June 24th, we entered into an agreement would be FTC to run the Westcliff business as an independent company separate from LabCorp while the FTC conducts its review of the transaction. The Westcliff business continues to loose money as a separate entity and accounted for the bulk of the margin contraction we experienced in the third quarter. We hope that the FTC will expeditiously conclude its review and allow us to integrate the businesses. At this time, we are unable to provide further information on the transaction. Second, expanding managed care relationships has long been a key growth strategy for LabCorp. As we have said in gaining access to the New York market to the United Healthcare contract, we are focused on growing our business in this important region. To that end, on August 1, 2010 we gained access to all of the Empire BlueCross BlueShield crucial markets and products as an in-network provider. Empire is New York’s largest insurer by medical membership. This expansion of the network provides broader choice for Empires members and physicians and reduces member cost associated with out-of-networks laboratories. We are working diligently to build relationships with Empire and their physicians and look forward to providing Empire members with greater choice and exceptional lab service. Third, we have consistently discussed our desire to expand the international footprints of our clinical trials central laboratory. After carefully reviewing many opportunities, we took a significant step in doing so by partnering with Clearstone Central Laboratories, a global central laboratories specializing in drug development and pharmaceutical services. The collaboration combines the complementary strengths of two leading central laboratories to support drug development and enhances our clinical trials and Central Lab offerings in key international geographies, including China, France, Singapore and Canada. Our collaboration is proceeding as anticipated and we remain pleased with the growth opportunities this relationship will provide. Fourth

[Steve Anderson:]

Thank you, Dave. Can you update us on the mix of your business coming from esoteric testing? In the third quarter, approximately 37% of our revenue was in the genomic, esoteric and anatomic pathology categories. We have previously stated that our goal over the next three to five years was to increase our esoteric test mix to approximately 40% of revenue. Once we receive regulatory clearance the acquisitions of Genzyme Genetics will achieve this goal .We will provide you with updated growth goals for our Esoterix business after we have closed the acquisition. Does acquiring Genzyme Genetics limit you ability to repurchase shares or act upon other acquisition opportunity? While we do not comment specifically on share repurchase, we have historically been a consistent purchaser of our shares. Also we believe that we can be active with acquisitions, obviously adjusted for the need for Genzyme Genetics funding. Thus we do not believe we are precluded from conducting our business as usual or prompt for ceiling our strategic goals. Can you remind us of how drugs of abuse trended during the year? In the quarter, our drugs of abuse volume increased 13.9% year-over-year. That compares to a year-over-year increase of 15.4% in Q2 of 2010, a year-over-year increase of 6.8% in Q1 of 2010, a year-over-year decrease of 6.5% in Q4 of 2009 and a year-over-year decrease of 15% Q3 of 2009. What gives the status of your transition payments to UnitedHealthcare? Our obligations to reimburse UnitedHealthcare for transition payments ended on December 31, 2009. We have received and paid the final invoices for these payments. The final amount was approximately $120 million. What impact was the proposed 2011 Medicare physician fee schedule rule have on your business. Assuming the Congress acts to prevent the reduction in the physician schedule, we would expect to receive a modest increase to our revenue tied to that schedule. As a reminder, approximately 2% of our revenue is tied to the physician fee schedule. Now I would like to turn the call back over to Dave.

[David King:]

Thank you Steve. In summary we are pleased with our performance this quarter and look forward to the opportunities ahead. Thank you very much for listening. We are now ready to take your questions.

[(Operator Instructions):]

Our first question will come from the line of Robert Willoughby, Bank of America/ Merrill Lynch.

[Robert Willoughby:]

Brad what was the obviously amount of deferred revenue that was recognize during the quarter?

[Brad Hayes:]

Bob we are breaking that out specifically but we combined it with the impact to the lost contracts to quantify that it had 2.5% impact on price. So in Dave’s comments the real way we think about price excluding those items was 3.2%. I will say there it affected multiple periods, the deferred revenue that is, it had associated cost with it and it is not material to earnings.

[Robert Willoughby:]

Okay. The can speak to, you mentioned the bulk of the margin degradation was Westcliff. Do you have an EPS estimate of the top your head what that was in the quarter.

[Brad Hayes:]

No, not specifically we have that all on top of our head but probably about $ 0.03 if we though about that.

[Robert Willoughby:]

Okay. Then would you give us estimate for tax rate for the fourth quarter, was that truly just one timer in the third quarter or is there some change to your annual view on the tax rate?

[Brad Hayes:]

We don’t guide on the tax rate for the year or the quarter but I would take this opportunity to say that since the adoptions of FIN 48 it is fairly normal for the third and fourth quarter to have reversals of uncertain tax positions as the statutes of limitation expire on those uncertain tax positions. I would say this somewhat greater impact in Q3 this year as past years but again I think its normal since the adoption of FIN 48 and we will expect to see that continuing to the future that phenomena of lower third and fourth quarter.

[Robert Willoughby:]

Okay. Then just may be Dave any thoughts on the Genzyme quarter? How they did operationally, I guess you didn’t give too much granularity on there data as there, something you can comment how well they did or how far they may have done?

[David King:]

Bob I have not seen anything in terms of financials and because of the antitrust review that’s currently ongoing we are not allowed to share specific details about operational performance. So my sense is that they came in pretty close to plan but I don’t have any specifics.

[Robert Willoughby:]

Okay. That is it. Thank you.

[David King:]

By the way Bob. I am sorry, I am just referring to the Genetics business I have no visibility at all in to the activities of Genzyme Corporation.

[Operator:]

Our next question comes from the line of Adam Feinstein from Barclays Capital

[Adam Feinstein:]

Just I guess may be few questions here. So volumes I did pick up here especially in the core business, still lower than normalized but certainly we’re seeing some improving trend. So I just wanted to better understand as you guys work at that if we back out the acquisitions, we’re still seeing that same improving trend? I know you don’t break the number out, we are just trying to better understand the trend there? Then secondly if you can just comment in terms of anatomic pathology, lot of noise in that space over the past year with the whole in-sourcing trend. Just curious in terms of whether you’re seeing that’s stabilize and just and just thoughts there and then a quick follow up.

[David King:]

Sure. It’s Dave, Adam. Your first question on volume, we did see volume growth, organic volume growth this quarter, which really is the first time this year that we’ve seen the organic business grow. Again, that is a change in the trend from the first two quarters. So, positive in the sense that we had organic volume growth. Yes, we had some help from acquisitions but both on the core side and the esoteric side, we saw the business grow. In terms of anatomic pathology, our histology volumes actually increased year-over-year in the third quarter. There was some help from acquisitions there but again, the organic trend in anatomic pathology improved. So to be clear on that, we lost a little volume organically but the trend has improved substantially from what we’re seeing through last year and the first two quarters of this year.

[Adam Feinstein:]

Okay. Then do you think the in-sourcing trend is dying down as you think about that and hear about that, I was just curious, I guess there’s a question out there that thought it was stabilizing. So, are you guys are seeing a similar thing?

[David King:]

I think the issue that one sees with in-sourcing is that, it makes the most sense for bigger practices. So, the bigger practices that were the leaders in this in-sourcing basically have I think completed the in-sourcing. The question that is still out there is, given the impact of healthcare reforms and everything else are smaller practices going to start consolidating and then try to in-source too and we don’t have a lot of ability to see that. Certainly it is the case that the in-sourcing trend has stabilized where we are now from where it was a year ago and even at the beginning of this year.

[Adam Feinstein:]

Okay Just to add another question for me here David, just I don’t need any comment on some specific contracts but just for the Empire business, maybe you can just comment in terms of what you see as an opportunity once if you can quantify revenue, can you just talk about the opportunity there and if you have any updates in terms of how things are going this far?

[David King:]

So it’s the largest plan by medical membership in the New York market and while we don’t qualify the revenue opportunity, my recollection is it’s something on the order of 1.5 and two million members who have a laboratory benefit in that plan. So the potential opportunity is pretty sizeable in terms of continuing to improve our position in New York, capture market share and have further opportunity for pull-through from the existing United Health Care business. In terms of progress to-date, I would say we are of to a somewhat slower start than we expected Adam and we continue to be focused on improving our performance in the New York market and certainly the senior leadership responsible for operations recognizes that we need to pickup our performance with Empire but we are making the physician office calls, we are starting to see traction and I think overall we are pleased with how that relationship is progressing.

[Adam Feinstein:]

In may be some of the radio ads that I have been hearing you will start to kick-in also?

[David King:]

Yes.

[Operator:]

The next question will come from the line Amanda Murphy, William Blair.

[Amanda Murphy:]

Good morning, just a question on the esoteric side. You are seeing strong growth there over calls. I guess I don’t even know how long it was, a year and half of that you were focusing only specialty docs primarily. I am curious, are you still seeing a benefit from that initiative or can you talk little about why you are seeing such strong growth there?

[David King:]

We did talk about I am sure about a year ago, but now it seems shorter but we did talk about our focus on specialty markets and I would say we are seeing very solid growth in endocrinology, we are seeing very solid growth in infectious disease and some of that obsessively is being assisted by the success of our Monogram integration and so in other specialties rheumatology, nephrology, with our chronic kidney disease program we are seeing very strong year-over-year growth particularly in volumes there. As I think we said before and as you see in the IMS data the biggest detractor is the OB/GYN market continues to be soft for everybody, but I think the reason you are seeing a good esoteric growth and as we mentioned a return organic volume growth is, we are focused on the specialty physicians, we are focused on the specialty markets, we are focused on the comprehensive LabCorp offering, which we enhanced last year with Monogram and obviously we feel we’ve strongly enhanced once we receive regulatory approval and when we are able to close the Genzyme Genetics transaction. That Genzyme Genetics transaction really opens up a whole new area of opportunity for us, which is the large hospitals and academic medical centers that are sending reference work to Genzyme Genetics that historically have been very difficult for LabCorp to reach.

[Amanda Murphy:]

Then in terms of going forward what do you think you still have more opportunity on the specialty doctor side ex-Genzyme?

[David King:]

Absolutely.

[Amanda Murphy:]

Okay. Then what strategizing topics, what’s your latest thinking or do you have any perspective on the FDA and do you have any insight into what that regulatory structure might look alike or even the timing of when they might roll something out?

[David King:]

The FDA as you know held very comprehensive two day public meeting back in June in which it solicited comments from a broad range of stakeholders about regulation of laboratory developed testing. It’s my understanding that the FDA continues to review the input they have received at that session and also continues to evaluate what the right regulatory approach would be for lab developed testing. We have worked extensively through the American Clinical Laboratories Association or trade association to, which by the way the collaboration of I believe 13 other or 14 other affiliated industry groups including the College of American Pathologists, the hospital lab trade association, a lot of a good thinking has gone on in the industry about trying to help FDA find the right course. So at this point I think its private sure to try to hypothesize what FDA might do, but I do you think there they are taking a measured approach which we appreciate. We are trying to contribute in a constructive way to the dialog to lead to an outcome that will be positive from their perspective as well as from the industry prospective.

[Operator:]

Your next question will come from the line of Kevin Ellich, RBC Capital Markets Corporation.

[Kevin Ellich:]

Good morning guys. Steve gave the information on drugs-of-abuse testing growth, I was wondering if you could provide the actual impact on total growth?

[Brad Hayes:]

Yes. Kevin this is Brad. I am just looking through less then 50 basis points.

[Kevin Ellich:]

Less then 50 basis points, okay.

[Brad Hayes:]

Yes

[Kevin Ellich:]

That’s on the total volume Brad?

[Brad Hayes:]

I was doing that on revenue.

[Kevin Ellich:]

Okay, on revenue. What about on the total volume growth?

[Brad Hayes:]

It provided about 60 basis points.

[Kevin Ellich:]

Okay thank you. Then just going back to the 2.5% impact that came from the lost contract and the deferred revenue, how much of an impacted did, is that the lost government contract?

[Brad Hayes:]

Yes, that’s right.

[Kevin Ellich:]

Has that annualized yet? I mean is there still one contract that you guys still have in the last year?

[David King:]

Correct Kevin, its Dave. There is one contact that we spoke about last year that will fully annualize. It went of in various tiers and so it will fully annualize in December.

[Kevin Ellich:]

How much of an impact will that have on the price this quarter?

[Brad Hayes:]

Well, the two items combined were 2.5%.

[Kevin Ellich:]

Okay.

[David King:]

A favorable impact to price.

[Kevin Ellich:]

Understood, Dave I was wondering if you could may be just provide us an update on the IL-28B Test?

[David King:]

Sure. A couple of things. First of fall the clinical volume IL-28B has grown pretty significantly since we launched it in September, so that’s the positive. It’s a not huge and at this point, it’s certainly not anything that would be material to revenue but we are seeing a very substantial growth in the number of clinicians who are ordering IL-28B. Second, in the clinical trials business there are a large number of newly initiated or ongoing trials, relating to hepatitis C drugs and drug treatment in which IL-28B will be a key component. So we’ve seen a pick up in interest on the clinical trials business in that Monogram for the use of IL-28B to evaluate the new direct acting HCV anti virus. So, pleased with the progress and we expected it to continue to grow.

[Kevin Ellich:]

Understood. Then just going back to the Genzyme Genetics deal, can you guys provide any detail or may be any information on the assumptions with financing costs and amortization?

[Brad Hayes:]

Well, Kevin, this is Brad. I’ll go back to what we said when we announced the deal on the financing costs. We said at that time, we intended to permanently finance about two-thirds of the transaction price and fund through cash or our revolving line of credit, the other one third. I think it’s too early to provide any details on what we assume around the amortization because we have to close the transaction and then also complete some work to finalize that number.

[Kevin Ellich:]

Understood. Then the two thirds of the cost, would that be on at 795 net numbers?

[Brad Hayes:]

No, it will be on the gross. We have to come up with funds 925. So, that would be on the gross.

[Kevin Ellich:]

Got you. Okay. Then lastly, just wondering if you could talk a little bit more about the Clearstone joint venture and I don’t think you guys breakout your clinical trials revenue yet, but wondering where it is and what’s the goal or target is, where do you expect that to go overtime?

[David King:]

Sure. We don’t break at our clinical trials revenue but it’s not something we are ashamed of. It’s about $120 million of revenue and for a reference, in about 2005, that business was a $40 million business. So, in the space of less than five years, it’s triple from a revenue perspective. Also, I would point out that, last year was a very tough year. So we actually went backward a little bit. This year we’re getting back to where we were really in the 2008 time. So its been an excellent source of growth for us its also been an excellent source of innovation and it positioned us in terms of out ability to license and capitalize on assays like IL-28D because the pharmaceutical sponsors recognize our superior esoteric capabilities and all the other advantages we have, including our infrastructure and the service centers that can help them with patient collections. So the business had been a very good business. What it has lacked and what we have talked about probably for at least the last year if not more is, we have lacked a central lab network that went beyond the United States. Our central lab in Belgium and some affiliates, some loose affiliations that with labs in other countries and the reality is that, the naive patients, and when I say that, its patients who are not being treated and therefore the patients that are most desirable for trial sponsors. The naïve patients largely these days are in the developing markets, so that’s India, its China Singapore, and Malaysia. Our central lab capabilities in those areas has been a detriment, particularly in China because under Chinese regulations no one is allowed to move blood out of the country to do testing elsewhere. So what Clearstone offers us is a collaboration that makes our services and also our esoteric testing capabilities available in places that we previously have not had those capabilities. So I think it will be a significant opportunity to grow the clinical trials business going forward.

[Operator:]

The next question will come for the line of Gary Lieberman, Wells Fargo Securities.

[Gary Lieberman:]

Brad in your comments looks like your genomic price per session had some nice increase in the quarter and I was wondering what that was attributed to?.

[Brad Hayes:]

Gary, this is Brad. That’s where some of the deferred revenue impact hit. So there would be very little volume related to that and mostly priced. So we have that impact there.

[Gary Lieberman:]

Okay. It shows that were all the deferred revenue was booked or just a portion of it?

[Brad Hayes:]

I think the majority of it was there.

[Gary Lieberman:]

Okay. Then you mentioned that there was some cost associated with the deferred revenue. Could you comment on that little further?

[Brad Hayes:]

Only just, by its very nature there is deferred revenue and the deferred cost associated with it. I am not going to quantify it but it was represents the cost of performing those tests.

[Gary Lieberman:]

Okay. Then I guess the other comment you made on the deferred revenue was, that it was immaterial so would that be safe to assume less than $0.05 cents to earnings would be in that range?

[Brad Hayes:]

Correct, immaterial.

[Operator:]

The next question will come from the line of Bill Quirk, Piper Jaffray

[Bill Quirk:]

Just a quick question on the OB/GYN comment, you mentioned obviously that visits remain challenging. Can you quantitatively talk about LabCorp’s performance here? How is the business tracking relative to the market trends?

[David King:]

I think what I see Bill in the IMS data on physician office visits, which again we should remember is not intended to be a month-by-month but rather sort of a quarterly view is that the physician office visits particularly in the OB/GYN market continue to trend down year-over-year although by less in September then they had in July and August. How are trends? The OB/GYN market continue to be better than the IMS data so if the IMS data is down by X, we are down by less than X, but we are still down and I would say the biggest thing we noticed on a year-over-year basis is a decline in PAP testing and my hypothesis and I will tell you its only a hypothesis, it’s very hard to prove out but my hypothesis is you were seeing a lot of people, a lot of women who are differing a PAP for a year, whether its because on financial considerations, whether its because the PAP itself isn’t very expensive but it’s also involves a physician office visit, which can be expensive. I don’t know the answer to that but that’s where we see the biggest impact in overall volume in the OB/GYN market.

[William Quirk:]

Understood and then understanding that we are still pretty early into 4Q Dave, the slight improvement in terms of trends, which is to say kind of less than negative year-over-year comparison. Are we continuing to see that into the early stages 4Q?

[David King:]

I don’t think we’re going to say anything about 4Q until we announce the quarter Bill.

[William Quirk:]

Understood and then second question for me or second topic rather, it’s just a thinking about the Polmedo changes, the proposed changes rather that are coming up here in December. I would imagine that this isn’t going to be terribly disruptive for you guys? Can you talk a little bit about some of logistic changes that you are looking at if there is any concern around reimbursement on some of the new pipeline esoteric tests?

[David King:]

What I think the focus at Polmedo and the medical director there are trying to accomplish and we’ve had many discussions with them through [PCLA] is they are trying to get greater transparency in what they are paying for. So right now they get set of CPT codes and particularly with genetic testing that sort of CPT codes could be any number of a wide variety of tests. So the concern is that whether it’s by design or otherwise, the coding is not consistent among providers for the tests and so that adds further opaqueness to what are they actually paying for. We have always been supportive of greater transparency in CPT coding and in people knowing and payers knowing what they’re paying for, that’s absolutely appropriate and I think the concern that we’d express to Polmedo is make sure that when you implement guidelines such as these, you don’t run in to the law of unintended consequences as CMS did a couple of years ago with their medically, whatever they were called, the medically unbelievable and its where there were some significant potential consequences to provide they had not foreseen. I know that recently the Monogram business people met with clinicians, met with medical director of Polmedo. They provided a very detailed data package on why Polmedo should reimburse appropriately for the trofile testing. Polmedo was very pleased with the package that we provided and I think what it says is, if you provide the appropriate date and you provide transparency, which is what we try to do, its not a big issue. So I think again I think we will be fine with this. I think the initiative for greater transparency in coding is something that we at LabCorp welcome. So I think the key is to make sure that in doing these things there are not unintended consequences that are not foreseen at the time when the rules are implemented.

[Operator:]

The next question will come from the line of Ralph Giacobbe, Crédit Suisse.

[Ralph Giacobbe:]

Thanks, good morning. May be I just wondered again, why you don’t break out the acquisitions just considering if there is number of deals that you sort of done over the last year and some of little bit larger and then perhaps what sort of the organic growth number that you have there. Dave may be remind us again why you don’t like to break that out?

[David King:]

The reason we don’t like to break it out is because part of our growth strategy is to acquire and fold-in other businesses. We grow the business organically and we grow the business by acquisitions. So to us, there is no difference in terms of how we achieve that growth. So I think, clearly when you do a sizeable acquisition along the line of a Genzyme Genetics its perfectly reasonable for people who want to know how that business is performing, but when you do a fold-in acquisition, my view is that’s just part of our business and it doesn’t merit separate consideration.

[Ralph Giacobbe:]

Okay. Then just, Westcliff, Diamond, Monogram, are there other deals over the last year that we should kind of be aware of that were done, that are helping the numbers?

[David King:]

I don’t think Diamond materially helps the number. Westcliff is in platform, Monogram is annualized. So I don’t think you’re seeing much impact from that in the number, it is annualized in August. The only other one, that’s been written about that is making some contribution is, is DCL up in Indiana?

[Ralph Giacobbe:]

Okay. All right, perfect. Then, give us a little bit more sense of the margin pressure and many be how quickly you can get that sort of backup as you move through some of the recent acquisition. I know you said, it was a 50 bip impact on margin. Even if you had that back margin profile, it seems like it was kind a flat year-over-year, despite the fairly healthy top line. So, just your sense as about the margin pressure and how we should think about that as we think about 4Q and your guidance.

[David King:]

Yes. The real drag is Westcliff. As I mentioned in my opening comments, give that the FTC has asked us to hold the business separate. That business was losing money before we acquired it and given that we have to hold in separate and its being run by a separate manager with a separate FTC monitor, we can't do anything to improve the profile. So its losing money, which obviously is not helping only either the expense side or the margin side. So that where a real drag is coming from. We are hopeful that the FTC will give us clearance to close the transaction and at that point the cost reductions, they are not all they want obviously but reductions of some of the inefficiencies occur pretty quickly and we get back to the company margin profile fairly rapidly.

[Ralph Giacobbe:]

Is there a time frame on for all that Dave in terms of when the FTC is going to deliberate or is there just no real time frame?

[David King:]

I wish I could give you a time frame but its really in the hands of the FTC and they are the ones who will tell us when they have completed their review.

[Ralph Giacobbe:]

Okay. Fair enough. Then just my last one, just maybe a little bit on the managed care environment and sort of kind of got brought up last quarter and, sort of things have tied down a little bit, maybe just remind us kind of if any large contracts are coming up for renewal, how you feel about pricing in terms of the managed care environment?

[David King:]

We don't have any national contracts up for renewal. As we mentioned, there is some regional contracts. There are a couple regional contracts that are up for renewal and we are working on those. The environment continues to be, the manage care companies are very anxious to move, work to the low cost provider and we are the lowest cost provider and they would always like the pricing to go down, but I think the pricing environment continues to be quite stable.

[Operator:]

The next question will come from the line of Steven Valiquette, UBS.

[Steven Valiquette:]

Good morning. Couple of questions here, first on the revised full year guidance. I just want to clarify and make sure that the number for the first nine months of the year, we should be using 423 within that. So the acquired range for 4Q should be above 29 or about 34. Is that correct?

[Brad Hayes:]

That’s right.

[Steven Valiquette:]

Okay. Then the Westcliff, I was going to ask one or two. You just kind of answered that but just to be clear there, when you look at FTC clearance, understanding your press release that we are though can you reminds us whether there will be some additional benefit 4Q and not from your ability to integrate that?

[Brad Hayes:]

We haven’t made a decision about whether we would do a press release or not. So I can’t project that right now.

[Steven Valiquette:]

Okay. So for 4Q, right now you are assuming in the guidance right now those are not really much improvement in 4Q from 3Q there what’s currently baked there. Was that sort of the biggest delta in the range to five to seven range for the fourth quarter?

[David King:]

No. We are assuming the Westcliff remains a standalone business through the fourth quarter in the guidance that we have given.

[Operator:]

The next question will come from the line of Darren Lehrich, Deutsche Bank.

[Darren Lehrich:]

Good morning everybody. I just wanted to ask a question about the out of period revenue and related to the contract amendments, I think you referenced in the press release. What was the nature of the amendment, can you just help us to understand what exactly you’ve done and how common that type of amendment is?

[David King:]

It’s very unique for us it was a contract that came with the monogram acquisition. I would say in our history, it’s the first time we’ve ever had anything like that, and so it’s a very unique item for us as opposed to something that you would expect to see on a normal basis.

[Darren Lehrich:]

Okay. So is it fair to say that, that was the bulk of the 250 basis points you’ve spiked out in terms of the pricing difference?

[David King:]

Was it the bulk of the 250 basis points of the pricing difference, I would say no. It was not.

[Darren Lehrich:]

Okay. May be its more split evenly and it is that I guess I am trying to understand that.

[Brad Hayes:]

What we’ve said is that the two items account for 2.5 points of the price and that’s all we are going to say.

[Darren Lehrich:]

Okay fair enough. My other question here is just on the tax rate. We know obviously that you had some bigger adjustments in recent years in Q4, we haven’t typically seen them in Q3 so I’d be curious just to hear from you was this sort of within the normal band of what would you expect to your tax rate to be or did the Q3 tax rate turn out to be a bit better, just so we can put that a little bit more in a perspective?

[Brad Hayes:]

Sure. When I look back at some of the history that you mentioned, one was related to a tax treaty an international tax treaty that was one large item in the fourth quarter in a past period. The other was a resolution of a state audit that had large number related to it. I would say this is normal part of our expectation. Its somewhat lower that is the tax rate than I would expect on a normal Q3 basis but one thing I’d like to point out about both items that you’ve mentioned, the deferred revenue as well as the tax rate is, that we raised the mid point of the guidance for the full year by $0.07. So basically leaving the fourth quarter unchanged.

[Darren Lehrich:]

Sure, now I certainly recognize that. I wanted to just and that’s helpful. I wanted to also just go back to the histology question, because we can see pretty clearly in your disclosures that the growth in Q3, I mean this swing is very notable, it was significantly negative in the last several quarters and it has turned positive. So Dave maybe can you just come to that point and help us understand the swing in the growth rate and what exactly you guys experience there?.

[David King:]

Yes, there is a couple of things, the acquisitions, particularly DCL, which is a women’s health focused business did bring us volume in histology year-over-year that helped that number. So that’s the first item. The second item, on a sequential basis the trend in our base anatomic pathology business particularly the DIANON business is better. Now that doesn’t mean that volume is improving in that business compared to where it was, because we’re still seeing the fall off that was discussed early in the in-sourcing but its improving on a relative basis and it has improved since the first quarter. Its about 300 basis points better in the third quarter than it was in the first quarter in terms of the relative decline. So those two factors are why histology has turned positive, a better organic trend and help from the acquisitions particularly DCL.

[Darren Lehrich:]

That’s really helpful. My last question here, we heard from Quest yesterday, clearly a more cautious outlook just about how year-end is going to ramp up for them in Q4. You’ve guided more or less inline to the street EPS numbers. I know you don’t comment on the quarters but can you just may be put in the context, your overall outlook about the environment? Is there anything that you’ve seen that’s changed here in the second half?

[Brad Hayes:]

Our outlook on the environment is that it is not getting better but its not getting worst and so our guidance for the rest of the year is unchanged. Our guidance for the fourth quarter, we don’t give guidance by the quarter but look at the end of the third quarter and there is full year guidance and there is one quarter left. So we can kind of figure out what the fourth quarter expectation is. So our guidance for what we think we’re going to do in the fourth quarter is unchanged, because we think fundamentally the environment is unchanged. That’s why we are where we are.

[Operator:]

Your next question will come from the line of Gary Taylor, Citigroup.

[Gary Taylor:]

A couple of questions. I wanted to go back to gross margins. Just for a moment, I know you talked about drag from the couple of the acquisitions there, but even adding back some of the drag, it looks like gross margins still down year-over-year versus the first half of the year. You are up about 30 basis points in terms of gross margin. So, can you talk about kind of the impact on the quarter of gross margin when pricing/mix was very-very good and what kind of your outlook going forward is on gross margin?

[Brad Hayes:]

Yes. If you back up the impact of the acquisitions particularly Westcliff, gross margin was flat year-over-year. So, was a little bit disappointing. I would point out that one of the things that is having an impact there is that, trends particularly including healthcare costs have continued to increase. So that’s a headwind in terms of gross margin, but, offsetting that, and why we’re able to improve gross margin, the first half of the year and keeping net of the acquisitions flat this quarter is to continue progress on our 2010 initiatives and our efficiency initiatives and we expect those to continue to have a positive impact on gross margin overtime.

[Gary Taylor:]

So, going forward as we look into next year, any material change in terms of where your think the trend is , holding pretty steady, material opportunity to improve or..?

[Brad Hayes:]

Well. Obviously we don't guide the gross margins. So what I would say is the first, you always have as you turn the year, you have the impact of salary increases, which we factor in and what ever fringe costs are. That’s always is a negative to when you start the year to being able to achieve gross margin improvement. So, if we are going to see gross margin improvement, which we continue to strive for, we think we have done a very good job of accomplishing, its going to be because the efficiency initiatives offset the impact of those and other factors, I mean rental increases and things that are just part of our business. So, you are not going to see huge jumps in gross margin. You are going to see incremental gains, 10, 20 basis points, and I think that’s the way we should think about it. So we certainly should think about overtime, there is the opportunity to continue to improve our gross margin.

[Gary Lieberman:]

Thanks. Second question just going back to, that implied fourth quarter earnings guidance with just being a tough period basically but that, $1.29 to $1.34 that remains to achieve your annual guidance. I understand it’s possible you could have another quarter where tax rates benefits from some issues that could be lower than we have seen in the first part of the year. The question is does the remaining guidance contemplate a materially lower tax rate like we saw this quarter or would the tax rates simply be a variable in that $0.05 range that’s remaining.

[Brad Hayes:]

Gary, this is Brad. I think it can be a variable. Not certainly, I don’t expect that number that we saw this quarter but certainly a variable in that range like every other assumption.

[Gary Lieberman:]

Okay, great. Last question. When we look at the Genzyme deal, it looks like that financing costs alone could be, if you get to the $0.25 to $0.35 GAAP dilutions just with financing costs alone, which really implies the zero operating income contribution in year one. So I guess, the two questions we have seen the disclosure of Genzyme diagnostics on its own either as a money loser, fully loaded with R&D and overhead cost. So, I guess one there was an expectation that because of your scale, we'd see better margin on where that’s run historically. Then the second question is, what would you be amortizing, will that be significantly higher than your own amortization, which runs about 1.5% of revenue?

[Brad Hayes:]

So, I think on the amortization question, until we finish the closing and the accounting, we're not really in the position to talk about that. So I think on the overall running of the business, I would obviously it is our goal, and its a goal of the managements group of Genzyme genetics which is a terrific group. It’s the goal to improve that the operating profile on the business but this is a complex transaction involving complex businesses that do very complex testing. There are three lines of business within Genzyme Genetics; the genetics business, the hematology-oncology business and the clinical trials business. We are not going to rush through on the integration process to improve the margin profile at the expense of loosing the revenue and the value of the brand that we’re paying for. So, this is a very important strategic acquisition. On both sides we're committed to improving the operational performance from a financial perspective but we’re going to do it in the deliberate way, we are just not going to jeopardized rationale for why we’re acquiring the business.

[Gary Taylor:]

Okay. Good that make sense. As you swing in to 2012, with the expectation for GAAP accretion, what’s the number one swing factor there, is it just a testing growth, revenue growth?

[Brad Hayes:]

Well, its partly revenue growth and is partly expense reduction. I mean that’s where you get to. First of all we’re going to focus on the non-employee related expense reductions, which are specimen collections, logistics, transportation, use of our patient service centers, couriers, better usage of genetic [council]. So all of the opportunities where we can reduce expense, supply costs and supply chain, where we can reduce expense that does not have a direct impact on personnel. Then we sit down with management and we’ll look at, I mean there are many overlapping facilities, we may be able to quite comfortably accommodate the testing and the people who do the testing at Genzyme in facilities that we already have safe substantial rental expenses. So that the big improvements in 2012 are both top line revenue growth and improvement in the cost structure.

[Operator:]

Your next question will comes from the line of Ricky Goldwasser, Morgan Stanley

[Ricky Goldwasser:]

Couple of follow up questions, first of all on the tax rate what was the effective tax rate in the third quarter?

[Brad Hayes:]

33.9%.

[Ricky Goldwasser:]

Okay. What was the impact under tax rate on the new guidance range?

[Brad Hayes:]

As I said earlier and I’ll relate this to two issues the tax rate in the third quarter any differed revenue were part of the third quarter and we raised our full year guidance by $0.07 in the middle.

[Ricky Goldwasser:]

Okay. So you benefit from the effective tax rate is included in that?

[Brad Hayes:]

Yes, that’s in the year to date number absolutely.

[Ricky Goldwasser:]

Okay. Then the revenue guidance implies this sequential decline in revenue of about 4.4% from 3Q to 4Q, which is actually a lot better than what we’ve seen historically between third quarter and fourth quarter. So I mean obviously there is some positive trends implied in the fourth quarter. I guess my question here is what would be that delta between September and December quarter if you exclude the benefit of the deferred revenue from third quarter numbers?

[Brad Hayes:]

We haven’t done that specific calculation. As you pointed out the forth quarter is typically much lower than the third sequentially. We haven’t done the exact calculation that you’re asking for but I think as Dave alluded too earlier, we don’t see any material deterioration or change in the business between the third and fourth quarter except for adjusting for the holiday volumes.

[Ricky Goldwasser:]

Okay, because again the implied number seems just [eroded] yes there is obviously the seasonality but its actually to some degree less than what we’ve seen historically. Is that a some degree improvement that you are seeing in histology that you’re assuming is going to be sustainable in to fourth quarter?

[Brad Hayes:]

I think it would be difficult to try to breakout all the puts and takes in the fourth quarter we just have continued impact to the acquisitions. We have the full annualization of the lost contract. So I think there is a lot of moving pieces and our guidance is intended to encompass the full potential range of moving parts and outcomes and I just think its very tough to start breaking it down in to the detail of what up and what’s down.

[Ricky Goldwasser:]

Okay. Is the lost contract completely phased out that in the fourth quarter from a comp perspective?

[David King:]

At the end of the fourth quarter they will be but there is still some impact in the first couple of months in the fourth quarter.

[Operator:]

The next question will come from the line of Kemp Dolliver, Avondale Partners

[Kemp Dolliver:]

Thank you. First question relates to your progress with Monogram. Since that was going to be a big swing factor this year in terms of driving earnings growth particularly in the second half. How are you doing with Monogram in terms of test uptake and then also on the expense structure?

[Brad Hayes:]

Monogram, the integration is complete. We annualized the acquisition. The business achieved our growth expectations and continue to achieve our growth expectations and in fact, in the third quarter was accretive to EPS which we had said it would be. Probably a thing, I’m most pleased about here, Kemp, is we’ve introduced the [Geneassure] powered by Monogram for HIV resistance testing, which gives physician a very favorable price point and a very large data base to do their genotyping for HIV resistance. We’ve introduced profile DNA which is a new Tropism Assay. We’ve seen increasing interest in assays used to evaluate the HCV antivirals including HCV genotype. HCV phenotype also HCV genotypic and phenotypic resistance tests. I mentioned earlier the IL-28B. We got Monogram fully integrated into the LabCorp logistic network. So that’s providing us with significant cost savings. The Monogram scientist had a very strong year in terms of thought leadership. So they have had over 60 peer reviewed publications in both the oncology infectious disease market in the first nine months of this year. So, I’m very pleased with where Monogram is, I think its been exactly what we said it would be which is, it was diluted in year one, its slightly accretive, going into year two and it continues to be a leader for LabCorp in science and in innovations, in the infectious disease market which we think has a tremendous amount of potential.

[Kemp Dolliver:]

Great. Thank You. The second question is just to clarify, and that is the subject of organic volume growth. Can you give us a little more clarification with regard to how much volumes are up organically. I'm assuming its probably less than 1%, but just want to be clear given the uptake in acquisitions, what’s really driving the trends here.

[Brad Hayes:]

I think for the reasons that we have said, we are not going to break out what we consider to be organic verses acquisition driven volume growth. Volume was up, adjusted for the lost contracts by 3.3% that includes some acquisition impact and some organic growth impact and we are very pleased with that.

[Operator:]

Your next question will come from the line of Anthony Vendetti, Maxim Group

[Anthony Vendetti:]

Okay. Thank you. I just have just one follow up, I'm kind of trying to put together the pieces a little bit of the revenue growth. So, some of that obviously is from the deferred revenue, some of which from price increasing and then there is a little bit from volume increasing which is a combination of organic and inorganic. Is that about correct?

[Brad Hayes:]

Yes.

[Anthony Vendetti:]

Okay. Then, in terms of the Esoteric and genomic, sometimes you provide the breakout and then Vitamin D obviously in specific. Anything this quarter specifically that was helping the Esoteric and genomic group?

[Brad Hayes:]

The deferred revenue on the price side, and as you mentioned, Vitamin D the acquisitions again back to Dave’s comments on histology obsessively helped and also on improving trend organically. So I would say those were the big items.

[Anthony Vendetti:]

All right. So, you said this was the first quarter this year we actually, actually saw organic volume growth, correct?

[Brad Hayes:]

In total or in genomic or in a histology.

[Anthony Vendetti:]

In total.

[David King:]

In total. Yes, that is correct. One thing I would like to clarify on that point too because it came up earlier when we are valuating that, we also back out the drugs of abused. So, we know that drug of abused is growing year-over-year, but, when we think about our organic volume, we also take that into account. So we can see what the core business is doing.

[Anthony Vendetti:]

Okay. Great.

[David King:]

Yes. First time, we have seen growth this year.

[Anthony Vendetti:]

Okay. Good. Then lastly on the Genzyme Genetics, if that were to close, let’s say tomorrow not likely but if were to close tomorrow versus closing by January 1st, do you have a range of what you think the one-time charges would be associated with that?

[David King:]

No, we don’t. If it were to close tomorrow, I think we would obviously announce that and we would provide an update to the balance of the year guidance based on the early closing. Right now the balance of the year guidance assumes that Genzyme Genetics does not close this year.

[Anthony Vendetti:]

Does not close this year. Okay, and just lastly on physician utilization was commented on Quest call yesterday that, expected to remain stable. Is that sort of inline with where you are seeing physician utilization. Its been down but you don’t expected it to get worst or better by the end of the year?

[David King:]

You mean office visits.

[Anthony Vendetti:]

Office visits, yes.

[David King:]

I mean I think the trend continues to be year-over-year declines but again less decline in for example in the month of September that IMS reported in the months of July and August, I think we expect to see the trend remain about what it is, I don’t expect that to improve, I don’t expect to get noticeably worse.

[Operator:]

Your next question will come from the line of [Mirac Stobiski – Fares Private Bank]

[Unidentified Analyst:]

Great, so well first more over comment I guess there was frustrated by the several quarter and you guys report to us sort of the most frustrating part of really liking that more of as a company and as an investments is really that few hours report the fourth quarter results after request and as always seems no matter how can consisting better a year operating results are that’s sometimes as if you operating different businesses few years back but it doesn’t recognize the superiority and so sort of the damage reflected by Quest results and is already done. So I guess the then we comment here is perhaps some best thing you can do for benefit of all of us owners now would be to consider may be to move a year release dates to always before question, so that’s kind of point one and the actual question and secondly that related to what I just said its , in terms of ,your view about the industry and trends that you see, I mean you have said in some very positive things in terms that you just reiterated just now that there you may seen growth for the first time, this year and in fact you said that you’re seeing some very strong growth in medical specialties and you can’t trust that yesterday and you know there seem continued softness there. I am just wondering if you could maybe highlight some light and what do you think the major differences are , why they say, what they say and what you’d say?

[David King:]

Sure., First of all with regards to the timings of earnings we will take that understand the timings of earnings are largely indicative by closing the quarter, the timings of our announcements are largely indicative by closing the quarter and recognizing a comment at the same time. We think that our results stand up well on there merit and that’s what we want our honors to evaluate us by. With regards to the commentary as I don’t make it a habit of listening to our comparators call, I don’t know what comments they gave but the commentary I can give you is, we started to see the impact on, the economic impact volumes as early and we started to make reference to it, as early I believe is the second quarter of 2008 when we did that when others were expressing the view that they were not seeing that impact. We did that, we undertook strategic initiative to redirect our sales force and to redirect our sales efforts to areas where we felt there was the greatest opportunity to continue to grow the business in spite of the economic challenge and so we put a lot of sales resources in to infective deceases, we put a lot of sales resources in to endocrinology, we put lot of resources in to particularly the up deferred market for pre-natal and pre-conception genetic testing. So I think our results since we undertook those initiatives speak for themselves, which is that they have been positive not only by comparison to the industry, but generally in terms of just the profile of our business and the continued growth of the esoteric testing line. We also have said that the acquisitions are part of our growth strategy and we continue to make strategic and in our view very sensible acquisitions and then deliver what we say we do which is we said monogram be accretive of post the annualization and monogram is accretive post the animalization and its driving top line revenue growth because of the pricing and because of the unique to sort of test offering. So, we’re going to continue with the strategy that is been successful for us and of course always going to continued to refine that strategy to improve it as we take account of what’s going on in the market place and the long-term opportunity in the business when we receive regulatory clearance and close Genzyme Genetics and have a new window into a large hospital systems, academic medical centers, more pre-natal and pre-conceptions genetic testing, more hematology, oncology business in an area that is not subjected in-sourcing, which is a very sophisticated treatment of a blood and bone cancers. We feel great about the way the future looks for us.

[Unidentified Analyst:]

Yes. I mean absolutely, I agree and I think it’s all that and everything that you’re doing all the acquisitions that you’re doing the path that you’re taking forward. This is all fantastic. I mean, this is exactly what as an owner this is exactly what I want to see out of the management team leading this company and really building enduring shareholder value. That’s exactly what you’re doing and that’s exactly where we want the stock and my first comment is there was just basically remaining to a frustration because it seems like this happens every quarter. Lots goes out there and provide these numbers but I just came on like the gang I can shoot straight. So that’s just implants these ideas in investors mind and then its some of no matter what you do or say, the damages has already done and but when you read everything on paper I mean that does, the priority of your results and what you’re doing and just head and shoulders above what they are doing. I just feel that’s really and missed by the market simply because of what’s the timing of the news that’s came forwards.

[Operator:]

We have a question from the line of Bill Bonello, RBC.

[Bill Bonello -RBC:]

Hey, guys. Thanks for being willing to take my call. Just a follow-up on something you said earlier. I am just curious if you can say, Dave because you specifically pointed out weakness in PAP volume if you could say whether you saw similar trends in HPV and Chlamydia and gonorrhea there as well.

[Brad Hayes:]

Different trends I would say because some of those come out of the wire but some are orders separately, so I would say the overall trend is not anywhere near as noticeable there as it is in the straight PAP claims.

[Bill Bonello -RBC:]

Okay, and just when you talked about improvement and volumes during the quarter I wasn’t sure if that was specific to sort of path in women territory if that was overall you were talking about volume improvement?

[Brad Hayes:]

Overall

[Bill Bonello:]

Okay. Carried away and whether it improved for PAP as well.

[David King:]

No

[Bill Bonello:]

Okay. Then I know you are going to say no but I am going to ask anyway since you are as bold as giving inter quarter volumes trends, which I never heard you do before any desired way and what October is look like?

[David King:]

I don’t think we gave inter quarter volumes trends. I think we said, we wouldn’t and we are not going to in October.

[Bill Bonello:]

Okay. I thought you said that September was better than July and August, they must have made that up.

[David King:]

I am sorry in terms of decline in position office visits year-over-year based on the IMS data its not based on our volumes.

[Bill Bonello:]

So not based on your own volume. Okay that’s great and that I am disappointed that you wont give guidance on how the new share impacts your P&L?.

[David King:]

Bill as you know our guidance is intended to in encompass a wide range of outcomes but we guided a high level.

[Operator:]

No more questions at this time I’d like to turn the call back David King for closing remarks.

[David King:]

Thank you all for listening to our earnings call. We very much appreciate the time you spent with us this morning and hope you have a great day.

[Operator:]

Ladies and gentlemen, this concludes today’s presentation and again thank you for your participation. You may now disconnect. Have a great day.