Labcorp Holdings - Earnings Call - Q1 2011

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Laboratory Corporation of America Earnings Conference Call. My name is Jeff, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. If at any time you require operator assistance, please press star followed by zero, and we will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. David King, Chairman and Chief Executive Officer of Labcorp. Please proceed, Mr. King.

David King (Labcorp)

Thank you, Jeff. Good morning and welcome to Labcorp's First Quarter 2011 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 Andersen, Vice President, Investor Relations. This morning, we will discuss our First Quarter 2011 financial results, highlight our progress on our five-pillar strategy, and provide answers to several frequently asked questions. I'd now like to turn the call over to Steve Andersen, who has a few comments before we begin.

Steve Andersen (VP of Investor Relations)

Before we get started, I would like to point out that there will be a replay of this conference call available via 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 the 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. These non-GAAP measures include adjusted EPS excluding amortization, free cash flow, and adjusted operating income. I would also like to point out that we are making forward-looking statements during this conference call. These forward-looking statements include, among others, statements about our expected financial results.

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 2010, 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 (EVP and CFO)

Thank you, Steve. By now, you should have had a chance to review our First Quarter financial results. On today's call, I'll discuss four key measures of our financial performance: cash flow, revenue growth, margin, and liquidity. First, cash flow. Our cash flow remains strong. Free cash flow for the trailing 12 months ending March 31, 2011, was $735.9 million, which was reduced by approximately $20 million due to delays in the Genzyme Genetics enrollment process. We expect that these delays will be resolved in due course and are reiterating our 2011 operating cash flow guidance of $900 million. We remain pleased with our cash collections. DSO increased one day year over year to 47 days at the end of March and increased sequentially by two days. Excluding the impact from Genzyme Genetics, DSO improved two days year over year to 44 days at the end of March and increased sequentially by one day.

Our bad debt remains stable at 4.7%. Second, revenue growth. Revenue increased 14.6% year over year in the first quarter. Genzyme Genetics accounted for approximately 8% of this growth. During the quarter, we achieved strong growth in revenue per requisition, which increased 8.2% year over year. The growth in revenue per requisition is attributable to acquisitions, rate increases, test mix shift, and increases in test per requisition. Genzyme Genetics accounted for approximately 6.5% of the growth in revenue per requisition. Total company volume increased 5.9% year over year during the first quarter. Genzyme Genetics accounted for approximately 1% of this volume growth. Esoteric volume increased approximately 11% in the quarter. Third, margin. For the first quarter, our adjusted operating income margin was 19.3% compared to 20.4% in the first quarter of 2010. Recent acquisitions that we have not yet fully integrated caused a 180 basis point drag on margin.

Over time, as we integrate the businesses, we expect margins to improve. Fourth, liquidity. We remain well-capitalized. At the end of March, we had cash of $195.4 million and approximately $420 million available under our revolving line of credit. At the end of March, total debt was $2.2 billion, including $40 million drawn down on our revolving credit facility. During the first quarter, we repurchased approximately $265 million of stock, representing approximately 2.9 million shares. At the end of March, approximately $469 million of repurchase authorization remained under our previously approved share repurchase program. This morning, we updated our 2011 financial guidance. We expect revenue growth of 9.5% to 11.5%. Adjusted EPS excluding amortization in the range of $6.17 to $6.32, excluding the impact of any share repurchase activity after March 31, 2011. Operating cash flow of approximately $900 million and capital expenditures of $140 to $150 million. I will now turn the call over to Dave.

David King (Labcorp)

Thank you, Brad. We are extremely pleased with our first quarter results. We generated strong revenue growth of 14.6%. Volume increased a solid 5.9%, and esoteric volume increased approximately 11%. Importantly, our organic volume increased more than 3%, which reflects the continuation of the positive trends we saw beginning in the fourth quarter of 2010. Revenue per requisition remained strong, increasing 8.2%. Genzyme Genetics accounted for approximately 6.5% of the revenue per requisition growth. Similar to last year, inclement weather negatively impacted revenue by $22 million and EPS by $0.08. Our continuing focus on optimizing our business would have resulted in operating margin expansion, excluding the impact of recent acquisitions. The impact of weather further weighed against our margins in the quarter. Excluding the impact of Genzyme Genetics, our DSO declined on a year over year basis to 44 days, reflecting the continued exceptional performance of our operational and billing personnel.

Genzyme Genetics had an impressive quarter, recording one of its strongest historical performances. I would now like to update you on our progress on our strategic initiatives, which are focused on providing the highest quality laboratory services at the most reasonable cost, thereby providing the highest value for each dollar of laboratory spend in the healthcare system. The first pillar of our strategy is that we deploy our cash to enhance our footprint and test menu through acquisitions and to repurchase shares. As I just mentioned, our recent major acquisition, Genzyme Genetics, is performing well. We are extremely pleased and appreciative of the skill and dedication we observe among the Genzyme Genetics personnel who are now part of our Labcorp family. Earlier this month, we announced our intended acquisition of Orchid Cellmark, an international provider of DNA testing services primarily for forensic and family relationship applications.

The transaction is subject to regulatory approval, and if received, we would expect it to close later in the second quarter. While not material, we expect the transaction to be neutral to GAAP earnings and slightly accretive to cash earnings in 2011. Finally, in 2010, we repurchased $337.4 million of our shares, and we have repurchased approximately $265 million of our shares thus far in 2011. The second pillar of our strategy is to enhance our IT capabilities to improve physician and patient experiences. We have already incorporated Genzyme Genetics' result delivery into our Beacon platform. We are also implementing Beacon order entry functionality nationally and deploying specialty modules so that healthcare professionals can order all Labcorp services and receive results through a single online portal.

We are also developing and introducing the Beacon Patient Portal, an Android version of Beacon Mobile, and the Beacon Hospital Edition to meet the needs of our clients and patients. The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. We are continuing to improve automation in our laboratories, which allows us to lower our cost structure, increase throughput, and redirect personnel to customer-facing positions. We are expanding our Touch and AccuDraw order entry systems throughout our network to improve the physician and patient experience. Touch is an on-screen draw tool that allows us to fully accession specimens in patient service centers, reducing paperwork and labor. The fourth pillar of our strategy is to continue scientific innovation at reasonable and appropriate pricing.

Adding the Genzyme Genetics scientists to our strong scientific team at Labcorp will allow us to continue to lead the industry in scientific discovery and initiatives in personalized medicine for years to come. We will continue to introduce new tests and collaborate with leading companies and academic institutions to provide our physicians and patients with the most scientifically advanced testing in our industry. In 2011 alone, we intend to bring at least 15 new tests to market in the area of women's health, genetics, and oncology. The fifth pillar of our strategy is to consider alternative delivery models. We believe there will be incentives to our industry and healthcare in general to move away from traditional fee-for-service models. We will continue to work on these alternative delivery models to provide the highest value for each dollar of laboratory spend in the healthcare system.

These five pillars will allow us to continue to execute on our foundation model, enhance customer service and patient care, provide cost-saving opportunities to the healthcare system, and create value for our shareholders. In summary, we are pleased with our first quarter performance, and we remain excited about the opportunities on our horizon and the strategies we employ to realize them. Now, Steve Andersen will review anticipated questions and our specific answers to those questions.

Steve Andersen (VP of Investor Relations)

Thank you, Dave. Why are you not adjusting your guidance higher given your performance and weather? Our guidance encompasses a wide range of potential outcomes, and we are only one quarter into 2011. That said, in reviewing the most recent analyst estimates for 2011, we continue to note that the diluted share count estimates differ considerably from our own and from each other. It appears to us that many of the components of the first call estimates include future share repurchase, and our guidance does not. We would like to remind you that our original guidance included $234 million of share repurchase that occurred in January. Finally, in reviewing the analyst models, we do not believe the seasonality of our business is captured within many of the published estimates.We have previously noted that the fourth quarter tends to be the lowest quarter from a revenue and earnings perspective due to seasonality, weather, and holidays. However, this is not currently reflected in most of the analyst models we have reviewed.

Can you update us on the mix of your business coming from esoteric testing? In the first quarter, approximately 40% of our revenues were in the genomic, esoteric, and anatomic pathology categories. As we mentioned on our fourth quarter call, our new goal is to increase our esoteric test mix to approximately 45% of our revenue within the next three to five years. Does acquiring Genzyme Genetics limit your ability to repurchase shares or act upon other acquisition opportunities? We repurchased approximately $265 million of our shares in the first quarter and have $469 million of authorization remaining under our previously approved share repurchase program.

While we do not comment specifically on share repurchase, we have historically been a consistent buyer of our shares. We do not believe we are precluded from making acquisitions as usual or from pursuing our strategic goals. Can you remind us of how drugs of abuse volume trended during the year? In the quarter, our drugs of abuse volume increased approximately 14% year over year. That compares to a year over year increase of 12% in Q4 of 2010, 13.9% in Q3 of 2010, 15.4% in Q2 of 2010, and 6.8% in Q1 of 2010. Now, I'd like to turn the call back over to Dave.

David King (Labcorp)

Thank you, Steve. Thank you very much for listening. We are now ready to take your questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you'd like to withdraw your question, press star followed by two. Please press star followed by one to begin. Our first question comes from the line of Glenn Novarro with RBC Capital Markets. Please proceed, sir.

Glenn Novarro (Managing Director and Senior Analyst)

Hey, thanks for taking my question. I got a follow-up on the guidance, even though Steve gave some explanation of where you're at relative to where analysts are, but I'm still a little puzzled. I mean, you grew EPS by more than 8% year over year in Q1, and at the high end of guidance, you're looking for less than 5% growth. At the low end, you're looking for EPS of less than 2% growth. I appreciate the conservatism in one quarter doesn't make a year, but I just want to make sure that I understand if there's anything in particular you're looking at over the next three quarters that would make the comps more difficult than they were in the first quarter. Because intuitively, if anything, it would seem like the comps would get easier as Genzyme becomes less of a drag.

David King (Labcorp)

Bill, good morning. It's Dave. I'll start, and then I'm going to let Brad give you some specific details. Let me first say that we do not see any major clouds on the horizon or bumps in the road that cause us to be concerned about the guidance. As you say, one quarter does not make a year, and the guidance that we gave, as we always say, is intended to encompass a broad range of potential outcomes. There is nothing out there that is a concern to us that we see coming down the road, but the quarter was in line with our internal expectations. As Steve mentioned, the share count and the seasonality do have an impact on where we see the estimates versus what we look at internally. With that, I'll turn it over to Brad to add some color.

Brad Hayes (EVP and CFO)

Dave, and I can't think of much to put on top of that, Bill, other than just to reiterate we don't see anything unusual in the model going forward. I think our first quarter was in line with our own expectations. As Steve said, the fourth quarter tends to be our lowest quarter in terms of revenue and earnings, and we don't think that's incorporated. Also, the share repurchase in our model does not occur. I think, again, looking at expectations externally versus our own, that is a major driver.

Glenn Novarro (Managing Director and Senior Analyst)

Okay. That makes sense. It seems like share repurchase maybe contributed 300 basis points or something like that to the EPS growth. Just one follow-up, and I'll hop back in the queue. Just Quest, as discussed on its calls, the need to make incremental investments in its business, and in particularly in phlebotomists and patient service centers. I'm just curious, if you're seeing anything out there in terms of sort of increased competition in terms of access to draws, and in particular, if you're seeing any significant uptake, excuse me, any significant uptake in the demand for in-office phlebotomists?

David King (Labcorp)

Bill, it's Dave. I think if you look at our year over year patient service center numbers, you'll see that they're probably up by a total of about 100, and most of that is due to the Westcliff acquisition. Our patient service center numbers are relatively stable, and I think in terms of access for patients and access to draws, we're not seeing anything that would cause us to feel that there's an increase in competition. Obviously, it's always a very competitive business. In terms of in-office phlebotomy, that's been an area in which we have certainly seen growth over time. I would say it's relatively stable at this point. As we've said many times, our strategy here is to use the efficiency gains that we're making in the laboratories and the patient service centers to redeploy our personnel into customer-facing positions.

We are continuing to invest in the business. A lot of that investment goes into IT and automation and better efficiency, and that allows us to basically put more people in front of the customers without having to increase our headcount.

Glenn Novarro (Managing Director and Senior Analyst)

Got it. Thank you very much.

Brad Hayes (EVP and CFO)

Bill, one more thing I'd just like to add to your EPS question. I'm looking at some detail here. I mean, operationally, we definitely don't see anything unusual. I think it just goes to looking at the diluted share counts over the quarters of last year compared to our assumptions of this year. We started off Q1 2010 with a higher share count, obviously, than we ended. The lower share count Q1 2011 drives a greater growth rate. I think as the shares came down in 2010, that's what's driving, in your question, the lower growth rate going forward in our sort of no-share repurchase guidance.

Glenn Novarro (Managing Director and Senior Analyst)

Yep. Makes sense. Thank you.

Operator (participant)

Our next question comes from the line of RobWilloughby with Bank of America Merrill Lynch. Please proceed.

Robert Willoughby (Analyst)

Hey, Dave. You mentioned Genzyme had a very impressive quarter. I mean, year over year, can you give us any kind of data how it did? We know what it contributed to your volume and revenues, but internally, what was the performance there year over year for the Genzyme asset in isolation?

David King (Labcorp)

Without making reference to specific year over year performance, Bob, what I would say is from a revenue perspective, my understanding is this was the best quarter that Genzyme Genetics has recorded in its history in terms of revenue performance, and we also were pleased with the profitability of the business.

Robert Willoughby (Analyst)

Didn't we move to Labcorp managed care contracts, or has that not happened as yet? I would have thought revenues would have taken a bit of a dip before rebounding.

David King (Labcorp)

All of that is in process but is not fully implemented. That is part of the reason as we get into the second half of the year, we expect to see more of that impact in both our pricing and the overall pricing.

Robert Willoughby (Analyst)

I gotcha. From a consolidation standpoint, I mean, it's early, but anecdotally, can you cite any activities that have happened that have resulted in some savings?

David King (Labcorp)

Yeah. The major activities, as we said from the beginning, what we started out with was the kind of SG&A stuff. So FedEx, logistics, the overlapping personnel, their, for example, financial staff, which we did not need. There has been we have made some move to consolidate the sales forces, particularly in the oncology business. We continue to look at all the areas of overlap to make sure that we are moving toward optimizing the business. As I have said from the very beginning with regard to this acquisition, the number one priority is maintaining and growing the revenue, and that is why I am really very pleased with the revenue performance this quarter. Obviously, as the revenue grows, that enhances the profitability of the business and makes it less necessary to look at operational cuts.

We're continuing to look hard at the opportunities that we have in SG&A and facilities and other overlapping areas, but at the same time, making sure that top-line revenue is stable and growing is number one for us.

Robert Willoughby (Analyst)

On the valuation for the Orchid deal, visionary, by the way, what have you assumed for the federal and state NOLs in terms of the availability with the change of control?

Brad Hayes (EVP and CFO)

Bob, this is Brad. Those are fairly limited because they're based on purchase price and go out over some amount of time. I don't think we're getting specific on what our assumptions are related to that, but it's cash flow entirely in its benefit.

Robert Willoughby (Analyst)

Right. And the accessibility of those NOLs, you don't lose them in the change of control?

Brad Hayes (EVP and CFO)

Don't lose them, but they get limited, as again, I said, quite a bit by purchase price and other factors in the calculation.

Robert Willoughby (Analyst)

Quickly on the strategy there, is it the intention to keep the Orchid facilities open, or will you consolidate those revenues with your existing business?

David King (Labcorp)

Bob, it's Dave. We've not made a final decision on that either in the U.S. In the U.K., the intention is to keep the Cellmark business essentially as is, and I think it's actually the Cellmark brand over there. We're still subject to regulatory approval on the U.S. transaction, and so we have not even begun to do any planning on what the businesses would look like after our closing.

Robert Willoughby (Analyst)

Okay. Lastly, Brad, you had mentioned there'd be some new disclosures this quarter. I see what's missing. What have you added? I guess we're waiting for the queue. Is that a?

Brad Hayes (EVP and CFO)

Bob, I'm not sure exactly what you're referring to. The 8-K is filed, so that has information. When the queue's filed, it will have the traditional information, which has some detail around revenue, volume, and revenue per requisition for our core, esoteric, and other businesses.

Robert Willoughby (Analyst)

Okay. So that is in the queue. That's all we're looking for. All right. Thank you.

Operator (participant)

Our next question comes from the line of Brendan Strong with Barclays Capital. Please proceed, sir.

Glenn Novarro (Managing Director and Senior Analyst)

Hey, good morning. Yeah, maybe just first, going back to the question around guidance. I mean, you've got Genzyme Genetics delivering 8% this quarter. You look at the other acquisitions that are annualizing. That's another 1.5-2% of revenue. You got 3% organic revenue growth this quarter. I mean, what's going to result in, I guess, revenue being below the top end of your guidance for the year?

David King (Labcorp)

Brendan and Dave, I mean, I do not know what we can really say beyond what we have said already, which is that this is one quarter. Obviously, we are very pleased with the quarter, but one quarter does not make a whole year. We know that in the second half of the year, the Westcliff and DCL acquisitions will annualize starting in the third quarter. We get 11 months of Genzyme, not 12 months of Genzyme because that deal closed in December of last year. Obviously, we are optimistic that we are going to perform well, but at the same time, we have one quarter under our belt, and we want to be realistic in terms of the way we think about the business. As Brad said and Steve said, the share count matters and the seasonality matters.

We don't give quarterly guidance, but the numbers that are out there for the fourth quarter, just on a historical basis, are not squaring with the seasonality that we see in the business.

Brendan Strong (Analyst)

Sure. Okay. I mean, on the Empire contract, have you guys started to, you mentioned in the past that there was a slow ramp up there, but I'm curious if you guys are starting to gain additional traction there. As part of that, I don't know if you have a number in your mind in terms of what the total revenue opportunity is, not necessarily what part of it you could capture, but what the total revenue from Empire that goes to Reference Labs is.

David King (Labcorp)

I don't have a number in mind in terms of the total revenue. I think my recollection is they have about 1.5 million members who have a lab benefit, and so that's the base. We have seen a marked improvement in our Empire volumes this quarter and very pleased about that, and we expect that to continue to improve.

Brendan Strong (Analyst)

I mean, is it so it's growing off of a small base, but is it big enough that it's actually moving some of your metrics and actually driving some of that 3% organic growth?

David King (Labcorp)

Every encounter with a patient matters in terms of driving growth. It is off a small base, but at the same time, anytime you see share gains within a new contract, that's a good indication that we are getting organic growth. It is small, but it still contributes.

Brendan Strong (Analyst)

Fantastic. Thanks.

Operator (participant)

Our next question comes from the line of Gary Lieberman with Wells Fargo Securities. Please proceed, sir.

Gary Lieberman (Analyst)

Thanks. Good morning. Maybe if there's any insight into any restructuring charges throughout the remainder of the year. You guys were kind enough to give us what the charges were in the quarter, but how are you thinking about it through the remainder of the year?

Brad Hayes (EVP and CFO)

Yeah, Gary, this is Brad. I think as we continue to integrate Genzyme Genetics and some of our other acquisitions from the middle of last year, there's the possibility that you'll continue to see some other activity in that line.

Gary Lieberman (Analyst)

Okay. In line with kind of what it was in the first quarter, or should it diminish over the period of the rest of the year?

Brad Hayes (EVP and CFO)

I wouldn't want to go as far as estimating amounts.

Gary Lieberman (Analyst)

Okay. Just given what sounds like the strength in Genzyme, any change in your thoughts of when it might be accretive? Do you think it might be accretive a little bit sooner, so maybe towards the end of this year as opposed to into next year?

David King (Labcorp)

Gary, it's Dave. Again, terrific quarter for Genzyme. We're very appreciative of the effort of the Genzyme leadership team starting right from the top and the sales leadership as well, all the way down to the individual employees, the salespeople, the lab employees, the genetic counselors who have just done a terrific job and really put their shoulder to the wheel in terms of making this business successful. Again, I think it's too early to make a statement that it's going to be better than we thought that it would be. As we noted in response to Bob Willoughby's question, I mean, there will be some managed we expect that there will be some managed care pricing implications later in the year.

I'm delighted with where we are, and I have every hope that it will be better, but I don't think we're prepared to incorporate that into any of the financial metrics.

Gary Lieberman (Analyst)

Okay. Thanks a lot.

Operator (participant)

Our next question comes from the line of Amanda Murphy with William Blair. Please proceed.

Amanda Murphy (Analyst)

Hi, thanks. I just had some more volume questions, if I may. I guess just a follow-up to Brendan's earlier question. If you look at the 3% organic volume growth number, is there any way to get conceptually just how much of that is really due to sort of true underlying improvements and utilization as sort of correlated to physician office visits versus, say, Empire or drugs of abuse?

David King (Labcorp)

Amanda, it's Dave. I think you can try to slice this down to a very fine set of numbers, but I think the better way to look at it is we saw what I would say is we saw strength in all aspects of the business. We saw strength in esoteric. We saw strength in the core. We saw strength in Empire. We saw better volumes in OBGYN practices than we've been seeing for the last couple of quarters. I don't think it's and we saw better drugs of abuse volume. I don't think it's necessarily easy or productive to slice every little piece apart as opposed to saying we had good volume growth. It continued the trend that we saw in the fourth quarter, and we're cautiously optimistic that that's the trend we're going to continue to see throughout the year.

Amanda Murphy (Analyst)

Okay. Fair enough. I guess just trying to get you to slice it more maybe on the esoteric side of the business, that was obviously pretty strong and seemed to be strong sort of ex-Genzyme as well. Can you maybe talk to, and I know you're not disclosing the specific segments anymore, but maybe the histology side of the business, is that insourcing still moderating as you talked to last quarter?

David King (Labcorp)

Yes. The histology side of the business was we continued to see the moderation of insourcing. I will say we're starting to see insourcing now in the dermatopathology business, which is concerning for all the reasons that we've articulated: utilization concerns, quality concerns. The insourcing trend has definitely moderated from where it was a year ago, and we continue to work for legislative and regulatory resolutions to what we consider to be a matter of concern, continuing concern.

Amanda Murphy (Analyst)

Again, I guess this last one on Genzyme, again, just to follow up to your comments about their quarter. Any way to get a sense of what sort of drove that? Is it market share gains? Is it the OBGYN visits coming back? Any better sense there?

David King (Labcorp)

What drove it is a terrific effort and performance by the Genzyme leadership team and by the Labcorp leadership team in terms of the collaborative way in which we're integrating the business. What drove it is a terrific performance by the Genzyme sales reps, the Genzyme genetic counselors, the lab people. I mean, it's just it was a great performance. They came into the organization energized. They've had strong leadership from the top about why it's important to retain the business and continue to be successful. We've had great leadership on the Labcorp side and collaboration in terms of the steps we've taken in the integration. Those are the real reasons. I think, as I said before, it's a people effort putting their shoulder to the wheel and just doing a tremendous job.

Amanda Murphy (Analyst)

Okay. Thanks very much.

Operator (participant)

Our next question comes from the line of Steven Valiquette with UBS. Please proceed.

Steven Valiquette (Analyst)

Hi, thanks. A couple of things here. I guess first, the official guidance last quarter on the Genzyme Genetics deal was the 16 to 26 cents dilution to the cash EPS. I'm wondering if somebody asked about would it be accretive, but can you at least just give us a flavor for it? Do you see it being less dilutive, or do you still see it within this range? Just trying to get a little more color around that. Also, how much of the upside in the quarter really is from Genzyme Genetics versus other factors? Just trying to get from your sense, what were the true drivers of the upside in the quarter if you had to kind of rank order them? Thanks.

Brad Hayes (EVP and CFO)

Yeah. As Dave said earlier, it's too early to, while we're pleased with how things have gone to date, it's too early to call. I would say we still believe that range of 16 to 26 cents dilutive is the right range. On the contribution to the quarter, again, slightly better performance than we had modeled, but I would not say that that was a major contributor to the quarter that we reported.

Steven Valiquette (Analyst)

Okay. All right. Thanks.

Operator (participant)

Our next question comes from the line ofRalph Jakobi with Credit Suisse. Please proceed, sir.

Ralph Jakobi (Analyst)

Thanks. Good morning. Just going back to the esoteric business, you had said it was up 11%. That's exclusive of Genzyme?

Brad Hayes (EVP and CFO)

No, that's including Ralph. It was seven excluding.

Ralph Jakobi (Analyst)

Okay. All right. That's helpful. In terms of Westcliff, can you give us a sense of what had been in your guidance previously and maybe kind of what's changed given the developments there?

David King (Labcorp)

Ralph, it's Dave. My recollection is that we had expected that we would be able to integrate Westcliff, I think, beginning in June. Up until that time, I think we had assumed that we would continue to lose about a penny a month there and that it would basically turn break even kind of in the third to fourth quarter time frame. We got a little bit of a head start, but nothing that's going to materially change the numbers.

Ralph Jakobi (Analyst)

Okay. And then maybe get into the margin opportunity going forward a little bit more. Obviously, margins are depressed now just given some of the recent acquisitions. Can you give us a sense at all where you think margins can go in, I do not know if we want to consider a normalized environment or once we get through some of the recent acquisitions you guys have done?

David King (Labcorp)

I think what we've said and continue to believe is that with the foundation model, if we are growing the top line sort of in the 4% to 6% range, that should lead to 20 basis points of margin expanse and all other things being equal. There is a lot of noise in this quarter because of Genzyme, Westcliff, DCL, weather obviously. To me, what's instructive here is that if you take out all the revenue and all the expense associated with the acquisitions, gross margin would have been up, operating income margin would have been up. What that says is that kind of on 3% volume growth and 5% revenue growth, we would have achieved margin expansion, which is exactly what we say the foundation model should lead to.

Ralph Jakobi (Analyst)

Okay. And then just the last one. Can you maybe just get into a little bit more? You talked about sort of one of the five pillars being sort of an alternative delivery model. Maybe just give us a little bit more details around exactly what that kind of encompasses and how to think about that.

David King (Labcorp)

I think it encompasses a whole variety of initiatives that are out there in the marketplace. I mean, obviously, people have been writing about pre-authorization of molecular testing and genetic testing. There's been a good deal of discussion about accountable care organizations and what that's going to mean. There's been a fair amount of discussion about the mandatory MLRs and how managed care companies are going to deal with the need to achieve the mandatory MLRs. Our goal is to understand all of these opportunities, work in a collaborative way with managed care and even with the government as appropriate, and try to develop options for those that want to move away from traditional fee-for-service. These are important strategic considerations, but I will say, having spent some time even studying the ACO regulations, none of this is clear or well-formulated at this point.

Ralph Jakobi (Analyst)

Okay. Just to follow up on that, I mean, in those scenarios, I'm assuming the ultimate goal from you guys, I mean, do you see a way that you can sort of preserve and expand margins within those sort of alternative models?

David King (Labcorp)

Yes. I mean, I think the idea is that there's the opportunity to gain volume and share over time. With improved volume and share, again, push through the fixed cost base, we should see the opportunity to expand our margins.

Ralph Jakobi (Analyst)

Okay. Thank you.

Operator (participant)

Our next question comes from the line ofTom Gallucci with Lazard Capital Markets. Please proceed.

Tom Gallucci (Analyst)

Good morning. Thank you very much. You guys have obviously done a good job on the acquisition front, pretty consistent. A couple of big ones, but lots of smaller ones along the way. Just wondering what your outlook is there. Obviously, with Orchid, there's some international exposure. Is international any more attractive to you these days, generally speaking, or higher on the radar screen at all?

David King (Labcorp)

Morning, Tom. It's Dave. In terms of the domestic acquisition market, again, there are a lot of opportunities. We continue to focus on number one being very disciplined and selective in what we want to buy and paying an appropriate price and multiple for it. Number two, with Genzyme and Westcliff, we have two fairly sizable acquisitions that we're integrating. The smaller acquisitions are the easier ones to integrate, and you should probably expect that those are the ones that we'll focus on. That's not to say that we don't have the appetite to do something significant if it comes along, but we've got a job on our plate to fully integrate those businesses and continue to make them successful. That is taking, obviously, quite a bit of management focus. I would say the acquisition market is attractive. There are going to be assets coming along.

We're going to look hard at the assets that do come along. Within our pricing discipline, we're going to choose the ones that we want, and likely they will be smaller than the last couple of sizable ones that we've done. On the international market, we have the lab in Dubai. We have the Clearstone joint venture, which gives us exposure to some international markets, including China, Singapore, and some other places. At this point, that's just for our clinical trials business, but it kind of gives us a window into those markets, which I think is helpful. I think with respect to the U.K., the opportunity that the Orchid Cellmark presents in forensics is quite attractive. What I would say about the international markets is, again, don't have the expectation that we're going to do anything big in the international markets.

Don't have the expectation that we're going to do anything game-changing. Certainly, we're going to continue to look at international opportunities. In those markets that are attractive, whether it's from a demographic perspective, whether it's from a growth perspective, or whether it's from a clinical trials perspective, we will continue to participate.

Tom Gallucci (Analyst)

Okay. That's great. Obviously, your commentary around sort of the seasonality and the quarterly progression is pretty clear. At the risk of beating a dead horse a little bit, I just did want to understand one thing about Genzyme. You're not changing your sort of dilution estimates for the year, which is fair enough at this point. I would expect that it gets better throughout the year. Just wondering, you've got share count sort of maybe working against you if you're not assuming share repurchases. You've got seasonality working against you. Will we expect a little less seasonality than normal given that Genzyme theoretically should be ramping up a bit over the course of the year? I know you have some managed care pressures, but there should be some integration too, I would think. Can you help us understand the quarterly progression on Genzyme?

Brad Hayes (EVP and CFO)

Yeah. Tom, this is Brad. And you've nailed all the right points. I mean, the managed care compression that we've talked about a couple of times that hasn't really started to happen yet happens based on different contracts at different times throughout the year. That will bring the revenue down. There are integration activities that are necessary to offset that. I wouldn't necessarily describe it as a, in year one, clear ramp as the year goes on. I think in the out years, that begins to be true as the revenue impacts annualize and the integration activities continue. No, I wouldn't think about it as a material progression throughout the year on Genzyme.

Tom Gallucci (Analyst)

Okay. What about even as we get, I guess, into the first half of next year, just sort of thinking out a little bit further? If you've got some managed care pressures that start later this year, I guess, do you really start to see the bigger ramp later in 2012, or could we be thinking about it earlier than that?

David King (Labcorp)

Tom, it's Dave. Just one other thing I want to add to what Brad said, which is obviously, if we continue to retain the customer base and grow the revenue, then you could see better in the second half of this year than our expectation. It is too early to tell what's going to happen there. That remains our focus is the top line customer growth and revenue growth. With respect to next year, assuming that there's some managed care compression that kind of starts in the second and third quarters, it will take us some time to annualize that. Again, there is always opportunity to do better if we perform well from a revenue perspective. We have a very well-thought-out and well-planned approach on the cost perspective, and I wouldn't expect that to go any faster.

Tom Gallucci (Analyst)

All right. Thank you very much. We appreciate you sort of keeping the bar low, and maybe you can beat that over time. Thanks.

Operator (participant)

Our next question comes from the line of Darren LeRiche with Deutsche Bank. Please proceed.

Brian Zimmerman (Analyst)

Hi. Thanks and good morning. This is Brian Zimmerman in for Darren. I was wondering if you could give us an update on what the next step with the FTC process is regarding Westcliff.

David King (Labcorp)

Yes, Brian. It's Dave. Just to recap, there was a federal court hearing at which the federal district judge determined on the FTC request for an injunction that in his view, this was not an anti-competitive situation. He denied the FTC's injunction, and the Court of Appeals did not do anything to disturb that ruling. As a result, we have basically filed a, first of all, we filed a request to take the scheduled May administrative proceeding off the docket, which was granted by the administrative law judge. We have filed a request to dismiss the administrative case, which I think is presently under consideration. That actually has to be done by the commission, so it's their decision.

Brian Zimmerman (Analyst)

Okay. Any sort of time for when you expect to hear a decision from them?

David King (Labcorp)

We don't have a timeframe on that.

Brian Zimmerman (Analyst)

Okay. Could you make any comments on specific facility closings you've had in regards to Genzyme Genetics?

David King (Labcorp)

No.

Brian Zimmerman (Analyst)

No? Okay. You talked a little bit about Orchid Cellmark and some of the opportunities you saw, especially in the U.K. Can you give us some sort of an idea of how you size up those revenue opportunities or potential market opportunities?

David King (Labcorp)

The biggest market opportunity is the forensics business in the U.K. I'm going from memory here. My recollection is that up until March of this year, the bulk of that business was handled by a government agency called the FSS, and that the FSS has basically determined that it is not going to do forensics anymore. It is going to outsource that to private companies. My recollection is that the FSS was approximately $150 million a year in revenue, and I believe that's dollars, not pounds. So about $150 million a year in revenue that the Orchid Cellmark business will have the opportunity to compete for. That does not guarantee any business, but it gives Orchid Cellmark the opportunity to compete for. The revenue opportunity in the U.K. is attractive, assuming that, again, we have a, assuming we get regulatory approval to close is a very solid management team over there. The U.K. opportunity is attractive, and that is where we are really focused.

Brian Zimmerman (Analyst)

Okay. Thanks a lot.

Operator (participant)

Our next question comes from the line of Gary Taylor with Citigroup. Please proceed, sir.

Gary Taylor (Managing Director and Senior Equity Research Analyst)

S``orry. Caught me just choking on a drink. Just a couple of questions at this point. Brad, I just wanted to make sure on the disclosure. Did you suggest that all of the segme``nt metrics that we're used to having will be in the Q? Because I thought you had said before some of that was going to be trimmed down.

Brad Hayes (EVP and CFO)

It'll be consolidated and consistent with what was in the Qs and Ks of the past in the MD&A section on how we describe the revenue performance. It does not have it exactly as it used to be in the AKs, but we think it has adequate information, and we talk about it as such in our MD&A section to understand how the business is doing core versus genomic and esoteric.

Gary Taylor (Managing Director and Senior Equity Research Analyst)

Okay. I just wanted to make sure I understood. The Q is not out yet, correct? I did not hear.

Brad Hayes (EVP and CFO)

Oh, that's right.

Gary Taylor (Managing Director and Senior Equity Research Analyst)

Okay. I think kind of the only other question I just want to think about. I apologize. I'm not familiar with how you guys put it in the Qs and Ks because we were used to before just pulling it out of those 8-Ks. For example, will we be able to see the core business separately or not?

Brad Hayes (EVP and CFO)

Yes.

Gary Taylor (Managing Director and Senior Equity Research Analyst)

Okay. I guess maybe the answer is just wait till the Q comes out. I was just trying to think about the total volume to 5.9, you said up 4.9 excluding Genzyme and more than 3% excluding other acquisitions. I guess I'm still trying to kind of parse it down. It looks like drugs of abuse may have added 80 basis points, and esoteric may have added 70 basis points, which would put core maybe in the one and a half range. Am I in the ballpark, or are you going to tell me just wait?

Brad Hayes (EVP and CFO)

Well, what I'm just going to consider is that in the reported number, our lost contracts have now annualized. So that was about a point drag in the past that's no longer with us. So that's why when we take out all of those things, when Dave referenced the 3% earlier, we try to take out all of those different moving parts. And the reported number did get better. But the organic number, taking out all the moving parts that we mentioned of just over three, is a little bit up from Q4 of last year. And if we go back a little bit, the first half of last year was very challenged, even neutralizing for all those parts. It started to gain some strength in Q3 and Q4, and it continued into Q1.

Gary Taylor (Managing Director and Senior Equity Research Analyst)

Right. So you lost that drag, and that's part of why the number looks better. And that kind of more than 3% number, what do you think that number looked like adding back your estimate of weather impact?

Brad Hayes (EVP and CFO)

Weather is taken into account.

Gary Taylor (Managing Director and Senior Equity Research Analyst)

Right. I know it's in there, but well, you've added that back already, so the real number wasn't up that much, or that's the number including the impact of the weather?

Brad Hayes (EVP and CFO)

No. Well, let's go to this. Year over year for us, weather wasn't an issue. So in any year over year comps for us, we're not thinking about weather.

Gary Taylor (Managing Director and Senior Equity Research Analyst)

So you called out 8 cents of weather. Am I thinking the wrong quarter? During this quarter, you called out 8 cents of impact from weather, but you're just saying you had a similar impact a year ago, so.

Brad Hayes (EVP and CFO)

We called out our EPS was impacted by $0.08 in this quarter compared to, for example, our expectations. On a year over year basis, it was exactly the same.

Gary Taylor (Managing Director and Senior Equity Research Analyst)

The weather impact. The weather impact was roughly the same year over year.

Brad Hayes (EVP and CFO)

Yes. That's exactly right. And to revenue, it's neutral because we lost the same amount of revenue in the first quarter of last year.

Gary Taylor (Managing Director and Senior Equity Research Analyst)

Right. Got it. And then finally, just still around the volumes, regionally, is there any color that would be helpful for us to think about given that I'm sure everyone's trying to ascertain sort of where we are in the cyclical or the modest cyclical recovery we might be beginning here on some of these volume metrics? Is there any regional color you have that might help us think about that?

Brad Hayes (EVP and CFO)

No. We really saw pretty consistent performance all around the country.

Gary Taylor (Managing Director and Senior Equity Research Analyst)

Okay. That's all I have. Thanks.

Operator (participant)

Our next question comes from the line of Bill Quirk with Piper Jaffrey. Please proceed.

William Quirk (Senior Research Analyst)

Thanks. Good morning, everybody.

Steve Andersen (VP of Investor Relations)

Morning.

William Quirk (Senior Research Analyst)

A couple of questions, Dave. First up as a follow-up to Amanda's questions. It sounds like we have fairly well-rounded volume improvement across several of the business lines. I think you specifically called out OBGYN. Anything else to point out here? And then secondly, can you just help us think a little bit about the trend as we moved over the balance of the year here? And I guess what I'm trying to get at is, did the trends that we see in the quarter, were they fairly well-rounded throughout the quarter? Did we see some sporadic January's crumming because of weather and things improved in February and March, etc.? Thanks.

David King (Labcorp)

Gosh, no matter how many times we say we don't give month-by-month guidance, you guys keep trying. So I got to give you credit for persistence.

William Quirk (Senior Research Analyst)

I'll take it.

David King (Labcorp)

So the answer is that obviously there was severe weather in a couple of months, January and February, that has an impact on the overall quarter. However, the trend was pretty consistent, and we're not going to break it down month-by-month because the minute we start doing that, then you're going to want it week by week or day by day. So it was a consistent performance in terms of volume during the quarter. As I mentioned, it was consistent across the business lines. We didn't see any area of great strength or great weakness. Obviously, esoteric did well. Some of that was helped by Genzyme. Some of that was just helped by good growth in several lines of esoteric testing. And what I would say, Bill, is the trend in 1Q was very consistent with what we saw in 4Q of 2010.

And our guidance assumes that the trend is not going to get measurably better throughout the year, and it assumes that it's not going to get measurably worse. So it assumes that the trend is going to be relatively the same from a volume perspective throughout the year. And that, again, we would love to do better. And if we see recovery in things like commercial managed care lives and job creation, it's conceivable we could do better, but we're not building any of that into our expectations.

William Quirk (Senior Research Analyst)

Great. Thank you for the caller. And then, Brad, I guess at the risk of getting too granular on the fourth quarter organic number, you mentioned obviously it was lower than the 3% we saw in the first quarter. Is about 2%, is that the right way to think about it?

Brad Hayes (EVP and CFO)

In the fourth quarter of 11 or 10? Are you?

William Quirk (Senior Research Analyst)

Fourth quarter of 10.

Brad Hayes (EVP and CFO)

I think we said 2.7%.

William Quirk (Senior Research Analyst)

Got it. Must have missed that. Thank you very much, guys.

Operator (participant)

Our next question comes from the line of Kemp Dolliver with Avondale Partners. Please proceed.

Kemp Dolliver (Analyst)

Thanks. Good morning. Your competitor yesterday in discussing Q1 volumes felt that there was an extra business day in the quarter around the timing of the New Year's holiday. Is that a factor in your thought process regarding how much we should extrapolate Q1's performance?

Brad Hayes (EVP and CFO)

Kemp, this is Brad. Not a factor for us. Our days were the same in the first quarter of this year versus the last. You may ask, how can that be? All days are not created equal, and we weight our days based on strength. When we add that up for the first quarter of this year versus last, we see the same number.

Kemp Dolliver (Analyst)

Okay. Fair enough. And everything else is covered. Thank you.

Operator (participant)

Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please proceed.

Ricky Goldwasser (Analyst)

Good morning.

Operator (participant)

Good morning.

Ricky Goldwasser (Analyst)

I have a couple of questions. The first one on the pricing side, just to confirm, I think you mentioned in the prepared comments that Genzyme accounted for 6.5% of the growth. So should we think about the base business or the core growth at about 1.7%? And are there any moving parts in that number that we should normalize for?

Brad Hayes (EVP and CFO)

Ricky, this is Brad. You're right on the math of what the base business is. No moving parts to normalize for other than I would say that back to the volume questions, we did annualize the loss of the lower-priced contracts. So while in the past that's been a detractor from volume and an aid to price on a year over year basis, now it's not as much a detractor from the volume number, and it's actually showing up as a negative in price. So other than that, and again, we've annualized that. Other than that, can't think of anything. The acquisitions were the largest impact by far.

David King (Labcorp)

Ricky has stated the only thing you should factor into your thinking there is that because of growth in drugs of abuse testing, which obviously is at a lower price point, that's going to be a bit of a damper on overall pricing growth.

Ricky Goldwasser (Analyst)

Okay. And can you quantify the impact of drugs of abuse? Should we add up to that 1.7 number?

David King (Labcorp)

We don't quantify it in terms of the price impact. I think Steve in the prepared remarks did go over the volume impact.

Ricky Goldwasser (Analyst)

Right. Okay. And then just to clarify on Genzyme, based on what you kind of expect today, what percent of Genzyme revenues or volumes, whatever you're comfortable with, do you expect will be under the labcorp managed care contract pricing umbrella by the end of the year?

David King (Labcorp)

It's really too early to tell. These are ongoing discussions with the managed care plans, and we just don't have a way of making a prediction there.

Ricky Goldwasser (Analyst)

Is this really the key swing factor to kind of the guidance of you kind of beating guidance versus you kind of coming in line?

Brad Hayes (EVP and CFO)

I'd say it's a swing factor. I wouldn't call it the swing factor because obviously we've built in some assumptions into our expectations.

Ricky Goldwasser (Analyst)

Okay. And then just one follow-up question on the OBGYN. I might have missed it early on. Can you just talk about the trends that you're seeing there and kind of any specific growth for kind of the women's health test like HPV?

David King (Labcorp)

I think what we said is that we did see improvement in our volumes coming from OBGYN offices in this quarter, both year over year and sequentially. And so that obviously led to some overall improvement in our women's health portfolio. As you know, we don't break down growth in specific tests. So HPV continues to grow on a year over year and a sequential basis. And there is nevertheless still more opportunity there.

Ricky Goldwasser (Analyst)

Okay. Thank you.

Operator (participant)

Our next question comes from the line of Dane Leon with Macquarie. Please proceed.

Dane Leone (Analyst)

Hi guys. Thanks for taking the questions. Congratulations on a quarter. Can you just remind me if there's any larger contracts coming due in 2011 that could need to be renegotiated outside of any Genzyme genetics discussions?

David King (Labcorp)

Good morning. It's Dave. I think what we've said is that the Horizon Blue Cross Blue Shield plan in New Jersey does come up this year. And so those discussions are obviously underway. Other than that, we don't have any sizable contracts in 2011.

Dane Leone (Analyst)

Okay. Great. Thank you. Just quickly on additional efficiency programs that are scheduled for the rest of 2011, are there any outside of just the acquisition-related integrations?

David King (Labcorp)

Acquisition-related integrations. And as we mentioned at the beginning, the continued implementation of the AccuDrawn, the touch systems moving from patient service centers into in-office phlebotomy and also to the doctor's office through the Beacon platform. So those are probably the key initiatives in terms of our efficiency programs.

Dane Leone (Analyst)

Okay. Great. Thank you. I think everything else has been covered.

Operator (participant)

Our next question comes from the line of Shelley Noll with Goldman Sachs. Please proceed.

Shlomi Noll (Analyst)

Great. Thank you. Just going back one more time to the organic esoteric testing growth of around 7%. Is it fair to say that that's largely market share capture, or are you seeing an improvement in underlying demand?

David King (Labcorp)

Shelley, it's Dave. I just think it's too hard to—I don't think we have any way of answering that question. So I really couldn't give you a good assessment, but obviously we're pleased with the growth there in whatever form it's coming.

Shlomi Noll (Analyst)

Okay. But fair to say that it's still a challenging environment, and we're not back to the sort of pre-2008 underlying demand environment for either routine or esoteric. We're still in a pressured environment. Is that fair to say?

David King (Labcorp)

I think the environment has clearly improved in the last two quarters. We're not back to where we were. I mean, obviously, if you look at the—if you look at the newspaper and you see the unemployment numbers and you see the standard employer's view of the government stat and all the other factors out there, I mean, we're not in a robust period of economic growth. So sure, there are still challenges out there, but we have a couple of quarters of what we think are pretty good, at least pretty good trends in terms of utilization and growth.

Shlomi Noll (Analyst)

Okay. Great. And then on the pre-employment drug screening, which is clearly in double-digit territory, what is the margin on that business relative to the rest of your book of business?

David King (Labcorp)

Again, very hard to talk about margin by business line in our business. The drugs of abuse business uses most of the existing infrastructure for the core business. So it uses the patient service centers. It uses the logistics and transportation. But on the other side of that, it doesn't fully bear the costs of the SG&A function with Bears Its Own S function, but it doesn't fully bear the cost of the SG&A function. It doesn't bear the cost of the corporate resources. It doesn't bear the expenses of the divisional, their utilization of patient service centers or of careers. So I just prefer to think of it overall as the incremental margin on just about everything that comes in the door is very good, whether it's drugs of abuse testing, esoteric testing, or core testing.

Shlomi Noll (Analyst)

Makes sense. Okay. And then just a last one on FDA regulation, the lab developed test. I think we're still expecting to hear something. Do you have any guidance on when we might hear something from the FDA?

David King (Labcorp)

I was at a meeting yesterday where Dr. Gutierrez presented, and his statement was that it is his hope that there will be something from the FDA by the end of the year. However, there is no certainty of that. And when he put up his slide about the next steps, he commented that it was the same slide that he has been putting up for at least two years. So I would say we know that FDA's thinking is they would like to get something out this year. Whether that will happen is really anybody's guess.

Shlomi Noll (Analyst)

Okay. Great. Thanks very much.

Operator (participant)

Our next question comes from the line of Tony Vendetti with Maxim Group. Please proceed.

Tony Vendetti (Senior Equity Research Analyst)

Yes. Thanks. Just I know that you're not giving out the exact words of the genomic and esoteric test, but some of them have been growing pretty rapidly. And I guess the question is, when do you expect the growth for things like HPV and vitamin D to slow in terms of year over year growth? And then on the goal of getting to 45% of your revenues from genomic and esoteric testing, did you give, I didn't catch if you gave the timeframe of when you expect to get to 45%. And then lastly, on gross margins, is the gross margin that you're at today, do you think that's a stable number? And if it's going to vary in any material way, why so?

David King (Labcorp)

Okay. Well, so first of all, we said three to five years on the 45% from esoteric. Second of all, on the particular tests within the esoteric category, yes, clearly some of them like vitamin D are slowing on a year over year basis because you're off of a much higher base. Some of them like IL-28B are growing dramatically on a year over year basis again because you're off a small base. So there's a lot of—this is why it's important for us to continue to bring new tests to market, particularly new tests that are reasonably priced in the esoteric category so that—and again, vitamin D is still growing, but it's not growing as fast year over year because you're off of a bigger base. But as growth slows in those areas, we can replace it with growth in other testing.

As to gross margins, obviously gross margins were dragged by the acquisitions this quarter. But if you actually look at our gross margin perspective, I think over the probably last couple of years, gross margin has actually been improving as the efficiency initiatives have taken hold. So there isn't any reason why gross margin should go down over time. It should improve.

Tony Vendetti (Senior Equity Research Analyst)

Okay. Great. Thanks.

Operator (participant)

Our next question is a follow-up. It comes from the line of Glenn Novarro. Please proceed.

Glenn Novarro (Managing Director and Senior Analyst)

Hey. Thanks a lot for taking my follow-up. It's kind of a two-biscuit morning here. I am wondering, GenPro yesterday announced that it received FDA approval for its TRIC test. Is that something that you could anticipate seeing some pretty substantial demand for? I mean, where we could kind of think about physicians who are checking the box for chlamydia and gonorrhea going ahead and checking the box for TRIC?

David King (Labcorp)

As you know, Glenn, and I appreciate the fact that you're talking about checking different boxes because, as you know, we feel quite strongly about the need not to jam these things together in a way that encourages odd ordering patterns. So I think the answer to your question is it's an option that we will offer. I do think that there will be a good deal of physician interest in the test. And my belief is that we have been offering the test in some form already, as have a number of other labs. But certainly, the fact that GenPro got the approval should bring some further focus to physicians on appropriate utilization.

Glenn Novarro (Managing Director and Senior Analyst)

Okay. And then the investment that you wrote off in the quarter, care to tell us what that was?

David King (Labcorp)

So that's two follow-up questions. So now it must be a three-biscuit morning. And no, the only thing we're going to say about it is we periodically make investments in ideas that we think are interesting, opportunistic, and strategic, and have the potential to work out well for us. This was an opportunity that was interesting and opportunistic and strategic and did not work out well for us. And in my recollection, in my 10 years at LabCorp, it's the first time that we've sort of had anything like this. It just was not successful. But I view it purely as a one-time event and not something that there's a risk of repetition.

Glenn Novarro (Managing Director and Senior Analyst)

Okay. And then a final at risk of being into an 18-biscuit morning, the CPT coding initiative. I know in the past you guys have sort of indicated you're not really worried about it, but I continue to get a lot of questions from investors about it. And I'm hoping you can give us some rationale for why you're not really worried about it. Is it just you look at it and you say, "Gosh, we're hard-pressed to see that rates would actually come down," or is it more of, "When we add up the amount of revenue we get from stacked coding, it's just not that much"?

David King (Labcorp)

Okay. This is a complex question, so let me try to address the various component parts of it. First of all, there's developed this kind of idea that somehow stacked coding is a bad thing. And that could not be more inaccurate because the way CPT stands for Current Procedural Terminology, and the P is procedure, and so we bill by procedure. So if we perform in a particular molecular test, if we perform a particular procedure like a DNA amplification 20 times, then it is absolutely appropriate to bill 20 units of DNA amplification and bill 20 units of that CPT code. So there's nothing wrong with "code stacking." However, what has been pointed out to the lab industry is a couple of things.

One, there are some labs that use CPT coding to generate, and the way that they code their tests to generate higher revenue for testing than other labs. And this is a concern because you can look at, as we were shown at a meeting one time, you can look at four different labs billing Medicare for the same test with four completely different sets of CPT codes. And so there is a concern that coding in general, and it's not code stacking, it's just coding in general, can be used in a way that maximizes reimbursement. And we don't do that, and obviously we do not support it. The other thing that is a concern is there's very little transparency in what the payer sees from a CPT coding perspective.

So they look at, to go back to my example, 20 units of DNA amplification, and they don't know what they're buying. They don't know if that's a cystic fibrosis test. They don't know if it's Fragile X. They don't know what the test is. And so there has been a push for greater transparency in coding, which has led to the idea that we should have a single code for highly utilized molecular tests like cystic fibrosis and Fragile X and some others. And we support transparency in coding and billing, and obviously that's a laudatory goal. So the reasons that, in our view, this is not a particularly big issue, at least at present, is first of all, this is a Medicare initiative, and the amount of molecular testing, particularly in these categories like CF and Fragile X that we do for Medicare, is really immaterial.

Second of all, we do not have any indication that there is any consideration of major changes to reimbursement as a result of this initiative. Nobody has said, "Well, cystic fibrosis reimbursement is going to be dramatically cut as a result of this." Usually, we do not know how these tests are going to be reimbursed, but our expectation is that reimbursement levels will be relatively consistent with what we have seen in the past, and that would be the fair way to handle it and the appropriate way for CMS to handle it. I realize it is a long answer, Bill, and I am sorry for having gone on, but I think it is important that people sort of really understand what is going on here, which is we do support transparency in coding. We do support payers knowing what they are paying for.

We don't have a huge amount of revenue at risk, and believe me, we are through ACLA and individually, and our partner labs in ACLA are doing the same thing. We are going to fight to make sure that there is not a negative impact on reimbursement as a result of this initiative.

Glenn Novarro (Managing Director and Senior Analyst)

Thank you very much.

Operator (participant)

All right. Ladies and gentlemen, this concludes the Q and A portion of the call. I would now like to turn the presentation over to management for closing remarks.

Steve Andersen (VP of Investor Relations)

Thank you, Jeff. We appreciate your taking the time to listen to our first quarter earnings call and hope you have a great day. Good day.

Operator (participant)

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.