Labcorp Holdings - Earnings Call - Q4 2010

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Laboratory Corporation of America earnings conference call. My name is Shawn Fillet, and I will be your facilitator for today's call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero, and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn this presentation over to your host for today's call, Mr. David P. King, Chairman and CEO of Labcorp. Please proceed, sir.

David P. King (Chairman and CEO)

Thank you. Good morning, and welcome to Labcorp's 2010 fourth quarter conference call. Joining me today from Labcorp are Brad Hayes, Executive Vice President and Chief Financial Officer; Ed Dodson, Senior Vice President and Chief Accounting Officer; and Steve Anderson, Vice President, Investor Relations. This morning, we will discuss our fourth quarter and full year 2010 financial results, highlight our progress on our 2010 key strategic initiatives, discuss our 2011 priorities, 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 (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 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. These non-GAAP measures include adjusted EPS, 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 other 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 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 (EVP and CFO)

Thank you, Steve. By now, you should have had a chance to review our fourth quarter and year-end financial results, which include the financial results of Genzyme Genetics for the month of December. On today's call, I will 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 year ended December 31st, 2010, was $757.5 million compared to $747.7 million in 2009, both net of transition payments to UnitedHealthcare. We remain pleased with our cash collections. Excluding the impact from Genzyme Genetics, DSO improved one day year-over-year to 43 days at the end of December and declined sequentially by one day from the third quarter. As a result of our success in cash collections, we are lowering our bad debt rate to 4.7%. Second, revenue growth.

Revenue increased 11.2% year-over-year in the fourth quarter. Genzyme Genetics accounted for approximately 3% of this growth. During the quarter, we achieved strong growth in revenue per requisition, which increased 7.3% year-over-year. The growth in revenue per requisition is attributable to acquisitions, rate increases, test mix shift, and increases in tests per requisition. Genzyme Genetics accounted for approximately 2.5% of the growth in revenue per requisition. Total company volume increased 3.6% year-over-year during the quarter. Genzyme Genetics accounted for approximately 0.3% of this volume growth. The contract losses in 2009 that we have previously discussed reduced volume by 1%. Esoteric volume increased 5.5% in the quarter. Third, margin. For the fourth quarter, our adjusted operating income margin was 19.5% compared to 19.1% in the fourth quarter of 2009. Recent acquisitions that we have not yet fully integrated caused a 150 basis point drag on margin. Fourth, liquidity.

We remain well capitalized. At the end of December, we had cash of $230.7 million and approximately $460 million available under our revolving line of credit. At the end of December, total debt was $2.2 billion. During the fourth quarter, we did not repurchase any shares of our stock due to the closing of the Genzyme Genetics acquisition. During January 2011, we completed our previously approved share repurchase program, buying back approximately $234.2 million of stock, representing approximately 2.6 million shares. Before we review our 2011 guidance, I'd like to note that beginning with our first quarter results, we intend to modify our adjusted EPS to exclude intangible amortization associated with our acquisitions. As we continue to grow the business through acquisitions, we will begin using earnings excluding amortization as a measure of operational performance, growth, and shareholder returns.

We believe adjusting EPS for this amortization will provide investors with better insight into the operating performance of our business. If we had made this adjustment for the fourth quarter of 2010 and 2009, adjusted EPS excluding amortization would have been $1.46 compared to $1.26 for the fourth quarter of 2009 and $5.98 for the full year 2010 compared to $5.24 for 2009. For the full year 2011, excluding intangible amortization will increase our adjusted EPS by approximately $0.50. This adjusted EPS excluding amortization will be the measure we request First Call to use in compiling 2011 consensus EPS estimates. As such, to ensure comparability, we are requesting research analysts to also provide estimates on this basis. We will provide reconciliation tables in future earnings releases so that investors can clearly see the adjustments we will make. This morning, we announced 2011 financial guidance.

We expect revenue growth of 9.5%-11.5%. Adjusted EPS excluding amortization in the range of $6.12-$6.32, excluding the impact of any share repurchase activity under the new share repurchase program announced today. Operating cash flow of approximately $900 million and capital expenditures in the range of $140-$150 million. We anticipate that Genzyme Genetics will contribute approximately 6% to revenue growth. We estimate that the Genzyme Genetics acquisition will be $0.25-$0.35 diluted in 2011. Excluding amortization, that EPS dilution will be $0.16-$0.26, primarily attributable to interest expense. However, we expect the transaction to be slightly accretive to operating cash flow in year one, excluding transaction costs such as legal and advisory fees and restructuring costs.

Due to the normal post-acquisition enrollment process for government payers and the contract assignment process for managed care payers, the company will experience delays in billing for services rendered by Genzyme Genetics. Cash collections, receivable agings, and DSO in the first quarter of 2011 will be negatively impacted by these delays. The company expects the delays to be resolved in due course, and the related billing and collections will be brought up to date during the second quarter of 2011. Finally, beginning in the first quarter of 2011, we will no longer provide the test and payer mix slides within our quarterly 8-K filings, which can be found on slides seven and eight of our 8-K filing this morning. I will now turn the call over to Dave.

David P. King (Chairman and CEO)

Thank you, Brad. We are very pleased with our fourth quarter and 2010 results, and I would like to begin by highlighting our accomplishments over the last year. We did a great job growing the business in 2010. We grew revenue 6.6%, adjusted EPS 13.5%, and achieved the goal of coming in at the top of our guidance. We accomplished this with both organic and acquisition-driven growth. In the third and fourth quarters, we saw increases in volume from our core business, reflecting our continued effort to sell more effectively. The organic growth we achieved in the second half of the year positions us well to continue the positive volume trend in 2011. We made significant acquisitions in key markets: DCL in Indiana, Westcliff in California, and Genzyme Genetics in Esoteric testing.

Genzyme Genetics was the crown jewel of our acquisitions this year, but our M&A team overall had a terrific year. We gained entry to the Empire Blue Cross Blue Shield plan in New York, which is the largest plan in the New York metro area by membership. This has been a long-standing goal for the company and provides us with a solid growth opportunity in the New York metropolitan area. We launched the Labcorp Beacon product. Customers can now receive results from all Labcorp brands, including Dianon, US Labs, and Esoterics, through the Beacon portal. We have over 4,500 customers using Beacon for delivery of results, and the number is growing weekly. We also released the Beacon mobile iPhone app to meet the needs of our clients. We improved our efficiency and realized our planned 2010 cost savings.

We completed the Sysmex Hematology Automation Project, the largest laboratory automation project ever undertaken in the United States. We implemented touch accessioning in nearly 400 patient service centers and are processing more than 23,000 accessions per day with this system. Touch is an on-screen draw tool that allows us to fully accession specimens in patient service centers, reducing paperwork and labor. We also implemented online appointment scheduling in our AccuDraw specimen collection tool in all patient service centers. We continued the consolidation of our billing resources and the implementation of lean processes. The billing team's accomplishments, with strong support from the operating divisions, were impressive. We reduced our billing footprint from 24 to 13 locations and opened our new billing facility in Greensboro, North Carolina. We reduced bad debt significantly despite a difficult economy. We excelled in scientific innovation in 2010.

Labcorp became the only national laboratory to offer IL-28B testing for responsiveness to interferon in hepatitis C patients. Hepatitis C infects an estimated 4 million people in the United States and 170 million worldwide. We introduced five other new assays from Monogram alone, including GenoSure, a lower-cost, faster genotypic resistance assay that uses Monogram's algorithm to correlate HIV genotype and phenotype. Our scientists also authored over 100 abstracts for presentation at scientific meetings and over 65 peer-reviewed journal publications. These are terrific achievements, and it is gratifying that the market took notice of our success. Our share price was up 17.5%, creating nearly $1.5 billion in additional shareholder value. We intend to continue this record of achievement in 2011.

Our key strategic goals are: first, use our free cash flow to make strategic acquisitions that will enhance our test menu and expand our geographic footprint. Second, improve our ability to provide actionable information rather than simply lab data. Third, continue to optimize our business so that we remain the lowest-cost and most efficient provider. Fourth, bring innovation to the market at reasonable prices. Specifically, in 2011, we will integrate DCL, Genzyme, and, assuming success in the FTC matter, Westcliff, into Labcorp operations and make other acquisitions that meet our strategic criteria. We will implement Beacon order entry functionality nationally so doctors can order all Labcorp services and receive results through a single online portal. We will incorporate Genzyme Genetics order entry and result delivery into the Beacon product.

We will also develop and introduce the Beacon patient portal and the Beacon hospital edition to meet the needs of our clients and patients. We will continue to implement touch in patient service centers and begin using touch with in-office phlebotomists and in-physician offices, with the goal of continuing to improve the physician and patient experience. We will implement voice-activated appointment scheduling so those who do not wish to use computers can schedule an appointment without a live operator. We will explore collecting demographics in advance of patient encounters so that we can further expedite the blood drawing process and improve the patient experience. In 2010, we began a 110,000 sq ft addition to our Powell Center for Esoteric Testing in Burlington, North Carolina. When we complete this project in 2011, we will have a state-of-the-art facility to continue our leadership in development and performance of Esoteric testing.

We will continue innovations such as our virology report, a compilation of data that we recently released regarding infectious disease testing in the U.S. that is without peer in the field of virology. The report will assist clinicians, scientists, and public health officials in understanding infectious diseases and treating patients optimally. We already have three major new tests planned for Monogram alone in the first half of 2011: V3 genotype for viral tropism, Permark 2 adding P95 for septin resistance marker, and GenoSure MG Plus, a genotypic HIV resistance assay that includes protease, RT, and integrase genes. In summary, we are very pleased with our fourth quarter and full year performance, and we are proud of our progress on our key strategic initiatives. We remain optimistic about the growth opportunities ahead, and we are focused on the operating and financial objectives that will allow us to realize them.

Now, Steve Anderson will review anticipated questions and our specific answers to those questions.

Steve Anderson (VP of Investor Relations)

Thank you, Dave. Your guidance appears below consensus. Is this the case? Our guidance encompasses a wide range of potential outcomes. That said, in reviewing the most recent analyst estimates for 2011, we 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. Furthermore, the appreciation of our share price during the fourth quarter has increased the number of equivalent shares used for calculating diluted EPS. Also, we believe a number of analysts have modeled less dilution from Genzyme Genetics than our guidance includes. How has the recent severe weather impacted your business? We have experienced severe weather in many areas of the country thus far in 2011, which has negatively impacted our volumes.

However, our guidance issued today does not include any reduction in EPS due to the impact of severe weather. Can you update us on the mix of your business coming from Esoteric testing? In the fourth quarter, approximately 37% of our revenues were in the 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. The acquisition of Genzyme Genetics will allow us to achieve this goal in the first quarter of 2011. 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?

Again, I would observe that we repurchased $234.2 million worth of our shares last month and received a new $500 million authorization from our board. 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 12% year over year. That compares to a year-over-year increase of 13.9% in Q3 of 2010, 15.4% in Q2 of 2010, 6.8% in Q1 of 2010, and a year-over-year decrease of 6.5% in Q4 of 2009. Why are you removing the payer and test mix slides from your 8-K filings? We believe this information has been used to our detriment competitively.

The relevant information in these slides can be found in our 10-Q and 10-K filings. Now, I'd like to turn the call back over to Dave.

David P. King (Chairman and CEO)

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

Operator (participant)

Ladies and gentlemen, at this time, if you'd like to ask an audio question, please press star one on your touchstone telephone. If your question has been answered or you wish to withdraw your question, please press star two. Please press star one at this time. Your first question comes from the line of Adam Feinstein of Barclays Capital. Please proceed.

Adam Feinstein (Managing Director)

Close enough. Good morning, everyone. Just had a few questions here. I guess, Dave, maybe just a good starting point is just the core volume growth looked very good. Maybe just talk about some of the drivers there. Just curious how much of an impact Empire had in the quarter, and just wanted to get some color in terms of the acquisitions in terms of the impact there as well.

David P. King (Chairman and CEO)

Okay. Probably the major drivers of core volume growth, as Steve pointed out, were improvement, again, in drugs of abuse testing year over year. We did have benefit from the acquisitions as we called out. Genzyme Genetics, from a volume perspective, was not significant, but we did have benefit from Westcliff and DCL. We continued to see good strength in vitamin D. We saw better year-over-year performance in some of the women's health testing, Pap, HPV, some other things that, as we've mentioned before, had trailed in the first three quarters. Generally, across the board, improvement. On Empire, I would say our performance improved in the fourth quarter versus where it was in the third quarter. We still have a ways to go in terms of achieving full execution of our goals for Empire volume, but we saw sequential improvement in Empire volumes, which we're pleased about.

Adam Feinstein (Managing Director)

Okay. And then just a quick follow-up. Would you say that you think that the market growth rate has picked up slightly or stabilized? I guess throughout 2010, there was a lot of noise just about overall market growth, and you guys did a good job of growing in terms of taking market share. Do you believe the actual market growth rate is stable or maybe growing slightly?

David P. King (Chairman and CEO)

I think it's definitely stabilized, and it looks like in the fourth quarter, we did start to see some growth in some areas. As I've mentioned before in response to specific questions about volume increasers and decreasers, vitamin D growth has been slowing throughout the year, which has an impact on overall volume but also on the esoteric testing. The other thing that I had mentioned was that we had seen year-over-year a noticeable decline in Paps. And what that means is when Paps decline, the reflex testing from Paps decline as well. What we started to see in the fourth quarter was some better year-over-year Pap volumes, and that also helps with HPV volumes and volumes of other testing that are being done related to or concurrent with Paps. We're seeing growth in other Esoteric areas, although again, very small base with things like IL-28B.

I mean, I think, Adam, the market is stable and starting to grow again. I think as long as there's some sense of economic optimism, we'll see similar optimism in the market here.

Adam Feinstein (Managing Director)

Okay. And then just my final question. I appreciate the time here. Now that you guys have owned Genzyme for a couple of months, I guess just any new thoughts, any new things you have learned? Just any update. I mean, you guys spent a lot of time going through the opportunity and the earnings impact previously, but I guess just wanted to just get an update as you're thinking about that opportunity.

David P. King (Chairman and CEO)

Yeah. We have a month under our belt. What I would say is that what we're seeing, I think, is very much what we expected. There is a terrific group of Genzyme employees, really from top to bottom, from management to pathologists to reproductive health specialists to genetic counselors to lab techs. We're very pleased with that. We're very pleased with retention of those employees. We think they're happy to be part of the Labcorp family, and we're certainly happy to have them. The revenue numbers for December we were pleased with. They came in where we expected them to, which means we did not see a lot of customer attrition, which is terrific. The expenses were no surprise. We knew that the expense base in Genzyme was higher than we wanted it to be. We have work to do there.

I would say, all in all, the integration has gone very smoothly. It's a tribute to a lot of people on both sides. There was an enormous effort from our HR people and Genzyme HR people to get all the Genzyme people enrolled in our benefit programs and on our payroll systems in a very short period of time. There's been a great effort by the Genzyme employees to harmonize their work practices, their ordering patterns, the pilots, and use of the PSCs. There's been a great, I think, welcome from the Labcorp side of the additional capabilities. All in all, I'm very pleased with where we are, and I think it's going to prove in years two and three and the years beyond to be a tremendous acquisition and very positive in terms of the cash generated and the earnings power.

Adam Feinstein (Managing Director)

All right. Thank you very much. Appreciate it.

David P. King (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Bill Vanello of RBC Capital Markets. Please proceed.

Hi. Thanks. A couple of questions, mostly on the guidance related. First of all, can you give us any sense of how much dilution there was from Genzyme in the fourth quarter from an APS standpoint?

David P. King (Chairman and CEO)

I'm not going to answer the question specifically, Bill, because then we're going to end up answering that question every single quarter. I will tell you it was exactly what we expected it to be, and it is consistent. It is exactly consistent with what we've said about 2011, which is that it would annualize to a $0.16-$0.26 dilution, not including the amortization.

Okay. So, pull in if I sort of take the $0.25-$0.35 and divide it by 12, I'm going to get close.

You're going to be right. You're going to be right in the neighborhood.

Okay. And then I haven't adjusted my math for that, but just if I look at the guidance, I mean, it would sort of seem to imply that the foundation model you've talked about, you don't expect to necessarily hold in 2011. I mean, I'm just doing the math, and if I add back the Genzyme dilution, it seems like the midpoint of guidance is about 7.5% EPS growth, which seems considerably lower than what you typically talk about in terms of 10% at least. I'm just curious if you have any comments on that.

Sure. So here's how I do the math, and I'll just run through the numbers and show you why I think that it implies 10% EPS growth. We start with adjusted EPS excluding amortization for 2010 of $5.98, and I put 10% growth on top of that, and that gets me to $6.58. I take off $0.26 for Genzyme dilution, and I take off $0.10 for the difference in share count between the consensus estimates and our estimates because there's a 5 million share difference between our share count and the share count that's being shown in the models. $6.58 minus $0.36 gets me to $6.22, which is right smack in the middle of the guidance range. I think this implies 10% EPS growth ex Genzyme and using the current share count. I think it implies 10% growth. It does not include share repurchase.

You're going to ask me this, so I'm going to say right away, yes, it does include the dilution from Genzyme at the high end of the 16-26 rather than in the mid-range. If we do better, obviously, we have opportunity there. Basically, it's exactly what we have said would happen in 2011. In 2012, we've said Genzyme will be accretive, and we will go back to making up this dilution plus our 10% growth. I don't think the foundation model is broken. I think the foundation model works, and I think this is very consistent with the foundation model.

Okay. That makes sense. I guess when you think about your 10% sort of normalized growth, that does assume some leverage on the share count. That helps a little bit. Just the last question on the guidance, and I'll hop back in the queue. Does it assume continued dilution from Westcliff at this point, or do you not want to purse it to that level?

I can't resist the opportunity to say the guidance encompasses a wide range of outcomes. But having said that, it basically assumes that Westcliff, I think it assumes that for the full year, Westcliff is sort of slightly diluted for the first half as it has been. And then the FTC matter gets resolved, and it becomes neutral to maybe slightly accretive in the last quarter. So all in, Westcliff, I don't think is material one way or the other.

Okay. Great. Thank you.

Operator (participant)

Your next question comes from the line of Robert Willoughby of Bank of America Merrill Lynch. Please proceed, sir.

Robert Willoughby (Analyst)

Hey, Dave. You're trying to help us understand the operations with a move to cash earnings, but you're then eliminating the disclosure on the payer and test mix that Brad cited. I mean, how are the—this was really the relevant operating metrics that you've disclosed for over a decade, I guess. Why does this happen concurrently?

David P. King (Chairman and CEO)

There isn't we've talked for a long time, Bob, about eliminating the payer and test mix disclosure because we do feel that it has been used to our competitive detriment. It's been used by competitors in pricing negotiations. It's been used with accounts to say, "Look, Labcorp's histology business is down, and it must mean they're not good at histology." We're the only ones who provide this level of detail in our disclosure. You won't find it in anybody else's disclosure. I don't see why we should continue to provide information in that level of detail that we feel is a competitive detriment at this point.

Robert Willoughby (Analyst)

It brings up two questions. I mean, would you provide it on an annual basis, which I think your competitor does? And then secondarily, how do you propose we monitor your progress with Genzyme? Because that was one area that I thought the disclosure would help us understand how well you're doing on that front.

Brad Hayes (EVP and CFO)

Bob, this is Brad. In each 10-Q in our MD&A section, we talk about, at a high level, the esoteric versus the routine testing both on revenue and I think volume as well. There are going to be some disclosures that we've done historically that will continue. In each 10-K, there is some further disclosure about our payer mix. We think there is some very relevant disclosure that's been there that will continue to be there on those two metrics. As it relates to Genzyme Genetics, I think our general comments about our results as we move forward will be the best way to understand those as opposed to what you would see in the schedules that we're eliminating.

David P. King (Chairman and CEO)

Yeah.

Bob, obviously, we will give, we have always prided ourselves on the transparency of our disclosures, and we will continue to disclose everything that our competitors disclose and probably more. With Genzyme, I mean, as you saw in this quarter, we did call out the impact on volume. We called out the impact on price, and we called out the impact on revenue. We are not trying to keep it a secret. We will be very clear in what Genzyme's contribution is from a revenue perspective, from a margin perspective. Those are questions that we will not have any problem answering.

Robert Willoughby (Analyst)

I guess it gets more challenging to the extent you remain active on the acquisition front. I mean, that's where the uncertainty I think will stem from going forward. I don't know how you'll break it out in the future as incremental deals do happen, but that would be a concern from our end. I guess another question, Dave. With the move to cash earnings, how do you anticipate senior management's incentive compensation metrics will then change? Will you be paid on a cash earnings metric? If so, how are you guys going to be held accountable for some of the premiums you're paying for these deals?

David P. King (Chairman and CEO)

Yes, we will. The EPS, adjusted EPS excluding amortization, will be the measure of our performance. It'll be the measure of company operating performance. It'll be the measure of our incentive compensation. It'll be the measure of all of our compensation because it'll be the measure of our compensation for our bonus compensation for EPS and all the other metrics. In terms of the prices for deals, this is one of those things where I think we have a record historically of paying very reasonable prices for transactions. We have, I think, demonstrated that we are responsible in the way that we deploy our capital and spend our cash. That's not going to change.

This is something that has been the adjusted EPS excluding amortization has been something that our shareholders and our investors have been encouraging us to do to give a clearer view into the earnings power and the performance of the business. It is something that as we continue to acquire, it is a growing expense, and it is a non-cash expense. It is not going to change the way we look at acquisitions. It is simply going to change the way we report earnings to our investors, analysts, and shareholders.

Robert Willoughby (Analyst)

Dave, that's kind of that's very difficult for us to get our arms around because I am certainly acutely aware of my own metrics that I need to hit. If you can meet a compensation goal by making that extra acquisition to get you above some cash earnings number, isn't that a conflict for you?

David P. King (Chairman and CEO)

The issue in my mind is for acquisitions to get you above a cash earnings number, they still have to earn. When you acquire revenue that's not earning, you actually don't improve your cash earnings, whether you exclude the amortization or not. They still have to be earning money. Part of the impact, obviously, in next year's guidance is that Westcliff and Genzyme have not historically been earning money or have not been earning as much money as they should earn given our model. No, going out and just doing acquisitions for the sake of doing acquisitions may help you grow revenue, but it doesn't help you grow earnings. That's why we focus on doing acquisitions that are going to be accretive to earnings in the near and long term.

Robert Willoughby (Analyst)

I'll leave it, but it's the premium that you would pay for some of these deals that the market is ultimately going to hold you accountable for. Some broader return on invested capital metric will incorporate that metric. It sounds like you folks will not going forward. I think there will be a challenge somewhere down the line with that for you.

David P. King (Chairman and CEO)

I think the market should hold us accountable, and we welcome the market holding us accountable because we should be held accountable for the deals we do and our performance. We welcome that.

Robert Willoughby (Analyst)

Thank you.

Operator (participant)

Your next question comes from the line of Tom Gallucci of Lazard Capital. Please proceed.

Tom Gallucci (Analyst)

Thank you. Good morning. I guess just a couple of quick ones. First, I guess the implied revenue guidance is more like 3.5-5.5, excluding Genzyme, if I heard your numbers correctly. Wondering if you could break that down any further. I do not know, price, volume, or do you assume some other small deals in there over time?

David P. King (Chairman and CEO)

I think, Tom. It's Dave, I think you're right about the implied guidance. We don't break down price versus volume. Yes, our revenue guidance always includes the impact of some small fold-in deals, but not material to top-line growth.

Tom Gallucci (Analyst)

Not material to the overall number? I mean, you're talking about like 1%-2% to the growth number, or? I'm just trying to figure out what you really think the underlying market grows, even if you don't want to get into sort of price and volume specifically.

David P. King (Chairman and CEO)

The fold-in acquisitions are not a material part of the 3.5%-5.5%.

Tom Gallucci (Analyst)

Okay. All right. That's more clear. Thank you. And then what about for the quarter, I think in response to Adam earlier, you talked about the drug testing being strong and Westcliff and DCL adding to volume. Can you sort of frame that for us as well, so we can, again, sort of try and get the underlying market condition?

Brad Hayes (EVP and CFO)

Hey, Tom, this is Brad. This is consistent with our discussion in the third quarter and I think in the first half of the year too. Because we have some of the acquisitions that you mentioned, the drugs of abuse testing business growth, as well as contract losses, which we've been very consistent in talking about, there's an analysis that we do where we take away all those items and look at what I would call the underlying growth rate. Now, it does not capture every acquisition, but certainly the big ones that you've mentioned. We've seen that growth was around flat, and this is on a volume basis in the first half of the year, improved to about 1% in the third quarter, and up to about 2.7% in the fourth quarter.

We have seen throughout the year 2010 an improvement in that sort of, I'm sorry, organic, if you will, volume growth rate.

Tom Gallucci (Analyst)

Right. So that was just excluding the drug testing, the bigger acquisitions, and the contract losses.

Brad Hayes (EVP and CFO)

That's correct.

Tom Gallucci (Analyst)

Okay. I just wanted to make sure I was clear. You said there was some weather, but you said that your guidance does not really have any EPS impact from weather. I am assuming that just to date, it has been immaterial to your earnings. Is that what you were sort of trying to say?

David P. King (Chairman and CEO)

No. We're talking about 2011 weather. So we're talking about what's occurred so far. And when we give our guidance, our guidance is based on our outlook at the beginning of the year and how we think as the foundation model works. And so I don't think we should sort of adjust our guidance midstream in the middle of the month of January or in the beginning of the month of February because we saw some weather. Our guidance does not take the weather into account, but if the weather has an impact on our first quarter results, which we expect that it will given the severity, then we'll tell you when we report the first quarter what the weather impact was.

Tom Gallucci (Analyst)

Okay. I guess given one difficult month behind us, would you at least frame at all sort of what the impact has been from a volume or top-line standpoint at least?

David P. King (Chairman and CEO)

The weather was very tough in January, and it definitely had a noticeable impact on our results. We are not going to talk about January numbers because we know what will happen if we start going down that path.

Tom Gallucci (Analyst)

I guess sort of unique situation, I guess, with the storms we've had, at least hopefully. Okay. I guess last one, you got asked about what your expectations were for Westcliff sort of within the numbers. Can you just update us more broadly there on sort of some of the nuances in the process and how we can monitor that going forward?

David P. King (Chairman and CEO)

Yes. There was an evidentiary hearing in front of a federal judge last week on the FTC's request for an injunction, a continued injunction. There was a temporary restraining order that was granted on the papers back in December. The judge held a full-scale evidentiary hearing. He listened to our view. He listened to the FTC's view. He listened to witnesses. We are expecting a decision on whether the preliminary injunction will be continued when the judge decides, or, I'm sorry, when the preliminary injunction will be issued when the judge decides. We hope that will be soon. In the meantime, we have an administrative proceeding coming up in May in front of an FTC administrative judge, which will be the FTC's opportunity to present its view of the case on the merits and our opportunity to present our view of the case on the merits.

The nearest term thing that will happen, we expect will be a decision from the federal district judge in California about the preliminary injunction. Again, that will be when the judge decides, but we hope it'll be fairly soon.

Tom Gallucci (Analyst)

I guess just to, well, not to assume, but to make sure we're okay in our thoughts, nothing new or different that's been brought up from the government's perspective that's changed your views at all on your situation?

David P. King (Chairman and CEO)

No. Nothing.

Tom Gallucci (Analyst)

Okay. Thanks a lot.

Operator (participant)

Your next question comes from the line of Mr. Kevin Ellis of Collins Stewart. Please proceed.

Kevin Ellis (Analyst)

Good morning. Thanks for taking my questions. Just going back to Westcliff, if the completion of the deal continues to be held up, Dave, will there be a tipping point when you decide to just walk away, and it's not worth it?

David P. King (Chairman and CEO)

It's hard for me to see how that would be the case, Kevin, for a couple of reasons. First of all, on the merits of this transaction, I do not believe there is any anti-competitive effect. I'm simply scratching my head about how it could be perceived that increasing our market presence in the state where we've historically been significantly underrepresented could be viewed as anti-competitive. I don't think we're going to walk away from the legal argument. From a practical standpoint, Westcliff is a good asset. It's a good laboratory. It has a good patient service center network. It's something that we want to complete the acquisition of. We hope we'll find a way to do that either through the litigation process or through some negotiated resolution with the FTC. I can't see anything that would cause us to walk away from this deal.

Kevin Ellis (Analyst)

Okay. Thank you. Just going into the revenue details since we're soon to not get this information, it looks like genomic testing was down in the quarter a little bit. Just wondering if there's anything behind that. The other moving part was the managed care fee for service increased sequentially. Was that all driven through the acquisitions?

Brad Hayes (EVP and CFO)

Kevin, this is Brad. I think on the genomic testing, that growth rate was, if you're looking at the same numbers on a volume perspective, 6.9 in the third quarter and 5.5 in the fourth. There is a little deceleration of the growth rate there. As we look behind that, I think vitamin D, as Dave mentioned earlier, is still a good grower for us, but it's not growing at the same rate that it has been historically. Also, Genzyme is in the payer mix schedules. I think that's what you're seeing on the managed care portion of that business because Genzyme had a more than our average share of managed care business that's driving the payer mix. Genzyme is helping a little bit back to the genomic volume, but not very much.

Again, Genzyme does not show up much in our volume metrics, but it's more driven by price given the nature of the type of testing there.

Kevin Ellis (Analyst)

Sure. Okay. That all makes sense, Brad. Thanks. Just actually, since I've got you looking at the P&L, other expense was a little bit higher than expected, and then JV income was down. Anything going on with those two line items?

David P. King (Chairman and CEO)

On the JV income line, one of our joint ventures had a non-recurring expense in the fourth quarter, so we know what that is. It is not anything that concerns us on a go-forward basis. When you say other expense, I'm not exactly understanding what line you mean there.

Kevin Ellis (Analyst)

The other income expense line, I think.

David P. King (Chairman and CEO)

Oh, I would.

Kevin Ellis (Analyst)

Yeah.

David P. King (Chairman and CEO)

Okay. No. That does not look like a very material change at all, so nothing there to worry about.

Kevin Ellis (Analyst)

Okay. And then the gross margin was also, I guess, it was more or less flat year over year, but it was down sequentially. Is that seasonality, or is it also acquisition-related?

David P. King (Chairman and CEO)

Both. Yes, I would say that absent acquisitions, we would expect that, and the acquisitions have made it even tougher. I think the compare back to the fourth quarter of last year is the best compare and flat despite the acquisitions. Back to what's going on in the base business, we definitely think there's improvement in the base business on some of these metrics, but the acquisitions, Genzyme and Westcliff, that we've talked about several times on this call, are creating challenges in those margins.

Kevin Ellis (Analyst)

Okay. And then my last question, going back to Dave, is strategically, I'm just wondering what's next for the company. Obviously, the integration of Genzyme Genetics is still at the forefront and completion of Westcliff, but are there regional pockets within the country you want to expand in? Are there certain managed care contracts that you want to get into? I know you guys have talked in the past a little bit about Chicago and Michigan, the upper Midwest. Just wondering if you could provide any updated thoughts there. Thanks.

David P. King (Chairman and CEO)

Sure. So again, we've identified kind of the four strategic priorities, which is use of cash flow to make acquisitions, continuing to improve the Beacon product, and our overall IT capabilities, continued optimization of the business because I more strongly than ever believe that post-healthcare reform, the lowest cost and most efficient providers are going to be the successful providers, and that's what we aim to continue to be. Then continuing to bring innovation to market at reasonable prices because, again, the country is looking to spend less on healthcare, and that means as we innovate, we have to bring new tests and new technologies to market at prices that our system can afford. Those at the high level are the priorities. In terms of acquisitions, as we've said all along, things that will complement our esoteric testing portfolio are high on the list of priorities.

Presence in markets that we feel we're underrepresented. We continue to be interested in Chicago, St. Louis, New York City, metro area, Boston. I mean, there are plenty of places where we have the desire and the capability to grow. Again, absent favorable acquisitions at favorable prices, then deploying the cash toward share buyback.

Kevin Ellis (Analyst)

Got it. Thanks, Dave.

Operator (participant)

Your next question comes from the line of Darren Alaric of Deutsche Bank. Please proceed.

Thanks. Good morning, everybody. I just wanted to go back to Genzyme a little bit. Dave, you mentioned that you're pleased with the short time you've had it so far. I just wanted to confirm what you said about customer attrition and revenue attrition. That's something that we all would expect during the first year. Are you saying you haven't experienced that as yet?

David P. King (Chairman and CEO)

Anytime you do an acquisition, you always assume that there will be some customer attrition. What I said is that during the month of December, which is the month that we're talking about, the revenue, the one month we've owned it that we're talking about, the revenue came in pretty much right where we expected it to be, which means that we didn't see sizable customer attrition beyond anything that we had modeled. I'm actually, again, I think it's a testament both to the Genzyme people and their passion in the marketplace, the Labcorp people, in terms of getting the companies working together, that the revenue has been strong and we haven't seen sizable attrition at this point. We're going to continue to do the same things that we've been doing so that we can keep that top-line revenue.

As we've said all along since the day we did this deal, the number one goal here is to keep and grow the top-line revenue and keep and grow the opportunities for the Genzyme Genetics people integrated into the Labcorp platform.

Okay. That's great. And then just so I understand a little bit more about the plan for 2011, and obviously the dilution effect from Genzyme is, in your mind, still the same at this point. But what is the facility consolidation plan with Genzyme? And I guess maybe if you don't want to get specific on that, can you just give us a sense for how you feel the year could progress relative to the overall integration plan, and maybe frame that up for us? We'd expect some normalized margin over the next two years. So, will we get close to that by mid-year? We'll take the full year. Just a little bit more there would be great.

Yeah. I think obviously if you look at the dilution that we have been talking about, we're not going to get anywhere near what we expect to be the ultimate Genzyme margins in year one. The real impact of that starts to be seen in 2012. In my mind, as we've said, it's a complex transaction. There are two separate lines of business here. We are focused on employee and customer retention, client retention, top-line revenue growth. Without going into a lot of detail, the key opportunities are the G&A, the specimen collection, the use of the PSC infrastructure, logistics, and what I would describe generally, Darren, is the supply chain in year one.

We are and obviously will be giving consideration to the facilities, but the number one priority here is not to disrupt the business, not to disrupt the customer experience, to make whatever changes we make seamless in terms of the customer experience. For that reason, I do not expect to see major changes in facility structure, at least for some period of time. Obviously, not talk in detail about what those would be because we are still evaluating what is the best way to run the business and protect that top line.

Okay. And just on the facility side of things, you did call it out here, the 110,000 sq ft. It seems like an almost doubling of what you have in Burlington, if I'm not mistaken. I don't think growth would fill that up necessarily, just from an organic standpoint. Maybe fill us in a little bit more on the plan there.

Yeah. That center for esoteric testing, I do not think it quite doubles the space. It is a sizable addition, but that center for esoteric testing has been bursting at the seams for several years now. Those who have been here longer than I have remember that there was a time when it was probably 10 years or more ago, that we were going to expand the Powell building. We had the plans, and we had the steel out there. Because of the improvement in instrument throughput and the shrinking of the size of instrumentation and decentralizing some tests, we did not need to do it. The volumes there have been growing substantially over time. The number of tests that we offer there has grown substantially. The number of instruments we have has grown substantially. We are literally bursting at the seams there.

It'll be in part to accommodate our present volumes, and it will be in part to accommodate what we expect to be volume growth in the future.

Okay. That is great. Just the last question. You're spending a lot of time obviously talking about Beacon, and it sounds like it is rolling out on plan here. I am curious just to know what the customer response has been like and whether you can give us any color at all on how that is either improving client retention or anything that you might have to help us understand the importance of Beacon.

Sure. I give the IT team all the credit here. They did a terrific job with this product, and they literally have worked, many of them, around the clock to get this into the marketplace. One of the things they did was and it has revolutionized the connectivity experience for physicians when they connect to Labcorp. It is a great achievement. It is a great achievement by the IT people, and obviously with a lot of support from the operating divisions. One of the things they did was we did extensive work with customer focus groups before we designed and launched the product, so that this would be something that, instead of handing the customer something and saying, "Here, take this. It's great," the customers had input into what they wanted to see and how they wanted to use the system. It is very intuitive. It allows dynamic test ordering.

It allows the customer to receive the results the way they want it. It allows the customers to fax and email results right off their screen. One of the things that has been a very frequent complaint is that when a patient is seeing two physicians, it's very difficult for the second physician to get results. It allows the sharing of results with other physicians both within and outside the practice by fax, by email. It allows the physician to annotate results. It's a terrific product. The market response has been very enthusiastic. In fact, the reason that we developed the iPhone app is because doctors were telling us that they wanted to be able to have the Beacon product and the result delivery availability over their mobile devices. Now they can receive the results on the iPhone.

The results are still highlighted in the way that they're used to seeing it on their screens. Through the demographic piece of the results on the iPhone, they can immediately call or email the patient. They can follow up with our discipline directors about if they have questions about the test through the iPhone. The reaction has been great. I'm very excited about when this will be, when we'll be able to launch an app that will allow patients to have access to this information, as well as other applications like mobile access to appointment scheduling, because these are the things that are going to continue to improve the patient experience. What we want to do is we want to continue to improve both the client experience and the patient experience. That's how we think we're going to continue to attract business.

Great. Thanks a lot.

Operator (participant)

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

Amanda Murphy (Analyst)

Hi. Thanks. I just had a question on the margin side. Specifically, if you look over the next year, could you help us frame out where there might be opportunities to drive further margin expansion? If I remember right, you were working on automating sort of the accessioning process and where the variability might come from other than obviously volumes.

David P. King (Chairman and CEO)

I think we've talked about most of the things. Obviously, with the leverage in the business, volume helps with margin expansion. On the cost side, all the things that we mentioned during the call, the continuation of automation projects, the continuation of the touch, and the AccuDraw. By the way, I didn't mention in response to Darren's last question, but the AccuDraw is incorporated into the Beacon ordering system. This is something that physicians are very pleased about. They know exactly how much specimen to draw. It shows right up on their screen. They know what kind of tubes to put it in. It reduces draw issues, specimen draw issues, which again is a big positive for patients. Continuing to look at our facilities, continuing to look at SG&A.

I mean, those are the collection opportunity and bad debt reduction, particularly in some of the acquired businesses. It is an ongoing process of continuing to focus on becoming more efficient and remaining the lowest cost provider.

Amanda Murphy (Analyst)

Okay. And then I guess just thinking about things at a higher level, there's been this trend towards hospitals buying physician practices and ultimately shifting to maybe more of an ACO sort of model. How do you view that in terms of where you guys sit as an independent lab? Is that a risk, an opportunity? What's your take?

David P. King (Chairman and CEO)

In the short term, it's a risk because if hospitals start buying large physician practice groups that are sending large volumes of work to independent labs, one can assume that that work is going to be redirected to the hospital lab. In the long term, in my view, it's an opportunity for a couple of reasons. One, for the most part, hospital labs are charging more for lab services than independent labs are. And if the payers start seeing a trend where, due to acquisitions of physician practices, there's more work going through hospitals and they're paying a higher cost per lab, that only further incentivizes them to move work to the more efficient providers. I think that's a positive for us.

In terms of the accountable care organizations, the accountable care organizations, at least from what I've read, are one of the things that's going to that Medicare is going to be experimenting with, essentially is bundled payment for outpatient services to the ACOs. In a bundled payment environment, who are you going to choose to provide the discretionary services? You're going to choose the lower-cost providers. If the ,ACOs are getting basically a capitated payment pushed through from Medicare to take care of a patient, then why would they select a higher-cost lab provider like a hospital versus a lower-cost lab provider like an independent lab and particularly us? Near term, we haven't seen a noticeable impact from this yet. We could if there are big physician groups going to hospitals, but we haven't seen that yet.

Longer term, again, I think it's going to continue to move work to the more efficient providers in the market.

Amanda Murphy (Analyst)

Okay. Thanks a lot.

Operator (participant)

Your next question comes from the line of Steven Veliquette of UBS. Please proceed.

Steven Valiquette (Managing Director)

Hi. Thanks. A couple of questions here. I guess first, another one on the Genzyme asset. I guess on the one hand, you mentioned today the asset performing exactly in line with what you expected. At the same time, I think you guys made some statements at various conferences, kind of right after the deal was announced, that you thought the deal could still be neutral to slightly accretive right away on a cash EPS basis if you strip out the amortization. Obviously, today, you're still saying it's diluted. I'm just trying to reconcile those two comments.

David P. King (Chairman and CEO)

Most of the dilution comes from the interest expense. Right? What we said was that Genzyme, we think, and we continue to think in year one, will generate cash. We will not lose money on the operations. We have additional financing costs that I think are in the range of $0.20 of EPS that we have to factor in there.

Steven Valiquette (Managing Director)

Okay. Yeah, I figured it's either a change in the amortization or just a change in the financing. It sounds like it was the financing. All right. Second question. I mean, you guys obviously mentioned you have some small acquisitions applied in the guidance, but not share repurchases. I guess from my personal point of view, I would think buybacks would be easier to control than acquisitions. You probably get this question every year around this time, but can you remind us again what's the philosophy behind not including the share repurchases in the guidance? I mean, you've been pretty consistently doing them every year, just trying to remind us again what the philosophy is there. Thanks.

Brad Hayes (EVP and CFO)

Yeah. This is Brad. I mean, philosophy is that, and this is very consistent with what we've always said, we would choose to acquire and grow our business first. It is hard to predict the success of all the opportunities that are in front of us. To dedicate a portion of our cash flow to share repurchase simply for the sake of guidance, we have never done. We prefer to say we're flexible. We look to grow first. If there aren't those opportunities to grow, we then have historically purchased shares.

Steven Valiquette (Managing Director)

Okay. Got it. Okay. Thanks.

Operator (participant)

Your next question comes from the line of Gary Lieberman of Wells Fargo Securities. Please proceed.

Gary Lieberman (Analyst)

Thanks. I think most of my questions have been answered. Maybe if you could provide any kind of update on the Medi-Cal audit or any update on the Florida Medicaid subpoenas.

David P. King (Chairman and CEO)

Okay. It's Dave. On Medi-Cal, just to give you kind of a reminder and a status. So the Hunter Laboratories lawsuit was unsealed in March of 2009. It was filed against Labcorp and other major laboratories, claiming that all of us have improperly billed Medi-Cal and violated the California False Claims Act. We moved for our case to be separated from other cases. That motion was granted. A separate complaint was filed against Labcorp in December, and we are defending that lawsuit vigorously. In July of 2010, there was an audit from the California Department of Health Care Services regarding Labcorp's charges, and DHCS asserts that Labcorp's billing is inconsistent with their interpretation of the California regulations. We disagree with their interpretation of the California regulations. We don't think there's been any such interpretation, and we think that we have properly billed the Medi-Cal program under the applicable laws and regulations.

We are cooperating with DHCS with respect to their audit and a self-audit that they have asked us to do. DHCS is auditing the vast majority of laboratories that do business in California, for similar practices. We are in discussions with DHCS about both our billing practices and about how they interpret their regulations and how they think Medi-Cal should be billed going forward. The trial date in the Hunter Laboratories lawsuit for Labcorp is now in 2012. The only comment I would make is that we're always open to reasonable and appropriate resolutions of litigation. In the meantime, we will continue to defend the lawsuit vigorously. We don't think we've violated any laws or regulations. We'll see how the matter evolves over the next months.

Gary Lieberman (Analyst)

Can you give us any comments on any settlement discussions that you've had in the case?

David P. King (Chairman and CEO)

I can only tell you that we have had discussions. The system in California, the court system, is very insistent about parties discussing settlement and about mediation. We have cooperated fully in that. Those discussions are ongoing. Our view is that we have a sound defense in the litigation. We are going to continue to follow the litigation track until we tell you otherwise.

Gary Lieberman (Analyst)

Okay. Any update in Florida?

David P. King (Chairman and CEO)

I don't think there's any update to give on Florida. We just closed the subpoena in our last filing, and there isn't any new information there.

Gary Lieberman (Analyst)

Okay. Thanks very much.

Operator (participant)

Your next question comes from the line of Ralph Giacobbe of Credit Suisse. Please proceed.

Ralph Giacobbe (Analyst)

Thanks. Good morning. Just wanted to go back on the share count. Can you just give us the assumption you're using for 2011? Is it the 104.5 that you ended with minus roughly the 2.6 that you acquired in the or repoed in the first quarter so far?

Brad Hayes (EVP and CFO)

Yeah. I mean, 104.5 is not going to guide, but that's a logical way to think about it.

Ralph Giacobbe (Analyst)

Right. So just to be clear, so that gets us roughly 102. Just to reconcile Dave's comments, it looked like consensus was closer to 97, 5 million shares off. Is that fair?

Brad Hayes (EVP and CFO)

I've got a little bit higher number on consensus.

Ralph Giacobbe (Analyst)

Okay. All right.

Brad Hayes (EVP and CFO)

It's off in kind of that magnitude. If we look at kind of further the high and low out there, there's definitely about over 5 million shares difference on net incomes that are almost the same. Back to Dave's math, I mean, there's definitely, any way we calculate it, a dime difference between consensus and our numbers based on shares.

Ralph Giacobbe (Analyst)

Okay. All right. Thanks. Is there anything else that we need to consider, maybe on the cost side, as we think about 2011, incremental investments or anything like that that we should keep in mind as we model?

David P. King (Chairman and CEO)

I think the only thing, Ralph, is that our CapEx guidance, we've given you a range that's a little bit higher than what we spent this year and considerably higher than what we spent in 2009. Some of that is just continued investment in Beacon. Some of it is this expansion of the Powell Center for Esoteric Testing. That's the only thing on the cost side that I think is worth pointing out.

Ralph Giacobbe (Analyst)

Okay. And then just my last one. Your biggest competitor talked about more conversations with both managed care and employers, basically working to shift more business. You alluded to it earlier as sort of an opportunity. I guess are you having these conversations as well? Is it something the market's receptive to, or is it just too early at this stage?

David P. King (Chairman and CEO)

I think we have these conversations all the time. How do you get more business into the payer networks? How do you get business away from the higher-cost providers? I think in terms of controlling out-of-network spend, there is a high level of energy on the part of the payers to control out-of-network spend. I think the experience of some of the competitors who have aggressively followed an out-of-network strategy suggests that the payers understand that strategy. They are not receptive to it. You are starting to see pretty aggressive efforts to redirect that work. I think on work that is going in network but to higher-cost providers, that is a work in progress. A lot of that is going to depend on what is the payer's appetite or level of energy for really pushing work to the lowest-cost providers.

As I said in response to Amanda's question, a lot of that is going to be dictated by the economics of the business and by how people start getting paid. I think we're in a good position to benefit from that.

Ralph Giacobbe (Analyst)

Okay. Thank you.

Operator (participant)

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

Gary Taylor (Analyst)

Hi. Good morning. Thanks for taking the call. Just a few questions. I wanted to verify—sorry to go back to this—but just the disclosure on the tests and revenue. I thought you were saying it would not be in the slides, but you said that information is in the Qs and Ks. Is it that we are going to get some of that later, or is it not going to appear anywhere?

David P. King (Chairman and CEO)

You'll get it at a high level, but not at the level of detail that we have given it every quarter. In response to the earlier comment, we'll certainly consider giving it on an annual basis if that's what the competitive marketplace is doing. For the most part, you're not going to get it every quarter at this level of detail.

Gary Taylor (Analyst)

Okay. I just wanted to make sure I understood. Secondly, on Genzyme revenue, obviously, it was a modest amount this quarter, and then we get the full quarter effect next in the one Q. Does all of that revenue show up in the genomic bucket, or does some of it show up anywhere else?

Brad Hayes (EVP and CFO)

In the fourth quarter, it's all in the genomic bucket.

Gary Taylor (Analyst)

That'll be true on a go-forward basis, I guess?

Brad Hayes (EVP and CFO)

Yes.

Gary Taylor (Analyst)

Okay. Two more quick ones. Can you just go back to, since this has kind of become a topic of conversation, just in terms of the amortization and the change that you're making? Obviously, we do not amortize Goodwill anymore. Can you just remind us what it is, these intangibles that you're actually asked to amortize by GAAP? I think I know they're like customer lists and.

Brad Hayes (EVP and CFO)

Trade names.

Gary Taylor (Analyst)

Trademarks or whatever.

Brad Hayes (EVP and CFO)

Exactly. Intellectual property, things of that nature.

Gary Taylor (Analyst)

What's your view on any economic replacement costs for those assets?

Brad Hayes (EVP and CFO)

Oh, gosh.

Gary Taylor (Analyst)

Is there any, or?

Brad Hayes (EVP and CFO)

I don't think there is. I mean, you take customer lists, which usually gets a very large kind of probably one of the larger allocations. And we have a salesforce that's out there maintaining the customer list. So in terms of any incremental costs to replace that, this is my opinion, there is none.

Gary Taylor (Analyst)

Okay. And then the final question, I just want to clarify. You've explicitly said that the guidance you've laid out does not include the $500 million repurchase authorization, the additional, which you could do. But my understanding is it does include the $2.6 million that you executed in January. Is that right?

Brad Hayes (EVP and CFO)

That's right.

Gary Taylor (Analyst)

Okay. Perfect. Thank you.

Operator (participant)

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

Thanks. Good morning, everybody. Dave, first question. As we think about the lower and the upper range of the top-line guidance, how should we think about that relative to your comments about the overall environment? Should we assume that the low end of guidance kind of assumes that we see this kind of slight recovery that we've seen thus far, and the higher end assumes an acceleration? How should we think about that?

David P. King (Chairman and CEO)

I feel the obligation for when any person named Bill asks me a question to start by saying our guidance encompasses a wide range of outcomes. I am going to start with that. I am going to say, Bill, that yes, the low end of the guidance would assume that we sort of see a continued lack of acceleration in the market for tests. We continue to see physician office visits declining or certainly not improving. The mid-range of the guidance assumes that the business continues to perform basically the way it has performed in the second half of the year. As I noted, it also assumes that the full $0.26 of Genzyme dilution occurs. The upper range of the guidance, we could achieve in a variety of ways, which is why we say that it encompasses a broad range of outcomes.

We could achieve it by better performance from Genzyme on a, in other words, being less dilutive. We could achieve it by favorable changes in test mix. We could achieve it by continued improvement in test per requisition. We could achieve it as stronger volume growth. I think you're correct in framing it as the mid-range of the guidance assumes the business continues to perform as it has performed in the second half of the year. The lower end assumes that if anything, we go backwards a little bit in terms of the economic environment. The top end, there are several different options about how we would end up there, but they would all generally involve an improving market environment.

Very good. And then two quick last ones from me here. Just in terms of any expectations, Dave, there's a couple of interesting upcoming meetings, one on DTC advertising and the second being a fairly long expected one in terms of potential changes anyway to CPT coding. Any thoughts on either one of those?

I think it's good that DTC advertising is getting some attention. I think if you go to your computer and you Google direct-to-consumer genetic testing, you'll find some pretty astonishing things advertised, including we do genetic testing. I'm not saying we, Labcorp, but there are companies out there that say they do genetic testing to tell you whether your child is going to be a good athlete, which is really, in my mind, not very responsible. I think it's good this area is getting some attention. I will say this has been an area that has been, there has been a lot of frustration about this for a long time. I'm not sure anything is going to happen in the near term.

On the CPT coding, I think the biggest goal that has been articulated is to get greater transparency in coding for molecular testing. And as I've said all along, I mean, we're supportive of transparency in billing and coding, and we're supportive of consistency among laboratories about how they bill and code because coding and billing should not be used as competitive tools. I think where the issue is doing this in a way that allows the providers time to make appropriate transitions. If you're going to change a coding system, there's a lot of IT work that goes behind our coding and billing and doing it in a way that does provide greater transparency and doesn't create just another layer of paperwork. Those are the things that we're focused on as we think about that CPT coding meeting.

Again, generally, greater transparency and greater consistency in billing and coding, we're in favor of.

Okay. Very good. Then just the last one for me. You threw it out there earlier in terms of the iPhone app for docs. Any thought, Dave, in terms of building one for, say, the Android operating system? Thanks.

I'm going to have to punt. I feel very sure that our IT people are working on that, but I don't have a firm answer for you.

Okay. Great. Thanks, guys. Appreciate it.

Operator (participant)

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

Kemp Dolliver (Analyst)

Hi. Thank you. First question is, over the last few months, some nontraditional companies have made acquisitions in the molecular segment of the market. I wanted to get your thoughts with regard to, do you see other nontraditional players competing for acquisitions? What's your sense of how the competitive environment in that market for acquisitions and then also just for services might evolve now?

David P. King (Chairman and CEO)

It's interesting that GE and Novartis and McKesson have acquired assets that we think of as being kind of, in the case of GE and Novartis, pretty pure lab assets. McKesson is a, that's a complex structure, US Oncology. Everything I've read and all of the commentary that those companies have made suggests that they view these acquisitions as a platform for enhancing their position in molecular diagnostics and personalized medicine. The good news about that is we have been enhancing that platform and building that platform for many years. I think we have a very strong position through our clinical trials business, through Monogram, through Genzyme Genetics, through our own genetics and oncology programs. We just have a terrific platform already. Obviously, it will be interesting to see how those competitors deploy the assets that they've acquired.

I think we're in a very good position to maintain our leadership in the whole personalized medicine environment. There will certainly be some changes in the marketplace as a result of having a GE or a large pharma company standing behind what have been relatively small lab assets. Again, I think anything that advances the cause of personalized medicine, anything that advances the cause of better patient care, anything that advances the cause of being able to target the right therapeutic to the right patient at the right time and therefore reduce systemic costs is a good thing. We should welcome it.

Kemp Dolliver (Analyst)

Great. Thanks. Just one other question that relates to your comments on guidance and the share count. There was a comment about the impact of the stock price on the share count during the fourth quarter and presumably into 2011. I mean, how significant is that in this discussion about the share count?

Brad Hayes (EVP and CFO)

Kemp, this is Brad. We think it has a million-plus impact over the fourth quarter for us in terms of share count with the impact of options as well as the impact of there's some shares involved in our convertible debt that the number of shares go up as the price goes up. But it's a good problem to have.

Kemp Dolliver (Analyst)

Right. Is there just a broad algorithm in terms of if the stock moves five points, that it's another million shares or down? Just any rough guidance you can give on that?

Brad Hayes (EVP and CFO)

No, I don't think so.

Kemp Dolliver (Analyst)

Okay. Very good. Thank you.

Operator (participant)

Your next question comes from the line of Chris Fidyk of Findlay Park. Please proceed.

Chris Fidyk (Analyst)

Hi, guys. Thanks for taking the question. Can you just help me explain why the free cash flow this year is not really growing versus last year's? Thank you.

Brad Hayes (EVP and CFO)

Yeah. Chris, this is Brad. So are you talking about eleven to ten or ten to nine?

Chris Fidyk (Analyst)

11 to 10 and really 10 to 9 as well. It's sort of three years above the level.

Brad Hayes (EVP and CFO)

Yeah. Just wanted to be clear. It is about the same in all three years, a little bit different. Interest expense in 2011, as we've mentioned several times, is definitely a detractor from operating cash flow. Our capital expenditures going into the free calculation, 2009 was a very low year if we think back to the state of the world at that time and what companies, including ourselves, were doing in terms of cash spend. We came up some in 2010 and are projected to go up even more in 2011. Even at the 2011 rates, that's about 2.5% of our sales, which I would consider to be back to a normal kind of a spend. Last but not least, the acquisitions. I mean, as we've discussed, their drag in terms of operating income margin is definitely creating a challenge for growing cash flow in 2011.

Back to some of our earlier comments, especially 12 and 13, as Genzyme Genetics starts to perform as we expected it to in those out years, we think that that cash flow will be greatly enhanced.

Chris Fidyk (Analyst)

Okay. Great. Thank you.

Operator (participant)

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

Hi. Thanks for taking my question. I'll be quick. I just want to make sure I'm understanding the volume trends. So they improved throughout 2010. Would you say, I mean, how would you attribute the performance? Would you say it's mostly improving market trends in the back half of the year, or would you say it's taking share or a combination of both?

David P. King (Chairman and CEO)

I just think it's very hard to characterize. I mean, yes, the market has definitely the market trend appeared to improve in the fourth quarter. I think it's a little we think we're doing a good job selling. We think we're doing a good job winning accounts. We think we're doing a good job increasing our presence in accounts that we have won for all the reasons that we've talked about. I'm not going to engage in a lot of chest thumping about taking share or not taking share. We're happy with the volume trends. We like to think that some of it is market-driven and some of it is company-driven with better sales and offering a better product and offering a higher quality service and offering a more convenient service to patients and physicians. I think I'll leave it at that.

Okay. That's helpful. Then as we think about the fourth quarter, I guess, how would you break it down between, I don't know if you can tell, but the underlying trend versus a seasonal issue with patients meeting plan deductibles and whatnot? I mean, based on the types of volumes that saw growth, can you get a sense of how much seasonality had an impact?

No, not really. Because there are so many aspects of seasonality. There is weather. There are holidays. It would be very difficult to try to reach any conclusion there that would be meaningful.

Okay. I guess just on the regulatory outlook, can you give us any sense of when you're expecting we could hear anything from the FDA on regulation of lab-developed tests?

I don't think we have any better sense. We continue to be engaged in discussions with FDA. I think there was a sense after the election that the administration was going back and looking at, did we really need to increase the regulation in a lot of areas that are already regulated by other entities? It is very hard to say, but I don't have any time frame in which we expect to hear from FDA on that. We continue to engage in discussions with them about what's a reasonable way of thinking about it.

Okay. Thank you.

Operator (participant)

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

Anthony Vendetti (Analyst)

Thanks. I just wanted to go over the Genzyme Genetics, what you said in the beginning of the call. So out of your revenue growth expectation for 2011, did you say 6% of that should be derived from Genzyme Genetics?

Brad Hayes (EVP and CFO)

Yes.

Anthony Vendetti (Analyst)

Based on what they did in 2009, if 6% of revenue growth is from that, would that be about $300 million for 2011?

Brad Hayes (EVP and CFO)

That's right. But also taking into account that we had one month in the 2010.

Okay. So that you've got the incremental impact, but you don't have the full.

Anthony Vendetti (Analyst)

Did they do about 371 in 2009?

Brad Hayes (EVP and CFO)

I believe so, yes.

Anthony Vendetti (Analyst)

Okay. So is there a reason why you're expecting that to go down a little bit?

David P. King (Chairman and CEO)

Yeah. There are several reasons. One is anytime we do an acquisition, we model some customer attrition. Anytime we do an acquisition, there is an expectation that because of our managed care contracted rates being the lowest cost and most efficient provider, at some point, the rates of companies that we acquire tend to be compressed. Those are the reasons why our budget is for Genzyme to grow volume in 2011. We feel great about that. That does not necessarily translate into first-year top-line revenue growth.

Anthony Vendetti (Analyst)

Okay. So your billing practices will be in terms of what you charge, it'll be a little bit less even though volume will be going up, correct?

David P. King (Chairman and CEO)

Yes. Because of our contracted rates with managed care payers and because of our discussions with them. I should say that we have had a number of discussions with managed care payers about continuing to maintain Genzyme Genetics pricing. The managed care payers place a high value on the Genzyme Genetics testing. If anything, the number that you've arrived at includes probably a quite conservative approach on our part as to what we might see in price compression. We hope that the managed care plans will continue to recognize the value of the Genzyme services and continue to reimburse at the price point that they have been reimbursing.

Anthony Vendetti (Analyst)

Okay. On the Medicaid plans, obviously, everyone is involved, just about in Medi-Cal, Florida. Are there any other states right now that are piggybacking off Florida and California that are examining their billing practices that you're aware of?

David P. King (Chairman and CEO)

As we disclosed, we have received a subpoena from the Commonwealth of Virginia. That was in February of 2009. We received a subpoena from Florida in June of 2010. We received a subpoena in October 2009 from the state of Michigan relating to Michigan Medicaid. I will tell you, we did not do any, we had no revenue from Michigan Medicaid. I feel confident there's not going to be much to discuss there. Those are the subpoenas that we have received and disclosed.

Anthony Vendetti (Analyst)

Are you required to provide under Medicaid rules, are you required to provide those plans with the absolute best pricing?

David P. King (Chairman and CEO)

I'm not going to get into a legal discussion of our interpretation of how we interpret. The short answer is we do not believe that in California, in particular, that there is any law or regulation that requires us to provide Medicaid with absolutely the best pricing. I would also comment that the laws and the regulations do vary from state to state. In those states where there are lowest pricing rules for Medicaid, we believe we've been quite rigorous in following and complying with those rules.

Anthony Vendetti (Analyst)

Okay. Lastly, on the weather, I know you commented on this. Last year, in the first quarter of 2010, weather in January was pretty bad. I think you mentioned impacted volume back then by 1.3% or $23 million in revenues and about $0.08 in EPS. Clearly, January has been much worse this year. It is built into your guidance, I understand. Suffice it to say, with this weather being worse, it is probably a little more of an impact than it was last year. Is that right?

David P. King (Chairman and CEO)

Let me just be clear. It is not built into our guidance. The guidance does not include any reduction from January weather. Our guidance assumes that we start the year and that we experience normal weather patterns and normal everything else patterns. The guidance does not include any weather impact. I'm not going to—the question is, is it worse or better than last year is another, would sort of be another way of talking about our January numbers, which we're not going to talk about. I will simply say what I said before, which is the weather has had an impact. At the time we report our first quarter results, we will tell you what that impact was.

Anthony Vendetti (Analyst)

Okay. It does not include. Okay. Perfect. Thank you very much.

Operator (participant)

At this time, there are no further questions in the queue. I would like to turn the call back over to management for closing. Please proceed, gentlemen.

David P. King (Chairman and CEO)

Thank you. Thank you very much for listening to our fourth quarter 2010 earnings call. We appreciate the time you spent with us this morning. Good day.

Operator (participant)

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.