Labcorp Holdings - Earnings Call - Q4 2011
February 10, 2012
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Labcorp Holdings' earnings conference call. My name is Jeff, and I'll be your coordinator 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 a coordinator 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 CEO of Labcorp. You have the floor, sir.
David P. King (Chairman and CEO)
Thank you, Jeff. Good morning and welcome to Labcorp's fourth quarter and full year 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 Anderson, Vice President, Investor Relations. This morning, we will discuss our fourth quarter and full year 2011 financial results, provide 2012 guidance, update you on our Genzyme Genetics integration, 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 Anderson, who has a few comments before we begin. 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 8K that included additional information on our business and operations. This information is also available on our website. Analysts and investors are directed to this 8K 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 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, the implementation of our business strategy, and the ongoing benefits of the Genzyme Genetics and other acquisitions.
These statements are based upon current expectations and are subject to change based upon various 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.
William Bradley Hayes (EVP, CFO, and Treasurer)
Thank you, Steve. On today's call, I will review four key measures of our financial performance: cash flow, revenue growth, margin, and liquidity. I'll also review our 2012 guidance. First, cash flow. Our cash flow remains strong, excluding the Hunter Labs settlement of $49.5 million. Free cash flow for the year ended December 31, 2011, was $759.4 million. Cash flow has been negatively impacted by approximately $17 million due to delays in the Genzyme Genetics enrollment process, which we expected and have previously discussed. The impact from these delays has improved by $11 million since the third quarter of 2011, and we expect to continue to make progress in resolving these issues. We remain pleased with our cash collections. BSO was 46 days at the end of December, unchanged year-over-year and sequentially. Our bad debt remained 4.5%. Second, revenue growth.
Revenue increased 5.5% year-over-year in the fourth quarter. Genzyme Genetics accounted for approximately 4.8% of this growth. During the quarter, revenue per requisition increased 4.2% year-over-year. Genzyme Genetics accounted for approximately 4.1% of the growth in revenue per requisition. Total company volume increased 1.2% year-over-year during the fourth quarter. Genzyme Genetics accounted for approximately 0.6% of this volume growth. Esoteric volume increased approximately 3.5% in the quarter. Third, margin. For the fourth quarter, our adjusted operating income margin was 18.9% compared to 19.5% in the fourth quarter of 2010. Year-over-year margin decline was due entirely to recent acquisitions that we have not fully integrated. Excluding these acquisitions, margins would have remained stable year-over-year. Margins will improve as we integrate these businesses, and our guidance for next year implies margin expansion. Fourth, liquidity. We remain well capitalized.
At the end of December, we had cash of $159.3 million and approximately $400 million available under our revolving line of credit. During the fourth quarter, we replaced existing credit facilities with a new $1 billion revolver. We borrowed $560 million under the new facility and repaid all amounts outstanding under our previous term loan and revolving credit facility. In addition to the cash generated by operations, we believe the new $1 billion revolver will provide us with ready liquidity to carry out strategic initiatives. At the end of December, total debt was $2.2 billion. During the fourth quarter, we repurchased $172.1 million of stock, representing 2.1 million shares. At the end of December, $84.4 million of repurchase authorization remained under our previously approved share repurchase program. This morning, we announced that Labcorp's board of directors authorized a new $500 million share repurchase program.
This authorization reflects our continued commitment to return capital to and create value for our shareholders. This morning, we also announced our 2012 financial guidance. We expect revenue growth of 2-3.5%, adjusted EPS excluding amortization in the range of $6.75-$7.05, excluding the impact of any share repurchase activity after December 31, 2011, operating cash flow of approximately $950 million, and capital expenditures of approximately $155 million. I'll 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 2011 results. Before discussing progress on our five-pillar strategy, I would like to update you on Genzyme Genetics. The integration of Genzyme Genetics continues to go extremely well, and we are very pleased with our retention of Genzyme's clients as well as our realization of cost savings. The continuing success of the integration will remain a top priority for us throughout 2012, and we remain confident that Genzyme Genetics will be slightly accretive to earnings this year. In January 2012, as our right to use the Genzyme Genetics name ended, we began rebranding Genzyme Genetics as part of a broader rebranding of Labcorp's specialty testing capabilities to create a consistent market-facing structure. To this end, we adopted the name Integrated Genetics for the reproductive portion of Genzyme's business and Labcorp's legacy genetics business.
We adopted the name Integrated Oncology for Genzyme's oncology business and Labcorp's legacy oncology businesses. This rebranding effort is an important company-wide initiative that will further the second pillar of our strategy in that it will simplify and enhance the physician experience in dealing with Labcorp's many specialty businesses and assets. Response to the branding has been positive, and we look forward to continuing to streamline and focus our brands. Now, I'd like to update you on the progress on each aspect of our five-pillar strategy. 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. In December, we closed our acquisition of Orchid Cellmark, an international provider of DNA testing services primarily for forensic and family relationship applications.
This acquisition strengthens Labcorp's capabilities in forensics and identity testing and establishes our presence in the U.K. With respect to the U.S. portion of Orchid's business, we are pleased to add to our strong forensics and private paternity business. As we disclosed, we were required to divest certain assets of the government paternity business upon closing the transaction. With respect to the U.K. portion of Orchid's business, known as Cellmark, we are pleased to expand our forensics business to a new market. As many of you know, the U.K. government has decided to close its forensic crime testing operations. Thus, Cellmark has a solid market opportunity in the U.K. and will also enable us to evaluate the opportunity to extend our forensics business into Europe. The integration of Orchid is going well, and we expect the transaction to be slightly accretive to our 2012 earnings.
We welcome the talented employees of Orchid, both here and abroad, to our Labcorp family. Finally, we repurchased approximately $644 million of our shares in 2011. The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. Last year, we introduced Beacon order entry nationally, which allows our customers to place electronic orders for almost all Labcorp brands and services. With the previously released Beacon results delivery capability, customers can now place orders and receive results through a simple, customer-friendly portal. We have seen strong growth in adoption of Beacon in 2011, making it our fastest-growing external software offering ever. With Apple and Android versions, we have also brought Beacon capabilities to our growing mobile user base. Additionally, we completed development of the Beacon patient portal.
The portal is a secure and easy-to-use online solution that enables patients to receive and share lab results, make appointments, pay bills, set up automatic alerts and notifications, and manage health information for the entire family. We currently have an active pilot program, and we plan to launch the portal nationwide later this year. We continue to improve our electronic medical record connectivity. Labcorp connects to more than 500 EMRs, working closely with leading EMR partners to streamline connectivity and enhance lab workflow, assisting clients in seamlessly integrating lab services into their EMR solutions. We added over 6,000 new client EMR interfaces in 2011. We continue to pursue our differentiated open platform strategy, allowing our customers to connect to Labcorp directly or via their EMR of choice. We made a conscious decision to pursue this open platform approach because it is what our customers want.
Going forward, we will continue to enhance our Beacon Platform by providing more and better patient and physician-facing IT solutions. The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. In the fourth quarter, we continued our Touch AccuDraw system implementation to an additional 76 sites. The system is now deployed in more than 1,100 sites across the country and is processing over 1 million accessions per month. We continue to enhance the system that allows our phlebotomists, a critical link in our sample flow, to improve accuracy, workflow, and processing time to enhance the patient experience in our patient service centers. In December, we opened a 110,000 sq ft expansion to our Burlington Lab campus.
This state-of-the-art facility will provide an improved work environment for our employees and will allow us to consolidate satellite locations and enhance specimen flow. Additionally, it provides significant capacity for future growth. The fourth pillar of our strategy is to continue scientific innovation at reasonable and appropriate pricing. We introduced 104 new tests in 2011. I would highlight two key companion diagnostics that we brought to market in the fourth quarter because they demonstrate our continued leadership in personalized medicine. The first was a new FDA-approved companion diagnostic for use in patients with advanced ALK-positive non-small cell lung cancer. The VYSIS ALK break-apart FISH probe test detects all ALK gene rearrangements and is the only available diagnostic assay that has been clinically validated to predict response to the targeted therapy Zelboraf. The second is an FDA-approved diagnostic for melanoma patients who have inoperable or metastatic melanoma.
The test determines the presence of the BRAF V600E gene mutation within the tumor sample and identifies patients eligible for treatment with Zelboraf. Last month, we added to our ovarian cancer management tools with a new FDA-cleared assay, ROMA, or risk of ovarian malignancy algorithm. This is a risk stratification tool that combines the results for HE4, Architect CA125, and menopausal status into a numerical score that, along with clinical and radiological evaluation, can aid in evaluating whether a woman over the age of 18 who presents with an ovarian mass and for whom surgery is planned is at a high or low likelihood of having a malignancy. ROMA provides equal sensitivity to other commercially available risk stratification tools with improved specificity for determining the risk level of malignancy. Labcorp continues to be a leader in the field of chromosomal microarray analysis.
In addition to our pediatric, prenatal, and conception test offerings, we recently added oncology applications. The Labcorp SNP microarray has been shown to be superior to traditional technologies for the detection of genetic alterations, having greatly improved copy number resolution and the capacity to detect clinically significant gene conversion associated with pediatric syndromes and clonal evaluation in cancer. The fifth pillar of our strategy is to develop alternative delivery models.
The director of the CBO recently pointed out that the results of recent Medicare demonstration projects on disease management and value-based payment, "suggest that substantial changes to payment and delivery systems will probably be necessary for such programs to significantly reduce spending and either maintain or improve the quality of care provided to patients." We are preparing ourselves for these changes and continue to discuss alternative models with physicians and our managed care partners so that we will be well positioned in the future. As we mentioned last quarter, the recent extension of the UnitedHealthcare contract was an important step in our fifth pillar, as we will continue to be the sole national laboratory for UnitedHealthcare through the end of 2018. Over the next seven years, both organizations will continue to make investments to help reduce healthcare costs and improve patient care.
In summary, we are very pleased with our fourth quarter and full-year performance and the progress we have achieved on our strategic initiatives. Although current macroeconomic conditions cause our outlook for volume growth in 2012 to remain muted, we believe that the long-term outlook for our industry is excellent and that over time, volume growth will return to historical levels. Now, Steve Anderson will review anticipated questions and our specific answers to those questions.
Steve Anderson (VP of Investor Relations)
Thank you, Dave. Can you describe the potential impact for Medicare reform? As we all know, the Supercommittee failed to reach agreement on a $1.5 trillion deficit reduction plan over 10 years. Absent any congressional activity, mandatory sequestration including a 2% reduction in the Medicare fee schedule will be implemented effective January 1, 2013. Congress must also address scheduled reductions to the Medicare physician fee schedule sustainable growth rate by March of this year. There are numerous proposals circulating to address these issues. It is too early for us to predict the impact of any potential reforms. We believe that across-the-board reductions to reimbursement, cost-sharing proposals, and arbitrary exclusion of services are bad policy. Such proposals will increase administrative costs to providers, deter patients from seeking early and appropriate care, and ultimately increase the cost of healthcare.
We are working closely with the American Clinical Laboratory Association and members of Congress to explain our position on these matters and will continue to press for responsible reforms and appropriate reimbursement for our services. Can you update us on the mix of your business coming from esoteric testing? In the fourth quarter, approximately 40% of our revenues were in the genomic, esoteric, and anatomic pathology categories. As we reiterated last quarter, our new goal is to increase our esoteric test mix to approximately 45% of our revenue within the next three to five years. Can you remind us of how drugs of abuse volume trended during the year? In the fourth quarter, our drugs of abuse volume increased approximately 10% year-over-year.
That compares to a year-over-year increase of 9% in Q3 of 2011, 8% in Q2 of 2011, 14% in Q1 of 2011, and 12% in Q4 of 2010. Now, I'd like to turn the call back over to Dave.
David P. King (Chairman and CEO)
Thank you, Steve. Thank you very much for listening. Before we take questions, I would like to note that we now have 25 analysts covering our company. So that we may do our best to accommodate everyone, please make your questions brief and to the point, and we will endeavor to answer them in the same fashion. 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 retract your question, just press star followed by two. Our first question comes from the line of Adam Feinstein with Barclays Capital. Please proceed.
Adam Feinstein (Managing Director in Equity Research)
I guess just maybe a question would just be, as you think about 2012, you talked about the five pillars, but how are you thinking about 2012 relative to last year? What are the big themes? I mean, clearly, you guys always just see yourself as an operating company and doing the blocking and tackling and following the same strategy. I am just curious, as you're messaging around 2012, what are you thinking about just kind of big picture for Labcorp and the industry?
David P. King (Chairman and CEO)
Adam and Dave, good morning. The beginning of your question cut off a little bit, so I'm just going to—I think what you asked is kind of high-level themes for 2012 and beyond?
Adam Feinstein (Managing Director in Equity Research)
Yes.
David P. King (Chairman and CEO)
Okay. Again, I would repeat that first message is we think that the volume outlook is muted for 2012 because of broad macroeconomic conditions, but still, the long-term outlook is excellent. Over time, we believe that we'll return to the historical volume growth rates that we've seen in the industry. That's probably one high-level theme. Second is the importance of continuing the Genzyme Genetics integration, and I would say that has two components. The first is growing that business. We spent a lot of effort this year protecting the client base, making sure that the level of service remained at expectations, particularly placing value on the genetic counselor network and the importance of that to the clients and to the business.
Growing Genzyme Genetics is a very important priority for all the reasons that we've articulated: the genetics franchise, the oncology franchise, the importance of reproductive and oncology testing to our business model of the future. On the other side of that, of course, is continuing to rationalize the cost structure in that business, which will allow us to, as we've said, make it slightly accretive in 2012, and then as we move through 2013 and beyond, get it to company margins and really start to see the earnings power of that business. Both growth and cost rationalization there are going to be extremely important. Third, I would say is continuing to develop and enhance the focus on our specialty businesses.
We have not talked a lot about this, but underneath all of the Genzyme Genetics acquisition and the rebranding is, I would say, some changes to the structure of the way that we go to market with our specialty businesses and the way that we message the market, the way we interact with physicians. I think all of those things, the growth in the future, the core business is very important and fundamental to what we do, but growth in the future is increasingly going to come from specialty and esoteric testing. I think continuing to enhance our market-facing capabilities there is going to be very important in 2012. The fourth thing is allocation of capital. We continue to look for attractive acquisitions. We continue to buy shares. We continue to consider all other aspects of capital allocation.
I think those are going to be an important priority. I would say, last of all, I think that we're going to start to see an acceleration of payers looking at different kinds of models. I think continuing to invest resources in and collaborate with payers on what other ways our lab services and this care generally is going to be delivered will be an important priority for us in 2012. Congruent with that, continuing to improve our own internal efficiency so that we can be best positioned in the marketplace. I know that was a lot, and I failed in responding to your question in a brief and concise fashion, but I hope it was helpful.
Adam Feinstein (Managing Director in Equity Research)
It was wonderful. Thank you, Dave.
Operator (participant)
Our next question comes from the line of Bill Vanillo with RBC Capital Markets. Please proceed.
Hey. Thanks a lot. Good morning. My question has to do with pricing and mix. It looks like excluding Genzyme revenue per requisition was essentially flat. I do not think I recall that ever happening in the past, even in 2007 after the big UnitedHealthcare contract implementation. Can you give us some color on what is happening on that front? Are you seeing less mix shift? Are you losing some of the esoteric testing? Is price coming down? How should we be thinking about that? I would have one quick follow-up to that.
William Bradley Hayes (EVP, CFO, and Treasurer)
Bill, this is Brad. I think about that metric from three different ways. First of all, year-over-year growth is important, but we also look at what those revenue per requisitions are doing sequentially. They were sequentially up in Q4 compared to Q3. Especially across payers, across testing, managed care was up sequentially. That is the first thing we do when we're looking at that, is say, "What happened sequentially?" Second, on a year-over-year basis, we took two looks. One was by payer, and the other was by test, to your specific point. By payer, our client category is experiencing the fastest volume growth. Our client category has the lowest revenue per requisition. An example of a business that's growing in our client category that Steve Anderson mentioned is our drugs of abuse testing business.
As we see volume growth accelerate above the average in those businesses, it's putting some pressure on the overall price metric. The second is in our patient and our uninsured population. That volume is our highest price in terms of revenue per requisition. That volume year-to-date in 2011 was 6.5% lower than 2010. In the fourth quarter, 8.7% lower than 2010 in the fourth quarter. We're seeing some acceleration of lower price point payer categories and also some deceleration in higher price point categories. On the test mix side, we're also seeing the flattening of vitamin D and also flattening in our histology business. That is also putting pressure on the overall metric.
Okay. That's extremely helpful. Just as a follow-up to that, can you kind of help us feel confident then in your ability to reach the 2-3.5% revenue growth in 2012? I mean, all in, I think you were less than a percent this quarter. I know you were facing extremely hard comps on the volume side, but just kind of tell us what gives you confidence how we should think about that.
David P. King (Chairman and CEO)
Yeah, Bill. It's Dave. First of all, not to be overlooked, I mean, we're going to get about a percentage point of growth from Orchid, the full-year impact. That gets us a reasonable head start toward the number that we put out there. We did have a very difficult volume comp in Q4 of this year versus Q4 of last year. As we went and looked back at Q4 of last year, it was the single largest organic growth quarter in at least the prior eight quarters. We're just going up against a tough comp here, which makes the volume growth look less than it was. I think with what we're hearing in the commentary from the payer community, from WellPoint on their call, from United on their call, they are expecting utilization improvement, particularly in the second half of 2012.
We feel pretty good that all those things in combination will comfortably get us into the revenue guidance range that we've given you. Obviously, again, as I've said, we have a pretty muted expectation in terms of volume for 2012, but if volume is better, it gives us additional opportunity.
Thank you very much.
Operator (participant)
Our next question comes from the line of Robert Willoughby with Bank of America Merrill Lynch. Please proceed.
Robert M. Willoughby (Managing Director in Equity Research)
Hey, Dave. Just can you give us a quick update on the attack plan for Orchid in terms of how the consolidation will proceed and maybe an update in the U.K.? Is that FSS business getting any closer to you? And then just quickly for Brad, the $0.51 hit from amortization expense in 2011, do you have a guess what that would be for 2012?
David P. King (Chairman and CEO)
It's Dave, and I'll start with the Orchid question. As we said, we divested the state government paternity business, or we're in the process of divesting it as part of the resolution of the FTC inquiry. With respect to the private business, I think our current plan is that most of our existing forensics business will actually move into the existing Orchid facilities. What we're doing at our Center for Molecular Biology and Pathology, I think we'll be moving toward their facilities. There'll be some—I’m sure there'll be some rationalization, but I think generally the businesses are very complementary and give us a nice growth opportunity in private paternity. In terms of the U.K. business, my understanding is that most of the tenders have been resolved and have essentially a two-year time frame. There are still, I believe, a couple that are waiting to be decided.
There's a nice market opportunity as those come up. We've been successful in winning those tenders. The government has closed their government forensics lab. It is basically open to private competition. We do see some growth opportunity there as the tenders are decided and as they come up for rebid. There is also the potential of looking at being able to expand the forensics business outside the U.K. into Europe. No firm plans there, but a good beachhead in the U.K. as we consider that expansion opportunity. I will turn it over to Brad on the amortization.
William Bradley Hayes (EVP, CFO, and Treasurer)
Bob, on the amortization, it looks to be roughly the same.
Robert M. Willoughby (Managing Director in Equity Research)
Perfect. Thank you.
Operator (participant)
Our next question comes from the line of Gary Lieberman with Wells Fargo. Please proceed.
Gary Lieberman (Analyst)
Thanks. Maybe just to follow up on some of your pricing comments. You had made comments regarding the transition of some of the Genzyme contracts onto some of the legacy Labcorp contracts, and at some point that would put pressure on the pricing. Did you see some of that in the fourth quarter? If so, how much was in there?
William Bradley Hayes (EVP, CFO, and Treasurer)
Gary, this is Brad. We did not see any change in the fourth quarter compared to what we had been experiencing throughout 2011.
Gary Lieberman (Analyst)
How far along in that process are you, and how much additional pricing pressure, if any, would you expect to see from that transition?
William Bradley Hayes (EVP, CFO, and Treasurer)
We're pretty well along, given that we're over a year now from the actual acquisition. So we're pretty far along in that process. There still are some transitions that are scheduled to occur in 2012, but it's definitely baked into our guidance and our thinking for 2012.
Gary Lieberman (Analyst)
Okay.
David P. King (Chairman and CEO)
Gary, it's Dave, it will obviously reflect in the price metric as you look at 2012 on a year-over-year comparison because to the extent that we have further adjustments into our contract levels, that'll show up as "negative price.
Gary Lieberman (Analyst)
Okay. It sounds like there's not that much more of that. Is that what I'm hearing?
William Bradley Hayes (EVP, CFO, and Treasurer)
I think that's fair to say.
Gary Lieberman (Analyst)
Okay. Could you just give us an update on where you are on the Horizon contract?
William Bradley Hayes (EVP, CFO, and Treasurer)
We don't really have an update on the Horizon contract. We continue to discuss a longer-term extension with Horizon, but no final resolution.
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 (Equity Research Analyst)
Hi, thanks. I actually had a follow-up on the volume questions that I've been asked. I'm curious if you look at the underlying business, what are you guys seeing in terms of seasonality? Typically Q4 was the worst given holiday seasons. I'm curious if the whole deductible factor has meaningfully changed that pattern over the past couple of years.
David P. King (Chairman and CEO)
Amanda, it's Dave. I think that it does have an impact. I mean, obviously, we're dealing with pretty sizable volume, so it's hard to point to particular facts and figures. I think it does have an impact. I think if you look at the historic trends for 4Q and you look at what's happened the last three years, really, you do see more—you don't see a pickup, but you see more stability between 3Q and 4Q than we've seen in the past. I think it has some impact. It'd be hard to quantify.
Amanda Murphy (Equity Research Analyst)
We should just expect a similar progression through 2012 as we saw last year, basically.
David P. King (Chairman and CEO)
Yes, I would agree with that.
Amanda Murphy (Equity Research Analyst)
Okay. And then just a question on Genzyme. You talked to the branding. I'm curious, how meaningful is a Genzyme brand to the business? Is this something that could impact the underlying Genzyme attrition rate, which seems to have gone better, but just curious about 2012?
David P. King (Chairman and CEO)
I think the Genzyme Genetics brand is a valuable brand, make no mistake. Pursuant to the asset purchase agreement, we had a certain time in which we were allowed to use the brand, and then the name Genzyme now belongs to somebody else. The name that we adopted, Integrated Genetics, is actually a legacy brand that was part of Genzyme Genetics and that Genzyme Genetics acquired. It is familiar to the customers. It is something that they know. There is strong brand recognition within the Genzyme Genetics reproductive business. I actually think that the Genzyme organization has welcomed the brand in that it really completes the separation from Genzyme and is now part of the Labcorp family. Integrated Oncology just seemed like a good, consistent market-facing brand to adopt once we went with the Integrated Genetics brand.
I think that I don't mean to in any way underestimate the value of the Genzyme Genetics brand, but I think we've made a very smooth transition here.
Amanda Murphy (Equity Research Analyst)
Okay. Thanks very much.
Operator (participant)
Our next question comes from the line of Ralph Jacoby with Credit Suisse. Please proceed.
Ralph Jacoby (Analyst)
Thanks. Good morning. In the past, I think you've talked about sort of needing 4% top line to sort of have leverage to increase margins. I guess maybe help us understand where the cost savings is being generated in 2012 to sort of allow you to expand the margins at a fairly decent clip despite some of the lower top line expectations.
David P. King (Chairman and CEO)
I think the place where the cost savings are coming are within the Genzyme business, within Orchid, within the remnants of Westcliff and DCL. The integration of the acquisitions is a key line of cost savings as well as Clearstone, the Clearstone acquisition and clinical trials. The continuation of all of the efficiency programs that we have been working on. Lab automation, patient service center automation, improvements in the throughput of instrumentation. Those are probably the two big categories of cost improvement.
Ralph Jacoby (Analyst)
It’s largely all sort of SG&A related if we think about sort of the model on where we would see the greatest opportunity?
David P. King (Chairman and CEO)
You'll see some in SG&A, but I think you'll also see some in the gross profit line because that's where the efficiency programs and facility rationalizations and those types of activities will show up.
Ralph Jacoby (Analyst)
Okay. And then just my follow-up. Remind us again the large contracts that are coming up for renewal in 2012 aside from Horizon that you already talked about.
David P. King (Chairman and CEO)
I don't think we have anything sizable in 2012. We go out to 2013 with Cigna and WellPoint.
Ralph Jacoby (Analyst)
Okay. Thank you.
Operator (participant)
Our next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.
Darren Lehrich (Analyst)
Thanks. Good morning, everybody. My question is really just about volume. I guess I hear you're not making any call on the economy or any real big improvement for 2012. We get that part of the guidance. What I wanted to just focus on is the deceleration that we did see throughout 2012. I'd be curious just to get your comments on where you saw the weakness, whether you think there's anything new competitively that's emerged in your markets that's led to some of this organic weakness in recent quarters, or you just chalk it up to a tough comp. Maybe just some framework for thinking about the trend.
William Bradley Hayes (EVP, CFO, and Treasurer)
Yeah. Darren, it's Brad. I would say that definitely you touched on something that we've said earlier and want to continue to stress is the tough comp, especially in Q4. I think looking back across the year, the deceleration I would say was around in the summer months, and then we saw stability in the fourth quarter compared to that deceleration, at least in terms of absolute levels of volumes, setting aside the year-over-year comp, again, back to the tough comp for Q4. That's the way we think about what happened in 2011. Again, 2012 will be up to the macro environment as well as what things that we can do internally to offset and outpace that.
David P. King (Chairman and CEO)
Yeah. Darren, it's Dave. Just to add to that, I mean, again, when we came out of 2011, Q4 was very strong, and Q1 of 2012 also started out strong. Then, as everybody knows, we saw deterioration in the macro environment. We saw, I mean, for those who have forgotten, I mean, we saw real complete political gridlock for months over Medicare, over the SGR fix, over the debt ceiling. All of those things, I think, played into the macro environment, which in turn played into people's confidence in going out and spending discretionary dollars on healthcare. Q3 was the low point. I think Q4 was a strong volume quarter for us given the comp. We feel that that is sustainable going forward, but we're waiting on the economy to improve for us to feel like we can be more confident in our expectations about volume.
Darren Lehrich (Analyst)
Okay. If I could, just to clarify in revenue guidance for 2012, have you contemplated any kind of impact from electrodiagnostic coding changes? Any comments there would be helpful.
David P. King (Chairman and CEO)
No, we have not. Our understanding on the coding changes is that in terms of Medicare, the coding changes, whatever they turn out to be, are not going to be implemented in 2012. The earliest those would be implemented is 2013. I think in terms of the private payer community, our sense is that although they may implement some of the coding, it does not lead to structural pricing changes.
Darren Lehrich (Analyst)
Okay. Thanks a lot.
Operator (participant)
Our next question comes from the line of Tom Galucci with Lazard Capital Markets. Please proceed.
Thomas Gallucci (Managing Director and Senior Healthcare Services Analyst)
Good morning. Thanks for all the color. I guess maybe sort of following on one of Darren's questions there, as we think about 2012, then I know you don't give quarterly guidance, but just maybe from a high level, it seems like a fair amount of the earnings growth is sort of coming from the ramp-up of acquisitions or synergies related to the acquisitions. Inverse to 2011, it seems like the volume comps get a little easier as the year goes on. Can you give us any sort of high-level thoughts about first half versus second half or stronger and weaker type quarters given those dynamics?
David P. King (Chairman and CEO)
No. I mean, so we don't give quarterly guidance, so I don't think it would be, I don't think it would be reasonable to try to give you anything more than at a very high level. Yes, the comps will get easier in the third and fourth quarter, so that'll help volume. The integration synergies from Clearstone and Orchid, they'll be more probably at the beginning of the year, but gen-time will be relatively stable throughout the year. I think the earnings pattern is likely to follow the historical pattern, is really about what we can say there.
Thomas Gallucci (Managing Director and Senior Healthcare Services Analyst)
Okay. Good. That's helpful. Then one follow-up on sort of the competitive environment and pure pricing. I was curious what your perspective is there. Also, Dave, was wondering if you could follow up on a comment that you made earlier in 2012, maybe seeing payers toy with some new types of payer-type models. Wondering what types of things you may be thinking about.
David P. King (Chairman and CEO)
Sure. I think in terms of the competitive environment generally, it's what it's always been, which is it's quite tough. That's the nature of our industry. It's a very competitive industry. There are a lot of players. There's competition for volume. There's competition on service levels. There's competition on price. There's competition from our customers, as we know, in histology with the insourcing. I don't think we see that changing much. In terms of the alternative models, Tom, I mean, I guess what I would say is if you look at just even within the last week or two, WellPoint is talking about paying physicians in different ways. United came out with a pretty comprehensive announcement that they were going to look at a whole different methodologies to start paying physicians, and they called it transforming the way they pay their provider network in their statement.
If we think that physicians are the only ones who are going to be affected by this, I think we're helping ourselves do a healthy dose of rose-colored glasses. There's clearly going to be different ways in which lab services are going to be paid for, whether it's bundled payments, whether it's payments based on quality of services delivered, whether it's narrowing of networks. I think all of those things are going to come into play. I think we're very well positioned to participate in that. I think in the long term, it will be a benefit to Labcorp, but I don't think we should underestimate the fact that the payment models are going to be changing.
Thomas Gallucci (Managing Director and Senior Healthcare Services Analyst)
Okay. Can I state one more? What was the ultimate Genzyme dilution for 2011? Thanks a lot.
David P. King (Chairman and CEO)
Yeah. We're not going to talk about that. We gave you the guidance, and I think that's what we're going to stand on. Thank you.
Operator (participant)
Our next question comes from the line of Gary Taylor with Citigroup. Please proceed.
Gary P. Taylor (Analyst)
Hey. Good morning, guys. Just a couple of questions. First, I've been listening. I don't think you've kind of parsed this out. For 2012, I heard your comments on expectations for margin improvement from improved integration of the acquired assets. Is the implied organic revenue growth that you're anticipating, is that at a level that's going to allow you to maintain organic margins? Or would you expect improvement? Would you expect them down slightly? Do you have a general view around that?
William Bradley Hayes (EVP, CFO, and Treasurer)
Gary, this is Brad. I think without the help of some of the efficiency programs that we've talked about before, organic volume at the low end would make it challenging on margins. Again, we have the help of the acquisition integrations in 2012. As Dave has said several times on the call, we expect growth to accelerate from where we're seeing growth now. I think looking out into the future, there are margin expansion opportunities for us.
Thomas Gallucci (Managing Director and Senior Healthcare Services Analyst)
Okay.
David P. King (Chairman and CEO)
Yeah. I just I think we stand by that it takes in the range of 4% top line growth to generate real organic margin expansion. If we're not, we're going to get margin expansion next year from what we're doing with the acquisitions and from the efficiencies. We've always got to be making our business more efficient. That's just fundamental. In our perspective, as volume improves over time, we'll see a return to organic margin expansion.
Gary P. Taylor (Analyst)
Right. Yeah. I appreciate that. I just wanted to drill into '12 specifically a little more detail. My last question, and I apologize. I'm not exactly sure how to ask this, but I was reading about a new initiative the company has to create kind of an esoteric test benefit manager, so to speak, and kind of build a network of other esoteric labs and present this management potentially in a capitated model to payers. And I've forgotten the name of that venture. But is that something that you're willing to talk a little bit about at this point, or is it too early?
David P. King (Chairman and CEO)
At a high level, we call it Beacon LBS. At a high level, Beacon LBS is a multifaceted offering for both physicians and health plans that has a very simple goal. The simple goal is to get patients the right test from the highest quality laboratories at the most effective cost. There is an option to have narrower lab networks for some esoteric services. There is an option to have physician decision support in test selection and in guiding care pathways. The goal is to, and there are a lot of these models out there, as you know, being offered by others who are not labs and therefore do not have the expertise to provide these services. The goal is, again, right test for the right patient from the highest quality laboratory network at the most effective cost.
This is something that, again, is part of how we are going to look at payment for lab services and how lab services are provided over time. We think it is very important that we not only participate but lead in initiatives in this area.
Gary P. Taylor (Analyst)
Got it. Sounds interesting. We'll keep an eye on that. Thank you.
Operator (participant)
Our next question comes from the line of
Sandy Draper with Raymond James. Please proceed.
Sandy Draper (Analyst)
Thanks very much. Most of my questions have been asked and answered. I appreciate it. Maybe one follow-up on Genzyme. I appreciate you not specifically calling out where the dilution came in in 2011. You may not be willing to give a target accretion for 2012, but if you're not going to do that, maybe one of the things you're talking about is the incremental growth or benefit in 2013. Maybe just remind me of some of the things of why you think 2013 you actually see more of a step up in terms of the accretion and the growth there as opposed to 2012. Thanks.
David P. King (Chairman and CEO)
Yeah. So we're not going to give target accretion numbers for any of the businesses because, as we've always said, we give you a range of guidance because there's a range of outcomes within the guidance. The minute we start giving individual targets, then we start breaking the guidance down into pennies and nickels. Frankly, with a company that's talking about earnings power of $7 a share, it just doesn't make sense to go through it and try to tell you penny by penny how we get to where we get. What I would say about Genzyme is that it'll be slightly accretive next year, as we've said. I think in 2013, one, we'll realize the full impact of the synergies, which will significantly help in terms of the margin.
Two, a lot of the investments that we've been making in the IT, for example, when we acquired Genzyme, there was no electronic order and result delivery capability in that business. They just didn't have it. If you think about it, they've done a terrific job growing the business without one of the most fundamental basics, which is allowing physicians to order electronically and get their results delivered electronically. The investments in the business, the investments in the sales force, the investments in the branding, and all of the things that that will allow physicians to do in terms of ordering other specialty tests in the Labcorp core menu from a single order entry and result delivery portal, all these things I think are going to lead to strong top line growth as we get through 2012 and 2013.
The improvement on the expense side will lead to real earnings power as we get in the out years.
Sandy Draper (Analyst)
Okay. Great. I appreciate the call. Thanks.
Our next question comes from the line of Lisa Gill with JP Morgan. Please proceed.
Lisa Gill (Managing Director and Senior Equity Research Analyst)
Thanks very much. I just had a follow-up question around gen-time. Am I looking at the numbers correctly? I'm just trying to understand what the organic growth in recs were for gen-time in the fourth quarter. Either Brad or Dave, can you help us to understand that? My second question, Dave, would just be, do you have any update at all around the congressional hearings or congressional inquiry that you've submitted documents to in December?
William Bradley Hayes (EVP, CFO, and Treasurer)
Lisa, this is Brad. I'll start with the organic growth rate. We reported volume up 1.2% with Genzyme attributing 0.6% of that. If we go to that organic number, it's 0.6%.
Lisa Gill (Managing Director and Senior Equity Research Analyst)
That's organic because last year in the fourth quarter, didn't you have some level of Genzyme in the fourth quarter as well?
William Bradley Hayes (EVP, CFO, and Treasurer)
We did.
Lisa Gill (Managing Director and Senior Equity Research Analyst)
Okay.
William Bradley Hayes (EVP, CFO, and Treasurer)
It is apples to apples. When we backed it out of the fourth quarter last year, even backing out Genzyme, we were at 3.2%.
Lisa Gill (Managing Director and Senior Equity Research Analyst)
Okay. When we look at our numbers, it looks like that has slowed and has slowed sequentially. Is that the right way to look at it? If that's the case, is there something behind that slowing growth rate?
David P. King (Chairman and CEO)
I think we got two things confused here. We do not break out the gen-time volume specifically. I do not know if you are trying to back into that from the numbers that we have given you for gen-time's contribution to our overall volume growth, but.
Lisa Gill (Managing Director and Senior Equity Research Analyst)
Right. That is what we're trying to do. You're saying that it's not possible to do that based on the information you give us.
David P. King (Chairman and CEO)
I'm just saying, remember that in the fourth quarter of 2012, we had three months of Genzyme. And in the fourth quarter of 2011, we had one month of Genzyme. So you don't have a.
Lisa Gill (Managing Director and Senior Equity Research Analyst)
Apples to apples.
David P. King (Chairman and CEO)
Exact comparison. That is probably why you are seeing something that we are not seeing.
Lisa Gill (Managing Director and Senior Equity Research Analyst)
Okay. All right. That's helpful. Dave, do you have any update on have you heard anything further from this congressional inquiry?
William Bradley Hayes (EVP, CFO, and Treasurer)
All I would say on that is that we continue to believe that this is based on the allegations of the qui tam that was filed, the NPT case. We are working cooperatively with the Senate Finance Committee staff to respond to their questions. Obviously, we'll update you as matters progress.
Lisa Gill (Managing Director and Senior Equity Research Analyst)
Okay. Perfect. Thank you.
Operator (participant)
Our next question comes from the line of Kevin Ellich with Piper Jaffray. Please proceed.
Kevin Ellich (Principal and Senior Research Analyst)
Good morning. Dave, just thinking about what Paul Meadows is trying to do with McKesson's Z codes, I'm just curious what your take is on the whole matter and how big of a deal you think this is for Labcorp and how prepared you are for the part of the changes.
David P. King (Chairman and CEO)
First of all, let me reiterate that we are strong supporters of transparency in billing and coding and always have been. I think anything that creates greater transparency for payers in billing and coding is a good thing. I think, Kevin, that Paul Meadows is in the process of reevaluating their program. My understanding is they've delayed the implementation date of the program until May, and they're looking at some other options for how they would evaluate these tests. We're working with them to try to devise an ACLA, by the way. It's not Labcorp alone.
Labcorp, ACLA, all of the ACLA members, the CCLA too, are working with them to try to devise a system that is going to be, that's going to be fair, that's going to respond in a reasonable timeframe to requests for coding for new molecular testing, and it's going to lead to fair payment with transparency on their side of what they're paying for.
Kevin Ellich (Principal and Senior Research Analyst)
No. I appreciate that. I guess the bigger question is, why would they add another level of complexity? I understand the transparency issue, but obviously, you've got a lot of moving parts now. How much exposure do you guys have? Have you applied for any of the Z codes yet?
David P. King (Chairman and CEO)
I don't think it would behoove us to talk specifically about the actions that we've taken. I will say, I think our exposure is, remember, this applies so far just to the California region where they're the Medicare carrier. Our exposure is relatively limited both because of the number of tests and because of the region. We're trying to work with Paul Meadows in a collaborative way to do something that's fair and equitable for all of the labs and allows the labs to get coding and reimbursement that's satisfactory to Paul Meadows and satisfactory to the labs and fair payment. I don't think we should get hung up on the individual parts of the process. We should think about it as a long-term process. Billing and coding transparency will be a positive thing.
Kevin Ellich (Principal and Senior Research Analyst)
Understood. And then just my follow-up is, given the current environment and organic growth coming in a little bit and your outlook for 2012, I guess, what do you think about the strategic acquisition environment? Are there some good deals out there? And then how do you manage or think about using free cash flow? At what point will you consider paying a dividend versus continuing to buy back stock?
David P. King (Chairman and CEO)
As I mentioned in response, I think to the very first question, one of the things that we're always looking at is capital structure and how we deploy capital. I think there are some attractive acquisition opportunities. As always, there are plenty of things in the market. We're very selective about what we're interested in. We will continue to look at acquisitions. We always evaluate in terms of allocation of capital, whether it makes sense to pay a dividend. That's something that's always under consideration and that we talk about a lot. We will continue to talk about it. Some of it will depend, obviously, on are we right about our view of return to historic volume growth over time? Because if we're not right, it suggests a different sort of capital allocation.
Kevin Ellich (Principal and Senior Research Analyst)
Understood. Okay. Thanks, Dave.
Operator (participant)
Our next question.
David P. King (Chairman and CEO)
We're going to try to finish up in about the next five minutes. If we could be, we promise we'll be brief in our responses if we can be brief in our questions and not re-ask.
Operator (participant)
All right. Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please proceed.
Ricky Goldwasser (Managing Director of Equity Research)
Good morning.
David P. King (Chairman and CEO)
Good morning.
Ricky Goldwasser (Managing Director of Equity Research)
One follow-up question on gen-time. I'm just trying to look at it from a little bit of a different perspective. Based on the data points that you gave us, we calculated about 7-8% step down in top line contribution once you annualize the contribution from 4Q 2011 to 4Q 2012. One, are we kind of in the ballpark? If so, is this how we should think? Is this kind of like the run rate that we should think of for 2012, factoring in kind of the changes in commercial reimbursement, etc.? Should kind of gen-time top line contribution be down on a run rate by about 7-8%, 2012 versus 2011? Just trying to break down kind of the top line growth components.
David P. King (Chairman and CEO)
Ricky, it's Dave. We don't see that math at all. What I would suggest is get with Steve and Brad afterwards if you want to walk through the math because I don't think it's going to be productive to try to walk through it on the call. I will say we don't see anything like that kind of step down. In fact, Genzyme had a very strong year 2012 versus 2011 and a very consistent rate of growth year-over-year.
Ricky Goldwasser (Managing Director of Equity Research)
Just to clarify, the pricing reduction for managed care contracts, which you've talked about, you expect to be completely offset and some more by volume growth? Is that how I should read your comment?
David P. King (Chairman and CEO)
No. I don't think I said that. I think what I said is that although that would be my hope, I think what I said is that the contribution throughout the year in terms of revenue stability was quite stable and that the growth throughout the year, year-over-year in terms of revenue, was quite stable.
Ricky Goldwasser (Managing Director of Equity Research)
Okay. That's your expectation for 2012?
David P. King (Chairman and CEO)
Yeah. I mean, as Brad commented earlier, incorporated in the guidance is some managed care compression that has not fully shown up in the numbers. Our expectation for 2012 is, and I think we said this in response to the very first question, the growth of the gen-time business year-over-year from a volume perspective is a very important priority for us.
Ricky Goldwasser (Managing Director of Equity Research)
I understand that. My question is, does guidance factor in that growth, or is it upside to your guidance number?
David P. King (Chairman and CEO)
The guidance incorporates all of our assumptions and expectations about all the components of the business.
Ricky Goldwasser (Managing Director of Equity Research)
Okay. I'll follow up after.
David P. King (Chairman and CEO)
Thank you.
Operator (participant)
Our next question comes from the line of Dane Leon with Macquarie. Please proceed.
Dane Leone (Analyst)
Hi. Thanks, guys, for squeezing me in at the end here. Quick questions for me. Your view of 2012 is histology as a mix of revenues up, down, or flat. Finally, all in for 2011, how many bolt-on acquisitions did you do? If you could parse out the organic revenue growth attributed to those bolt-on acquisitions, and what's your outlook for 2012? The smaller acquisitions like customer lists, etc. Thanks.
David P. King (Chairman and CEO)
Histology in 2012, our expectation is basically flat. We do not break down the individual acquisitions or the number of acquisitions. As we have said, small acquisitions are a part of what we believe to be our organic growth. We expect we will do a similar number in 2012 to what we did in 2011.
Dane Leone (Analyst)
Okay. Actually, one more follow-up, if I could. Any competitive share shift you're seeing from Quest, given the turmoil at the top of the management team there?
David P. King (Chairman and CEO)
I'm not going to associate myself with any comments about our competitor. I think they're a tough competitor. They continue to be a tough competitor in the marketplace. I think we've done a great job over the last multiple years in attracting business away from them with IT improvements and service improvements. We're going to continue to stay focused on that.
Dane Leone (Analyst)
Thank you.
Operator (participant)
Our next question comes from the line of Aseem Anand with Natixis.
Thanks for taking my question, guys. My question was regarding the ROMA algorithm for ovarian cancer. It is actually quite exciting to see that only with two markers, HE4 and CA125, you are able to achieve a 92% sensitivity, which is equivalent to OVA1 by Quest and Vermillion, which have five markers. If you can comment more on that test. Also related, if there is any commentary from American College of OB-GYN or Society for Gynecological Oncologists in terms of ROMA. Finally, for this test to become a screening test, is that a goal? If that is a goal, do you think addition of more markers would achieve that goal?
David P. King (Chairman and CEO)
Okay. That was a lot. We'll try to answer it all. First of all, it's cleared by the FDA for assessment of malignancy in patients presenting for surgery. It's not cleared for screening, and we don't market it for screening. Over time, if the assay would become cleared for screening or if with the addition of additional markers, it could be represented to the FDA for screening, that's certainly something we would be interested in. Remember, because of the low incidence of ovarian cancer in the population, it's challenging to get a screening test that's going to have the sensitivity and specificity that we would like. We've been working on that for a long time and will continue to do so.
In terms of the science behind the test and the Vermillion test, what I would say is, obviously, FDA was satisfied in terms of clearing the test with the sensitivity. What we like about it is the greater specificity than the competitive test. Overall, I think it's a very attractive market opportunity. Recognize it's part of an evaluation along with radiological and clinical signs and symptoms of a relatively small population, which is women presenting with an ovarian mass for surgery and trying to assess malignancy. I hope that answered it. I think that's about all the time that we have. One more question? We have one more question.
Operator (participant)
Yes. It looks like it comes from the line of Anthony Vendetti with Maxim Group. Please proceed.
Anthony V. Vendetti (Executive Managing Director of Research)
Thanks. It'll be quick. You said you had 104 new tests in 2011. Can you just compare that to what you had in 2009 and 2010?
David P. King (Chairman and CEO)
It's probably about comparable to 2010 and probably a little more than 2009. We kind of think about 20-30 new tests a quarter being introduced as being our expectation and our goal.
Anthony V. Vendetti (Executive Managing Director of Research)
Same thing for 2012?
David P. King (Chairman and CEO)
I would expect so, not having a whole list in front of me. That is what we've historically seen as kind of the typical output.
Anthony V. Vendetti (Executive Managing Director of Research)
Okay. Great. Thanks a lot.
Operator (participant)
Ladies and gentlemen, that'll conclude the question and answer portion for our event. I'd now like to turn the presentation back over to Mr. David King for closing remarks.
David P. King (Chairman and CEO)
Thank you, Jeff. Thank you all for listening to our earnings call. We look forward to speaking to you again next quarter. 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.