Bio-Reference Laboratories, Inc. Q4FY08 Earnings Call Transcript

Bio-Reference Laboratories, Inc. (NASDAQ:BRLI)

Q4FY08 Earnings Call

December 18, 2008 10:30 am ET


Tara Mackay - Investor Relations

Marc D. Grodman, MD – President and Chief Executive Officer

Sam Singer - Chief Financial Officer


Arthur I. Henderson - Jefferies and Company

Charles Rhyee - Oppenheimer & Co.

Amanda Murphy - William Blair & Company, L.L.C.

[Brandon Strong] - Barclays Capital


Good morning ladies and gentlemen and welcome to the Fourth Quarter and Year End 2008 Bio-Reference Laboratories Earnings Conference Call. My name is Jerry and I will be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call Miss Tara Mackay, Investor Relations.

Tara Mackay

Good morning and welcome to Bio-Reference Laboratories Fourth Quarter and Fiscal Year End 2008 Earnings Conference Call.

Bio-Reference Laboratory is one of the largest independent regional full service laboratories in the country with focused marketing capabilities in the areas of genomics, oncology, correctional health, and physician office pathology.

Leading us on the call today will be Dr. Marc Grodman, President and Chief Executive Officer, and Sam Singer, Chief Financial Officer. Some of the commentary made in this presentation may relate to future results and events.

Statements regarding the company’s revenue and earnings guidance are based on the company’s current expectations. Actual results in future periods may defer materially from those currently expected or desired because of the number of risks and uncertainties including general economic and business conditions; future regulatory requirements and mandated pricing reimbursement; the service, customer and geographic mix of any particular period; the company’s ability to effectively manage its operating costs and collect its receivables in a timely fashion; on the level of demand for the company’s products and services; and on the company’s ability to manage its supply and delivery logistics in such an environment.

Additional discussion of these and other factors affecting the company’s business and prospects is contained in the company’s periodic filings with the Securities and Exchange Commission.

I will now turn the call over to Dr. Marc Grodman, President, and Chief Executive Officer.

Marc Grodman, MD

This has been a good year for Bio-Reference. This has been a good quarter for Bio-Reference and we are well positioned for the coming year and proud about what we have accomplished and even more excited about what we have, what the future holds for us.

Sam Singer will give you some comments about our financial performance and then I would like to make a few comments about this year and next. Thank you.

Sam Singer

Good morning everyone.

During the fourth quarter of fiscal year 2008, which ended on October 31, 2008, Bio-Reference recorded record net revenues of $81,236,000 compared to $69,795,000 in the fourth quarter of the prior fiscal year, an increase of 16%.

Gross profits on revenues for the current quarter were $40,801,000 representing a gross profit margin of 50%. In the fourth quarter of the prior year gross profit on net revenues was $36,191,000, representing a gross profit margin of 52%.

Earnings per share on net income after taxes were $0.38 per share in the current quarter versus $0.33 per share in the prior year quarter.

Patient count for the current quarter increased to $1,029,000 from $972,000 for the prior year quarter, an increase of 6%.

Our net revenue per patient for the fourth quarter jut ended was $78.22 compared to $71.06 per patient in the same quarter of the prior fiscal year, an increase of 10%.

On October 31, 2008 working capital was $58,568,000, a 20% improvement over the $48,747,000 that we reported on October 31, 2007.

Our day sales outstanding on October 31, 2008 were 107 days.

Our net revenues were $301,071,000 for the 12-month period ended October 31, 2008 which represents a 20% increase over the net revenues for the same period in the prior fiscal year.

Gross profit on net revenues for the current 12-month period was $147,240,000 or 49% compared to the prior fiscal year of $126,402,000 or 50%.

Income taxes increased to $15,617,000 during the current 12-month period from $13,957,000 during the prior comparable period, a 12% increase.

Earnings per share for the 12-months on income after taxes increased to $1.12 per share on a fully diluted basis, from $1.01 per share for the prior fiscal year.

Patient count for the current year increased to 4,085,000 from 3,681,000 for the prior year, an increase of 11%, and our net revenue per patient increased 9% to $73.09 from $67.14 in the prior year.

Thank you and I will turn the conference back over to Dr. Grodman.

Marc Grodman, MD

Sam, thank you very much.

We recognize that these are difficult economic times and it is within that context, especially within that context, that we are gratified with the results we have been able to achieve, not only for the recently ended fiscal year, but especially for the fourth quarter.

If you take anything away from this call I would like to really emphasize three points:

One, despite difficult economic times, that are primarily manifested in lower volumes, Bio-Reference achieved its 15th consecutive year of 20% compound annual revenue growth. We believe that that kind of sustained growth is unprecedented in our industry.

Second, we have demonstrated the foresight to invest in better science, whether it is new testing platforms or innovative technologies, in order to anticipate the clinical questions of our physician clients. We have combined this with an investment in better service marked by an increase in our sales professionals and developments of an outstanding marketing program. This investment has positioned us well for the future.

Lastly, the third point is that we have demonstrated the commit into financial restraint when appropriate as evidenced by tough expense control over the past two quarters. Allow me to go into some detail.

In late fiscal year ’07, early fiscal year’08 we made a decision to invest in infrastructure and marketing in order to take advantage of market opportunities that we felt would provide a long-term benefit to the company. Having made that decision we also recognized that we needed to demonstrate the fiscal constraints while supporting our new initiatives in continued growth.

We are a growing company. We have demonstrated growth and we have to be able to support that. At the same time we have to be able to control it. Those decisions had some impact on our annual numbers, but we believe that the fruits of those decisions are clearly indicated by our third and fourth quarter results.

In 2007 our growth was fueled by the tremendous regional opportunity presented by changes in the managed care environment. That growth, coupled with our greater dedication to genetics and investments in new platforms created new challenges on many fronts.

In 2008 we refocused on esoteric testing, which had been our primary growth driver over the prior year’s and we believe the results validate the correctness of this decision. We have seen a flattening of our patient count numbers, 6% over the comparable quarter last year, as the growth of the routine businesses returned to pre-2007 levels.

We have made a conscious effort to emphasize areas where we can grow and find leverage and deemphasize those where we can’t. Our year-over-year increase in revenue per patient, from $71.00 to $78.00 in the fourth quarter, was fueled, for the most part, by our success in our national specialty services as well as our Women’s Health Initiatives.

You know it is and has been for some time our stated goal to seek out disruptive technology and scientific advances in specialty testing and offer those services under a superior service physician centric model. Better service and better science that will enable the physician to provide better health care.

During the fourth quarter we introduced two new initiatives based on technology platforms and sophisticated scientific capability as we began offering our NextGen sequencing tests for hypertrophic cardiomyopathy in August of this year. We believe this is a model for other testing services that will be offered to clinicians to make genetic testing more responsive to the clinical challenges that confront physicians. It has taken well over two years of research and developing to bring this testing to market and our initial limited offering has been very, very well received.

In September of this year we introduced our Second Generation Women’s Health Initiative, specifically targeting the problem of detecting sexually transmitted infections. This is a significant clinical issue today. We believe that this innovative, clinically relevant program will surpass the success of our initial Women’s Health Initiative.

We are scheduled to introduce additional testing capabilities based on better, more advanced science during the first half of the coming year when we will introduce our hempath CGH array test. We have expanded our footprint for specialty testing through out the entire United States and have seen significant growth in our esoteric testing based on our better science and better service model.

Given the return to our specialty testing growth model, it is not surprising that we not only saw a corporate wide increase in revenue per patient, but that we also saw the percentage of revenues attributable to esoteric testing rise to 50% from 45% on a year-over-year basis in the fourth quarter.

Our investment in infrastructure, supporting technical, professional, and sales initiatives was necessary at the beginning of the 2008 fiscal year in order to ensure continued growth and to take advantage of opportunities in the marketplace. While that decision may have had some effect on the subsequent quarters and the year as a whole, we believe that the extra spend, done when it was done, from this past year has already begun to pay off.

Gross profit on revenue for the fourth quarter was just under 50% compared to just under 52% for the same period in the prior year, consistent with the infrastructure investments that we made earlier in the 2008 fiscal year. However, it should be noted that having made those investments we have been quite disciplined in controlling expenses and will continue to be so until the growth justifies further expansion.

Direct employee related expenses, meaning those employee expenses that have everything to do with processing and getting out a result, obtaining the specimen, running the specimen, reviewing, autolyzing the specimen and delivering the specimen and billing the specimen; those direct employee related expenses were virtually flat from the second quarter to the third quarter, to the fourth quarter of this fiscal year. These numbers include and will continue to include our investment of about $500,000 per quarter during the past fiscal year and R&D expenses related to the development of new testing platforms.

Similarly, all SG&A expenses excluding sales, marketing, and bad debt were also essentially flat for the second, third, and fourth quarters of this fiscal year, demonstrating leverage in every quarter.

On a year-over-year basis sales and marketing expenses rose 29% during the fourth quarter consistent with the investment that we have made this year and they remain just shy of 9% of total revenues for the quarter.

Most of the investments in sales and marketing were in our specialty testing services such as oncology, GenPath and our Women’s Health Program, or genetic testing through GeneDx.

While we will remain aggressive in seizing upon any opportunities afforded us in the marketplace and will grow in the normal course of business, we do not expect any extraordinary expenses to occur in the near future.

Bad debt was approximately 13.5% of revenues during the fourth quarter. This was about 200 basis points lower than the same period in the prior fiscal year; however for the entire fiscal year bad debt was comparable to what it had been last year, about 50 basis points less this year than for fiscal year 2007. We do not expect any significant change to occur in bad debt for this coming year.

DSO’s at the end of the fourth quarter were 107 days down from 115 days in the prior year at the end of the fourth quarter and unchanged or down one day from the third quarter of fiscal year ’08, consolidating the gains that we made during this fiscal year.

We continue to do a good job in collections. Cash flow from operations for Q408 exceeded 4 ½ million, over 60% higher than for the corresponding quarter in the prior fiscal year. Free cash flow was positive for the fourth quarter ’08 at just under $1 million. But, to put these numbers in perspective, I would like to be able to talk about the year numbers.

Cash flow generated from operations more than tripled from just under $6 million in fiscal year 2007 to nearly $19 million in fiscal year 2008 and free cash flow went from -$4.6 million to a positive of $6.2 million, a swing that approaches $11 million year-over-year.

The tax rate for the year was just shy of 42% which was higher than the tax rate for fiscal year 2007. We expect it to be unchanged for the coming year and approximate 42%.

While we believe that the economy has had an effect on volumes and we believe that our growth might have been greater in a more stable economic environment, we are pleased with our financial results. We have a seasoned and well-experienced team of managers and scientists and hard working employees that have enabled us to maintain this record of growth over the last decade and a half.

We expect that in 2009 our top line revenue will grow at least 15% and we expect that our net income will increase at least 20%. We have maintained fiscal discipline over the last two quarters and we don’t currently see anything or any extraordinary expenses that will have any impact on our expenses. While we have and talk about 15% and 20%, although we realize that as we have done in the past, that may not be demonstrable exactly quarter-over-quarter. We believe that is where we will be for the coming year.

There are going to be two questions or comments in which I will be asked, fully one is going to be on the effect of the economy. As I said a number of times in my comments, that we see the economy affect us primarily in lower volumes. People deciding not to go in and go to the physician. We have seen tides and ebbs and flows of that over the course of the year and that has been well documented. We do not see any other significant effects of the economy on our business. However, on can’t rule out any other changes that may go beyond that, but none of those appear to be on the horizon.

The other issue, which I am sure people have an interest in, is how the change in administration will affect our business. For this I really would like to talk about the business.

I am optimistic about the clinical laboratories. I am optimistic on where we are as an industry. We as an industry have worked in a responsible manner to solve clinical problems. We sort that out and tried to use that as a differentiation for Bio-Reference, but it is going to be true of all of us.

As we approach the new administration, and I probably have to age myself to remind you that this is a third administration that I have been through as a clinical laboratory. I do have a sense of optimism. The first one in ’92 people didn’t know what to expect. Healthcare was going to change. In 2000 the laboratory industry was so far down that it was felt it couldn’t get any worse.

But, for right now, for two of the most important areas that anyone talks about, both the prevention and monitoring of disease as well as the advent of new clinical tools to be able to personalize medicine and care, these are two areas of clinical laboratories that are at the forefront. These are two areas where we can go in and make a difference and we are clearer on being able to talk about that message and how it affects us in the future.

Whatever is done by anyone who pays to purchase services as they look to the comparable effectiveness of services, we stand in a good position, because we offer efficient ways both to prevent disease and to better treat disease. That is a promise of clinical laboratories.

The promise of Bio-Reference is that we have taken a leadership in this role, to get leadership in better service, all of which will result in better health care for the patients.

Thank you very much for being on the call and I am now happy to respond to any questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Art Henderson of Jefferies and Company.

Art Henderson - Jefferies and Company

Hi, good morning, very nice quarter. I have two questions for you. First, the feedback we were getting from the field has been extremely positive on this Women’s Health Initiative. Obviously you highlighted it quite a bit in your remarks, but what is it hat you’re doing differently, because it strikes me that you have expanded this offering across the country and the uptake has been pretty amazing pretty fast. Could you just talk about what you are doing to differentiate yourself on that end?

Marc Grodman, MD

What we are trying to do is to answer a clinically relevant question. You know the incidence of sexually transmitted infections is fairly high and that of undiagnosed infections has kind of pretty well been substantiated. What we are doing is offering tests and information education for the physician to be able to know what are potential organisms that can cause this. We have employed some technology, that we have worked on for a time, to be able to go in and offer these tests in a very economic fashion that is able to go in and make it easier for the physician to go in and ask the clinical question. They order this, they understand these different organisms and they would perform them in an efficient way, so that we kind of fulfill the role of being able to go do what they ask, but help them with the education. We spend a lot of time in education, a lot of time in monograms and published articles just to go in and to bring them up to speed on what is available out there.

It answers the clinically relevant question; it also allows them and gives them the background to understand what they are by different kinds of clinical conditions.

The physician is the boss, the physician is the one who has to go I and take information and what we find out is that most physicians are incredibly well regarded and arrayed in most areas. We try to close the gap. We try to be able to have a laboratory go in and feed them more and be more of a partner in this process.

The way it is done, the way it is explained, the way the education and the materials are provided for them to make it easier to provide materials for them to explain to patients has become a compelling service and the reaction has been very, very good. But, it is all part of a compelling question. It is all a part that what we have to do is to ask clinically relevant questions and if we do that the business will come.

Art Henderson - Jefferies and Company

To your comments on the economy, it strikes me that your esoteric business is significantly more resilient than your routine business.

Marc Grodman, MD

Yes, I think that it is. I mean, for a long time we grew in a manner whereby we really grew in the esoteric testing and specialty markets, because it is within those areas. I mean, how do you grow? It is not given. No one is going to hand you growth. It has eluded most companies and it eluded many companies in the laboratory industry. We have had 15 years of compound annual growth rate at 20%; so where you have new science, where you have more clinical questions, you can go differentiate yourself better. It is easy to do that within specialty markets where the questions are a bit more refined.

You are absolutely right, Art. We have gone back in emphasizing this area. These are initiatives that we have worked on for years and we are able to go in and grow better in those areas. You need to have people who sell. You need to have people and feet on the street. You need to have people who can tell your story and have a greater service for physician clients, but you also have to have differentiating science and that is how we will grow. Those opportunities are going to be greater in those specialty markets and they will be in many of the regional routine markets.

So, we are kind of going back to where we were before the changes of the 2007 year and grow by emphasizing where we can differentiate ourselves and show greater strength.

Art Henderson - Jefferies and Company

That makes sense. I have one last question and then I will jump back in the queue. Of all the things that, I guess, are being discussed at the congressional level with the new administration is there any one particular initiative or proposal that is being pushed that you are most excited about?

Marc Grodman, MD

You mean from the administrations point of view?

Art Henderson - Jefferies and Company

Yes, whether it is personalized medicine or focus on more genetic testing. I mean what is really…

Marc Grodman, MD

As I mentioned in my final comments, the two areas that people talk about are, one, the emphasis on prevention. You need to be able to go in and deal with the low hanging fruit and how to better manage chronic diseases. A lot of the proposals that are out there, that are still all just proposals, that runs through all of them.

We as an industry do well in that debate, because we provide valuable services in that debate. The second part is that you have to be excited by the promise of personalized medicine and the promise of [indiscernible] treatments and understanding diseases and not just in oncology, but in other areas. In many ways genetic testing is very much the next model which we have been working on which, as I said many times in presentations, physicians can’t order mutations. They can’t order for clinical need and we can go in and help them understand how you translate mutations into clinical questions. That becomes important. It is still facts, it is not a black box, it is just answers and put them in an educational format.

The advent of personalized medicine is very, very exciting for all of us who are working this area. The other buzzword is the comparable affect; it is the idea that if I am a payer I want to make sure I am getting the most for my money. Within that context, if I care about prevention, I care about innovation and personalized medicine, then within that debate of comparable effectiveness we should be able to be at the forefront. We are the best deal in town, 1.6% to 1.7% of the Medicare spend. That is not bad for what we offer as an industry.

That is the reason for my feeling optimistic about where we are right now. It is why I feel optimistic about our industry. It is why I feel optimistic about where we are as a company, because we have tried to exemplify services within those areas.

Those are the buzzwords that are there and what you get less of is, let’s just go cut. There is less talk about that. There is less of a sense of it. Nobody is going to say it is not the threat that is there, but at least the discussion is one that has a far-reaching affect on the health of the population.

Art Henderson - Jefferies and Company

Thanks and congratulations again.


Your next question comes from Charles Rhyee - Oppenheimer & Co.

Charles Rhyee - Oppenheimer & Co

You mentioned about the patient count going back to pre-2007 levels, but obviously over the last two, three quarters now we have seen that number keep ticking down. What level do you think this is going to be going to, and is this a reflection of the economy itself, or is there anything else going on? I am particularly wondering, you obviously picked up a bunch of patients over the last year and changed from the spillage of United and Aetna. Is that some of the business you are walking away from? Is there something that we should think about as we look forward?

Marc Grodman, MD

Charles, the answer is yes to most of your questions.

The modus in ’07 was to go in and grab and take what you can, because that is what the market dictated. There has been and I did say in my comments that part of what we have over here now was to be able to emphasize that which we can do well and deemphasize those that we think we can’t do well on. It is a bit of a combination a little bit higher, because there is something of a contraction after the growth of the patient count for 2007. A little bit of that contributes to the lower numbers that you go in and see these quarters; but I think they will flatten out and may over the next year. I don’t think that they will change much, but you are absolutely right that part of this is our decision to contract a little bit and look at those areas where we can do well and not those areas that we can’t and emphasize those that will have higher revenues per patient where we can make an impact.

A lot of the people and the growth in the local markets have been far more into women’s health where we are going to be having higher revenue per patient.

So, I think that you are right that you see a sense of putting the emphasis in a different place and somewhat of a response back to the old, but I think that we will be back to where we were and you will see a flattening, a steadiness of this effect right now and not a drifting downward.

Charles Rhyee - Oppenheimer & Co

How much would you attribute, maybe, to the economy though? You know obviously the [interposing].

Marc Grodman, MD

You know what, I am sorry, I should have mentioned that, because you are absolutely right. The economy has also had an absolute effect and that does see itself not in the specialty areas, is what I mentioned before, that does see its area in the more routine clinical business, so it is always going to be a few points percentage increase. That also has contributed to be somewhat lower, so that the base is somewhat lower than what it was at the same time last year.

The economy absolutely plays in a role and that plus the somewhat of a contraction is why it is we are somewhat lower than what it would have been in the past.

Charles Rhyee - Oppenheimer & Co

Okay, that’s fair. So, it looks like your esoteric business was up 29% year-over-year. You spent a lot of time talking about the Women’s Health here. I have two questions regarding that. The first is what contribution did the Women’s Health business contribute in the growth in the quarter? Secondly, when I look at your GenPath, the hematopathology business, obviously you did a lot of hiring at the beginning of the year. Are we starting to see a lot of traction from those hires? What kind of growth did that part of the business contribute, when I look at this 29% growth number?

Marc Grodman, MD

For a variety of reasons we have decided that we are not going to go break out specifically where we are, because the numbers really tell the story on their own. When you see patient count kind of not growing to the same extent to what it did in the past, and you see the growth in revenue per patient, clearly we have shown that in the area of specialized testing a lot of the growth has been from the investment we made in the oncology services of Genpath and a lot of the increase has been through the work in Women’s Health. Even though it represented only about a month and a half of numbers in the quarter it still had a sizable impact onto the esoteric numbers.

GeneDX, I have said before, has had a remarkable increase, that we have talked about, that remains as strong as it has been in the past.

Overall, when one looks at the growth rate it is clearly the Women’s Health, GenPath and GeneDX that is fueling this kind of high growth superimposed upon a routine business which grows low single-digits, has been affected by the economy, that in fact in some ways has been contracted through our own volition.

Charles Rhyee - Oppenheimer & Co

Wouldn’t we want to see more margin expansion then? Because we’re expanding the higher margins, so the higher revenue per patient business is on the specialty side?

Marc Grodman, MD

It is going to be. All of it is works in progress. This is something in the refocusing that has all occurred in the last two, three, four quarters.

Charles Rhyee - Oppenheimer & Co

My last question before I jump back in the queue is you talk about your guidance being at least 15% top line, at least 20% EPS growth. Can you talk more about how we should think about it on a quarterly progression? Is there anything that we should think about in the first half of the year versus the back half of the year? I mean is there more infrastructure spend that needs to be done to…

Marc Grodman, MD

Sure. Our history is we have been very, very clear. If I just look at the net income numbers throughout this given year, and this year was in effect. If you go look at what this year was and you look at the difference in net income, take into account that our tax rate was somewhat higher, which would have brought us closer to 20%. Not quite there, but closer. When you realize what the effect of the economy was that had an effect in two different points in volume, and you look at the fact that what we really did was that we go in through the year and usually we grow through the year, but we also add infrastructure usually yearly to keep up with growth. This year the infrastructure that was added was kind of all done fourth and first quarter instead of through the second and third quarters. This is why even this year, where we showed this comparison of net income, the first quarter comparison net income was $0.14 and $0.16, the second quarter was $0.23, $0.25, $0.30, $0.34, and now $0.33, $0.38.

I mean, we always seem to go in and progress more, so if we go in and say that we will do at least $0.20, we seem to always do better as the quarters go on during the year.

Part of that is that even wherever we are infrastructure remains higher and volumes will tend downward in the first quarter, as we have talked about, because of the holidays. Usually these are among the slowest months of the year and they seem to trend up more as the initiatives go in and all the marketing and sales begin to go kick in for the current year.

So, we have shown this. I think if one goes in and looks historically on what we have always done, we have always had that margin, that difference in net income. We have always progressed through out the year from the first and the fourth quarter. Even this year, which was a different change, we are having the, sort of the, same kind of growth.


Your next question comes from Amanda Murphy of William Blair.

Amanda Murphy - William Blair & Company, L.L.C.

I just have a couple of follow-up questions on the guidance questions. First, in terms of volume growth how are you thinking about that for next year in terms of the economy? Are you assuming sort of status quo or have you built I a little bit of buffer as you reach for the 15% top line growth target?

Marc Grodman, MD

Well if I say I have built in a buffer than I am not changing my numbers. I think that all we can base it on is where we are right now. I think right now that we see volumes being somewhat lower. Not tremendously lower. Clearly on a growing company it has just a very small marginal affect, but we do see it has an affect a bit. Although I don’t think it will be as bad as some parts of the year, it has somewhat of a negative effect on it.

Amanda Murphy - William Blair & Company, L.L.C.

Is it fair to say it is still in that 1% to 2% sort of [interposing]?

Marc Grodman, MD

Yes, I mean I think that 1% or 2% has always been the numbers that we have talked about. I mean, depending on the quarter, anywhere from 1% to 3%, I think, really is the effect that we have on the economy and I think that is probably true.

I have always given you credit, Amanda, for having done the work over the summer and documenting the affect of the economy on patients showing up at the doctors office and we have seen that effect and we have done that. Will that effect be greater in January, or February, or March when people have to go in and we start their deductibles? I don’t know. Could they be tougher than what they would be? There is no way to really figure because that is somewhat of a hindrance, but we have kind of worked them into where we are at this current level, which is not quite as bad as it was in the second and third. I think that range of 1% to 3% for us in terms of overall growth volume that we don’t have is probably appropriate.

Amanda Murphy - William Blair & Company, L.L.C.

Okay and then what about in terms of real price increases. There have been some pretty nice expected updates in the clinical lab and physician fee schedules. Is that something that we should think about for next year or is it mostly mixed shift that is going to drive that revenue per patient up?

Marc Grodman, MD

That is going to be a factor, of course. Something that I have often said is that until I really see that I still won’t believe it, but I think that it is expected to be there. The greater emphasis that we have is going to clearly be of some aid to us and we have kind of included those things in our numbers.

Amanda Murphy - William Blair & Company, L.L.C.

Switching to the hematopathology business, as I understand it the hemat accounts are pretty sticky. As you work to grow that business and expand into new accounts what is it that enables GenPath to win the business and also who would you be winning that business from?

Marc Grodman, MD

Well, I wouldn’t comment on who we would win it from. I think we win it from all parties in the business. We have been successful. We have grown our GenPath growth in the last year and although we have said we really are not going to break that out specifically, it is substantially higher, as are all of the other specialty growth areas, than what the overall growth of the company has been.

How we grow with it, I think we have the best hematopathology lab in the country. We do tests that are medically appropriate. I think that it is important to go in and to realize that we all live in a society where we have to be responsive in medical care. One of the things that we are known for is that we do those tests that are appropriate. We give out algorhythms to physicians. They understand what medically appropriate tests are.

If people have tough cases they don’t leave GenPath. Our hematopathologists’ are extremely competent. We do all of our testing in house. There is nothing that we send out. We develop novel tests on our own that in many ways lead the industry. We respond to the advisory board. We have some of the most outstanding hematologists and hematopathologists in the country.

The new work that we are trying to do with using CGH arrays with hematopathology, there is nothing more about personalized medicine than to diagnose with leukemias’ and lymphomas. Where else do you do a test where you do genetics on every single case? If we can go in and yield more information and do it better then that is a real positive advantage and that’s what we have been working on for two years and what we will be introducing.

What is important is that if you are going to yield that information that you don’t do it as a corollary, but you do it in line with the entire case, which is what we have been doing.

Our people have been successful because GenPath truly has better professional service, I believe, and we try to differentiate ourselves in that part and better technology.

Doing their own tests, developing many of them on the cutting edge using the best scientific people around the country who people see in our materials really, I think, differentiates us. The other part of it is to do what is medically appropriate and not just do every test. I think we have to be really careful to be able to do that, especially, especially in this day and age.

Amanda Murphy - William Blair & Company, L.L.C.

As you expand geographically in GenPath what is it that surprises you? Is there anything in terms of what the hemat’s are looking for or what you are offering that surprised you?

Marc Grodman, MD

We meet with people and I meet with them myself. I mean I have contact with customers. These are among the most scientifically sophisticated customers/physicians that you could ever have. They will read things in blood and want to be able to do the test that year, that day.

So, speaking with them at a high level and being able to go in and understand what their needs are, I think, has separated us. I mean, they want the most information they can get. The want to know the most which is reasonable, they care about their patient’s, they care about what their patient’s are charged, but they also really care about better care and getting more information, and to know that they are working with people who treat them as professionals.

I am not surprised, because we have had remarkable growth in this are. Our volumes have been very strong and I think that we are recognized as a leader within this area around the country, both of the hemat and pathologists who go send us to specialized work that they don’t do themselves. So, there is little to surprise except for un-quenching thirst for better information.


Your next question comes from [Brandon Strong] of Barclays Capital.

[Brandon Strong] - Barclays Capital

Are there any particular contract renewals in 2009 that you are excited about being able to maybe win some new business there?

Marc Grodman, MD

There are none that are going to have a significant effect. We do a lot of work in correctional health. We are in a very strong position. There always are ongoing, not contracts with us, but contracts with those companies. But, since we have relations with many of the companies we are in a fairly strong position.

We provide better services here. This is an area that we have really done well in providing informatic solutions and service solutions that we think are a very high barrier to entry to others coming in. But, other than that we have no other contracts of a significant nature that have come up that are at risk for the coming year.

[Brandon Strong] - Barclays Capital

Okay and no other united like events as well where you think you might be able to boost? I know you haven’t spent the time talking about the routine business, but I am curious if there are any contracts that may come up in ’09 or maybe 2010 that you might be able to…

Marc Grodman, MD

Not that is on my radar at this time.

[Brandon Strong] - Barclays Capital

Okay and then I have a follow up on hematopathology. Have you guys provided any specific details of exactly how big you are in that business these days?

Marc Grodman, MD

We have in the past and we have talked about that in terms of esoteric testing. We don’t break this out specifically within numbers, because it is really all part of one laboratory. We don’t do it or break them out.

For the customer, they see this as a business unit that we report as one company. We are a sizable advantage and outside of the clinical work, which is esoteric everything else, but most of the esoteric work is really in GenPath; so it represents a very sizable part of our overall business.


Ladies and gentlemen this concludes today’s question and answer session. I would now like to turn the call over to Dr. Marc Grodman for closing remarks.

Marc Grodman, MD

I want to thank everyone for being on the call. Thank you for your patience, for doing it so close to the holidays. Changing fiscal years was never something which we ever thought about doing, but it kind of puts us in this position if we want to report before the end of the year.

I wish everybody a happy, healthy holiday season and a healthy and a great New Year for you and your families.

Thank you very much.


Thank you for your participation in today’s conference. This concludes the presentation.

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