Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

David King - President and Chief Executive Officer

Brad Hayes - Executive Vice President and Chief Financial Officer

Ed Dodson - Senior Vice President and Chief Accounting Officer

Bill Bonello - Senior Vice President, Investor Relations

Analysts

Ralph Giccobbe - Credit Suisse

Jason Gurda - Leerink Swann

James Star - Longview

Amanda Murphy - William Blair & Co.

Darren Lehrich - Deutsche Bank.

Adam Feinstein - Barclays Capital

Robert Willoughby - Bank of America

Ricky Goldwasser - UBS.

Arthur Henderson - Jefferies & Co.

Anthony Vendetti - Maxim Group

Bill Quirk - Piper Jaffray

Gary Taylor - Citigroup

Shelley Gnall - Goldman Sachs.

Charles Rhyee - Oppenheimer

Laboratory Corporation of America Holdings (LH) Q1 2009 Earnings Call April 23, 2009 9:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2009 Laboratory Corporation of America earnings conference call. My name is Franceine and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today’s call, Mr. David King, Chief Executive Officer.

David P. King

Thank you, Franceine. Good morning and welcome to LabCorp’s 2009 first quarter conference call. Joining me today from LabCorp are Brad Hayes, Executive Vice President and Chief Financial Officer; Ed Dodson, Senior Vice President and Chief Accounting Officer; and Bill Bonello, Senior Vice President, Investor Relations.

This morning we will discuss our first quarter results, highlight our strategic priorities and growth drivers and provide answers to several frequently asked questions.

I’d now like to turn the call over to Bill Bonello, who has a few comments before we begin.

Bill Bonello

Before we begin, 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 will be filing a Form 8-K/A, which includes additional information on our business and operations. This document supersedes the 8-K previously filed this morning correcting an error in the specialty mix table on page eight. This information will also be available on our website. Analysts and investors are directed to this 8-K/A on our website to review this supplemental information.

Additionally, we refer you to today’s press release which is available on our website for a reconciliation of non-GAAP financial measures discussed during today’s call to GAAP. I would also like to point out that any forward-looking statements made during this conference call are based upon current expectations and are subject to change based upon various important factors that could affect the company’s financial results. These factors are set forth in detail in our 2008 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 Hayes

Thank you, Bill. By now you should have had a chance to review our first quarter financial results. On today’s call, I’ll discuss four key measures of our financial performance cash flow, revenue growth, margin and liquidity.

First, cash flow; our cash flow trends remain excellent. Free cash flow for the trailing 12 months ended March 31, 2009 increased 18.4% to $663.9 million. For 2009, we continue to expect operating cash flow, excluding any transition payments made to United Healthcare to be approximately $800 million. The operating cash flow guidance includes a $54.8 million reduction from the pension contributions. We continue to expect capital expenditures to be approximately $130 million.

We are also pleased with our strong cash collection efforts in the quarter. DSO at the end of March was 52 days. Our bad debt rate was stable at 5.3%.

Second, revenue growth; during the quarter, we achieved strong volume growth and continued mix shift to higher value test. Revenue increased 4.8% year-over-year in the first quarter. Total company volume increased 3.9% year-over-year despite a 20.1% year-over-year decline in the drugs-of-abuse testing business. Excluding the consolidation of the company’s Ontario, Canada joint venture, volume increased 2.6% year-over-year with a drag of 160 basis points from the decline in drugs-of-abuse testing.

Volume growth remained strong in esoteric testing, where volume increased 9% year-over-year. Revenue per accession increased 0.8% year-over-year. Excluding the consolidation of the company’s Ontario, Canada joint venture, revenue per accession increased 3.2% year-over-year. The growth at revenue per accession is attributable to both mix shift and rate increases.

Our 2009 guidance for revenue growth remains 2% to 4%. We continue to expect that 2009 could be a challenging year for volume growth, given the economic environment. We believe that the job losses that occurred in late 2008 and early 2009 could have a more pronounced impact on volume and collections as these patients lose employer provided insurance coverage. On the other hand, our pricing outlook remains positive. We are pleased to have received price increases from both Medicare and several large managed care payers in 2009.

Finally, I would remind everyone that Easter fell in the first quarter in 2008 and in the second quarter in 2009. That timing helped our year-over-year volume growth during the first quarter of 2009 and will reduce our volume growth in the second quarter.

Third: margin. For the first quarter, our operating income margin was 20.8%. Operating income margin declined approximately 100 basis points year-over-year due to increases in bad debt, pension expense and the impact of foreign exchange. In addition, due to the economic environment, we made the decision to hold the employee share of healthcare cost flat, which increased the cost of employee benefits to the company. Excluding those item, margin would have been flat year-over-year.

Given these factors, we continue to expect that 2009 could be a difficult year for margin expansion. Nevertheless, we continue to lead the industry in operating income margin. We are focused on increasing automation and efficiency in our labs, which should enable greater margin expansion in the years to come.

Fourth, liquidity. We remain well capitalized. At the end of March, the company had cash of $373.2 million and approximately $300 million available under its revolving line of credit. At the end of March, total debt was $1.7 billion, including $70.8 million drawn on our revolving credit facility.

I will now turn the call over to Dave.

David King

Thank you, Brad. We are very pleased with the first quarter results, especially our continued strong volume growth and cash flow. However as Brad noted, we remain cautious about volume growth and collections for the balance of this year. I would like to highlight some of the initiatives that we are pursuing to drive growth in 2009 and beyond.

As we discussed in our fourth quarter conference call, our most important priorities for this year are to gain new customers, maintain pricing and control costs. Furthermore, we see opportunities to accelerate revenue growth through continued leadership and personalized medicine. So we will remain focused on growing our esoteric testing platform, expanding our outcome improvement programs and developing and commercializing companion diagnostics.

We are also optimistic about our ability to reduce fixed costs through facility rationalization and introducing robotics to automate front end solutions. Let me discuss what we are doing to gain new customers to maintain pricing and control costs.

On the volume front, we are continuing our efforts to target specialty physician’s whose referral patterns may be less sensitive to the economy. Our ability to grow esoteric volume by 9% in the first quarter is a testament to the success of this strategy.

On the pricing front, we have received scheduled rate increases from both Medicare and large commercial payers. Price integrity is a top priority and we continue to review our pricing structure to ensure that we are being paid appropriately for more complex and higher value tests.

On the cost front, we are working aggressively to reduce expenses without compromising quality or growth. For instance, during the past quarter, we continued to generate supply cost savings by consolidating vendors for selective supplies and services. We continue to keep a tight lid on discretionary expenses such as consulting and travel. All of these efforts will be balanced against the spending that is necessary to accommodate our continued volume growth.

I would also like to spend a few minutes discussing some of the initiatives that we are pursuing to lay the foundation for future revenue growth and margin expansion. On the revenue front, our objective is to continue to be the leading provider of personalized diagnostic medicine. We have three strategies that will move us toward that goal; continued growth in esoteric testing, expansion of outcome improvement programs and development and commercialization of companion diagnostics.

Our goal is to increase esoteric testing to 40% of our revenue in the next three to five years. We will achieve this goal by continuing to introduce new esoteric tests to respond to scientific discoveries, to improve patient care and outcomes and to satisfy unmet medical needs.

We will also advance our important collaborations with academic institutions such as Duke University and Yale University to help us in identifying and commercializing new and innovative tests.

During the first quarter, LabCorp became the first national clinical laboratory to offer HTV PCR testing using a newly FDA-approved assay, the Roche's COBAS(R) AmpliPrep/COBAS(R) TaqMan(R) HCV Test. This assay is intended to be used as an aid in managing HCV infected individuals undergoing antiviral therapy.

Also during the quarter, LabCorp signed a collaboration agreement with Duke University related to LabCorp’s state-of-the-art Biorepository in Kannapolis, North Carolina. The collaboration agreement focuses on the operation of the facility as well as the management of samples deposited by Duke University and its clients and collaborators.

In terms of outcome improvement, during the quarter we introduced our unique outcome improvement for chronic kidney disease in several key markets, and we will continue to roll the program out nationally throughout the year. We are in a process of developing additional programs for other chronic diseases and our goal is to introduce at least one such program each year.

During the quarter, we also made progress in development and commercialization of companion diagnostics. For instance, LabCorp was recently selected by United Healthcare as one of just two clinical laboratories with whom United Healthcare has contracted to perform KRAS testing to help guide therapy for colorectal cancer. Effective April 1, 2009, United Healthcare began to require the submission of a pathology report documenting KRAS gene type to determine coverage for Erbitux and Vectorvic.

During the quarter, we began to offer a companion diagnostic test for Plavix. Our test determines patients who are poor metabalizers in the most common CYP2C19, which is useful in determining risk for adverse cardiovascular events.

On the margin front, over time we believe there is opportunity to reduce our fixed cost base through automation and capacity rationalization. During the quarter, we implemented proprietary robotics to automate front-end processing for HPV testing in our largest lab. We will continue to roll out HPV robotics nationally throughout the year.

This automation will result in savings from labor, more efficient use of reagents and test site consolidation. We are also in the process of developing robotics to automate other pre-analytical processes. In summary, we remain very excited about the growth opportunities that lie ahead and continue to believe that we are well positioned to capitalize on it.

Now, Bill Bonello will review anticipated questions and our specific answers to those questions.

Bill Bonello

Thank you, Dave. Can you update us on the mix of your business coming from Esoteric Testing? In the first quarter, approximately 35% of our revenues were in the genomic, esoteric and anatomic pathology categories. Our goal over the next three to five years is to increase our esoteric test mix to approximately 40% of revenue.

What are your plans for usage of free cash flow during 2009? We remain committed to returning value to our shareholders, first by using our free cash flow to grow our business through strategic acquisitions and licensing agreements. Second; through continuing our approved share repurchase program. However, given the economic environment, we may choose to retain a higher than normal cash balance throughout the year.

The acquisition market remains attractive with a number of opportunities to strengthen our scientific capabilities, grow our esoteric testing franchise and increase our presence in key geographic areas.

Historically, we have been a consistent buyer of our own shares. Over the past three years, the company has repurchased $1.7 billion worth of stock. Approximately $95.4 million of repurchase authorization remained under our approved share repurchase plan at the end of the quarter.

Can you remind us of how drugs of abuse trended during the year? In the quarter, our drugs of abuse volume declined 20.1% year-over-year. This compares to a decline of 15.9% in the fourth quarter of 2008, 10.3% in the third quarter, 7.9% in the second quarter and 4.4% in the first quarter of 2008.

What is the status of your transition payments to United Healthcare? In the quarter, the company was build $5.5 million in transition payments and paid $5.5 million in transition payments. To-date, LabCorp has been built a total of $80.1 million and paid $79.9 million in transition payments to United Healthcare.

Can you give us an update on the status of your managed care contracts? We have no national contracts up for renewal in 2009.

Now, I’d like to turn the call back over to Dave.

David King

Thank you, Bill. In summary, we are pleased with our robust top line growth in this challenging environment. We will work aggressively to gain new customers, maintain price and manage cost. Looking forward, we see great opportunities to accelerate revenue growth through continued leadership in personalized medicine.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ralph Giccobbe - Credit Suisse.

Ralph Giccobbe – Credit Suisse

Good morning. Just a couple of things here. One, I don’t know if I missed it, did you guys give an impact for sort of one less day due to leap year?

David King

Ralph, it’s Dave. The number of business days from the first quarter of this year and the first quarter of last year was the same, because of the way the calendar fell.

Ralph Giccobbe – Credit Suisse

Easter shift?

David King

Well, no. The one fewer day from leap year will actually be seen in the third quarter of this year and we talked about it a good bit last year, but it’s just the way that the calendar falls. That’s where the extra revenue day fell.

Ralph Giccobbe – Credit Suisse

And then I guess, staying on volume, just given the kind of tough comp in sort of the first quarter, just around drugs-of-abuse testing. I would think that comp should ease as we move through the year, is that not the way to look at it or how should we think about that?

David King

I think you are correct that the comp will start to annualize, because as Bill pointed out, it was a 7% decline in the second quarter of 2008 versus ’07. So we are starting off a lower base. The only caution I would give there is, we saw 15.9% in the fourth quarter and then it was 20% in the first quarter and that was off a reduced base from the first quarter of 2008. So, it’s hard to predict when we would see the absolute bottom of it, but I agree with you that it will moderate over time because of the way that the volumes declined last year.

Ralph Giccobbe – Credit Suisse

Then just on the pricing side, on the organic sort of 3.2% growth and I think it sort of matched the fourth quarter, but this quarter sort of we saw the Medicare price bump come in. So we would have thought maybe a little bit higher is there anything we should be thinking about in that line item whether it’s adverse mix shift or something on the pricing side as a reason why we didn’t see that sort of pick up sequentially?

Brad Hayes

Hi Ralph, this is Brad. I think if you look payer by payer in our 8-K, you will see it up where you would be expect it to be up. It’s hard to deny that the decline in patient volume has a negative impact on the total pricing dynamic in terms payer mix shift.

Ralph Giccobbe – Credit Suisse

Just the last thing, I just want to back to sort of the kind of cost initiatives, you said sort of that tough margin expansion sort of year are more challenging. I just wanted to back to LabCorp 2010, just understands what are the timeframe, I know it’s sort of longer term strategy, kind of more of a kind of three-year plan, but it was supposed to start sort of in this year, and I know we are not probably not going get the benefits from bad debt they initially thought.

Is there anything we should thing about the ramp of sort of when the initiative start taking hold, is it second half of this year, and I’m assuming the net 100 million of savings is still sort of the targeted goal for sort of the longer term period?

Brad Hayes

Yes. The $100 million in savings is still the targeted goal for the longer term period, as you noted Ralf, and as we’ve noted, some of that comes from reduction of bad debt over time. So, we do expect to see reduction of bad debt over time based on a number of the initiative we’re pursuing, but being realistic we will be very happy to hold bad debt stable for the rest of this year, just given what we see going on in the environment around us.

We will start to see the impact of a number of the 2010 initiatives in the second half of the year, and then probably picking up in the fourth quarter. That is all incorporated into the guidance that we have given. So, I think as we get out into the third and fourth quarter, you would see improvements in margin from 2010, but not necessarily anything that would cost the guidance to be different.

Operator

Your next question comes from Jason Gurda - Leerink Swann.

Jason Gurda - Leerink Swann

As far the quarter goes, when you guys lower guidance in January, how the quarter turned out, was it better than expected when you changed the guidance by then or was it sort of in line with expectations?

David King

I would say, the quarter was within the range of our expectations when we reduced the guidance. Obviously we’re quite pleased with it in terms of the volume and revenue growth. The guidance that we put out, Jason was intended to incorporate a wide range of what could happen, and so we had a strong quarter from a volume and revenue standpoint, but as Brad pointed out there are reasons why we continue to feel cautious about the balance of the year. For that reason, I would say that the quarter was within the range of expectations of what we had in the January guidance.

Jason Gurda - Leerink Swann

Okay. So with the idea that, obviously with the recent unemployment increases that we maybe facing more challenging quarters up ahead are there flexibility in the guidance do you think to absorb some of that?

David King

Well, the guidance is intended to incorporate a number of scenarios, so one of the things that we have mentioned is, there a six million people drawing on employment right now in the United States, and the number of new jobless claims actually have reported this morning, the consensus is going to go up.

Our belief is that there are people who lost their jobs in the fourth quarter of last year and even into the first quarter who have some sort of severance or continuation of health benefits that at some point during the year that’s going to transition to some other form of benefit, whether it’s a government benefit, whether it’s a COBRA benefit or whether it’s uninsured and that’s going to, in our view, put some pressure on volume and also on collections. So, the guidance is intended to incorporate our view that that is a possibility going out as we get later in the year.

Jason Gurda - Leerink Swann

Then, just a final question. Looking at your mix of volume and pricing, patient volumes down about 10%, is that simply economic related or was there’s something more to that?

Brad Hayes

Well, Jason, that’s what we would speculate, that category of patient may not be coming, but again there will only speculation on our part, but there is nothing internal that we point to say something that we’ve done that would cause that.

David King

I think it’s a little early to draw any definitive conclusions just based on one quarter. So that’s something we’re obviously going to watch closely as we go through the year.

Operator

Your next question comes from James Star - Longview.

James Star - Longview

I’m going to start kind of interesting in one of this recent pieces and I wanted to ask you about it. He noted that the economy is really been stressing on hospitals and he postulated that or he has been hearing that there might be a dramatic cutback in capital spending many, many hospitals which we translate to the labs and that might have an impact of course in the future on you.

Can you comment on what you’re saying in this regard, I think that theory has any or much solidity?

David King

Most of our information is similar to your information, which is there is a lot of anecdote. I do read and I certainly see and hear from colleagues and peers that hospitals are under some pressure, and it’s certainly been widely reported that a number of hospital systems are freezing all capital, freezing wages; some are even doing reductions in force.

So I think the observation is accurate that there is a lot of pressure on hospitals, and in addition a number of hospital systems have reported that they are seeing a growing number of uninsured patients. I think that will put pressure on hospital’s desire or willingness to invest capital in laboratory and outreach programs, and I think over time that will be a benefit to our desire to continue to make sound acquisitions that are accretive to EPS and that we can bring up to our level of margins.

Operator

Your next question comes from Amanda Murphy - William Blair & Co.

Amanda Murphy - William Blair & Co.

Good morning. A question on the core side of the business and volume, it looks like the growth picked up a little bit sequentially. Is that clearly the Easter impact or are you seeing maybe people using more benefits ahead of potential unemployment or is that not a fair trend?

Brad Hayes

Amanda, this is Brad. I don’t think it’s a clear trend. I think the Easter from a year-over-year in the first quarter is definitely a benefit, but to the other point that you asked about it would be hard to determine exactly if that’s a driver.

Amanda Murphy - William Blair & Co.

Okay. Do you have any insight into how COBRA adoption is trending and do you have an idea how many people are switching to COBRA versus becoming uninsured?

Brad Hayes

No. At this point, we don’t.

Amanda Murphy - William Blair & Co.

And then one more question on the volume side, it looks like the histology testing volumes ticked down a bit in the first quarter. Is this something to do with hospital-related business or pathologist insourcing testing or is there something there that’s driving that?

David King

I think there are four things that are driving the pathology volumes. One is just mix shift, so higher volumes in lower priced testing, dermatopathology and also higher volumes in the technical component piece of the pathology business versus global pathology.

The second is, certainly there is a trend for physicians to be internalizing labs for pathology and that has an impact on volume. The third is, there was an issue with CMS over the Medically Unlikely Edits in the first quarter that had a revenue impact, there were some denials based on some Medically Unlikely Edits that would put in that have since been withdrawn and that will correct itself in the second quarter.

Then the last thing is, this is a very competitive market, we see a number of small competitors using practices that we feel are non-compliant and that we are not willing to use and that certainly is having an impact on our volumes.

Amanda Murphy - William Blair & Co.

Is it fair to say that you are in some of this growing esoteric business, sort of more focus on the genomic side than may be anatomic pathology or are they pretty interclient at this point?

David King

I think anatomic pathology is a very important part of our growth strategy in the esoteric market. And I think particularly as we move more and more towards the molecular testing and molecular pathology, it’s going to continue to remain an important part of our strategy. So they are quite early interclient.

Operator

Your next question comes from Darren Lehrich - Deutsche Bank.

Darren Lehrich - Deutsche Bank

Thanks. Good morning everyone. A few things here. I just wanted to turn to your comments you have made for several quarter now about your sales efforts focusing on special essence, may be you could update us on how you see that progressing and if you could just comment on intangible benefit from redirecting your sales force that way?

David King

I think the most obvious thing I can point you to is the continued significant growth in the esoteric business, which is outpacing the growth in the core business and it’s been in double digits for the last several quarters and 9% in this quarter.

Certainly the things we look at internally in terms of the types of areas of testing that are growing and the thing that you can see in the tables in terms of the amount of our price increase that’s due to mix suggest that we are continuing to do a good job of targeting the specialty physicians and selling the higher value tests. So I think those are probably coupled with data points that are most apparent from what we disclosed publicly.

Darren Lehrich - Deutsche Bank

If I can just go back to your prior response about Histology, could you may be size for us the impact of the unlikely edits that CMS was making and now what’s wrong, what basically would you expect to reverse out in the subsequent quarter?

David King

I think, given all of the uncertainty around the Medically Unlikely Edits and how long it’s going to take to reprocess the claims, I’m just reluctant to put a number on it, but we did have a significant number of claims that were fully denied because of the imposition of these Medically Unlikely Edits that we have been told by CMS will be reprocessed in the second quarter.

Darren Lehrich - Deutsche Bank

So there potentially could be some catch up because there is retroactivity, is that the way to think about it?

David King

Well, I would say that what you are seeing in terms of a decline in volume and price, there will be some catch up when those claims are reprocessed.

Darren Lehrich - Deutsche Bank

Fair enough. Couple other things here with regard to your collection trends, could you just update us there on what you are seeing obviously the bad debt has been pretty stable, but can you just give us some more color on that and your upfront collection process where you think you are and getting some of that rolled out in the PSCs?

Brad Hayes

Yes, Darren, this is Brad. We continue to work our initiatives in our patient service centers as well as our in-office lobotomist that we have in place in certain physician offices. They continue to show progress we monitor and track to a very low level of detail how we are doing there, and it continues to go well.

The other thing that I’ve just pointed out is in the payer mix schedule and again, Dave it’s surely good draw trend, but our exposure to patient balances is at least in the first quarter lower relatively speaking than it was in the first quarter of last year, given the volume decline in the uninsured.

Then one another data point that we have talked about, we look at the third party patient responsibility after a claim has been adjudicated by a managed care plan or other payer. That relatively speaking in the first quarter is consistent with last year and the first quarter.

Darren Lehrich - Deutsche Bank

That’s helpful. I guess just one other thing, you did talk a little bit of your views on maintaining more excess cash in the business. I just wanted to revisit that topic a little bit. What is the right level of cash to keeping the business, given the current environment sort of first of all and second of all, I don’t think just looking at the cash flow statement there was really any buyback. So maybe just share with us your views on how you do think about buyback given the substantial free cash flow we’ll this year going forward?

Brad Hayes

Sure. From a working capital perspective, there is really a minimal amount of cash that we need to keep on hand. I think two things come to mind when we think about the current environment, one is acquisition opportunities which ties into our first use of cash. It’s consistently been our first use of cash or acquisition opportunities and we continue to think that they are out there and holding cash in this environment for what we think maybe different today than it was last year at this time just due to access to the capital markets, it comes and goes.

We do have a revolving credit facility, but again the uncertainty there around capital markets may cause us to keep more for acquisitions than we would have in the past. Again acquisition has always been our first choice and as Bill mentioned, when they haven’t been there and we don’t think they are going to occur we’ve done a fair amount of share repurchase in the past few years. Our views really haven’t changed that much on how we want to deploy our cash.

Darren Lehrich - Deutsche Bank

In terms of the flavor of the acquisition opportunities you see, just one last thing here. Can you remind us where you think that the best opportunities or the hospital outreach labs. Are they enhancing product capabilities what is at this stage of the game?

David King

I think there are several categories. The first is the traditional fold-in acquisitions. We are purchasing a set of customers, consolidating facilities and gaining synergies from the acquisition. The second is the more esoteric types of acquisitions whether it’s in esoteric testing, whether it’s in genetic testing, whether it’s in pathology and then the third would be something that historically if we have not looked at because they’ve been so pricy, but those are more what I would describe as proprietary test or technologies.

There are pricing in all aspects of those potential acquisitions has come back to earth a little from where it was last year. I think challenge continues to be, there are a lot of businesses that had great years in 2006 and 2007 and pretty bad years in 2008 in our industry and you have to decide whether these are fundamentally sound businesses that had a bad year. Whether they were businesses that just look great in 2006 and 2007 because everything else looked great and that’s why we are being very deliberate and cautious about the decisions we make on the acquisition front.

I just want to add to Brad’s comment on share repurchase. I mean, we obviously are firm believers in share repurchase. We are firm believers in the stock of our company. In the fourth quarter, we had the issue with potential conversion that caused us to stimulate some additional cash and in this quarter, obviously there was a great deal of volatility in the markets, and there was some volatility in our share price. I don’t want anybody to leave the call with the impression that we don’t believe in the stock or that we don’t in share repurchase because we firmly believe in both of those.

Operator

Your next comes from Adam Feinstein - Barclays Capital.

Adam Feinstein - Barclays Capital

A few questions here, just want to follow-up, there was a question earlier Brad that you had answered based, someone asked why pricing wasn’t higher considering that it looks like on average managed care pricing was almost 6%, the Medicare was 4.5% for the quarter.

You had mentioned something about just a mix shift, but can you just give us more details, I’m trying to make sure, I was following your point there?

David King

Sure, Adam. I mean, if you look at our payer mix scheduling and lined it up quarter-over-quarter with prices and I mean year-over-year, quarter-over-quarter. I mean, you looked down the line items which I think you are alluding to, you see pretty good growth on a revenue per accession basis.

The individual lines add up to more than the total, so how can that be? If you look at the patient line, so we’d lost 10% volume on an accession basis from a payer that has a very high price point that has a drag on the overall total., so I would call that a shift in payer mix that’s affecting the 3.2% of our revenue per accession growth, excluding the Canadian business.

Adam Feinstein - Barclays Capital

Okay. So, it’s just that direct patient bill piece is where you are seeing the biggest impact because the dollars are much higher?

David King

Yes.

Adam Feinstein - Barclays Capital

Okay. All right. Just trying to get a sense in terms of the impact the acquisitions had on the quarter I know you guys aren’t breaking that out, but I’m just trying to figure out what to think about. I know you did the Stanford deal and so just wanted to know which deals we should think about in terms of what was included in the numbers.

Brad Hayes

Adam, this is Brad, and you pointed it out and when we don’t break it out and there were a number of small deals last year. You mentioned one of the larger ones, Tandum was another that we did earlier last year that actually annualized during the first quarter. So again, two specific and then we haven’t broken in out to that level, but there wasn’t anything to my knowledge worth mentioning in the first quarter that we closed.

Adam Feinstein - Barclays Capital

And then just down on the esoteric pricing side, the number was pretty robust there. I just wanted to just get a sense was that any sort of mix shift that drove that just any thoughts in terms of why esoteric pricing was so robust in the end of the quarter?

David King

Could you let me know exactly are you looking sequentially or you are looking year-over-year?

Adam Feinstein - Barclays Capital

Yes, sure. So I just looking here, it looks like the pricing growth in the year-over-year basis was 8.3% in Q1 and that compares to about 2% increase in the fourth quarter and averaged about 2.5% to 3% in 2008, so just wanted to know why we saw the acceleration in esoteric pricing.

David King

And Adam, may I ask you are looking at the original 8-K or the amended 8-K?

Adam Feinstein - Barclays Capital

Yes, let’s see, that was from the original head-end. I haven’t had a chance to go back.

David King

I think it impacts the volume growth in bigger in the amended 8-K in that category so I’m not looking at it on a corrected basis, numbers that you’re enquiring.

Adam Feinstein - Barclays Capital

Okay. Well, I guess, just conceptually there, I think even making some of the changes it seen link there will still be some improvement in the pricing, so just curious if there was anything different in that business this quarter?

David King

No.

Adam Feinstein - Barclays Capital

Then just my final question, I just get down to some of the cause, just wondering if you had to call at the pension cost and the benefit cost, just wanted to see if you could size those items first for the impact for the quarter?

Brad Hayes

Adam, this is Brad again. We’re not going to size them specifically, but the four that we mentioned in total get us to a flat margin and so just to review the four again we’ve got bad debt still a drag year-over-year. We did raise slightly in the quarter of last year but not to the extent that we’ve raised later in the year. We have the pension expense that we’ve talked about and I think you can go in and find those numbers in our filings.

The employee benefit costs, again we’re not going to break out specifically and then foreign exchange, but again those four items get us to flat. One other thing, I mentioned about those four items is that they’re unusual and they are occurrence for us. If we look back over the last five years, we’ve never had anything either in one of those categories that’s come close to the impact that they are having on us this year compared to last year. So we think they are worth pointing out.

David King

Adam, its Dave. I would say no one is disproportionate to the other let’s put it that way.

Operator

Your next question comes from Robert Willoughby - Bank of America.

Robert Willoughby - Bank of America

Can you just comment on the article that you saw in the New York Times, I think it was last week and just on the expansion to stay commitments to some of the DNA based forensic testing programs, I’ve really seen fairly pronounced yet we’ve really don’t hear you guys talking about it or your competitors. That mean, is it’s just premature there for that opportunity.

David King

I think it’s premature. There is a substantial increase in commitment of desire to expand DNA data basis and filling data basis. There has yet to be the substantial increase in funding and we know that there is a lot of significant backlogs and DNA testing and DNA analysis in state forensic labs, but there hasn’t been a great move yet toward outsourcing that.

So at some point Bob, I think there is potential opportunity there and we continue to be happy with our forensics in our identity business, but I think it’s still the common in terms of when that’s going to develop.

Operator

Your next question comes from Ricky Goldwasser - UBS.

Ricky Goldwasser – UBS

Just a couple of follow-up questions, on the customer mix shift, it seems that Medicare accounts now for a greater part of your overall tie. Is there some fundamental shift in terms of customers which you’re servicing or is this just a function of the better pricing which you are getting from Medicare this year?

Then, can you comment on the united relationships, do you think that some of the trend that you might be seeing on the volume side is tied to going to affect the fact that United now is a bigger part of your revenue mix and then if you could just comment on whether you are seeing any proof through from that relationship or not? Thank you.

Brad Hayes

Ricky this is Brad, I’ll address the payer mix shift. That category is a combination of government payers, and when we look beyond the total there, Medicaid is growing larger than average as apposed to Medicare.

Ricky Goldwasser – UBS

Is that because of the better pricing?

Brad Hayes

I don’t think our Medicaid growth would have anything to do with the better pricing.

Ricky Goldwasser – UBS

No, I mean Medicare. I thought you have heard you saying that Medicare was growing faster.

Brad Hayes

No, Medicaid. I am sorry if that was unclear.

Ricky Goldwasser – UBS

Is that related to the new relationship that you have or what do you think are the drives there?

Brad Hayes

We can only speculate, but I did read an article in today’s paper that Medicaid roles are growing as people lose their employer sponsored health benefit.

Ricky Goldwasser – UBS

Okay. So you think you might see some shift in volumes. So we are going to take one bucket to the Medicaid bucket, it might be associated with lower reimbursement?

David King

That is possible. Again, I would say based on one quarter of experience, it’s too early to draw any definitive conclusion. We did see an increase in Medicaid volumes this quarter, but we don’t have a clear explanation for why that would have occurred or whether in fact increases in Medicaid would translate into increases in Medicaid volumes for us.

I think your second question, Ricky, had to do with the United relationship and we are very pleased with United Relationship and I think we continue to see obviously not the kind of volume growth that we saw in 2007, but we continue to see volume growth year-over-year in the United business.

I think as we continue to solidify relationships to the number of the markets like the North where there is strong United presence and where we continue to grow our presence that we are seeing better volume from United as well as better pull through. So all in all, we continue to be very happy with that relationship.

Operator

Your next question comes from the line of Arthur Henderson - Jefferies & Co.

Arthur Henderson - Jefferies & Co.

How much of a factor was whether during the first quarter. It struck me that that might have impacted you in certain states?

Brad Hayes

Arthur, this is Brad. It did have an impact. It was about a 70 basis point drag on our revenue growth in the first quarter.

Arthur Henderson - Jefferies & Co., Inc.

That’s helpful. Then, sort of sort of following on Ricky’s question on United, the transition payments end at the end of this year, is that correct?

Brad Hayes

The transition liability ends at the end of this year, because the liability ends at the end of this year, there’ll obviously be a true up period that goes into probably the first quarter at least next year. So, you probably see us making a final payment either in the first or second quarter of 2010 as those claims run off.

Arthur Henderson - Jefferies & Co.

Okay, that’s helpful. Then Bill, I know you had mentioned that there is no big managed care contracts coming up for renewal this year, but as we think about 2010 I know you’ve had few renewals well point and of course United extends way out, what’s the next big one we should be looking for and what’s the timeframe of that?

William Hayes

The only major contract that’s up for renewal for us in 2010 is the single contract Art. And we don’t have anything, any national contract beyond that.

Arthur Henderson - Jefferies & Co.

Is that mid-year or what sort of timing would that be, do you recall?

William Hayes

I believe it’s the end of 2010.

Arthur Henderson - Jefferies & Co.

End of 2010, okay. And then last question Dave, any thoughts on all the health care reform discussions. I know laboratory services are not really being targeted, but there are some opportunities, I suppose some risk. I just wondered if we can get a thought from you on what’s your impression now it is and what you are looking forward --?

David King

Well, we’ve been bolt through the American Clinical Laboratory Association and ourselves individually. We have been active in Washington in the last several months, making the point that laboratories offer the best value per dollar of anything in health care. That the 2% of the spend or 3% of the spend drives about 80% of the healthcare decisions.

This administration has repeatedly stressed that it’s focused on prevention and screening, and wellness all of which I think, there is very little in the healthcare system other than the laboratory that is more important in the monitoring of prevention, screening and wellness. Obviously any expansion of coverage would be a benefit to us. So the kinds of programs that are being discussed that will provide expanded coverage would be helpful.

There is nothing specific proposed in the budget that would equate to a cut for labs, but obviously this is a big project that Congress is taking on, and so certainly it’s far too early to say how it’s going to turn out. I guess the biggest concern that I have is that there will be a great deal of talk and a great deal of activity around prevention screening and wellness and then at the end of the day there will be a decision that these things are all great, but we’re not ready to pay for them.

So part of prevent, part of improving healthcare through preventions, screening and wellness is a willingness to pay for prevention, is a willingness to pay for screening and it’s a willingness to pay the laboratory for helping physicians manage the patients in those aspects of their care.

Operator

Your next question comes from Anthony Vendetti - Maxim Group.

Anthony Vendetti - Maxim Group

Thanks most of my questions have been answered, but I just have two quick ones. The number of health plans, you said you’re seeing pick up in volume from United Healthcare, but number of the health plans are showing, slowing growth in their membership or declining growth in some of their membership. Do you see that starting to impact overall volume for you in the second quarter, or is that kind of factored into your guidance right now?

David King

Well, I want to say that, we are not going to talk about volume in the second quarter. Clearly as commercial plans, clearly as managed care plans or healthcare plans lose commercial membership that has an impact on overall laboratory volumes. Do you have to remember that it as much as we would like to be more, I mean we are about 9% of the total market. So we’re not going to be unduly affected by membership losses unless they really become extremely large, but we will be we will have our share of the impact from losses of membership.

To answer your second question, yes, the idea that we may see volume pressures as we go out later in the year is built into the guidance that we’ve given.

Anthony Vendetti - Maxim Group

Lastly can you tell us any HIT type initiatives that you have or anything in that arena that’s giving you a competitive advantage over the smaller clinical labs which you compete with ?

David King

Well, I think that we have a number of HIT initiatives on the way. I think the biggest one that gives us the advantage over smaller laboratories is the number of products that we offer. So a thick client product, a thin client products that are especially tailored for specialty practices. We also offer the ability to do interfaces not only into the doctor’s office, but also into electronic medical records, into physician lab systems if they have their own lab.

So I would say is the scope of the product offering, the breadth of what we can do in terms of in terms of interfaces and electronic exchange as we don’t attempt to have a proprietary platform for our IT, so we are able to work with over 300 different vendors to be able to create interfaces and built interfaces to deliver records in information to doctors in the way that they want to see it is as opposed to in some proprietary fashion.

Then the last thing, I would say is the fact that we are a one stop provider where physicians can order all their laboratory testing whether it’s pathology, whether it’s core testing, whether it’s esoteric genomic through one IT system obviously as a significant advantage over labs that are not able to offer that full range.

Operator

Your question comes from Bill Quirk - Piper Jaffray.

Bill Quirk – Piper Jaffray

Couple of questions. Understand the goal to hold bad debt flat this year, but obviously balancing that, in fact it’s an important metric for the longer term under obviously LabCorp 2010. So if we think about the planned improvement here guys, do we have additional metrics that we are going to be rolling out or is the expected improvement largely dependent on the economy and obviously the flow through there.

David King

Well we have a number of things that we are doing that we have talked about previously as I think about it, Bill to reduce the number of times that we extend the credit to patients at the time that they receive services.

So one of the things we introduced this quarter is the patient discount program, which obviously has a patient’s get a substantially discounted price if they pay at the time of service. That obviously has an impact on our patient pricing, but it also has an impact on the collectibility when we do work for the uninsured and it takes us out of the business of extending credit to the consumer.

So we are continuing to roll out improvements and enhancements to our collection efforts, but the metric that you’re going to see that in is a reduction in the bad debt rate as a percentage of revenue.

Bill Quirk – Piper Jaffray

I guess is there anything, and certainly understand appreciate the metrics or the steps you have taken thus far, obviously you are seeing result. Is there anything in particular that you want to callout in terms of what we should be thinking about for additional metrics going forward or is it little bit of stay tuned here?

David King

We look at internal metrics very closely, how much cash did we collect during the patient encounter how many opportunities did we have, how many opportunities we missed, but those are not the kind of things that are going be public metrics. Again the public, publicly disclosed metric is going to be bad debt as a percentage of revenue.

Bill Quirk – Piper Jaffray

Okay, understood. Shifting here a little bit on the esoteric side, any test in particular that demonstrates strength in the quarter you would like to call out?

David King

Well, I think we continue to see good strong growth in vitamin D, we saw a good strong growth in the C - reactive protein in the cardiovascular arena, and KRAS was a strong positive for us in terms of esoteric testing , those are probably the part 3 that come to mind.

Bill Quirk – Piper Jaffray

Actually that’s a nice way to my last one and that’s talking a little about KRAS. Relatively new test, you don’t have a specific CPT code for that yet, but can you talk a little about how you guys are looking at this from an opportunity standpoint and then there is a little bit of discussion in the community over actually the best way to do this, we are sequencing arrays and obviously I would love to hear to get your opinion there. Thanks?

David King

Well. I’m not going to give you my opinion on sequencing KRAS arrays because I don’t know the answer to that question, so now we can take up offline if you want to do that and we can get our scientist involved in the discussion. KRAS has been widely accepted in Europe as a test for determining the appropriate treatment for early stage colorectal cancer for some time and there was a paper presented I believe at ASCO last year in the U.S. that has really driven payer adoption and physician adoption of using KRAS to determine what drug will be administered for early stage colorectal cancer.

I think KRAS is a growth opportunity in and of itself. Now there are other mutations that are already being looked at in colorectal cancer like NRAS, so everyone of these mutations they get discovered, then there are other aspects of that. There are other mutations and there are other aspects of that mutation that continue to be looked at.

So I think it’s a nice opportunity in itself, but I think what it points to more fundamentally is the correctness of our strategy, which is that personalized medicine is going to continue to grow. It is the laboratory medicine of the future and it’s why we are so focused on growing the esoteric line, continuing to role out the outcome improvement programs and continuing to develop and commercialize the companion diagnostics.

Operator

Your next question comes from Gary Taylor – Citigroup.

Gary Taylor - Citigroup

Hi, good morning. Just a few quick questions on the histology issue with Medicare, is there anything there that’s going to lead you to change how you quote or bill for that I guess given you expect to recoup some of those dollars than just filling them?

David King

Well, the short answer, Gary is no. I mean the Medically Unlikely Edits have really been a frustration to us because originally there was a collaborative process by which we address these with CMS and then this most recent release was really sort of imposed on us without any discussion and once we explained to CMS why these edits didn’t make any sense and the impact that they would potentially have on very acutely ill patients, they made the decision to withdraw the edits.

So the short answer is, no, there isn’t anything that it’s going to change. The more complete answer is, we continue to have concern about the process by which these types of decisions are made at CMS and we continue to talk to CMS and to the administration about a better process for making this sort of a decision.

Gary Taylor – Citigroup

Is it a FI issue or is it in CMS proper?

David King

That was a CMS issue. That was not an issue with the intermediaries.

Gary Taylor - Citigroup

On your drug-of-abuse testing, which bucket is that come out of. Is some of that pathology because it’s here is that all in core testing or what is it comprised of?

David King

It’s all in core.

Gary Taylor – Citigroup

On the managed care side, you had good results obviously with large national payers and nothing coming up there soon, what about on some of the smaller contracts from the St Louis plans etcetera, some of the chatter in the market place, you know the labs are still reimbursed better on those smaller contracts than they are in some of the national contracts and maybe the pricing update there are not as good. That doesn’t seem to be reflected in any of the results today, but how are you doing on some of those smaller contracts?

David King

I’m very happy with how we are doing on -- I don’t want to insult anybody by saying some contracts are smaller, some contracts are larger. Some of the State Blues plans are quite large and influential plans, but I would say generally we are very pleased with where we are in terms of overall pricing and obviously it’s one of our focus areas for this year is to maintain the integrity of our pricing. We continue to be, as I’ve mentioned and I think everybody around the industry mentions, we continue to be the best value for the healthcare dollar that can find.

Gary Taylor – Citigroup

I want to go to just the patient care bucket for a second and you addressed a couple of questions on this, but I think I’m being a slow student today, so I just want to ask a follow-up to make sure I understand what’s happening and I don’t have the amended 8-K either, but if you look at just total number of sessions and the patient responsibility bucket is down about 10% year-over-year. Is that primarily being driven by just less uninsured showing up that you are physician partners or is that because of something that’s actually happening with better screening at the patient service centers or both?

David King

Gary, it’s very difficult to say, but I do want to make sure that they we are clear. That is for us the uninsured bucket, the patient responsibility for managed care stays in the managed care lines. So what you see there is the uninsured, the source of that decline or the cause of that decline is really something that’s hard to get at.

Gary Taylor – Citigroup

So you can’t tell which channel it’s coming though, whether it’s coming through docs or versus the patient service centers?

David King

We haven’t broken it down that for yet.

Gary Taylor – Citigroup

Then on the price procession of bucket, the 157 versus the 165 year-over-year, I guess this is what you are talking about the mix, but I am kind of missing what’s happening there. Presumably there is still some gross rate increases on your fee schedule, but this is coming down because why --?

Bill Hayes

Well, we don’t typically raise this price, so the majority of the decrease that you see there is related to what Dave mentioned earlier. We implemented in the first quarter a discount for those patients who come through the channel of our patient service center or through our in-office lobotomist on a certain list of our test. So that’s a real drag in the price, but I want to be clear on the payer mix impact, that’s more driven by the volume decline than the price decline.

Gary Taylor – Citigroup

My last would be, I think you kind of answered this when you talk earlier about some of the way you’ve analyzed the AR, but if we go to the co-pay deductible piece that’s reported in your managed care revenue mix, that number is stable year-over-year you haven’t seen acceleration in co-pay deductible versus prior year?

Bill Hayes

That’s correct.

Operator

Your next question comes from Shelley Gnall - Goldman Sachs.

Shelley Gnall - Goldman Sachs

That you for taking my question op. I’ll try to be quick here. It sounds like the revenue per accession is down obviously because you lost some of your self pay mix, was there any offset to that to higher number of tests per accession. Can you tell us on what trends you are seeing there?

Brad Hayes

Shelly, this is Brad. We don’t measure that specifically about the payer bucket for this schedule, but we saw a slight up tick, nothing significant.

Shelley Gnall - Goldman Sachs

I think a follow-up to Gary’s question. I mean, what I was going to ask and I think this has sort of been addressed, what are you seeing overall from an industry perspective on physician office visit, maybe in the impact of how deductible health plans industry-wide and my question here is how important is your ability to take market share? How important has market share been and being able to put up these pretty good volume growth numbers?

David King

Well, physician office visits really depends on the way you talk to, I mean you talk to some positions you said it seen a dramatic decrease you talked other position just say it’s relatively stable. Again I think it’s a bit early to draw any definitive conclusions there just because of the number of unemployed that were added to the rows in the fourth quarter and even into this quarter.

So how important is market share? Obviously market share is very important, we have to be taking market share to be able to grow volumes in this environment and we’re growing faster than others in the industry. So that means, in my view, we are gaining market share and what I think is important, because you’re going to be asking this question is, we are not gaining market share by taking low profit or low margin business.

If you look at the year-over-year margins and you adjust for the items that Brad talked about, we are continuing to acquire business at the same margins that we have acquired in the past. So that’s also the good for us.

Shelley Gnall - Goldman Sachs

Okay. And that’s fantastic. Thanks for the color. I just wanted to clarify, do the Canadian JV have any impact on the mix that you are reporting or are that I think it is 7.4%, is that comparable to the 9% that you have asked during the first quarter?

David King

That’s comparable. We put the Canadian business at the bottom of those schedules, so that we’ve entered into the payer mix or the specialty mix schedules.

Operator

Your final question comes from Charles Rhyee - Oppenheimer.

Charles Rhyee - Oppenheimer

Thanks for taking my question. I’ll also be quick, just really a follow-up on a couple of earlier question and it gets to sort of outlook here on volumes. With the subsidies for COBRA is that any way for you as you are moving through this year to be able to track people as they shift may be from one insurance to taking from an employer provided to going over to COBRA or are you able to track an increase in people using COBRA, is that something you can see at all?

David King

I don’t think so. The only way that we really know when a patient changes status is, they give us different insurance card and that would be very difficult to track at the level of individual patients. I just don’t think it’s realistic to think that we will be able to see that particularly because my understanding of COBRA is you continue to have the same insurance card that you previously had, it’s paid differently.

Charles Rhyee - Oppenheimer

Okay. So from your standpoint you are just seeing that insurance card, so it will be difficult for you to know at all?

David King

Right. I mean, we would know if somebody previously had a commercial insurance card and they came in with Medicaid that we could see, but we can’t see they went from commercial plan to a COBRA plan administered by the same commercial company.

Operator

Ladies and gentlemen that concludes Q-&-A portion of presentation. I would now like to turn the call over to Mr. David King.

David King

Thank you very much. We appreciate your listening to our call this morning. Have a good day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Laboratory Corporation of America Holdings. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts