Laboratory of America Holdings' CEO Discusses Q1 2014 Results - Earnings Call Transcript

|
 |  About: Laboratory Corporation of America Holdings (LH)
by: SA Transcripts

Laboratory of America Holdings, Inc. (NYSE:LH)

Q1 2014 Earnings Conference Call

April 28, 2014 9:00 AM ET

Executives

David King – Chairman, President and CEO

Steve Anderson – VP, IR

Brad Hayes – EVP and CFO

Analysts

Robert Willoughby – Bank of America Merrill Lynch

Bill Bonello – Craig-Hallum

David Clair – Piper Jaffray

Darren Lehrich – Deutsche Bank

Gary Taylor – Citi

Ryan Halsted – Wells Fargo

Amanda Murphy – William Blair

AJ Rice – UBS

Lisa Gill – JPMorgan

Ricky Goldwasser – Morgan Stanley

Glen Santangelo – Credit Suisse

Michael Cherny – ISI Group

Bryan Brokmeier – Maxim Group

Whit Mayo – Robert Baird

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Laboratory Corporation of America Holdings Earnings Conference Call. My name is Glenn, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will facilitate a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. David King. Please proceed, sir.

David King

Thank you. Good morning, and welcome to LabCorp’s First Quarter 2014 Conference Call. Joining me today from LabCorp are Brad Hayes, Executive Vice President and Chief Financial Officer; Ed Dodson, Senior Vice President and Chief Accounting Officer; and Steve Anderson, Vice President, Investor Relations.

This morning, we will discuss our first quarter 2014 financial results, update 2014 guidance, highlight our progress on our five-pillar strategy and provide answers to several frequently asked questions.

I’d now like to turn the call over to Steve Anderson who has a few comments before we begin.

Steve Anderson

Before we get started, I would like to point out that there will be a replay of this conference call available via telephone and internet. Please refer to today’s press release for replay information.

This morning, the company filed a Form 8-K that included additional information on our business and operations. This information is also available on our website. Analysts and investors are directed to this 8-K and our website to review this supplemental information. Additionally, we refer you to today’s press release, which is available on our website, for a reconciliation of non-GAAP financial measures discussed during today’s call to GAAP.

These non-GAAP measures include adjusted EPS excluding amortization, free cash flow and adjusted operating income. I would also like to point out that we are making forward-looking statements during this conference call. These forward-looking statements include, among others, statements about our expected financial results, the implementation of our business strategy and the ongoing benefits from acquisitions.

These statements are based upon current expectations and are subject to change based upon various factors that could affect the company’s financial results. Some of these factors are set forth in detail in our 2013 10-K and will be included in subsequent filings with the SEC. The company has no obligation to provide any updates to these forward-looking statements, even if our expectations change.

Now Brad Hayes will review our financial results.

Brad Hayes

Thank you, Steve. On today’s call, I will review 4 key measures of our financial performance: Cash flow, revenue growth, margin and liquidity. I’ll also update our 2014 guidance.

First, cash flow. Our cash flow continues to be solid. Operating cash flow for the quarter ended March 31, 2014, was $142.3 million. We estimate that weather had a negative impact on operating income and a corresponding impact on cash flow of $32 million.

DSO at the end of March was 52 days, which was up 3 days sequentially and up 2 days year-over-year. We continue to experience claims being subject to higher deductibles and co-insurance. Accordingly, we raised bad debt by 25 basis points in the quarter and continued to focus on initiatives to improve patient collections.

Second, revenue growth. Revenue decreased 0.7% year-over-year in the first quarter. Excluding the impact of weather, revenue would have grown approximately 2% compared to last year. During the quarter, total company volume increased 2.6% excluding the impact of weather, volume growth would have been approximately 5% and organic volume would have increased approximately 2.5% year-over-year.

Revenue per acquisition decreased 3.3% year-over-year primarily accounted for by Medicare payment reductions, text mix and the Canadian business. It is important to note that managed care revenue per acquisition was flat sequentially.

Third, margin. For the first quarter, our adjusted operating income margin was 14.7% compared to 18.7% in the first quarter of 2013. During the first quarter, weather reduced the company’s margins by approximately 180 basis points.

Fourth, liquidity. We remain well-capitalized. At the end of March, we had cash of $338.9 million and no borrowings outstanding under our $1 billion credit facility. During the first quarter, we repurchased $106.2 million of stock, representing 1.1 million shares.

At the end of March, approximately $946.3 million of repurchased authorization remained under our share repurchase program. Our share repurchase activity during the first quarter reflects our continued disciplined capital allocation program and commitment to return capital to our shareholders.

Despite losing $42 million of revenue and $0.22 of earnings to weather in the first quarter, we raised our 2014 earnings guidance. Our updated guidance is for revenue growth of approximately 2%.

Adjusted EPS excluding amortization of $6.40 to $6.70. Operating cash flow of approximately $780 million to $820 million, and capital expenditures of approximately $185 million to $205 million. The guidance excludes the impact of any share repurchase activity after March 31, 2014.

I’ll now turn the call over to Dave.

David King

Thank you, Brad. We are pleased with our first quarter results. During the quarter, we delivered volume growth of 2.6% excluding the impact of weather, volume growth would have been 5% and organic volume would have increased approximately 2.5% year-over-year. We continue to execute well on our key growth initiatives.

Although our revenue per requisition was down 3.3% year-over-year, managed care revenue per requisition was flat sequentially. During the first quarter, inclement weather negatively impacted revenue by an estimated $42 million and EPS by approximately $0.22, yet we raised our full-year 2014 earnings guidance.

In addition to our continued development of Beacon LBS, we significantly expanded the fifth pillar of our strategy by introducing Enlightened Health during the first quarter.

I would now like to update our progress on each aspect of our five-pillar strategy. The first pillar of our strategy is that we deploy capital to investments to enhance our business and return capital to shareholders.

We repurchased $106.2 million of stock during the first quarter, representing 1.1 million shares. Our share repurchase brings us almost to our stated target leverage ratio of 2.5 times debt to EBITDA and demonstrates our continued commitments to return capitals to shareholders.

Our acquisition pipeline remains robust and acquisition should continue to provide an attractive way to expand our test menu and geographic footprint for several years. We will maintain a disciplined approach to valuation as we seek optimal strategic opportunities.

The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. We continue to see strong customer adoption of our Enlightened Healthcare Intelligence platform for managing practice and population health data.

This platform helps clients unify the multiple components of population health management, providing primary care physicians with complete access to their patient’s healthcare picture, rules for monitoring gaps and care and reporting that addresses more than 600 quality measures.

Enlightened Healthcare Intelligence, helps providers reduce expenses, improve outcomes and enhance patient satisfaction. The robust rules engine is highly customizable and provides compliance with meaningful used requirements as well as ACO, Jaco and PQRS reporting requirements.

These industry leading data driven services position LabCorp as a trusted partner to healthcare stakeholders, providing knowledge to optimize decision making, improve health outcomes and reduce treatment costs.

We continue to improve tools that assist physicians and patients in understanding test results and optimizing decision making. We’re pleased with the recent HHS ruling which provides access to lab results for all patients.

Our patient portal, which has over 475,000 patient registrations and is growing daily is well positioned to support this need. And we can also deliver results directly to physician and health system portals where patients can conveniently review them.

Looking ahead, we will focus on providing additional content to our patient portal to further assist patients in understanding their lab testing results and needs.

We will assist our customers in analyzing their population health and clinical practice data with new tools for hospitals, physician practices and ACOs, supplemented with insights derived from our extensive patient database. We are working with clients to use our data to benchmark ordering patterns and to determine preclinical markers in specific diseases.

Insight gains from these efforts help payers and physicians better manage healthcare expenses and optimize patient outcomes.

The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. We are in the assessment stage of our comprehensive enterprise-wide cost structure review. It is too early for us to estimate the magnitude of opportunities to further streamline our operations and reduce costs. We will provide additional color on these initiatives on our second quarter earnings call in July.

The second installation of our propelled robot is live at our major laboratory in Tampa, and is now processing approximately one third of the facility’s volume. We intend to begin the next installation of Propel in our Dublin Ohio facility early next year. Propel continues to drive expense reduction, increase throughput and accuracy and enhance specimen management at our Burlington lab.

We continue to consolidate facilities into our new Phoenix campus, and we’re now processing more than 23,000 specimen’s per day at this state of the art facility. As part of our cost structure assessment, we will evaluate our potential to consolidate additional facilities.

The fourth pillar of our strategy is to continue scientific innovation at reasonable and appropriate pricing. We introduced new tests and collaborate with leading companies and academic institutions to provide our physicians and patients with the most scientifically advanced testing in our industry.

We recently announced the availability of Thermo Scientific ImmunoCAP allergy testing products from Thermo Fisher Scientific, Inc. Allergies effect approximately 60 million individuals in the United States annually and this population is growing. The results of a well documented relationship between allergies and asthma. LabCorp offers an extensive test menu to assist medical practitioners in determining whether patient’s system support or rule out and allergy diagnosis, thereby suggesting other etiologies.

We continue to see strong growth across our suite of BRCA test for the assessment of breast cancer risk. Our BRCA testing menu includes a comprehensive panel of BRCA one and two, complete gene sequence analysis and deletion duplication testing, targeted analysis test for other family members once a mutation is identified and a panel for mutations prevalent among the Ashkenazi Jewish decent.

In combination with our care coordination pre-authorization service, LabCorp offers an end-to-end program that includes compliance with insurance requirements, comprehensive testing and expert interpretation from our license directors from our license directors and a team of 123 Board-certified genetic counselors and 9 medical geneticists.

In addition to our next-generation sequencing offerings for Familial cardiac diseases and the preclinical and clinical development of new HIB and HTB antiviral drugs, we recently announced the launching of our first multi-gene oncology panel primarily for solid tumors on the NGS platform.

Over the next several quarters, we will continue to expand our NGS offerings. To support this growth in the next-generation sequencing opportunities, we recently acquired the former Provance Genomics lab in Seattle, Washington. The capabilities of this leading next-generation sequencing laboratory include whole genome and whole exome sequencing RNA Seq, MIRNA Seq and other specialty NGS sequencing technologies.

The fifth pillar of our strategy is to develop knowledge services. We are now just a few months from marching Beacon LBS across United Healthcare’s physician and patient base in Florida. LBS provides decision support tools to help guide lab and test selection, access to a lab of choice network and clinical and administrative rules engines for claim adjudication.

Beacon LBS assist physicians in managing lab ordering leading to better management of patient conditions and lower cost. We are excited about the valuable services that Beacon LBS offers physicians, patients and payers and will provide updates on this important initiative later this year.

Last month, we marched in Enlightened Health, which offers multiple capabilities to patients, physicians, health systems and pharmaceutical companies. Enlightened Health will include our patient facing capabilities, including ambulatory monitoring and the patient portal.

Physician and health system facing capabilities including clinical decision support, care intelligence and advanced analytics. Pharmaceutical capabilities including our clinical trial, central laboratory and data management businesses and several capabilities that touch, multiple stakeholders such as our genetic counselors.

Enlightened Health will continue to build capabilities organically and through acquisition to capitalize on our unique assets, diversify our revenue base and meaningfully differentiate LabCorp from the competition. We look forward to providing updates on these initiatives over the next several quarters.

We have positioned LabCorp to grow and excel through healthcare reform, an area in which quality, efficiency, scale and a central role in improving patient outcomes will be the key measures of success.

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

Steve Anderson

Thank you, Dave. Can you elaborate on LabCorp’s capital allocation policy?

As we have stated, we are committed to achieving a 2.5 times debt-to-EBITDA ratio. Based on our capital allocation history, we target half of our free cash flow for acquisitions and half for share repurchase.

We have a strong history of returning capital to our shareholders. Over the last decade, we have repurchased $5.6 billion of our stock, representing 78.1 million shares, at an average price of approximately $71.

Can you provide us with an update on your MoPath payment issues?

We are engaged with a number of States and pri-care to receive payments for these tests, most of which have long been covered are standard of care and are included in physician practice guidelines. We are making progress with some States but the process is slow and resolutions are still uncertain. The MoPath code changes, system problems and the complex procedures in some States have led to unconscionable delays in reimbursement.

As ACLA noticed, these coverage senile for standard of care test establishes a second class healthcare system for Medicaid and military beneficiaries. The refusal to pay laboratories for these pivotal tests is not sustainable, and patients will ultimately suffer.

In addition, we will continue to raise these non-payment issues with members of Congress that have key interests in the healthcare needs for and appropriate treatment of active duty personnel and their families.

We are finally starting to see recognition by some payers that they have to constructibly address this situation. We will update you on these important initiatives on future earnings calls until they are resolved.

How big of an opportunity is the recently-released Alberta RFP?

The size of this opportunity is approximately $200 million annually and the RFP is for a sole-source private provider. DynaLIFE is currently the sole-source private provider in Alberta and we are a minority partner in this business. The performance of this joint venture is captured on the equity method income line item on our P&L and is not consolidated in our revenue line.

Can you remind us of how drugs of abuse volume trended over recent quarters?

In the first quarter, our organic drugs of abuse volume increased approximately 10% year-over-year. This compares to a year-over-year organic increases of 15% in Q4 of 2013, 14% in Q3 of 2013, 10.6% in Q2 of 2013 and 10.2% in Q1 of 2013.

We also delivered strong year-over-year growth this quarter in our wellness and pain management businesses, which fall within our occupational testing services operations. We believe wellness and pain management testing will provide a great growth opportunity for LabCorp over the next several years.

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

David King

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

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Robert Willoughby, Bank of America Merrill Lynch. Please proceed.

Robert Willoughby – Bank of America Merrill Lynch

Hi Dave and Brad, can you comment on specific M&A in the quarter what you may have acquired and perhaps after the quarter what kinds of activity have you participated in?

Brad Hayes

Hi Bob, it’s Brad. Nothing significant in the quarter to talk about in terms of this contribution specially and we take all of that out when discussing our organic volume growth number. And then on the future and what’s in the pipeline I’ll defer to Dave.

David King

Yes, good morning, Bob. Obviously, there have been some transactions we’ve looked at number of things that we – for a variety of reasons including valuations have not been – have not felt good opportunities for us.

But the pipeline is quite robust, and we’re looking at a number of opportunities that we think are both exciting for the long-term and have the potential to continue on the global trend that we’ve established here.

Robert Willoughby – Bank of America Merrill Lynch

Obviously, not a surprise Dave, this magnitude of share buyback wasn’t bigger given where the stock was in the absence of many deals, why wouldn’t that – you’ve taken advantage of the stock price at the lower levels?

David King

Our philosophy is we try to be consistent in terms of share repurchase. And yes, the stock was at a lower point throughout much of the quarter. I will say however that also for much of the quarter there were – there was quite a bit of overhang from the potential for significant government reductions, the CMS administrative proposal to be able to cut the fee schedule, the looming SGR fix.

So, I think there was a lot of concern about what – how the share price is going to perform. And we don’t try to be market timer, we try to take a very consistent approach to – we buy more when the price is down. And we did buy more this quarter given that the price is down. And we wouldn’t have bought it if the price was higher.

Robert Willoughby – Bank of America Merrill Lynch

Okay. And just a last one Brad, can you just remind us what’s in the guidance and what’s excluded from the guidance, there is no incremental share repurchase or incremental acquisitions. But do you have the back analysis in there now in the oncology P&Ls in the guidance?

Brad Hayes

Yes. And you’re right on share repurchase and it excludes anything after March 31 working.

Robert Willoughby – Bank of America Merrill Lynch

Okay. Any other items out there that your store excluding?

Brad Hayes

Well, I think, some of our stance on some of the items that we said in the past is similar so MoPath for example, no assumption of any recovery there. Steve, went through a laundry list of things we went over but I can’t think of a significant change from the last time we updated on any of those items.

David King

Correct.

Robert Willoughby – Bank of America Merrill Lynch

Okay, thank you.

Operator

And your next question comes from the line of Bill Bonello, Craig-Hallum. Please proceed.

Bill Bonello – Craig-Hallum

Good morning, guys. Dave, I have a question, you spent a lot of time talking about Beacon Health and especially and Enlightened Health. I’m just wondering if you can give us a little bit more color on how those programs actually generate revenue and maybe some sense of the magnitude of the opportunity with those programs to kind of profit margin that they have, just anything that lets us get our arms around what business is significant new driver of revenue and profit for you? And then I have a follow-up.

David King

Sure. So, the answer to the question is today they’re not significant drivers of revenue and profit. Other than the clinical trial, central lab business will reside within Enlightened Health. And as we’ve said, I think a number of times, that’s approximately $150 million revenue business. And that business that as evidenced by our acquisition of the genomic slab in Seattle which were very, very pleased about that opportunity. We continue to grow.

The other aspects of Enlightened Health, I would describe them as internal startups. So there are businesses that we are starting to capitalize on for example, our genetic counselors. And the asset we have with genetic counseling, in ways in which those genetic counseling capabilities can be independent revenue generators, for example with interpretations of genetic testing results with interpretations of sequencing.

So, obviously, we’ll continue to give you more color around this Bill, as these turn into revenue generating businesses. But I think this is a terrific opportunity for us from a strategy perspective, putting all the data analytics capabilities, all of the assets that we already have into a business that’s focused on capitalizing them, facing the patient, facing the physician and health system and facing the pharmaceutical sponsors is a great long-term opportunity for us.

Bill Bonello – Craig-Hallum

And on the Beacon LBS side?

David King

Yes, I mean, I think Beacon LBS is again in the long-term is a terrific opportunity because as I think is fairly well recognized, lab is one of the last aspects of ancillary services in healthcare that basically has very, very limited management. And the management tool over there such as blanket preauthorization policies for all molecular testing that we’re seeing from some players are the proverbial blunt instrument using the sledge hammer to address a much more targeted concern.

So, I think Beacon LBS would be a significant tool that will not only help a trend management but will also help with selecting the correct test for the patient at the correct time. I will say parenthetically with regard to Beacon LBS – there is no question that the margin in that business would be a lot different from the margin in our Corp testing business, because it’s not a testing business.

It’s more of an administrative decision support and management business. So, we need to think about that as we roll it out over time. But I think in terms of generating revenue and enhanced opportunities for the company, it’s a terrific long-term opportunity.

Bill Bonello – Craig-Hallum

And at this point, are you prepared to give us anymore specifics about how you actually generate revenue, what is the source of that revenue is?

David King

Let us get it up and running and then we’ll give you more detail around exactly how the revenue is generated. But we will be prepared to address that once we get to pile up and running.

Bill Bonello – Craig-Hallum

Okay. Thanks, thanks a lot.

Operator

And your next question comes from the line of David Clair, Piper Jaffray. Please proceed.

David Clair – Piper Jaffray

Hi, I was hoping just to get some additional color on the MoPath reimbursement issues we’ve seen. So, what was the impact in the quarter and when you say you’re making progress, are you getting paid on the backlog in some of these States?

David King

David, its Dave. The impact on the quarter was not terribly significant, it was probably a little bigger than the impact on the quarter last year, just because in the first quarter of last year we didn’t see a huge denial rate. When we say we’re making progress, we’re engaged with some of the key States where we have been experiencing difficulties. And of course we’ve been heavily engaged with Tri-Care, which is one of the real pain points for us.

I think there is increased receptiveness from their perspective, there have been some commitments made about payments going forward and retrospective payments. But commitments made and dollars delivered are two different things and we haven’t seen the dollars delivered. So, this is a high priority issue for us.

And again, unfortunately this is an issue where at some point, I think the industry and ACLA has been very much engaged in this. At some, the industry is going to have to make a decision about providing free services to these beneficiaries given that the payers are simply indicating that they’ve decided not to pay for tested or standard of care that have always been covered. And that are critical to delivering appropriate and proper healthcare to the patient population.

David Clair – Piper Jaffray

Okay. Thank you. And just a quick question on BRCA and your NIPT business, maybe you can give us an update on how these are performing compared to your original expectations?

David King

I would say BRCA is performing in terms of buying very well and probably better than our original expectations. NIPT, at this point is – has been in the mix for quite some time. And we’re continuing to see – we’re continuing to see strong growth there in terms of volumes. So, we’re pleased with both of those businesses.

David Clair – Piper Jaffray

Okay. Thank you.

Operator

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

Darren Lehrich – Deutsche Bank

Thanks. Good morning, everybody. So, my question really is about the guidance you absorbed a little over $0.20 of weather impact which wasn’t in the original outlook. And you’re adding a nickel back in. So, Dave, if you could just maybe sit back and help us think about what is in the outlook that’s changed versus where we were. And if there is any things that you feel like need to be called out around what were in your original assumption to be helpful just to kind of square that over $0.25 differential?

David King

Darren, good morning, it’s Dave. So, obviously there were a couple of positives during the quarter. The SGR fix was resolved in a way that did not have any near term impact. ICG-10 was postponed for a year so some expenses that we expected that we were going to have to absorb this year, we don’t have to absorb. And then, obviously we had a pretty significant weather impact.

The positives, we have some expectation that BRCA is going to be positive from a volume enterprise perspective. We have not changed our assumptions on MoPath that is we assume it will be about the same.

We continue to exclude the impact of any significant M&A transaction that might occur. We continue to exclude the impact of share repurchase. And we haven’t factored anything in for the cost reduction program.

There was, in the quarter, a gain on an investment that we made in a publicly traded company that benefited us. And so, all of those things and we still own some shares in that company. So, there is the potential for us to realize additional gain if we sell those shares during the balance of the year.

And obviously, the full year impact of the repurchase that we did in the quarter also is in whatever we’re going to do, even if we didn’t do any more share repurchase and I’m not saying we’re not going to do any more share repurchase. But the full year impact of that share repurchase is something that we take account of. Although, again, we don’t assume any further share repurchase in the numbers.

So, if you just look at our reported EPS which is $1.51, net of the $0.22 of weather. And you look at what the expectation was, which is $1.60, we’re “$0.09 under”. What we’re saying is that we feel given the strength of the business in the quarter and given what we see unfolding for the rest of the year that we will be able to make up that $0.09 differential. And add an additional $0.05 of earnings.

So, that’s how we come up with the revised guidance which basically raised the top and bottom end by $0.05 and I hope that’s a sufficiently thorough accounting of kind of how we get there. Again, the guidance is a range, it’s not a point. The guidance is a range. And we’re looking at the entire range of outcomes that might occur during the year and try and provide you with an accurate expectation of where we think we’re going to come in.

Darren Lehrich – Deutsche Bank

Yes, that’s very helpful. So, and just so my math is closed on the gain, it looks like it comes out to about $0.05 gain in the period. Is that about right?

David King

That’s right.

Darren Lehrich – Deutsche Bank

Okay. And then, just maybe just to follow-up and I’ll jump off after this. But just to clarify, in your mind the biggest sort of swing factor now in the guidance, I mean, aside from M&A and buyback which we generally are used to seeing, but the biggest swing factor would just be some resolution and it’s more like your pathology issue. Is that the right way to think about it?

David King

Well, I don’t really think about it that way. I think the biggest factor in the – in where we come out in the guidance range is the underlying growth of the business and the price. So, we had a terrific, from a volume perspective, I think we had a very, very strong quarter.

The pricing, a combination of – we had the impact of sequestration, which we didn’t have in the first quarter of last year, we had a little bit of MoPath, we have a small where we have a reduction in the physician fee schedule based on some code revaluation and the reduction in the clinical lab fee schedule which is part of the original ACA, we still have the 1.75% reduction.

We had some test mix issues with big growth and toxicology, which depressed this price. And we had the impact of the Canadian business, which both the government price cut increasing utilization and the exchange rate, all dragged on price.

So, certainly if we get paid for MoPath that will help us in terms of the guidance. But what will also help us is, continuing to grow the business and seeing some positive movement in the pricing.

Darren Lehrich – Deutsche Bank

Got it, okay. Great. That’s helpful. Thank you.

Operator

And your next question comes from the line of Gary Taylor, Citi. Please proceed.

Gary Taylor – Citi

Hi, good morning guys. Not to be redundant, I just want to go back to the guidance for a second. I certainly understand all the mechanics and the pluses and minus. I guess, just broadly when you think about, you gave guidance. Weather was certainly much worse than the guidance had anticipated, you had a gain and some repurchase of couple of other things.

But still, generally the raise of guidance in the phase of that weather headwind, you just generally have to feel better about something? And I guess, it just sounds like there wasn’t any explicit singular item but just in general when you look at the total range, you feel good about where you’re at? Is that fair?

David King

I think that’s fair. I think we’ve answered the question in great detail in terms of what the components are. And obviously we wouldn’t be raising guidance if we didn’t feel that there was a reason why we would do better than the initial guidance that we put out.

Gary Taylor – Citi

Yes, I couldn’t understand in that what isolated got better. But I know it was a very detailed answer. On the gain and the public company, could you share with us what that was or is that private?

David King

Yes, its foundation medicine and we were an original investor in the company. And when it went public, our shares obviously became public shares. And when the lock-up expired, we had the ability to sell them.

Gary Taylor – Citi

Okay, great. One more small question. I just want to make sure, on the 2.5% organic growth adjusted for weather and so forth, that’s pretty close to our number. But, I think Brad had said that that excludes all tuck-in acquisitions and I apologize I know this has been asked in prior quarters. But I was under the impression that some of the small tuck-ins were kind of captured in that number, so I just want to make clear that 2.5% excludes any of even the small tuck-ins you do?

Brad Hayes

Well Gary, its Brad. And that’s probably back to Bob’s cash flow question. The small, small tuck-ins, we don’t go through the exercise of excluding those. So those, what’s excluded from that number are the – are larger type acquisitions where they have an impact on the – especially on the volume.

Gary Taylor – Citi

Great. And last question for Dave, just going back to the new lab pricing methodology that was in the doc fix legislation. I know the ACLA was in favor of that, a couple of the other lab lobbies with some opposition to kind of have a final rule came down. And it’s very clear that the new price med would be developed would apply to any hospital billings and our clinical lab fee schedule.

But what is a little less clear is if the legislation explicitly mandates the hospital pricing information be captured in that. I just wondered, do you agree that latter part is less clear and kind of what’s your view CMS develops the rights around that?

David King

No, I don’t agree, it is less clear. I think it was explicitly stated in many discussions that we had with Congress and with congressional staff that market pricing has to include the entire market. So, market – what you want to do is make sure that Medicare laboratory testing is priced at market, then you can’t look it through for examples as the flood OIG study did.

And say that that is market, market is market. And that includes large independent labs, it includes small independent labs, it includes hospital outreach labs. And so, I think the intent of Congress is very clear. I think obviously the devil would be in the details from the rule is propagated. But I think the rule should be very clear that the market has to include the determination of market pricing has to include all components of the laboratory services market, not selected or cherry picked components. And that certainly includes hospital outreach pricing.

Gary Taylor – Citi

Okay, I appreciate that. Thank you.

Operator

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

Ryan Halsted – Wells Fargo

Good morning, this is Ryan Halsted on for Gary. I guess, I appreciate all the detail on the guidance. But I was hoping you could speak specifically to any change on your views on, impact from healthcare reform, especially considering the better than expected enrollment?

David King

It’s Dave. I think our view on healthcare reform is that it’s still basically not material to 2014 that is basically a net neutral. So we’re not counting healthcare reform as a positive as we think about the guidance. We’ll – obviously if our views change, we’ll update that perspective but that’s where we are today.

Ryan Halsted – Wells Fargo

Okay, thanks. And on your cost structure, I realized you’re not prepared to provide any guidance on that. But just curious if any improved visibility on your reimbursement outlook, does that potentially change how you’re thinking about your cost structure and timing on as you’re reevaluating your cost structure?

David King

No.

Ryan Halsted – Wells Fargo

All right. Thank you.

Operator

And your next question comes from the line of Amanda Murphy, William Blair. Please proceed.

Amanda Murphy – William Blair

Hi, thanks. I just had a quick question on M&A. So, I think you guys have been pretty consistent in terms of the types of assets that you pursued over the years. So, I’m just curious going forward, should we expect you to pursue a similar strategy? And then also, have you seen a change at all in maybe the types of assets that are coming to market just given all the reimbursement pressure over the past few years here?

David King

Amanda, its Dave. I don’t think you should expect us – you should expect to see us do anything dramatically different. Obviously with Enlightened Health, there are some aspects of those businesses as we start them up that there may be acquisitions that are – there are a little bit different from kind of core diagnostic testing. However, those would be small exploratory type transactions, they’re not going to be anything significant in there.

In terms of assets coming to market, I think the mix is pretty much the same as what we’ve historically seen, it’s nothing – there is nothing in my mind that looks very different from what we’ve seen over the last several years. Again I think it’s one of the right assets from a strategic perspective for us and what’s the right valuation.

Amanda Murphy – William Blair

Got it. And then, a question on Nex-Gen sequencing. So you’re bringing up the number of test to market now. Just curious, what are your – do you have any insights and how payers may look at paying for those tests. And it doesn’t seem like there is – well there isn’t really an infrastructure in place for payment around those tests for the most part. So, any insights as to how that might evolve over time?

David King

No, I think it’s – I think your question has exactly the right premise, which there isn’t really an infrastructure for payment that – of the testing using that methodology. And there isn’t an established payment system, you can’t just send somebody a bill and say we perform next generation sequencing.

So, currently, obviously we’ll continue to build using the procedure codes that apply to the testing that we’re doing. I think there are very robust discussions going on with some of the payer community right now about how they might think about paying for those tests in the future. And we’ll continue to keep you updated on the developments there.

Amanda Murphy – William Blair

Okay. Thanks very much.

Operator

And your next question comes from the line of AJ Rice, UBS. Please proceed.

AJ Rice – UBS

AJ Rice actually. But thanks, hello everybody. Two quick questions, first of all, just kind of on Hep-C testing, how big that is for you, if you’re seeing any change because of the new drug capabilities here. And people want to get tested even more now. So, they have an option that could potentially cure them. Any thoughts on that?

David King

Yes, AJ, it’s Dave. We’ve highlighted Hep-C for the last – it is really since the CDC put out the screening guidelines as a growth opportunity. And we have seen nice growth there. I think the – and that’s been probably for 12 to 18 months. I think these targeted drugs do give us additional opportunities both in our clinical trials business because of the expertise that we have at monogram which is probably the leader in development of Hepatitis-C testing.

As well as, as well as the cost of these drugs means that efficacy really needs to be demonstrated and we think that diagnostic test is an excellent way to show which patients are going to benefit from the drugs and which patients are probably not going to gain as much benefit.

So, we like Hepatitis-C is the long-term opportunity and we think we have the right assets in place to build that.

AJ Rice – UBS

Okay. And then, I was just going to ask a little bigger picture question. I don’t know if I’ve heard you guys comment in a while about the nature of the competitive landscape and whether you see it having changed much between the competition for hospital outreach labs, small labs and then competition among you and your biggest competitor.

I did notice, I think I saw pressure forth, maybe one of the exclusive contract with independent Blue Cross Blue Shield this quarter. I wonder wrapping that in to the comments about broader competitive landscape, is there any update offer there?

David King

Well, I think the industry remains extremely competitive. It remains highly fragmented. There are still many thousand clinical labs that are – that we compete with on a daily basis. So, I don’t think that there is a lot that has changed. We have a lot of respect for our competitors, large and small. And we do some things better than some of them and they do some things better than we do.

So, we’re always trying to improve our levels of service. We’re always fanatical about our commitment to quality. It’s a – but it’s a tough industry. And obviously there is a lot of competition. And our job is to go out there and grow the business and excel in what we do. And I think our front-line people and our operational people have done a terrific job in doing that.

AJ Rice – UBS

Okay, thanks.

Operator

Your next question comes from the line of Lisa Gill, JPMorgan. Please proceed.

Lisa Gill – JPMorgan

Hi Dave, I noted in your comments that you talked about managed care, pricing was flat sequentially. But can you give us an update of what it looks like year-over-year would be my first question. And then secondly, do you have any major managed care contracts that are up for you now this year?

David King

Lisa, its Dave. We don’t have any major contracts that are up for renewal this year. And year-over-year the managed care pricing was down very slightly, not materially at all.

Lisa Gill – JPMorgan

Okay, great. And then, I guess, my second question would be, I know a lot of people were asking about acquisitions and I know in the past you’ve talked about not having as much interest in some of these outsourcing deals with hospitals or outreach programs. I’m just wondering if that’s changed at all, especially if we think forward and think of you as being a lower cost provider than some of these hospitals if you move towards ACA. Are they looking more enticing?

David King

Its Dave again. So, I think that all those things are being equal, we would prefer to do a more comprehensive deal with a hospital than with a health system than just buy an outreach program. I mean, we would like to work with them on their internal lab, we’d like to work with them on rationalizing where the testing is performed and the utilization. We’d like to work with them on population health management on delivering the tools that we deliver in terms of analytics and decision support.

So, that has been our preference in most of the hospital deals that we have done recently, we have focused on more comprehensive, a more comprehensive global approach. Part of the challenge in acquiring a hospital outreach program is because of the pricing that the hospital outreach labs typically command from the managed care payers.

When that pricing moves to RP schedule, there is significant revenue compression which also leads to significant profitability compression which makes it hard to pay the multiple but those outreach programs are looking for – because of how those businesses look when they move over to our pricing structure.

So, again that’s why our focus Lisa, is more on the comprehensive partnership with the health systems than it is on individual hospital outreach lab acquisitions.

Lisa Gill – JPMorgan

All right, thank you.

Operator

Your next question comes from the line of Isaac Ro, Goldman Sachs. Please proceed.

Unidentified Analyst

….and clearly an area of focus for the business, at a high level, can you just walk us through your marketing and pricing strategy versus competition for these tests? I’m just trying to frame how you’re thinking about pricing scheme, either versus trends player in BRCA testing or a new developing market for example like Tumor profiling, where formal reimbursement hasn’t been established yet?

David King

Isaac, I’m sorry, but the first probably 15 seconds of your question got cut off, so maybe you could just recapitulate.

Unidentified Analyst

Yes, probably it’s actually Jo in for Isaac this morning. Just genetic testing, just trying to get an idea of your overall pricing and go to market strategy versus the competition. Just trying to frame how you’re thinking about going in entrenched player for example in BRCA or new developing market like tumor profiling, where we just haven’t seen for more reimbursement?

David King

Well, I think it’s hard to comment in a lot of detail on those areas because obviously they are strategic and we assume there is competitors who listen to our calls. So, I think generally our go-to-market approach is that we try to come to market with a high quality reasonably priced comprehensive test offering with BRCA. We’re especially proud of the capabilities that we’ve been able to build around the database and around the preauthorization. So that we can help to make sure that patients are getting the services and that the services are going to be paid for.

I don’t know that there is much more say then that is our consistent philosophy in terms of go-to-market, it fits exactly within the fourth pillar of our strategy. And we’re going to continue to follow that.

Unidentified Analyst

Thanks. And then just a quick one on capital allocation. Any updates from the board regarding the dividend?

David King

Well, the decision about our allocated capital is management’s decision. Obviously, we speak to our board about it quite a bit. And but it’s management’s decision. And our view continues to be at this point that acquisitions and share repurchase are appropriate deployments of capital and we’re going to continue to deploy them that way.

Unidentified Analyst

Great. Thanks.

David King

Your next question comes from the line of Ricky Goldwasser, Morgan Stanley. Please proceed.

Ricky Goldwasser – Morgan Stanley

Hi, good morning. I have two follow-up questions here. Firstly, on the volumes, I might have missed it. But when you talked about same-store volume growth of 2.5%. Can you just help us understand what was the contribution for that for drug of abuse, I know you talked about the year-over-year growth rate. But off that 2.5%, what was drug of abuse testing?

Brad Hayes

Ricky, its Brad. I don’t think we’re going to get into that much detail. But we did have an acquisition that contributed but that was stripped out of the organic. And our regular drugs of abuse testing business, I think Steve, went over earlier was 10% growth in that business.

Ricky Goldwasser – Morgan Stanley

Right, no, no, I understand that. But I’m just trying to understand is it half of the 2.5%, is that very clear?

Brad Hayes

No, no, no. Small contributor but not close to half.

Ricky Goldwasser – Morgan Stanley

Okay. And then, Dave, going back to the healthcare system question. You talked about more (inaudible) type of relationship with the hospital is kind of like – it’s a preferred partnership.

What do you think is the episode of the healthcare systems given the fact that – over time we are moving or we will be moving toward episode of care type reimbursement and we’re hearing kind of like the non-for-profit hospitals talking about that? So, are you being involved in these types of conversations because I think that’s kind of like changes the whole kind of like approach towards reimbursement?

David King

Yes, Ricky, I know it’s been you thesis that we’re rapidly moving into a bundled payment world. And I would simply say that eve within payment bundles there are clear fee-for-service components. And the movement towards payment bundles is going to be incremental and evolutionary, it’s not – we’re not going to be in two years, and 100% bundled payment environment. It’s just – it is not going to work that way.

So, certainly we’re involved in many conversations with health systems with large physician practices about how they think the payment system is going to evolve and how the diagnostic testing is going to play into that. And we welcome those conversations because again, given the – given our cost – our cost position, I think we’re in a great position to be a huge contributor of value there and to show integrated delivery networks and large health systems that we can really help them move the needle.

Not only on the cost of their lab services, but on the quality of the results they are delivering and on the analytics and the data and all of the things that we can do that will make them winners in the – in whatever the new models are.

So, one, I think bundled payments will go slowly and incrementally because there are lot of questions about how those payment systems are going to work and whether they are going to work and how providers are going to be rewarded. And two, yes, we’re very much engaged in those conversations and look forward to the opportunity to demonstrate our value.

Ricky Goldwasser – Morgan Stanley

Okay. Thank you.

Operator

Your next question comes from the line of Glen Santangelo with Credit Suisse. Please proceed.

Glen Santangelo – Credit Suisse

Yes, thanks, and good morning. Hi, Dave and Brad, I just want to follow-up on the revenue per acquisition. I mean, down another 3.3% this quarter, I don’t think that’s really surprising. But if you look at the different components, I think decided Medicare test mix and the Canadian business. I’m wondering if you could sort of break down those different factors and maybe give us a sense of what’s really driving that revenue per requisition the most?

And ultimately I should think about that in a little bit longer term basis, I mean, obviously we have greater clarity on the Medicare side. But how do you think about the other factors driving revenue per requisition throughout the balance of the year and into next year?

Brad Hayes

Glen, its Brad. I’ll start with the 3.3% that we reported. We talked about the impact there as being mix, our Canadian business in the government. We’re not going to break that down any more specifically. But if you think back to the mix, the drugs of abuse testing businesses, having an impact there as well as an acquisition in that space.

Then also we have the Canadian business that we speak of, where the exchange rate is about 8% lower this Q1 than last Q1, so we’ve had some erosion there. Plus, there is volume growth in that business which is essentially a capitative model so that drives down the price per. And then, the government reductions that we’ve already talked about, the physician fee schedule, the clinical fee schedule and sequestration are all year-over-year impact to that number that we see.

Our goal is to have that number be more positive than 3.3% negative. And I think we look at that by focusing on the test mix in our business and trying to grow the higher value test that we’ve spoken about several of those on this call. We certainly know with a little more clarity what’s ahead in the government reimbursement world. But we realize that to be successful, we need to have solid and growing revenue per requisition as well as a volume of requisitions.

Glen Santangelo – Credit Suisse

Thanks to that comment. Maybe, if I could just follow-up Brad on the margin side. I think if I heard you correctly, you seem to suggest that margins were impacted by about 180 basis points due to weather, which would kind of imply an incremental margin of about 70% on that weather related lost revenues.

I’m kind of curious, is that the right number and then as we think about the margins throughout the balance of the year within the context of your full year guidance, it kind of sounds like to get to that midpoint of the range, based on what you’ve talked about in terms of revenues, we’re assuming margins are down about 150 basis points, year-over-year. And how should we think about that ramp throughout the balance of the year?

Brad Hayes

Yes, you’re right on the weather. It’s probably a little higher drop down that you imputed. We take out the cost of our supplies and our bad debt to get there. So, yes, and if you think about our original guidance for the year, it would imply some margin compression as well.

So, I don’t think of any besides not having a negative weather impact, I don’t think of any ramping of the margin performance over the course of the year. We’ll get better as we lack some things and we have growth, continued growth in our business. And then, some of the cost items and opportunities potentially start to contribute, that will help as well.

But nothing significant counted on and guidance work for that. So, I think you’ve got it about right, generally speaking on the margins. And again, given our guidance for the year, that we initially gave, we expect those margins to be under pressure.

Glen Santangelo – Credit Suisse

Okay. Thanks very much.

Operator

Your next question comes from the line of Michael Cherny, ISI Group. Please proceed.

Michael Cherny – ISI Group

Hi, good morning guys. So, just one last quick question from my end. When you think about the increase in the market, I know you talked about little bit of it over the course of the day. But seeing a big rise in the plus consumer direct health plans, how does that factor into the way you see your business performing and what impact has that had, at least both recently as well as in your expectations for next maybe few quarters or couple of years?

David King

Michael, its Dave. The plus consumer direct health plans is that with greater consumer responsibility and we’ll create our pricing transparency. Our price point would be much more attractive. The minus is, it puts pressure on patient collections because we have to collect more and more dollars from the patient. And that’s the reason that you saw the bad debt increase in the quarter.

Michael Cherny – ISI Group

Got it, thanks.

Operator

Your next question comes from the line of Bryan Brokmeier, Maxim Group. Please proceed.

Bryan Brokmeier – Maxim Group

Hi, thanks for taking the questions. You previously stated that the ICG-10 expenses this year would probably be in the $5 million to $10 million range. Are those expenses that you’re now pushing off to 2015 or were some of them already spent this year?

David King

Bryan, its Dave. Some of them were already committed and some of them were able to defer.

Bryan Brokmeier – Maxim Group

And given the longer timeframe, we’d be able to better work that was caused into the regular workflow or should we not expect all of those, I guess, looks like you spent a couple of million, should we not expect all of those $5 million to $10 million to be additive to 2015 expenses?

David King

I think it’s too early to tell with certainty. It gives us more time to work on some of the things that we’d like to do in a more automated and less manual fashion. So we’ll know about that as we get closer to the compliance.

Bryan Brokmeier – Maxim Group

All right. And you discussed the possibility previously as some significant expense reductions that you’re currently evaluating which were also excluded or continue to be excluded from guidance. Has that decision progressed at all?

David King

I think we’ve answered the question three times that we’ll value – we’ll update it on the July call.

Bryan Brokmeier – Maxim Group

All right. And just last quick one, you said that volume ex weather, would have been 5%. So, weather negatively impacted volume by about 2.4%. Can you remind us what the weather impact in the fourth quarter was?

Brad Hayes

Fourth quarter weather was actually on a year-over-year basis to the fourth quarter of the previous year a better comp, an easier comp. I don’t remember the specific weather number in Q4.

Bryan Brokmeier – Maxim Group

Okay. Thanks a lot.

Operator

Your next question comes from the line of Whit Mayo, Robert Baird. Please proceed.

Whit Mayo – Robert Baird

Thanks for squeezing me in. I just wanted to go back for a second to the fee schedule reprising. Aqua has been very supportive of the doc fix legislation, it seems like you guys concur. And one thing today have highlighted as the study that was performed by Avalere of the year that attempts to illustrate that average Medicare pricing is probably not too just similar from commercial pricing when you actually do include hospitals.

And they also seem to suggest that when CMS establishes these private payer rates in some instances, some of the non-hospital lab test rates could actually increase. And so, I just wanted to get your broad perspective on that study and whether or not you agree or disagree with their inclusions?

David King

With the Avalere study’s conclusions?

Whit Mayo – Robert Baird

Yes.

David King

Yes, it’s Dave. Yes, I think the Avalere study was a very comprehensive look at a large number of data points and multiple MSAs, as big as New York City, as small as I think Boise Idaho. And what Avalere did was look at paid claims data, look at pricing data, look at a variety of sites of service, independent labs, small labs, nursing home labs that are – that were paid under the fee schedule, and hospital labs, commercial pricing, Medicare pricing.

And I think what the study demonstrated quite clearly is that Medicare is at or below market for almost all the test that we’ve reviewed whether routine testing or a high complexity or low complexity testing. So, I think the Avalere study was a very detailed and comprehensive approach to determining what is market, and I think it – we bought it this notion that’s been going on for a long time. And somehow Medicare is above market in the way that it pays for lab test.

Obviously, how CMS implements this rule is going to be significant and we at LabCorp, and I trust ACLA are going to be very significantly engaged in the rule-making process. But I do think that the way that the – there was a very strong policy view in Congress that they wanted Medicare pricing to be compared to and based off of market pricing.

There was a very strong policy view from the ACLA, from the LabCorp and the constituents that the market had to be a true market, not a manufactured market to make it look like Medicare was overpaying.

And the Avalere study shows that in the true market, Medicare’s pricing is very, very competitive. So, I think that in the long-term this was a policy driven decision by Congress. And they can scrape that we have policy driven decisions as opposed to financially driven decisions. And we’re going to be very much involved in making sure that policies are implemented in accordance with the way that Congress wanted them to be carried out.

Whit Mayo – Robert Baird

Great, very helpful.

Operator

We have no further questions. I will now turn the call over to Mr. David King for closing remarks.

David King

Thank you all very much for listening this morning and good day.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. And have a great 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!