LabCorp 2008 Annual Report Download - page 22

20 Laboratory Corporation of America® Holdings 2008
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (in millions)
Laboratory Corporation of America
General
During 2008, the Company continued to strengthen its financial performance through the
implementation of the Company’s strategic plan and the expansion of its national platform.
The Company has been successful in growing many of its focus areas, in such areas as esoteric
testing, disease management and companion diagnostics.
Effective January 1, 2007, the Company commenced its successful implementation of its
ten-year agreement with United Healthcare Insurance Company (“UnitedHealthcare”) and became
its exclusive national laboratory provider. Over a period of several years, the Company will
continue to perform more of UnitedHealthcare’s testing. During the first three years of the ten-year
agreement, the Company has committed to reimburse UnitedHealthcare up to $200.0 for transition
costs related to developing expanded networks in defined markets. Since the inception of this
agreement, approximately $74.6 of such transition payments were billed to the Company by
UnitedHealthcare and approximately $74.4 had been remitted by the Company. Based on trend
rates of the transition payment amounts billed by UnitedHealthcare during 2008 and 2007,
the Company believes that its total reimbursement commitment under this agreement will be
approximately $125.6. The Company is amortizing the total estimated transition costs over the
life of the contract.
Effective January 1, 2008 the Company acquired additional partnership units in its Ontario,
Canada (“Ontario”) joint venture for approximately $140.9 in cash (net of cash acquired), bringing
the Company’s percentage interest owned up to 85.6%. Concurrent with this acquisition, the terms
of the joint venture’s partnership agreement were amended. Based upon the amended terms of
this agreement, the Company began including the consolidated operating results, financial position
and cash flows of the Ontario joint venture in the Company’s consolidated financial statements
on January 1, 2008. The amended joint venture’s partnership agreement also enables the holders
of the minority interest to put the remaining partnership units to the Company in defined future
periods, at an initial amount equal to the consideration paid by the Company in 2008, and subject
to adjustment based on market value formulas contained in the agreement. The initial difference
of $123.0 between the value of the put and the underlying minority interest was recorded as
additional minority interest liability and as a reduction to additional paid-in capital in the
consolidated financial statements. The contractual value of the put, in excess of the current minority
interest of $22.5, totals $98.8 at December 31, 2008.
Seasonality
The majority of the Company’s testing volume is dependent on patient visits to doctor’s offices
and other providers of health care. Volume of testing generally declines during the year-end
holiday periods and other major holidays. In addition, volume declines due to inclement weather
may reduce net revenues and cash flows. Therefore, comparison of the results of successive
quarters may not accurately reflect trends or results for the full year.
Results of Operations
Effective January 1, 2008, the Company began consolidating the results of its Ontario joint
venture. Certain analysis of the Company’s operating results is provided below, excluding the
impact of this consolidation, in order to facilitate comparison with the prior period’s results.
Years Ended December 31, 2008, 2007, and 2006
Net Sales
Years Ended December 31, % Change
2008 2007 2006 2008 2007
Net sales
Routine Testing $ 2,777.9 $ 2,671.9 $ 2,347.6 4.0% 13.8%
Genomic and Esoteric 1,478.3 1,396.3 1,243.2 5.9% 12.3%
Ontario, Canada 249.0 – – 100.0% –%
Total $ 4,505.2 $ 4,068.2 $ 3,590.8 10.7% 13.3%
Number of Accessions
Years Ended December 31, % Change
2008 2007 2006 2008 2007
Volume
Routine Testing 86.0 85.4 76.7 0.7% 11.3%
Genomic and Esoteric 23.7 21.9 18.8 8.2% 16.5%
Ontario, Canada 8.0 – – 100.0% –%
Total 117.7 107.3 95.5 9.7% 12.3%
Price Per Accession (“PPA”)
Years Ended December 31, % Change
2008 2007 2006 2008 2007
Price
Routine Testing $ 32.30 $ 31.29 $ 30.60 3.2% 2.3%
Genomic and Esoteric $ 62.49 $ 63.76 $ 66.14 (2.0)% (3.6)%
Ontario, Canada $ 30.92 $ – $ – 100.0% –%
Total $ 38.28 $ 37.92 $ 37.59 0.9% 0.9%
The increase in net sales for the three years ended December 31, 2008 has been driven
primarily by volume growth in the Company’s Managed Care business, the impact of acquisitions
and the Company’s continued shift in test mix to higher priced genomic and esoteric tests. Excluding
the Ontario operation, Managed Care revenue as a percentage of net sales has increased from
42.6% in 2006 to 44.5% in 2008. Excluding the Ontario operation, the Company’s genomic
and esoteric volume increased as a percentage of accessions from 19.7% in 2006 to 21.6% in
2008. During the fourth quarter of 2008, the Company recorded a $7.5 cumulative revenue
adjustment relating to certain historic overpayments made by Medicare for claims submitted
by a subsidiary of the Company. Net sales of the Ontario joint venture were $249.0 for the
twelve months ended December 31, 2008.