奎斯特診斷 (DGX) 2001 Q1 法說會逐字稿

Welcome to the Quest Diagnostics, first quarter 2001 financial conference call. At the request of the company, this call is being recorded. The entire contents of this call including the presentation and question and answer session that will follow are copyrighted with all rights reserved. No portion of this call may be recorded, transcribed, or retransmitted in any form for commercial purposes. Now, I would like to introduce Catherine Doherty, Vice President of Investor Relations for Quest Diagnostics.

Thank you and good morning. I am here with Kenneth Freeman, Chairman, and Chief Executive Officer of Quest Diagnostics who will briefly update you on our results before we open up the call for your questions. We are also joined by Robert Hagemann, our Chief Financial Officer. Some of our commentary and answers to questions may contain forward-looking statements that are based on current expectations. Actual results could be materially different from our expectations due to factors that are detailed in our 2000 10-K and subsequent filings as well as some unanticipated events. Now here is Kenneth Freeman.

Thank you Cathy. We continue to deliver strong financial performance in our first quarter. Net income doubled, EBITDA grew 25%, and base revenues were up 7%. We also achieved several milestones. The integration of our laboratory networks is now essentially behind us, our credit rating has raised to investment grade by standard in force and we have joined the ranks of Fortune 500. Let's briefly review the numbers; for the first quarter, net income doubled by $35.7 million and EPS grew 90% to $0.74 per diluted share. Cash earnings or earnings before amortization of intangible assets grew by almost 50% to $0.94 per diluted share. First quarter revenues grew 7% to $883 million excluding the gross-up in the prior year of revenues and expenses for our network management business. As we have explained before, as a result of renegotiating several managed care contracts, the accounting requirements will include revenues and expenses associated with third party testing has been eliminated. Revenue per acquisition during the first quarter grew 8% compared to the prior year. Clinical testing volume measured by the number of requisitions increased approximately 1% over the prior year period. Actual adjusting for business contributed to unconsolidated joint ventures, which reduced volume by approximately 1.5%. As a result, reported volume during the first quarter was about 1% below the prior year level. Earnings before interest, taxes, depreciation, and amortization or EBITDA were $122 million or 15.9% of revenues compared to $98 million or 11.4% of revenues with the prior year period. The increase in EBITDA margin was due primarily to our continued pricing discipline, a shift to higher value testing services such as gene-based testing, which continues to grow at more than 25% a year, and the continued realizations of synergies associated with the integration of SmithKline Beecham laboratories.

We are virtually finished with the process of combining laboratories with 98% of the specimen transfers now complete. We realized approximately $25 million in synergies during the first quarter, which translates to approximately $100 million on an annual basis. We remain firmly on track to achieve $150 million annually in synergies by 2002. Bad debt expense improved to 6.3% of revenues during the first quarter, compared to 7.3% in the year earlier period and unchanged from the fourth quarter. Day sales outstanding improved to 51 days compared to 56 days at the end of the fourth quarter, and remain the benchmark for our industry. Our cash balance at the end of the quarter was $121 million after paying $47 million to acquire the assets of clinical laboratories of Colorado and paying out our annual employee incentives for 2000. Capital spending for the quarter totalled to $44 million. The last two quarters, we have seen a higher level of capital spending, principally attributable to facility expansions and reconfigurations initiated as part of our integration plans and information technology investments. As facility modification, they are completed capital spending will slow in the second half of the year. For the year, we expect capital spending of $140-150 million.

Now, let's look behind the numbers and provide some insight in what is driving our revenue comparisons. Revenues grew 7% excluding the network management gross up. As you know, we no longer are required to gross up network management revenues that are attributable to testing performed by other labs and networks we manage. The gross-ups amounted to $32 million in the 2000 period. Revenue per acquisition increased 8% driven by improved pricing on managed-care business, improved mix of business both in terms of payer and past mix and by other price increases. We experienced rapid growth in gene-based testing, where reimbursement is significantly above the levels of routine testing. For example, Hepatitis C test volume grew almost 20% in the period and revenues grew almost 40% as a result of higher value testing such as geno technique. A good example of how gene-based testing is helping our overall business is high-risk human papilloma virus or HPV DNA testing. This gene-based test used to help diagnose and manage cervical cancer, more than tripled in volume during the quarter. In addition, our ability to perform this test is a secondary screen for inconclusive ThinPrep Pap tests, is driving the conversion of conventional Pap testing to the higher valued ThinPrep Pap test. As conversion rate continued to grow and was 51% for the quarter company wide and more than 70% in some markets.

Coming to volume, as we had explained before, the contribution of business to unconsolidated joint ventures for which we were compensated has reduced reported requisition volume. Contributions of business to JV and Phoenix, Indianapolis, and Dayton reduced our reported requisition by approximately 1.5% during the quarter compared to last year. Combining these operations was an important part of our integration plan and has significantly improved the performance of these businesses. As a result, our level of profits realized from the JVs has also increased. Adjusting reported volume for these contributions results in total company year-over-year growth of approximately 1% consistent with the guidance we have provided previously. Looking more closely at that figure, we see that it is essentially due to the acquisition we made in Denver early in the quarter. Net of the acquisition then same store sales were essentially flat compared to last year. Volume during the quarter was adversely impacted by our drugs abuse testing business, which experienced the significant decline driven by softness in the economy generally and by the sudden slow down in hiring. This reduced total company volume by about 1.5%. However, because drugs abuse tests tend to be lower priced then our average revenue per acquisition, the impact on our revenues was about 1%. Drugs abuse testing last year accounted for approximately 6% of our revenues and approximately 10% of requisition volumes.

Rest assured, we are taking action to minimize the impact on our overall performance. Looking ahead, we have raised our earnings guidance for the full year. We now expect diluted earnings per share to grow more than 50% from last year to between $3.40 and $3.50. We now expect full year revenues to grow between 5-7% compared to our previous guidance of 6-8% reflecting a slow down in our drugs abuse testing business. Our previous guidance assumed full year price and volume improvements at between 3% and 4% each. We expect price to be at the upper end of that range with year-over-year price comparisons to be more favorable in the first half than in the second half resulting from the timing of contract modifications during 2000. Our current expectation for full-year volume growth is 2-3%. We anticipate volume to be flat to up 2% in the second quarter and continuing to improve as the year progresses. We now expect second quarter earnings of $0.90-0.95 per diluted share. We expect full year EBITDA margins to approximate 15%, interest expense $90-95 million, and amortization expense of about $45 million. There are a number of factors that we see leading to an improvement in revenue growth for the remainder of the year. Laboratory consolidations are essentially behind us and we are turning our attention to expanding our base business. All of last year and through the end of this quarter, our sales force was focused on the existing customer base and to a lesser degree on acquiring new accounts. Integration is no longer the priority for our sales organization that it was last year. In addition, we have attracted new sales and marketing talents including specialists in esoteric and gene-based testing and are enhancing our sales compensation plans to create added incentives for higher value testing volume.

We continue to be a leader in introduction of new tests and technologies. During the first quarter, gene-based testing revenues continued to grow by greater than 25%. The greatest volume growth is coming from resistance testing for HIV and Hepatitis C, and from single nucleotide polymorphism or SNP snip testing for hypercoagulation, or a propensity to clot excessively, and we are gearing up for increased volume from gene-based cystic fibrosis testing based upon the anticipated joint recommendation by the American College Of Obstetricians And Gynecologist and the American College Of Medical Genetics with all pregnant Caucasian women receive prenatal CF testing, not just those with family history. And with the FPCO integration essentially complete, we are now better equipped to complete selective acquisitions, which can further strengthen our market position. The Colorado acquisition is an example and is contributing to revenue and earnings growth. In the longer term, we are well positioned to execute our strategic intent. We are investing in new tests and technologies that have the potential to be high volume offerings in the future. For example, we are first commercial laboratory to train pathologist to review "ductal lavage" specimens. This new procedure, which doctors have just starting to fully understand, promises to give important new information to women who are at high risk for breast cancer. We continue to make significant investment in technology particularly to further well enable our business. Our results online service has been received favorably by our physician customers, and we have begun a phased roll out of our quest on demand, test, ordering, and results online service. Our planned purchase of Med Plus is an example of an acquisition intended to bring us needed technology our customers want with speed. It is a classic buy versus build decision.

Our Quest direct consumer testing business continues to represent what we feel as a major opportunity in the future. We are investing in this opportunity in 2001; currently we are preparing for a June 1st marketing launch in our 5-pilot markets. Our financial position continues to strengthen and has earned us upgrades in our credit ratings. As a result, we are well positioned to efficiently access capital to fuel growth. Finally, we continue to pursue Six Sigma Quality and standardization to create competitive advantage and drive future volume growth. We currently have 62 black belts and 6 master black belts leading 65 Six-Sigma projects around the company. With 14 local projects completed, we have begun replicating results across our business units. Six Sigma and standardization are about driving business results and the project teams are being held accountable to deliver those results. This year represents a net investment in the Six Sigma. However, some projects are already demonstrating the power of Six Sigma to analyze business prophecies and drive improvement. For example, in Dallas, we have reduced missing information on requisitions coming from our patient's service centers, which is a major driver of bad debt improvement by 90%. At Nichols Institute, which depends on flights into LAX Airport for Logistics, we have reduced late specimen shipments by more than 50% and at Atlanta we reduced billing errors associated with setting up of new accounts by 98%.

Our stated long-term financial goals remain unchanged. We are committed to achieving sustainable double-digit revenue growth, EBITDA margins in excess of 20%, and the continuation of at least 30% growth in earnings per share over the next several years. To summarize, we are the industry leader in an industry with significant growth opportunities. We continue to drive strong financial performance. With integration largely behind us, our focus is turned to accelerating profitable revenue growth. We are differentiating ourselves in the market through Six Sigma quality. Both our Six Sigma quality and standardization initiatives will drive long-term sustainable improvements in growth and profitability. We have strengthened our balance sheets and credit ratings and improved our ability to access the capital markets, and we remain highly confident that we will deliver sustainable outstanding performance for our shareholders. We will now open up the call for your questions. Operator

Thank you sir. At this time, if you would like to ask a question, please press a *1 on your touchtone phone. You will be announced prior to asking your question. To withdraw your question, please press *2. Once again, to ask a question at this time, please press *1 on your touchtone phone. The first question comes from Tom Gallucci from Merrill Lynch.

Good morning everyone. With the bulk of the specimen redirection from the integration and the purchase of SmithKline behind you, what are the real focuses for synergies over the next 6-12 months as you reach your target of 150?

Tom, this is Cathy. This quarter we realized approximately $25 million in synergies and that gets us to a run rate of approximately $100 million. Over the next 6-12 months, you will be seeing synergies from both the bad debt area and from internalizing test send-outs, and you also have synergies from lab consolidations. As we have said before, typically there is a lag between when we redirect specimens and when we realize the synergies. So that is where you should expect synergies to come from over the next 6-12 months.

Now, just to clarify internalized test send-outs means exactly?

Historically, in the SBCL world, they had sent out tests that they did not have the capability to perform internally and we are in the process of continuing to internalize those type tests.

Right. Thank you.

The next question comes from Peter Emch from Credit Suisse First Boston.

How much of your debt structure right now is impacted by falling interest rates? How much of it is floating versus fixed?

Today, we have about $400 million in floating rate debt, which is paid to 30-day life board and 90-day life-board right now. The reason I thought higher in terms of floating rate, that is because we had requirement under our bank agreement to hedge a good portion of that.

Does that include any of your receivables financing?

The receivable on the bank side is $400 million. The receivables financing of $256 is floating rate debt as well, but in total there is only $400 million of floating rate debt that we have out there.

That includes the receivables?

Yes.

The next question comes from Bill Bonello from US Bancorp Piper Jaffary.

Can you just repeat you mentioned, what are the revenue in volume growth targets including the impact of the drug testing declines, but I did not hear you clearly.

Our guidance for full year for revenue is that revenue will grow between 5-7%, a rate of 4% of that will come from price and we believe that will be at the upper end of that range and 2-3% will come from volume and that is down from 3-4% as a result of the slowdown in our drugs and abuse testing.

Okay. It is perfect. Thank you very much.

The next question comes from David Lewis from Thomas Weisel Partners.

If you could give us some more detail on free cash flow from Q1, any changes to free cash flow guidance for 2001?

For the full year we expect free cash flow to continue to be in excess of $200 million. You have to keep in mind that the first quarter has historically been our slowest quarter in terms of either free cash flow or cash flow cum operations because of the annual incentives that we typically pay out in the first quarter related to the prior year; but full year, we fully expect it to be in excess of $200 million.

Can you give us any color on, what was paid out in terms of these pension pay outlays in Q1.

Did you say pension?

Yeah.

These are annual employee incentives, which are, the entire 27000 employee population what we have is eligible for and they are based upon achieving certain metrics, which we believe will drive performance over the course of the year and for the last year, the pay-out was in excess of 4% of annual wages for the entire 27,000 employee population. That amounted to about $80 million paid out in the first quarter.

Thank you.

The next question comes from Ricky Goldwasser from UBS Warburg.

Good morning. I have a number of questions; the first one is the guidance for the second quarter flat to 2% volume growth, does it include the impact of the joint venture? Then, if you can sort of go through, when did you complete the re-negotiation of the six-sigma in United contract and in the last quarter, you said that some of the last contract had a negative impact of 1% on fourth quarter results and I just wanted to see what was the impact on first quarter results? Lastly, Cathy, you mentioned synergies in the bad debt area and I am just wondering does that mean that you are going to return to Quest Diagnostics old level of bad debt expense of this 5.2% by the end of the year or are you going to see some reduction from parent level.

Okay. In terms of our guidance around volume on a full year basis, the 2-3% does include the impact that the contributing business to unconsolidated joint ventures will have on a year.

What about the second quarter, does it flat to 2%?

Yes, it does

Your second question related to the re-negotiation of contracts Ricky, as always, you know, we are typically in negotiations with a hand full of customers at any point in time on contracts. We do not have any specific comments to make today, relative to those dialogues does not indicate that the dialogues are not going.

Right, on a historical basis, if you can just refresh my memory as to when did you complete the re-negotiation of the major contracts last year?

We re-negotiated, the effective date of the re-negotiation at the Etna contract was April 1st and we re-negotiated the Oxford contract effective July 1, and the United Health contract was also re-negotiated with an effective date of June 1st.

In addition, there was a contract in the Pennsylvania area that was re-negotiated in the fourth quarter last year.

And then Ricky, your question as far as bad debt is concerned, last year 2000, we ended the year with bad debt as a percentage of revenue at about 7%; that compared to 1999 pro forma level of 7.6%. Our guidance for this year reflects about the same improvement when it comes to bad debt or around 6.3%. So as the year progresses, we will continue to realize synergies in this area on a year-over-year basis.

We do believe in the longer term of course, that we have opportunity to drive bad debts to the level of 4% or better over time, and we believe that certainly since the day we were spun off, about four years or sort of that.

The next question comes from Kemp Dolliver from SG Cowen Securities.

Could you give us a layout for the Quest direct business, once you start the marketing program in June. What we should expect to see by yearend in terms of, what you expect to see by yearend in terms of results and over what time frame you expect to roll that program out?

Sure Kemp. Currently, as you know, we are underway with pilots in five areas primarily in the mid-West and Rocky Mountain Areas. We are in the early stages of this program representing a net investment for us in 2001. Earlier this year, we got in to the company as a very seasoned sales and marketing professional from the lot of consumer products that lead the charge with us in this business and we will see the first results of that in terms of driving the business pilots as we roll out our marketing programs starting on June 1st. This will include both Internet and non-Internet capability as we go through the year. This year fundamentally is a year of proof of concept. We are not rolling us out nationwide without piloting and improving the concept of first offering in selected market places around the country. As we drive this business forward, we do know that there are many Americans who are not insured. They get virtually no health care service today and as you know, 70% of Health Care decisions start with our lab results; that is a great place to start. We have also noted that there are number of folks that are among the worried well, who are out there as well, we want to monitor their health. So, we believe that this is a significant opportunity for the year 2001 as I mentioned before; it is quick concept year.

Thank you and also on pricing front this year beyond managed care, do you have any initiatives in terms of other parts of payer mix where you have been pushed for price increases?

In terms of pricing Kemp, the way we intend to operate here is that we drive for pricing discipline across all segments of our business. We have our rigorous account management process, where we strive to match the cost of services provided with the kind of appropriate level of reimbursement that we might be able to realize and so driving pricing discipline is not unique to arrange with large payers, if you will. You can expect that steadfast dedication in pricing discipline to continue as we look forward. It is fundamental for success of our company and our industry, we believe.

Thank you.

The next question comes from Andrea Bici from Credit Suisse First Boston.

Good morning. Congratulations. ____ 00:25:48, it looks like it went from third-party free for service from the 33-38% range to the 40-45% range. Do you view that as being sustainable or increasing and is the esoteric or kind of gene-based testing sort of reimbursed on a third party free for service base and assets growth. Can we expect this shift to continue, not by the same magnitude, but at least to increase third party sale service from where it is?

Andrea, I think you directionally you can assume that the percentage we drive to do free for service will continue to become a more important part of the mix for some of the reasons you described.

You commented on your ThinPrep penetration. Can you comment on the penetration of any other test runs should do, such as cardiac CRP, any of those tests and do you think that you can achieve 100% ThinPrep? Do you think it will sort of cap at 80-90%.

In terms of ThinPrep penetration, Andrea, the end is not near. We see upside as you could expect that. We are continuing to grow in terms of penetration nationally at 51% in the first quarter and in some geographies over 70%. We do not have a specific percentage point in mind if you want it in terms of where we will end up, but we fully expect for this year to be in the range of 55-57% overall, and we see the opportunity to certainly drive to the 80, 90 or above levels of penetration as a materially better and more effective methodology. This will improve patient health and there is no reason it should not continue to grow.

One more question, with respect to the 75 million of remaining synergies you expect to see for this year, will the bulk of that be coming out of cost for the service line as it did in the first quarter activity, expect to see also some in SG&A expense?

You will continue to see as you see it in the same areas that you see it right now in the first quarter. We will see SG&A this year as the percentage of revenues below where it was last year and as the year progresses you should start to see the cost of sales starting to rocket down over the pit as well.

Thank you very much.

The next question comes from Ruth Upton from SG Cowen.

Hi, good morning. I have couple of questions, one on the internalizing the send outs from SBCL. I was wondering if you could tell us what the, do they have a higher percentage of send outs than you did on a couple of basis? Is it percentages like nearly as high as 5-6%, that I trust they were sending out?

Ruth, the former SBCL did have a higher level of tests send outs than the former Quest Diagnostics. I think your percentages are probably on the high side, but one more question is that there were a number of tests that SmithKline Beecham Clinical has historically send out that we have historically performed in-house primarily at Nichols Institute. So, that only makes sense after bringing those tests in-house.

Okay. Secondly, I was curious to notice that one of your competitors recently purchased a pretty sizable lab operation up in New England and I just was wondering if you could shed some light for us on how many or how significant the number of opportunities are out there that private lab companies that have revenues there in excess to $50 million, probably or more working around than we know about. If you could give us an idea whether there are a number of opportunities available and also whether you expect that you will have any anti-trust issues in any particular area of the country.

In terms of the market opportunity, in terms of acquisition opportunities of private laboratories, there are over 5000 small labs out there around the United States with annual revenues averaging around $5 million. I don't have a specific number of laboratory companies out there, but the revenue there are in the $50-100 million. However, I would indicate, if you look at earlier this year, we acquired a laboratory in Colorado also with revenues in that zone, and so they are all out there. They tend to be very localized and as we look across United States, you can expect us to renew our efforts to make selective acquisitions where they make sense. We are constantly being called with opportunities for acquisitions and just keep in mind our three ground rules, you know that they have to comply with the law of rule #1 or we walk away, #2 to be reasonably well around and rule #3 is of course they have to add their earnings for the company.

Do you have any appetite for international expansion at this time?

We have no specific plans in place that we are prepare to comment about other than for say that over time, as we look to the future, we do believe that there is an opportunity to grow outside the United States and bring our capabilities to markets that are underdeveloped. I want to do a recall back with US about anti-trust potential issues as well, and fundamentally we believe that given the high degree of fragmentation that exists in this industry that we would not anticipate any anti-trust situation or issues in any market where we might compete and remember we made the acquisition of SBCL, an industry changing event a year and half ago and went through the process without a second request for information.

Okay. Thanks Kenneth.

The next question comes from Bob Parente from Leerink Swann.

Thank you, my question was asked. Thank you very much.

The next question comes from Charles Hawk from Bank One Investment Advisors.

Good morning. I noticed that your income tax expense has progressively looked down from past year from about 49.4% to 45.4%. I was just wondering if you could give maybe the reasons for this, which your guidance would be going forward? Thank you.

The principle driver of the reduction in the tax rate is the fact that the pretax income is actually increasing. One of the things that impact our tax rate is non-deductible goodwill amortization. In excess of about $30 million dollars or so and obviously as the pretax income increases and that number stays constant, it has less of an impact on the overall tax rate, net principally what the drive has been.

And your guidance going forward for the tax rate would be?

The tax rate through the full year should be around 45% or so.

Okay. Thank you.

The next question comes from Wayne Cooperman from Cobalt.

Congratulations on a great quarter and being #1 in the last balance call, I do not know what it means, but though it is good to be number 1. You paid out $80 million in bonuses in first quarter, was that accrued last year or in the first quarter. How did you account for that and I guess on an ongoing basis, how do you account for that?

Wayne, that was accrued through the last year and the cash flow is out once a year typically in the March time frame, may be a moment also on this amount. We are starting very religiously in our company to drive complete alignment around our goals and objectives. So, every employee in our company has the opportunity to earn somewhere between 0-8% of their pay for the year. Upon achievement in their business units of specific quality and customer satisfaction goals, as well as few minutes of financial goals for the unit as well as the company, but we certainly accrued throughout the year, with the cash flowing once a year state out annually.

When do you kind of a true up to equal out accrual over this cash pay?

We at the end of the year, attempt to drive the accruals of what we believed the pay out would be, with subject certainly Directors approval in February, but in terms of the accrual amounts, in what we accrued them up essentially in a way that it ensures that we have the earnings in the right place. Wayne, we are actually accruing those and chewing them up with each quarter based upon where we expect the full year to end up.

Right. We haven't seen any large adjustments in the fourth quarter?

No.

Okay. Great!

The next question comes from Anjali Shaw from Robertson Stevens.

Hi gentlemen, I wanted to ask you a few questions regarding ductal lavage, how many technicians you have trained at this time in the in-houses and how many are you planning to train? And at what point do you see your technicians to be fully trained? Also I wanted to ask you is, is ductal lavage going to have a material impact on revenues and what kind of volume and pricing do you see for ductal lavage?

As far as the number of pathologists that we currently have trained to analyze the specimen, right now, we have 11 pathologists trained. We are the first commercial laboratory to offer ductal lavage testing. In terms of the impact that this will have on our results for this year, at this time it is very immaterial. The medical community is just beginning to embrace this. It really is only used for women who are already identified as high risk for breast cancer. But we do believe that this is definitely positive in terms of bringing innovation to the market place.

Okay. What kind of pricing do you see with that?

We are not prepared to comment on that today.

Okay. Very well, thank you very much.

We have a follow-up question from Tom Gallucci from Merrill Lynch.

Thanks. This is ____. 00:36:15 Hi everybody, I have a couple of questions that I was going to ask. First of all, the 8% price-increase in the quarter or average revenue per acquisition. Can you give us some sense about how that breaks down between core year-over-year pricing gains and maybe make-shifts and is there any comments to be made on trends in the especially esoteric business versus the traditional core business?

In terms of the 8% improvement in revenue per acquisition, I think, you could say about 2/3rd of that impact have been driven by contract negotiations and by about 1/3 by a combination of factors including mix. As we look forward, certainly the continuing acceleration and growth in the gene-based testing arena is a favorable impact that we expect to continue as time goes on. You also can expect, given the impact of the contract renewals that we have had bring us forward and that you should expect as the year goes on at that the level of price improvement year to year will subside some in the second half functions versus the first half.

Okay. I was also going to ask you about if acquisition activity is going to be a little bit more in the focus going forward, given the integration of SBCL's larger done. Can you describe a little bit in your team or how you approach acquisitions, you still get a lot of calls, do you have a acquisition team at corporate that evaluates that or is it done out in the field? Could you give us a little bit of flavor for the process of evaluating acquisitions?

Yes. In terms of acquisition focus, you can assume that our focus is renewed as related to opportunities for selective acquisitions, but I must emphasize that word "selective" realizing that for the better course of last year or so, we have been focused very, very fundamentally on integrating the largest acquisition in the history of our industry, the acquisition of SBCL. The way we structure ourselves to get after evaluating opportunities for acquisitions, what will they be that you might call more traditional laboratory-related acquisitions geographically or conversions that are space-like depending opportunity with Med Plus, to accelerate our capability in information technology. We have a very rigorous and fuller approach to analyze in the approach of the acquisition opportunities. We are fundamentally driving this in the corporate level, much more so than in the geographies. We have business development effort in place at the corporate level headed by Kenneth Finnegan, who used to be the head of investor relations until recently, who brings very strong financial and business development skills to the game and we have an integrating process that involves our legal, our financial, and our operational people. We have a very rigorous _____00:39:11 process that we go through as well, and as result we also fully expect as we drive acquisitions AJ, and you would expect me to say this that we intend to exert price discipline in this area as well. Now, we want to make sure that what we pay for is what we get. So, not only is price and discipline important in dealing with our customers, we view that as very important also in dealing with perspective acquisition opportunities.

Okay. Thanks a lot.

We have a follow-up question from Andrea Bici from Credit Suisse First Boston.

Hi guys, just a quick question. Were there any tax payments that impacted your cash flow from operations or do you think will they all be in the second quarter?

Andrea, we did have tax payments in the first quarter. They were in the range of about $20 million or so and you should expect that, unfortunately, we will be a taxpayer as the year progresses. It is a good problem to have I guess so.

Okay. Thanks very much.

Once again, if you would like to ask a question at this time, please press *1 on your touchtone phone. We have a question from Nat Buton from Gallion 00:40:29.

Hi congrats on the great quarter, everyone. Can you just tell me, you talked about drugs abuse testing representing higher acquisition percentage than top line, what was the gross margin, kind of impact from further abuses at low margin business and inventory?

When we look at drugs abuse testing from an EBITDA perspective, it is significantly lower than the corporate average.

Can you be a little more specific?

No.

Okay. Thank you.

At this time, Ms. Doherty there are no further questions. Do you have any closing comments?

No. Thank you everyone for your time.

Thank you for participating in the Quest Diagnostics first quarter 2001 financial conference call. Investors in US may listen to a replay of this call by dialing 800 342 8825. The replay will open today at 10:00 am Eastern Time and will continue until through 5:00 pm on April 26th. Investors outside US may dial 402 220 9674. No password is required for either number. In addition, registered analysts may access an online replay of the call through street events, at www.streetevents.com. The call will also be available to the media and individual investors at www.questdiagnostics.com. The online replay will be available 24 hours a day beginning at noon. Goodbye.