奎斯特診斷 (DGX) 2003 Q4 法說會逐字稿

Welcome to the Quest Diagnostics fourth quarter and full year 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 the copyrighted property of Quest Diagnostics with all rights reserved.

Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Quest Diagnostics is strictly prohibited.

Now I'd like introduce Laure Park, Vice President of Investor Relations for Quest Diagnostics.

Go ahead, please.

Thank you and good morning.

I'm here with Ken Freeman, Chairman and Chief Executive Officer of Quest Diagnostics, Surya Mohapatra our President and Chief Operating Officer, and Bob Hagemann our Chief Financial Officer who will provide comments about our results as well as major trends before we open up the call for your questions.

Some of our commentary and answers to questions may contain forward-looking statements that are based on current expectations and involve risks and uncertainties that could cause actual results and outcomes to be materially different.

Certain of these risks and uncertainties may include but are not limited to unanticipated expenditures, changing relationships with customers, payers, suppliers and strategic partners, competitive environment, changes in government regulations, conditions of the economy, integration of acquired businesses and other factors described in the filings of Quest Diagnostics Incorporated with the Securities and Exchange Commission including the 2002 Form 10-K.

A copy of our earnings press release together with any information that is required under Regulation G and the text of our prepared remarks will be available in the Press Room section of our Web site later today at www.QuestDiagnostics.com.

Now here is Ken Freeman.

Thank you, Laure.

We had a strong fourth quarter capping another year of solid performance.

Some highlights for the full year.

Earnings per share increased 28% with revenue growth of 15%.

EBITDA margin exceeded 20% of revenues and increased by almost 2.5 percentage points from 2002, primarily due to revenue gains and efficiencies from Six Sigma and standardization.

Cash generation was outstanding and enabled us to initiate a quarterly dividend of 15 cents per share that was paid last week.

At the same time, we repurchased almost $260 million of our common stock while maintaining financial flexibility to invest in growth opportunities.

Toward the end of the year, we began seeing positive signs with regard to our initiatives to drive organic growth.

Investments in sales and marketing and our other initiatives are beginning to pay off.

During 2003, we completed the Unilab acquisition establishing Quest Diagnostics as the leader in the California marketplace and the integration is firmly on track.

We continue to invest in our value proposition, a commitment to provide superior quality and service with unparalleled access and convenience, the industry leading scientific and medical staff and a comprehensive suite of connectivity products.

And we expect continuing strong performance in 2004 and are raising guidance.

In November, we announced a succession plan under which Surya will succeed me as CEO and I will stay on as Chairman of the Board.

The change in leadership will take place by our annual meeting later this spring and the transition is proceeding very well.

The entire organization including the corporate staff now reports into Surya.

In addition, Surya is taking the lead with investors and with our employees.

Over the past nine years, we've transformed Quest Diagnostics from a turnaround and industry consolidator into a leading healthcare services company.

As we take Quest Diagnostics to the next stage in its evolution, Surya brings unique qualifications, particularly his broad scientific and medical knowledge, passion for the patient, extensive experience in healthcare and proven ability to drive performance.

Under Suryas' leadership the company is very well positioned to continue to grow and prosper.

Now Bob will discuss the quarterly results and guidance, and then Surya will comment on several business topics of interest.

Bob?

Thanks, Ken.

We finished the year with a strong fourth quarter, exceeding our guidance for revenues, earnings and cash flow.

Earnings per diluted share increased 24% over the prior year to $1.02.

Revenue growth accelerated in the fourth quarter, driven by improved volume.

Revenues grew 16.5%.

Volume increased 12.7% for the quarter and increased three tenths of a percent on a pro forma basis after considering the Unilab acquisition.

We continue to be encouraged by the progress we are making with our efforts to accelerate organic volume growth.

During the quarter, revenue per acquisition grew 3.5%, or 5.3% on a pro forma basis.

Improvements in test and payer mix continued to be the principal drivers of the increases.

Gene-based and esoteric testing continued to grow rapidly during the quarter.

Approximately half a percent of our total company revenue growth was contributed by our non-clinical testing businesses which grew approximately 12% over the prior year.

During the fourth quarter, we took a number of actions to accelerate growth and improve efficiencies.

We increased spending in sales and marketing and increased our efforts in sales recruiting and training.

Additionally, we provided extra incentives to employees across the company to accelerate improvements in customer satisfaction and loyalty and win new business which contributed to progress in the quarter.

These efforts were put in place to help finish the year strong and build momentum going into the new year.

As much as we would like to take all the credit for the improved volume, we estimate that just under a point of the improvement is attributable to the timing of the Christmas and New Year's holidays and less severe weather than the year before.

In addition in the month of November, we saw an unexpected increase in volume which has since returned closer to the levels we were expecting.

We estimate that these factors combined with the Unilab acquisition contributed about 12.5% of the 16.5% revenue growth in the quarter.

EBITDA margin increased to almost 20% for the quarter, up from 17.9% in the prior year.

Increase was driven by our improving mix of business and continuing efficiencies from our Six Sigma and standardization efforts which have resulted in reduced cost of services and SG&A as a percentage of revenues.

These improvements were realized even after increasing spending associated with our efforts to accelerate growth and improve efficiencies which I referred to earlier, most of which impacted the SG&A line and, after approximately $3 million in gains from the sale of certain assets in 2002.

As we previously indicated, we will continue to report the necessary information for you to calculate EBITDA from our financial statements.

However we are shifting our focus to operating income, a GAAP measure.

Operating income which runs about 3% below EBITDA as a percentage of revenues, increased to $197 million or 16.4% of revenues for the quarter.

Cash from operations for the quarter was outstanding at $262 million, an increase of $16 million over the prior year even though the 2002 fourth quarter included a non-recurring benefit of approximately $40 million associated with the acceleration of certain tax deductions.

For the full year, cash from operations was $663 million and free cash flow approached $500 million.

During the quarter, we repurchased an additional 1.6 million common shares for $116 million.

Since May, we have repurchased a total of 4 million shares for $258 million at an average price of $64.54.

Before I turn to specific guidance for 2004, I want to remind you of two items we shared with you at the end of the third quarter.

First, we will provide guidance on operating income instead of EBITDA.

Second, although we will continue reporting growth in requisition volumes and revenue per requisition, we will no longer provide guidance for each item.

We will provide total revenue guidance in order to keep the focus on our primary objective, driving profitable revenue growth.

In addition, to keep everyone's focus on the longer term, this will be the last year during which we will provide you with quarterly financial guidance.

We will continue to provide quarterly guidance through 2004 when we report earnings for the preceding quarter.

Turning to the full year guidance.

As a result of improved fourth quarter volume, we are increasing guidance for total company revenue growth to 6% from 5%.

This includes a full 12 months of revenues from Unilab which is expected to add about 1.5% to reported revenues.

Earnings per diluted share are expected to increase to between $4.70 and $4.80.

We are also increasing guidance for cash from operations by $50 million and expect the total to exceed $650 million for the full year.

We expect operating income as a percentage of revenues to approximate 18% and capital expenditures to be between 180 and $190 million.

For the first quarter of 2004 we expect revenues to grow 13 to 14%.

Inclusion of Unilab for a full quarter is estimated to add about 6.5% to reported revenues in the quarter.

We expect operating income as a percentage of revenues to approximate 16% and diluted earnings per share to be between $1.02 and $1.07.

Note that our first quarter revenue growth includes a benefit of approximately 3% due to an extra day in 2004 caused by leap year, and unusually severe weather in early 2003.

Lastly keep in mind that the first quarter is historically our softest in terms of cash flow.

Now I'll turn it over to Surya.

Surya Mohapatra, Ph.D.: Thanks, Bob.

As you heard from Ken and Bob we had a great quarter ending a great year.

We are encouraged by positive signs regarding our growth initiatives and have raised guidance to reflect that.

However we do still face a number of market challenges such as high level of unemployed and uninsured and ongoing changes in the design of health plans that may impact the utilization of lab services.

I would like to discuss three items that may be on your minds, growth initiative, the competitive landscape and the transition.

Our focus on growth initiative such as expanding our sales force and providing better training and tools is making our sales organization more productive and starting to show results although we have much more to do.

We are taking Six Sigma to the next level.

Going to the next level involves using methods such as lean Six Sigma and design for Six Sigma.

We are leveraging our Six Sigma investment and driving further efficiency and customer satisfaction.

Six Sigma projects have improved quality in every aspect of our operation.

New diagnostic tests are giving physicians additional reasons to meet with our sales team.

We are encouraged by the early acceptance by physicians and insurers of two new tests, the InSure colorectal cancer screening test and the high risk HPV DNA test.

In short colorectal cancer test will enhance patient adherence, is gaining traction with managed care payers and is now covered by all the major national plans.

Recently InSure was added to Medicare's list of reimbursed screening tests, is also now one of the heated metrics used by the National Committee for Quality Excellence to measure the performance of health plans.

The high risk HPV DNA test provides a clear opportunity to help physicians improve cervical cancer detection.

This test is now approved for primary screening in women 30 and older in conjunction with a Pap test.

Regarding the over check [PROTUMICS] ovarian cancer block test, we continue to be very deliberate in validating the test.

We will not offer the test to physicians until it meets all of our rigorous medical and scientific requirements.

Gene-based and esoteric testing continued to grow rapidly during the quarter driven by continued growth in cystic fibrosis and amplified chlamydia and gonorrhea testing.

At the same time, demand for cardiovascular testing grew.

For example, cardio CRP showed a continued strong growth driven by broad-based acceptance among physicians and recent favorable coverage in the popular press.

As physicians order new diagnostic tests, they're doing so by using our collective dissolutions.

At the end of the year, we [inaudible] 25% of all test orders by the Internet.

And 35% of reports are delivered online, more than double where we were at the start of 2003.

Turning to the competitive landscape we are excited about the long-term prospects for our industry.

The population continues to grow and age producing more patients who will progressively require more diagnostic tests each time they visit the doctor.

Rapid development of genomics and protumics, [inaudible] testing platforms and the application of information technologies will enable us to offer new tests and connectivity solutions that help physicians help patients.

The laboratory testing industry remains very dynamic with competitive [inaudible] and living the business.

We have a unique value proposition for our customers that enable us to maintain our commitment to pricing discipline in the face of consistent pressure from payers.

Still, they recognize the value we provide and the investment we continue to make to enhance our value.

Turning to the transition, I would just like to say that I am honored to be named the next CEO of Quest Diagnostics.

I know I have a tough act to follow and will work very hard to earn the continued trust of our customers, our employees and our shareholders.

I believe that we are positioned well to continue to deliver outstanding results now and in the future.

Thank you, Surya.

Putting it all together, we had a strong fourth quarter, capping another year of outstanding financial performances.

The CEO transition process is going well.

Looking to the full year 2004 we expect solid improvement in revenues and earning per share and continued strength in cash flow.

And as a result of our compelling value proposition, Quest Diagnostics is very well positioned to provide superior returns for shareholders today and tomorrow.

We'll now open up the call for your questions.

Operator?

Yes sir.

At this time we'd like to open for questions.

If anyone has a question, please press star one on your touchtone phone.

You'll be received in the order that you come in at.

If your question is answered, you may press star two to retract.

Again, for questions, please press star one on your touchtone phone.

Our first question is coming from David Lewis of Thomas Weisel Partners.

Good morning, guys.

A couple of questions here.

The first one, Bob, could you talk about pricing growth, the stronger than expected given the volume improvements.

Maybe you could talk about pricing growth in relation to drugs of abuse trends and what a potential negative impact that may have on price, any impact from Unilab you're seeing, potential price raises happening out in California or any effect of mix shift on pricing specifically?

Well, as you know the guidance that we had put out for improvements in revenue per acquisition for the fourth quarter was 2 to 3%.

We reported a 3.5% increase, about a half a point above the upper end of the range that was out there.

And it was principally due to continued improvements in tests and payer mix.

Our drugs of abuse testing business which had been rapidly declining over the last two years or so certainly was a contributor to the improvements in revenue per requisition as a result of that being lower priced business.

We have seen a slowing in volume declines there.

The volume for the drugs for abuse testing business declined about 5% during the quarter.

That slow down from the ten plus percent that we had seen earlier in the year.

And that certainly is a bit of a contributor to the improvement.

Okay.

And the effects of mix shift, pricing mix shift from test mix, Bob?

Test mix continues to be a significant piece of the improvement in revenue per requisition.

In fact that and payer mix are the principal drivers.

We continue to see some modest increases in pure price.

Okay, and then just two more quick ones.

The first one was, you mentioned specific sales changes in the fourth quarter that may have served as kind of a catalyzing force for the sales force.

Can you walk us through specifics there?

Sure.

A couple things that we did in the fourth quarter.

We decided to accelerate some spending in certain areas so that we could actually accelerate the growth initiatives we have going on and the efforts that we had going on to improve efficiencies as well.

We made some investments in some specific marketing programs and some sales and service incentives and on the cost side we did some capacity adjustments associated principally with the drugs of abuse business and incurred some other costs.

None of this we see as routinely recurring spending though.

Okay.

And then maybe one last question for Ken or Surya.

We're expecting the federal workplace guidelines to be updated for drugs of abuse testing in the workplace to include not just urine but urine and oral fluid and hair testing.

Given your relationship with OSHA what impact can that have on future testing volumes at Quest going forward?

Do you think it will be material or immaterial?

Surya Mohapatra, Ph.D.: I don't think it will be really material.

There is no significant change in our [inaudible] drug of abuse testing but some of the tests are moving from urine to saliva-based tests and also the hair testing which we offer.

The other thing to keep in mind, David is remember that drugs of abuse testing in total represents only about 3% of revenues, total revenues for our company these days, so even though we are encouraged by the possibility of further adoption moving the overall needle of course from small base, you can understand the impact.

Okay.

Thank you very much.

Thank you, sir.

Our next question is coming from Tom Gallucci of Merrill Lynch.

Good morning, everyone.

A couple quick ones if I could.

Just a follow up to that one first.

You said there was 3% of revenues, drugs of abuse testing but the volumes were down 5%.

Approximately what percent of volume is it or how much does it depress against your overall volume growth either way?

It's about 6% of total volume, Tom, and the impact that it had on the year-over-year total volume growth for the company was less than half a percent in the quarter.

Okay.

Great.

Maybe turning to esoteric testing specifically what percent of the revenues are you up to in that area at this point?

Gene-based testing represents 12% of the top line which is consistent with the prior quarter.

If you add on to that the impact of esoteric tests, just adding the two together it's about 18% of the top line which is consistent with the prior quarter.

Okay.

And then I noticed the announcements on the Digene test and you mentioned it briefly in your prepared remarks.

I was just wondering if you could give us a little bit more color on maybe how much HPV testing you're doing in general and how you see this playing out and just confirm that that's the same test that Kaiser, I guess recently said that they'd be reimbursing on a routine basis.

Is that right?

That's correct.

Kaiser and other major insurance companies are indicating that they will be offering to their members HPV in conjunction with Pap testing and the primary screen for women 30 and older.

We think this is positive that insurers are recognizing the benefit to women from this in regards to cervical cancer screening and we will be out talking to physicians about this.

Surya Mohapatra, Ph.D.: Tom, we have offered HPV test before.

And most of our activities now actually going, educating the doctors so that they know what is available and they can make an informed decision.

Great.

And then, one last one.

I noticed you upped your cash flows a little bit.

What are you seeing out there in terms of acquisition environment and what's your appetite on that front?

Thanks a lot.

Surya Mohapatra, Ph.D.: Well, in our acquisition environment, as we said, there may not be a lot of lab company's left but there is a good number of small companies, 50 to $100 million and going forward our emphasis is on organic growth but having said that, we are not going to ignore any acquisition that makes economic sense.

Thank you.

Our next question is coming from Robert Willoughby of Banc of America Securities.

Thank you.

How much of the upward revision to guidance here reflects the elimination of a Medicare co-pay hit that you took last quarter forward?

And secondly, does the guidance reflect any contributions from acquisition spending or additional share repurchase activity?

The change in the guidance is solely attributable to our increased expectations for volume growth at this point.

And as we told you at the end of the third quarter when we provided guidance for '04 that that was with or without a Medicare co-pay, it was all in number, and this change is as a result of our improved outlook for volume.

Additionally with respect to acquisitions, there is no acquisition growth other than the carry over from Unilab built into the revenue number but the EPS number again is an all in number.

We'll be using our excess cash flow, either to do acquisitions if they're available at the right price and if they're not we'll be deploying much of that into share repurchases.

That's great.

Thank you.

Thank you.

Our next question is coming from Matt Rippenger from JP Morgan.

Hi.

Thanks very much.

Just a couple of questions.

First, can you comment how many patient service centers you had in the field at the end of the quarter and comment briefly on other measures to accelerate internal growth going forward such as adding more patient service centers or more phlebotomists in the field?

Surya Mohapatra, Ph.D.: Yes.

We have more than 1900 patient service centers and you know, focusing on organic growth takes effort in all aspects.

We have the broadest access and the broadest menu but also we are educating our sales force as the technology changes we are realigning their skills to really help our doctors to make the right decision and at appropriate places, we actually invest in phlebotomists and also the patient service center but invest on our marketing plan depending on which area needs what kind of assets we invest appropriately.

The other thing we're continuing to do is to install additional connectivity solutions into our physician offices which will give us additional stickiness with our customers and also help to drive efficiencies internally.

Great.

And the second question I had is for the InSure tests, I believe Medicare came back with about an $18.00 reimbursement per requisition.

I wanted to see if you could comment on that pricing, whether that was in line with your expectations and whether there was any opportunity to go back to them and potentially get an increase to that?

At the Medicare reimbursement rate of a little over $18 we are profitable on that test.

As to the process with CMS I believe there is a process for additional reimbursement that's out there for entity.

Thanks very much.

Thank you.

Our next question is coming from Sandy Draper of Deutsche Bank Securities.

Thanks and good morning.

A couple questions.

Bob can you just remind me what's left on your share repurchase?

About $340 million is what's left under the authorization.

Okay.

Great.

Second question, you commented that you're not going to give guidance anymore, I think you had said on price and volume specifically related to pro forma, but will you still report it when you give us the quarters historically?

Absolutely.

There's going to be no decrease in the level of information that we report to you each quarter and we'll be reporting absolutely the actual numbers and if they're meaningful pro forma numbers as well.

Okay.

Great.

And final question.

Obviously you pointed out a few sort of positive one time factors that boosted the volume but obviously what you're suggesting with raising the guidance for '04 is even xing out those, you're generally starting to get more positive regarding the volume trends.

Is that a correct assumption?

That is absolutely correct.

As Surya said and Ken said we are encouraged by the signs that we're seeing from the efforts that we put in place to grow organic volume.

Okay.

And while I know you're not giving specific guidance but looks like if I do some back of the envelope on your numbers, you're expecting to see positive volume growth for next year even excluding the Unilab numbers.

Yes, that is the case and in fact even before we raised the guidance from 5% to 6% revenue growth we were anticipating both positive volume and revenue per requisition.

Great.

Thanks a bunch.

Thank you.

Our next question is coming from Bill Bonello of Wachovia Securities.

Just a couple of follow-up questions.

You gave a pro forma volume growth of three tenths of a percent.

Is that a fair approximation of the overall internal growth or is that pro forma growth negatively impacted by Unilab business attrition?

That is not negatively impacted by Unilab.

We're not seeing any significant attrition there, in fact it's very much on plan.

It has been adjusted, though, for the divestiture that we had to make in northern California so it's an apples to apples.

But, no, that is a good indication I think of how the overall volume is growing on a pro forma basis.

Okay.

And then you mentioned the unexpected increase in volumes in November.

Can you give us some sense of the magnitude, how much that might have boosted volume growth during the quarter?

Yeah, Bill, we estimate that that boosted the volume growth by about a point during the quarter.

It's hard to precisely pinpoint the drivers of what drove that November volume.

We believe that it's due to a jump in physician office visits in November which could have been flu related, it could have been people meeting their deductibles.

But what we saw in the month of November was above the historical patterns for our business and did not repeat in December.

Okay.

So maybe you can just clue me in a little bit.

I know you're feeling bullish about the growth prospects but I guess I'm a little bit confused.

I mean if you had three tenths of a percent growth this quarter and it was boosted a little bit by unusual growth in November, and then that's gone back a little bit to where it was, and you kind of need to get probably 1.5% internal growth to hit your 6% target in '04, what has you so confident that that growth rate is going to pick up?

Keep in mind, Bill, that when we provided guidance we were anticipating that the volume growth, would actually, the pro forma volume growth would actually be down 1 to 2%.

So the performance here is significantly stronger than we were anticipating.

As I said about a point of that difference was due to the unexpected increase in November.

But also a point is due to the activities that we've been taking to drive volume improvements.

And that additional point is what we believe is sustainable and the reason that we've raised our guidance for this year.

Okay.

That makes a lot of sense.

And then just to understand on the EPS guidance, just to make sure I understand what's driving the increase, if revenue guidance was up about a percent and it looks like the EBIT margin guidance was pretty much in line with where it had been, then the boost in the revenue guidance is maybe 5 to 6 cents, the EPS guidance is going up maybe 10 to 20 cents, is the difference what you're expecting to do with your cash?

No, Bill, the total difference is really attributable to the change in the volume outlook.

If you take the volume up 1%, that's $50 million give or take in total revenues.

And if you look at the way we've raised the EPS guidance, I think the midpoint is up about 13 cents.

So that translates into maybe 20 or $22 million in incremental pretax profit which is sort of the type of incrementals that we'd expect on that volume.

Okay.

That makes sense.

I have to think about it in terms of the marginal profit on the additional volume and not just the overall.

Okay.

That's very helpful.

Thank you.

Thank you.

Our next question is coming from Ricky Goldwasser of UBS Warburg.

Hi, good morning.

I have a couple questions.

The first one is a follow-up on a question that was asked earlier on the call regarding the investment in service.

Can you give us a comment about what the ratio in terms of headcount between sales reps and service reps?

Surya Mohapatra, Ph.D.: Ricky, this is Surya.

We really have not disclosed the ratio of sales versus service because we have a number of sales people who also do service and depending on the area.

We try to serve the customer the best way we can.

Would you say it's [inaudible] because I know in the past I think it was more skewed toward service?

Is it now more equally weighted between sales and service?

Surya Mohapatra, Ph.D.: What we have done as we have told before that we are becoming very focused.

We have a specialty sales force for genomics and esoteric testing.

We created the hospital organization.

They have sales and service.

And now in our physicians and managed care we're also putting more focus and depending again the area we may have more salespeople than service people.

But we are getting more and more focused towards selling and getting new customers and new patients.

Ricky, I think you might be tying back to some comments we made as we came out of the integration phase with SBCL where we indicated we were changing the way we were focusing our employees from being focused on retaining customers and moving them forward to growth and this is really a continuation of that change in focus and actually moving it to the next level.

Okay.

And then, and I'm sorry I was late on the call, you might have talked about it already, anecdotally we are hearing that January volumes are actually stronger than usual especially the pick up after days off of bad weather.

Are you seeing the same phenomena as January with at least a pick up after slow days is stronger than you've seen before?

Ricky we generally don't comment on month to month volumes within the quarter but what we're seeing is consistent with the guidance that we've got out there at this point.

Okay.

And lastly, EXACT Sciences announced last night that they have restructured their contract terms with LabCorp and it seems the economics are better for LabCorp now.

Do you think that this move helps you grow in terms of positioning when you negotiate with developers of new tests?

And also can you talk a little bit about what you are seeing in the pipeline?

I think what's important to keep in mind and also [inaudible] the changeover to [inaudible] when we look at new technology the way that we address technology first we evaluate the science and if the science makes sense we look at the economics and look at the operational ease of a test and those are the pieces that we're looking at consistently with new technology.

What other people are doing in regards to negotiating their arrangements, that's what they're doing but this is our process and how we focus on new technology.

Surya Mohapatra, Ph.D.: And you know, Ricky, you heard from Ken and you also you heard from me that we are not a believer that having any exclusivity really helps us in the long-term.

Very rarely there's anything in medicine which there is no alternative test.

As far as going forward in our organic growth is going to be fueled by the science and technology and also how we can reduce time to market so you heard that we are working with Celerra Diagnostics and [Ross] Diagnostics and other companies to really bring in technology quicker along with the advancements we do in house with the Nichols Institute

And can you provide us any status in the ovarian cancer testing?

Surya Mohapatra, Ph.D.: Well, ovarian cancer testing over check is the first [PROTUMICS] test and as I told in my prepared comments that we are doing our own scientific and medical evaluations.

We are making sure along with [Colologic] that when we introduce this product it meets all our joint requirements and we're not going to introduce until we are both satisfied in our evaluation.

So there is no time line for that yet?

Surya Mohapatra, Ph.D.: As of the moment it is sometime this year.

Okay.

Thank you.

Thank you.

Our next question is coming from Jim Lane of Argus Partners.

Hi.

Good morning.

I was just hoping maybe you could give us a little bit more color on why there's a need to formalize or change the relationship with Digene relative to how you've interacted with them in the past and any other color on the announcement that came out last night, or this morning, thank you.

Digene like many of our vendors we periodically renew and re-establish those relationships.

We've been working with Digene for the past several years as a vendor and this really is a continuation of this relationship.

Right.

So is there any substantive difference in the way you will interact with them in the future regarding price exclusivity, anything along those lines going forward relative to the way you've interacted with them in the past?

We don't typically comment on specifics of arrangements with all of our suppliers and so we would not be prepared to share any specifics today on this particular arrangement.

Thank you.

Our next question is coming from Kemp Dolliver from S.G. Cowen.

Kemp Dolliver, CFA: Hi.

Thanks and good morning.

A couple of questions.

Just back to the '04 outlook.

Is there anything you are assuming in the background with regard to, say, the overall industry backdrop as 2004 unfolds relative to what you've seen in 2003?

Surya Mohapatra, Ph.D.: No, we are actually assuming 2004 is very much like 2003.

The most important factors that drive our industry is actually the laboratory, utilization is very influenced by the uninsured and unemployed and we are expecting a modest growth, 3 to 4% and that's been taken into account in our guidance.

Kemp Dolliver, CFA: Okay.

That's helpful.

Secondly, could you give us an update with regard to your efforts in the hospital markets since it's probably been about 12 to 18 months since you initially organized that group and set it loose?

Surya Mohapatra, Ph.D.: Yes.

We are pretty excited about what we are doing there.

First of all we have created a dedicated sales and service organization.

We have now also two Nichols Institute, you know, east coast and west coast.

And we have got major contracts and it is on track.

It is on track and what we are actually counting in the future is to really get more market share from the hospital business.

As you know, the hospital revenue is $20 billion and that leads to one-third of that revenue is available for us.

So it's [inaudible] just to give you any specific answer on that particular segment.

Kemp Dolliver, CFA: I'll just try, is it growing faster than the corporate average?

Surya Mohapatra, Ph.D.: I really can't break it down by segment.

Kemp Dolliver, CFA: Okay.

That's fine.

Last question.

Is there, there have been some noises out of MDS with regard to their U.S. operations.

They've been apparently struggling and I think they're trying to decide what to do.

It sounds like it's either for sale or going to be for sale.

Is that something, do they operate in markets where those operations and ventures make sense to you or just structurally inappropriate?

Thanks.

Kemp as you know we don't typically comment about potential acquisition or partnership opportunities.

Kemp Dolliver, CFA: I thought I'd try.

Thank you.

Thank you.

Out next question is coming from Brad Ahmaler of Goldman Sachs.

Good morning.

It's Brad Ahmaler on behalf of Andrew Bhak.

Bob, I may have missed this, but could you remind us why cash flow from operations will be flat to down in 2004?

And secondly going forward should we expect cash flow from operations to grow at or about the rate of after tax cash flow?

Thanks so much.

The answer to the second part of your question is yes, and the answer to your, the first part of your question, we've indicated that cash from ops is going to be in excess of $650 million for '04.

As you know we reported $662 million this year.

A couple of things to keep in mind.

Over the last several years we've been dramatically reducing our day sales outstanding effectively harvesting cash from the balance sheet.

DSOs are now at 48 days.

Is there opportunity for them to go lower?

Yes.

Do we expect to see the dramatic decreases in DSOs that we've seen over the last several years?

No.

Additionally, last year as I indicated in the fourth quarter we had a one time benefit of about $40 million associated with the acceleration of certain tax benefits due to a tax law change in the prior year.

And then additionally in each of the last several years, we've had some pretty dramatic benefits from the exercise of stock options which have provided tax benefits to us that end up in the cash from operations number.

We are not anticipating the same size of tax benefits associated with those.

But the underlying business in terms of the cash flow generated from earnings is going to continue to be very strong and as we go forward you should expect that cash from operations is going to grow commensurate with the after tax earnings.

Thank you very much.

Thank you.

Our next question is coming from Dimitri Perlstein of Tanaka Capital.

Yes, good morning.

I have a quick question.

Can you quantify for us the impact of bad weather in the fourth quarter?

I know you said it was less severe than last year but still maybe you have the number for us?

We didn't give a specific amount.

We indicated that the timing of the holidays, the way they fell this year versus last year, coupled with the fact that we had less severe weather this quarter than last year, although we did have some weather, was about a point benefit overall in terms of volume and revenues for us as we compare this quarter to the quarter last year.

And was included in the guidance that we gave at the beginning of the quarter.

Okay.

Thank you.

Thank you, sir.

Our next question is coming from Gary Lieberman of Morgan Stanley.

Gary Lieberman, CFA: Thanks.

Can you talk about any specific markets where you might be seeing some market share gains that are helping your overall volumes and could you specifically comment on how it's going in the Carolinas?

Gary, as you know we don't specifically comment on particular business units or particular markets.

Surya Mohapatra, Ph.D.: But you know, just to add on Bob, a point here that we are now working across the United States and making sure that we are well represented in all the areas and all the segments and we are seeing encouraging results [inaudible].

And Gary just to your point, there is no one specific market that is significantly impacting the trends one way or another.

Gary Lieberman, CFA: On an overall basis can you comment on market trends?

Are you seeing overall market share gains?

Surya Mohapatra, Ph.D.: As you know our goal is not to go towards market share.

It's very competitive market.

We really focus on [inaudible] revenue growth and we are growing at or above the industry growth rate which I think is about 3 to 4%.

Last year we said that we had certain initiative in Carolinas and Ohio and again we have some traction in those two states.

And as we go forward, we really want to make sure that whether there are other areas where we want to put some focus.

Gary Lieberman, CFA: Not to beat a dead horse but to just circle back and get a little bit more clarity on where you're seeing the benefit in the volumes.

Is it just that the comps are easier but you would have known about that historically so it doesn't sound like that's where it is, but where, are we seeing the economy get better or what is it if you can give us any more granularity?

Thanks.

Gary, as we've told you we've been working very hard over the course of the year to drive efforts to improve organic volume growth and we indicated at the end of the third quarter that we are seeing early signs.

Well, those signs have continued and we've seen an acceleration there and it's pretty much been across the board.

Surya Mohapatra, Ph.D.: Just to add some color, we are putting a lot of focus in sales initiatives.

Our senior managers are driving accountability and not only the sales training our sales metrics and sales performance is really helping us to make sure that we are actually getting new customers and also retaining customers and selling more to the existing customers.

Gary Lieberman, CFA: Okay.

Thanks a lot.

Thank you.

Our next question is coming from Stuart Hozanski of Vanguard.

Yes, good morning.

I had a couple questions for you.

First on the integration with Unilab, have there been any negatives or unexpected issues or surprises with the integration?

Surya Mohapatra, Ph.D.: There has not been any unexpected or surprises as far as Unilab integration is concerned.

I do know we have to divest some business and that went very well and Unilab integration is on track.

We are building a new facility.

We are going to merge two of our laboratories in L.A. area into one and we are looking forward to really completing that work within the next 18 months.

Okay.

Great.

The second question I have is, you're expecting about $650 million or more in cash from operations and about 180, $190 million in Cap Ex.

What is your use of your free cash flow?

As I indicated earlier, Stuart, we would expect to use the majority of our free cash flow to do acquisitions if they're available at a appropriate price for us.

When they're not available we would expect to deploy much of the free cash flow into share repurchases.

And as you know, there's probably a little over $60 million of annual dividends at 15 cents per share per quarter.

Okay.

And final question is, your November '04 convertible, what's the status of that, is that in the money, do you expect that to be converted?

No, I don't expect that to be converted at this point.

I believe that the economics are such that the stock price would have to be a lot lower than it is for that to make economic sense for the holders to convert.

Additionally you should know that the conversion price is actually set at $87.50 on that.

Okay.

So would you expect that to be put to you then?

I don't expect it to be put, again because of the economics.

I believe that the share price would have to be significantly lower than it is today for the economics to make sense for that to be put to us.

Okay.

Thanks.

Thank you.

Our next question is coming from Tom Stern of Chieftain Capital Management.

Yes, good morning.

Given everything you've seen to date in the science, can you talk about what you see as the ultimate potential for [OVACHEK] and also comment about what you see as the approximate timing of launch and where it will be priced?

Surya Mohapatra, Ph.D.: Well as I said, [OVACHEK] is the first [PROTUMICS] test and we are really excited about the potential of this test to detect ovarian cancer.

At what stage it's going to be used and how it's going to be used remains actually the way it's going to come out in the clinical trials but I think there is almost 10 million patients can benefit from this particular test.

Regarding to the timing, it is sometime this year and we are working very closely with Colologics and the scientists to make sure that it meets all our requirements.

Tom, just to follow-up on that.

What we're looking at for initial, the initial target of market would be women at high risk of ovarian cancer which coincides, which corresponds to that approximately or approaching 10 million women.

Let me just follow that up.

The reality is that it looks like the sensitivity and specificity are extraordinarily high.

Practically speaking wouldn't most women who go visit a gynecologist just end up having this test or requesting the test?

Surya Mohapatra, Ph.D.: We would like to think like that but we have to also have [inaudible] and other medical society really recommend that, but at the moment the clinical trials is aimed at the high risk women.

Where do you expect the test to be priced?

Surya Mohapatra, Ph.D.: I can't really comment on pricing.

Thank you.

Thank you, sir.

And our final question is coming from Bill Bonello of Wachovia Securities.

Great.

Thanks for letting me ask a follow-up.

I am going to sneak two in if you let me.

One is, you've referenced the shift in payer mix driving pricing.

Can you give us some sense of what that shift has been?

I mean, going from what to what and what the potential for continued shift is going forward?

Bill, the biggest shift has really been out of capitated into fee for service.

And as we've indicated in the past, we don't expect going forward that the improvements in revenue per requisition will be as great as we've experienced in each of the last two years even though we expect them to be an important element of our revenue growth.

There's a limitation on how much of a shift you can have from capitated into fee for service and I believe that we've enjoyed much of that already.

Additionally, one of the big drivers of the improvements in revenue per requisition has been test mix.

And as you know we've had dramatic growth in our gene-based testing.

We expect that to continue to be a very fast grower for us but with gene-based testing revenues now in excess of half a billion dollars, it becomes tougher for that to grow at the same rate that it has been simply because of the sheer size of the numbers.

What is capitation as a percent of your business now?

Capitation as a percent of our business today total revenues is in the 5 to 10% range.

Is that about as low as it can go?

As I said, I'm not sure exactly how low it can go but I believe that capitation is here to stay and that there have been as I said some dramatic shifts over the past several years from capitated into fee for service as individuals continue to look for choice in their health plans.

But we don't believe that we're going to see the kind of shifts going forward that we've seen over the last several years.

Okay.

And then just finally, often you will give us what the thin layer Pap penetration was for the quarter.

I'm wondering if you could give us that and if you'd be willing, I don't know if you have, are prepared to give any kind of similar information on HPV by any chance.

The ThinPrep conversion at the end of the quarter was 84% on a consolidated basis and at this point in time we are not going to be discussing HPV conversion.

It's really not even so much conversion rate as it is in conjunction with the Pap test.

When you say 84% just so I'm sure, is that truly ThinPrep or is that any mono-layer product?

All liquid-based preparations.

Okay.

And that's where it was last quarter basically?

No, last quarter it was about 82% and this is on a consolidated basis.

The 84% number you're referring to is excluding Unilab, is where it was at last quarter.

Okay.

Great.

Thank you very much.

Thank you.

At this time I show no further questions.

Thank you for participating in the Quest Diagnostics fourth quarter and full year 2003 conference call.

A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics Web site at www.QuestDiagnostics.com.

Investors in the U.S. may listen to a replay of this call by dialing 800-925-1657.

The replay will open today at 10:30 a.m. eastern time and will continue through 11:00 p.m. on February 22, 2004.

Investors outside the U.S. may dial 402-530-8063.

No password is required for either number.

In addition, registered analysts and investors may access an online replay of the call through StreetEvents at www.StreetEvents.com.

The call will also be available to the media and individual investors at Quest Diagnostics Web site.

The online replay will be available 24 hours a day beginning at noon.

Goodbye.