奎斯特診斷 (DGX) 2004 Q3 法說會逐字稿

Welcome to the Quest Diagnostics third quarter conference call.

At the request of the Company, this call is being recorded.

The entire contents of the call, including the presentation and question-and-answer session that will follow, are 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.

I would like to introduce Laure Park, Vice President of Investor Relations for Quest Diagnostics.

Go ahead, please.

Thank you and good morning.

I'm here with Surya Mohapatra, our President and Chief Executive Officer, and Bob Hagemann, our Chief Financial Officer.

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 competitive environment, changes in government regulations, changing relationships with customers, payors, suppliers, and strategic partners, and other factors described in the Quest Diagnostics, Incorporated 2003 Form 10-K and subsequent filings.

As we have previously indicated, this is the last quarter in which we will provide quarterly guidance.

To keep everyone's focus on the longer-term, beginning in 2005 we will provide financial guidance for the full year only.

A copy of our earnings press release, together with any information required under Regulation G, and a text of our prepared remarks will be available in the quarterly update section of our Web site later today at www.questdiagnostics.com.

Now here is Surya Mohapatra.

Thank you, Laure.

We reported strong financial results during the third quarter.

Earnings per share grew by 13%, revenues grew nearly 6%.

We generated substantial amounts of cash during the quarter, $217 million.

So far this year we have returned in excess of $400 million to shareholders in the form of share buy backs and dividends.

We continue to differentiate ourselves in the marketplace.

We do this by providing patients and physicians with innovative science and medicines, advanced information technology, unparalleled access and distribution, and the benefits of our longstanding [governmental] Six Sigma quality.

Now Bob will discuss the quarterly results and provide you with guidance for the fourth quarter and full-year 2004.

I will then discuss some of the investments we are making to generate growth.

Thanks, Surya.

Overall we reported strong results for the third quarter.

We generated solid gains in revenues, earnings, and cash flows despite the impact of hurricanes on our business in the Southeastern part of the United States.

Revenues grew 5.6%, volume increased 3.3%, and reflects a reduction of just over half a point due to the hurricanes.

This represents the fourth consecutive quarter of underlying volume improvement.

Revenue per requisition grew 1.9% for the quarter.

The benefits of changes in test mix and test per requisition continue to be the principal drivers of the improvement with modest increases in pure price.

The 1.9% improvement is a slower rate of growth than reported in the first half of the year, and reflects about .5% reduction from a shift in payor mix associated with certain new business.

We continue to expect revenue per requisition to contribute about 2% to revenue growth in a given year, principally driven by improvements in test mix and the number of tests per requisition.

The rest of the revenue growth in the quarter was attributable to our non-clinical testing businesses.

For the quarter, operating income, as a percentage of revenues, was 18%.

This reflects a reduction of about 60 basis points contributed equally by the hurricane impact and an increase in bad debt expense compared to the second quarter.

The increase in bad debt expense was driven by two of our business units which we are currently addressing.

We expect lower bad debt and improved margin expansion in the fourth quarter.

We are committed to expanding operating margins through a combination of profitable growth and efficiencies from our Six Sigma efforts.

At the same time, we invest to further strengthen our value proposition.

Cash from operations was strong, totaling $217 million during the quarter, an increase of $44 million compared to the prior year.

Days sales outstanding were 48 days, unchanged from the level at the start of the year.

Our goals call for further reducing this level by several days.

During the quarter we repurchased 1.3 million shares of common stock for $110 million, at an average price of $81.64.

We have now repurchased a total of 8.5 million shares for $639 million at an average price of $74.82 since initiating our share repurchase program in May 2003.

Currently, $261 million of the share repurchase authorization remains available.

We continue to view growth opportunities as the first priority for our excess cash flow, with share repurchases the alternative when growth opportunities are not available on appropriate terms.

Turning to our outlook for the fourth quarter, we expect revenues to grow approximately 6%.

Earnings per diluted share are expected to be between $1.18 and $1.23 before the required change in accounting for our convertible debentures, which will reduce earnings by 3 cents, and we expect operating income, as a percentage of revenues, to be between 17% and 18%.

The resulting 2004 full-year outlook is for revenues to grow approximately 8%, earnings per diluted share to be between $4.82 and $4.87 before the special charges recorded in the second quarter, and the change in accounting for the convertible debentures.

We have narrowed the range since our previous guidance with the midpoint of the range unchanged.

A reconciliation of the EPS guidance is included in Footnote Seven of our earnings release.

We expect full-year operating income to approach 18% of revenues, and capital expenditures to be between 180 and $190 million.

Cash from operations is expected to exceed $700 million.

Now, I'll turn it over to Surya.

Thanks, Bob.

We continue to make progress in driving organic revenue growth.

The primary driver of this growth is our strong market differentiation.

Here are a few examples of how we are investing to further differentiate Quest Diagnostics from our competitors.

Our focus on Six Sigma is producing benefits for physicians and patients.

For example, in our Nichols Institute esoteric lab in Chantilly, we improved the turn around time for cystic fibrosis testing by 70% using Lean Six Sigma.

We did it by linking value-added steps and eliminating unnecessary work throughout the process.

As a result, turnaround time improved while specimen volume continued to grow for this extremely important test.

In addition to reducing our turn around time, we also reduced, what I call, the anxiety time for patients and doctors waiting for the test results.

We have continued to expand our access for patients and it is producing results.

Managed care organizations choose Quest Diagnostics for the clear benefits we offer their members and physicians.

We offer patients access to almost 2,000 conveniently located patient service centers for collecting their blood samples.

Each day our professional drivers make 85,000 stops, and our dedicated pilots fly 82 flights to 42 cities, all to ensure that we get the patient samples to our lab quickly and safely for quality testing.

Another significant differentiator for us is our science and medicine which provides patients and doctors with the broadest tests menu.

We continue to seek out new and innovative tests to help physicians diagnose and treat patients.

Our main areas of focus are cardiovascular disease, cancer, and genetic testing.

Recently, we announced availability of an innovative new cancer test called "CellSearch" from Johnson & Johnson's Veridex unit.

This test identifies and counts circulating tumor cells from metastatic breast cancer patients.

Clinical studies have shown that measuring the number of circulating tumor cells in the blood samples can help oncologists monitor the response to therapy.

There are an estimated 80,000 or more patients with metastatic breast cancer in the United States.

We are the only national commercial reference laboratory to offer this test which has been cleared by the FDA.

We launched this test roughly one month following its August publication in the New England Journal of Medicine.

This demonstrates our commitment to science and medicine as well as our focus on bringing important new tests to market quickly.

Another way we differentiate ourselves is through healthcare information technology.

Increasingly, the government and private payors that are interested in clinical integration, pay-for-performance, electronic health records, and in prescribing to improve patient care and reduce healthcare costs.

Quest Diagnostics has unique expertise in the application of information technology to healthcare.

For example, our patient-centric Care360 eMaxx portal enables doctors to aggregate [ph] lab and pharmacy data and other clinical information to improve patient care.

In addition, it allows doctors to verify insurance availability and write the prescription electronically reducing errors and improving efficiency.

Doctors continue to expand their use of our on-line services.

At the end of the third quarter, we were receiving nearly 40% of all test orders and transmitting more than 50% of all test results to doctors via the Internet.

That equates to approximately 2.5 million transactions per week.

All of this investment continue to differentiate us from the competition as well as drive growth and expand operating margins.

Increasingly we have been recognized for our accomplishments.

During the quarter, we were named as one of the nation's top 100 innovators by the prestigious InformationWeek 500 ranking.

Also, Business Week magazine included questdiagnostics.com on its short list of the best websites in healthcare for its extensive and useful library of health information.

We are the leader in a vital and growing industry and are well positioned for sustainable growth.

Last month Quest Diagnostics was added to the Dow Jones Sustainability World Index.

The index contains more than 300 companies from around the world identified as sustainability leaders ranked according to objective benchmarks linked to financial, environmental, social criteria.

We had a strong third quarter and I'm excited about the prospects for our Company.

We'll now take your questions.

Operator?

Thank you.

We will now begin the question-and-answer session.

If you'd like to ask a question please press star one where you will be prompted to record your name.

One moment.

Bill Bonello, Wachovia.

Your line is open.

Good morning.

Just a couple of questions.

You talked a little bit on the pricing, but any thoughts on what drove the pretty significant increase in volume growth for the quarter?

Well, as you know, there is no single factor that really changes our sales productivity.

We have been investing in sales training, put in new sales people and at the same time investing in our value propositions.

So it's a number of factors that's really producing results and I'm very encouraged that our investment is paying off.

Okay.

And then you mentioned the new business that you picked up impacting price a little bit.

Is that new business that was in for the full quarter, or did it build over the course of the quarter just as we try and think about pricing going forward?

Bill, the mix shift was related to principally new business, which slowed the growth by about half a point, and it was related to two things, principally -- Growth in some capitated business and growth in our drugs of abuse testing business.

Both of those at lower average prices than we typically have, but both contributing good profits.

I would expect that in the fourth quarter you'd see payor mix have somewhat of a greater impact than it had in the third quarter.

In other words, the mix would continue to go a little bit towards that capitation and drugs of abuse?

Correct.

Okay.

That's great.

And then just a final question on the bad debt.

Can you just give a little bit more of an explanation?

You mentioned issues at a couple of business units, what kind of issues we're talking about?

Bad debt was up 0.3 of a point from the second quarter, it was at 4.6%, it's now at 4.5% year-to-date.

And in any quarter you can typically have 0.1 to 0.2% in sort of normal variation.

We had a little more than that.

And that was caused by two business units which essentially took their eye off the ball and we are currently addressing.

It's not a collections problem.

It's really a process issue that we're fixing at those two business units and the increase that we saw is not a trend.

In fact, we're expecting lower bad debt in Q4, and for the year we're expecting bad debt to be about 0.5 point less than it was last year.

As you know, long-term our goal is to drive bad debt down to 4% or less.

Okay.

Great.

Thanks a lot.

Bye-bye.

Tom Gallucci, Merrill Lynch.

Your line is open.

Thank you.

Good morning, everybody.

Two questions if I could.

First, you mentioned doing share repurchases but growth opportunities and initiatives still kind of the number one priority for cash but doing share repurchases if you don't see any of those.

I think for a long time you've been talking about a lot of acquisition opportunities out there but maybe the pricing being too high.

Can you talk about maybe what the latest on that landscape brings today?

And then the other question would just be on the contingent convert.

I think you can call that at the end of November if that's right, and I was wondering what your plans were there?

I see you outlined the potential dilution in the press release.

Tom, you're right.

We have been talking about acquisition, but one thing, you must know that we are not going to be anxious buyers, and we will utilize our pricing disciplines.

And I still believe there is a lot of opportunity for acquisition but it has to be realistic value for us and our shareholders.

And we'll continue to evaluate opportunities, whether it is a reasonable fold-in or whether it is acquisition to improve our capabilities.

[overlapping speakers] Is it getting any better out there than it was a while ago?

Is it trending in any direction or is it still just very high prices out there?

Well, I think it's a mixture of what I call aspirations.

So I still believe that when there's an acquisition available which is appropriate for us we will really buy it but if it does not meet our requirement, our ground rules, we will walk away from those kind of acquisitions.

Bob?

With respect to, Tom, with respect to the convert, as I mentioned, the EITF came out with some guidance now that we will have to include that as a security for purposes of calculating EPS and it's going to be dilutive for us.

But it's important to remember that it doesn't change the economics of the security at all, and so the accounting change isn't going to drive necessarily what we do with that security, and what we do with that security is really going to be a function of where the share price is at the time that we have the ability to call it.

Okay.

Thank you.

David Lewis, Weisel, your line is open.

Good morning.

Just a few quick questions.

I guess first of all, Bob, you had talked about last couple of quarters net adds, not [indiscernible].

You talked about PSC adds but didn't specifically quantitate them, and then net adds of phlebotomists.

Can you just talk about trends you're seeing there and has that aggressive ramp up period somewhat moderated here in the third quarter or do you still expect the same aggressive spending going forward the next six months?

I expect that you'll see us continue to invest in those areas, phlebotomy, the rollout of our connectivity products and maintaining our service levels in our patient service centers.

Although the rate at which we've been having to add phlebotomists has certainly slowed as we've seen a slowing of work coming out of physicians' offices or being drawn in physicians' offices, and shifted to our PSCs.

Perfect.

And then Bob, could you also give us a commentary on the L.A. lab facility consolidation timing and potential synergies off of that?

Overall we're making good progress with the integration in California, sales, parios [ph], PSCs, we are very much integrated.

The integration in the L.A. area, Tarzana and Van Nuys, where we're building a new lab, is going to take a little longer than we had initially thought, and -- as a result of the construction plans out there, and we expect to be into that building maybe as late as the first part of '06.

We're certainly pushing to get in there by the latter part of '05.

But it's not changing our outlook at all for ultimately what we expect to realize in terms of synergies and things like that.

Bob, that represents a timing shift of three to six months or more.

It's about three to six months is the shift.

Okay.

And Surya, just one scientific question.

Given your dominant Pap smear market share, are you concerned at all about LabCorps' addition of the Thin Prep Imaging System, what impact that could have on share shifts going forward for you?

Well, you know, what we can only do is to provide the best technology quickly to the marketplace, and we are providing a choice, and we are selecting our technology platform which can do more than one test.

As you know, the [indiscernible] device can do Pap smear and also liquid [indiscernible], and we are, at the moment, rolling out to selective areas in our network.

Okay.

So you're not anticipating any sort of competitive market share losses if one company is offering the Thin Prep [indiscernible] system versus other?

[overlapping speakers] I'm not anticipating any loss of market share.

Okay.

Thank you very much.

Thank you.

Gary Lieberman, Morgan Stanley.

Your line is open.

Thanks.

Good morning.

I was hoping maybe you could talk a little bit about the competitive environment and any impact that you were seeing on price per requisition from any changes in the competitive environment?

Let me first start with competitive environment.

You know, it is a tough competitive environment, but there is no significant changes in the marketplace.

You know, hospitals still have 60% of the total market, independent laboratories have 32%, and the physician office labs have 8%.

The managed care is always at the near top negotiators and what we are seeing is that we are winning business based on our value propositions.

We have been telling people that quality is very important, patient must come first rather than just the price, and, as you know, that we emphasize our value propositions and many times they buy or believe in the value proposition and the quality and the patient work we do, but sometime we have to really walk away from business if it doesn't make sense.

And Gary, just to add to that, as I said when I talked about components of the improvement in revenue per acquisition, overall we are seeing modest improvement in pure price.

It's a competitive environment but as Surya said, we believe that we have a value proposition that helps differentiate us so we're not competing on price alone.

If I could just ask a quick follow-up.

What opportunity do you think there is for the investment in the sales force to more strongly drive the esoteric portion of the business and also the revenue per acquisition at a higher level?

I think the sales force in diagnostic industry is going through a change and should go through changes and we initiated this four years ago by creating a specialty sales force for esoteric and genomics test.

When the doctors have very little time to give it to the sales people, our sales people really have to go and talk to the doctor and be an audit source.

So what we have done by investing money in sales [indiscernible], now we have really changed the way the sales people are trained from two weeks, one week, two weeks, to now 11 to 12 weeks.

Now that gives us a lot of confidence and conviction that our sales people can speak with knowledge and the clinicians look forward to seeing them.

So that's number one.

Number two is apart from genomics and esoterics, the technology-based selling is becoming very important.

So we're also training our sales people to not only look at the territory but also can provide solutions to the clinicians including the information technology and genomics and esoteric testing.

So training sales people, investing in sales, and what are called frontline is extremely important for us and we are very encouraged by the results we're getting.

Okay.

Thanks a lot.

Kemp Dolliver, SG Cowen, your line is open.

Thanks and good morning.

A question relates to the calculation of the hurricane impact and I admit my first cut at the numbers is imprecise, but if I take some of your commentary at face value, it looks like you were estimating there was about 5 to 6 million in lost revenue from the hurricane, and that translated into close to, say, $3 million in lost net income.

My question really is that the relationship between those two numbers, because if my math is correct it essentially would imply that there's no incremental costs associated with those revenue.

Could you elaborate?

Sure.

Kemp, you're close, but the numbers are slightly different.

The revenue impact is about 7 to $8 million or so, and about $5 million in a pretax impact, which translates into the 3 cents that we mentioned.

So there's very little incremental costs that come out in a situation like this, because essentially we're continuing to pay people.

The labs, with the exception of One-Day, continued to be up and operating.

We're trying to get whatever samples are there into the laboratory, and about the only costs that go away in a case like this are the costs directly attached to testing which is the reagent cost and any associated bad debt that you might have with those incremental revenues.

That's great.

Thank you.

One other question, again related to revenue, and that is your non-testing business, it looks like it had a pretty good increase in the quarter.

Could you just discuss the sources of that?

Sure.

The non-testing businesses include several small businesses that we have.

Our clinical trials testing business which had good growth, and continues a trend that we've seen throughout the year now.

Our MedPlus business, which sells our electronic connectivity products, has continued to show growth, and then our kits business, Nichols Institute Diagnostics has continued to show growth as well.

Overall those three businesses contributed about .4 to .5 point to the revenue growth.

You didn't have any contracts true-ups during the quarter, I assume?

No, nothing unusual in there.

Thank you.

Sandy Draper, Draper Investments.

Your line is open.

Thank you.

Two questions.

One just a quick one.

I apologize Bob, if I missed it.

Did you give out the number of share repurchased or just the dollar amount?

The number of share repurchases in the quarter were 1.3 million shares.

Okay.

And year-to-date it's roughly 4.5 million shares.

Also, Sandy, in a footnote to the income statement we'll draft will give you all that detail along with weighted average cost.

Okay.

Thanks, Laure.

The second question, I think it's probably for Surya, in the, in one of your competitor's conference calls, they mentioned some of the slowdown they were seeing in the genomic area was really due to sort of a lack of a strong pipeline, or product pipeline out there and that 2004 had been a little bit weaker than 2003 and 2002.

I'm just curious on your thoughts about that?

What '04 looks like from a test pipeline and what your thoughts are going out into '05 as, you know, the scientific pipeline for new tests?

Sandy, you know, of course, the tests we introduced two years ago will have a rate of growth lower than the tests which are going to be in the pipeline.

I personally feel that our pipeline is strong, and if you can look at, it doesn't have to be all the genomics testing.

We just introduced Veridex, the product which is CellSearch for metastatic breast cancer patients.

We have ImmunoCAP, we have InSure, and when you look at those things along with the tests for women's health, I feel that the number of tests and the type of tests is really going to help us to really move forward.

Obviously the rate will be a little different because you have now a larger base, but I feel very excited about the pipeline and also we are making some changes in our business development area so that we can bring products to market very quickly.

And, as you saw, the CellSearch was introduced just after a month when it was published in the New England Journal of Medicine.

So I feel pretty encouraged.

Great.

Thank you very much.

Thank you.

Ricky Goldwasser, UBS, your line is open.

Hi.

Good morning.

A couple of questions.

The first one is, have you finalized your negotiations with managed care for '05?

And the second one is regarding the calendar year '05 guidance.

Last year you provided preliminary guidance on your third quarter call, you haven't provided guidance this morning.

What's different this quarter compared to last year in terms of visibility and should we expect to see guidance by year-end or on the fourth quarter conference call?

Let me talk about the managed care contract and Bob can comment on the guidance.

First of all, as you know Ricky, that every year we have a couple of contracts we negotiate but we really don't comment on it and the negotiation obviously is continuing, and we are on track.

As regards to the guidance, Bob?

Yeah, Ricky, first of all, there's no change in terms of visibility for underlying operating performance compared to where we were a year ago.

We feel good about the fundamentals of the business at this point.

There is, though, a change with respect to accounting pronouncements, and the accounting for equity-based compensation is going to change next year.

There's still a little ambiguity with respect to that, and as you may know, they just deferred the point at which that becomes effective.

That goes into effect mid-year next year.

So our plans at this point are to give you guidance just prior to or in connection with the year-end earnings release.

Now, with respect to longer-term at this point, we're not giving any specific, we don't plan to give any specific guidance beyond '05 when we provide you that, and as Laure mentioned earlier, we'll be giving annual guidance.

But in terms of the way you should think about us longer-term, we expect to continue growing revenues at or above the industry level, we expect to see continued improvement in revenue per requisition although that's going to moderate over where it's been.

Top-line growth, Six Sigma and electronic connectivity are going to help us continue expanding operating margins and our goal for that over time is to drive it to a sustainable 20%, and we expect to be a continued strong generator of cash.

Okay.

Thanks.

Robert Willoughby, of Banc of America, your line is open.

Thank you.

Surya or Bob, can you detail the ChartMaxx or eMaxx economic model?

Just how you're booking revenues there?

Is there a backlog to profit kinds of contributions we could expect to ultimately see there?

And I guess any other idiosyncrasies to that model perhaps the economics surrounding the RxHub relationship.

Robert, the ChartMaxx systems are essentially booked as revenue when we deliver those to the hospital and have them installed.

They could be anywhere between 1 and $2 million in terms of revenue.

The eMaxx revenues are principally transaction-based and we record those as the transactions are taking place.

Is there a meaningful installed basis yet of the ChartMaxx?

The ChartMaxx, from an installation perspective, there's greater than 70 hospitals that we've contracted with at this point.

And I just had clarification on the CareMaxx [ph], Care360 eMaxx, it's either [ph] on our base services there are no subscription fees associated with that, it's when a physician opts into the premium services such as the ePrescribe and other capabilities that they go on a subscription per-doctor-per-month fee.

And at this point, we have several hundred physicians that are using our premium services.

And that's ramping up very rapidly at this point, albeit a small base.

And is there any backlog that you record?

No.

We're not recording backlog, per se.

But we have backlog of customers who are waiting for eMaxx installation.

And one thing, Robert, is that, if you see our transactions, in a way it is almost, you know, 2.5 million transactions a week, and what we are seeing is that we are gaining momentum as far as our products versus the competitor products and having the lab data and access to PBMs will give us a competitive advantage here, although it's very early day as far as revenues are concerned.

And Robert, just to maybe get at your question, if you're concerned that there may be spikes or valleys in revenue as a result of the way we're recording the revenues for ChartMaxx or eMaxx, that's not the case, we don't expect that.

Okay.

And you might have thrown it out, was there any update in drug testing volumes?

Did you throw a number out for that and then update on the clinical trial support business?

We didn't give a specific number on the Drugs of Abuse testing business, although it is growing, and it's continued to grow throughout the year.

It's picking up rather nicely, it's contributing to our volume growth, it's also negatively impacting the revenue per requisition because it's obviously at a lower average price.

But the impact that it's having on those two metrics isn't the principal driver of either one although it is contributing to it.

And with respect to the clinical trials, the business continues to grow.

We continue to have a good backlog there, and we feel as though that will continue to grow for the remainder of the year at a pace similar to what we've seen so far.

That's great.

Thank you.

Bill Bonello, Wachovia, your line is open.

Great.

Thanks.

I just wanted to revisit a couple of things that have been discussed.

One, I think you said during your opening comments that you feel comfortable with about 2% price growth in Q4, and I'm just curious what makes you feel comfortable if you are expecting a little bit more of a shift to some of the lower priced capitated and what not, if you could explain that?

And then I have a second question.

Yes, Bill.

I did not say that we expect 2% price growth in Q4.

In fact, we don't provide the components of revenue guidance any longer.

What I did say, though, is in a given year we'd expect about 2% of our revenue growth to be contributed by improvements in revenue per requisition, principally driven by test mix and number of tests per requisition.

So that's just being a typical year?

Correct.

And then secondly, just another crack, should we interpret your answer to Ricky's question regarding contracting to mean that you do have a couple of significant payor contracts that have not yet been secured for '05?

Bill, that was my comment.

What I was referring to, that every year we have a couple of contracts and we do not comment on specific contracts and we negotiate the contract depending on the expire date.

And I think that, at any point in time that's the case.

Okay.

That's just the nature of the business.

Okay.

And then did you say you're already offering the CellSearch test?

Yes, we've already had volumes that we've tested on the CellSearch test.

Our sales force along with the J & J Veridex sales force is out there meeting with oncologists.

The early feedback we have from the oncology community on the test is very positive.

This test is really extremely important as far as the 80,000 patients who are suffering from metastatic breast cancer because this is the first test where you could really understand the response to therapy within a month rather than waiting for three or four months to do all kinds of imaging.

And coming from imaging background I'm pretty excited that we have a test now where the patient can know the therapy so quickly rather than waiting for such a long period.

And do you have any sense of sort of how that ramps?

I mean, is that entire 80,000 patient population a logical candidate for the test or is there some subset that you expect physicians to initially use the test for?

You know, it's really, all you have to really know how the clinicians are going to use but I think the whole 80,000 patients, depending on what stage they are, they will go to the doctor and ask for the test just for their peace of mind rather than what level they're at in the therapy.

Now, going forward, obviously the medical societies are going to tell them how many times you ought to do this test, whether it's one time or three or four times a year and we have [indiscernible] along as go with this test.

Interestingly enough Bill, this test was mentioned in the current month's edition of "Ladies Home Journal," and I think it's magazines like that and other women's health-related magazines that really help to drive adopting a lot of these tests as people become more informed about what's out there and what their options are for healthcare.

And are payors paying for it?

At this point, yes.

Can you give us any sense of price point?

It's, the price point on this is estimated to be several hundred dollars.

Okay.

And then one last question.

Any update at all on OvaCheck?

Well, OvaCheck, as you know, is the first proteomic test and one of the things we want to make sure that we evaluate it appropriately and we're working with Correlogic and anxiously waiting to see when they resolve their issues with FDA.

But again, this [indiscernible] test which will really help a lot of patients with cancer.

Is it, from your standpoint if Correlogic gets FDA clearance to go ahead and start using the test, are you, from your perspective, have you validated the test?

Are you ready to roll?

Bill, we are evaluating.

We are increasing our comfort and increasing our reproducibility and sensitivity and specificity in our hand, and when we feel comfortable that we can produce data which can satisfy our science and medical people we'll roll it out.

Okay.

Thanks a lot.

Michael Maguire, Leerink Swann.

Your line is open.

Thanks.

Most of my questions have been answered.

Just one quick one on the topic of growing above the industry rate.

From which groups typically are you taking share from if in fact that's the case currently and how do you foresee that going longer-term?

Our goal is really not to aim at the market share.

I think what we are getting, currently we're getting business from a number of places, from our competitors, sometimes from small laboratories, sometimes from large laboratories, sometime the doctors where we have an account but we have not penetrated the full share in that account.

So it's actually all over the portfolio, where, you know, more doctors are ordering more tests, and there is no one specific contract or section or reason I can point to, to say that we're getting our market share from that section.

And Mike, one other thing to keep in mind is, as the market expands through the introduction of new tests, that's the area in which we expect to gain a significant share because we will be essentially introducing many of those new tests and having a first mover advantage.

Great.

Thank you.

Matt Butin [ph], Argus Partners.

Your line is open.

Thanks.

That was fast.

Congratulations on a nice quarter.

I have a couple of questions regarding both guidance and the volume that might have come from the shift in payor mix.

You commented on the pricing impact, maybe if you could comment on the volume impact that you've gained from that shift in payor?

If you could also maybe talk about your thoughts on market growth for '05, and then with respect to guidance, I believe the 5% revenue and 13% earnings growth is kind of what consensus is looking for, and I wanted to get your comments on whether or not that was something you felt comfortable with, everything else being equal excluding the convertible or the compensation-related expenses.

There's a number of questions that you had in there.

Let me start from the back and go forward.

At this point we're not providing '05 guidance.

And as I said, we'll provide that either just before or in connection with our year-end earnings call.

And with respect to market growth for '05, first, it's tough to estimate what the market has grown for our industry.

Historically, since there's not real good data there, we believe that the market has been growing this year in the 5 to 7% range.

I don't see anything that should significantly change that, although there aren't any real good projections out there for what market growth should be next year.

And what was the other element to your question?

I'm sorry.

Well, you had reported about pricing being negatively impacted by a change in payor mix, and I wanted to get your sense as to how volume was positively impacted.

Volume was obviously positively impacted, but not significantly either way.

I mean, in terms of the impact on revenue per requisition and in terms of the impact on volume, payor mix was a contributor, but not in a significant way.

Thank you.

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Thank you.

Thank you.

Thank you for participating in the Quest Diagnostics third quarter 2004 conference call.

A transcript of today's remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com.

Investors in the U.S. may listen to a replay of this call by dialing 866-407-9273.

The replay will open today at 10:30 a.m. eastern time and continue through 11:00 p.m. on November 26, 2004.

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In addition, registered analysts and investors may access an on-line replay of the call through streetevents at www.streetevents.com.

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The on-line replay will be available 24 hours a day beginning at noon.

Good day.