奎斯特診斷 (DGX) 2005 Q3 法說會逐字稿

Welcome to the Quest Diagnostics third quarter 2005 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 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 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 Chairman 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 result 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 2004 Form 10-K and subsequent filings.

A copy of our press release is available and the text of our prepared remarks will be available later today in the Quarterly Updates section of our Website at www.questdiagnostics.com.

A downloadable spreadsheet with our results will also be available later today on the Website.

Now, here is Surya Mohapatra.

Thank you, Laure.

We put in strong financial results for the third quarter.

Revenues grew 6.4%.

Earnings per share were $0.66 and cash flow was $178 million.

All of our business remains strong.

The quarter was impacted by the hurricanes along the Gulf Coast and performance at our test kit manufacturing subsidiary, NID.

We are driving continued profitable growth of the Company by focusing on patients, growth and people.

Now, Bob will review with you our financial performance.

Thanks Surya.

I'll take us through the third quarter results and outlook for the year.

Our clinical testing business continues to perform well despite the impact of the hurricanes.

Clinical testing revenues grew by 7.1% for the quarter, driven by an increase in volume of about 4% and an increase in revenue per acquisition of 3%.

The disruption caused by hurricanes Katrina and Rita reduced revenues in volume for the quarter by about 0.5% This is similar to the impact we saw last year in the third quarter from hurricanes, which impacted parts of the southeastern United States.

Therefore, while this year's hurricanes reduced our third quarter revenues from what we expected, the year-over-year revenue comparisons have not been affected.

On a consolidated basis, operating income in the quarter was 17.7% of revenues, compared to 18% of revenues for the prior year.

Margins in our clinical testing business continue to expand during this quarter, increasing as a percentage of revenues by over 1%.

The business interruption caused by hurricanes Katrina and Rita reduced consolidated margins as a percentage of revenues by about 0.5% for the quarter.

As was the case with revenues, this impact was similar to what we experienced last year and did not materially impact the year over year comparisons.

What did impact the comparisons was a charge of $6.2 million we recorded in this year's third quarter.

Primarily associated with forgiving amounts owed by patients and physicians in the hurricane affected areas and related property damage.

This charge further reduced consolidated operating income as a percentage of revenues by almost 0.5% and reduced the year-over-year margin expansion by a like amount.

Taking all of this into consideration, our clinical testing business reported strong gains and was the principal contributor to improvements in consolidated DSO's and bad debt expense compared to a year ago.

Our test kit manufacturing subsidiary, NID, which accounts for about 1% of our consolidated revenues; reported revenues and profits for the quarter that were below the prior year levels by 4 million, and $10 million respectively.

And reduced earnings per share compared to the prior by $0.03

NID's performance reduced consolidated revenue growth by about 0.5% and margin expansion by about 1%.

As we previously communicated, late in the second quarter NID instituted a voluntary product hold in connection with an additional quality review of all its products.

As of last week, products which had previously contributed about $30 million in annual revenues had not been released.

NID is actively working to complete the product review and return products to market.

However, this is taking longer and costing more than we had anticipated.

We do not expect NID's revenues to return to preproduct hold to levels for the foreseeable future.

And are taking steps to align its cost structure with its revenues.

The ongoing cost of completing the quality review and cooperating with the government regarding the subpoenas. which we received late last year. will continue to impact NID's performance through at least the end of this year.

Also, during the quarter we recorded a noncash charge of $7.1 million to write down an investment made in 2002.

We continue to generate significant amounts of cash.

Through the first nine months of this year, cash from operations totaled $548 million, compared to $535 million for the same period last year.

For the quarter, cash from operations was $178 million, compared to $217 million last year.

The difference, principally related to the timing of tax payments.

Capital expenditures were $54 million for the quarter.

During the quarter, we paid dividends totaling $18 million and repurchased 2 million common shares for $98 million at an average price of $50.41.

Turning to our outlook for the full year.

We are excluding the operating performance of LabOne and integration costs associated with its acquisition, which we expect to close in early November.

We expect the performance of NID and the impact of the hurricanes to continue to affect our results.

As such, we now expect full year performance to be as follows.

Earnings per diluted share of between $2.61 and $2.64.

This reflects the $0.05 per share impact of the hurricanes and the investment writedown in the third quarter.

It also includes an estimated fourth quarter impact of $0.02 per share from the continuing disruptions from the hurricanes and $0.05 per share from the performance of NID.

We expect revenue growth to approach 5.5%.

The combined impact of this year's hurricanes and the performance at NID is estimated to reduce revenue growth by approximately 0.5% for the full year.

We expect operating income as a percentage of revenues to approach 18%.

The combined impact of this year's hurricanes and the performance at NID is estimated to reduce the improvement versus the prior year by approximately 1%.

And we expect cash from operations to approximate $750 million and capital expenditures of about $235 million.

The change in our outlook for cash and operations is principally due to the change in outlook for earnings.

Now, I'll turn it back to Surya.

Thanks, Bob.

Before I update our progress on our strategies I would like to make a comment about performance NID.

Last quarter we shared with you that NID had instituted a voluntary product hold.

This was done to help ensure consistently high quality of NID products and manufacturing processes.

Despite its financial impact, it is the right thing to do.

NID has improved its quality focuses.

We changed the management team.

NID is working diligently to complete the quality reviews.

And our goal is to return NID's operations to profitability by the end of next year.

Turning to our growth strategy.

We have always said that growth at our Company is an organic growth and acquired growth.

Leading the quarter we drove strong organic growth in the clinical testing business and we also announced a significant acquisition, LabOne.

Combining with LabOne will further solidify our leadership position in diagnostic testing and strengthen our drug-abuse testing business.

In addition, we will establish ourselves as the leader in the new testing business regarding health clinic and risk assessment services to the life insurance industry.

LabOne customers will benefit from access to our industry leading distribution network and our innovative science and technology including Quest Diagnostics' Nichols Institute and our advanced healthcare IT solutions.

Integration planning is well underway.

And we see the opportunity for significant synergies.

We have a received regulatory clearance and we anticipate completing the transaction in early November.

An important element of driving organic growth is our focus on improving the overall patient experience.

We introduced customer service gold standards, during the summer, to help ensure that our front line employees provide warm and caring customer service on a consistent basis.

That includes rating standards for phlebotomists and improving the interaction with patients.

Our focused effort on reducing wait time in testing service centers is working.

Now, that all 2,000 SCS's are connected electronically, we are enabling patients to schedule their own appointment for blood draws by phone or online in certain markets.

We have received very positive feedback from patients, doctors and payors.

Our customers see the difference between us and our competitors.

And that is driving both revenue growth and increased satisfaction in surveys of patients, physicians and hospitals.

We are very encouraged with this positive trend, yet we have more to do.

Recently we published Quest Diagnostics Heart Health Report.

A public service report that analyzes cholesterol levels based on 18 million patient encounters between 2001 and 2004.

This report identified a 10% decline in mean LDL cholesterol levels during that period.

As well as a statistically significant difference between men and women.

We are very pleased to be able to utilize our large and unique clinical database to provide timely and qualitative insights on health of persons on a national basis.

We continue to differentiate ourselves based on our recognized leadership in science and innovation.

And are using our medical expertise to make a difference for patients.

I'm proud that the California Department of Health Services selected Quest Diagnostics' Nichols Institute to provide confirmatory testing for more than 30 genetic disorders on the expanded Newborn Screening Program. program.

We are collaborating with payors to provide early detection of disease that leads to better outcomes and also reduce healthcare costs.

For example, Cigna Healthcare and Quest Diagnostics provided the insured for colorectal cancer tests to about 30,000 Cigna members in Florida.

And we continue to receive recognition from customers and industry analysts for our advanced healthcare information technology solutions.

During the quarter, several large citizen groups elected our Care360 service as a way to enable them to achieve clinical integration.

We see increased use of our premium services such as represcribing.

Also, Information Week, we ranked as Number 42 on it list of Top 100 IT Innovators.

In summary, our clinical testing business is strong.

We are addressing the NID issues.

We are announcing our value proposition.

We see opportunities to continue to grow revenues and expand margins.

And we are excited to join together with LabOne.

We will now take your questions.

Operator?

Thank you. [OPERATOR INSTRUCTIONS] Robert Willoughby, Bank of America Securities, you may ask your question.

Good morning, John Wooden for Bob.

Thank you.

The cash flow and Cap Ex revisions are those primarily hurricane and NID related?

And can you kind of break out the increased spending maybe where that is coming from?

The cash flow revision is principally related to the change in outlook.

We had indicated previously cash flow from operations approaching $800 million.

We're now estimating it to be about 750 or so.

Keep in mind a couple of things.

That the cash flow is going to be lower slightly than last year but not significantly.

Last year did benefit by some sizeable deferred tax benefits and some tax benefits associated with the exercise of stock options, which we are not going to see to the same degree this year.

Probably to the tune of $100 million or so.

And the CapEx is changed some what from where we were previously.

Part of it is the fact that we'll be rebuilding in the Gulf.

The others that we're just continuing to refine the investments, the estimates for the investments we have been making in IT testing equipment and facilities.

Okay.

Great.

And is there any way you can provide some preliminary guidance around LabOne, give us - - I know you are not going to provide 2006 guidance but maybe some expectations around there?

Well, what we have indicated is we don't expect LabOne to have a material impact to our results this year given the time of the year that we are going to close the transaction.

Keep in mind that the months of November and December are generally their softest months.

So, we are not going to get a significant benefit there.

And we've indicated that our guidance is before any costs that we might incur to integrate the operations of LabOne this year.

Although, we don't expect those to be substantial this year either.

And then for '06 we've indicated that we expect the transaction to be mildly accretive.

Okay.

And then one more, if I might.

Can you speak to the propensity for stock repurchases near term given the pending LabOne deal?

Thank you.

Yes, I think that when you think about share repurchases we'll continue to be a repurchaser of shares.

We continue to generate significant amounts of cash.

The borrowings and the leverage that we are going to add in connection with the LabOne acquisition are going to keep us well within the guidelines that we have established for ourselves.

And we will not be anywhere close to being highly leveraged at that point.

I feel very comfortable with the debt capacity that we will be carrying and in the flexibility that we'll retain to either do further acquisitions or share repurchases.

Next question.

Gary Lieberman with Morgan Stanley you may ask your question.

Thanks, good morning.

I was hoping maybe you could give some absolute numbers in terms of what you think the impact of the hurricane was on requisitions?

About 0.5% in the quarter is what we estimated it to be.

And again, when you think about the year over year comparisons, though, there is really not much of an impact.

Because the volume impact that we saw last year in the third quarter is pretty consistent with the volume impact that we saw this year.

So, when you think about the hurricanes this year, the business interruption due to them is pretty consistent both from a revenue impact and an operating margin impact to what we saw last year.

The difference is that with the hurricanes this year we were required to take a charge associated with property damage and then the forgiveness of certain receivables of people in the affected area.

Another difference obviously too is the business interruption is continuing in that region and will be impacting our fourth quarter results as well.

It looks like revenue per req held up pretty well.

Can you talk about what is going on?

It seemed like over the past year or so the managed care companies have become perhaps more aggressive on pricing.

Is that letting up a little bit or are you seeing that start to annualize and that starting to show up in the number or is there something else going on?

Let me start.

This is Surya.

I think as you know, revenue per req has more to do with the mix and the number of tests.

And as we introduce more tests and more new tests and more esoteric tests, that is actually influencing the revenue per req.

And we're really pleased that this quarter we had a strong revenue growth, both volume and revenue per req.

And then just finally, if you could comment on any impact that higher energy costs, I guess specifically gasoline, might be having on the business or that you would expect it to have going forward?

Gary, they are having a modest impact but not enough for us to - - not big enough for anything to show up in our results.

Keep in mind that our fuel costs are actually less than .05% of our total revenues.

Okay.

So do you guys do any hedging or is there any impact?

No, we have not been doing of fuel costs.

Great, thanks a lot.

Thank you.

Ricky Goldwasser of UBS you may ask your question.

Good morning.

The first question is a follow-up on the revenue per req.

Specifically, does the lower utilization due to the negative impact of the hurricane did that have any positive impact on the revenue per req assuming that when you have the per capita contracts and I assume - - ?

Ricky, insignificant.

I'm not even sure it could be measured at this point.

Yes, typically the capitated payments continue even though the volume might be affected.

But certainly the impact of that was negligible in the quarter.

And then secondly, you talked about $0.05 of negative impact from the nonclinical business spilling over to this fourth quarter.

Does the $0.05 include already the reduction in cost savings that you talked about?

Yes, that is the net impact of the performance at NID.

We have already taken some actions to reduce their cost structure, get it more in line with the revenues that we anticipate.

But there is a lot more work to do there, quite frankly.

And we still are incurring costs to complete the quality review.

That is costing us and taking us a little longer than we had thought.

And additionally there is some costs associated with continuing to cooperate with the government around the subpoenas.

And as Surya said our goal is to return NID operations to profitability by the end of next year.

And then lastly, can you remind us where do you report - - or where do you include the clinical trial business?

It's included in our revenues and our operating income.

We don't break it out separately.

And keep in mind that is between 2% and 3% of our total revenues.

But should we look at it basically as also part of the nonclinical?

We have discussed it as part of the nonclinical.

But what we have been talking about in terms of having an impact in the fourth quarter is NID, the test kit manufacturing business.

Okay.

Thank you.

Next question, please.

Bill Bonello of Wachovia Securities you may ask your question.

I have a couple of follow-up questions.

So, if I can ask and then follow-up.

But the first one just - - I want to make sure I heard you right.

Can you restate what you said the impact of NID on revenue and earnings this quarter was?

This quarter we indicated that the impact of NID on revenues was approximately 0.5% and in terms of earnings it was $0.03.

Right, but I thought you gave an absolute dollar numbers, too, just - - did you?

I thought you did?

I did.

It was 4 million in revenues and 10 million in pretax income.

Versus the prior year.

Okay.

So then the follow-up to that is can you explain and I think you kind of did in answering Ricky's question.

But can you explain how it is possible that a $4 million reduction in revenue drives a $10 million reduction in income?

Yes, and it is more than just the change in revenues, Bill.

As we indicated there is some significant cost in completing the quality review and getting products back into market.

We are actually getting assistance from some outside expertise on that.

And then there are some significant costs in complying with the subpoena requests that we have gotten to date and cooperating with the government around that.

So then when we try and think of how recurring or nonrecurring this might be, I mean should we think of at least a $0.05 per quarter impact as we move into Q1 and Q2 of 2006?

Or is this something that is going to be sort of cleaned up in terms of at least the unusual expenses by the end of the year?

Yes, and Bill, as we indicated, we are not yet in a position to provide 2006 guidance.

But what I would tell you with respect to NID is over the course of the next year we expect to turn that business around and have its operations generating a profit for us.

Right, I guess what I'm trying to understand is how much of that $10 million cost is sort of unusual and nonrecurring?

In other words - -?

Ultimately - - your question is ultimately when we are completed with complying with the subpoena and we're completed with the quality review.

Right.

How much of that cost will go away?

Right.

At this point it is not clear and we still have some work to do there.

As we told you it has been taking us longer and costing us more to complete the quality review than we initially thought.

But ultimately those costs do go away.

And then just out of curiosity.

I'm sort of curious.

Was this something that the costs took you a little bit by surprise?

I know when we had checked in earlier the response was, this is immaterial, it is less than 1% of our revenue.

And this seems pretty material.

And so I'm just kind of curious how we moved from sort of immaterial to material?

And that is a good question.

If you reflect back to the second quarter we discussed the issues at NID in connection with our second quarter earnings release.

And at the time NID's performance was not having a material impact on our results.

Since then the product review has taken longer and certainly costing us more.

And NID's performance worsened as a result of that, too.

And actually up until now we believed that we could accelerate certain other cost actions to mitigate much of the NID impact. and as it's turned out some of those things weren't feasible to do in the short term.

That is very helpful.

Just on a totally different topic two other questions.

One just clarifying.

The price in volume growth stats that you reported, those are inclusive of the hurricane?

I assume.

Yes, that reflects the impact of the hurricane.

Okay.

And then can you just comment on managed care and if you are seeing any change in regard to managed care contracting efforts or efforts to try and keep testing in network?

I know that that had been an opportunity that has been discussed in the past.

And I'm just curious if you are seeing any sort of teeth behind those kinds of efforts that maybe hadn't been there in the past.

Bill, as the managed care organizations consolidate obviously our relationships with them increases.

We bring product differentiators and we have the value proposition and we work with them to really create a differentiated product, which they can bring to the marketplace.

Obviously, half of our revenue is managed care and we have a very good relationship and we are working with a number of managed care organizations on a different approach how to really help them save money at the same time we get a fair price.

I want comment on the NID a little bit, too, because, NID is a 20-year-old Company and it has a long history of innovations.

They created products like PTS and their tests useful for thyroid assessment, hypertension, anemia and growth.

And we - - when we got the subpoenas last year we did an internal investigation and NID took the steps in response to the internal investigation and subsequent FDA audit to have a voluntary product hold for all their products.

And we allowed NID to go through product by product review.

This is a very rigorous quality review.

But that is the right thing to do because they have a lot of loyal customers.

As you know the Company's policies and strategies are based on patient growth and people.

I know it has some financial impact at the moment but the Company is doing really well.

And we are going to return the NID operations to profitability by the end of next year.

Great, thanks a lot.

Thank you.

Next questions, please.

Tom Gallucci with Merrill Lynch you may ask your question.

I don't have too much left.

I just wanted to ask one follow-up to that NID and then maybe one other.

Just curious, as you were describing Bob, before that things had deteriorated from the second quarter.

Is that mostly related to the extra costs that you are referring to or is there another issue here on revenues?

Obviously I think one longer term concern for this business is that the customers can't get the tests that they need right now so they are finding it other places, probably.

How is the $30 million or so of product that you don't have available affecting the rest of the business at this point?

Certainly that is one of the things that is having a significant impact on it quite frankly.

That is in the range of about half of NID's revenues at this point.

And that coupled with the added costs of completing the product review is really what's changed the outlook for NID.

What I would tell you, though, is that the generally many of NID's customers have shown very strong loyalty.

And it continues to be good demand for those products.

So, we are actively working to complete that review so we can get products back into market as soon as possible.

That is going to be the best way to fix NID.

Right.

And are there other - - as we are thinking about fixing it from a bottom line perspective are there any other cost cutting initiatives that you can do over the course of the next few quarters?

Or is it mostly just getting the reviews complete and then eliminating the costs that way?

We are continuing to look at all of our options in terms of improving the profitability of NID including additional cost actions.

But as I said, most importantly, though, getting good quality products out into the marketplace as fast as we can.

All right.

On - - I know you break it out in your press release there the impact from the stock option expense with the new accounting rules that are kind of coming upon us here.

Is there any reason to think that due to - - I don't know how you are going to word your compensation programs or anything that the impact is any different in '06 versus what we see in, let's say, in the current quarter in '05?

Bill, we are still in the process of evaluating some things that we might do to our comp - - I'm sorry, Tom, that we might do to our comp plans and it could move it some what.

The other thing that you need to keep in mind, too, is in any one year the pro forma amount is based upon the value of the stock and the options that were granted historically.

I think as the value of stock and options changes so does the compensation costs that hits the P&L.

But we will we able to give you a real good sense when we provide '06 guidance.

And just I'm sorry to go back to NID for one follow-up.

You had said, I think, in the conference it hurt margin expansion by 1%.

Does that mean you were talking about the percentage margin or the EBIT growth?

The change in the percent - - the percentage of revenues relative to the prior year was a couple points higher.

And actually to give you a little more color on that it had impact on both SG&A and cost of sales.

Probably a little more on the cost of sales line than the SG&A line.

Great, thank you very much.

Adam Feinstein with Lehman Brothers you may ask your question.

Great, thank you.

Good morning, everyone.

I just have a couple of questions.

One, could you talk about the subpoena you guys got in the quarter from the 8-K filing from about eight months back?

And then secondly I just wanted to also ask about large contracts.

I guess the - - you guys added the Blue Cross of Florida.

I just wanted to see the benefit the might have provided in on the quarter?

And then I know you guys are going to be losing a business in the Denver market that you had spoke about previously.

Just curious of the timing of that.

And so we wanted to see if you could us any color.

Thank you.

Let me start with subpoenas.

You heard about the NID subpoenas but we have received two more subpoenas.

One in September '05 and the other one in June '05.

The September '05 subpoena came from the U.S.

Department of Health and Human Services, requesting business and financial records.

Particularly regarding the relationship with HMO's,IPA's and GPO's but they want records from 1995 to the present.

The June 2005 subpoena is from the U.S.

Attorneys Office District of New Jersey, they are seeking business and financial records regarding capitation and risks sharing from the government and private payors from '93 to '99.

Now, of course, we are cooperating with the investigations.

We cannot speculate what is the reason for why they are asking for this information.

And the June '05 subpoenas went to other labs and other known lab companies.

But all I can tell you that we take compliance with the law seriously.

And we have strict compliance rules.

And we are cooperating with the government and it is going to take some time to understand what is the reason why they are seeking all this information.

I'll answer the question on I guess volumes and contract related.

Blue Cross Blue Shield of Florida, which you had referred to.

Keep in mind that is really anniversaried during the third quarter.

And as we go into the back part of the year we will have anniversaried on that contract.

And I'm not sure what you were referencing in Denver potentially the Centura relationship, I guessing.

Yes.

And that is one relationship with one hospital.

And it is - - it will be in the guidance as we put it out.

And we just we continue to work with all of our customers around work to provide a differentiator between value proposition and serve them well.

And I'm sorry, just back to the sue subpoena question, if I may, just a follow-up.

It is your understanding that other lab companies did not receive the same subpoena from the Department of Health and Human Services that you guys received last month.

We don't know - -

We can only tell you who has published but we do not know who else got the subpoena, which we good in September '05.

Okay.

All right.

And then just one more follow-up question.

Just from the Medicare front just wanted to see just any thoughts there, there was a MedPAC meeting last week.

They spoke about the medical lab sector as an area they really haven't focused on in the past.

I just wanted to see if you guys had any thoughts in anything from your trade group or any information you could give us?

Thank you.

Obviously through ACLA we are active in part of that.

I know there was discussions at the recent MedPAC around laboratory reimbursement.

We've given feedback on some of their proposals.

And we will continue to educate them on the value that we bring to the healthcare system.

Okay.

Thank you.

Mike Maguire from Susquehanna, sir, you may ask your question.

Just a quick follow-up on the guidance number.

Is there anything on there outside of the $0.12 you've identified in the guidance.

It looks like you brought the range down by $0.12 to $0.14 on the top end.

It there anything else there that's identified outside of the hurricanes and the NID issues?

No, and especially what we have done is brought the lower end of the range down by $0.12 and we've essentially tightened the range now going into the last quarter of the year.

What are the key drives in the - - Bob, one of your earlier comments with regards to margin expansion in the clinical testing business up over 100 basis points.

What is driving that primarily?

It's - - first it is topline growth, which was very nice in the quarter.

But additionally, it is the things that we have been working on all along to make our operations more efficient.

Utilizing Six Sigma.

Deploying electronic connectivity that we have been after.

And those two things actually helped us reduce costs in several areas.

The electronic connectivity is helping us reduce cost in the billing operation.

It's helped us improve the bad debt expense and it's helping us reduce costs in accessioning.

And Six Sigma is actually helping us across the board in just about every aspect of our business.

And then finally, just - - could you remind us of the LabOne long term synergy expectations that you put out there previously?

We indicated that we expect to generate $30 million in net annual synergies upon the completion of the integration, which we expect to take several years.

Steve Hamill from Piper Jaffray you may ask your question.

Good morning, guys.

Just looking at the face of the P&L, I know you have over $6 million hit in other operating expenses.

But there is a pretty good sized pop in nonoperating other income.

Is there some Nichols expense included in there or is that more in cost of sales?

That is actually the investment write-off that we mentioned.

The $7.1 million sits down there.

Okay.

And then just is there any color you can provide, I mean everyone knows United Health has put out that RST, have they iven you any feedback or is there any commentary you can provide as to they are looking for and their rationale for this?

Is it - - how it is going to be structured?

Whether it's going to sole source, multiple providers?

Anything you are willing to share in that aspect?

The policy we really don't comment on any specific contract.

United is a great customer for us and we are really working with them to meet their requirements.

Okay.

And then just as far as your Care 360 goes is there any metrics that we should be looking at there?

Can you update us on percent of tests ordered and any metrics there you are willing provide?

Sure, Steve, orders are sitting right around 45 - - 44% to 45%.

And reports are about 75%.

On the premium services side we are seeing some growth on those as well.

Okay.

Great.

Just one point about electronic connectivity.

We started this four years ago and people are wondering why are we investing money in IT.

Our philosophy is not to put anybody out in our customers.

And now, having electronic connectivity connected to all of the service centers producing 75% of the results on the Web.

Not only helps it really us but helps out patients and doctors because they can get the results anywhere at any time.

And this is going to be a very - - this has been and this is continue to - - is going to be a key differentiator when we continue our business with our patients and the doctors.

Is there any way you can kind of quantify in dollar terms how this is impacting your cost structure?

The cost structure - -

One way to think about it as I mentioned earlier it is helping us reduce costs in accessing.

It's helping us reduce costs in billing.

It's helping us reduce bad debt.

And a big piece of the improvement in SG&A is due to some of the connectivity that we're deploying.

Fair enough.

Where it really helps is the growth because as you see our organic revenue growth and this is not just one thing only we focus on.

We have a value prop position and one of the key value positions is our advanced IT.

And this is suddenly helping us to gain the mind and the soul of doctors and the hospitals.

Thank you.

Kemp Dolliver of SG Cowen & Company.

Sir, you may ask your question.

Great.

Thanks.

Two questions.

First on the hurricane impact.

What exactly do you need to do with regard to rebuilding facilities and how long will that process take?

Frankly the rebuilding effort in the Gulf region is going to take quite some time.

Our business in that area, we are continue to service out of other laboratories right now.

We will need to rebuild our presence there.

And frankly, we're going to be competing with everyone else who's looking to rebuild in that area.

So I think it will take quite some time for that business and that region to get back to where it was prestorm levels.

But we are doing what we can right now to make sure that we are servicing the business coming out of that area as effectively as possible.

Okay.

And with regard to the NID issue, what is your sense as to where you are in the process?

Have you completed five out of ten steps, eight out of ten steps?

Just I know that the - - I have seen this with pharmaceutical companies and it - - they are - - they end up in the same boat.

It always takes longer than expected.

But any sense of where you are if you were looking at this on a flow cart?

No, we have, of course we have many flowcharts.

But as you would understand, this is a very rigorous product by product review.

And what we are finding is that our own process is strict enough to understand what we need to do.

And sometimes while we are reviewing the product by product we come up with other issues that need clarification.

So, I would not be surprised if some of the products need regulatory filing to clear it before it goes back to the market.

Kemp, and to go back to what Bob had indicated, there's right now products representing 30 million in revenue that we are completing the product review process on yet.

And we are working diligently to get that completed as timely as possible.

But I think we've made great progress in establishing the process and one that we feel good about.

So, that as products do clear it we will have a high level of confidence in those products.

Okay.

That's helpful.

And what is your esoteric mix now and how does it compare to last year?

Kemp, our esoteric - - our gene-based and esoteric revenues continued to grow at over 10% percent on a year over year basis.

And they're - - as a percentage of revenues it's looking pretty similar to where we were sitting last quarter at about 17% of revenues.

Thank you very much.

Mike Johnson with EAC Management.

You may ask your question.

Yes, thank you.

The LabOne meeting is set for October 27, I heard you say close early November.

I was just wondering why early November as opposed to the 27 or 28 of October.

Thank you.

Just because it takes time to put several things in place.

And I think if you would take a look at the agreement you would see that we have roughly five business days or so to complete the transaction after all of the hurdles are addressed at that point.

And the last one being the shareholder vote.

Is the vote the last hurdle?

Yes, it is.

Thank you.

David Lewis from Thomas Weisel Partners you may ask your question.

Bob just a couple of follow-ups on NID.

Should we assume on the $30 million of business you are carrying kind of a classic IBD reagent margin of something like 50% to 60%.

We have not disclosed the margins that we generate on NID.

Historically, they had not been dramatically different, though, than our clinical testing business.

So, the principle offs here are simply the spending to get the business up to kind of regulatory par and really isn't about the true profitability impact on the 30 million?

I didn't catch that.

I'm just surprised that the reagent business is not carrying a higher gross margin than your classic 40% service business.

Well, if you are talking gross margins certainly the gross margins on the products are relatively high.

And although we have been able to reduce costs outside of the manufacturing process in SG&A and areas like that we have not been able to remove costs to completely offset the margin erosion.

So, yes, from a gross margin perspective it is much higher than the 20% margins or so that we generate as a Company.

If you look into the fourth quarter and we take that $0.05 impact; if we had to do it in percentages, Bob, what percent would be regulatory and other related improvement spending and what percent would be the operating business?

David, we haven't broke than out.

And to some degree they are related, frankly, as we go through the quality review and complete that process.

So, at this point it would be difficult for to us give you any specificity on what those two pieces are.

But certainly with $30 million of products not out the door at this point a significant piece of it is the impact on revenues.

But again, as I said earlier, we have these ongoing costs of the quality review as well as complying with the subpoenas and ultimately those costs will go away.

And as we said we are driving to return operations to profitability by the end of 2006.

And, Surya, you mentioned you still find the business to be strategic.

We had thought in the past Quest had looked to part with this business.

If this business returns to profitability sometime during the 2006 period is a strategic alternative to maybe selling the assets still on the table?

David, we look at all options.

But I personally feel that NID with its loyal customer base around the world and the - - and with the platform technology is very important for us going forward.

And they have a number of products which are unique.

However, as we go and looking at the NID operations obviously we are look at how to really get this product back to market first and then get it to profitability.

And then meanwhile, as I've always said, that Quest Diagnostics looking for ways how to really grow.

And one of them may be having some other strategic products, which might really even fit into the NID platform.

And just lastly, Bob, can you update us in terms of the West Coast facility buildout and kind of how close we are there?

We actually have moved some operations principally administrative operations into the new facility at this point and we expect in the early part of '06 to be transitioning the testing into the new facility.

So, the majority of the synergies, if we were going to see synergies from the buildout, we likely would not see in the fourth quarter, would start seeing this in the first half of '06?

Correct, we are not going to see those until '06 until we actually completed the transition of working.

Thank you very much.

Next question.

I have no other questions at this time. [OPERATOR INSTRUCTIONS] Thank you for participating in the Quest Diagnostics third quarter 2005 conference call.

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