奎斯特診斷 (DGX) 2006 Q3 法說會逐字稿

Welcome to the Quest Diagnostics third quarter 2006 conference call.

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

The entire contents of this call, including the presentation and the question and answer session that will follow, are the copyrighted property of Quest Diagnostics, with all rights reserved.

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

Now I'd 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 answer to questions may contain forward-looking statements that are based on our 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, payers, suppliers and strategic partners, and other factors described in the Quest Diagnostics Incorporated 2005 Form 10-K and subsequent filings.

A copy of our earnings press release is available, and the text of our prepared remarks will be available later today in the quarterly update section of our website at www.questdiagnostics.com.

A downloadable spreadsheet with our results, as well as a restatement of our prior quarters for the discontinued operations treatment of NID, as well as supplemental analysis, are also available on the website.

Now here is Surya Mohapatra.

Good morning and thank you, Laure.

We reported strong financial results for the third quarter.

Revenues increased 16%, earnings from continuing operations grew 21% to $0.82 per share, and cash flow was $235 million, a 32% increase over 2005.

Our business is performing very well.

Now I will turn it over to Bob, who will discuss our third quarter financial performance.

Then I'll address the United HealthCare situation and also the growth drivers for our business.

Thanks, Surya.

It was another quarter of strong results, driven by the performance of our clinical testing business.

As we go through the numbers, I'll separately quantify each of the major factors impacting the quarter.

Revenues from continuing operations grew just over 16% for the quarter, with the acquisition of LabOne contributing just over 9% and the recently completed acquisition of Focus Diagnostics contributing 1%.

A little over half of the LabOne revenues were generated from the risk assessment business, with the remainder classified as clinical testing.

Our clinical testing business, which accounts for over 90% of our total revenues, grew 10.5% during the quarter on a volume increase of about 5% and an increase of revenue per requisition of 5.4%.

LabOne contributed almost 5% growth to the clinical testing business, principally reflected in volume.

The increase in revenue per requisition continues to be primarily driven by a shift to a more esoteric test mix and an increase in the number of tests ordered per requisition.

Please note the quarterly revenue and buying comparisons for the prior year were reduced by 1% due to the number of business days in the quarter, and increased by almost 0.5% due to last year's hurricanes.

Operating income, as a percentage of revenues, was 18.5% for the quarter and reflects an improvement of about 1.5% from the prior year on an apples-to-apples basis, driven by the performance of our clinical testing business.

Clinical testing margins continue to benefit from solid top-line growth, efficiencies from our -- from the use of our physician connectivity solutions and continued benefits from our six sigma and consolidation efforts.

Expense associated with FAS 123(R) reduced margins by about 1%, and the results of the LabOne business, which for now carry lower margins than the rest of our operations, reduced margins by another 1%.

We remain on track to realize the $40 million in annual synergies we committed to in connection with LabOne, most of which will be realized in 2007.

Diluted earnings per share from continuing operations increased 21% to $0.82.

The growth in earnings was driven principally by strong performance in our clinical testing business.

In addition, $0.02 of the improvement was driven by a lower tax rate, resulting from the resolution of certain income tax contingencies in the quarter.

Included in footnote seven of our earnings release is a table, which summarizes the impact of revenues, operating income and EPS of the various items I just discussed.

Cash from operations in the quarter was $235 million, an increase of $57 million from the prior year.

During the quarter we spent $230 million or acquisitions, made capital expenditures of $45 million and repurchased $22 million of common stock.

Days sales outstanding were 48 days compared to 46 days at year end.

A temporary stoppage in Medicare payments caused a one-day increase in DSOs.

Subsequent to the end of the quarter, Medicare payments resumed and the DSO impact reversed.

In addition to funding the Focus and Enterix acquisitions, we repaid our $275 million note, which came due.

We utilized existing credit facilities and cash on hand to complete these transactions.

The wind-down of NID's operations is complete.

As such, we've classified NID as a discontinued operation for all periods presented.

During the quarter, NID generated a $0.02 per share loss, which included facility closure and severance costs.

Turning to guidance, as we typically do, we will provide 2007 guidance in January in conjunction with our year-end call, at which time, we will provide additional information related to our change in status with United.

For the full year 2006, we expect results from continuing operations as follows;

We expect revenues to grow approximately 15%.

This excludes the impact of potential additional acquisitions.

We expect operating income as a percentage of revenues to approximate 17.5%.

This includes the impact of FAS 123(R), which is estimated to reduce margins by approximately 1%, and also includes the impact of integration charges recorded in the first quarter.

We expect cash from operations to approximate $850 million and capital expenditures to be between $180 and $200 million.

And lastly, we expect diluted earnings per common share to be between $3.05 and $3.10.

Now I'll turn it back to Surya.

Thanks, Bob.

Now I will discuss the United situation and our growth opportunities.

As you know, our existing contract with United HealthCare continues to run through end of 2006, and we will become a non-contractor or out-of-network provider effective January 2007.

We have had a longstanding relationship with United and it is unfortunate that we could not come to reasonable terms.

United accounts for approximately 7% of our revenues.

It is going to take some time before we can estimate the financial impact of this contract change, and for competitive reasons, we will not discuss our market strategy.

What we can discuss is our goal, which is to keep as much of the United business as possible, now and after January 1st.

We are developing and implementing comprehensive plans to achieve that goal.

We have mobilized key leaders across the Company to develop plans for retaining business and reducing costs to the extent that volume changes.

We are continuing to evaluate our rights as out-of-network provider in each of the states and for each of the plans, and are preparing to defend those rights.

And we are educating patients, their physicians and employers that there is a difference between laboratories and that when it comes to health care, they do have a choice.

We are grateful for the support we have received from patients, physicians and employers for the position we have taken.

We estimate we have approximately half of United's members, and we believe that this is a result of our expanded network and high-quality service.

For example, in the New York tri-state area, we have more than 300, and in California, we have more than 450 of our own [inaudible] service centers staffed with skilled phlebotomists focused on enhancing the patient experience.

More than 90,000 doctors have come to rely on us for electronic ordering and delivery of test results over the last several years.

United has eliminated Quest Diagnostics as an in-network provider.

This could have the effect of trying to limit the ability of doctors and patients to choose, though doctors and patients can continue to choose Quest Diagnostics after January 1st as an out-of-network provider and to avoid unpleasant disruptions.

It takes years to build trust for the physicians and patients, and we strongly believe that the service we provide them is not a commodity.

Laboratory test results drive more than 70% of those care decisions.

We believe in the value we bring and have invested to enhance patient care.

One thing is certain.

Each of our 42,000 employees is focused on continuing to provide superior service to all of our patients and physicians.

We will fight for every doctor and every patient.

At the same time, we continue to drive our growth strategy.

We will grow organically by winning new customers and introducing new tests, and through selective acquisitions.

We are encouraged by the third quarter results.

Gene-based test for women's health continued to grow in double digits.

This was driven by continued strong emphasis in HPV and familia and gonorrhea testing.

Additionally, we have further strengthened our industry-leading endocrinology offering.

We are seeing strong acceptance of testing using tandem mass spectrometers to provide increased sensitivity and specificity for many of our hormone, regimen and toxicology tests.

Also, allergy testing using aminocap grew more than 20%.

And we continue to build our pipeline of innovations to enter new tests for future growth.

We are announcing our connectivity solutions, which drive loyalty among physicians.

Our [inaudible] platform has enabled us to receive nearly half of lab orders and send more than 80% of tests results online.

We are also driving growth through selective acquisitions.

In third quarter, we completed the acquisition of Focus and Enterix, and now have the worldwide rights to their proprietary test for infectious disease and colorectal cancer.

Focus provides [inaudible] diagnostics for infectious disease, autoimmune disorders and genetic testing.

The Focus select test is a gold standard for laboratories worldwide.

Enterix provides the InSure test for colorectal cancer screening.

The [inaudible] a new version of InSure that can be performed in physicians' offices.

We anticipate introducing this test early in 2007.

Additionally, our integration of LabOne is on track and we have completed the consolidation of labs in southern California.

We continue to be bifocal.

We are working to optimize our operating performance in the short term, including retaining the United business.

At the same time we are taking the necessary steps to ensure long-term profitable growth.

In closing, our business is performing very well.

We remain focused on driving profitable growth.

As a health care service provider, putting patients first is our first responsibility.

Thank you.

We'll now take your questions.

Operator?

Yes.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is coming from Tom Gallucci from Merrill Lynch.

Good morning.

Thank you very much.

A couple of questions.

First, Bob, wondering on the price per [inaudible].

Would Focus have had much of an impact there?

I think it was a higher esoteric sort of acquisition, so as we're thinking about the strong increase, would that maybe account for a bit of the differential that you saw third quarter versus maybe in the first or second?

Yes, it did, Tom.

As you just mentioned, Focus does have a higher esoteric mix of business.

And when you look at the revenue per req increase this quarter versus the revenue per req in last quarter, the improvement of about 1% is really principally driven by mix, a combination of test mix from the Focus acquisition, and also a combination of payor mix.

We had a drug screen relationship with -- which was very low-priced business earlier this year.

Okay, great.

On the CapEx, I think you reduced it a little bit when you reported second quarter and now you reduced it a little bit further along with this quarter's release, is some of that related to United or are there some other things that we should be thinking about?

There's no specific adjustment to our CapEx spending as a result of United at this moment.

We're looking at our spending to date and reassessing the timing of certain of the projects that we have going on.

And like anything else, we continue to manage it down to be as efficient as possible there.

Okay.

One more or two more, if I could.

You mentioned, Surya, the electronic connectivity.

I was wondering if you had the data, the United testing that you're doing these days.

I think you said on average you're getting about half of the orders, if I remember, electronically in general?

Do you know if United tests, specifically, would be higher or lower than that average?

No, I think you can assume at least half of the orders and 90% of the results going by electronic means.

Okay.

So they'd be at least kind of at the average?

Yes.

And then on the acquisition environment, you've talked about maybe doing something a little bit more outside the box in the past.

Can you update us kind of on your latest thinking and what you see in terms of availability out there or pricing?

Thank you.

Well, first of all, as I said, that we need to be bifocal.

We have to run the business, but at the same time we are preparing the Company for the long-term growth.

We have to find a way how to leverage our assets, and our assets are the 145 million patients and the [230,000] doctors and the very large distribution network.

So as I told before, there are a number of opportunities for us to grow.

We can take our knowledge and expertise to the international market.

We believe that over the long term, testing is going to move to the patient's bedside and we can utilize our testing expertise by introducing point-of-care products and devices.

We can move to the adjacent markets, whether it is diagnostic imaging or whether it is health care IT.

But we are a disciplined buyer.

Any acquisition candidate we consider has to be well run, it has to make strategic sense, and it has to make economic sense.

Thank you, sir.

Our next one is coming from Ricky Goldwasser from UBS.

Good morning.

Excluding the LabOne contribution, volumes were slightly up, I think, for the rest of the business, about 1% to 3%.

First of all, as we think conceptionally about next year as you anniversary the LabOne acquisition and you can lose some of United business, should we expect negative volume trends but increasingly improving price?

And then, two other follow-up questions.

One, does the '06 guidance include or exclude the one-time write-off that was included in guidance that you provided on the second quarter?

And also, have you updated your synergies from LabOne, or is it still in line with what you expected, what you told us on the second quarter conference call?

Thank you.

Okay, Ricky.

I think I've got all your questions here.

With respect to volume for next year, at this point, as you know, we're not providing guidance for '07.

We'll do that in January.

And typically, we don't provide guidance for volume and revenue correct, anyhow.

We do it in terms of total revenue growth.

I will say, though, in terms of the volume this quarter, one of the best ways to look at it is, if you go to the footnote seven in the earnings release, you'll see a little table there, which reconciles the impact of acquisitions, the impact of last year's hurricanes, and the number of business days this quarter to try to get you to an apples-to-apples impact there.

But one of the things I think you'll see as you go through that is, it was essentially flat in this quarter in terms of volume.

And that's really because of the fact that there were two very low-priced relationships, which were marginally profitable but which ended.

One of those is the drug screen testing relationship I just mentioned earlier and another was a hospital lab management agreement.

And the two of those had the impact of reducing volume growth close to 2% or so.

But they also had the impact of improving the revenue per acquisition over the prior year by an excess of 1%.

So, just coming back to -- as we look about the business that we take on and try to retain, it's mostly focused on making sure that we're driving profitable growth here.

With respect to '06 guidance and whether or not to the write-off that we took earlier is in there, yes.

Everything is in there that's guidance from continuing operations, including any charges that we took for integration earlier in the quarter -- or earlier in the year.

And as far as synergies go, I think on the last call we told you that we raised the synergies for LabOne to $40 million a year.

We feel very comfortable holding at that number.

And the integration is on track and we fully expect to realize the vast majority of that in '07.

Thank you, sir.

Our next one is coming from David MacDonald from SunTrust.

Good morning, guys.

Bob, I was wondering, can you give us a sense of what the share repurchase activity has looked like since the end of the third quarter?

And then, just a little bit more color on the 15% full-year revenue guidance, can you clarify if that -- do we have to back out NID out of Q1 and then grow it 15% from there or exactly what's the 15%?

Okay.

First, on the share repurchases, one of the things that you should remember that we're not going to necessarily be in the market every quarter, repurchasing the same amount of stock.

You know, this past quarter we spent $230 million on acquisitions.

Therefore, we throttled back a little bit on the share repurchases.

We will be in the market in Q4, more so than in Q3, certainly.

But as I think about the cash, our first objective to put it to use first for growth, and then secondly, use any excess cash for share repurchases when growth opportunities aren't available at the right price.

And essentially, what we look do is take all of our free cash flow and invest it in growth and share repurchases.

And if you look over the last few years, we've taken all of our free cash flow and more and essentially invested it in acquisitions, share repurchases, and you should expect that to continue.

There's also a spreadsheet out on the website that'll give you 2005 and 2006 revenues, restated to exclude NID.

And the 15% growth that we're talking about this year is for continuing operations.

NID is out of both last year's base and this year's numbers.

Thank you.

Thank you.

Our next one is coming from Arthur Henderson from Jefferies.

Hi, good morning.

Just following off of David's question, you have about $440 million left still available on your repurchase authorization?

446.

446, okay.

Surya, just one quick question.

You had mentioned that you were -- the doctors and patients can choose Quest as an out-of-network provider once we kick into January 1 and United moves out-of-network.

Now, the question I have is do you get the sense that there are a lot of physicians there that may be confused by the changeover, and this is a lot of the effort that you're going to initially be doing is going to be educating those physicians and those patients?

Yes.

First of all, nothing changes today.

And because we saw half of United members, we have very strong relationship with the doctors and their patients.

And we are educating the patients and the doctors that is they have a choice.

And we're also evaluating what is our right as a out-of-network provider.

But also let me make some comments about the managed care of United.

Most of the managed care organizations evaluate based on multiple criteria.

Size of network, size of service, and also [American] quality, and the member, which is [inaudible] reference and price.

So we believe that, by educating the doctors and the patients and looking for our rights, we will continue providing the service to the United members and we will mobilize the whole Company to hold as much of the United business from January 1st.

Okay.

Great.

And one last question and I'll get back into queue.

Since the United announcements, have you seen any trends in pricing discussions or anything on the managed care front that can you update us on?

Is it still pretty stable or what's your outlook there?

You know, the marketplace has been competitive.

But, you know, whether this United contract changed the landscape or not, it all depends on execution.

In the name of affordability, one should not just regard medical quality and ignore physician and patient preference.

So this is going to be the real test of whether the patients and the physicians have a say in which laboratory they're going to select.

Great.

Thanks, very nice quarter.

Thank you, sir.

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

Surya, I guess it doesn't sound like the acquisition strategy as you've laid it out has really changed that much.

Maybe I'm just not picking up on some subtleties.

No, no, no.

Acquisition strategy has not changed.

We're not [inaudible] because of United, but we are building up, as you see, brick by brick.

Now we have Focus and we have acquired the worldwide rights for infectious disease.

Now we acquired Enterix, which we have worldwide rights for colorectal cancer.

So we are actually progressing our acquisition strategy.

And you will see as we go forward, depending on what opportunities are available, we will move to international and we will build up our other platform for growth.

Well, I guess my concern might be can you give us a little bit more granularity in terms of going forward.

Is the United an issue that would spur to you do more acquisitions of lower-end commodity testing, companies in certain markets or should we really just continue to focus on esoteric and a pathology franchise, or -- you know, really -- isn't this the platform to really highlight a little bit more of your strategy in light of the recent setback here with United?

Well, first of all, we always bid for a couple of contracts every year.

And so nothing really changed just because we lost a contract, and we have not given up in as far as getting the business.

Our acquisition strategy does not change.

Our strategy of the Company [inaudible] and growth and people does not change.

And we have had in past a difficult situation when people have unreasonable demands, and we have grown as a stronger Company.

So we are going to continue our strategy going forward, and as we find the right opportunity, we are going to let you know.

But we're focused on the core business and we're going to continue the rest of the business growing much faster than before, depending on what new products we're going to introduce.

And you saw that we are introducing a number of esoteric products.

In terms of strategies like diagnostic imaging, which you've spoken to at some point, and possibly moving into the physician testing markets here through an acquisition of some sort, I mean, these are more outside the box kinds of initiatives with longer-term tails on it.

Would those be on the shelf for a while or is it still full-speed ahead on some of those strategies, as well?

It's still on the agenda.

Nothing changes because of United.

And you know, this is a long-term contract, it's all in the execution.

And we are not accelerating acquisitions, neither we are [decelerating] our strategy.

Thank you.

Thank you.

Thank you, sir.Our next one is coming from Bill Bonello from Wachovia Securities.

Hey, good morning.

Have a handful of questions, if I can.

One is just -- when you say that, Bob, that margins increased on an apples-to-apples basis, I just want to make sure what you're not -- what you're considering unusual.

Is that just excluding NID or anything else?

Bill, NID is totally out of it because we're reporting margins for continuing operations.

Yes.

Again, if you go footnote seven in the earnings release, you'll see the things that we believe you want to adjust for to get more of an apples-to-apples comparison.

Okay, perfect.

That's all I've got there.

No, that's great.

And then, can you update where you're at with your lab consolidation and maybe give us some sense of how that's impacted cost in the near term and how longer-term it might be a benefit?

Sure.

In California, as you know, earlier this year, we concluded our consolidation of laboratories into a new facility that we built there, and we're starting to see benefits from that, as we speak.

We are in the process of consolidating facilities in connection with the LabOne integration.

And we're starting to see some benefits from that, although the big benefits will actually occur next year.

And as we typically do, we're constantly evaluating the lab footprint and where it makes sense to have facilities, and making sure that we've got the most effective and efficient operations and locations that we can.

Okay.

Now, when you talk about that you're actually see something benefits already, I guess I would have imagined that maybe in the quarter you would have seen some duplicative costs as you're transitioning from one lab to another.

But it sounds like that's not necessarily the case?

No, you see transition costs.

That's certainly there and those are planned, but the benefits that we had planned for we are also realizing at this point.

Okay.

That makes sense.

And then, have you given -- you maybe just won't comment on this -- but have you given any reconsideration to utilizing the site [test] imager, just given the fact that it seems like physicians are adopting that, you know, test, and it seems like pricing has held?

I mean, that's not -- as you know, Bill, we -- we're out constantly evaluating technology and we actually do have it in the legacy LabOne facilities, as well as we're evaluating the -- continuing to evaluate and offer the Focal Point technology in other markets as well.

So we continue to offer a choice and we're evaluating.

And, obviously, a key piece right now is educating physicians around HPV, which is increasingly important around cervical health.

Okay, that's helpful.

And then, just two more questions if I can, and I'll jump back in the queue.

Can you -- Surya, can you just explain from your viewpoint, the benefits of owning Focus and Enterix as opposed to simply contracting with them?

Well, you know, I think it's important to know that, as we look to the future, testing might move closer to patient in some areas.

And what Focus and Enterix have given us, the worldwide rights, just not in the U.S., to enter into different marketplace, in infectious disease and in colorectal cancer.

The other advantage of owning this is that we could bring products to the market much quicker than they do on their own.

So, our strategy has been, if there is a product which we think we can leverage our assets and expertise, we invest where there's equity, and then we look at the companies and see if it can help us and we can help them, then we acquire.

And that was the basis on the Focus acquisition.

And not only infectuous disease, but also [inaudible] disease and genetic testing, and we have a number of R&D projects going on, which, in the future, is going to accelerate product introduction.

And, Bill, the Focus acquisition we also think will help us accelerate growth in the hospital market, given that that's an important customer base for them.

Okay.

And, when you talk about the testing moving closer to the patient, the connection there on Focus and Enterix, is that simply that, if that market grows, you get it up and established, but then it becomes something that doctors can do more in their office or more point of care, you still would continue to get some profitability?

Or I'm not, I don't know (multiple speakers) connection between Focus and Enterix.

Well, it's not only Focus and Enterix, but other products which we are licensing.

And I believe the central laboratories are like main frame and the physician office laboratory is like the PC, and one day there will be some point of care like blackberry.

So you are absolutely right that so as the leader in diagnostic testing, we want to make sure we don't lose out what's going to happen in the future.

And it's a small part, but we'd be able to really invest and grow those business and take care of that opportunity that may arise in the future.

Yes, we certainly see the market for a laboratory-performed test continuing to grow, but we see it expanding, as testing moves closer and closer to the patient.

Is okay, that's helpful.

And just the final question is one connected to United.

In New York, particularly, is New York a state where you're allowed to client bill?

New York is a non-client bill state, Bill.

It's a non-client bill.

And does that mean that -- just so I understand, that would mean (multiple speakers) physicians can't -- physicians can't -- just so I understand what that means, then, you couldn't then shift it so that the physician became your payor and they dealt with United as a -- that wouldn't be an option then, I take it?

In the state of New York, there are anti-markup rules in place, such that as a physician cannot mark up a bill and send it on.

Okay.

Is that true with the hospital, too?

No.

No, we don't believe so.

Okay.

Great.

Thank you very much.

Thank you, sir.

Our next one is coming from Adam Feinstein from Lehman Brothers.

Great, thank you.

Good morning, everyone.

Several questions here.

Maybe just to start, a lot of talk about UNH here and just some of the lateral impact for the sector.

I guess, without mentioning specific contracts, are you aware of any other big contracts where payors are looking to consolidate the number of labs they are currently using?

Do you have other RFP's that you are currently involved with related to contract consolidation?

Adam, this is Bob.

We're always, responding to RFP's, as you could expect.

But we don't necessarily see a trend of payers looking to consolidate to single providers.

That's not something that we've seen in the RFP's.

Okay.

We believe most of them feel it's very important to have broad access.

Yes, but just to amplify, I think in the United situation, we'll know whether they have met their goal or not, because a lot of other providers, they have just eliminated Quest Diagnostics.

They still have hospitals, they have a lot of regional players, so it all boils down to whether this step they have taken, whether that's going to provide them what they are looking for.

Okay.

And then, I guess just next question here, I mean, obviously, as we think about the impact.

Bob, can you just go through as you think about your fixed costs versus your variable cost?

And in the past we've talked a little bit about this, but just wanted to just get a quick update there in terms of how we think about your cost structure?

Adam, yes.

You heard me say, I think on our last call, that in the long run, all of our costs are variable.

But in the short term, there are certain other actions that you need to take to try to make as much of your cost variable as possible.

Certainly when you think about our costs, 50% of them are staffing levels.

They tend to be pretty variable, so those are things that is we can adjust.

We can certainly adjust overhead cost, the G&A area.

And ultimately, we can reduce capacity.

And capacity is defined, including both laboratory footprint -- you know, the number of square feet, the number of analyzers you've got, et cetera.

So yes, I think that there are a number of levers that we can pull to adjust cost when we need to for changes in volume.

Some you can take immediately.

Some take a little longer.

But our goal, as we think about adjusting costs in line with service levels, which, frankly, we're always doing, is to make sure that we do it without impacting service.

Okay.

We want to make sure that we maintain a differentiated service, as we're adjusting for volume changes.

Okay.

And then just -- just to move on to a different topic here, Obviously not as big for you guys.

But the risk assessment business, it looks like it slowed down some another quarter.

Just from backing into the growth, it appears the revenue growth slowed some relative to what you reported in the first half of the year.

Any trends going on there, any sort of updated thoughts in terms of how you view that business?

Adam, the risk assessment business, on the life insurance side, we continue to see -- saw decreases in the number of licensure applicants, but we are seeing continued interest as it relates to the teleunderwriting and other activities.

The other things we're concerned -- we are encouraged by is the results of our pilot to expand access of life insurance applicants to use our patient service centers as -- instead of just having a paramedical coming to them.

We're in four markets at this point in time and are seeing good acceptance and results related to that, so the primary impact right now is the softness in the applicant levels.

Okay.

And then just -- I guess another area here, I guess just recently some commentary -- I guess the FDA making some commentary in terms of regulatory guidance.

Could you just give us any thoughts there in terms of what you think may ultimately happen?

You can't project what's going to happen.

I mean, obviously we've reviewed the draft guidance and it is that at this point, it's draft guidance.

And we've been active in the sessions in sharing our analysis of it with the FDA, giving them feedback of it. [inaudible] back on, it goes directly and through our trade association.

But ultimately we have the same goal as the FDA does, safety and efficacy.

And, are there any other regulatory issues?

Seems like just been hearing small things here and there recently about clinical labs in Washington, where it's been pretty quiet the last several years, so any other areas that you guys are following here, in terms of other types of regulatory changes?

From a regulatory perspective, I mean, the only other -- obviously, [inaudible] lab quality after coming out, but we clearly are comfortable with our quality in our laboratories and our auditing and our insurance processes there.

The only other thing that's sitting out there -- and it's not so much a regulatory as coming out of CMS and then, from a legislative perspective, follow-ups from the 2003 Medicare Modernization Act -- is the competitive bidding.

We are waiting to hear from CMS additional details, particularly which geographies they will be selecting as part of this pilot.

And have also given them feedback on the design of the pilot and our thoughts around it.

But that's the other thing out there.

Okay.

Thank you.

Thank you, sir.

Our next question is coming from [Dan Dobler] from Wachovia Securities.

Good morning.

You've talked about United HealthCare being about 7% of revenues.

I'm wondering, does that number include other pull-through business that UNH brings in with it?

No.

That is the amount of business that United reimburses us for.

Okay.

Could you estimate how much additional related business comes as a result of UNH?

Yes, Dan.

We really can't, quite frankly, because the business comes not necessarily from the relationship with UNH, but our relationship with the physician.

And the fact that we provided differentiated level of service and we are in physicians' offices every day, providing that differentiated service, and participate on the vast majority of contracts that they have in their office.

Okay.

And another question, what is the possibility, do you think, that a patient, whether it's United HealthCare or otherwise, might go out-of-network, you know, and continue to be one of your customers?

Well, you know, there are instances where we go out-of-network.

It depends on the patient's belief where they get the best testing and as we have always sold and seen, the diagnostic testing is only account for 2% to 4%, but it's going to impact 70% of the health care cost, so there are a number of instances where the patients have gone out-of-network to get better service.

Maybe you can't say, but assuming that a client wants to go out-of-network, would they be able to get similar pricing as they would've if they stayed in network in the future?

Well, you know, we can't comment on that, but as I told you that we are continuing to evaluate our rights as an out-of-network provider.

And these are different for state to state and from plan to plan.

The patients have choice and can choose to go out-of-network.

Right.

So do the doctors, by the way.

They can send people where they feel they get appropriate service.

And as I keep saying, in the name of affordability, you cannot ignore medical quality and patients' and doctors' preference.

Is it possible you'll have a higher profit margin on any out-of-network business?

It's certainly possible.

It's not clear at this point.

As Surya said, we're still assessing and evaluating our rights as an out-of-network provider to various forms of reimbursement.

Okay.

Thanks much.

Thank you.

Thank you, sir.

Our next one is coming from Mike Maguire from FTN Midwest.

Thanks, good morning.

Just a couple of quick follow-ups.

Bob, you mentioned with regards to the cost structure fixed versus variable, just qualitatively, what can you rationalize in a particular market?

Obviously there's service levels you need to provide to other customers, what are assets that, if there's sufficient volume loss, what type of assets can you rationalize going forward?

Frankly, not to be cute here, but all of them, ultimately.

But first it would be staffing levels.

We'd evaluate our PSC infrastructure, we'd evaluate logistics networks, we'd evaluate the capacity that we have in that particular marketplace.

And frankly, you can serve markets without necessarily having a testing presence there.

We do that all the time today.

We have 35 laboratories, but we cover every state.

So, yes, I think you have the ability to reevaluate your footprint as well.

Okay.

Just curious question.

How long was the United RFP in the marketplace until it got this decision a month ago?

About a year.

Yes, we've been negotiating with them for almost 12 months and the last minute they changed direction.

Okay.

And then just one final numbers question, Bob.

This may be an NID answer.

But Q2 to Q3, the sequential operating expense went down a decent clip, just curious if that's entirely NID or anything else that was rationalized sequentially?

If you're looking at last quarter compared to what we've reported this quarter, a piece of it certainly is NID.

But again, we're going to have all of the restated quarters out on the website for people to see.

That's out there right now, and if you go to the investor home page, you can pull down the spreadsheet with restated quarters.

Okay.

So outside of NID, was there anything operationally that changed quarter to quarter?

Nothing specific.

We continue doing what we've been doing all along, and that is trying to drive down bad debt.

Trying to become more efficient.

Trying to grow did top line.

I wouldn't say there's anything unique in the quarter.

And it's just really a function of us continuing to, to execute at this point.

Great.

Thank you.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our next question is coming from Bill Bonello from Wachovia Securities.

Great.

Thanks.

Just a couple other questions.

First of all, were there any unusual factors that boosted operating cash flow in the quarter?

Nothing significant, bill, in the quarter.

You may recall in the second quarter, we had timing of cash payments actually work against us.

Yes.

And some of those start to flush out a little bit in this quarter.

But nothing significant in the quarter.

We did have a $0.02 per share benefit associated with finally putting to bed some income tax contingencies -- I mentioned that earlier in the script -- but otherwise, nothing significant in the quarter.

Okay.

And then, just two more questions on the United situation.

You're probably getting sick of that.

But it seems to us like there's some unusual characteristics of that particular situation, in that you had LabCorp was not very present in markets where United was very present and you had sort of a singular relationship with them.

If we think about it in that standpoint, are there other markets around the country, or significant numbers of markets around the country, where you are very present with a large payor and LabCorp is not?

Bill, I wouldn't say necessarily with a large payor, but you know where our -- we have very strong businesses.

The northeast, obviously, and in California, Texas, Florida, in the midwest, and, frankly, we see LabCorp in all of those markets, at this point.

You do, okay.

You may not want to answer this, but what would happen, as you understand, it if you were to buy a provider that currently in the United network, would they immediately become out-of-network because they're part of Quest?

Bill, I don't know.

I think that would all be a function of the type of agreement they've got in place with United.

Okay.

Great.

Thank you.

But, you know, you are right.

There are a lot of unusual circumstances with this United contract.

Okay.

Thank you very much.

Thank you.

Thank you, sir.

Then our last question is coming from Robert Willoughby from Banc of America Securities.

Surya or Bob, I guess given what may be some flux in the financial statements here going forward -- we'll wait and see, I guess -- do you anticipate any changes in management's incentive compensation, what metrics we should look at next year?

No.

In fact, we don't see any change in that direction.

You know, we have a very profitable business.

And contracts come and we try to be competitive, but we want to be paid fairly for the service we provide.

And the United contract has not changed our strategy, nor our incentives of compensation.

And, Bob, we do have an element of our compensation which is tied to long-term performance.

And that's really the way we want people thinking here, not just short-term, but long-term.

Thank you.

Thank you, sir.

Thank you for participating in the Quest Diagnostics third quarter 2006 conference call.

A transcript of prepared 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 866-483-9093.

The replay will be open today at 11:30 a.m. eastern time and will continue through 11:00 p.m. on November 16, 2006, to investors in the U.S. by dialing 800-925-4647.

Investors outside the United States may dial 203-369-3530.

No password is required for either number.

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

The call will also be available to the media and individual investors at Quest Diagnostics's website.

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

Good-bye.