奎斯特診斷 (DGX) 2007 Q1 法說會逐字稿

Welcome to the Quest Diagnostics first quarter 2007 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 am 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 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 2006 Quest Diagnostics Incorporated 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 this morning in the Quarterly Update section of our Website at www.questdiagnostics.com.

A downloadable spreadsheet with our results and supplemental analysis are also available on the Website.

Now, here is Surya Mohapatra.

Thank you, Laure.

During the first quarter, we reported revenues of $1.5 billion, earnings per share of $0.55, and cash from operations of $152 million.

As expected, during the first quarter, we experienced significant attrition of the United Healthcare business.

Over the last six months, our marketplace has experienced a major disruption.

A large payer is attempting to turn laboratory testing into a commodity, at the same time a large competitor has offered a significant price reduction and also guaranteed hundreds of millions of dollars of leakage.

United Healthcare is taking unprecedented and inappropriate actions including threatening doctors with penalties for selecting Quest Diagnostics.

This has created confusion among doctors and patients.

During this time, we have taken action to defend our market position and have mentioned high levels of service and we have added to our valuable proposition, which differentiates us from our competitors.

As a result, we have significantly minimized the potential loss of fall-through business associated with United Physicians.

Additionally, our access, quality and cost effective service enabled us to renew our agreement with Aetna.

We also renewed our agreement with WellPoint Anthem in New England.

Our focus now is on growing our business and we are gaining momentum.

I will speak more of our efforts to drive growth but first of all we'll review our financial performance and 2007 guidance.

Bob.

Thanks, Surya.

Our first quarter performance is behind where we would like it to be.

We have gained better visibility on a number of uncertainties, which we had entering the year and are clearly gaining momentum.

Revenues from continuing operations were $1.5 billion, 1.7% below the prior year.

Revenues in our clinical testing business, which accounts for over 90% of our total revenues, were 3% below the prior year on a 7% volume decrease and a 4% increase in revenue per requisition.

The increase in revenue per requisition was primarily driven by a positive mix shift and an increase in the number of tests ordered per requisition.

We estimate that revenues declined approximately 5% due to our change in status with United, with volume reduced by approximately 6%, partially offset by a positive impact to revenue per requisition of about 1%.

The positive impact to revenue per requisition is associated with higher reimbursement on the retained United work.

Although some of the benefit is offset by higher bad debt expense associated with having to bill patients directly.

The United volume moved to other contracted providers somewhat faster than we had forecasted, with about 70% having moved by the end of March.

So far, that rate has not changed significantly since March 1, the date by which United threatened to impose financial penalties on physicians.

However, United is continuing to go to great lengths to move volume, and we continue to expect that additional volume will move to contracted providers as the year progresses.

While United volume may have moved faster than we anticipated, we have retained more of the discretionary working physicians than we initially estimated.

We believe this is due to our outstanding service levels, which we improved during the quarter and the efforts of our salesforce to retain business.

In addition, we worked to inform patients and their physicians that they do have a choice in selecting their laboratory provider and that there are important differences among providers.

While the net revenue impact associated with the United change was generally somewhat less than we had estimated, we saw roughly 2% slower growth than we had anticipated due to focusing our salesforce on customer retention and clarifying significant misinformation that had circulated about the United situation during the fourth quarter and most of the first quarter.

However, as we exited the quarter, we were beginning to see underlying improvement in revenue growth as our salesforce began to refocus on winning new accounts and selling additional tests.

Our new agreement with Aetna, which goes into effect July 1, will certainly help us continue that momentum.

But remember, today we already are Aetna's largest laboratory provider by a wide margin.

Also impacting revenue growth in the quarter, were severe storms in the central part of the country during the month of February, which reduced revenues and volumes by about 1%.

Organic revenues in our nonclinical testing businesses as a group, which include our clinical trials testing business and the risk assessment business acquired as part of Lab 1, were comparable to the prior year.

The acquisitions of Focus Diagnostics, Interex and HemoCue contributed about 2% to consolidated revenue growth.

Operating income as a percentage of revenues was 13.2% for the quarter, compared to 16.7% in the prior year.

We estimate that the net revenue loss associated with United impacted margin comparisons by just over 3%.

As we indicated when we provided guidance in January, the profit impact associated with lost business will be greatest during the first first six months following its loss due to the time it takes to align the cost structure with volume levels.

And as I mentioned earlier, during the first quarter, we actually increased certain expenditures to maintain and improve service levels and inform patients and physicians of the facts regarding their choice of laboratory providers.

In addition, during the quarter, we recorded charges of $11 million associated with workforce reductions, which reduced margins by almost 1%.

Bad debt expense as a percentage of revenues was 4.4%, compared to 4.1% last year.

The increase was principally driven by higher bad debt expense associated with billing patients directly for a portion of the United volume.

The acquisitions of Focus, Interex and Hemocue combined to reduce margins by about 0.25% after the amortization of intangibles.

As required by the accounting rules for acquisitions, we recorded a pretax charge of $4 million or $0.01 per share to expense in-process R&D in connection with the HemoCue acquisition.

The charge is recorded in other operating expense net.

Diluted earnings per share from continuing operations were $0.55, compared to $0.77 in the prior year.

The decrease was associated principally with the changing contract status with United and the various other items I just discussed.

Included in footnote 7 to the earnings release, is a table, which summarizes the impact to various measures for each of the items.

Cash from operations was $152 million, compared to $241 million in the prior year.

With the change principally driven by the various factors already discussed.

During the quarter, we made capital expenditures of $40 million, repurchased $105 million of common stock, and invested $450 million in HemoCue acquisition.

Day sales outstanding, DSO's, were 47 days, down one day from year end.

For the most part, the work we performed for United members is being reimbursed on a timely basis.

As a result, the several day increase in DSO's we were anticipating was avoided.

Turning to full year 2007 guidance.

While we have gained better visibility on a number of questions we had coming into the year, as we explained to you in January, developing estimates for the full year will remain challenging through at least the second quarter.

Our current guidance for results from continuing operations is as follows.

we expect revenues to approximate $6.1 to $6.2 billion.

The increase from previous guidance is principally due to the HemoCue acquisition.

We expect operating income as a percentage of revenues to be between 16% and 17%.

This is about 0.5% below our previous guidance, principally due to the first quarter results.

However, we continue to expect to exit the year with margins similar to our earlier estimates.

We continue to expect cash from operations to approximate $800 million and capital expenditures of approximately $200 million.

And lastly, we expect diluted earnings per share, adjusted to exclude the $0.04 in Q1 charges, to be between $2.75 and $2.95, the mid-point unchanged from earlier estimates.

These estimates exclude the impact of the planned acquisition of AmeriPath and any additional charges related to potential restructuring activities.

The first quarter was particularly challenging, and we expect that there will be challenges for the remainder of the year.

However, we are gaining momentum and we are excited by the opportunities we see and expect to exit the year as strong or stronger than we anticipated at the start of the year.

Now, I will turn it back to Surya.

Thanks, Bob.

We continue to leverage sales, service and time to drive organic growth, and we are clearly focused on all three [currently].

It was our access, quality and cost effective service that led to our new agreement with Aetna.

We are pleased to have the opportunity to continue to serve their members, and we are working with Aetna to communicate the contract change to physicians.

We continue to in-house the overall patient experience.

We are seeing the results of training we are providing to our phlebotomists.

Nine out of 10 patients that are rated in our patient service centers rated their experience outstanding and 98% said they would return to a Quest Diagnostics PSC.

Patients in managed care organizations are excited about our electronic appointment scheduling for patients.

We have accelerated the deployment, and most of our PSC's across the country will be live by the end of the summer.

Our emphasis on introducing new tests, services and technologies is helping to improve patient care and drive growth.

Our recent acquisition of HemoCue expands our near patient testing capabilities technologies, enabling testing to be performed closer to patient whether in the physician's office or at the patient's bed side.

We want Quest Diagnostics to be the trusted source for testing, both in the central lab and near the patient.

We continue to build on our healthcare information technology offerings.

We are excited that the Province of British Columbia have selected our Care360 Physician Portal and our data hub to be an integral part of their comprehensive electronic healthcare system.

This system is expected to transform the way laboratory results and other essential personal information is securely shared among healthcare practitioners.

We also see increased opportunities to bring our experience and expertise in diagnostic testing to international markets.

In the U.K.

the National Health Service recently selected us to manage their laboratory testing needs of the West Middlesex Hospital and Hounslow Primary Care Trust.

This is for the recognition of the quality and service we provide in the U.S.

and abroad.

We have been building our cancer testing capabilities.

Earlier this week, we announced a definitive agreement to acquire AmeriPath, which will establish us as the leader in cancer diagnostics.

This acquisition will create long-term value for our shareholders by accelerating revenue and earnings growth.

It is expected to close in the current quarter.

In closing, our focus and our value propositions putting patients first, providing superior service to physicians and payers, and bringing innovative science and medicine to the marketplace; has served us well in the past and will drive growth in the future.

Bob provided you with the guidance for the full year 2007.

Looking beyond this current year, we remain fully committed to our longer term goals, to grow revenue organically at or above the industry growth rate, to pursue selective acquisitions, to expand margins to 20% and to further strengthen our leadership position.

I am excited about the prospects for our Company.

Thank you, we will now take your questions.

Operator?

Thank you.

[OPERATOR INSTRUCTIONS] Our first question comes from Adam Feinstein from Lehman Brothers.

Thank you.

Good morning, everyone.

A couple of questions here.

Bob, can you just clarify the comments about the U&H contract impacting consolidated revenues by 5% in other quarter, just wanted to confirm, so that includes the pull-through impact also?

Yes, it does.

And with respect to the pull-through, you guys are saying before previously that you thought it was going to be a 1, 2 and 3 ratio, and it sounded like you said the revenue impact was a little less than what you were thinking.

So, do you have a revised number for what that ratio would look like?

It is currently running about 1 to 4.

Okay.

1:4.

And then with respect to -- clearly, with the guidance you gave here, you had said the quarter was weaker than what you guys were thinking and clearly weaker than what we were thinking also.

Now, with the guidance in the mid-point still consistent with what you were saying before, so just curious in terms of the thought process there and with the weakness in the quarter?

And then, I know before you said that it includes the Aetna contract as well as HemoCue.

And clearly, with Aetna, you were already servicing most of the business but I would have thought the revenue number would have been a little higher.

So, can you just provide some more clarity behind some of those comments earlier?

A few things, Adam.

First, we would like the performance of the first quarter to be better as well.

However, we're in a fight.

And we're not going to let the results for one or two quarters keep us from doing what we think is in the best interests of the Company.

In fact, that's one of the reasons that we don't give quarterly guidance.

And you heard us say that we did a number of things in this quarter to defend what we felt was our position so that we could come out of the year where we would like to be.

So, what's important is not to forget that the mid-point of our full year guidance hasn't changed and therefore, our view on the back half of the year has actually improved.

And part of that has to do with the improved outlook for the pull-through.

And in terms of why we feel good about that, when we adjust for the contract losses and any other discreet items that we saw in there, we see our underlying volume improving month by month.

The Aetna contract is certainly going to help that but additionally, you need to keep in mind that it does take some time to get costs out, especially when you don't want to impact service levels, and we're making good progress there.

Things are falling into place.

And plus as I said, we had some extra costs that we had -- that we incurred in the first quarter to retain business that will not continue throughout the year.

And the focus of the sales organization in the fourth quarter and really much of this first quarter was really on addressing the confusion in the marketplace that Surya talked about that was created for physicians and patients.

And now we're moving beyond that and we're again focused on selling and we're seeing progress there.

Okay.

And then just one more question if I may.

Just with respect to -- so you mentioned some of the extraordinary costs here in the other quarters.

There is a couple of questions because clearly the revenue number appeared to be relatively in line but the costs were higher.

So you mentioned before just the costs of just with the retention.

But I wanted to see if you can provide more details in terms of what exactly those costs are?

And then, at the same time you were talking previously about $100 million in annualized cost savings from of these cost reduction initiatives.

Is that still the same rate we should be looking for, Bob?

No.

At this point, actually, the annualized cost reductions are probably closer to $200 million at this point.

But again that's against what's probably closer to $400 million in annualized revenue loss at the moment.

But again, when you think about the actions that we took in the quarter, some of which were to defend our position and some of which were indirectly related to the United loss.

As we mentioned, there was about $11 million in severance in the quarter but also in the quarter we had higher bad debt expense.

We also had higher billing expense in the quarter because there were a significant amount of mailings and clarifications that needed to go out to patients.

We had additional selling and advertising costs to make patients and physicians aware of what their rights are and the fact that they did have a choice.

We had additional costs for advisory and legal fees.

And then, when you just look at the absolute dollars in the cost line, both the acquisitions of HemoCue and Focus actually added to some of that.

Okay.

Thank you very much.

Our next question comes from Tom Gallucci from Merrill Lynch.

A couple of different questions.

You mentioned Aetna, you're sort of their primary provider already but it should add to your momentum as you get through the year on the sales side.

Can you characterize the potential that you see there from added business at Aetna?

Well, Tom, this is Surya.

First of all, this really exciting news about Aetna.

We are the largest provider to Aetna but we still have an opportunity to get other business.

And again, if you listen to Aetna, 75% of their doctors are covered by us and we are counting on Aetna to build the momentum and not only keep the business we have but we also work with Aetna to reduce their leakage and move those business to Quest Diagnostics.

It is going to take a little bit of time because we're going to start from July.

And Tom, it is important to understand, too, that when we put our initial guidance together, we certainly anticipated being a continued provider to Aetna at that point.

Right.

It's been well document and had publicized what United has been trying to do to move business over into their preferred network.

How aggressive or can you talk about some of the things that Aetna is going to do similarly for their current network or their network as of July that is primarily you?

Well, of course everyone is organized different and what United has done is so unprecedented and so inappropriate I don't see others that are going to encourage that kind of activity.

And, Tom, Aetna has already made comments that people should not expect to see the kind of things they've been hearing about with the United Lab Corp.

deal.

They said that publicly.

So, is it fair to be more conservative towards the upside of opportunity in the near term on the incremental Aetna business?

Well, certainly, there is incremental opportunity there associated with this contract.

But again, given that we've got the vast majority of it, we're not baking in a significant additional upside there.

We do feel as though there is opportunity to gain more business and we believe that we can get that business to us as a result of our service levels, our differentiation.

And we don't need things like you see United doing to move the work.

Right.

On the bad debt expense, up 30 basis points year-over-year, mostly from having to bill patients directly, it sounded like, related to United.

Can you just put in perspective a little bit what that means?

Are you collecting half the bills that you're sending to patients related to United or does that 30 basis point uptick really mean that you're not really getting anything from the patients directly?

Just how should we think about that?

It just means that any time we have patient build, that it carries higher bad debt expense than our typical mix of business.

And given also that this is the period where folks haven't met their deductibles and there may be higher co-pays as a result of us being out of network at this point, we're expecting there to be higher bad debt expense.

But we also believe that as the year progresses, that will start to level off as patients have met their deductibles and there will be more that's paid directly from United related to that.

And then just on that note, you said that United bills are being paid on a fairly timely basis generally speaking.

So, it was a big variable, in our view, how much you were going to be able to charge United and how much they would actually pay you for the out of network type of testing at this point.

So can you give us any more clarity on where that has come out at this point?

Well, we did indicate that the revenue per requisition is up about 1% versus the prior year because of the higher reimbursement rate on United.

Remember, we expected that.

We said that as an out of network provider we felt that we were entitled to reimbursement and we expected it to be higher than it would otherwise be.

There are certain cases, though, in some markets where we are actually not billing the patient for their piece, their responsibility.

Those are situations where we're allowed to do that because of the regulations in a particular state and that's actually driving down the overall average of revenue per requisition.

Okay.

Great.

I will ask one more and then I'll hop off.

Share repurchases were $100 million plus this quarter given the acquisition.

How do you expect that to trend going forward?

Thanks.

You should expect it to be reduced for the remainder of the year.

Our next question.

Ricky Goldwasser, from UBS, you may ask your question.

Good morning.

Following up on Adam's question regarding the pull-through business, you said currently it's 1:4 in pull-through.

What are you seeing quarter to date in the second quarter in terms of pull-through and is the guidance assumes 1:4 now for the full year or is it still 1:3?

Ricky, I don't want to get too specific in terms of the components of guidance because there are so many moves moving parts here.

The 1:4 though is still pretty consistent with what we're seeing at this point and I see no reason for that to dramatically change.

And why is that?

Because of the service levels that we're continuing to maintain.

And if a physician hasn't moved at this point, I am not sure what additional reason they would have to move.

And Ricky, this is one of the things what we did this quarter.

We had to validate our value of our value proposition, and what we found that doctors do have preference which laboratory they use, and when they've been given a choice, they will use Quest Diagnostics overwhelmingly.

One thing, one has to realize that we have earn our business based on quality, service and technology, one doctor at a time.

And doctors don't like to be threatened or penalized when they select the laboratory they want.

And I think that is the reason why we were able to minimize pull-through and we're really pleased with the way the doctors and patients are responding to this.

Again, in the guidance you're not assuming that the loss pull-through that you will see any acceleration there from current levels?

We're not specifically giving guidance on that component but what I will tell you is we don't see any dramatic change in that ratio.

Okay.

And as far as the Aetna contract, given that you had the vast majority of the business, and I assume that some price reduction was required to obtain the national exclusive status, does Aetna have a positive impact on your guidance or a negative impact on guidance?

Ricky, as I told you, when we put our initial guidance together, we fully anticipated being a provider to Aetna.

And what I will tell you, though, is that Aetna certainly helps us gain that momentum that is allowing us to feel better about the back half of the year than we were coming into the year.

But Aetna also has volume discounts.

The more business comes to Quest, based on our quality and service, they benefit and we benefit.

It is a mutual alignment between the two parties on that side.

And as Aetna said, this is a financially sound deal for them and for us, and that's absolutely the case.

With that being said, when we think about modeling the second half of the year, about how we should be pricing, under the assumption that there are some volume related discounts on the Aetna business starting July 1, and that we're going to see the anniversary of Focus, should we assume so down in pricing growth?

Ricky, as you know, we don't give guidance on the components of revenue growth, and we're not going to begin doing that now.

I'm not asking for specific guidance.

I am just asking for kind of the trends.

I am not giving directional guidance either.

And can you just give us some more color on how much Focus did add to growth, price and volumes so we can better understand?

It was modest overall to price, very modest, and if you look at the table on footnote seven, you will see the impact to volume of acquisitions.

It is specifically laid out volume, revenue and revenue per requisition in footnote seven.

Our next question come from Bill Bonello from Wachovia.

Just a handful of follow-up questions.

First, just on the mechanics of the quarter, should we think of all the unusual costs that you talked about related to the workforce and the in-process R&D as nonrecurring or are some of those going to show up in future quarters?

Bill, certainly, the in-process R&D is not a recurring number.

That's something you have to write off in connection with the acquisition as a result of the accounting rules.

The severance that we incurred in the first quarter, we may have more of that as the year progresses.

And what we've indicated is that is not included in the guidance because those are really essentially adjustments that you make at a point in time to adjusted the size of your workforce.

And the other costs, though, that we incurred in the first quarter, a lot of it having to do with clarifying the misinformation that was out there for patients and physicians, some of the legal and advisory costs; you will not continue to see that at the same rate in the back half of the year.

And the other thing too, as I said, it takes some time to get the costs out.

We wanted to make sure that in the first quarter we did not impact service levels.

We had better visibility as to where things are shaking out right now.

And some of the actions that we've been taking to address our cost structure are beginning to kick in and they'll kick in a little more in the second quarter.

And we'll start to see the full effect of those in the second half of the year.

And just to clarify when you talk about the other costs, those that you're referring to, those are -- not the cost savings but the other costs incurred, that's part of what you called out in the press release?

Yes.

And then in terms of operating cash flow, you're looking for a pretty significant improvement from the Q1 level.

Can you give us a sense how much of that is the expected reductions in costs versus how much is working capital benefit, et cetera?

I'm not looking for specifics but just is is there anything unusual driving this 800 and why do you feel confident you can get there?

Bill, it is purely connected to the operating performance of the Company, not necessarily anything specifically that we'll be doing with working capital in the back half of the year.

And again if you look at the cash flow that we had put out as initial guidance and you look at the earnings that we put out as initial guidance, they are still pretty much in the same place.

The other thing I ask you to keep many mind is that the first quarter, in a lot of cases, tends to be one of the lower quarters in terms of cash flow because you're paying out all the prior year variable comp in the first quarter.

Okay.

Q1 is historically lower.

Okay.

That's helpful.

And then, anything unusual about -- you just mentioned that you renewed WellPoint for New Jersey.

Was there anything unusual we need to know about that?

No.

In fact, we are very pleased that we continued our business with WellPoint Anthem in New England.

Connecticut.

New England, sorry.

But it is not an exclusive relationship or anything like that?

No, it is not.

Okay.

And then, just trying to think about what you said on the cost side, I am thinking if you expect your costs reductions to sort of annualize out to about $200 million, and it sounds like net/net your loss revenue expectations are pretty darn similar, if not even a little better, than where you have been at, can I extrapolate that you expect to enter '08 at kind of a better run rate than what you would have initially expected?

Yes.

In fact, that is absolutely correct.

We're looking at the back half of the year to be stronger than we anticipated when we first put the guidance together this year.

Now, just to clarify as well, when I talked about the annualized cost reductions and revenue loss, that's about where we're at today in terms of the annualized amount of related revenue loss and related cost adjustments.

So, you're already annualizing at about $200 million of cost reductions.

Correct.

And we're already annualizing about $400 million of revenue reduction.

And I would assume -- you said the revenue reduction you think would increase but can we assume that the cost reduction would as well?

Yes, and if you go back to our guidance in January, we indicated that we felt the margin impact of the contract change would be somewhere between $160 and $260 million.

We're still pretty confident with that range although it is getting tighter and we're getting closer to the middle of it.

Okay.

And then, just one last question.

Are you aware at all or do you have any knowledge of employers with PPO products that might be challenging United's actions as being inconsistent with the kind of product that they're paying for?

I don't know specifically on that challenge, but we have heard of some employers that have indicated that they are looking at their plans.

And clearly, obviously, in the state of New Jersey the Department of Banking and Insurance has indicated that it has had what United pull the penalties that they have been threatening physicians.

And have you seen any impact as a result of that?

Did you have any doctors that had switched away from you, switched back or anything like that?

Bill, we absolutely have examples of physicians that have initially moved and then come back due to service levels.

I think we'll know, it will be interesting to know what's happening to the membership during the open enrollment this year.

Okay.

All right.

Thank you very much.

Our next question comes from Robert Willoughby, Bank of America Securities.

The question was actually answered.

Thank you.

Our next question come from Kemp Dolliver from Cowen & Co.

Hi.

Good morning.

First on the Aetna contract, has that been totally buttoned up now and you know the network structure and all of the related terms?

Absolutely.

It is executed.

Great.

And in terms of understanding the -- where you stand looking into the second half, it sounds like, and I think this has been the case through the year, is that probably the biggest variable in determining your second half performance is going to be what you do on the cost reduction side.

Well, right, it is that, as well as the pace with which the rest of the United volume moves, the ratio of pull-through and actually quite frankly us accelerating the underlying volume growth.

Right.

But it seems like you had already assumed that virtually all of the United business would go away by the end of the year based on some of the commentary in your 10-K.

We said the vast majority we expected to move by the end of the year, and as you've heard me say already, we're at about 70% right now.

Okay.

Great.

And just the last question.

You had this 2% estimate in note seven with regard to contract retention efforts.

Roughly how do you measure that phenomenon?

Well, it is basically the difference between what we had anticipated doing, based upon the plans we had in place, compared to where we came out as a result of not being able to execute some of those plans because we were focused on retaining and clarifying the misinformation that was out there.

The salesforce really had a significant effort to clarify the misinformation that was in the marketplace and as a result, they were not selling new accounts.

They were not selling additional tests to existing accounts.

They were really in the retention mode and -- but we've since shifted their focus and we're starting to see that now.

We're starting to see closer to what we had anticipated in terms of underlying revenue and volume growth.

Okay.

So, that's things such as sales calls not made, et cetera?

Correct.

Okay.

Great.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Constantine Davides from SIG.

Good morning.

Just a couple of quick follow-up questions.

First just wondering, is there anything notable about AmeriPath's book of business, justin terms of how much capitated exposure they have?

Just any kind of color there.

And then second, on a related note, can you comment on what you're seeing in terms of capitated interest from current or perhaps recently completed RFP activity relative to what you encountered in years past?

On the AmeriPath side, they have very little if any capitated work.

And in terms of whether or not we're seeing a shift from fee-for-service to capitated, we are not seeing any significant shift in that regard.

Nothing on any recent contracts that you've signed or anything?

No.

This concludes the question and answer session.

Thank you for participating in the Quest Diagnostics first quarter 2007 conference call.

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

The replay of the call will be available from 11:30 a.m.

on April 19 through 11 p.m.

on May 19, 2007.

to investors in the U.S.

by dialing 888-566-0495.

Investors outside the U.S.

may dial 1-203-369-3054.

No pass code is required for either number.

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

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

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

Goodbye.