奎斯特診斷 (DGX) 2007 Q3 法說會逐字稿

Welcome to the Quest Diagnostics third 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 the 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.

You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date that they are made and reflect management's current estimates, projections, expectations or beliefs and involve risks and uncertainties that could cause actual results and outcomes to be materially different.

Risks and uncertainties that may after affect the future results of the company include, but are not limited to: the competitive environment, changes in government regulations, changing relationships with customers, payers, suppliers, and strategic partners, and other factors described in the Quest Diagnostics 2006 Form 10K, quarterly reports on Form 10Q, and current reports on Form 8K.

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 and supplemental analysis is also available on the website.

Now here is Surya Mohapatra.

Thank you, Laure.

During the quarter we continued to grow our revenues, improve margins and generate strong cash flow.

Consolidated revenues grew to $1.8 billion, operating margin grew to 17.3%, the second consecutive quarter of strong improvement, and cash flow was strong approaching $300 million.

We started the year with uncertainty in the competitive environment with health plans and our ability to manage costs and growth.

We have made excellent progress in reducing debt uncertainty by renewing and in some cases extending our relationship with health plans.

We have aggressively reduced our cost structure while improving service and returned margins to the level we realized as a contracted provider to United.

We continued to retain approximately 25% of the United business and have seen no change in the associated discretionary work.

This is a clear testament to our strong and different stated value proposition.

We have also begun to implement plans to further reduce costs by $500 million over the next two years, and we have made important acquisitions which position us to accelerate growth.

Later I will elaborate on our growth plans, but first Bob will review our performance and guidance.

Thanks, Surya.

As Surya indicated, we've continued to make excellent progress in improving margins over the course of the year and are essentially back to the profitability levels of last year before considering the acquisition of AmeriPath.

In addition, we've begun discussions with the government in an effort to reach a settlement regarding its investigation of NID, a test kit manufacturing subsidiary closed in 2006.

In connection with these discussions we've established a reserve of $51 million and recorded the charge as part of discontinued operations.

We've been working difficult diligently to bring closure to this matter but remains unclear as to how long it may take and what the ultimate cost will be to resolve this issue.

Given that we're in ongoing discussions regarding this matter, what we can say is limited and is contained in footnote eight of the earnings release.

In order to assist in making comparisons, as I go through our results I will highlight the impact of AmeriPath on a number of key metrics.

In addition, to highlight our progress of improvements in certain metrics over the the last several quarters.

Revenues were $1.8 billion, 11.6% above the prior year with AmeriPath contributing about 13% growth.

Revenues for our clinical testing business, which accounts for over 90% of our total revenues, were 10.6% above the prior year with AmeriPath contributing 14%.

Volume was 2.4% below the prior year and approximately 8% below without the AmeriPath acquisition.

Revenue per acquisition increased 13.3% with 8.5% of the increase due to AmeriPath.

The balance of the increase in revenue per acquisition continues to be primarily driven by a positive test mix.

AmeriPath's organic revenue growth for the third quarter was 7%, with particular strength in [damata] pathology and hospital testing.

We estimate that consolidated revenues were reduced by almost 5% due to our change in status with United with clinical testing volume reduced by about 7% partially offset by a positive impact to revenue per acquisition of about 2%.

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

Throughout the third quarter we saw little change in our United volume and continued to remain at about 25% of the previously contracted level.

We expect that some additional United volume will move over time due to United's ongoing efforts.

We continue to be encouraged by physicians decisions to select Quest Diagnostics when given a choice and have seen no further loss of discretionary work during the quarter.

Adjusted for the change associated with United, we saw about a 1% improvement in our base volume growth compared to that of the second quarter.

Improvement principally related to our new Aetna agreement which went into effect July 1.

Organic revenue growth in our nonclinical testing businesses as a group, which include our clinical trials testing business and the risk assessment business, was a little over 5% for the third quarter.

The acquisition of HemoCue contributed 1.5% to consolidated revenue growth.

Operating income as a percentage of revenues was 17.3% for the quarter compared to 18.5% in the prior year with a difference due to the acquisition of AmeriPath.

Before including the results of AmeriPath, margins have now returned to the prior year level only nine months after the contract change with United.

This is a further improvement of about two full margin points from the year-over-year comparison in the second quarter, which itself reflects significant improvement from the first quarter comparison.

Improvements are due to actions we're taking to reduce our cost structure, the avoidance of certain costs incurred in the first quarter associated with business retention and workforce reductions and higher revenue per acquisition.

Bad debt expense as a percentage of revenues was 4.8% and 4% before the inclusion of AmeriPath.

AmeriPath, which carries a higher bad debt rate than the rest of our business, much of it due to the inpatient work done for hospitals and billing systems conversions, will increase our bad debt expense by about 1% for the time being.

At this point we have not reduced AmeriPath's bad debt as quickly as we had planned.

However, the eventual synergy opportunity related to bad debt remains unchanged.

Diluted earnings per share from continuing operations were $0.77 compared to $0.82 in the prior year.

The impact of the change in contract status with United has been essentially mitigated.

The difference from the prior year is principally due to the AmeriPath acquisition, which will be somewhat more dilutive in the near term than initial estimates in large part due to higher bad debt.

Included in footnote six to the earnings release is a table which summarizes the impact to various measures for a number of the items discussed.

Cash from operations for the quarter was strong at $291 million, up sharply from Q2 and $56 million above the prior year.

During the quarter we reduced debt by $152 million bringing the total debt reduction since the AmeriPath acquisition to $192 million.

Cash at quarter end was $165 million, up $42 million from the second quarter.

Capital expenditures were $54 million in the quarter, and we repurchased $41 million of common stock.

Day sales outstanding were 50 days, one day below the Q2 level and two days above the same point last year.

The increase over last year is due to AmeriPath's impact on our DSOs, which we expect to decrease over time.

Now I will turn to our full year outlook for 2007.

Our current guidance for results from continuing operations is as follows: we expect revenues to approximate $6.6 billion to $6.7 billion, we expect operating income as a percentage of revenues to approximate 16%.

This is reduced by just over .5% due to the inclusion of AmeriPath which currently carries lower margins than the rest of our business.

We continue to expect cash from operations to approximate $800 million, and we expect capital spends of between $210 million and $220 million.

And lastly, we expect diluted earnings per share adjusted to exclude the $0.04 in first quarter charges to be between $2.84 and $2.91, the mid-point unchanged from previous guidance.

Please note these estimates exclude any additional special charges.

Before turning it to back to Surya, one last comment on performance.

So far this year is best characterized as one of significant progress in the face of substantial challenges.

Despite the loss of a contract with our largest private payer and intensified pricing pressures and an increased competitive environment, we have managed to grow our business and return it to its underlying profitability of the prior year.

We have renewed or expanded our relationships with a number of important health plans for multi-year periods, and developed plans to redesign and streamline our operations for substantial savings totaling $500 million over the next two years.

With our recent acquisitions we've put if place the major pieces needed to drive future growth, and our focus is now on integrating and aligning the capabilities we have assembled as we delever and reposition our capital structure for the next wave of growth and investment.

Now, I will turn it back to Surya.

Thanks, Bob.

As you have heard, we are making great progress and are well positioned to drive top and bottom line growth.

While our business has become much more competitive over the last year, diagnostic testing remains and will always represent a vital healthcare service.

Our strategy based on patients, growth, and people positions us well to continue to drive profitable growth.

We put patients first with the highest standard for quality and superior service.

We give patients and physicians even more reasons to choose Quest Diagnostics, and we continue to differentiate ourselves competitively.

Our patient service centers are electronically connected to physician's offices and our labs and are now connected to patients through electronic appointment scheduling.

More than 10% of all visits to our patient service centers are now scheduled, and our adoption continues to grow at more than 50% in some locations.

Additionally, we are piloting a portable electronic patient health record called [My] Care360.

It enables patients to avoid the need to fill out forms when they visit our patient service centers.

Patients can also create, store, and manage their own personal health records.

We have introduced a new program called Quest Cares in two markets to make testing available to the uninsured.

This complements our existing needs-based testing assistance program and addresses an unmet need in the market for access to healthcare services.

These actions empower patients, assist physicians and add value to health plans and employers.

We also continue to raise the bar for quality and safety through technology and lean Six Sigma.

We recently launched a specimen tracking initiative that enables us to accurately track irreplaceable specimens such as biopsies at every stage of the journey to our lab.

We have joined a nationally prescribing patients (care) initiatives that call health and technology companies working to drive improvement in patient care and safety.

Our growth strategies for custom high growth and high margin products and services.

We continue to produce new tests and technologies that improve quality and patient care.

For example, volume for our Leumeta plasma-based leukemia test more than doubled compared to last year.

Leumeta family represents a suite of proprietary tests that one day may replace painful bone marrow biopsies.

We are the leader in cancer diagnostics.

Together with AmeriPath we're able to offer a unique combination that includes routine testing and [more routine] pathology and medical diagnostics.

We are in the process of aligning the two organizations to accelerate growth.

We continue to lead the industry in our advanced healthcare IT solutions.

More than 120,000 doctors use our Care360 for lab orders and results.

We're beginning to see traction in physicians using it to write prescriptions with more than 100,000 scripts written in September.

We are also pursuing growth opportunities outside the United States, around the world emerging markets are creating an educated middle class that can afford private healthcare services.

We are building operations in India, and we see opportunities in other countries such as the U.K.

and Ireland.

In summary, we are driving top line growth, we continue to improve margins, and we are generating strong cash flow.

We are empowering patients and doctors and creating different set of services to earn their trust and loyalty.

Within the world of healthcare, diagnostic testing is a critical tool that can detect disease early, drive treatment assistance early and improve health.

The opportunities are enormous and I am excited about our future.

We will now take your questions.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS) One moment for the first question.

Ralph Giacobbe from Credit Suisse, your line is open.

Hi.

Thanks.

Can you maybe give us more details around Aetna, how much of that business has shifted to you all and maybe the contribution this quarter versus the year ago quarter?

Keep in mind with respect to Aetna we had the lion's share of that business already.

The vast majority of what was available to us has moved to us at this point, but again we didn't see that as a significant volume opportunity because of the fact that we had most of the business already, and as I mentioned in the prepared remarks, the Aetna increase contributed about a 1% improvement in our volume growth in this quarter compared to the second quarter.

Okay.

And then just looking at organic growth, or actually I guess I should say just growth excluding AmeriPath and U&H, looks like revenue was up around 3.5%, a little below sort of the industry average.

So we're just hoping to get some of your comments around that, whether you think that's still a function of U&H distraction or if there is something else and basically when we'll get a turn.

There is certainly some of that as we stated in the first quarter and the second quarter, the salesforce has for the most part of this year been focused on business retention as opposed to selling new business.

We're starting to shift that over now.

And I think we're starting to see it in the underlying numbers, but it is not something that turns on a dime, but there is no reason for us to believe that we won't continue to grow organically over time at or slightly above the rate of the industry.

Great.

Thanks.

Our next question comes from Adam Feinstein from Lehman Brothers.

Your line is open.

Okay.

Thank you.

Good morning, everyone, and great job on turning the -- around the operations here.

Just maybe, Bob, just want to get you to elaborate.

You mention about AmeriPath being slightly dilutive for the time being.

Just want to make sure I heard you correctly as you were talking about the bad debt.

Were you implying that the bad debt is going to be worse in the fourth quarter?

Was there something this quarter that led to it being lower so it would be more dilutive later in the year?

Just wanted to make sure I was following your comments before.

Adam, the point that I was making is it is taking us long to her get at the bad debt improvement than we thought.

A number of AmeriPath systems and their processes are not providing us the information necessary to make some of the planes that is we have actionable at this time, so it is taking some time to get those systems and processes in place.

But as you know, this is an area, billing, bad debt, that we've got some particular expertise in, and we'll get at it.

It is just taking us a little longer.

We're not necessarily anticipating that AmeriPath's bad debt is going to go up, it is just that we're not getting at the reductions as quickly as we would like.

Okay.

And then just on that topic, maybe you could just talk a little bit more -- I know you haven't owned the asset that long, but I'm certainly just curious in terms of you talked about the bad debt and maybe just talk about other aspects of the -- that business in terms of the integration process?

First thing I would tell you is there is nothing changed regarding our excitement about the opportunity the acquisition brings to us accelerate growth for both Quest Diagnostics and AmeriPath.

Remember, accelerating growth was the principle rationale for this deal.

And for the most part it is a matter of being very deliberate as we integrate the businesses.

As we told you, we want to make sure that we keep the brand identity of AmeriPath intact, particularly on the [dramatic] pathology side, and we're being very deliberate about the integration, but generally there is nothing there that leads us to believe the outlook for this business is any different than we thought it was when we acquired it.

Adam, this is Surya.

Remember, we acquired AmeriPath because of growth, and we are focusing the company on more high-margin, high-growth product and services, and cancer diagnostics is an important area, and we are real excited about providing -- becoming the number one in this area, and very, very pleased with the reception we've got from our AmeriPath doctors and their employees.

All right.

And then just final question here is just on some of the cost cutting.

Last quarter you had said that about a $20 million run rate in terms of what you had already implemented, and then you had touched on $500 million in future periods.

Just want to see if you had any update there and just any additional thoughts on cost cutting.

Thank you.

Nothing specific to add to what we've said before.

We continue obviously to manage costs pretty aggressively, but at the same time being very focused on maintaining the service levels that we've got because we see those service levels as one of the principle differentiators that we bring to our customers.

We've continued to reduce the size of the workforce.

Most of it through voluntary attrition, and as we look at the $500 million in savings that we expect to get over the next several years, certainly a significant piece of that is going to come from reduced people costs, but again we expect that we'll get that through normal attrition over the next several years, and we feel good about being able to get it.

It is starting to show up in the numbers as you can see, and I think our focus has to be on continuous improvement in both our efficiency as well as our service levels.

Okay.

Thank you very much.

Our next question comes from Bill Bonello from Wachovia Securities.

Your line is open.

Hey, yes, hey.

Good morning.

A couple of questions.

It looks like if we strip out AmeriPath and United that your revenue per acquisition was up about 2.5%, maybe a little better than that even after excluding those.

Is that a pretty reasonable expectation for the underlying increase going forward, or are there any price cuts that you've negotiated, but haven't taken effect yet that could potentially bring that down a little bit?

Bill, as you know, we don't provide guidance on revenue per acquisition growth or volume growth.

We try to manage the business for profitable revenue growth overall, and there will be times when we can't come to agreement on a particular contract, and as such might walk away, and it will impact the volume, but in the end I think it will help our overall profitability in many cases.

So I would rather not start now giving guidance on revenue per rec or volume, rather point you to the fact that we believe organic revenue growth over time will continue to grow as or slightly above the industry rate.

And as you know, as we've gone through these managed care negotiations, we have had to make some pricing concessions, and hopefully with much of that behind us now we'll start to see some stability.

And that's all I am trying to understand is, is this quarter's results pretty representative of whatever pricing concessions that you know that you have to make?

Yes.

Again, you're asking me to give you guidance on revenue per rec.

I think we're going to continue to see pressure on price as we go forward, and frankly that's one of the reasons that we embarked on this program to pull $500 million in costs out of our business, because that's going to allow us to continue to drive towards that 20% operating income that we've spoken about.

Okay.

That's helpful, and then just -- I am a little confused by the volume stats you threw out.

I want to make sure I understand what you were getting at.

If AmeriPath -- if ex AmeriPath your volume was down about 8%, I thought you said that sort of ex United you were growing volume about 1%.

Something's not matching up.

Are you saying that there was maybe about a 2% impact from business that was sort of -- that you lost that wasn't United, but was sort of attributable to having lost the United contract?

No, Bill, what I am saying is when you strip out acquisitions and then you strip out the impact of United, the underlying year-over-year volume growth that we saw in the third quarter was about a point better than we saw in the second quarter.

Oh, in the second -- it was a point better than what you saw in the second quarter.

Okay.

Not necessarily positive?

Correct.

Okay.

Great.

That's very helpful.

Thank you.

Our next question is from Bill Quirk from Piper Jaffray.

Your line is open.

Hey, everybody, it is Dave [Clair] for Bill.

How are you?

Very good.

Hey, just a question on competitive bidding.

With the first competitive bidding demonstration site announced, I was hoping you could give us your initial thoughts on the process and any expectations for impact to the San Diego business?

Well, we really -- with the first site out there we're evaluating and looking at the whole process.

We still have concerns with the process, and we're working through the appropriate channels.

That being said, the addition in the naming of the first site doesn't change our belief that competitive bidding is not a good thing for the industry, and we're continuing to work through ACLA to get that message out, and obviously are hopeful that some of the bills introduced in Congress will have an impact.

Okay.

And just on kind of the international front, you guys talked about India and the U.K.

and Ireland looking attractive.

Are there any, like, additional emerging markets that you guys are looking at?

And just on the India front, is that going to be strictly processing India testing volume?

Are you thinking about outsourcing anything from the states?

Dave, this is Surya.

First of all, we are looking at international very seriously, but we're focusing on developing countries rather than developed countries, that means Asia and South America.

We have started building our operations in India.

The middle class is approximately 300 million people there, and there is a lot of private payers, and we are building the business first to address the local market.

And as tremendous the opportunity there, and we will concentrate and pull out expertise and experience to make ourselves a leader there, and after that obviously we are looking at other opportunities.

We have some small operations in the U.K.

and Mexico, and as you know, we had some work from our [government] to reduce our backlog, so the international opportunity is really a growth opportunity, and in five to six years you will see a significant traction there.

Okay.

And then just on AmeriPath going forward, it was a little bit lighter than what we were looking for over here.

Just your thoughts on what you expect as kind of a longer-term growth rate for that business?

We haven't given specific guidance on the growth rate for that business, but the two areas they're focused on, [dramatic] pathology, anatomic pathology in general and specialty testing are two of the fastest-growing areas of -- in clinical testing, and we don't see any reason for that to change.

Certainly demographics are driving some of that growth.

And --

They are growing at 7% which is the assumption we had in that sector which is higher than clinical pathology.

Okay.

Thanks, guys.

Next question comes from Robert Willoughby from Banc of America Securities.

Sir, you may ask your question.

Just a clarification on that.

I think you said it grew 7%.

I thought you did have a 10% growth expectation out there for AmeriPath.

Am I just remembering wrong?

I am not sure we ever put a 10% growth expectation out there.

I think we generally said 7% to 8% range or so, and actually in this quarter even though we reported 7%, when you look at the business days impact, it is almost right on top of what the last quarter growth was.

Okay.

And just the plans for the cash, I was a bit surprised by the share repurchase in the quarter.

Are we likely to see more of that, or really is the deleveraging the priority, and any change to your view on when acquisitions again are likely?

Well, as I said to you when we did the AmeriPath acquisition, we committed to our lenders to improve our credit stats as part of obtaining the AmeriPath financing.

We think that's the prudent thing to do.

We want to get back within what I will call the credit parameters that we had previously used, and once we're within those parameters, the first objective is to invest our cash into growth opportunities because we believe it generates sustainable cash flows, and then secondly when they're not available at the right price, we will then divert it into share repurchases.

But right now, and for the time being, you should expect that share repurchases are going to be at a much more modest level until we get the credit stats back in line with where we were.

Now I think Surya had said that 18 months was a likely time frame to be out of the acquisition market.

Is that correct, or --

Well, we're not going to be completely out of the acquisition market.

That's important to understand.

In fact, we did a small acquisition this quarter which added to our MedPlus operations, an important one with respect to healthcare IT, but we don't expect to be doing large acquisitions over the next 12 to 18 months or so.

Still have that calendar, Robert.

Okay.

Thank you.

Our next question comes from Art Henderson from Jefferies & Co.

You may ask your question.

Hi.

Good morning.

Kind of following off of what Bob was just asking there, Bob, in your guidance do you have share buybacks in those numbers, and sort of anticipated debt repayment levels?

We do, and again I have not provided specific guidance for either share repurchases or debt repayment.

The cash that we generate over the course of the year will principally go into debt repayment, but there will be potential modest share repurchases, but we've historically not given specific guidance on share repurchases.

Okay.

Okay.

That's fair.

And then --

Getting the cash to work.

Understood.

Thanks.

One other question.

Looking ahead, obviously this last year was a big contract renewal year.

How does the contracts -- how much contract renewal activity do you have next year?

Well, certainly not nearly as much as this year, almost 60% of our managed care business which was contracted coming into the year has been renewed with the majority of that under multi-year agreements and some of those extending into 2010 or beyond.

So 2008 is certainly not going to be the year that we had here, but keep in mind we have probably as much as a third or so of our managed care business that is either one-year agreements or is actually not contracted.

So we're dealing with that on a regular basis all the time.

Okay.

Okay.

And then one last question.

It appeared I guess from the commentary you made earlier that you really haven't yet started tapping into the $500 million of opportunity that's out there from a cost savings standpoint.

Is that a fair assessment?

Is it something that we're going to see more later on down the road or where do you stand on that?

Well we certainly have started tapping into it.

We've started to deploy some of those actions, and in fact that's what's gotten us to where we're at in terms of the operating margin improvement that you see in this quarter.

But the lion -- the vast majority of that is still to come, and we'll see a significant piece of it in '08, and then another significant chunk in '09.

And as we said, we expect that $500 million to be the run rate savings that we generate exiting '09.

Okay.

One last question and I will jump back in the queue.

On AmeriPath, I know you guys talked about operating that business as least for the short-term somewhat separately from the main core business.

At what point do you start thinking about bringing it in more formally?

Well, first of all, that is actually a main business for us.

I think when we said that we're going to use it -- run it separately, we want to make sure that the service quality and the client services and the branding and all of those things remain in tact, but they are integrated in the company as far as finance, legal and compliance.

And we are aligning the two sales organized to accelerate growth, but also AmeriPath has specialty, and we're integrating specialty with Nichols Institute, so they're an integral part of the company, but we are going to focus more on hospital and esoteric and cancer diagnostics.

That's the reason why I wanted to run it a little bit differently from what we've done in the clinical business.

Okay.

Great.

Great work.

Nice quarter.

Thank you.

Our next question comes from Kemp Dolliver from Cowen and Company.

Your line is open.

Hi.

Thanks.

And good morning.

With AmeriPath, what -- over what time frame do you think you will be in position to start driving the sales -- accelerated sales growth that you are looking for?

Yes.

We -- if we just start integrating the organization and the first one we're doing is specialty and Nichols Institute, and we will probably within the next couple of quarters we will see more and more sales integration to strengthen our product offering.

So this is not actually a synergy story, but this is actually how do you really grow, how do you keep our 400 pathologist from AmeriPath, another 400 pathologists from Quest Diagnostics busy and engaged with the patients.

Great.

Thank you.

Our next question comes from Andreas Dirnagl from JPMorgan.

Your line is open.

Yes.

Good morning.

Most of my questions have been answered, but, Surya, I was wondering, maybe a little bit more color on India, I guess you're about six months away from completing construction.

I wanted to see what your expectations were there and then also maybe just some thoughts about what appears to be kind of a go-it-alone strategy as opposed to maybe joint venturing or even buying a local operator?

Okay.

Good question, Andreas.

First of all I've already said that 300,000 middle class in India and frankly there is so much discretionary income that they can provide for healthcare services but the issue in India is who can bring high quality tests, technology which is not available and create a diagnostic service which people can trust?

And that's the reason why we have decided to go it alone rather than buying any local businesses because our business model is going to be different from other business model.

Apart from just doing the routine testing we'll be doing esoteric testing.

We'll have estimated for clinical trials, so this is going to be a full fledged laboratory to provide services to different segments of customers.

Now, as far as acquisition and JV, as we establish ourselves and create the value system, then we'll see what is available, but we want to establish a completely new diagnostic testing services which will bring trust, transparency and technology to Indian healthcare system.

Great.

And just to confirm, it will be about six months until you're up and running there?

That's our target.

Okay.

Great.

Thank you very much.

Thank you.

Our next question comes from Ricky Goldwasser from UBS.

Your line is open.

Thank you.

Good morning.

Just a couple of follow-up questions.

First of all, on the AmeriPath bad debt, I think you said that the synergy opportunity's unchanged.

Just quantify for us, are you looking to get the AmeriPath bad debt levels down to Quest standard levels, or what number are you looking for?

And then secondly follow up on the managed care contracts.

I know you said that 60% of managed care business is renewed in the third of the managed care business either as annual renewals or noncontracted.

And while I know that I anticipate your answer that you don't give -- you don't talk about specific contracts, without getting into details just for us to understand is [Humana] kind of in the [outstanding bucket in debt third], or should we factor in the 30% of existing renewals?

Okay.

Let me start with AmeriPath, and the opportunity that we've identified there is to reduce their bad debt although we don't expect it will be able to get it to the level of Quest Diagnostics simply because of their business mix, the fact that they do a lot of in-patient hospital work and there is indigent work in there.

So it will always be somewhat higher than we have as a result of that, but on the rest of the business there is no reason that we can't get it down to the levels of Quest Diagnostics.

And as we bring our processes there, and as we deploy the new systems that they're rolling out, we see opportunity to get at that.

We haven't given specific guidance on what that bad debt number would be because we haven't given any specific guidance on cost synergies there.

Remember, cost synergies were not the principle driver behind this acquisition.

It is the opportunity to accelerate growth over the long term.

Now, Bob, on just as a follow-up on the bad debt, have you seen any negative impact from the bad debt side that is related to United?

We saw in the first quarter we saw some and we quantified that for you, but since then I would say that United has not had a significant impact on our bad debt.

They've been reimbursing us pretty timely and appropriately for the work that we've been performing.

And with respect to managed care contracts and Humana, Ricky, you guessed right, your intuition is very good.

We don't comment on specific contracts, but we expect that we will continue to be a contracted provider to Humana, but, yes, that's still being worked out.

Okay.

Thank you.

Our next question comes from Tom Gallucci, your line is open, from Merrill Lynch.

Thank you.

Just, good morning, everybody.

Just a couple of follow-ups as well.

Bob, you were talking before about seeing your organic revenue growth similar or better than the industry.

What would you pick industry growth the the out this point?

Call it around 5% or so overall.

And then also on use of cash, you said you wanted to get back to the credit parameter that is you used to talk about.

Can you just maybe make sure we're clear on what your goal is there in terms of the specific parameter?

Yes.

What I would tell you is generally we really don't want to allow debt to EBITDA to be much over 2.25 times for an extended period.

And that's what we're targeting to get back.

Certainly if I look at it from a balance sheet perspective, and I look at debt-to-total capital, we'll be back there sooner.

The upper end that far range was around 50%, and we'll be back within that sooner, but the debt to EBITDA is going to take us long to get back to.

You also talked about the cost-cutting and voluntary attrition.

What area is really -- I guess when you think about efficiency and reducing the workforce, what areas have the bulk of the cuts been made, or do you anticipate making, just so we can get a better understanding of really what's changing internally at Quest.

Well, certainly to date the majority of the costs that have come out have come out from our laboratories and the infrastructure that supports those labs, the logistics, etc.

We've really not done anything in terms of reducing PSEs, and in fact we've added PSEs over the course of the year to expand our access there.

And as time goes by, what we will it continue to do is streamline the way we operate the existing labs and the patient service centers.

We've mentioned lean in the past.

We are deploying lean principles in a number of our laboratories, which help us make better use of our existing capacity, and I think I previously mentioned that we don't expect to have significant facility closures as a result of this.

We believe that the redesign that we're doing will allow us to make better use of our existing capacity.

Then on top of that there are areas like purchasing, billing, logistics, a lot of the administrative activities that we've looked at, and we're taking action there as well.

Let me make a comment, Tom.

As I said we started the year with a lot of uncertainty with the health plan, but what up certainty was really can we take costs out, can we grow, and just the cost reductions related to the United volume has gone very well, and we are back to the margin as we have with the contract.

But also I wanted to really emphasize although people are talking about cost cutting, the $500 million section is a deliberate process to take work out and redesign our laboratories so that that amount is gone for good.

So that includes Six Sigma, lean Six Sigma, and technology, and is going onto take a couple of years.

Once we're done we will have a different type of operation organized that than what we had before, but in any case we're not going to do anything that is going to change our risk level and value proposition for the patients and the physicians.

Okay.

Thank you.

I had one other one.

I know again not talking a lot about specific contracts, but incompetent you did expand you are your relationship in Ohio with Medical Mutual, and I was trying to gauge how we should think about that and what that can contribute to growth in the coming quarters or year?

Well, certainly it is an important relationship, but I will tell you in that it is not going to be significant in that you will see a material change in our numbers as a result of it.

It is important to get access there, but it is a relatively small opportunity relative to some others.

Even relative to the incremental Aetna business, which you had the lion's share of but that did seem to make a difference on volume?

Yes.

I would say so.

Okay.

Thank you.

Before we go to our next question (OPERATOR INSTRUCTIONS) Our next question comes from Bill Bonello from Wachovia Securities.

Hey.

Just a follow-up.

Can you tell us whether HemoCue and Focus are contributing positively to earnings at this point?

It is very modest, Bill.

It is neither accretive nor dilutive at this point.

I think with both HemoCue and Focus we expect that over time we'll see increased contributions there, but they're really not big enough to have a significant impact either way right now.

Okay.

Do you anticipate that -- you said over time do you anticipate at some point in time that they could have a significant contribution?

Well, we certainly expect that we'll see accelerated growth on the HemoCue side.

Point of Care is going to be -- we believe a big growth opportunity for us, and that carries higher margins than the rest of the business.

So I expect that it will be accretive and certainly Focus has products as well, which is going to drive growth, but in terms of significant, I don't necessarily see those two businesses as driving significant accretion, but over time I think you will see that our Point of Care business, as it continues to grow and as we look at other opportunities there beyond Focus and HemoCue, could contribute significant growth to earnings.

Right.

And when we bought HemoCue we said we are creating a platform, HemoCue, Enterix, and Focus Diagnostics, to create and make available products which will be used the doctor's office and the hospital and at the patient bedside, and that remains as the platform.

And as we move forward we will add some other products to that particular platform, which will be a significant platform for us in coming years.

Okay.

That's helpful.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Please hold a moment for any further questions.

At this time we have no further questions.

Thank you for participating in the Quest Diagnostics third quarter 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 a -- for investors from 10:30 AM on October 24th through 11:00 PM on November 21st of 2007, to all investors in the U.S.

by dialing 866-380-6722.

Investors outside of the U.S.

may dial 203-369-0343.

No pass code 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 media and individual investors at Quest Diagnostics website.

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

Good-bye, and thank you for joining.