奎斯特診斷 (DGX) 2007 Q4 法說會逐字稿

Welcome to the Quest Diagnostics fourth quarter and full year 2007 conference call.

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

The entire contents of this 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 Communications and Investor Relations for Quest Diagnostics.

Thank you and good morning.

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

Some of our commentary and answers to questions may contain forward-looking statements.

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

Risks and uncertainties that may affect the future results of the Company include but are not limited to adverse results from pending or future government investigations, lawsuits, or private actions, 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 10-K quarterly reports on Form 10-Q, and current reports on Form 8-K.

A copy of our earnings press release is available and the text of our prepared remarks will be available later today in the quarterly updates section of our website at www.Questdiagnostics.Com.

A downloadable spreadsheet with our results and supplemental revenue analysis is also available on the website.

Now, here Is Surya Mohapatra.

Thank you, Laure.

During the quarter, we reestablished strong growth in revenues, earnings, and cash flow, consolidated revenues grew to $1.8 billion, operating margin grew to 17.6%, the third consecutive quarter of strong improvement and cash flow was strong, $355 million for the quarter.

We entered 2007 with uncertainty regarding industry pricing and access to health plan contracts.

Over the past 12 months, we have taken many decisive actions to reduce that uncertainty and drive strong performance improvements.

These short-term issues did not paralyze us from executing our long term growth strategy.

As a result, we had a stronger Company now than compared to 12 months ago.

During the year, we renewed our expanded relationships with most of the major health plans.

We drove productivity improvements while improving service, and embarked on an initiative to reduce our cost structure by an additional $500 million.

We continued to build our near patient testing business by a acquiring HemoCue, a leader in that industry.

We continue to lead with innovations both in medicine and information technology.

We established a presence in the growing Indian market and with the acquisition of AmeriPath, we became the world leader in cancer diagnostics.

Our longer term goals are to grow revenue profitable above the industry growth rate, to expand operating income to 20% of revenues, and to derive 10% of consolidated revenues from international business within five years.

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

Thanks, Surya.

As you heard from Surya, and as you see in our results, we've continued to make excellent progress in improving earnings over the course of the year.

Despite the loss of a contract with our largest private payer, the intensified pricing pressure and an increased competitive environment, in the quarter, we managed to improve our revenues and profits over the prior year.

This progress stems from the decisive actions we took in the first quarter and the hard work throughout the year to reestablish revenue growth, streamline our operations, and enhance our service offerings.

With the actions we have taken and the plans we have in place, we are solidly positioned for sustained revenue and earnings growth.

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

As a result of further discussions, we have increased the reserve we established in the third quarter by $190 million, and $241 million and recorded the charge as part of discontinued operations.

While this is a substantial increase to reserve, we believe that we are closer to either settling this matter or determining that an acceptable settlement cannot be reached.

Given that we are in ongoing discussions, what we can say is limited and is contained in footnote six to the earnings release.

Obviously, we want to put this matter behind us quickly; however, it remains unclear as to how long it may take to bring it to closure.

We are committed to do what we believe is right for our Company and shareholders.

If we are unable to reach an acceptable settlement, we are fully prepared to litigate this matter.

Now, let's turn to fourth quarter performance from continuing operations.

In order to assist in making comparison as I go through our results, I'll highlight the impact of AmeriPath and a number of our key metrics, in addition to highlight our progress I'll point out improvements and certain metrics over the last several quarters.

Revenues were $1.8 billion, 14.3% above the prior year, with AmeriPath contributing about 13% growth.

Revenues for our clinical testing business which account for over 90% of our total revenues were 13.1% above the prior year with AmeriPath contributing 14%.

Volume was about 0.5% below the prior year and about 6% below without the AmeriPath acquisition.

This reflects continued improvement from the third quarter.

Revenue per acquisition increased 13.7% with 8.3% of the increase due to AmeriPath.

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

We estimate that consolidated revenues were reduced by a little over 5% due to our change in status with United, with clinical testing volume reduced by about 8%, partially offset by a positive impact to revenue per acquisition of 2%.

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

Throughout the fourth quarter, we saw little change in our United volume and continued to maintain over 20% of the previously contracted level.

We expect that some additional United volume will move over time; however 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 further improvement in our base volume growth of about 2% compared to that of the third quarter.

Improvement principally related to our new Aetna agreement and improved productivity of our salesforce.

Organic revenue growth in our non-clinical testing businesses as a group, which includes our clinical trials testing business and the risk assessment business, was 10% for the fourth quarter.

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

Operating income as a percentage of revenues was 17.6% for the quarter compared to 18% in the prior year.

Our base business for the results of AmeriPath is now achieving margins above the prior year level.

Fourth quarter margins reflect further improvement of about 1 percentage point from the year-over-year comparison in the third quarter, which itself reflected significant improvement from the first two quarter comparison.

As I mentioned earlier, these improvements are due to actions taken to reduce our cost structure, higher revenue per acquisition, and improved volume.

Bad debt expense as a percentage of revenues was 4.4% and 3.6% before the inclusion of AmeriPath.

This is an improvement of almost 0.5% compared to the third quarter and it comes from our base business.

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

As I mentioned last quarter, while it has taken us longer than we expected to reduce AmeriPath's bad debt, the eventual synergy opportunity related to bad debt remains unchanged.

Diluted earnings per share from continuing operations were $0.79 compared to $0.77 in the prior year.

The impact of the change in contract status with United has now been fully offset and we are back on path -- on the path of sustained revenue and earnings growth.

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

Cash from operations for the quarter was very strong at $355 million and above the prior year for the second consecutive quarter.

During the quarter, we reduced debt by $225 million bringing the total debt reduction since the AmeriPath acquisition to over $400 million.

Cash at quarter end was $168 million, similar to the Q3 level.

Capital expenditures were $76 million in the quarter.

Day sales outstanding improved to 48 days, two days better than Q3, and back to the prior year level, despite AmeriPath adding 2 days to our total.

Looking back on 2007, the fourth quarter cap off a year of tremendous progress despite some significant challenges.

Our program to reduce costs by $500 million is in full swing.

We had over 100 million of this benefit in our run rate as we exited 2007 and are on track to achieve the full amount as we exit 2009.

Much of the benefit will be in our laboratories where we are deploying lean Six Sigma and plan to realize substantial productivity gains.

Additionally, we are driving efficiencies into other areas by better aligning our service capacity with patient and sample flows.

We are driving more of our purchasing through master contracts to take better advantage of our scale.

We are rapidly deploying customer connectivity which reduces cost in specimen data entry and billing and helps lower our bad debt.

We are improving the efficiency of our logistics routes using advanced route optimization tools, we are transitioning to lower cost and more fuel efficient logistics vehicles.

We have streamlined our management structure, established clear targets, and have deployed the mechanisms to monitor and drive execution, and we exited the year with annualized revenues of $7 billion, improved profitability from the year before, and growing momentum as we enter 2008.

Now, let's turn to our outlook for 2008.

Our current guidance for results from continuing operations is as follows--We expect revenue growth to approximate 9%.

We expect operating income as a percentage of revenues to approach 17%.

We expect cash from operations to approximate $900 million, and we expect capital expenditures of between 280 million and $300 million.

And lastly, we expect diluted earnings per share to be between $3 and $3.20 excluding any potential special charges.

Earnings per share are after about $0.20 of investments we are making in 2008 to accelerate long term revenue and earnings growth.

Approximately $0.13 is associated with development and deployment of standard systems for both the AmeriPath practices and our clinical labs which will enable significant productivity gains and improved customer service , and approximately $0.07 is attributable to start up costs of our India operations, which we expect to be a major contributor to our future growth.

Now, I'll turn it back

Thanks, Bob.

2007 was an important year in which we drove performance improvements and continue to build the foundation for sustained growth.

We grow our business by focusing on sales, service, and science.

Our salesforce is energized and driving results.

During the fourth quarter, we accelerated underlying revenue growth by almost 3% compared to that of the third quarter.

Excluding the impact of acquisitions in United, fourth quarter revenues grew about 5%.

Patients, doctors, and health plans appreciate our quality, access, and convenience.

We continue to expand the use of our unique appointment scheduling system for our patient service centers.

One clear sign that patients and physicians care about the superior service we provide is our ability to retain the majority of the discretionary business despite the United contract change.

We see the opportunity to accelerate growth by working with payers and employers to shift more of their testing to us, which is currently going out of network or to higher price providers.

We continue to lead the industry with important new tests and the most complete testing menu for physicians.

With AmeriPath, we are the clear leader in clinical pathology and entering pathology as well as gene based and esoteric testing.

And as technology enables testing to move closer to the patient, we are prepared with a growing platform in near patient or point-of-care testing.

We continue to diversify our revenue base, of our $7 billion in revenue, about 35% now comes from anatomic pathology and gene based and esoteric testing, versus 26% of $4 billion revenue in 2002.

Our acquisition of AmeriPath made us the clear leader in cancer diagnostics.

We have strengthened our integrated offering of clinical, AP, and esoteric testing for hospitals, specialists, and primary care physicians.

We are excited about the opportunity to accelerate our growth in anatomic pathology.

A lot of data specimens come from primary care physicians.

This is a significant growth opportunity and one that AmeriPath previously had no way of realizing, due to its limited infrastructure to reach these doctors.

Our AmeriPath pathologists who are critical assets are very supportive and eager to realize these benefits, and they recently signed a new multi-year contract with United Healthcare.

We are entering the decade of diagnostics, the healthcare world is moving from a focus in curative care to reliance on early detection, prevention, and expanded use of personalized and targeted medicine.

Molecular tests are now used for more than diagnostics to predict present outcomes, determine genetic predisposition and monitor response to drug therapy.

For example, our competitive genomic hybridization microarray was initially evaluated to identify mental retardation in newborns.

Now, we are applying it to other testing areas such as leukemia.

We have introduced several block tests to reduce patient pain and provide early detection.

For example, our liver fibrosis panel uses a non-invasive approach to predict significant fibrosis or cirrhosis in patients with Hepatitis C without requiring a liver biopsy.

Also, our expanding Leumeta family of cancer diagnostics enables physicians to monitor leukemia and lymphoma early, using block specimens without painful bone marrow biopsies.

We continue to invest in our information technology, which is an important differentiator and a key enabler of almost everything we do.

We're investing to upgrade and standardize systems across our Company, including connecting AmeriPath systems to our Care360 portal.

We now have 125,000 physician users of our Care360 products.

We see tremendous opportunities to use healthcare ID to make our diagnostic insights more easily available to doctors, hospitals, and eventually to patients to improve medical safety and help drive better healthcare decisions.

Point-of-care testing will help us to diversify further and also drive growth in the physician business by offering doctors choice and convenience.

They can select traditional laboratory testing or in office testing depending on the needs of each patient.

The $6 billion market for point-of-care test is growing at a rate of 8 to 10% a year, and we are well positioned to benefit from the shift to our point-of-care testing.

During the quarter, we issued FDA clearance for two new tests, the HerpeSelect Express HSV-2 test, and the white blood cell test on our HemoCue platform.

These tests are designed to be simple enough for use in clinics and other point-of-care settings and can produce results within minutes.

The ability of physicians to provide counsel and treatment options and lifestyle changes during a single office visit will benefit patience who are anxious about their test results or who may be unwilling or unable to return for a second visit.

Now, coming to international, India is an enormous growth opportunity, and one in which we will be investing over the next several years.

Our offerings in India will include advanced esoteric testing for hospitals, physicians and patients, clinical trials testing for global pharmaceutical companies, and clinical testing for life insurance companies.

We also see opportunities over time to reduce our costs from clinical trials testing using our Indian facility.

In summary, 2007 was a year of significant achievements.

We took bold and decisive actions to deal with short-term business issues and strengthened the foundation of our Company for long term sustainable growth.

We reestablished growth in revenues, earnings, and cash flow.

We exited the year a much stronger Company.

The opportunities before us are better than ever before, and we're excited about our future and committed to superior long term shareholder returns.

We'll now take your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Bill Bonello with Wachovia.

Good morning.

I have a couple of follow-up questions predominantly related to your guidance for next year.

First of all, just on the revenue growth, can you give us a sense of how much AmeriPath is expected to contribute to revenue growth in 09?

Bill, this is Bob.

It's about 4% or so, organic revenue growth is about 5%.

That's embedded in the guidance.

Okay.

And the real step up in the organic revenue growth would just be that you've annualized the negative impact from United?

Well, certainly, that's part of it, but again, as we told you, the underlying revenue growth when you strip out the impact of United has accelerated over the course of the year.

Okay, perfect.

And then you mentioned the AmeriPath reaching a contract with UNH.

Can can you just tell us, do you think that gives you any kind of an opportunity to recapture any of the business that you've lost?

Bill, this is Surya.

AmeriPath renewed their contract with United and what it tells us that anatomic pathology is very different from clinical pathology and we have the premium pathologist and that is the reason why we acquired AmeriPath but it is a specific contract for AmeriPath and it will be kept separately.

Okay, but you can't, so you don't have the ability, say on something like PATH that I guess you could consider AP, you don't have the ability to sort of shift business towards AmeriPath?

No, that's not the intent of this contract, and the other thing is that we still have 20% of the United customers still with us and they really appreciate the service we provide.

But with that said that doesn't mean that we aren't going to try and regain some of the United business that the has been lost.

Based upon continuing to provide what we believe is a superior service to physicians and patients.

Okay, and I'll ask one last question if I can and get back in the queue, but the investment income that you're spending next year and thank you for giving the break out there, can you give us some sense of what we should be thinking about in terms of an expected return on investment from India?

What should we be looking for India to contribute to earnings or cash flow and sort of over what period?

Bill, it's Bob again.

What I would tell you with respect to India is you should assume that for the next several years, it's going to be a net investment.

Any time you enter a new market, you'd expect to make an investment up front in order to have significant gains in the future.

This year, our lab is going to be coming online, actually this quarter, and we're going to incur a significant amount of start-up costs, but there as Surya said there's tremendous opportunity there.

Today, it's a growing market that's underserved.

The middle class in India is as large as the entire U.S.

Population, and India is going to be an important element of our growth strategy internationally as you heard us say before, we expect international revenues to account for about 10% of our total revenues within about five years or so.

Okay, but in terms of it being a positive contribution, I mean, we really should think of that as that's really building for the future.

I mean, maybe 3 to 5 years out or something?

Correct.

That's true, and I think it's going to take 3 to 5 years but as we said, that we are expecting $1 billion from international in five years so India is going to be our largest investment outside the United States.

Okay, great.

Thank you, I'll get back in the queue.

Tom Gallucci with Merrill Lynch.

Good morning, thank you.

First, just following up on that last question there in terms of the organic growth expectation, can you give us any color on sort of volume versus price and within price, I think you said in the quarter, mostly driven by mix, what are you expecting in terms of absolute pricing in 08?

Tom, as you know, we tend not to provide the components of the revenue growth.

What I can tell you though is we expect both net revenue per acquisition and volume growth to be positive in '08 and that the revenue per acquisition increases will again continue to be principally driven by test mix, and the number of tests ordered per acquisition.

Okay.

But remember some of the pricing concessions that we had to make in '07 really go into effect in '08.

Right.

On the volume side, I know you won't give a specific number, maybe anecdotally can you tell us how you handled certain things like any assumptions for further deterioration of your United business or I think the Lab One contract with United is up and I know that Lab Corp.

is excited about an opportunity to market to Cigna, so are you seeing changes within that customer base either at this point?

A couple things.

With respect to Lab One and that contract coming up in May, that's really a de minimus amount of revenues for us.

It's only several million dollars of revenues that we generate from that, and we've actually, over the course of the last year, seen what we think is going to be most of the attrition on that contract, but with respect to Cigna, Lab Corp.

was on that contract previously as well, as were we, and we have not seen any significant change there in the volume associated with the Cigna members, and as I said earlier, given that we've seen an uptick in our underlying volume over the course of this year, we expect to see some continued growth in that as we go through 2008.

Okay.

My last question would just be cost of goods sold sequentially that seemed to deteriorate a bit although the revenue base was sort of stable sequentially.

Can you give us further color on that line item?

Thanks.

Tom, cost of goods sold again I'd encourage you not to look at it so much on a quarter to quarter basis or even SG&A on a quarter to quarter basis.

We really manage at the operating margin line and yes, as I mentioned, we've continued to see successive improvements about 1 point each quarter in 2007 in our operating margin comparisons versus the prior year and when you strip out AmeriPath now, we've actually achieved operating margins which are in excess of the prior year.

So we feel good about the work that we've done to pull costs out.

In some cases whether it be in cost of sales or SG&A, some of the actions we've taken to reduce the size of the workforce, those costs show up in there, and again, that's why I encourage you not to look at it on any single quarter.

Matthew Borsch with Goldman Sachs.

Hi, thanks for taking our question, this is Shelly in for Matt Borsch this morning.

First question is I was wondering if we could get a little bit more detail behind the 2008 guidance, relative to SG&A, I'm wondering not to focus too much on the improvement we saw in the quarter but I'm wondering how much further improvement there is in SG&A in 2008, and maybe how is that offset by the development in India?

Shelly, we don't give guidance for SG&A or cost of sales percentages.

That's why we gave it to you for operating income as a percentage of revenues.

Again, that's how we manage the business, and we expect that there's going to be continued improvement there but certainly some of these investments that we're talking about will offset that.

A lot of the India investment will probably show up in cost of sales but we'll also see some of it in SG&A.

Thanks, and relative to the 17% operating margin I guess is what we should be talking about.

Is that lower than your expectations a quarter or two ago?

Shelly, the OI really reflects continued improvement offset by these investments which are really being put out there for future growth so I don't think there's any change from what we were thinking.

Great.

Thanks very much.

Bill Quirk with Piper Jaffray.

Yes, thanks, good morning.

First question, thanks for the break down on the payer side.

I was hoping to maybe flesh out Medicare versus Medicaid a little further, obviously collective with 17% of revenue but can you break down those two a little bit more, please?

Well, Medicare is about 15% with Medicaid about 2 to 3% and that's pretty consistent with what it's historically been, and when you look at the Medicare/Medicaid reimbursement on average, it's about equal to our average reimbursement for the Company.

Understood, thanks, Bob.

Appreciate the color there.

Separately, if my math is right, did AmeriPath slow down a little bit on a year-over-year basis in the fourth quarter?

I guess first is that assumption correct and secondly can you just add a little color there, please?

With respect to AmeriPath, we're not breaking out specifically AmeriPath revenues or contributions.

As you start to bring businesses together and you operate it as one business, it becomes a lot more difficult to do that.

What I would say though is as we look at the AmeriPath opportunity and again, I try not to look at anything on a quarter to quarter basis because you can get misleading statistics but nothing has changed regarding our excitement about the opportunity to accelerate growth there, for both AmeriPath and Quest Diagnostics, and on a full year basis for AmeriPath, the organic revenue grew around between 7 and 8%.

Okay, great, and then so safe to assume then that looks like fairly stable trends within the employment of that group?

Yes, with respect to the pathologists I think we've had very stable pathology engagement there.

In pact the pathologists are I think as excited as we are about the opportunity to leverage the infrastructure that Quest brings to grow the AP business.

Great.

Thanks very much, guys.

Robert Willoughby with Banc of America.

Can you speak to the ongoing relationship on the clinical trials business, testing business with Glaxo?

We had heard some share had moved away.

Is there a formal contract in place and can you give us any details on that?

Robert, this is Laure.

We have a formal contract in place and actually we've signed on a letter of agreement that extends that contract beyond the expiration by an additional five years.

We are excited about our relationship with Glaxo and it continues strong.

That's it, thank you.

Ralph Giacobbe with Credit Suisse.

Thanks, good morning.

Can you maybe talk about that $0.20 investment in the context of your 20% operating margin goal?

Sure.

The first thing I would tell you is think about it as an investment, not necessarily ongoing costs, about 13% or so is associated with upgrading systems and that's going to be an important enabler for us to realize the $500 million of savings.

These are for the most part development and implementation costs.

They are not recurring costs, whereas the $500 million will be ongoing and is net of any ongoing cost that we're going to incur.

So 20% is 20% excluding sort of the investment or are you saying that 20% is what you still are looking to achieve by, was it 2009?

We didn't put a specific date out there from when we expect to achieve the 20% operating income, but it is certainly our goal and these are investments that we're making today to position us to get to that 20%.

Okay, and then just on the AmeriPath and the investment in the systems, I mean, is this, it sounds like it's something incremental and not incorporated in when you sort of gave the guidance initially on AmeriPath and what you thought the EBITDA contribution would be in 2008?

This is incremental to what we initially anticipated, the new systems both the lab and the billing system which are AmeriPath were deploying are now being enhanced, and they're going to be connected to our Care360 systems so that physicians will have a complete electronic record of both their anatomic pathology results and their clinical pathology results and as we look at these systems, they're also going to improve, we believe, the productivity of the pathologist and the efficiency of the AmeriPath billing operation, and help us get at that bad debt issue they've got there.

And then just looking at organic growth if I look at Q4, strip out UNH AmeriPath and other acquisitions it looks like the organic growth is about 5%.

That's about right.

Is there anything else in that number I should be looking at like an Aetna impact?

Was that meaningful at all?

Certainly Aetna was one of the things that helped us accelerate the volume growth and that was a contributor to it.

So but looking at 5% versus your guidance of next year 4% maybe some of that discrepancy is sort of incremental Aetna?

No, the 4% that I mentioned was the impact with the contribution associated with AmeriPath, therefore 5% is the organic number.

Okay, all right, I see.

And then just my last question here, the 9% top line assumption, just want to make sure if there's anything else I need to be aware of in terms of it sounds like Lab One, you don't expect that the much more loss, don't expect a whole lot from Cigna.

Is there any expectations of more pull through from Aetna or anything on the acquisition side that's embedded in that number?

Any color think would be helpful.

I wouldn't say that there's any one specific item that's driving that number.

Again, over the course of the year we had our salesforce focused on a whole bunch of things other than just selling.

There were a lot of contract changes that they need to deal with.

Those are essentially set at this point, and the salesforce is very focused on selling at this point, and we really have no further acquisitions built into that number.

That's really organic at 5% is true organic growth.

Okay, great.

Thanks.

Art Henderson with Jefferies & Company.

Hi, good morning.

Bob, when do the United Healthcare Lab One revenues start to roll off?

Is that mid year?

Well, the contract is up in May of '08.

Okay.

But again, I mentioned it's relatively de minimus the amount of revenues that we're generating from that contract today.

Is there, can you put a number on that or are you not comfortable doing that?

Several million dollars.

Okay.

Triple digits.

Okay, thanks.

And also, in looking at the timing of the expenses that you've talked about with relation to the IT investment and India, should we be thinking about that in any way on a quarterly basis?

Will it be earlier in the year, later in the year, how should we think about that?

I would tell you that they're going to be incurred throughout the year.

I at this point, I don't want to try and get too specific quarter by quarter.

Obviously we don't give quarterly guidance, but it's really going to be a function of the readiness in our plans for executing and we'll make sure that everything is lined up before we go forward and that will drive the timing of some of those things.

And I know you mentioned to Ralph just a second ago about these being incremental.

Is there anything that you have seen as you've gotten moving ahead with the integration of AmeriPath that's been disappointing or surprising to you in some way?

I mean, can you characterize how you feel about, I mean I know overall you feel good about it but what has sort of struck you as being surprising to the downside?

This is Surya.

Let me tell a little bit.

First of all, there was nothing surprising.

We acquired AmeriPath as a game changer in the industry just like when we acquired BCL, and we remain real excited about how we can bring these two companies together.

Now, there are a number of elements of integration around track, for example, specialty is now integrated with our hospital business.

The most important thing for us to have a culture integration and I'm very happy to tell you that both companies are culturally integrated so nobody is leaving.

The pathologists are pretty excited and engaged, and they are influencing some of our strategic discussion going on about cancer diagnostics.

I was worried about United contract, and they renewed the United contract and we have not lost any significant customers, so all of those things are really going in the right direction.

Obviously, we are a conservative management and we have a lot of experience in the integration, so we intentionally delayed two or three elements and that's a deliberate delay to make sure that we build this business for long term rather than short-term and they are like slowing down the IT conversely because we wanted to really make sure that they have all of the features and benefits which will help both companies.

Looking at the bad debt, bad debt is just not only a systems issue results, but a culture issue but those are the two things that are going to take a little longer but I'm really very proud of the number of pathologists we have and what the they can do with the Company and this was when you look back, would be the game changer in this industry so I'm pretty excited already.

One last question for you, Surya, and I'll jump back in the queue, how big is the Indian market right now and what is it growing at?

Okay, how big is the Indian market?

Indian market and Diagnostics is probably like 20 or 25 years ago in the United States, it's a very fragmented market.

And it's only $1 billion but because you really have this 300 million middle class with a lot of discretionary income, they are now moving from consumer electronics to healthcare, so if we just take 300 million middle class, think about the population here, I believe that that market is going to grow at least 15 or 20% as we go forward, and we are starting from scratch and building the value preparation and we believe that this is going to be the largest return for us and that's the reason why we announced this time that in the long term, in five years we'll have 10% of our consolidated revenue from international.

But we have also, I have to say, we just announced our first contract yesterday, from (inaudible) Life and like any other things it's going to take some time but again India represents the biggest opportunity for us outside the United States.

And I think down the road, India is going to present acquisition opportunities as well.

It's a very fragmented market today and after we have our operations up and running for awhile and we start growing organically there, down the road we will look at potential acquisition opportunities.

So get ready to visit India in the coming years.

Great.

Look forward to it, thank you.

Amanda Murphy with William Blair.

Hi, good morning.

In addition to the international expansion, do you see an opportunity to--.

Amanda we can't hear you.

Can you speak up, please.

I'm sorry is that better?

Yes.

Okay, sorry.

In addition to the international expansion, do you see an opportunity to gain market share in the U.S.

still and if so what strategies do you have in place to do so?

Absolutely.

We are the leader but we only have 15% of the market share.

There's a lot of growth opportunities.

As we mentioned that we are in medical service business, and the most important thing for our customers is quality and reputation, and because of our superior service, we still have 20% of United and we are reorganizing our sales organization, they're focused and our goal is to really grow and gain our market share in the U.S.

and 15% is not where we're going to stop.

Okay, and then in terms of working with health plans to control leakage are you seeing anything new or any new willingness out of health plans to implement tools to help control that metric?

Yes.

We look at the collaboration in both health plans and also we're collaborating on how to really pursue the doctors to send the samples to us, and now, it's an active engagement between us and health plans and it's something which you have to constantly work on.

And it's not only the health plans that are looking to do that.

Employers as well are looking to drive more of the work in network so that they can realize the savings associated with that as well.

And there's opportunities for us to work with the payers and the employers jointly in that effort.

Such things like co-pays and things like that that the employers are looking at?

Certainly, design is part of it, but just education can drive a lot of it as well.

Okay, thank you very much.

Kemp Dolliver with Cowen and Company.

First question relates to AmeriPath and at the time of the acquisition you set out a goal for this year that the implied multiple or the effective multiple would be 10 times EBITDA, and given the IP spending and the like, I'm still trying to reconcile whether that's still, you're going to achieve that this year and if not, how much of a variance we're likely to see?

Kemp, as I mentioned the IT spend is incremental to what we initially anticipated, and while this year, AmeriPath was somewhat dilutive and maybe a little more dilutive than we had anticipated and a lot of it being associated with bad debt, we're expecting significant improvements in 2008, but we're not providing a specific 2008 impact.

As I said earlier when you start to bring two companies together, and you operate it as one business, it becomes really difficult to break it out and frankly, we've never done that for an acquisition in the past, and AmeriPath is really not going to be any different.

Okay, and Bob, I think you did give this earlier but I wasn't sure I understood the numbers.

How much of the incremental IT spending would relate directly to the things you want to do at AmeriPath?

Well, of the $0.20, about $0.13 is systems development and deployment, with what I would characterize as the majority of that being AmeriPath.

That's great, thanks.

The second question relates to India.

Looking past this year, when you talk about the 3 to 5 year impact over time, does that contemplate opening additional labs or are we in a situation where this year, you've got the costs of entering the country, the cost of starting up one Lab, and that over the next few years it's going to be a matter mainly of how well this lab does or?

No, Kemp.

India is a very large country and some cities are probably 5 to 10 million people, more than Sweden and Finland, so we have to have other laboratories, we are cautious as far as our expansion, but our goal as we said for the next several years, we are going to invest in India and make sure that we establish ourselves in the major metropolitan area, and provide esoteric testing for hospitals and specialists and do clinical trials, so you will see we will build other laboratories and also we will acquire companies there.

Is the profitability there likely to be comparable to U.S?

Well, again, we're just starting and the model is very different because obviously, there's no managed care organized and there's no private payers, but it's too early to say exactly whether we'll have the same profit over there as the U.S.

Okay, thanks.

[Dave Bronton, with Trove Partners].

Just to follow-up on exactly who are the payers?

Is there any government healthcare?

Yes, there are some government payers like the dormant, depends Railways, there are some companies and the hospitals there, the insurers but mainly it's like Brazil.

It's mainly paid by the private payers and -- sorry, private patients and some employers.

And what is the approximate revenue per accession now?

We are just opening the lab right now.

But there are people in business, I assume you've done some kind of work.

The lab is not yet operational.

Your lab.

There must be other people in the business.

Yes, but I am, but you cannot really take their numbers to do certain things, we obviously have a different model and we want to provide esoteric testing in some of the labs they don't provide those tests.

That's the important point.

We're coming in with gene based and esoteric testing, the high end testing, this isn't going to be just a routine laboratory here, and obviously, the revenue per rec will be very different.

Is your lab open?

I'm sorry.

I didn't quite get that.

It's going to open, go online this quarter.

Do you have a price list on routine testing available?

You ask too many questions, of course they are available but obviously, it's a local price list with a local market, and--.

How does it compare to U.S.

prices?

Well, of course it's lower than U.S.

pricing.

You're paying in dollars and the rupee's are very different.

Cost will also be lower there as well.

And is there any currency hedging you contemplate?

Right now, since there's no business there, there's no hedging related to it, but certainly, it's a vehicle that we consider for any foreign exchange risk that we've got.

Thank you.

[Levon Von Reden] with [Hockey Capital].

Yes, just a couple of housekeeping questions.

Could you talk a little bit about your D&A and tax rate expectations for 08?

Well, what was the question?

Yes, could you talk about your depreciation and amortization and your tax rate for '08?

Tax rate.

The tax rate for '08, the tax rate for '08 won't be significantly different than it is for this year, which is just over 39%.

For the most part all of our operations, the vast majority today are still domestic, and you've got a 35% federal rate and then you have state rates net of the federal benefit, which puts you in the 39 to 40% range or so.

And your depreciation and amortization?

Amortization runs about 9 million a quarter.

And then obviously depreciation--.

We don't give specific guidance on depreciation.

You can take a look at what it ran in the fourth quarter and run your own models.

Okay.

And since I got you on the line, for the free cash flow that you're expecting in '08, uses of that?

Maybe give some top line expectations for those?

Well, certainly as you know, we are going to be deploying some of the cash to delever, that's one of the commitments we made to our lenders when we levered up the complete, the AmeriPath transaction, but certainly as we get back in line with the credit statistics that we target, then our excess cash flow generally, our first choice would be to have it go towards growth and when those growth opportunities aren't available, then to share repurchases.

And that's essentially the way it's historically operated the business but again in '08, you'll see us with a focus on repaying some of the debt and getting the credit stats down into more manageable levels.

Thank you.

Bill Bonello with Wachovia.

Great, thanks.

Just a couple of follow-up questions.

Just on some of the other investments that you have done, can you give us any sense and I know you said you don't break out specific initiatives but just wondering if you can give us any sense of the current contribution from the three big acquisitions that were completed over the last couple of years so AmeriPath, Focus, HemoCue, are they still a net-net a drag on earnings, are they contributing to earnings?

How do we think about sort of return on invested capital for that I guess it was about 3 billion of spend.

Well, you should think at this point, the ones that we can put AmeriPath -- Lab One which is fully integrated right now, Focus which is fully integrated, those are generating returns that are in line with what we had anticipated.

There were a lot of synergies involved in the Lab One deal which we have now fully realized and the Focus transaction was really about accelerating growth on the hospital side as well as in the product side, and we're certainly seeing that from that acquisition.

And how about HemoCue?

HemoCue is one that is just beginning to ramp up, as you heard.

We've got some products that were just approved the FDA, and that's really a business that we acquired because of its product portfolio and its pipeline of new products and we expect over the next several years that that's really going to ramp up and be a nice contributor.

And Bill, take for example, Focus.

We acquired it to be the number one in infectious disease but now we're number one in clinical trials of action so some things you recognize ahead of time and sometimes you do certain things and then it provides the assets and capabilities and at the end of the day, we want to be whatever it's testing, it doesn't really matter who they are, the center piece of the Company is going to be testing.

Sure, and then on the HemoCue mentioning the FDA approval, can you give us any update on your progress towards getting those tests CLIA waived.

The applications have been filed and are moving I guess at the time line you progress, so they're moving forward on, once we've got with the FDA clearance, we are able to start actually marketing those in a moderate complexity environment as well, even without the CLIA waiver.

But maybe year-end on the CLIA waiver or?

It's tough to put a time--.

It is FDA so we obviously, it is difficult to know the date.

And then just, I wanted, somebody asked about this but I guess I'm still a little confused on the stat you gave around the cost savings.

I thought I heard you say that you were exiting the year with 100 million, and then I thought in previous calls, you had said you were at a run rate of 200 million, but I might not be comparing apples-to-apples in the numbers you're giving.

Bill, this is Bob.

You heard both numbers right but they're separate numbers.

Through the first half, as of the end of June, we had reduced our cost structure by approximately $200 million associated with the change in volume from the United contract.

We then said that on top of that, we're going to reduce our costs by another $500 million, by the end of 2009.

Of that $500 million, we've realized $100 million on an annualized basis as we exited '07 and we're going to see the remainder of that, the $400 million or so, realized by the end of '09 or as we exit '09.

Okay, and again, that hundred is a net number?

Correct.

Okay, that's great.

Thank you very much.

Your last question is from Tom Gallucci with Merrill Lynch.

Thanks.

Just a couple of quick follow-ups.

I guess just on the spend, Bob, the $0.20 or so, what's the time frame to do these system implementations in particular?

Sounds like India will be the net investment for a couple of few years.

Will the IT all be done in '08 or should we expect there will be some more as we look into '09?

There will be more in '09, Tom.

The big costs that we're incurring this year is on the development side, and I think we'll have all of the development done in '08 and then it becomes implementation costs beyond that.

Right.

Just on '08 guidance, interest expense, can you offer any number there?

You said you were going to pay down some debt and then you've got a fair amount that's variable rate and obviously rates have come down a bit so can you sort of frame what the you're thinking about on that line item?

Again, we haven't given guidance on the components but as you heard me say earlier, you should expect that we're going to continue to reduce our debt levels and as you know, interest rates are moving down although we have a significant piece of our debt that's a fixed rate and in fact, even a portion of that was floating, has been converted to fixed earlier in the year.

So do you have a number that's maybe the total that's either variable or fixed at this point including those hedging?

You know what?

You should be able to take a look at that.

We're going to be filing our 10-K later this week and all of that detail is laid out in there but the vast majority of it is fixed.

Okay, and then I just had one more to make sure I understand, on, I know it's a sensitive issue but on NID, I mean you talked about if you couldn't come to a settlement you'd be prepared to litigate but you got a $241 million reserve at this point, so I guess just simply, is that sort of the minimum we should be thinking about and if you can come to a settlement hopefully that's the right range but if you have to go litigate obviously the government must be looking for something bigger than that?

Well, as you see disclosed in the footnote that we've got, we indicate that that is what we leave is the minimum estimate of the liability, but what you also heard me say is we are much closer to either settling this or determining that we're not going to be able to reach a settlement, in which case, we're fully prepared to litigate it.

And when you come to that conclusion if it's not a settlement and it goes to litigation that will be sort of news worthy and you'll let us know?

I would imagine it would be.

Thank you very much.

Thank you for participating in the Quest Diagnostics fourth quarter and full year conference call.

A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.Questdiagnostics.Com .

A replay of the call will be available from 10:30 a.m.

on February 21, through 11:00 p.m.

on March 20, 2008, to investors in the U.S.

by dialing 866-393-1025, investors outside the U.S.

may dial 203-369-0451.

No passcode is required for either number.

In addition, registered analysis 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 website.

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