奎斯特診斷 (DGX) 2008 Q1 法說會逐字稿

Welcome to the Quest Diagnostics first quarter 2008 conference call.

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

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

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

Now I would like to introduce Laure Park, Vice President of Communications and Investor Relations at Quest Diagnostics.

Go ahead, please.

Thank you, and good morning.

I am here with Surya Mohopatra, 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 management's current estimates, projections, expectations, or beliefs, 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, changes in relationships with customers, payors, suppliers, and strategic partners, and other factors described in the Quest Diagnostics 2007 Form 10-K and current reports on Form 8-K.

A copy of earnings press release is available and a text of our prepared remarks will be available later this morning in the quarterly update sections of our website at www.questdiagnostics.com.

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

Now here is Surya Mohopatra.

Thank you, Laure.

During the quarter, we delivered strong growth in revenues and earnings.

Consolidated revenues grew 17% to $1.8 billion, earnings per share increased 31%, and cash flow was $158 million for the quarter.

During the quarter, we also made good progress in all elements of our plan.

We grew profitable organic revenue growth, we followed our line AmeriPath with Quest Diagnostics, we generated double digit revenue growth in our near patient, our point of care testing business, we continued to reduce our cost structure and improve our efficiency.

We opened our lab in India, which is a key market for our international business, and we were e the only company in our industry to be named one of America's Most Admired Companies by Fortune Magazine.

After we hear from Bob, I will address each of these elements.

Bob?

Thanks, Surya.

As you heard, we continued to make solid progress against our plan, and are on track to meet the goals we established for the year.

As I take you through the numbers, I will elaborate on the areas of progress Surya highlighted.

Before I do, I'll quickly address NID.

We are continuing our discussions with the government to attempt to settle this matter.

We have made no adjustments to our reserve and have no updates to the status we provided you in February.

Now, let's to the results.

Revenues were $1.8 billion, 16.9% 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 17.1% above the prior year, with AmeriPath contributing about 14%.

Volume was 5.6% above the prior year, and essentially even with the prior year before the AmeriPath acquisition.

This reflects continued growth in our underlying business, adjusted for the United contract change.

Remember, that change went into effect January 1st of last year, and most of the volume loss ramped up over the course of last year's first quarter.

Therefore, there continues to be about a 1.5% carry-over impact in comparing this year's first quarter volume to that of last year.

During the first quarter, there was a positive impact to the year-over-year revenue per requisition comparison of about 0.5% due to higher reimbursement on the retained United work, which brings the year-over-year revenue impact of the contract change to about 1%.

Since most of the volume impact was felt by the end of last year's first quarter, and since there continues to be no significant change in the amount of the United volume we have retained, over 20%, we expect a more limited impact on future quarterly volume and revenue comparisons.

Revenue per requisitions improved 10.8%, with 7.8% of the increase due to AmeriPath.

The balance of the increase in revenue per requisition, about 3%,continues to be primarily driven by a positive mix, partially offset by price reductions on various health plan contracts.

This 3% increase compares to an increase of 5.4% in the fourth quarter of last year.

The difference is due to the anniversary of the positive price impact of the United contract change, and pricing reductions negotiated last year, which went into effect January 1 of this year.

As we previously explained, all of our largest health plan contracts have now been renegotiated for multiyear periods, and we believe there's much more stability in pricing than a year ago.

Adjusted for last year's contract losses, we continued to see growth in our base volume of between 1 and 2%, similar to the Q4 level.

This is despite seeing a significant decline, almost 10%, in preemployment drug testing, which accounts for about 7% of our total volume.

Given that this tends to be very low priced business, the impact to revenue and profitability is generally much less.

Our drug-testing business and our risk assessment business, which serves life insurers, are our two businesses most subject to a slowing economy.

We expect both of these businesses to see their growth impacted this year and are taking actions to manage their cost accordingly.

However, please note that these businesses combined account for less than 10% of our total revenues.

In our actions to manage their costs, we do not expect their performance to alter our consolidated revenue or earnings expectations for the year.

Lastly on the topic of revenue growth, we saw a strong double digit growth in each of our point of care, clinical trials and health care IT businesses in the quarter.

You will hear more from Surya on the point of care business.

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

Operating income as a percentage of revenues was 15.7% for the quarter, up 2.5% from last year's first quarter, principally due to the actions we had taken to reduce our cost structure.

This percentage is below the level we exited last year, primarily due to annual salary and wage adjustments which go into effect in the first quarter, a seasonal increase in bad debt, as well as pricing reductions, which went into effect January 1st.

However, we expect that our operating income percentage will continue reflecting improvement over the prior year in each of the next three quarters, due to continued revenue growth and further savings from our cost reduction program initiated last year.

That program, which we expect to reduce our cost structure by $500 million as we exit 2009 delivered over $100 million in savings as we exited last year, and we expect to have realized about half of the remainder as we exit this year.

The largest component of the savings will come from streamlining processes and increasing productivity in our labs by deploying lean six sigma.

First deployment of lean is now complete and has been fully analyzed.

The analysis has confirmed significant productivity gains, double digits in most of the impacted departments, exceeding our initial estimates.

We are now utilizing the learnings from this first deployment to insure we maximize the returns and facilitate the deployment of lean to our other labs around the country.

The other major elements of our program which contribute substantial savings include having more of our purchasing through master contracts to take advantage of our scale, deploying enhanced connectivity to our customers and patient service centers, which helps reduce costs in specimen data entry and billing, and helps lower our bad debt, driving efficiencies in other areas by better aligning our service capacity with patient and sample floats, and improving the efficiency of our logistics routes by using advanced route optimization tools and other techniques.

We are seeing good progress across all of these areas.

Bad debt expense as a percentage of revenues was 4.8%, up 0.4% from last year, but down 0.3% before the inclusion of AmeriPath.

Slight increase from the fourth quarter rate of 4.4% is due to the typical increase we see in the first quarter associated with patient deductibles and copays.

We do not anticipate any significant impact to our bad debt rate as a result of an economic slow down.

A higher bad debt rate carried by AmeriPath continues to be an opportunity which we expect to begin realizing later this year.

Diluted earnings per share from continuing operations were $0.72 compared to $0.55 last year.

Last year's first quarter EPS was reduced by $0.04 of special charges, principally due to work force reductions.

In providing guidance for 2008, we indicated that we expected to make investments in systems and our start up in India, which together would reduce full-year EPS by about $0.20.

We are on track with both of these initiatives and have incurred about $0.03 of the impact in Q1.

Our lab in India, in the New Delhi region is now operational.

We are in the early days of ramping up our selling efforts and our other support functions.

This market is expected to be a significant contributor to our international contributions.

Revenue we expect to realize this year is less than $10 million.

Our estimate for start-up losses this year of about $0.07 per share is unchanged with $0.01 of that realized in the first quarter.

Our systems investments, totaling $0.13 a share, associated with developing and deploying standard systems across AmeriPath and our clinical labs are also on track.

With completed enhancements to the AmeriPath lab and billing systems, we plan to begin deployment in the second quarter.

Additionally, the linking of Care 360 with AmeriPath systems for test results is on track with completion expected by the end of the second quarter.

We expect the initial development associated with the standardization of our clinical lab testing to be completed in the second quarter with deployment of the enhanced system to begin shortly thereafter.

The remaining development is expected to be completed around year-end.

For the first quarter, we incurred roughly $0.02 of the $0.13 per share we expect to spend this year.

Cash from operations for the quarter was $158 million compared to $152 million last year.

Keep in mind the first quarter cash from operations is typically lower than the quarterly average due to the timing of various cash flows.

During the quarter, we reduced debt by $113 million, bringing our total debt reduction since the AmeriPath acquisition to more than $500 million.

Cash at the end of the quarter was $170 million, and capital expenditures were $47 million in the quarter.

Days sales outstanding were 48 days, unchanged from year end.

Turning to guidance for results from continuing operations, full-year 2008 guidance is unchanged from what we provided you in February.

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 and $300 million.

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

While there is still much more to accomplish this year, we have gotten off to a very solid start.

Our confidence in achieving our goals, financial and strategic, continues to grow with each milestone achieved.

Now, I will turn it back to Surya.

Thanks, Bob.

During the quarter, we drove profitable organic revenue growth, leveling our sales, surveys, and signs.

As Bob said, revenues for our clinical testing business were up 17% year-over-year.

We are working closely with health plans and offering them a series of unique services to meet their requirements.

For example, with Aetna, we have been communicating to patients the benefits of our unique appointment scheduling services, patients appreciate the convenience and their employers like the fact that their employees can remain productive if they use Quest Diagnostics.

With Cigna, we are recently launched a program to educate physicians about the benefits of H.

Pylori testing for early detection of digestive disorders.

Previous programs have focused on expanding colorectal screening using our proprietary Insure test.

With Wellpoint, we continue to promote e-prescribing in a pilot using our Care360 portal, which combines prescribing and laboratory data.

E-prescribing can reduce medical errors and costs, avery drug interactions, and drive appropriate drug utilization.

These service offerings are unique to Quest Diagnostics and are available to help regional and national health plans improve patient's health and manage cost for their customers.

We continue to grow our esoteric testing services.

[We invest in] esoteric testing revenues increased over 20% in the quarter.

We are seeing strong growth in HIV, cystic fibrosis and tests using as [tandem mastecs] such as Vitamin D and testosterone tests.

We are also excited that we are providing physicians the gold standard proprietary test for kidney stone evaluations, [ural risk] and stone risk.

Also during the quarter, we licensed a promising new biomarker from Epigenomics for a future colorectal cancer test from a blood sample.

Our unique proprietary tests and service offerings are helping us grow our hospital business, we won a number of new hospital and commercial lab accounts during the quarter.

Hospital and other commercial labs value our superior service, quality, comprehensive testing menu.

We are in the process of aligning AmeriPath and Quest Diagnostics.

For the quarter, we completed the integration of specialty labs, AmeriPath's esoteric testing business.

We have engaged a pathologist in the process and together we are executing our growth plans for anatomic pathology.

We have extended a key health plan contract, and we are leveraging our physician sales force to sell the AmeriPath value preparations to primary care physicians, who represent a major growth opportunity for us.

We are moving with deliberate speed and the integration is on track.

Our newer patient testing revenue grew double digits.

Newer patient testing is providing exciting opportunities to improve care and reduce costs by enabling physicians to make more timely treatment decisions to the patient at the point of care.

We expect new product launches from our HemoCue-focused diagnostics and enteric operations to drive further growth.

For example, HemoCue is simply an FDA-cleared hand held white blood cell monitor has the potential to change medical practice, by enabling physicians to diagnose infection, inflammation, and other serious conditions at the point of care.

We are currently waiting for a clear waiver, which will greatly expand access for this test.

Similarly, focused diagnostics is awaiting a clinical clear waiver for its [Harkis] Express test.

This test can quickly and accurately diagnose a herpes infection, allowing the physician to make an immediate treatment decision while the patient is still in the office.

We recently launched a physician office version of the Insure fecal immunochemical test for colon rectal screening.

This product provides physicians with the ability to generate the test results in their office, which have the potential to increase patient compliance.

In conjunction with the test, we also launched an exciting educational campaign to promote the benefits of early detection of colorectal cancer.

We set an ambitious goal of reaching 5 million people over age 50 within the next five years.

And I would like to invite each of you to join me in our challenge to increase early detection by visiting www.DoYouHaveTheGuts.com.

We are expanding our international business by entering the Indian market.

Today India is an underserved health care market.

Fast growing with the diversified customer base, India has suppressed China as the most popular site for clinical trials in Asia.

A lab in the New Delhi region is operational, we have begun to sign contracts with customers to build a business focused on esoteric trials, trials, assessment and new assent testing.

We are in the very earliest days and continue to believe this is a significant opportunity.

Before closing, I will briefly comment on recent developments associated with the CMS competitive bidding process.

As I am sure most of you know, the competitive bidding pilot in San Diego was successfully challenged by the local hospitals.

In granting the preliminary injunction, the charge expressed concern about the quality of patient care if the pilot were to move forward.

We continue to believe that competitive bidding is not apropos for laboratory services.

In summary, we are focused on execution and our approach is bifocal.

We are committed to deliver results in the short term while building sustainable shareholder value for the long term.

Last year, we took many bold and decisive actions to reduce uncertainty in this n industry and we also built a platform for our growth this year and beyond.

During the quarter, we make good progress in all elements of our operating and strategic plan.

In particular, we generated strong top and bottom line growth with our revenues increasing 17% year-over-year.

Our cost reduction is in full swing and we are on track to achieve our goal of reducing our cost structure by $500 million by the time we exit 2009.

And we are on track to deliver our commitments for 2008.

We'll now take your questions.

(OPERATOR INSTRUCTIONS) One moment for the first question.

Our first question comes from Art Henderson, Jefferies and Company.

Sir, you may ask your question.

Good morning.

Very nice quarter.

Couple of follow up questions.

Bob, you had discussed a little bit if the economy took a real downturn here, what the exposure would be.

If I am understanding you correctly, less than 10% of your business you really consider to be more discretionary in nature, I guess, drug testing, and if you could just elaborate on that a little bit more.

Sure.

As I mentioned, we have two businesses that are really most subject to an economic downturn, that being the drug testing business which is really preemployment drug testing and our risk assessment business, which does testing for the life insurance industry.

And both of those businesses are already feeling the effects and we are starting to address their cost structures.

As I said, combined they account for about a little less than 10% of our total revenues and we don't believe that there's anything in their outlook that would cause us to change that, the guidance for those two.

When you think about our, the rest of our business, the physician business, the hospital business et cetera, where the effects of the economy generally would show up there, would be in our volumes.

Volumes generally move in line with physician office visits.

We don't believe we saw any impact to volumes in Q1.

The underlying volume that we saw in Q1 is consistent with what we saw in Q4, and throughout the second half of last year, we saw the volume, the underlying volume growing.

However, if a patient doesn't come into a physician's office, we are not really sure why, quite frankly.

But to the degree that we see any impact on the physician's side of the business, we don't believe that it will be significant nor cause us to be outside the guidance that we put.

Frankly we would have to, think about doing some further adjustments to the cost structure if we saw that.

But at this point, we are not anticipating any significant changes there.

So we wouldn't need to worry about any pick up in bad debt expense as far as self pay goes?

No.

Bad debt is mostly driven by the quality of the billing information we get and not an inability of people to pay us.

We don't expect the economy to be a significant impact on our bad debt, unlike hospitals because the vast majority of the testing that we do is actually for insured patients.

Okay.

Great.

That's helpful.

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

You indicated that you spent about, it looks like about $0.03, actually, it looks like about $0.04 of the $0.20 during the quarter, or actually $0.03 I guess it was, $0.03 of $0.20.

How should we think about that for the remaining few quarters.

I know you don't give quarterly guidance.

Is that spread equally or front loaded?

How should we think about that, Bob?

I want to stay away from trying to give you guidance on that since we don't give quarterly guidance, but obviously since we only spent $0.03 in the first quarter, you would expect that the rate of spend in the rest of the year is going to be higher than what we had in the first quarter, and frankly, how much hits in the second, third and fourth is really a function of a number of things including how fast we can actually complete the development and then the deploy some system changes.

Okay.

Thanks very much.

Our next question comes from Adam Feinstein of Lehman Brothers.

Sir, your line is open.

Thank you.

Good morning, everyone.

Just a couple of housekeeping questions.

Bob, did you say that the bad debt expense, excluding AmeriPath, would have been down about 30 basis points?

Did I hear you correctly?

And as as we think about bad debt, what sort of goal do you guys have there so as we think about any sort of goal that you could outline whether it is a shorter term or longer term goal in terms of where you would like bad debt to be.

Obviously, we want it to be lower; right.

And the big opportunity for us right now is reducing AmeriPath's bad debt, which we expect we will be able to start making progress on this year, and we expect to see that starting to ramp down as the year goes by.

But also, when you look at our $500 million cost reduction program, a significant portion of that is reduced bad debt as well.

That's a function of deploying more electronic connectivity, which gives us better billing information, doing some things in our billing shop, using some Six Sigma processes et cetera.

So I want to stay away from giving a specific target for bad debt.

It is something we believe we can continually start to drive down.

It is a big opportunity for us, even when we are at 4%, like we were before.

Okay.

And then just a follow up question here, just on the managed care contracting side, clearly last year was a difficult year, a lot more stability this year, but in your opening comments, you had mentioned that there was some price reductions that took effect on January 1.

Just curious to get an update in terms of the managed care landscape, would you guys say you are more upbeat, more cautious there, and then just curious, any updates in terms of some of the newer contracts that you signed at the end of 2007?

Adam, last year was a challenging year but we took a lot of decisive action and we feel very good about our relationship with health plans and as you heard, we have a number of unique services we offer and we are working with all of the labs and smaller health plans to help them to reduce their costs by providing some unique offerings.

Last year is gone and we feel better.

Certainly pricing is much more stable than it was a year ago.

Okay.

And then this may be difficult to answer but just on the Sierra business, any update in terms of what UNH intends to do do with that piece of business?

At this point in time we have seen the letter that has been sent to the physicians which would indicate they need take care of some matters related to the disposition of those members to Humana, so we are watching this closely.

You know, we still have retained the United business.

As you know, our AmeriPath subsidiary extended their contract with United.

Okay.

Great.

Thank you very much.

Our next question comes from Ricky Goldwasser of UBS.

Your line is open.

Good morning.

A couple of questions.

First of all, on the volume growth of the 1 to 2% on a normalized basis.

Is this in line with your expectations, internal expectations and do you expect that metric to accelerate as we progress in the year?

Certainly volume is tracking where -- it is in the range of where we thought it would be at this point, and it is certainly one of the things that we are focused on and our plan is to try and ramp that up as the year progresses.

And is in terms of focusing are you deploying more sales people into the force?

Can you just give us a little color on how you are going to get volume growth back?

Again it is not necessarily adding sales people but if you look at last year, what was going on, we had the sales force very focused, on explaining contract changes.

And when they get in front of a physician we had rather see them selling than explaining changes in contracts.

That's what we are doing this year.

We are getting the sales force back to selling.

We started to see that last year in the second half of the year and the volumes started to improve.

We are continuously seeing growth in the underlying volume.

And our plan is to continue to see that over the course of the year.

Ricky, we have introduced a lot of proprietary products and some of those products are doing very well whether it is Insure or whether Lumeta, or whether it is now going to be the [urolase kinstolarase], so we continue our diversification toward higher margin, higher growth esoteric DNA testing and AP.

That's also helping us.

And in terms of the impact Surya just to follow up.

In terms of the impact to pricing, can you quantify what was the contribution to pricing from more proprietary products?

We don't break into that.

It is not just one product, but Bob you want to make any comment?

As I said in my remarks, in most of the increase came from mix.

Some of that mix had to do with the fact that the United contract changes started to anniversary and the big benefit on pricing there is actually going away a little bit.

But yes, on the other hand, we continue to sale a lot of esoteric and gene-based tests, which carry higher reimbursement rates, and that has been improving the revenue per requisition and we expect revenue per requisition to continue to be positive throughout the year, driven principally by the fact that we are selling new tests and a better test mix.

The other thing I would ask you to keep in mind is, we got away from giving specific guidance for volume and revenue per requisition because essentially what we are looking to do is accelerate revenue growth and sometimes that means you focus at the expense of the other potentially.

But our focus is all about profitable revenue growth and I would caution everybody not to focus too much on quarter to quarter, slight quarter to quarter swings in either the volume or the revenue per requisition.

And two last questions.

First, on the physician fee schedule, does your affirmed guidance assume that reimbursement changes post June, then, if you could just remind us, what percent of patients use your drawing centers versus samples taken at a doc's office.

Also what is the process there.

So for patients who actually used Quest drawing center do you basically take their credit card information or if you can walk us through that.

First on the physician fee schedule we are not assuming any changes in the physician fee schedule as we go into the back half of the year.

We are assuming that basically the fix stays in place.

On the PSC side, we have about one-third of our volume is coming into the patient service centers, and clearly you're right, that when they come in through the patient service center, we are able to insure the accuracy of the billing information and where appropriate and calculable, we can collect payments, as well.

The big key is we can make sure we have good billing information and good clean information at that point of service.

Okay.

Thank you.

Our next question comes from Ralph Giacobbe of Credit Suisse.

Your line is open.

Thanks.

Just a quick question on organic growth so I know I understood you correctly, it sounds like United, basically about a percentage point overall taking into account pricing and volume.

So in looking at organic growth, roughly 5% for the quarter, is that fair.

It is actually a little less than that.

Okay.

And I guess is there anything, noteworthy from whether it is incremental Aetna or loss of Cigna or weather impact, anything else we should sort of consider when thinking about the organic growth figure?

First there's no loss of Cigna business.

The Cigna business that we have continues to be consistent with the levels that we had prior to renewing the contract.

Most of the underlying organic growth that we are seeing is as a result of the Aetna contract.

And Ralph, I don't know if you said this but footnote four to the press release does lay out the significant drivers in the revenue net line.

Okay great.

Thanks.

Then just to clarify, I think there was note of an extension of a key managed care contract.

Was that the AmeriPath UNH.

Is that was what referred to?

Yes.

Okay.

Is there any other update sort of contracting in the northeast around GHI and Hip plans that have been sort of buzz in the market about that contract potentially coming up?

Can you give us the timing of that, if there's been any recent changes, et cetera.

Ralph, we don't specifically comment on contracts particularly when there's on going discussions.

But what I can tell you is that we are a contracted provider to both of those plans and we would expect to continue to be a contracted provider to both of those plans.

And then my last one just sort of thoughts on acquisitions you guys have paid down a decent amount of debt.

I know you said you are out of the acquisition market in terms of large sale.

There's some fairly sizable out reach labs out there I guess on the block.

Can you maybe talk about your appetite for acquisitions at this point?

Let me step back and put it in the context of the capital structure.

We managed the capital structure so we have the flexibility to be opportunistic with respect to acquisitions and other growth opportunities.

We also want to make sure we have significant operating flexibility to address situations which could impact our cash flow.

Like the NID settlement.

But in each case, we are considering what will provide the greatest long-term shareholder value.

To me that means having a prudent amount of leverage and operating within certain parameters.

That translates into generally not allowing our debt to EBITDA much over 2.25 times for an extended period.

We are currently outside those parameters, especially if you think about the $241 million-dollar reserve for NID as short-term debt.

At this point the majority of our excess cash flow this year is going to be used to pay down debt.

We paid down a little over $500 million in the last 12 months.

And that will be the focus this year.

It doesn't mean we won't do any acquisitions.

But the principal focus of cash flow deployment will be to repay debt this year.

Okay.

Great.

Thanks.

Our next question comes from Matthew Borsch, Goldman Sachs.

Your line is open.

Yes.

Thanks good morning.

Apologies if you already addressed this but could you talk a little to whether you can spike out any impact to volume from either the extra day in the quarter for leap year or the flu season?

Actually, it is an interesting question.

As we analyzed the volume and the number of business days that we have this year in the first quarter, the number of business days is actually flat with what it was in the prior year despite the fact that we had the extra day of leap year.

So there's really no impact of volume as a result of that.

With respect to the flu season, I will tell you, we have had flu seasons that have been nonexistent.

We have had really difficult flu seasons and historically we have not seen any significant impact to our volume as a result of the flu season.

Part of that is because there's not any specific test for the flu.

To the degree that it drives increases in physician office visits, you might see a little more testing, but generally there's nothing in the volumes that is we can see this quarter associated with the flu season.

Great.

And if I could ask a question on sort of a more historical basis.

Have you tried looking back at how the volumes may relate to the economy in any way.

Is there some historical perspective that there's a lagged relationship between a slow down in acceleration in economic growth that may be three to five years?

Have you looked at that relative to your own business?

We have.

And as I said earlier, if we are going to see any impacts of the economy in our physician business, it will show up in the volumes, but in the past when we have seen the impact of the economy show up it really has not been significant in terms of volumes.

Okay.

It was maybe 1% to 2% in the past.

And as I said we have not seen anything that we can discern in either our first quarter or in the second half of last year that we can attribute to the economy.

And one more question if I could, California, apparently the Blue Cross in that market has cut lab reimbursement, again apparently to 70% to Medicare, I am not sure who their applying that to.

Is that something that you're aware of, is that having a positive or negative impact on you guys?

We are obviously aware of that, and we have a contract with them in that marketplace which guides what our reimbursement will be there.

Are you seeing more volume directed to you as a result, if there's some independence that--

Nothing significant on that front.

Okay.

Thank you.

Our next question comes from Tom Gallucci of Merrill Lynch.

Your line is open, sir.

Just a couple of follow ups.

Bob before you said in response to bad debt there's a big opportunity there, and it's a good chunk of the $500 million in expected in cost savings, have you quantified, I don't recall if you had said what portion of the 500 is related to bad debt.

We have not given specific guidance on the components but what we have said is when you look at the $500 million and you look at where most of the costs are.

For most part, the savings is proportionate to where the costs reside in our business.

Obviously the biggest pieces coming from the laboratory, where we've got much of our cost and then you look at purchasing you look at bad debt et cetera.

Okay.

And then on the physician fee schedule, we are not expecting any change there.

So continued fixed days in place.

So is it material either way, or could you quantify what the change would be if the fix wasn't continued?

Keep in mind obviously the only thing it would impact is anything that of a pathology testing for MediCare, so it's a modest -- but a larger piece of the AmeriPath acquisition but we have not specifically quantified it and obviously, it is everything is baked in here.

Right.

Okay.

But it is modest is what you would say?

Medicare in totality for us, for all pieces of business is 15%.

Right.

A subset of that.

Right.

How big would that be then versus the total 15?

The 15% would include anatomic pathology and clinical laboratory testing.

So in total, if Medicare is 15% and of our total book of business, anatomic pathology it is about 16 to 17% of revenue.

And then United you sort of said I guess that you've been pretty steady there in the percent of business you have retained.

You have been saying for some time you would expect that to go down.

Is that still the case, and what is sort of your outlook there for this year on United-related business?

Without giving specific guidance around that because that is not going to be valuable, I don't think to anybody, we have not seen significant change in the amount of business we've retained.

Over time, we expect that some of that business will continue to shift away because of United efforts there.

But that is all built into the guidance that we provided this year.

Okay.

And my last one, Bob I just wanted too make sure I understood one statement you did make before.

I guess base volume growth in the 1 to 2% range.

When you were responding to Ricky's question you said most organic growth is a result of the Aetna contract.

I guess how do you see sort of industry growth versus contracts that you've added contributing to your base volume growth at this point.

Well, as I said most of the base volume growth is coming from the Aetna agreement, and as we step back and we look at total industry growth, which I think is more to your question here.

We still think that over time it is going be around 5% organic revenue growth.

Right.

And again, as I said earlier, it is not necessarily appropriate to focus on just the volume or just revenue per reck requisition in any one quarter.

Right.

Right.

Thank you very much.

Our next question comes from Kemp Dolliver of Cowen.

Your line is open.

Hi, thanks and good morning.

Two questions on AmeriPath.

First, could you just talk about what actions you have completed so far as it relates to say sales force training for cross selling and anything related and then also just if the retention of the pathologists is still at the level you had mentioned in the last call?

Yes, Kemp.

I am very, very pleased with the progress we have made in aligning AmeriPath with Quest Diagnostics.

We were concerned about pathologist retention, and I can tell you that we have retained all of our pathologists and they're engaged in growing the combined organization.

We have also renewed the contracts, contract with United that was a worry, whether United would renew the contract with AmeriPath or not.

That's behind us.

We have no customer attrition to speak of and we have completed this specialty integration.

Now we are in the process of integrating the sales force to do approximate cross selling.

So we are moving with deliberate speed as we told you that we slow down the IT roll out.

So all in all, activity, we have good progress and we are moving at deliberate speed and on track.

Great.

Thank you.

Thank you.

Thank you.

Our next question comes from Robert Willoughby from Banc of America.

Your line is open.

Hi, Bob I guess you don't want to comment on the components of the $500 million in cost savings that you have indicated but can you help us prioritize or at least kind of rank where the savings from switching suppliers from Cardinal to thermo is on that list?

You know what, that's one of many, many things that we are doing on the procurement side.

And again, I don't think it would be appropriate to comment on any one contract whether it is a customer contract or supplier contract.

To get an allocation of what kind of buckets the costs are in.

Actually the most recent investor presentation, there's a pie chart that splits the costs on a ratio basis between the major buckets between basically work within a lab, purchasing, billing and the other areas.

So there's a pie chart that's 500 on the ratio basis.

Great.

And just depreciation and amortization a bit light relative to where our expectation was.

Is this the new run rate or do you anticipate any incremental charges with the new systems this year.

Again that's not necessarily a component of the P&L that we give guidance on but I would not expect it to be dramatically different than you are seeing in the first quarter.

Great.

Thank you.

Our next question comes from Amanda Murphy of William Blair.

Good morning.

Just had a follow up question on AmeriPath.

Could you provide an update on your efforts to drive cost and revenue synergies out of the acquisition.

Last quarter you indicated operating margins would be up year-over-year are you still seeing the same trends in AmeriPath?

Well, with respect to the revenue and cost synergies, most of the cost synergies were coming from integration of specialty laboratories and as Surya mentioned earlier, that integration is essentially complete at this point.

And we feel good about that.

And the revenue synergies are really going to come as we scale the AmeriPath value proposition into the primary care physician's offices.

Surya commented that we're making good progress around getting aligned around that.

Okay.

Then in terms of the operating margins you are still seeing the same trends in terms of year-over-year increases.

In terms of operating margin as we realize the synergies there, as we start to ratchet down their bad debt we would expect that the operating margin for the AmeriPath business will improve over the course of the year, not dramatically different in the first quarter than it was as we entered last year.

Thank you.

Our next question comes from Bill Bonello of Wachovia Securities.

Your line is open.

Morning.

Just a couple of follow up questions.

So first of all back on the cost savings, you mentioned where you ended '07 and you mentioned where you expect to end '08.

I am just wondering if you can give us any sense of the sequential increase in cost savings achieved in Q1 relative to Q4 of last year and then just as we look forward some sense of the timing, in other words, just trying to figure out how much these cost savings are back end loaded in 2008 or is it a pretty steady progression throughout the year.

Well, Bill, again I am trying to stay away from giving quarterly guidance here as much as you would all move me to do that.

As we exit this year we expect to have about half of the remainder in the books at that point in a run rate basis.

And for us to get there, we can't have it all coming in the fourth quarter.

So you should expect that there is some ramping up throughout the year, but we are making good progress in each of the quarters this year in order to get to that number.

Did you make some progress in Q1 relative to Q4?

Absolutely.

The cost savings is real.

It is happening.

Okay.

And then, I guess the next question would be just as we think about the start costs and I know you have addressed this before.

I want to make sure we have it correct, the $0.20 of start up costs, can you give us some sense quantification of what portion of that recurs in '09 and what is essentially nonrecurring?

There's two big buckets.

One is the start up cost associated with India, which we estimate to be around $0.07 or so.

Let's follow through on that one first.

India we expect is going to be in a start-up mode for this year and next.

We expect to have some on going start up losses next year as well.

We are targeting for India to be break even by the time we get into 2010.

So there is going be some recurring costs there next year.

With respect to the systems deployment, the development and deployment, much of that, if not all of that development cost will be incurred and behind us this year.

Yes.

And the other piece which is really the deployment cost is starting to occur this year.

There will be some next year because that's a key element to our standardization in enabling us to realize the $500 million in savings.

But next year's amount associated with systems will be far less than this year.

And you know, what that is going to be is a little premature to tell you.

A lot of that is the function of the progress we make this year.

Okay.

That is helpful though.

And just as we think as you look at what your initiatives are to drive that $500 million, are there are any additional sort of nonrecurring costs that might not be occurring now that you already expect to come on line in '09 or 2010?

The only nonrecurring cost that we are not incurring now could potentially be associated with work force reductions, but frankly, we are managing most of that through voluntary turnover.

That's the way we have managed the vast majority of it to date and the way we will manage it as we go forward.

Okay.

And then, just the last question, just trying to sort of bridge the quarterly results to the, to the guidance and I mean if, you do $0.72 in the quarter to get to the low end of the guidance you would have to do $0.76 per quarter for the next three quarters, plus you are going have an incremental $0.02 to $0.03 of start up cost in each of those quarters, so you need an extra $0.06 to $0.07 of improvement.

Is most of that coming from increased cost savings over the future quarters, or what else drives such significantly higher EPS in the future quarters than in Q1?

Well, certainly a big element of it is to ramp up in the cost savings.

But also, keep in mind, we are expecting that our growth is going to continue to accelerate.

Okay.

So you do, even reel relative to Q1 you expect cost saving you would still expect some incremental, incremental ramp?

Yes.

Okay.

That's very helpful.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS).

Our next question comes from Andreas Dirnagl.

Your line is open.

I am showing from JPMorgan.

Hi, guys.

Bill stole my big question I will just ask my last one which is more of a settle one, Bob.

When you were commenting on as to whether the economy has had any impact in the past, clearly you talked about the down side in those two portions of the business.

Have you also done an analysis as to whether you guys are also part of what we see in particularly in hospitals where you have an acceleration of some elective procedures.

Does that result in higher volume sort of prerecession environment.

Is some of this volume because of that and at danger of slowing down?

That would be very, very difficult question to answer.

I don't believe so, but I don't know that we have anything that we can look at which would help us attempt to even quantify that.

There have been no like in the past you haven't seen a significant spike in volume prior to an economic downturn?

No, we have not.

Most of our business synergy comes from physician offices and I think diagnostics is still to health care services.

So I think if there is some changes, very slow, but as Bob said, we are prepared to manage our cost if there's going to be any softness.

Keep in mind, too, if this is actually happening with elective procedures which are taking place in hospitals and elsewhere, those are bigger ticket items.

We are talking, much smaller dollar amounts here.

So I am not necessarily sure that people would think about either delaying or accelerating this as a result of their thoughts around the economy.

Okay.

Great.

Thank you.

Our next question comes from Bill Quirk of Piper Jaffray.

Your line is open.

Thanks, good morning.

Appreciate the earlier comments on the Blue Cross Blue Shield contract of California.

Just wanted to follow up there, are we seeing any other activity in the balance of the Wellpoint Blue Cross Blue Shield and I guess as a follow on, have you assumed any changes to any of those contracts over the balance of the year?

Thank you.

We have nothing to report on any of the other Wellpoint contracts.

We are not anticipating any significant changes to any of them over the course of the remainer of the year.

And our last question comes from Ricky Goldwasser of UBS.

Your line is open.

Yeah.

Just one follow up question.

As far as AmeriPath I am not sure if you quantified it or not, but what was the EPS impact in the quarter?

Still slightly dilutive, not significantly different than we saw from the fourth quarter of last year but as the year progresses we expect to see improvement there.

So you expect it to break even by end of the year?

We have not given specific guidance on that and frankly, we are starting to integrate that business now and it becomes very difficult to segregate that out as you proceed along that line.

Okay.

Thank you.

And that does conclude the question-and-answer segment.

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

The transcript of prepared remarks on this call be posted later today at Quest Diagnostics' website at www.QuestDiagnostics.com.

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

on April 21st through 11:00 p.m.

on May 19th, 2008 for investors in the U.S.

by dialing 866-431-7950.

Investors outside the U.S.

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In addition, registered investors may access an on line replay at www.streetevents.com.

The call will also be available to the media and individual investors at Quest Diagnostics web site, the on line replay will be available 24 hours a day, beginning at noon.

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