奎斯特診斷 (DGX) 2008 Q3 法說會逐字稿

Welcome to the Quest third 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 For Quest Diagnostics.

You may proceed.

Thank you and good morning.

I am here this morning 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 to the date they are made and reflect management's current estimates, 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 effect 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 regulation, changing relationships with customers, payers, suppliers and strategic partners and other factors described in the Quest Diagnostics 2007 Form 10-K, 2008 quarterly reports on Form 10-Q and current reports on Form 8-K.

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

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

Now here is Surya Mohapatra.

Thank you, Laure.

We delivered another strong quarter of growth and cost reductions.

Our growth was based on improvements across the board in esoteric, gene-based and routine testing.

We also made progress with our cost reduction programs.

I am pleased with our progress.

During the quarter, revenues grew 3.4% to $1.8 billion, and adjusted earnings per share increased 12% and cash flow improved to $329 million.

For the full year 2008, we have raised guidance for our adjusted earnings per share to between $3.17 and $3.22.

Let me take a moment to give you our view with respect to the diagnostics industry, and in particular, to our company.

In light of the current economic environment, very general agreement, that we are in a recession and facing difficulty economic conditions.

While the rate of our growth may temporarily slow, diagnostic testing is a critical healthcare service and we expect continued growth in revenues and earnings.

Remember, that almost nothing happens in patient care without a lab test.

We provide important and essential information that influences more than 70% of healthcare decisions..

The demographics of the growing and aging population are positive for our industry and our company.

We are seeing the number of tests ordered for each person increase.

The rapid advances in science, medicine and information technology, are bringing new and innovative tests to market quickly, to diagnosis this and monitor therapy at an earlier stage.

This is accelerating adoption of many gene-based and esoteric tests and helping millions of patients.

And anatomic pathology and molecular diagnostics are critical to cancer care, and increasing reliance on the tests have reduced mobility and mortality.

Healthcare reform is on the agendas of both the presidential candidates.

Both candidates have indicated the need to promote wellness and prevention, rather than simply treating the sick.

Employers, too, have recognized the importance of helping their employees to become healthier and maintain their wellness.

Laboratory testing is as critical for wellness as it is for treating illness.

As a result, we believe that our growth rate will remain positive and that we will have an opportunity to grow our revenues and increase our market share.

Diagnostic testing is a large and fragmented industry.

We only have 15% of the market, leaving plenty of room for our growth.

Over years, we have invested in building unique products and services.

Come competitors may find it difficult to compete in a down economy and many hospitals may prefer to partner with us to manage their labs to reduce their need for additional capital.

Diagnosis testing remains an attractive segment of healthcare industry, and we are well-positioned to take advantage of growth opportunities.

I will give you a brief progress report on our commitments and growth initiatives after you hear the analysis of our third quarter results from Bob.

Bob?

Thanks Surya.

As you heard, our business is strong and performing well.

Its revenues and earnings have continued to grow and it has displayed outstanding cash flow characteristics.

Before I take you through the numbers, a quick update regarding NID.

After lengthy discussions, we are pleased to report an agreement in principal with the Federal government in connection with its investigation.

While there are still details to be negotiated and definitive agreements to be executed, the details that we can share with you are included in footnote 6 of the earnings release.

As a result of this agreement, we have increased our reserves related to NID by $73 million to a charge recorded in discontinued operations, bringing the total reserves to $314 million.

The timing of any payments against reserve will be addressed as part of the definitive settlement agreements.

We're pleased to have reached agreement on the most important elements of this matter.

Now, let's turn to the results for the third quarter.

Revenues were $1.8 billion, 3.4% above the prior year, and about 4% above -- before the impact of hurricanes, which adversely impacted our revenues and volumes in the quarter.

Revenues for our clinical testing business which accounts for over 90% of our total revenues or 3% above the prior year and about 3.5% above -- before the hurricanes impact.

The AmeriPath acquisition anniversary in the second quarter, and is no longer impacting year-over-year revenue comparability.

Volume was almost 1% above the prior career and 1.3% above the prior year before the weather impact..

Over the last three quarters, we have consistently seen growth in our underlying volume of about 1%.

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

As we have explained previously, this tends to be very low-priced business and its impact on revenue and profitability is generally less significant..

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

Yet, the profits for both businesses were above the prior year level due to aggressive actions we have taken to manage their costs.

These businesses combined account for less than 10% of our total revenues.

Revenue per acquisition increased 2.3%, with the increase continuing to be primarily driven by a positive mix, and is in line with what we saw in the first two quarters.

As we've previously indicated, all of our largest health plan contracts have been renegotiated for multiyear periods and we believe there is much more stability in pricing than last year.

The impact of various revenue measures for a number of the items I have just discussed is included in a table within footnote 5 in the earnings release.

Operating income as a percentage of revenues was 17.4% for the third quarter and reflects continued improvement despite the hurricane's impact of approximately 0.5%, principally due to revenue growth and the progress we're making with our cost reduction program announced last year.

That program which we expect to reduce our cost structure by $500 million is on track and we expect to have delivered over $300 million in annualized savings as we exit this year with the balance in 2009.

Last quarter, I outlined the major elements of our program that include using lean six sigma to increase productivity in our labs, driving more of our purchasing through master contracts to take advantage of our scale, better aligning our service capacity with patient and sample flows, optimizing logistic routes and using more fuel efficient vehicles, and deploying enhanced connectivity to our customers and patient service centers to reduce cost in specimen data entry and billing, and lower our bad debt.

We're making good progress across all these areas, particularly in billing and collections, where we continue to see excellent performance in bad debt, day sales outstanding and the cost of our billing operation.

Bad debt expense as a percentage of revenues was 4.4%, 4/10ths of a percent lower than last year, and unchanged from the second quarter.

DSOs were reduced to fewer 45 days down from 46 days at the end of Q2 and 48 days at last year-end.

With a disciplined approach, we expect to see continued strong performance in our billing and collection metrics, despite the slowing economy.

Included in other income expense, is a noncash charge associated with the writedown of an equity investment made several years ago.

While the accounting rules required us to write down this investment, we have retained much of the value we initially expected to certain rights to intellectual property associated with various tests being developed.

Diluted earnings per share from continuing operations were $0.86 before the investment breakdown and impact of hurricanes during the quarter which together reduced earnings per share by $0.05.

This compares to $0.77 in the prior year, a 12% increase.

Last quarter, we indicated that combined, our investments in systems and our start-up in India would reduce full year EPS by about $0.17.

We incurred $0.05 of the impact in quarter three, bringing the year-to-date total to about $0.12 and now expect to incur about $0.16 per share for the full year..

Our lab in India became operational earlier this year.

We're still in the early days of ramping up our selling efforts and other support functions, but seeing real progress.

While this market is expected to be a significant contributor to our international operations, we are not expecting it to contribute material revenues this year.

Our estimate for start-up losses this year remains about $0.04 per share.

We have incurred roughly $0.01 in each of the first three quarters.

Our systems investments expect to total $0.12 per share for the full year associated with developing and deploying standard systems across AmeriPath and our clinical labs are on track.

Year-to-date we incurred roughly $0.09, $0.04 in quarter three of the $0.12 per share we expect to spend this year on systems enhancements..

The cash flow produced by our business continued to be outstanding.

Cash from operations increased to $329 million for the quarter, compared to $291 million last year.

During the quarter, we reduced death by $131 million, bringing our total debt reductions since the AmeriPath acquisition to $830 million.

Capital expenditures were $45 million in the quarter.

In addition, cash and cash equivalents more than doubled to $287 million.

As you can see from our results, we have been very prudent in the way we have deployed our capital and maintained our liquidity during what has been an extremely challenging time for financial markets world wide.

Our strong cash flow, our accumulated cash balances and our unused credit lines with strong banking partners which total in excess of $1 billion position us very well for these turbulent times.

Until the credit markets demonstrate stability, we will continue to be prudent and conservative in how we deploy our capital..

Turning to 2008 guidance from continuing operations, we expect revenue growth to exceed 8% for the full year.

This is slightly below our previous estimate of approximately 9%.

The change is principally due to the impact of hurricanes in the third quarter, a delay in obtaining approval for one of our point-of-care products and not seeing the acceleration and volume we had anticipated in our clinical testing business.

While we have not seen the acceleration in testing volume we had expected, we continue to expect volumes in the fourth quarter to grow at rates similar to what we have seen year-to-date.

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

We continue to expect cash from operations to approximate $900 million.

And we now expect capital expenditures of between $200 million and $220 million.

And lastly, we have increased our estimate for adjusted diluted earnings per share and now expect between $3.17 and $3.22, excluding the third quarter impact of hurricanes and the investment writedown and any potential special charges..

These are challenging economic times, and no company will be totally immune.

However, we're well-positioned to not only weather them but to further strengthen our competitive position..

We have already made the investments which provide us with truly unparalleled assets and capabilities, making it harder for others to catch up during a period when, for many, access to capital will be constrained.

Our program to reduce costs and drive efficiencies have been underway for some time, and already, has excellent momentum.

And our strong financial condition and cash flow characteristics will provide us with the ability to operate our business and take advantage of growth opportunities more freely than others.

Because of these strengths, we are confident in our prospecting for both the near term and the long term.

Now, I will turn it back to Surya.

Thanks, Bob.

Over the past several years, we have taken a series of bold and decisive actions to drive profitable growth, expand margins, diversify our business and differentiate ourselves from our competitors.

Let me comment on our progress.

Our efforts to profitable growth is to leverage ourselves, service and signs.

Our revenue growth is driven by increased demand for all test categories including gene-based, esoteric and routine tests.

Gene-based and esoteric testing revenues grew by almost 10% during the quarter.

Testing volume for vitamin D, testosterone, chlamydia, gonorrhea and HPV testing all grew in double digits.

We also saw strong growth in certain segments of routine testing during the quarter.

ImmunoCAP allergy block testing continued to grow at strong double-digit rates from a larger existing base, with food allergy volume up 30% -- 35%, during the quarter, and nonfood testing up more than 20%..

[Tiliac] testing increased more than 25% and InSure colorectal cancer screening was up over 15%.

Leveraging our science with strong innovation and quality remains at the core of how we drive growth.

We are keenly focused on expanding our leadership position in cancer diagnostics.

We simply introduced the new HE-4 blood test for ovarian cancer recurrence.

This is the only test in the last 20 years to receive FDA clearance for monitoring ovarian cancer and we're the only national reference lab to offer it.

Ovarian cancer is the fifth most common cause of cancer death among women in the U.S.

with more than 15,000 deaths in nearly 22,000 new cases diagnosed per year.

This is just the most recent example in a long history of new innovative tests and technology brought to market by Quest Diagnostics.

The centerpiece of our business is diagnostic testing.

We have on parallel assets and capabilities, in order to leverage these assets for growth and increase our personal efficiency, we have been focusing on various customer segments who need our products and services such as patients, physicians, health plans, hospitals, employers, life insurers and pharma companies.

We are expanding our diagnostic scope and expanding our geographic reach.

Over the longer term, we expect additional growth to come from some of our newer businesses such as point-of-care testing and international.

We have seen strong growth in new patient point-of-care testing growing at greater than 10% year-to-date.

Increased demand for clear way of testing help drive this growth.

We have our stronger sales in the U.S.

in 2008.

Our largest point of care customer, the American Red Cross, has accelerated its use of our hemoglobin testing.

We're making progress in India.

Our market presence is growing and we're adding new customers.

We have also expanded our lab and field presence and strengthened our management team in their league.

In [Addison], I am pleased that we won our first tender in the state of [Madastra] to screen hemoglobin levels for all our blood donors, using our HemoCue device.

As you've heard me say before, as we enter the decade of diagnostics, healthcare is moving from a focus solely on curative care to a recognition of the value of detection, prevention and personalized care.

We are encouraged by a growing trend that recognize the importance of promoting wellness and prevention that empowers patients to take control of their health and that encourages employers to create healthy work places.

This trend towards wellness bodes well for Quest Diagnostics.

We are empowering patients and collaborating with payers, governments and employers to help make people healthier.

Consider our collaborations to drive a wellness of the value of early detection for colorectal cancer.

Today, payers including Aetna, Cigna, and Independence Blue Cross and the State of Tennessee have given hundreds of thousands of our convenient InSure tests to their members, employees and residents.

We are helping employers create healthier work places and helping employees to take ownership of their health by participating in our Blueprint For Wellness Program.

This provides individuals with a comprehensive health risk report including laboratory test results.

Large employers such as Domino's Pizza, the Houston Independent School Districts and JELD-WEN are enthusiastic users of this exciting wellness service.

Through our collaboration with Google Health, we're empowering patients to manage their personal health information and get a better understanding of their health status using lab testing.

As the only laboratory partner of Google Health, we make it easy and convenient for people to manage their lab results and other health information in their personal health record.

Now we are further enabling Google Health users to by a limited menu of tests for themselves to monitor their health and wellness.

We're also helping to reduce medical errors and improve patient safety by helping physician customers use our Care360 portal to order lab tests and prescribe drugs electronically.

As we have announced the portal, its utilization has grown.

For example, the number of e-prescriptions through Care360 nearly doubled in September to 300,000 compared to a year earlier.

Our operating margins have grown through top line growth and cost savings.

We have embraced six sigma and lean principles as a way to drive improvements in the quality and the efficiency of our service.

This has become part of our corporate culture which puts patient first and is based on the need for continuous improvement in all that we do.

We're on track to meet our commitment to reduce our cost structure by $500 million by the end of next year.

We continue to expect that over time, we will have operating margins of 20%.

In summary, we are the leader in an attractive industry that provides an important and essential healthcare service.

Wire diagnostic testing is not immune to economic challenges -- the challenges that are far outweighed by the opportunities.

We continue to differentiate ourselves from our competitors through our superior patient centric service, six sigma quality, innovative new tests and advanced technology.

We are bifocal, doing what is right for the business in the short term and planning for the long term.

Our company remains strong personally and financially.

This enables us to execute our strategy without distraction through the current political and economic environment, and to take advantage of opportunities that may arise in the future.

Thank you.

We will now take your questions.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS.) Our first question comes from Amanda Murphy.

Your line is open and please state your company.

Hi, good morning.

It is Amanda Murphy from William Blair.

Just a couple of questions.

You mentioned that volume -- or sorry, revenue growth on the esoteric side is running at the 10% level.

Can you break that down in any way between pricing and volume growth and how that has trended through the year?

Amanda, we really are focused on revenue growth and the revenue growth is up about 10%.

We're seeing strong growth as we indicated in vitamin D testing which is driven off of increased demand across the industry as you hear for that test.

As well as improved demand also on HPV and chlamydia, and gonorrhea.

You should expect the majority of that growth in the esoteric testing is more volume driven, given the fact it tends to be the newer testing.

Okay, thanks that's helpful.

And then on the point of care side, can you just talk about what perhaps has surprised you both on the positive side and the negative side as you bring those tests to market?

Also, have you been able to apply any of the experiences from NID as you commercialize point-of-care testing?

Let me comment on you about the point-of-care.

Remember, only 18 months ago we acquired HemaCue which is a very well established point of care new patient testing company.

When you look at the point of care platform on newer patient testing we have [Enturics], HemaCue and focused diagnostics.

What we're doing actually is taking testing to the patient's bedside.

And, as we increase our coverage and use our distribution channel, we find that some of the main customer like American Red Cross, they are asserting the adoption of the some of the platforms.

We're pleased to -- the adoption our products.

The only work we have to do is to continue convincing the doctors and the FDA and the regulators that there is more to gain, using point of care in the -- laboratory in the doctor's office.

Have you seen any increase in the regulatory scrutiny in terms of the tests you're offering through Google, for example?

No, we are not seeing any regulatory scrutiny nor do we expect any scrutiny because remember, the patient is picking Google to put their health records and the doctors have to agree to that and the patient has to give us the consent.

Okay, thank you very much.

We have a question from Adam Feinstein.

Your line is open.

Please state your company.

Yes, Barclays Capital.

Good morning, everyone.

I guess a few questions.

Why don't we start with the volumes.

I wanted to just get some more thoughts, in terms of -- clearly the question everybody is trying to figure out is is the economy impacting in volumes.

Volume growth -- the effect of the hurricanes is slightly lower than what it was averaging in the first half of the year.

As you think about the difference there -- just curious in terms of how you think about the economy, weighing on that or was some of that just the fact you annualized the Aetna contract win or just curious on thoughts around what is going on with volumes.

Adam, is this is Bob.

To date -- listen, we have not seen significant impact, outside of our employer and our risk assessment business.

And as you know, both of those businesses are feeling the effects and we're addressing that through working the cost structures.

And in fact, the profitability for both of those businesses is better than it was a year-ago.

Now with that said, the rest of our business -- I think it is much more insulated than other types of businesses, is not totally immune to an economic slowdown.

And the impact to the degree that there is much of one, will be difficult to measure, but will likely be reflected of a temporary slowing of our growth rate.

And as we've said all along, will show up in volume.

We still fully expect to see positive revenue and earnings growth as we look ahead.

In fact, in Q3, volume growth was in line with what we saw year-to-date.

And in Q4, we're expecting volumes of about 1% or so, which is generally in line with what we have seen year-to-date.

There could be some impact that we're seeing, at this point, as -- as you know we did reduce slightly our expectations for revenue growth, but it wasn't really all just clinical testing.

Certainly the hurricanes impacted that somewhat.

We have had some product delays, in our point of care business, most notably the WBC test which we were hoping to have introduced by now.

And we're not seeing the acceleration in volume that we had expected in the clinical testing business.

That could be a combination of a couple things.

It could be some of it could be the economy, although that is difficult to measure.

And then, we are seeing a slightly slower ramp-up in growth from selling more anatomic pathology into primary care physicians.

It has taken a little longer to get that established.

But otherwise, nothing significant at this point.

I just want to make a comment, Adam.

The way I look at the economy, healthcare segment is an attractive segment and diagnostic testing and healthcare remains very attractive.

And as you know, it is not an elastic business.

If the economy was growing faster doesn't mean that people go and do more blood tests.

The same time, I don't think people are going to delay their essential healthcare services.

We have seen in past, that diagnostic testing to some extent is less affected by the changes in the economy.

And what I -- when I look at this industry with $45 billion revenue per year and when I look at the demographics, I really feel excited about the opportunity that diagnostic testing has compared to other industries.

We are actually pretty excited about the future and we're personally strong.

We're financially strong and looking forward to take advantage of the situation.

Okay and just a follow-up question here and appreciate all of the detail there.

Just -- maybe comment on the bad debt expense also.

You guys have done a good job in terms of managing the bad debt expense.

Just curious to get your thoughts there in terms of what is going on and do you think the current levels are sustainable -- excuse me.

Well, certainly, bad debt and DSOs are the other places where the economic impact could show up.

But as you ever seen, both of those have improved over the prior year and throughout this year for us.

And while there could be some impact to these metrics, I don't expect it to be significant.

Because as you know, unlike hospitals, the vast majority of our patients that we serve are really insured patients.

And on top of that, I think we have a very solid billing and collections process.

We're also working to do more collections of payments at the point of service as well which we think will help.

Just a final question on the bad debt and I will get back in the queue.

If we strip out AmeriPath bad debt, I know it is not included in the same store, just curious have you made progress?

I know that is one of the areas you were targeting.

Just curious in terms of whether the trend has gotten better there also.

If you strip out the impact of AmeriPath we're pretty comparable to where we were a year-ago.

Thank you.

Our next question is from Tom Gallucci.

Your line is open.

Please state your company name.

Merrill Lynch, thank you.

Maybe just a couple of follow-ups here.

Bob, just on that last answer you had.

You're saying that core Quest was stable year-over-year that would imply that AmeriPath did get a little better so you are making progress on bad debt on that side

Correct.

We continue to make progress there.

But then on the revenue side, it sounds like that is part of where maybe you haven't had as much progress as you expected and when you talk about selling AP through to the primary care doctor .

That would be some of the revenue related type synergy at AmeriPath, is that

It is an opportunity that we feel is as big as it ever was.

We just got off to a slower start there than we were anticipating.

Is there any particular reason why that happened or is it a harder thing than you thought it was going to be or any more color you can offer?

No, just the way integrating both the companies and we're taking it region by region.

We are doing some (inaudible).

It is taking longer than what we expected, but I think we want to do it the right way.

Okay.

Bob, on the topic of bad debt maybe could you just remind us how you do accrue bad debt just for the sake of making sure that -- to the extent there are changes in patient mix, that would be accurately reflected this quarter as opposed to delays when you don't get that bill until six or 12 months from now.

I will try to not take you through a detailed accounting procedure.

But essentially the way it works is -- we have a very rigorous policy that looks at our receivables by payer type and as they age out, requires additional reserves.

At one point, you have to fully reserve that receivable if it ages out beyond a certain level.

I am very confident in the process that we use to establish our reserves so that we're not going do have any surprises there.

You're describing there, right up front, though, if it is one payer versus another payer, you take a different level of accrual.

Oh, absolutely, absolutely.

Okay.

Then my last question is just on CapEx.

You lowered the expectations there last quarter.

Now they are lower again so it is a pretty significant difference from where you were in the beginning of the year.

What's the biggest drivers there?

I would tell you that it is just prudent capital management.

We have asked all of our managers to really take a hard look at capital spending to see if they can cut back or delay some projects.

Some of those actually are in the IT area.

India, as you know, is ramping up a little slower than we had thought and we had some capital in there, although still less than 10% of our total.

And we have frankly deferred some facility expansions.

But with that, keep in mind, we have historically invested in our operating and our technology infrastructure.

And it gives us the ability to moderate our spending if we want to without adversely impacting our business or its prospects.

I feel very comfortable that we can tighten our belts right now.

Some of this may be just deferred until next year.

But a lot of times you find out that when you go without something, maybe you realized that you could have done without it completely.

I am hoping that's the case as well.

Thank you.

Our next question comes from Ralph Giacobbe.

Your line is open.

Please state your company name.

Thanks, Credit Suisse.

Can you maybe estimate the impacts of the extra day in the quarter and how you think about that in terms of guidance you put out for 4Q or 2008 and implied 4Q?

That was fully built into the guidance we had out there.

And any estimate for the quarter?

What the impact was?

Yes.

Yes, around 1% or so.

Okay.

And then, with the NID settlement, maybe any updated thoughts for uses of cash and specifically, maybe thoughts on acquisitions just given the current market conditions?

First, I would tell that you that we have been pretty conservative in the way we have deployed capital over the last quarter or so.

As I think about it, our first objective with respect to capital is to make sure we preserve it.

That's why you saw us build up the cash balance this last quarter.

Once the credit markets have demonstrated that they have returned to some sense of normalcy and they can stay there, you will see us deploy capital similar to what we have done historically.

Our credit status has continued to improve over the course of the last year as we have paid down debt.

While debt reductions are going to continue to be an area where we will deploy cash, we will also be able to give more consideration to acquisitions and share repurchases.

Between the two of those, I generally see acquisitions as a priority over share repurchases.

They better position the Company for sustainable growth and shareholder returns.

And I would expect valuations may become a little more attractive as well.

As you know, like we have done historically, when acquisitions aren't available at the right price, we will deploy the excess cash into share repurchases.

And there -- generally while we won't be in the market every quarter repurchasing shares, over the course of the year we typically would purchase at a minimum, the amount necessary to offset the delusion associated with our equity claims.

Okay.

And then just my last one.

Can you make talk a little bit more about India?

I know you mentioned progress there.

I know there was some management turnover in that area.

Can you talk about some of the progress, what you're seeing, where you're at?

I know you talked about it being also a little bit slow in terms of some of the CapEx projects but just a little more detail on that and what's what's going on there.

Sure.

India remains the most attractive market for us as far as international is concerned.

And it is also the most important focus for us, because in the longer term in three or five years we expect enormous growth from a country which has 300 million middle class.

We have built a state of the art laboratory, not only the best in India, but probably the best in the South Pacific, in that Pacific Rim.

And we are going through hiring people, training people, improving our personal and medical need.

We have to make some changes in management.

We wanted to strengthen our management now that we have accomplished a stage of growth rather than just our personal efficiency there.

We are gaining customers.

If you think about the India business, it is not only the laboratory is not only going to do testing for hospital hospitals and physicians but also it is designed to do testing for pharma companies and clinical trials and the life insurers.

I am pleased with where we are.

I would have liked to have moved much faster as far as the customer acquisition.

But going forward with the new management, we have just -- we just leverage our marketing capital.

We just started actually last month.

I am very excited about opportunities we have in the future.

But it is a little bit slower than what I thought.

Okay.

Thank you.

Our next question comes from Dawn Brock.

Please state your company.

Sure, JP Morgan.

First thing I wanted to ask quickly was on the EPS raise.

I feel like we've talked around it.

Specifically, have you built in an increase in debt repayment or share repurchase for the fourth quarter that is going to drive the upside to the number?

The answer to that is no.

And frankly even if we aggressively repurchased shares in the fourth quarter or paid down debt in the fourth quarter, it doesn't have that much of an impact in the quarter that you do it.

Excellent.

Thank you.

The second thing was, Surya, in your opening remarks, you talked about the possibility from a competitive and from an opportunity perspective of some business moving to some of the larger independent labs from the hospital outreach programs.

Could you just give a little more color around that?

Sure.

As you heard from Bob, we have been investing in our company.

And over the last four years, we have been preparing ourselves, how do you improve the quality.

How do you provide the products and services that require not only for physician and managed care organizing, but also for hospitals and the pharma companies.

What I was referring to that this is a situation now, when lots of people have difficulty to access capital.

And I have a number of discussions with the many hospitals who would like to have somebody manage their laboratories with high quality tests, and then they don't have to spend the extra capital to update their laboratories.

We see that going forward, we will work with hospitals to manage their labs and also to update their labs.

As far as the outreach business is concerned, I think that always I say there will be ten or 12 outreach businesses.

But once you go above a certain region and above certain dollars, you have to do the same way as everybody else.

You have to have managed care contract, you have to have logistic, you have to have billing.

I don't think there is a lot of changes, increasing outreach.

In fact what we're seeing over the last 18 months, there are a number of outreach laboratories that are for sale.

We're not immune to economic challenges but our business has plenty of room to grow and a personally strong company as we are and financially strong, we're ready to take advantage of some of the opportunities that may come in front of us.

Now does that mean you would be more inclined at this point to manage or work with the hospitals versus acquiring some of those programs that might be on the block right now?

At the moment we do work with the hospital.

We manage some laboratories.

In the past, we have brought some of the hospital business.

Again, we told you last year that for 12 months we were not going to acquire anything until we integrate AmeriPath.

Now you heard from Bob as the credit market comes back to a normal state, we will utilize our cash appropriately to acquire right assets at right value.

Dawn, when we talk about acquiring hospital business, typically we're talking about their outreach programs.

When we talk about managing business for hospitals, we're really talking about the labs in the hospital, typically serving the inpatient and the outpatient areas.

Right.

Got you.

Each hospital has a variety of needs.

It would vary accordingly.

Perfect.

Thanks, guys.

Our next question is from Robert Willoughby.

Your line is open.

Please state your company.

Hi, Banc of America.

Three questions.

The guidance you provided, there was some language saying that it includes potential special charges.

Are you expecting something in the fourth quarter of size or magnitude?

Nothing specific at this point, Bob.

Again, we owe -- that's the qualifier that we always put out there every time we put guidance out.

And you did reference clinical testing results a bit lower than where you thought they would be.

Was there a rationale for that, any reason?

Yes.

As I said earlier it -- it could be some of it a slowing economy, although that -- it is really difficult to measure.

But again, when I think about the change in revenue guidance, we went from approximately 9% to over 8%.

It is a modest adjustment there.

And while we slightly adjusted the top line, we actually brought the bottom line up.

Okay.

But that is your pharma testing business, Bob?

I'm sorry.

That is the pharma -- the clinical trials testing business?

No, no, no.

This was clinical testing.

Okay.

Not clinical trials testing.

I'm sorry, I misunderstood that.

And just lastly, is there any ramifications -- if there is a felony charge here, is there any ramification whatsoever on your government business or are these exclusive?

I don't expect that at all.

The criminal plea was a single count of felony misbranding by a subsidiary NID which has been closed now since 2006.

There are no criminal charges against Quest Diagnostics.

Okay, great.

And your question is based on the agreement in principle we don't expect any impact to us related to our participation in Federal programs.

That's great.

Thank you.

We have a question from Kemp Dolliver.

Your line is open.

Please state your company.

Okay, Cowan and company.

First question relates to AmeriPath and the spreadsheet that came out.

It showed AmeriPath actually being a small drag on consolidated revenue this quarter.

Was that hurricane-related or some other factor?

Kemp, I think you're looking at the year-to-date impact for AmeriPath.

AmeriPath is fully anniversaried this quarter.

There is no separate breakout of AmeriPath impact to our revenue.

Actually, I am looking at Q3 and it is in there.

We can take this off line, but it is definitely in Q3.

I will verify.

Okay.

Thanks.

The other question as it relates to your moderation of revenue growth is Health Alliance a factor in that?

Certainly, it is.

Yes.

That is a management agreement that we had that has been discontinued.

And there will be -- there are actually several lab management agreements that we have terminated over the course of the last year or so.

Okay.

And any particular strategy behind that?

Was it just individual situations or -- is there something about that business?

Every one of those is unique.

If you have seen one, you seen one, basically.

That's what I can tell you about those.

They are individual situation.

You know what happened with the Health Alliance.

It has nothing to do with us but everything to do with [Cincinnati].

As Surya pointed out, though, this I think, will be a bigger opportunity for us as we look forward because hospitals will be capital constrained.

Right.

Okay, good.

Just my last question, Bob.

You're running a higher cash balance than normal.

Is that a reflection of your view of the credit markets at this point?

Yes, that is temporary.

As I said, our first priority right now in this market has been to preserve capital.

But certainly once things free up, you will see us carry a smaller cash balance.

Great.

Thanks a lot.

A question from Ricky Goldwasser.

Your line is open.

Please state your company name.

Good morning.

Just to clarify with some follow-up questions.

Bob, you mentioned that fourth quarter volumes are going to be at about 1%.

And if we back into your top line guidance, I get about 1.5% revenue growth.

My question here, are we comparing it to -- the fourth quarter -- the 1% volume increase, is this apples to apples with 0.7 reported for the third quarter?

Or this is adjusted for deterioration in surface abuse and hurricanes, et cetera.

Secondly, what are you thinking about in terms pricing?

If you're thinking 1.5% top line growth -- 1% volume growth does this imply the pricing metric is going to come down?

Yes, Ricky.

I think your squeeze is probably not giving enough credit to the fourth quarter.

We're expecting more than 1.5% revenue growth.

And the growth in volume that we're expecting in Q4, is really apples to apples with the volumes that we have been reporting here.

Obviously before the AmeriPath acquisition.

Okay.

And for the revenue growth, you're saying about 8% and you did say 0.5% I think year-to-date?

It will be greater than 8% so I am guessing that is probably a piece of what is driving your rounding, Ricky.

And as far as the pricing goes?

I don't see any reason for pricing to be any different in Q4 than it was for the rest of the year -- or for the earlier part of the year.

Okay.

And then one housekeeping, on the checks rate in third quarter -- those are higher than what we estimated.

Should we assume text rate will go down in the fourth quarter or should we assume similar levels to the third quarter?

Yes.

First, I don't typically provide guidance on the tax rate.

But I wouldn't expect it to be significantly different -- the underlying tax rate to be significantly different in Q4 compared to Q3.

Okay.

Thank you.

We have a question from Gary Taylor.

Your line is open.

Please state your company.

Hi.

Good morning, Citigroup.

I had a question about the fourth quarter.

If I am doing the arithmetic correctly, I believe the implied 4Q earnings is 76 to 81.

Yes.

That seems to imply -- that would be down 6% to 12% sequentially.

I think your typical 4Q seasonality is down more like 5% to 6%.

Is there is something else being baked in in terms of conservatism or concern on the low end?

I wouldn't say there's anything else being baked in.

If you go back over the years, our business has changed a little bit as we have done various acquisitions.

And let's call it the seasonality from quarter-to-quarter that you saw in the past, isn't necessarily indicative of what you're going to see going forward.

Okay.

That's what primarily growth away from the routine business is the change in the business?

Some of it, sure.

Okay.

Can you give us the balance sheet allowance against the gross AR?

Gary -- the 10-Q will be filed on Thursday which will have that number on it as well.

Okay.

And then finally, can you talk about self-pay revenue in the quarter?

I know that was up about 50 basis points last year.

What does that look like in the third quarter year-to-date.

Generally, it is up -- between 5% and 6% of our total revenues.

It hasn't changed dramatically.

We haven't seen a big change there.

That's mostly the uninsured that we classify as patient direct.

Embedded in our third party is the portion associated with the deductibles and co-pays that is about equal to that amount.

In total there is probably 10% to 12% that we collect from patients of our revenues and that hasn't changed dramatically.

No spiking growth in uninsured volume given the job environment in that has held pretty stable?

No, there hasn't really been any spike in growth nor has there been any increase in our receivables, balances or our [agings] associated with patient pay, either.

Okay.

Thank you.

Our next question comes from Art Henderson.

Your line is open.

Please state your company.

Hi.

Thanks with Jefferies Bob, I am sorry.

I got cut off for part of the call, but DSOs, how low can you foresee getting those numbers?

Listen, our goal is to continue driving them down where we can.

A lot of it has to do with making sure you get the right billing information up front.

But additionally, I think as we do more and more electronic connectivity with our physicians and then we do more and more electronic payments with our large payers, I think that can help drive that down over time.

But at this point, I would rather stay away from trying to give you specific guidance around DSOs.

Is it safe to say, though that a lot of the low-hanging fruit is now gone?

Oh, absolutely.

If you look at our DSOs over the last five or six years or so, they have come down pretty dramatically.

Yes.

And a lot of that had to do with not only getting the low-hanging fruit but also going after some of the really hard stuff, too.

And you know I think our billing operation is very efficient.

It is very focused on getting the information upfront that you need in order to build properly.

As I have told people all along here, billing is all about getting the right information up front.

If you don't get it upfront and you try to get it later, you're really going to have challenges in collecting things.

Okay.

That's fair.

One -- actually two more questions.

One for you, Bob.

With the economy slowing down obviously, is there an opportunity to reduce compensation expense to some extent?

Is there more people out there -- some of the lower levels where there might be some opportunity?

No.

I think that first of all, we have been improving our personal efficiency and we've been trying a number of ways where we can give flexible workforce.

But we're not going to change our strategy.

We have been doing this thing for the last three or four years and the Company has become much more efficient.

We're going to drive our growth growth strategy and the cost improvement strategy without any changes at the moment.

But we will be prudent as far as capital expenses and our personal expenses, but I'm not seeing any major reduction.

And our goal all along with our cost reduction program has actually been to take work out --

Right.

So that we need fewer people to do the work and not necessarily try to pay them less.

Yes.

Understood.

Okay.

One last question.

Surya, you mentioned wellness a few times in your prepared remarks.

Is there a bigger opportunity there that you're seeing, either in the way of an acquisition or something that we should start to think about?

First of all, Art, I think is the same testing whether it is for illness or for wellness.

And if you look at our company over the last four years, we have tried to bring more customers so that we can utilize our fixed infrastructure.

The laboratories are used in the night and we are utilizing that infrastructure whether it is for hospital, managed care, physician, employer, pharma or insurer.

Now the biggest trend, people are realized to reduce healthcare costs to take care of people before they become sick.

And that's what I was referring that both the presidential candidates are thinking about prevention and fitness.

We think this is a great opportunity.

And we have built up a small business, what you call Blueprint For Wellness.

We are working with employers and the government to how to create a wellness about health risk assessment and the associated tests.

Going forward, you will see us focusing on that area and I believe that is a great opportunity.

If there is again opportunity for us to buy a couple of companies to strengthen our platform, we will do that.

But I consider wellness testing is as important as illness testing.

Great.

Thank you very much.

Very nice quarter.

Thank you.

We have a question from William Bonello.

Please state your company name.

Sure.

Bill Bonello with Wachovia.

Just a question on trying to understand the impact of the cost savings and what potentially might be offsetting that.

If I think of the magnitude of dollars that you guys are talking about having saved exiting the year and how that compares to last year, it would seem like we should have seen a greater amount of margin expansion than what we have seen on a year-over-year basis.

I know a little bit of that is impacted by some of the cost initiatives, although those seem to have been pretty minimal in 2008.

I am just curious if you can speak to what else is impacting the cost structure and why we can't simply lay on $100 million or $150 million of savings on top of revenue and see that margin expansion.

Well, it would be nice if it was that easy.

But as you recall at the beginning of the year, some of the price concessions that we made last year when we renegotiated, managed care contracts kicked in.

And certainly that's one of the things that put downward pressure on the margins this year which are being offset by some of the cost reduction programs.

And in addition to that, we have what I will call normal inflationary increases for salaries, wages, benefits, et cetera,.

Would you say that X cost saving initiatives -- cost inflation is outpacing revenue growth?

Temporarily in '07, it was outpacing the pricing that we saw as a result of the concessions that we made in '07.

Okay.

And that is probably carried through due to timing in 2008?

Correct.

But now -- again, what I remind you is, pricing is much more stable than it was a year ago because all of those contracts were negotiated for multiple year periods.

And when do we completely annualize the impact of any price cuts that you have taken?

It will be sometime next year.

Okay.

Beginning probably more front-end loaded or -- ?

More on the first half of the year.

Okay.

When we think of the incremental dollars, blowing through on cost savings in '09, should we think of a more dramatic margin impact or are there other considerations in '09 that would offset some of that impact?

You know what, why don't we get into more of those details when we provide '09 guidance.

That's fair.

Thank you very much.

Only few months left.

Thank you.

Bye-bye.

Bye-bye.

We have a question from Shelly Nall.

Your line is open.

Please state your company.

Thanks.

Goldman Sachs.

It is Shelly Nall for Matt Borsch.

I have a couple of questions on the balance sheet.

I dropped off the call for a couple minutes as well.

Let me know if you have already addressed this.

Just wondering with the NID probable settlement exceeding the balance sheet cash that you have currently got, wondering if you could update us on your availability under the revolver.

Sure.

As I said in the prepared remarks, we have in excess of $1 billion available under our of revolver.

With respect to NID and the funding there, the timing of the payment or payments still needs to be finalized.

I wouldn't automatically assume that it is going to be in a lump sum.

Those details really need to be worked out at this point.

But yes, I would certainly expect that some combination of our cash flow, the cash on hand, and our available credit facilities will be used to fund those payments when due.

If we could just go into a little bit more detail.

The revolver itself, I believe is $750 million.

And then you have got an accounts receivable securitization worth about $400 million.

Correct.

Not to get too deep in the weeds, but I think that securitization is going to be expiring at the end of '08.

Actually only $125 million of that expires at the end of '08.

And we're in the process of trying to replace that at this point.

We can definitely think about $750 million as available on that revolver though, right?

There is no --

Absolutely.

Okay.

Okay.

I was just going back to -- there has been a couple comments that waiting until credit markets return to normalcy, we may take a look at doing some more M&A.

I am just wondering, isn't this the opportunity to be out as a buyer, maybe not right now this quarter.

But if the credit markets don't return to normal and you have adequate access to capital, and there could be some very attractive multiples out there.

Just wondering if you could talk about -- might that be a strategic change in direction for you, especially if we assume going into next year, the economy continues to be slow.

Maybe -- these volumes continue to be somewhat slower than expected, might you supplement the top line by going out and buying other companies?

Sure.

There is no reason that we wouldn't.

But until we see that there is some liquidity return to the market place, I think it makes sense for us to be very prudent in how we deploy cash.

But certainly, as you point out and as I said earlier, I think that valuations should even be more attractive as we look ahead.

But you're not implying you would need to go to access the credit market for an additional facility?

When you say --

No, I am not implying that.

Okay, great.

Just a housekeeping if I could.

Can you tell me when LIBOR resets for your floating rate debt?

It is actually resetting later this month.

And that's for fourth quarter interest expense?

I'm sorry.

I am wondering on the fourth quarter interest expense -- when we think about LIBOR resetting for the quarter.

I just said it is going to reset later this month.

The quarter will be a mix of two rates.

Got it.

Okay.

Great.

Thanks.

And I just want to -- I guess I will leave it there.

Thank you.

Our financial question and comes from Darren Lehrich.

Your line is open.

Please state your company.

Thank you for taking my question.

It is Darren Lehrich with Deutsche Bank.

Just a question here with regard to how you're working with managed care as they look to steer lab volume away from higher cost settings, mainly the hospital settings.

Do you see any momentum with that strategy?

Just want to get your thoughts as to whether you think that could be an offset somewhat if the economy has an impact on secular growth rates of your volumes and testing.

To be successful in steering leakage, we have to work together.

And we have quite a number of managed care organizations that are very active in doing these things.

For example, Aetna and Cigna, we're working with them.

We hope to have the information.

We have to walk hand in hand.

I think that is an opportunity for us.

But going back to the hospital, it is not only steering some of the the efforts that are going to the hospital.

I am talking about doing high quality innovative tests for hospital which we are very well-positioned to do either by managing their laboratories or by providing them tests because we have the volume and expertise.

And we could turn around and they have -- and I think with the current situation and with our strength in hospital business, I look forward to deeper market shares, more market share and gaining more presence in the hospital market.

Great.

Thanks.

That's all?

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

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

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

on October 21 through midnight on November 18, 2008 to investors in the U.S.

by dialing 866-431-7950.

Investors outside the U.S.

may dial 203-369-0981.

No passcode is required for either number.

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

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

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

Thank you.

You may disconnect at this time.