奎斯特診斷 (DGX) 2008 Q4 法說會逐字稿

Welcome to the Quest Diagnostics fourth 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'd like to introduce Ms.

Laure Park, Vice President of Communications and Investor Relations for Quest Diagnostics.

Go ahead, please.

Thank you and good morning.

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

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

You're cautioned not to place undue reliance on forward-looking statements which speak only as of the date they are made, and which 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 affect the future result of the Company include but are not limited to adverse results from pending or future government investigations, losses to private actions, the competitive environment, changes in government regulations, changing relationships with customers, payers, suppliers and strategic partners and other factors described in the Quest Diagnostics 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 the text of our prepared remarks will be available later this morning in the quarterly update section of our website at www.questdiagnostics.com.

Additionally, we have posted a PowerPoint presentation and a spreadsheet with our results and supplemental analysis on the website.

Now, here is Surya Mohapatra.

Thank you, Laure.

We delivered another quarter of solid performance, completing a year of strong revenue and earnings growth.

During the fourth quarter, earnings per share increased 10% to $0.87.

Revenues increased to $1.8 billion.

And cash flow increased to $363 million.

For the full year, earnings per share increased 14% to $3.23, revenues increased 8% to $7.2 billion, and cash flow exceeded $1 billion.

I'm very pleased to with our continued progress.

We were able to exceed our commitment for earnings growth in 2008, despite the current economic environment.

The fourth quarter and full year results represent outstanding performance.

We are in a recession, while the rate of our growth could temporarily slow as a result of external economic factors, we expect continued growth in revenues and earnings.

To the extent that economic impact is more severe than we anticipate, we are also prepared to take actions necessary to further adjust our cost structure.

For 2009, we expect revenues to grow approximately 3%, approaching $7.5 billion, and earnings per share to grow 8% to 15% to between $3.50 and $3.70.

Also, our dividend policy remains unchanged and our Board of Directors has approved an additional $500 million for future share buybacks, demonstrating confidence in our performance and commitment to increasing shareholder value.

In any economic environment, diagnostic is an essential health care service.

As the industry leader, we are well positioned to benefit from a range of future opportunities as diagnostic testing becomes ever more important within the healthcare world.

The opportunities include the following.

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

As people age, they require more testing and we are seeing an increase in the number of tests ordered for each patient.

The advent of personalized medicine enables targeted tests to help doctors guide (inaudible) therapy and monitor the effectiveness of treatment.

The pace of innovation in this important area is accelerating with the frequent development of new biomarkers.

Expanding access to screening tests for wellness and knowledge detection of disease.

While the healthcare team, dealing the precedence of election and it remains a stated objective of the Obama administration.

Diagnostic testing is a large and still fragmented industry.

We are the industry leader but we are only 15% of the market, leaving plenty of room to grow.

In 2009, we will grow revenues largely by driving increased sales of esoteric tests particularly cancer diagnostics for physicians and hospitals.

We'll grow earnings through top line growth combined with further improvements in operating efficiencies.

I will give you a brief summary of our progress after you hear from Bob on the analysis of our fourth quarter results.

Bob?

Thanks, Surya.

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

Despite challenging economic conditions, revenues, earnings, and cash flow have all grown.

And we remain confident in our prospects for continued growth.

Turning to results for the fourth quarter, earnings per share from continuing operations was $0.87, 10% above the prior year, with the increase principally driven by strong operating performance.

This brings full year EPS to $3.23, an increase of 14% from the prior year.

In the quarter, we recorded a charge of about $16 million, primarily associated with workforce reductions which reduced earnings by $0.05 per share.

This $0.05 was fully offset by the favorable resolution of several tax contingencies which increased earnings per share by $0.05.

During the quarter, costs incurred related to the continued development and deployment of standard systems were approximately $0.02 per share, and startup costs for our India operation were $0.01, bringing the full year amounts to approximately $0.11, and $0.04 respectively.

Revenues were $1.8 billion, 1.7% above the prior year.

Revenues for our clinical testing business, which accounts for over 90% of our total revenues, were 2.3% above the prior year and about 3% above, before the impact of our pre-employment drug testing business.

Volume was 40 basis points below the prior year, driven by a 16% decline in drug testing volumes.

Before the impact of drug testing, volumes grew about 1%, in line with the rate through the first three quarters.

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

Combined, they account for less than 10% of our total revenues and both tend to be lower priced business.

Therefore, their impact on revenues and profitability tends to be less significant.

We have taken and will continue to take, if necessary, aggressive actions to manage the costs of these businesses in order to mitigate their impact to our earnings growth.

Revenue per acquisition increased 2.8%, with the increase continuing to be primarily driven by a positive mix and is generally in line with what we saw through the first three quarters.

Operating income as a percentage of revenues was 17.6% for the fourth quarter, and reflects continued improvement, despite a reduction of almost a full percent associated with the $16 million charge discussed earlier.

Before the impact of the charge, operating income, as a percentage of revenues, is up almost 1% versus the prior year.

Principally due to revenue growth, and the progress we are making with our cost reduction program.

That program, which we committed would reduce our cost structure by $500 million, is on track and has now delivered over $300 million in annualized savings, with the balance expected in 2009.

We are making good progress across all elements of the program, 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 4.3%, 10 basis points improved from the third quarter and the prior year.

DSOs were reduced to 44 days, down from 45 days at the end of Q3, and 48 days at the end of last year.

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

Our cash flow continued to be outstanding.

Cash from operations increased to $363 million for the quarter, compared to $355 million last year.

During the quarter, we fully utilized our remaining share repurchase authorization, and repurchased 5.5 million shares at an average price of $46 for a total of $254 million.

Scheduled debt repayments were $45 million, and capital expenditures were $73 million in the quarter.

Cash and cash equivalents totaled $254 million at quarter-end.

In addition, during the quarter we successfully replaced the expiring $125 million portion of our receivables credit facility with a new $225 million facility, bringing the total receivables facility to $500 million.

This, coupled with the $750 million available under our revolving credit facility, brings our unused lines of credit to $1.3 billion nd positions us extremely well from a liquidity standpoint.

Consistent with our positive outlook, and in order to provide us with multiple options and continued flexibility to deploy excess cash, our Board has authorized an additional $500 million of share repurchases.

There is no specific time frame over which the additional share repurchase authority will be utilized.

Throughout 2009, we will remain prudent and generally conservative in how we deploy our capital.

With excess cash used to retire debt, invest in growth, and repurchase shares.

Now, let's turn to our 2009 outlook for continuing operations.

We expect revenue growth to be approximately 3%.

We expect operating income as a percentage of revenues to approach 18%.

We expect cash from operations to approximate $1 billion, before the expected payment of the $316 million reserve established for NID or approximately $700 million after such payment.

Capital expenditures are expected to approximate $200 million.

And lastly, we expect diluted earnings per share to be between $3.50 and $3.70, excluding potential special charges.

As we discussed last quarter, these are challenging economic times and no Company is totally immune.

Yet, we have continued to consistently deliver strong operating performance and are confident in our ability to deliver further improvement.

The investments which we have made provide us with unmatched assets and capabilities.

Our program to reduce costs is well under way and has excellent momentum and our strong financial condition, cash flow, and investment grade credit rating provide us the flexibility to take advantage of growth opportunities more freely than others.

Clearly, we are positioned to not only weather this difficult economic climate, but to further strengthen our competitive position.

Now, I'll turn it back to Surya.

Thank you, Bob.

2008 was a year of significant achievements.

We made progress in executing our plans and differentiating ourselves from the competition.

The factors that clearly differentiate us and drive growth include our superior patient experience, Six Sigma qualities, innovative science and medicine, unparalleled assets and capabilities and expansion into new markets and geographies.

Here are some examples of our progress.

We continue to empower patients through expanded use of appointment scheduling and Google health which enables patients to take control of their own health information.

We use lean Six Sigma to drive efficiencies and further reduce our cost structure.

During the year our productivity improved more than 5% within some areas of our labs.

And we launched an advanced tracking system so we can identify the location of a specimen en route to our laboratory.

We have been diversifying our business to higher value, esoteric gene based an anatomic pathology testing which now account for 36% of all revenues.

In 2008, gene based esoteric and anatomic pathology revenues increased 20%.

Our medical and scientific staff of 800 MDs and 100 Ph.D.s is unmatched.

Many of these people are internationally recognized experts in their specialty.

From (inaudible - highly accented language) pathology to anatomic pathology, from cardiac to cancer diagnostic and from infectious to genetic diseases.

Our doctors diagnose more patients a day than some hospitals do in months.

We are the leading provider of cancer diagnostics, offering physicians and their patients access to the most complex molecular tests, the finest anatomic pathologists and leading histology and cytology services.

We are expanding our pipeline of innovation.

We nearly doubled the number of assays in our Leumeta family of plasma based leukemia and lymphoma tests to 22.

We introduced the new FDA cleared HE4 blood test for ovarian cancer recurrence and we are the only national reference lab to offer it.

We introduced a gene based test to determine an individual's risk of (inaudible) macular degeneration, a common form of visual impairment.

We are developing a blood test for colorectal cancer based on the Septin 9 DNA methylation biomarker.

This innovative test will be a supplement to convince on matters of colorectal cancer screening.

We are developing companion diagnostics for new therapies that will enable personalized treatment.

We recently acquired additional biomarker capabilities to advance our efforts in this area.

We introduced CareAsk genetic analysis to determine which patients with metastatic colorectal or lung cancer will benefit from targeted therapy.

When it comes to CIT, healthcare IT, we added 15,000 physician users to Care360, bringing the total to 140,000 doctors.

This enables them to order lab tests, prescribe drugs and share clinical information with other healthcare providers quickly and securely.

The number of medic kits ordered through Care360 more than doubled to an annual rate of 4.5 million.

We are expanding into new markets and geographies to provide longer term growth opportunities.

We launched our HemoCue clear works micro point of care testing in the US, and a wide blood cell testing platform in Europe.

We became one of the few laboratories in India to receive triple accreditation from CAP, NABL, and NGSB.

In Ireland, we have significantly reduced the waiting time for pap test for women through a contract with the Irish government.

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

No Company is immune to economic challenges but we believe the opportunities before us far outweigh the challenges.

We are differentiating ourselves from our competitors through our superior patient centric service, Six Sigma quality, science and innovation and our unparalleled (inaudible) capabilities.

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

Our Company remains strong operationally and financially.

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

We expect revenue growth of about 3% and EPS growth of between 8 and 15% in 2009 and we remain committed to driving superior returns for shareholders.

Thank you.

We'll now take your questions.

Operator.

Thank you.

(Operator Instructions) Our first question comes from Amanda Murphy with William Blair.

Your line is open.

Hi, good morning.

Some questions about 2009 guidance.

In terms of volume growth, I know you probably don't want to guide specifically, but can you help us think about how volumes have trended maybe in '08 in the core business, so ex drugs of abuse.

Are you seeing a slowdown in test per rec, or lower physician office visits and then how does that extrapolate into next year?

This is Bob.

As I said in the prepared remarks, when you adjust for the drugs of abuse testing business, which obviously is most impacted by the economy, we've seen about 1% growth in each of the first three quarters in our underlying physician and hospital reference testing business.

And although we're not giving guidance in terms of revenue per rec and volume for '09, we tend to give it in just terms of total revenues, we're not expecting a dramatic change in that.

Okay.

So when you were thinking about the economic environment, were you sort of assuming status quo or did you anticipate some worsening or how did that work?

I think like everybody else, it's really difficult to estimate when the economy might reach bottom and how quickly it will rebound.

But as we've said, while we might be impacted somewhat in terms of either physician office visits or volume, we've not been significantly impacted.

I think you can see that in our results through the first -- through all four quarters of the year.

Where underlying volume was steady at about 1%.

Okay.

That's helpful.

Just one quick question.

In terms of share repurchases and acquisitions, did you include those in the guidance or is that -- would that be incremental?

No, our EPS guidance is always all-in.

So whether we're doing share repurchases, acquisitions or dent debt repayments, you should consider that reflected in our EPS guidance.

While it's all-in for our EPS guidance, our revenue growth is organic revenue growth and not anticipating acquisitions.

Okay.

Thanks very much.

Our next question comes from Jason Gurda with Leerink Swann.

Your line is open.

Good morning, thank you.

Could you give us an update on what's going on with the AmeriPath business and how the integration of the sales effort is going there?

Well, AmeriPath is now fully integrated into the Company and the specialty departments in the hospital and we see growth in outpatient anatomic pathology and (inaudible) pathology and there is slowness in the inpatient but it is fully integrated in the Company and we are not separately talking about AmeriPath.

I just meant from a -- are sales acceleration pretty much where you expected it to be?

As I said last quarter, we are doing some cross-selling and we're in the early stage of how to sell to the primary care doctors and we feel that that will help us growing the anatomic pathology business but near the early stage of integrating both the cross-selling activities.

Okay.

And on the numbers that you reported for the quarter, I mean, your costs of goods sold was down pretty significantly sequentially.

And just to clarify, the charge, the $16 million charge, what line item was that expense recognized in?

Jason, that was probably split almost evenly between cost of sales and SG&A with about a 0.5 point impact, 0.5% impact in each of them.

Okay.

That's helpful.

And then just looking at the overall cost structure, since it is down so significantly, I mean, it's definitely a sign of your cost cutting program, but is there anything unusual in the quarter or should we assume that this is pretty much the run rate going forward, except for some seasonal differences?

Again, yes, I'd caution you to take the percentages in any one quarter and try and extrapolate them through the year.

As we've done since the beginning of the year, we've been very, very deliberate in the way we've managed costs.

As we mentioned, the cost reduction program, which we've launched, well over a year ago now, has very good momentum and we feel very good about what that's delivering and what it will continue to deliver in '09.

And I think when you look at the guidance that we put out there for '09, we are expecting to expand the margins further, beyond what we've got this year, but yes, I want to caution you to try -- in taking one quarter and extrapolating that to the full year.

Okay.

Thank you.

The next question comes from Ricky Goldwasser with UBS.

Yes, good morning and congratulations on the quarter.

Thank you.

Couple of questions.

On the volume side, obviously throughout 2008 volumes were positive, if we exclude drug of abuse.

What are the trends that you're seeing January to date?

I know it's early in the year, but just curious to know that.

Ricky, we don't comment specifically on any one month but obviously what we're seeing in January has been built into our outlook for 2009.

Is it overall similar to what you've seen throughout '08?

As I told you, we don't comment on a specific month, particularly a two-week period.

It's really tough to try and interpret too much from that.

And then as far as the investment in the -- apologies, I jumped in late, if you mentioned it already, the investment in IT and in the India expenditures included in guidance, and also what's the bad debt as a percent that's embedded in guidance.

Ricky, we haven't given specific guidance on the amount of the investment in India or the investment in systems for 2009.

But you should expect that the they're not going to be significantly different in the amount of investment that we had in India this year was about $0.04 a share.

We're closely managing that to make sure that we don't get too far ahead of the ramp-up in revenues there.

Okay.

And as far as bad debt expense?

Bad debt expense, obviously, again, we don't give specific guidance on that but we don't see any reason for it to be significantly different than it was this year.

We continue to see opportunities there to improve our processes, work more closely with payers, et cetera and we're continuing to work those opportunities and those are the things that have allowed us to continue reducing bad debt and DSOs over the course of this year, despite the fact that the economy's been slow.

Thank you.

Our next question comes from Adam Feinstein with Barclays Capital.

With the drugs of abuse testing, you may have given this, I'm sorry, but did you give a percent decline for revenues for that business the way you have in prior quarters?

Yes, that business, the volumes were down about 16% in the quarter, so that was an acceleration of what we had seen in the earlier part of the year, where it was down 10% or so and if you look at the table that we have, footnote six to the earnings release, you'll see that the revenue impact in the quarter watt about 0.5%.

Right.

Okay.

And last quarter you guys highlighted that even with the decline in volumes in that business, you still saw margins go up in that business because of cost cutting.

Did you see a similar trend here?

We did not see them go up this quarter but I will tell you that that business and the risk assessment business, as a result of the things we've done to manage the cost structure, continue to be profitable business for us.

Okay.

Okay.

And -- all right.

And then I guess just, thinking about the impact just from the economy and such, just trying to better understand trends.

Are you seeing any significant differences in different regions, just curious in terms of just trends as you look at your business on a regional basis?

Adam, we don't typically comment on how our business is performing region by region, but what I could tell you is generally, we've not seen dramatic differences across the Company and what's happening as a result of the economy.

This is Surya.

In any economic environment, diagnostic testing remains an essential service and with the Obama administration's emphasis on expanded coverage and wellness, I think that diagnostic industry is going to do better than some other industries in this slowdown.

So we are projecting that we will grow 3%, more or less in line with the market, and -- but our earnings is going to grow because we're going to grow some in top line and also by reducing our costs and improving our efficiency.

Sure.

Absolutely.

Final question, just managed care contracting, seems like the environment is definitely much better than it was a couple years ago.

We've seen pricing improve.

So just as you look at contract renewals in 2009, any major ones as you're thinking about it and was there any impact in the fourth quarter from annualizing any prior contracts?

Yes, Adam, there was no significant impact in the fourth quarter of any annualization of new contracts and as you know, over the course of the last year, plus, all of our major managed care contracts have either been renewed or expanded with most of those into 2010 or beyond.

Okay.

So pricing on those is set and should be very clear to us over the course of that time period.

Okay.

And I'm sorry, one more follow-up question and I've got my voice back here.

As we think about the inflationary updates, does the reduction in CPI have any impact on you guys as you build in inflationary updates in the contracts?

Not in the contracts so much.

We don't have a lot of contracts that are pegged to CPI or medical CPIs.

In some cases we do, obviously.

In other cases we have set fee increases and in some we have further discounts for increased volume.

It's kind of all across the board but nothing significant as a result of what the CPI might be doing.

Okay.

Medicare is -- Medicare fee schedule is one that's CPI based, and that's based on CPI as of June 30, so obviously what happens here could impact the next CPI adjustment.

For 2009--.

for 2009 we're set.

We know that.

That's going to contribute about 0.5 a point to our revenue growth in '09.

Okay.

Thank you very much.

The next question comes from Derek -- I'm sorry, Darren Lehrich with Deutsche Bank.

Thanks, good morning, everyone.

I have two questions.

The first just relates to the buyback and wanted to hear from you about how the Board contemplated that buyback in comparison to perhaps an enhanced deal with the dividend policy and if you could just talk a little bit about the thought process there?

Thanks.

Well, Darren, as you know, we've been paying a dividend now for some time and it's been what I would characterize as a relatively modest dividend.

And the principal way that we have looked to drive shareholder value at this Company is by growing earnings and a lot of that has been as a result of us continuing to invest the cash flow that we have in growth, whether they be acquisitions or other opportunities for growth.

And when those opportunities weren't readily available at reasonable prices, you saw us deploy excess cash into share repurchases to drive shareholder returns.

And yes, as I mentioned in the prepared remarks, the Board has now provided us again with the flexibility to deploy cash into multiple areas, since we had used up the previous share repurchase authority, we restored that and now have the ability to not only pay down debt, but repurchase shares and continue to invest in growth.

So yes, I think you need to be somewhat opportunistic here.

We're going to have as a priority in '09 certainly some further debt reduction and after that, really, when you think about the priorities for cash, it would first be growth and then share repurchases.

Okay.

That's great.

My second question is just about the cost structure and you've stated, restated your goal of $500 million by the end of '09.

With the remaining $200 million, I guess, that's left if you've taken $300 million out thus far, could you just talk a little bit more about the various buckets that you've previously described and where you see the cost opportunities being in 2009?

Well, yes, it's going to be very much a continuation of what we've done over the course of the last year, plus.

The opportunities continue to be in our laboratory, in our logistics, in our billing areas.

Think about where the costs reside and the way we're going about this is such where we believe these are going to be sustainable cost reductions, because we are reorganizing processes, we're using Lean Six Sigma to actually take work out of the system.

We're not just asking people to do more with less, we're actually reducing work here.

And it's not only reducing costs for us but as you reduce the effort to complete a process, or you simplify the process, you also improve your quality along the way and that's essentially what we've been doing over the course of the last year and-a-half.

Pretty much the same thing will continue in 2009 and in each of the areas where we're expecting further savings, we've already got very good momentum.

And in the lab, is there any productivity gain goal or target that you may have '09 over '08?

Absolutely.

In every laboratory, in every department within the laboratory, we have productivity targets that we've established.

I mean in the aggregate, if you could just maybe share with us what that--?

I'm not prepared to do that right now.

Okay.

All right.

Thanks very much.

You're welcome.

The next question comes from Gary Taylor with Citigroup.

Hi, good morning.

Two questions.

First, on the incremental cost savings you're anticipating in '09, should we be modeling that ratably?

Is there any lumpiness to that through the year?

Generally, no.

As I said, we're already well under way with this program and it will continue pretty much at the same pace that we've got it running now so there's not lumpiness necessarily in those savings.

Now, that doesn't mean that as you thing about our performance quarter-to-quarter, that it's going to be exactly the same.

There are a number of things, either timing wise, from a revenue perspective or from a cost perspective, seasonality principally, that caused the quarters to be a little different from each other.

Okay.

And I apologize if I missed this but on the $8.8 million investment charge or impairment, did you describe what that was for?

That was--.

Q3.

That was Q3.

That was an investment that we had that we were required to write down as a result of the accounting rules, non-cash charge, but that was Q3.

Okay.

That wasn't in this quarter?

No.

Okay.

I'm sorry.

And then finally, my question is about your Vitamin D program, the New York Times was writing about some issues you've had with that testing, some letters you've had to send out to docs.

So my two questions are, one, what's happened to your Vitamin D volumes?

And secondly, how are you managing any PR impact there might be in the pathologist community?

Well, let me first state this, question about quality.

We practice Six Sigma and we strive for perfection.

So obviously we're not happy when we see a quality issue.

But when we found that there is some quality issue, we investigated it.

We fixed it.

And we informed the people.

We did less than 7% of our people were affected.

And that's what a good Company, a Six Sigma Company does.

So we did that in October and in many instances we got good response and good feedback from the Amana health plans and also the doctors about our process and sometimes this kind of activity even builds credibility.

As far as reduction in volume or losing customers, we have not seen anything significantly.

In fact, I haven't seen anything which modestly even.

And Vitamin D continues to grow.

And Vitamin D continues to grow.

But it is very important to know that a Company who practices Six Sigma, this is the right culture for the employees to do, to find a mistake, to self report, to fix it, and let other people know.

I'm pretty proud of actually the process we went through and I don't see there is any significant impact on our PR.

Okay.

Good.

And sorry, just going back to the $8.8 million.

It was in the other expense, net, the $8.8 million?

In the third quarter, yes.

Below margin, yes.

I'm looking at three months into 12/31/08, but maybe I'll follow-up offline.

Are you asking what's in there now?

Yes.

Okay.

Well, just to be clear, the investment loss was in the third quarter.

In the fourth quarter, what's really driving the variance in that line versus the prior year are the losses associated with our deferred compensation plan.

Those assets get marked to market and that's what's in there.

Perfect.

Thank you.

Next question comes from Art Henderson with Jefferies & Company.

Hi, good morning.

Bob, would you mind explaining maybe what the difference is between the low end of your guidance on the earnings per share number and the high end, what's the delta there that would drive that swing?

Principally revenue growth.

Okay.

Okay.

All right.

Thank you.

And then the -- for Surya.

Yes.

Are there any acquisitions out there?

I mean, with the -- I guess the economy sort of declining, I didn't know whether there might be some things that are opening up for you that you've been keeping your eye on?

Could you talk about what the acquisition environment looks like and what you might be thinking about?

Well, first of all, as Bob said, that we are in a good position to have enough liquidity and enough cash flow and the first thing we look at is the growth and if we can get some acquisitions, which is a reasonable price to improve our business, we'll do that.

But what we're not going to do is to acquire something to boost our revenue or earnings if it doesn't have the appropriate value.

We monitor what is available and we're a very active program of looking at acquisition growth from capability and from growth point of view and when it comes to fruition, and at appropriate value, we will do it.

Art, I would add too, that I think some of the sellers still have a little bit to go in terms of adjusting their expectations for value.

Okay.

Okay.

All right.

That's fair.

One last question, I'll jump back in the queue.

Just in terms of the point of care business, any sort of update on that and then on the government front, I know you touched on this, Surya, a little bit.

Yes.

What should we be looking for there that would be positively an opportunity for you or something that you might be concerned about?

Well, first of all, we really believe that the point of care or near patient testing is the way to go and as you know last year we introduced the (inaudible) and that's selling.

We were expecting to get the clear waiver on white blood cell device which is really a growth driver and has been delayed.

But I think that's the trigger point which you look at when we get the approval for the white blood cell, it will accelerate the point of care, our HemoCue business.

Now, having said that, we have a number of point of care innovations in the pipeline over the next two or three years, so we're going to add to that business as we go forward.

Okay.

Art, were you also asking for what we thought for the government side.

Yes, your outlook.

I know you're talking about it favorably from wellness testing and things like that but is there anything else that we should be thinking about there?

When we look at what's sitting out there in the landscape, obviously the expanded assets, and some of the pieces there are positive, more people have coverage is always positive as it relates to access to care.

The other things that we see for positive trends are obviously the discussion around healthcare information, technology.

We think successful and appropriate utilization of that is important.

And it's good to see the discussion around that, including potentially in the stimulus package as well as wellness prevention and expanded evidence based medicine protocols which we think are all positive for us.

Very nice quarter.

Thanks.

Next question comes from Bob Willoughby with Banc of America.

Hi, actually Art's question, can you comment what you did do in the fourth quarter from an acquisition standpoint and any deals that you've done to date?

I guess I'm left to the media to figure out what you've done otherwise.

Well, in the fourth quarter there was a very small deal that was done and you can see it in the change in the cash flow statement where we acquired some biomarker capabilities.

But that was it in the quarter.

And nothing to date?

When you say nothing--?

Nothing this quarter?

Oh, no.

That's great.

Thank you.

The next question comes from Ralph Giacobbe with Credit Suisse.

Can you, going back to sort of the margins, can you talk a little bit more about the leverage in the model in the face of declining or decelerating volume trends and sort of put that in the context of the cost savings plan, if you could?

In other words, should we think that this business in the face of declining volumes should see some margin deterioration but your ability to sort of circumvent that is largely related to your cost savings plan, is that the way to think about it?

I think that's fair, Rob.

Any business in the face of declining margins, declining volumes is going to have pressure on their margins, right?

That's pretty straightforward.

But if you look at what we've done, we've been pulling some of the fixed costs out or some of the -- even the variable costs have gotten adjusted as we've gone through this cost reduction program and that's what's caused us to be able to expand margins, even in the fourth quarter, where revenues grew 1.7%.

We had very strong margin expansion versus the prior year when you adjust for that charge that we took for workforce reductions.

Okay.

And then in terms of the -- I think you talked about a focus on the esoteric business.

Maybe how does that differ from previous years, if at all?

Is that more mainly a function of the economy?

No, I think first of all, we have been focusing on bringing new products and services to the market and over the last two years we've introduced a number of gene-based testing.

Through AmeriPath now we are the leading cancer diagnostics Company.

36% of our revenue now in gene based esoteric and anatomic pathology.

Now with that product and offering we are focusing through the sales channel to get those services to our doctors to benefit the patients.

So we think even though the economy's slow, there will be demand for these kind of tests to solve patients' problems.

Okay.

And then just my last question.

In terms of going back again to the acquisition side, you've seen anything more in the hospital outreach side, just given the challenges in the hospital industry?

Yes, I think that's certainly an opportunity that we might have going forward.

Hospitals I think are continuing to look for ways to raise capital and certainly looking at whether or not they could sell an outreach business is an opportunity to do that.

Okay.

Great.

And one more, if I could squeeze it in.

CapEx was a little bit lower than previous years.

Anything going on there that we should be thinking about?

No, just very prudently managing the capital that we're spending there, just like everybody else.

We're watching every dollar that we spend and making sure that it's spent on the most productive things that we can possibly spend it on and, yes, the other thing I would point out is if you look back over the years, we've heavily invested in this business.

So for us to ratchet back a little bit now in terms of capital spending, we can do that without impacting our business or its prospects and feel very good about that.

So we're not starving the business even though we're ratcheting back capital a little bit.

Okay.

Thank you.

(Operator Instructions) The next question comes from Bill Quirk with Piper Jaffray.

Thanks, good morning.

A couple of questions.

First, just wanted to go back to the margins for one last time here.

If we look at the year-over-year improvement in the cost of testing services, how much of this, Bob, would you say is mix versus the impact from the cost savings program?

That's tough to split out.

Certainly, mix helps us because it's the higher margin business that you're selling there.

And certainly the cost reduction program's helping us but it's tough to split those two out but they're certainly both contributing to it.

So there wouldn't be any one-time impact there?

Presumably mix and rather the shift to esoteric testing is something something that's been obviously going on for many, many years.

Again, the one-time that's in there is actually a negative which is the impact of the reduction in force, which is around 0.5 point or so.

Got it.

And then as we think about the 2009 growth and specifically you guys called out oncology in terms of one of the drivers, should we be thinking about kind of established testing franchises here akin to HPV or is this going to be perhaps more weighted towards some of the more recent tests you brought out, KRAS for example.

It's all in there.

Some of the tests which are already established, whether it's HPV or whether it is gonorrhea and chlamydia and all those things, they're all growing.

But also we have now a portfolio of tests to serve, whether it's ovarian cancer recurrence or whether it is cancer of unknown origin or whether it is looking at the (inaudible) tumor cells, whether the therapy's working or not, so when you look at the test, not only we have the test for diagnosis, but also now we have tests for monitoring therapy and the whole idea of having AmeriPath and Quest Diagnostics together is to really serve the cancer patients and as you know, unfortunately, the prevalence of cancer is growing and the good thing is that this test can give people knowledge detection and therapy and better outcome.

Bill, as these new tests ramp up, generally they're ramping up over several years.

It's not all in one year and then you have to look for something else to replace the growth.

These are typically ramping up over several years and contributing to accelerated growth over an extended period.

Understood.

Thank you very much.

The next question comes from Shelley Gnall with Goldman Sachs.

Hi, thank you.

As we look at the overall volume growth for 2008, can you break out for us how routine testing fared versus esoteric testing?

Hey, Shelley, this is Laure.

As you would second the routine testing grew at a slower rate than our gene based esoteric and anatomic pathology on an overall basis so -- and that's as you would expect and as we would anticipate going forward.

Okay.

Great.

And then on the CapEx guidance, can you give us some way to think about maybe a short-term maintenance CapEx number or percent of revenue?

Sure, Shelley.

As I've said in the past, I believe that replacement capital in this business is between 2 and 3% of revenues and if you go back several years, we were spending at the rate of about 4 as we were making some pretty heavy investments in technology and a number of other things.

This past year, we were right at about 3% of revenues and next year we're projecting in that range as well.

Okay.

Great.

And then a final question on the NID settlement.

It looks like we've seen a modest tweak of $2 million.

Is there anything you can update us with there?

That's the accrued interest on that payment and that's why we've added it to the reserves there.

Got it.

Thanks very much.

Nothing else changed relative to that.

Okay.

Thanks.

(Operator Instructions) One moment.

Thank you for participating in today's -- in Quest Diagnostics' fourth 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 January 26, through midnight on February 23, 2009.

To investors in the US by dialing 866-431-7950, investors outside the US may dial 203-369-0981.

No pass code is required for either number.

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

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

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

Good-bye.