奎斯特診斷 (DGX) 2009 Q1 法說會逐字稿

Welcome to the Quest Diagnostics first quarter 2009 conference call.

At the request of the Company, this conference is being recorded.

The entire contents of the call including the presentation and question-and-answer session that will follow, are 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.

Go ahead please.

Thank you and good morning.

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

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

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the day they are made, and reflects 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 results of the Company, include but are not limited to, adverse results from pending or future government investigations, lawsuits, or private actions, the competitive environment, changes in government regulations, changing relationships with customers, payors, suppliers, and strategic partners, and other factors described in the Quest Diagnostics 2008 Form 10-K, and current reports on Form 8-K.

I also want to point out a new accounting rule went into effect January 1st, FAS 160.

This requires minority interests to be renamed net income attributable to noncontrolling interest, and companies must present consolidated net income, that includes amounts attributable to such noncontrolling interests for all periods presented.

This change did not impact our previously reported numbers, but did change how our P&L was presented.

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.

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

Now here is Surya Mohapatra.

Thank you, Laure.

We are off to a great start in 2009.

During the first quarter earnings per share increased 24% to $0.89 per share.

Revenue increased to $1.8 billion.

Operating income increased to 17.8%, and cash flow increased to $273 million.

We are executing our strategy and driving results.

We drove profitable organic revenue growth.

The growth continues to be driven by our focus on growing esoteric testing, including cancer diagnostics.

We continue to reduce our cost structure and drive sustainable efficiencies.

We are committed to enhancing our patient experience with a range of innovations.

As a result of our strong performance, we increased earnings guidance, and now expect EPS to be between $3.65 and $3.75.

After we hear from Bob I will address our progress.

Bob?

Thanks, Surya.

As you heard, our business performance has continued to improve, off an already strong base.

Revenues, earnings, and cash flow have all grown, and we remain confident in our prospects for continued growth.

Earnings per share from continuing operations were $0.89, 24% above the prior year, with the increase principally driven by strong operating performance, and to a lesser degree, lower interest expense.

Revenues were $1.8 billion, 1.3% above the prior year.

Revenues for our clinical testing business, which accounts for over 90% of our total revenues, were 2.2% above the prior year, and about 3% above before the impact of our preemployment drug testing business.

Volume was 1.9% below the prior year, driven by a 25% decline in preemployment drug testing volume, which reduced consolidated volume by 1.7%.

In addition, the exit last year from several lab management agreements which did not meet our profitability thresholds, reduced volume by about 1%.

Also, this year's first quarter had fewer business days than the prior year, and impacted volume by about 1%.

After giving consideration to these factors, underlying volume grew about 1.5% in-line with, to slightly better than the rate we exited last year.

Revenue per acquisition increased 4.1%, with the increase continuing to be primarily driven by a positive mix, and a benefit of about 0.5% from the Medicare fee increase, which went into effect January 1.

Revenue in our nonclinical testing businesses, which include our risk assessment business, clinical trials business, point of care testing business, and MedPlus, and contained most of our international revenues, was below the prior year by about 8%, with the entire decline due to foreign exchange.

In total foreign exchange reduced consolidated revenue growth by almost 1%.

Despite the lower revenue for these businesses, their aggregate profits exceeded the prior year level.

A table contained in footnote four to the earnings release, summarizes the impact to various revenue metrics associated with a number of the items I just discussed.

Operating income as a percentage of revenues was 17.8%, up from 15.7% last year.

Improvement is due to a more profitable revenue mix, and progress we are making with our cost reduction program, as well as discreet cost containment actions we took during the quarter.

We continue to see strong performance in our billing and collection metrics.

Bad debt expense as a percentage of revenues was 4.5%, 30 basis points improved from the prior year.

DSOs at 43 days improved five days from a year ago, and one day form year end.

Our cash flow continued to be outstanding, cash from operations increased to $273 million for the quarter, compared to $158 million last year.

During the quarter, we repurchased 5.6 million shares, at an average price of $44.48, for a total of $250 million, and we made capital expenditures of $40 million.

Now let's turn to our full-year outlook for continuing operations.

We continue to expect revenue growth to be approximately 3%.

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

We expect cash from operations to approximate $1 billion, before the NID settlement payment, or approximately $700 million after such payment.

Capital expenditures are expected to approximate $200 million.

And lastly, we have increased our estimate of diluted earnings per share to between $3.65 and $3.75, which includes a second quarter benefit of $0.05 per share, associated with an insurance recovery.

We have been proactive in preparing for changes in the business climate and capitalizing on opportunities.

This has not only allowed us to perform well in a difficult economic environment, but has positioned us to further strengthen our competitive position, and further improve our outlook for the year.

Now I will turn it back to Surya.

Thanks, Bob.

We are making good progress in executing our strategy, which is based on patients, growth, and people.

I would like to review our growth drivers in the first quarter, look at the current climate, and update you on some of the ways we are planting the seeds for future growth.

Our business is moving to higher value, esoteric, gene-based, and anatomic pathology testing, which now accounts for approximately 35% of all revenues.

During the quarter, gene-based and esoteric testing revenues continued to grow more rapidly than overall clinical revenues.

We have seen double-digit growth in a number of tests.

For example, HPV testing increased as we continue to educate participants about testing guidelines, and the benefits of HPV testing in conjunction with pap tests.

Vitamin D testing grew more than 50%, based on increased awareness in the market, and interest of doctors in identifying patients with vitamin D deficiencies.

Our ImmunoCAP allergy testing grew approximately 20%, as doctors increasingly used it to identify allergy and asthma in patients.

We have also enhanced service to customers in several ways while driving efficiencies.

Now we are enabling physicians to get faster answers to their most frequently asked questions, by adopting self-service technology, through the web and interactive voice response technology.

This new system is more efficient for our physicians and us.

We have improved the ability of patients to pay for that testing in our patient service centers or on line, which has further improved cash collections and patient satisfaction.

Our specimen tracking initiative is a great example of how we are improving service quality, and also enhancing customer service and employee satisfaction.

By assigning unique bar codes and using handheld scanners, we can follow a patient specimen, at every step of it's journey to the laboratory, eliminating cumbersome manual tracking.

The number of uninsured people is increasing due to the recession.

We recognize that many patients are facing financial hardships.

We offer several programs to assist patients.

Our financial assistance program provides free or reduced fee levels for services.

In addition, we are proud to be participating as the official diagnostic testing laboratory for Walgreens' Take Care Recovery Plan.

We are benefiting today from investments and disciplines we made years ago.

We believe that our awareness drives appropriate utilization of diagnostics to enhance health care outcomes and reduce costs.

However, we do not create such awareness overnight.

It sometimes takes years to build support in the medical communities.

Take for example our Cardio CRP test.

10 years ago we were the first laboratory to offer high-sensitivity CRP testing, working with Dr.

Paul Ridker of Brigham and Women's Hospital.

Test volume did not increase immediately, but gradually use of this test has grown.

The landmark Jupiter study last November, supported broad use of CRP testing to identify people with low LDL cholesterol, who may be at high risk for heart attacks.

In the first quarter, Cardio CRP volume grew about 50% over the prior year.

We were one of the pioneers in the use of tandem mass spectrometry, to meet growing demands for a number of advanced tests, including vitamin D, testosterone, and other hormones.

Recently when the National Institute of Standards and Technology developed a vitamin D standard reference metric, to reduce intralaboratory variability, it used tandem mass specs.

The American Society considers tandem mass specs to be the new gold standard in the measurement of [sub-matter lights].

Our proprietary Leumeta family of plasma based leukemia and lymphoma tests continues to grow.

Since we introduced the first Leumeta test in 2006, we have expanded the family to include 22 tests.

Helping doctors manage patients with blood cancers is one of our goals, to solve this important growth segment, we have built a team of more than 60 Board-certified hematopathologists, more than any other laboratory.

We are pleased that the American College of Gastroenterology recently updated it's guidelines for colorectal cancer detection.

Now it recommends an annual fecal immunochemical test, such as our proprietary InSure Fit, in conjunction with colonoscopy, or as an alternative.

We focus in on med needs to identify the importance of new tests, in different disease states and across the spectrum of care.

From identifying a patient's predisposition to disease, to diagnosing a problem, to driving set operated systems, and monitoring treatment.

For instance, there is significant need for ovarian cancer tests.

We are excited about the importance of our [Edge and E4] blood test, and when used in conjunction with the CA-125 biomarker may enable doctors to better identify women at high risk for ovarian cancer.

While the combination test still requires FDA action, we are encouraged by a recent study by researchers at Brown University, that provides additional support for the use of two biomarkers together.

We are working on two new tests for prostate cancer.

We licensed a DNA methylation biomarker for a blood test, and are working to develop a urine test utilizing four gene markers.

Another test with good potential is the new QuantiFERON test for tuberculosis.

This new test replaces the 118-year-old skin test, and has significant advantages.

It reduces false positives, has a higher compliance, and does not require patients to return to a physician for a result.

We are educating physicians and public health operators about the benefits, and are starting to see results.

Interest in and demand for companion diagnostics and other personalized medicine is also increasing.

To meet the growing need in this area, we have added biomarker capabilities and medical and scientific personnel.

While it is still early days, some of these early tests are improving health outcomes.

Some examples are KRAS gene mutation analysis to determine eligibility for therapies such as Erbitux.

Our two new tests to assess candidates for Herceptin therapy and CYP450 mutation analysis, to identify patients who may have difficulty metabolizing drugs, such as Coumadin and anti-inflammatory agents.

We are growing our market presence in healthcare IT.

Starting in 2009, physicians using eprescribing for medication are eligible for a supplemental payment from Medicare.

This has resulted in strong increases in the uses of our Care360.

the Care360 features a portal for eprescribing.

By the end of the first quarter, epre uses was up 45% from year end.

The number of medications ordered through Care360 has grown, to a current annual rate of 6.5 million.

Care360 laboratory orders and results and eprescribing creates stickiness with physician customers.

We are enhancing the patient experience, and also making it easier for physicians to practice medicine.

Additionally, health implements and exchanges foster better patient care, and improve business forefronts for healthcare institutions, physicians, and patients.

Our MedPlus subsidiary is a leading developer and integrator of data exchange solutions, and it's technology is driving better data sharing for HIEs in New York, California, Canada, and New Mexico.

The national debate on healthcare reform is just beginning, and we believe that the outcome will be a net positive for our industry.

Diagnostic testing is a vital component of the healthcare equation, and it will play an even expanded role.

There is a growing consensus that keeping people healthy, drives better long-term outcomes and reduces cost.

That means identifying diseases like cancer, diabetes, and heart disease early, when there are options to avoid painful complications and costly treatment.

In closing we are the leader in our industry, and are making investments and taking decisive actions, to differentiate ourselves from the competition.

We were again recognized by 'Fortune Magazine,' as one of the world's most-admired companies.

We drew strong results in the first quarter and are raising our committment for the full year.

We now expect EPS of between $3.65 and $3.75.

And we are exciting about the opportunities before us.

Thank you, we will now take your questions.

Operator?

Thank you.

At this time, we will begin the question-and-answer session.

(Operator Instructions).

Our first question comes from Ms.

Ricky Goldwasser of UBS.

You may ask your question.

Good morning.

And congratulations on a strong quarter.

Good morning.

Thank you.

A couple of questions.

First of all, can you disclose the current run rate on the cost containment initiative?

And secondly, obviously we are seeing a normalized basis, very strong volume performance up 1.5%.

But I think is it could be somewhat surprising, given the concern around the potential impact from the economy on a core testing.

Can you just give us a little bit more color on what you are seeing in terms of physician office visits and overall trends, and do you think that they are sustainable throughout the year?

Ricky, this is Bob.

Let me first comment on the cost reduction program.

As we indicated at the end of last year, when we exit this year we will have realized $500 million in annualized cost save.

That program is progressing very well.

And as you have heard me say before, what we are doing there is taking out work, we are simplifying processes by redesigning them, streamlining them.

And as a result, those are sustainable cost reductions.

And that was obviously a significant contributor to what we saw in the first quarter.

That along with the revenue mix was a big piece of the increasing margins.

In addition, though, in this first quarter, I would say that we were probably a little extra diligent in managing costs and scrutinizing everything.

Some of the discreet spending that we had planned for the quarter, whether it be meetings, travel, consulting, other programs, was either eliminated or deferred.

And at least for the first quarter, I think we are in good shape in doing that without having any adverse impact on the business.

So I feel very good about the progress we are making with the cost reduction program.

It is either on or ahead of plan.

And as I said, it is going to be sustainable cost reduction.

With respect to your question about physician office visits, yes, obviously that is probably what would impact our business more than anything because, for the most part as physician office visits go, that is how our volume moves.

With that said, it is really hard to assess what the direct impact of the economy is on physician office visits.

There is not real good data out there on that.

But our underlying performance in our physician and hospital reference testing business has held up very well, and the volumes have been pretty consistent now over the last three our four quarters.

So, yes, I can't say that we are seeing any significant impact there.

Obviously where we have seen impact is in the employer business.

Drugs of abuse testing, and to some degree in the risk assessment business, as well.

But we see no reason to think that there is going to be a significant change in the experience that we have had over the last few quarters.

Just if you can remind us, when should we see the anniversary off the drug of abuse testing?

Well, you are not really going to see that until the end of the fourth quarter.

I mean, it was the fourth quarter where it really started to decline.

And it really wasn't until the end of the fourth quarter that we saw the real significant impact.

So it is going to be some time late in the fourth quarter.

There are a couple of other things though, that we will anniversary before that.

The impact of the lab management contracts I expect to anniversary before that.

That should anniversary as we get into the second half of the year.

Obviously the number of business days will reverse itself out as we get later into the year, as well.

Great.

That is helpful.

Thank you very much.

Our next question comes from Mr.

Anthony Vendetti of Maxim Group.

You may ask your question.

Thanks.

You had mentioned that the genomic esoteric and anatomic pathology was 35% of revenues for the first quarter.

I know you mentioned some of the tests that were up double-digit or even more.

Can you mention what the growth was overall for that category?

And then if you could just talk about MedPlus, I know that that is a growing piece of your business.

Do you have any quantifiable data, and what percentage of the physicians are using that?

And has that specifically increased?

Anthony, on the gene-based and the esoteric testing was growing definitely significantly higher than our overall average for the Company.

And as we have seen in the past, keep in mind that is becoming a large piece of our business.

You are no longer going to see over that entire book at double-digit growth.

But it continues to grow significantly in excess of the Company average.

On the MedPlus side, right now we have over 140,000 physicians on the Care360 connectivity suite, and we are seeing an increasing percentage of them on the physician portal.

The physician portal is important because that is the aspect that will give them the ability to do eprescribing, and other premium services.

On the eprescribing side, we saw an increase of 45% over the end of the year, with over 6.5 million prescription run rate now in that business.

I would expect to see continued strong growth in the number of physicians using eprescribing, as they look to take advantage of the Medicare premium that they can get this year for using eprescribing platforms.

Yes.

I think the beauty of MedPlus, or the Care360 physician portal is the combination of laboratory orders and results, and eprescriptions.

A lot of people ask AMR, they can do scheduling, they can do billing, and they can do eprescriptions.

But I think what we are seeing, the doctors are using our physician portal to have improved practice, because they can know the impact of various medications on therapy.

Okay.

Lastly on the CapEx.

You said $200 million for the year.

Can you talk about what projects that is going to focus on, and can you mention whether or not you made any small lab acquisitions this quarter?

There were no small lab acquisitions in the quarter.

If there were, you would have seen those show up directly in the cash flow statement.

So anything that we do there is pretty apparent.

On the CapEx side, there is nothing unique in there.

The way that you should think about our CapEx is typically about 1/3 of it goes into IT, about 1/3 of it goes into facilities and related, and with 1/3 of it goes into laboratory equipment.

I would say at this point the laboratory equipment is probably a little higher than it has been, only because the other two as a percentage of the total, only because the other two areas we have been managing I think pretty tightly at this point.

But no significant projects in there other than what we had last year, which is really the standardization of all of our IP systems, lab and billing, across the Company.

Which will continue for the next several years.

Okay.

Great.

Thank you very much.

Our next question comes from Mr.

Arthur Henderson, Jefferies and Company.

Hi, good morning.

Very nice quarter.

Couple of questions.

Surya, can we get your thoughts on healthcare reform, and what it may mean for the labs, and your outlook for the physician fee fix to start?

Okay.

Well, first of all, every Administration has a desire to deal with the healthcare reform.

But for some reason or other, the healthcare reform can become #2 or #3.

It does not feel like that with President Obama's administration.

What really encourages me is his understanding of the role of prevention that is going to play in healthcare.

His desire to really cover the children and the uninsured, and also the integral part of healthcare IT.

So we have been talking about for years that the diagnostic testing is important, nothing happens with other tests.

So my reading, and my in person and listening to people, I think the diagnostic testing is going to play a very important role.

And we are going to benefit as an industry.

But as far as the physician fee schedule, that is something we don't know what the final amount is going to be.

But we have the increase for the first time, the Medicare increase.

But it looks like there may not be any drastic cuts.

But I feel very encouraged about the diagnostic industry and about our Company.

How we have positioned our Company to meet the patients' and the physicians' needs, whether it is cancer or infectious disease, or whether it is cardiovascular disease.

And remember, with respect to the fee schedules, the bigger issues with the physician fee schedule, the laboratory fee schedule would be due for an inflationary adjustment, unless there is some other change to it.

Yes.

And on the fee physician schedule, they will do something.

We don't know what the final fix will be.

But for everything we are seeing, they are not going to let those draconian cuts go into effect.

Right.

And the most significant impact to us is really the laboratory fee schedule, as opposed to the physician fee schedule.

Right.

Okay.

That is helpful.

And two quick questions.

In terms of commercial payor contracts that are coming up, I guess CIGNA is the next one.

Is that in 2010, I just wanted to get your outlook on that?

And then Bob, on the uses of free cash flow, you bought back a lot of stock.

Is that kind of the way we need to think about what you are going to be doing with your cash flow?

Thank you very much.

With respect to managed care contracts, most of the big ones are extended through 2010 or beyond.

CIGNA actually runs out beyond that, closer to 2012 I believe it is.

So, yes, I think we are in good shape, I would say pricing relative to that piece of the business is much more stable, than it has been in quite a while.

So we are feeling pretty good about that.

With respect to capital deployment, yes, as you've heard us say in the past, the first goal with respect to excess cash is deploy it into growing the business.

Which would be acquisitions, new test development, and the like.

When those opportunities don't exist or aren't available at the right price, that is the point which we would deploy it into share repurchases, which is essentially what we have done in the past.

I would say though, that we want to do all of that in the context of improving our investment-grade credit rating.

So there will continue to be some further reduction in debt levels as we go throughout the year.

And that is actually at the end of the day probably the very first priority is to make sure that we maintain that investment grade credit rating.

Okay.

That is helpful.

Thank you.

Mr.

Robert Willoughby of Bank of America/Merrill Lynch, may ask your question.

Thank you.

Can you give us additional details on the lab management contracts that have gone?

How many were there, and why the change in philosophy here?

Those were good for you at one point.

Why the change?

And are there any left that you might seek to step away from?

All right.

I will tell you, these are and we talked about these a little bit on the last call.

These are lab management agreements that come up for renewal periodically.

And in assessing them, they were not meeting the profitability thresholds that we have set.

And as a result did not renew them.

And if you look at the table and footnote four, you can see that while it had a pretty significant impact on volume, you had a relatively insignificant impact on revenue.

So that tells you that they were pretty low priced.

They were profitable at one point, but sometimes either the service levels need to change, or other things cause those to not be as profitable as we would like.

And as a result, if we can't adjust the pricing accordingly, we won't renew them.

Now do I expect that there are additional contracts like that that are coming up this year?

No.

I think we are in pretty good shape, relative to the ones that we have got at this point.

Okay.

Again, most of the impact you see showing up in the volume.

Very little to revenue, and certainly very little to the profit.

All right.

Okay.

And just what is the strategy on the new Walgreens relationship you announced?

Are you guys just nice guys, or do you expect a relationship to evolve into something maybe more meaningfully economically for you?

First of all, we are nice guys.

But we work with a number of retail clinics, and this is our way of increasing our channel.

And we know the little clinics are going to play an important role in healthcare delivery systems.

And there was an opportunity to work with Walgreens.

And I think it is a great program for Walgreens to provide healthcare support for people who lost their jobs.

And we are going to provide them free testing for some of those patients.

But there is no, is there any cash business between the two of you at the moment or --?

Yes, there is.

Robert, there is.

We actually do provide laboratory services for paying customers into the clinics, for [minutes] for take care, as well as for minute clinics.

Right, all of the retail clinics.

And there is no esoteric opportunity there, is there?

At this point in time, their services menu is pretty focused on sick care.

There may be some movement as well, but right now it is a very thin menu.

Yes, there are a limited number of tests.

That is great.

Thank you.

Our next question comes from Mr.

Charles Rhyee of Oppenheimer.

You may ask your question.

Yes, hi, thanks.

Just had a couple follow-up questions here.

You talked about, you commented on healthcare reform, and where labs are situated looks very favorable in terms of helping in the diagnosis for care.

But as we think about the physicians' fee fix and Obama's, and the Administration's focus on preventive care, do you think we can come into a situation where maybe sort of family physicians, sort of the frontline of the physician community benefits more in the physician fee fix?

Maybe at the expense of higher end specialties, and do you think that might have potential impact on the esoteric mix at all, in terms of the fees?

Like a slight rebalancing?

Well, nobody knows exactly how it is going to turn out.

But I will be very surprised that if they are going to reduce any significant changes to the specialty, because the reality is that as we grow old, and the populace age is growing, there issues, weather it is chronic disease or whether it is actual disease.

So when I think about the healthcare reform, I think the most important thing at the moment people are realizing, that in sort of having episodic care, now we are going to take a continuum of care.

And that is where the diagnostic laboratories, the diagnostic testing is going to be more important.

We know the healthcare cost has gone up.

And for the last 20 years, we have miracle drugs and miracle devices.

And now the question is how diagnosis, diagnostics is going to start to know the predisposition to a disease, to monitor therapy.

And I think that is going to be across the spectrum of the care, whether it is primary care, or whether it is specialists.

And actually, I mean, if you think about everything they are looking at, Charles, around obviously we need to see exactly where they go with comparative effectiveness, but laboratory testing can help the specialized physician, to make decisions more efficiently and effectively as it relates to the overall use of healthcare.

Obviously if we think about some of the cancer areas now, and therapy selection and monitoring are great examples.

And I think if you are worried about whether the specialists are only ordering esoteric testing and that might change.

You shouldn't be worried about that, because now esoteric testings are also ordered by internalists and primary care, and what is esoteric today, in five years it becomes routine.

So this is the reason why I said that we invested money a long time ago, and we are now getting the benefit of CRP.

We invested money in technology like mass spec, and are getting the benefit of vitamin D.

We will continue doing this, bringing new technology and increasing the quality.

And we will have a significant amount of business based on high quality, high value esoteric testing.

No, that is fair.

Just two follow-up questions here.

The insurance recovery, can we get more details, what is that related to?

And I know you said $0.05, is that sort of the $8.5 million, does that sound about right then?

Charles, I am not sure I can give you a lot of additional color here.

We are expecting to receive an insurance recovery, in this, the second quarter, which will give us about a $0.05 EPS benefit.

That is closer to about $15 million pretax.

You are probably doing an after-tax number.

Yes.

I was looking at after tax.

So $15 million or so?

Right.

And it relates to a claim associated with the storm which occurred a number of years ago.

It is non-recurring in nature, so that is why we are breaking it out for you separately here.

Footnote six has the information, but from a placement on the P&L in the second quarter, it will be sitting above in operating income.

Okay.

Perfect.

The last one is the interest expense looked like it ticked down.

Then I look at debt and cash at the end of the period, it looks like the debt ticked up a little bit.

Is there anything that sort of occurred in the quarter, in terms of timing of payments that attribute to this, or --?

The debt is actually the same level that it was at the end of last year.

I am sorry.

The net cash, it looks like you have been buying back stock.

Correct.

I think you can see that all laid out on the face of the cash flow statement.

It was really essentially the share repurchases that reduced the cash balance.

Otherwise, it was a terrific quarter in terms of operating cash flow.

Okay.

Great.

Thanks a lot.

Our next question comes from Mr.

Gary Taylor of Citigroup.

Hi, good morning.

I missed a little bit of the Q&A.

So refer me to the transcript if I am repeating something.

Have you had any evidence in the 1Q that there was any more aggressive buydown by employers with the managed care plans through the last renewal cycle?

So any noticeable uptick on the co-pay side?

Not that we can see, Gary.

Certainly if you look at our billing metrics, they continue to improve.

Agings have continued to improve.

DSOs are down, bad debt is down.

So I would tell you that I have not seen a significant impact there.

Usually the first quarter carries a little higher bad debt than the rest of the year does, simply because of co-pays and deductibles.

But I can't say that we have seen any significant uptick in the amount that we are having to bill patients.

And can you remind us as a percent of revenue co-pays and deductibles are what?

Well, as you think about it, it is probably about 5% to 6% or so, and that is really embedded in what we call third party.

So if you were to look at our 10-K and you look at the revenue by payor there, embedded in third party are the co-pays and deductibles.

What you see up in patient is the uninsured that we are billing directly.

Right.

And just finally, can you give us the allowance on the gross AR, or do we need to wait for the Q?

The Q will be filed later this week.

It is planned to be.

Great.

Thank you.

Our next question comes from Mr.

Ralph Giacobbe of Credit Suisse, you may ask your question.

Thanks.

Good morning.

A couple of quick guidance things.

Is there something in the back half of the year that we should be thinking about that gives you confidence in that 3% top-line guidance?

And just to be clear, the 3% revenue is for total company right, not just clinical add business?

Correct, it is total company.

Ralph, the best place to look is in this footnote four to the earnings release, because there are a number of factors that are impacting the first quarter, which are not going to impact the full year to the same extent.

Certainly we talked earlier about the lab management agreements, which are going to anniversary.

The number of business days.

The drugs of abuse testing business won't anniversary until late in the fourth quarter.

And foreign exchange may or may not reverse out, but that is really not reflective of underlying performance.

Right.

But because you are using 1.3% I guess as the first quarter number, right?

It would imply that the back half is a little bit stronger.

Yes.

Okay.

That is fair.

Just in terms of the raise in guidance.

Obviously $0.05 was the insurance recovery.

Is the balance mainly lower share count, just given timing of repurchase so far, or is there something else?

It is really improved operating performance.

As you think about it, we brought the mid-point up by $0.10.

And you can think of that as $0.05 from the insurance recovery, and $0.05 from operating performance.

So the range got tightened to $0.10, we brought the bottom up $0.15, and the top end up $0.10.

Okay.

So it wasn't share repurchase, that had sort of been factored in when you originally gave it.

Yes.

Share repurchase for the most part is very consistent with the capital plan that we have got this year.

Maybe a little more front end loaded because of the GSK repurchase.

But very much in-line with our capital plan for the year.

Okay.

Then on the AmeriPath business, I know you are not breaking that out separately anymore.

But can you give us any color on retention efforts with pathologists?

On the pathology front, our retention efforts on the pathologists is very strong.

We have a pathologist team, if you think about a consolidated organization of about 800 pathologists.

So you don't keep everyone, but our retention efforts are very strong.

And we are pleased with that.

Okay.

And correct me if I am wrong, did you guys recently,did you lose a case in terms of sort of the non-compete around AmeriPath ?

It was related to one state.

And keep in mind, it is one state and still in dispute.

No, that is fair.

That is fair.

Then the last question, when we think about sort of international expansion, should we consider acquisition, or should we just think of about it as mainly built out of locations, and sort of startups if you will?

And if you could just remind us the goal again, was it 10% of revenue?

Is it in the next five years and you are currently at 3%?

Is that right?

International revenue is at about 3% for us right now.

The 10% is a multi-year goal.

And I think it is safe to say, you just see organics, plus the supplement of the strategic acquisitions as they become available.

Right.

And we continue to believe that going to international, that especially for developing countries, provides some mid and long-term growth opportunity.

And our large investment outside of the US at the moment is India.

That market is $1.522 billion and growing double-digit, and we are making progress on many fronts.

We built the laboratories, one of the best laboratories in the Pacific.

And we have got CAP and NABL certification.

And now we are putting together the plans to acquire customers.

So international is an important strategy, and when you look at our other business, whether it is clinical trials or HemoCue, which is point of care, and laboratory, and our work in Ireland and the UK, those are the things that are really going to grow.

And our goal is to have 10% revenue over the years.

Right.

And these markets, many of them are much more fragmented than you see here in the US.

And as we get more familiar with the markets, and understand how to operate there, it makes us more comfortable considering acquisitions down the road.

Yes.

But to put it in perspective, it is a small piece of the business today.

It is not a short-term driver.

It is really a seed planted for long-term growth.

Okay.

Thank you very much.

The next question comes from Ms.

Shelley Gnall from Goldman Sachs.

Thank you very much.

Just a couple of clarifying questions on the last questions on the top line guidance.

I am still having a little bit of trouble getting to the steeper ramp now to the 3% guidance for the year.

So if I understood correctly, I believe there was a comment that the number of business days that impact, essentially gets washed out by the end of the year.

And the anniversarying effect that we see from the lab management contracts should be worth about a 1% impact in the second half of the year.

So I guess my questions are, first, have I got that right?

And secondly, is there anything that is coming on line that would make that 4.1% revenue per acquisition within that range, not sustainable through the end of the year?

And then finally, are there any key assumptions in that guidance on improvement on volumes or recovering the economy that we should know about?

That is a lot of questions.

Sorry.

I can remind you of them.

Let me see if I can clarify at least one item that you mentioned about the laboratory management contracts.

And it was about a 1% impact of volume.

It was a lesser impact to revenue growth.

And again, that is all laid out in the footnote four in the table there.

But in terms of expectations for the economy and the like, we are not anticipating any significant improvement in the economy, which is going to impact our volumes over the course of the remainder of the year.

And again, if you look at the underlying growth that we have got in our physician and hospital reference testing business, it is in excess of 3% in the quarter.

And we feel pretty good about that being able to continue.

And then with a number of these things that we talked about anniversarying, we feel pretty good about our 3% revenue growth estimate.

Okay.

Thanks.

Our next question comes from Mr.

Adam Feinstein of Barclays Capital.

Thank you.

Good morning, everyone.

Very strong quarter here.

Just wanted to ask a few questions here.

I guess last quarter you said that the drugs and abuse testing business was still profitable, even with the decline in volumes.

Just curious whether that is still the case?

Yes.

Very much so.

Okay.

So still profitable.

Okay.

And then, Bob, last quarter also you had said that you thought that some of the cost cutting would be more back-end loaded in 2009.

I heard your earlier comment about you guys were just extra cautious this quarter, just in terms of managing costs with everything going on.

But still, you had made the comment, back with the Q4 conference call that it would be more back-end loaded.

So just trying to think about that now.

So can you just give us a quick update, in terms of what is different, or whether we should look for the rest of the cost cutting to be more back-end loaded?

Yes.

Adam, with respect to the comments that we made in Q4, it was not so much that we saw it as back-end loaded, as we saw it ramping up throughout the year, and increasing as the year progresses.

Because as we continue to deploy the initiatives across the businesses, the benefit continues to grow.

But as you did hear me say, we were extra diligent in this first quarter, making sure that we managed costs pretty tightly, and in some cases, deferring a few things.

Yes, my expectation is that some of those expenditures that we deferred in the first quarter are going to be required to be made.

And as such, we are not expecting the same benefit that we saw in Q1, in terms of a 2% margin improvement to continue for the rest of the year.

Obviously if we can see clear to permanently removing some of those costs from our cost structure, we will.

But that is not what we are projecting at the moment.

I see.

The cost reduction program that we have been talking about all along is very much on track, and a big driver of our performance improvement.

Okay.

Great.

Okay.

And then just on the bad debt side, you guys have done a great job there, and you answered some questions earlier about that.

But is it your expectation that we can see that trend continue to get better throughout the year, or do you think the trend for Q1 should be seen as kind of steady state for the rest of the year?

Well, yes, I certainly would love to see it get better in terms of bad debt and DSOs.

But I wouldn't expect any significant improvement in either of those.

And as you know, DSOs bounce around a few days from quarter to quarter.

And bad debt in the first quarter typically is a little higher than we see for the rest of the year, because of co-pays and deductibles.

But I am not expecting a significant swing in bad debt or DSOs either way at this point.

Great.

And then just final question.

There was this California Medicaid lawsuit that came out about a month ago.

I just wanted to get any comments there, in terms of how you guys are thinking about that, and just any additional color?

Adam, we believe our billing practices were entirely appropriate, and we plan to vigorously defend ourself within this case.

Okay.

And when would you expect any update in terms of getting that?

I am not going to--

Very, very early days.

Early days.

I am not going to speculate there.

Okay.

Understood.

Thank you very much.

Our next question comes from Mr.

Darren Lehrich of Deutsche Bank.

Thanks.

Good morning, everyone.

I just have a couple questions here.

I wanted to go back to the discussion around costs, and I know you are taking a lot of work out of the lab, so that should be sustainable.

I wanted to just key in a little bit more to what you are seeing with regard to supply chain, and the opportunity there.

Can you just comment a little bit more about the variable cost side, and maybe sort of the reagent trends, in terms of price increases or savings?

Well, there obviously we are looking at the entire supply chain, and we are talking to all of our vendors.

And it is not just a matter of trying to beat people up on cost, but work with them to see how we can help reduce their cost of delivery to us.

And as such, we can both benefit from it.

But I think we have done a nice job in managing the cost of supplies and reagents, and the like.

And certainly that has been one of the components of the $500 million savings program that we have got.

Okay.

On the cancer diagnosis, diagnostic comment that you singled out in the press release, I am just wondering if you can talk a little bit more about what kind of trends are you seeing there, and I guess just a little bit more color, please?

Well, first of all, there is no single test that I can really point to you.

The way we develop our tests, and the way we provide our services to the clinician, is to provide a solution for cancer patients.

And cancer tests are getting more and more molecular, along with an anatomic pathology and clinical pathology.

The whole idea of joining AmeriPath with Quest Diagnostics, is that we cover whether it is blood cancer, or whether it is skin cancer.

So just to give you some indication like HPV, of course it is growing.

There are the whole molecular diagnostics and anatomic pathology studied together, is increasing the revenue product positions.

And there are a number of companion diagnostics that are also growing.

So it is just not one particular test.

And we are very pleased that we have this group of pathologists, and a group of tests, whether it is genetic testing or [distro] testing, which is really helping to improve our revenue product positions.

But most important area also which is growing is hematopathology.

Our Leumeta family of tests, that is proprietary, and we have also cytology is growing.

And flow cytometry is also growing.

Okay.

Two more quick ones for Bob.

Just in terms of the investment you have made in India.

You have commented before about what that run rate has been on the earnings per share.

Can you comment on that?

Maybe give us a high level comment on the management team, and how long has that team been in place, and together at this point?

Well, let me first talk a little bit about we are what we are doing in India, and Bob can talk about the investment.

We decided to build a state-of-the-art laboratory in India, to provide high-quality esoteric testing, to not only India, but also become the ASA specific laboratory for clinical trials, and also testing for specialty physicians.

Now we have changed a couple of management, because as we develop and as we grow, we are seeing whether people meet our requirements or not.

So I am very happy with the current change in the management.

And we now have a group of people who are not only looking at high-quality operations, but are also focusing on customers.

Now as far as the investment, Bob?

Gary, the investment that we expect to make in India this year is not significantly different than what we made last year.

So if you will recall, it was rather modest, about $0.01 a quarter.

And obviously any time you enter a new market, you expect to make an investment up-front in order to realize gains in the future.

And I think we have been very diligent in managing that investment, until we get to the point where that business breaks even.

Great.

Then my last question, just with regard to your borrowings.

Obviously you can elect various LIBOR fixings.

Where are you on the LIBOR curve at this point?

And I guess going into the second quarter, I am assuming you are on the shorter end with most of your borrowings.

Can you just confirm that?

We are on the shorter end at the moment.

Very good.

Thanks.

Our next question comes from Mr.

Bill Quirk of Piper Jaffray.

Thanks.

Good morning.

Just a couple of wrap-ups here.

First off, Surya, basing your comments around vitamin D, it sounds to me that you are using the internally validated assay.

I assume that are you are obviously pleased with the corrections that you guys have taken?

Yes.

One of the things I always tell people that you would expect from our company as a Six Sigma company, that we will continuously evaluate technology, we will continuously evaluate quality.

And I am very pleased that we invested money in the long term on mass spec.

And we are very pleased with the demand that we have see in vitamin D.

And we are actually gearing up to meet that demand in the marketplace.

Very good.

Then just last one for me.

Even when we back out the benefit of the lab fee schedule, it does look like revenue [projected] increased nicely here in the quarter.

I am just trying to think about the sustainability of this.

I guess vis-a-vis what appears to be an incremental push, if you will, on the esoteric side?

Any color here would be great.

Thank you.

Yes, this is Bob, Bill.

Again, I hate referring people back to this footnote in four, but there is a table there that reconciles some of the big drivers of that 4.1%.

And as you can see, 1.7% of it is really due to mix, the drugs of abuse testing and the lab management agreements producing less volume, which carried lower reimbursement than the average.

But when you adjust for that we are around 2.5% or so, which is pretty consistent with what we have been seeing.

It is not just esoteric testing.

It is additional tests per recc being ordered during encounters.

That could be routine testing as well as esoteric testing.

But we do feel pretty good about that being sustainable.

Very good.

Thanks a lot, guys.

Our last question comes from Ms.

Amanda Murphy of William Blair.

The line just disconnected.

We currently have no questions.

Well, thank you.

Thank you.

Marcia, you can do the closing comments.

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

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

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