奎斯特診斷 (DGX) 2009 Q4 法說會逐字稿

Welcome to the Quest Diagnostics fourth quarter and full year 2009 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 Kathleen Valentine, Director of 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 answers to questions may contain forward-looking statements.

You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date that they are made and which reflect management's current estimates, projections, expectations, or beliefs, 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 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, quarterly reports on Form 10-Q, and current reports on Form 8-K.

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

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

Now, here is Surya Mohapatra.

Thank you, Kathleen.

We drove solid earnings growth in the fourth quarter.

Earnings per share grew 11%, revenues increased 2.7% to $1.8 billion.

Cash from operations totaled $360 million.

This completed a year of strong performance despite the challenging economic environment.

For the full year, we grew earnings per share 20% to $3.88.

Revenues increased 2.8% to $7.5 billion.

Cash from operations was $1 billion.

We have been expanding our pipeline of new tests and services that will improve patient care, reduce overall healthcare costs, and drive growth for our company.

At the same time, we have continued to improve the efficiency of our operations and quality of our service.

For 2010, we expect continued strong performance, revenues to grow between 3% to 4%, and earnings per share to be between $4.10 and $4.30.

Additionally this morning, we announced that our Board of Directors has approved $750 million for future share buybacks, demonstrating confidence in our performance and commitment to increasing shareholder value.

Now, here is Bob to discuss our financial performance.

Bob?

Thanks, Surya.

As you heard, our business is strong, performing well, and has a bright future.

Despite continued challenging economic conditions, we have again grown revenues and earnings and produced outstanding cash flow in 2009, and we remain confident in our prospects for continued growth in 2010.

Turning to results for the fourth quarter, earnings per share from continuing operations was $0.97, 11% above the prior year, with the increase principally driven by strong operating performance.

This brings full year EPS to $3.88, an increase of 20%.

In the quarter, we recorded a charge of $0.04 per share associated with prepaying certain of our near term debt maturities.

This $0.04 was fully offset by the favorable impact of certain non-recurring tax benefits which increased EPS by $0.04.

Revenues for the quarter were $1.8 billion, 2.7% above the prior year.

Our clinical testing business, which accounts for over 90% of our total revenues, grew 2.3% in the quarter, and about 3% before the impact of our pre-employment drug testing business.

Reported volume was slightly below the prior year level.

The decline in pre-employment drug testing continued to be a drag on volumes, but to less of an extent than it had been.

Drug testing volumes were off about 14% in the quarter compared to last year and reduced consolidated volume by 0.8%.

As we enter the first quarter of 2010, we expect the impact on volumes of drug testing to anniversary.

After considering drug testing volume, underlying volume grew about 0.5%, about 0.5 point slower than the third quarter.

The decrease is principally due to a general softness in the quarter and not any particular contract or customer changes.

Revenue per requisition increased 2.6%, with the increase continuing to be primarily driven by a positive mix and a benefit of just over 0.5% from the Medicare fee increase which went into effect at the beginning of the year.

The fourth quarter percentage increase was less than we reported through the first three quarters, principally due to the very strong revenue per requisition we saw in the fourth quarter in last year, which impacts the comps for the quarter.

The absolute level of revenue per requisition in the quarter reflects sequential improvement from the third quarter.

Revenue in our non-clinical testing businesses, which includes our risk assessment business, clinical trials testing business, point of care testing business, and MedPlus, and contained most of our international revenues grew 7% in the quarter.

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

For the fourth quarter, operating income as a percentage of revenues was 17.9%, up from 17.6% last year.

For the full year, the operating income percentage improved to 18.2% compared to 16.9% in 2008.

These improvements are due to revenue growth and the progress we have made with our cost reduction program.

That program has been very successful and has now delivered over $500 million in annualized cost reductions since its inception in 2007.

While we no longer plan to provide cost reduction targets, that program supplemented with new initiatives will continue to drive further efficiencies in our operations and be an important contributor to our continued margin expansion in 2010 and the years to come.

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

Bad debt expense, as a percentage of revenues, was 3.9% in the quarter and brought the full year percentage to 4.3%.

DSOs at 43 days were consistent with the Q3 level and improved a day from a year ago.

Our cash flow continued to be outstanding.

Cash from operations for the quarter was $360 million, in line with a very strong performance in last year's fourth quarter.

This brings the full year total to $1 billion, even after considering the $300 million settlement payment made earlier in the year.

During the quarter, we fully utilized our remaining share repurchase authorization and repurchased 2.6 million shares at an average price of $58.49 for a total of $150 million.

Capital expenditures were $50 million in the quarter.

Cash and cash equivalents totaled $534 million at quarter end.

The build up in cash in the quarter is due to the very successful $750 million notes offering we completed in November.

$600 million of the proceeds was used to repay debt maturing through 2011, with the remainder now part of our available cash balance.

Our cash balance, coupled with our unused credit lines, provides us with significant liquidity and positions us extremely well to capitalize on growth opportunities and take other actions like share repurchases to drive shareholder value.

Consistent with that objective, and in order to provide us with multiple options and continued flexibility to deploy excess cash, our Board has authorized an additional $750 million of share repurchases.

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

Given our current credit profile, we do not anticipate further debt reduction in 2010.

Our first priority for use of our cash continues to be growth and other actions to enhance shareholder returns.

We have consistently delivered strong performance under highly variable economic conditions.

During 2009, we continued to grow our business, generate substantial cash, and grew our earnings per share by 20%.

This was accomplished as we made further investments in our business and took other actions which positioned us for continued growth and strong performance.

In addition, it was a year in which we've met or exceeded all of our financial commitments made at the outset -- those for revenue growth, margin expansion, cash flow, and EPS.

Now, as we look ahead to 2010, we expect continued progress.

For 2010, we expect the following from continuing operations.

Revenue growth of between 3% and 4%, operating income as a percentage of revenues to approach 19%, cash from operations to approximate $1.3 billion, capital expenditures to approximate $200 million, and lastly diluted earnings per share to be between $4.10 and $4.30 excluding any potential special charges.

Now, I'll turn it back to Surya.

Thank you, Bob.

We continued to execute our plan and drive growth.

I will discuss the drivers of growth in the quarter and also the investments we continue to make for the future.

Fourth quarter profitability was driven by top line growth and ongoing improvements in quality and efficiency.

In 2009, we achieved our goal of $500 million in annual savings related to our cost cutting program launched in 2007.

We'll continue to drive further operating efficiencies in 2010.

Revenue growth in the quarter was driven by continued strong demand for gene based and esoteric testing, including cancer diagnostics.

Revenues from this test continue to grow faster than overall revenues.

Gene based, esoteric, and anatomic pathology testing now account for approximately 36% of all revenues.

Here are some highlights of fast growing tests from the quarter.

Vitamin D, tested using tandem aspects, grew more than 50%.

Allergy testing using a mineral cap grew more than 10%, and our Leumeta family of leukemia and lymphoma tests grew more than 40%.

Our continued focus on innovation is driving growth today and preparing us for the future.

We are expanding our test offerings to cover the full spectrum of diagnostic needs from screening to diagnosis to treatment and monitoring.

On the cancer front, we are integrating our expertise in clinical pathology, anatomic pathology, and molecular diagnostics to help physicians take better care of patients.

We're excited to introduce OVA1 later this quarter.

OVA1 is the first blood test cleared by the FDA that can help a physician evaluate the risk that an ovarian mass is malignant or not so the patient can be directed to the most appropriate surgeon.

Last year, we launched HE4 testing to monitor ovarian cancer recurrence.

With OVA1 and HE4 in our portfolio, we are now the only diagnostic testing company to offer FDA cleared tests for ovarian cancer in the pre and post surgical settings.

Another example of innovation is what we are doing in infectious disease.

Last year, we rapidly developed and deployed our H1N1 test and test kit to expand the nation's capacity to perform quality testing for the H1N1 virus.

This is a great example of how we're able to respond quickly to a public health need, help patients, and drive growth.

We made significant strides in the area of healthcare IT, which helps drive clinical testing growth.

During 2009, subscription to our E-prescribing solution more than doubled.

As we exited the year, physicians were ordering prescriptions at a rate of more than 12 million drugs a year, nearly triple the rate of the end of 2008.

Our recently launched Care360 electronic health record will help physicians improve patient care and office efficiency without changing their office workflow.

We have also continued to innovate in service delivery as a way to differentiate ourselves from the competition.

We introduced a number of service enhancements during 2009, such as our specimen tracking capability.

Innovation has also helped us drive improvements in efficiency throughout our operation.

We achieved our target for reducing our cost structure by $500 million and continued to identify opportunities to drive efficiency and enhance quality.

Finally, we generated $1 billion in cash from operations.

Our strong balance sheet gives us flexibility to capitalize on growth opportunities.

In closing, we delivered strong results in the fourth quarter and full year.

We continued to invest in growth opportunities and drive efficiency in our business.

We are the leader in a growing and vital industry and are positioned for continued growth in 2010 and beyond.

Thank you.

We'll now take your questions.

Operator?

(Operator Instructions).

Our first question comes from Robert Willoughby.

Your line is open and please state your company name.

Banc of America, Merrill Lynch.

Bob, the cash flow guidance I guess -- if you adjust for the payment that you had this past year, it's relatively flat.

Why wouldn't we see a bit more cash flow in 2010?

You're right, Bob.

It is pretty consistent with this year's cash flow, but think about our cash flow as principally earnings driven.

We're anticipating that DSOs are going to be generally stable, and in 2009, we really had the benefit of reducing DSOs and driving down some other working capital areas.

We think that's less of an opportunity in 2010, although we're going to continue to try and drive that as well.

Okay, and revenue relative to our expectations upside came from some of the non-clinical areas.

Can you give us a couple highlights what happened on that side of the business that drove some upside?

And then maybe lastly your plans for the EMR this quarter?

Those are the businesses in total which are about 9% of our total revenues -- grew about 7% in the quarter.

The clinical trials, testing business grew.

We had growth in point of care as well.

I wouldn't say that there was anything out of the ordinary there.

And just your electronic medical record that's due out this quarter?

That was not a contributor to growth in the fourth quarter.

While we're expecting it to be an attractive offering to physicians, we're also not expecting that though to be a big driver of revenue growth in the upcoming year.

As you know, we've always thought about the EHR and E-prescribing as something that helps us embed ourselves into the workflow in the office and make the relationship with those physicians and hospitals even stickier.

And can you break out -- just my last question -- the number of docs that are actually using the E-prescribing solution and perhaps tell us going forward how many have adopted that electronic health record?

The number of users are in the thousands at this point for the E-prescribe, and we're just ramping up with the EHR -- it's certainly a smaller number at this point.

But that's more than doubled since we've launched it.

Okay, great.

Thank you.

Our next question comes from Anthony Vendetti.

Your line is open and please state your company name.

Maxim Group.

Thanks.

In terms of the share repurchases, you have, you indicated another $750 million.

Is that going to be spread evenly and is that built into the $4.10 to $4.30 guidance at this point?

At this point, we're not going to speculate as to when or how much of the share repurchase program that we would execute in 2010, but you should expect that we're going to put our cash to use.

So whether it's growth, which is our first priority, or share repurchases, which would be the alternative, we're going to deploy the excess cash that we generate in 2010.

Can you talk about the types of acquisitions you'll be looking at in 2010?

Is it going to be more on the genomic and esoteric side, or are you looking to just continue to expand your reach?

Well, we're really not looking to change our priorities at all related to growth.

We'll continue looking for opportunities which leverage our core competency in diagnostic testing, whether that be domestic acquisitions of regional, esoteric, or hospital laboratories.

We'll look for opportunities to expand our point of care operations and then obviously investments which will give us access to new testing methods and technologies you get through licenses, investments, or acquisitions.

Just lastly on the guidance, is that figuring that the economy stays relatively flat or does that expect an uptick in the economy?

Well, we expect that the economy had some impact on our results in 2009.

We expect it will probably continue to impact us in 2010, but we're not expecting the economic climate in 2010 to be all that different than 2009.

Okay, perfect.

Thanks, guys.

We have a question from Darren Lehrich.

Your line is open and please state your company name.

Hi, it's actually Sudeep Singh for Darren and the bank is Deutsche Bank.

I guess my first question has to just -- maybe if you could just talk in general about the digital pathology initiative and how you think that's impacting your business to date?

Well, first of all, digital pathology is early state, but we expect this is going to be a very important aspect of combining clinical pathology, anatomic pathology, and molecular diagnostics.

Not only could you look at those images, manipulate those images, but also we could take care -- take advantage of some of our specialists who may be in remote places.

So one example that we're using, digital pathology in Ireland.

We get their data, and then they look at the data from here over digital pathology.

So we are expecting to have digital pathology as a path for integrating all of these results.

And that's one of the reasons why we acquired AmeriPath to combine anatomic pathology with molecular diagnostics and have digital pathology as the base.

Okay, and maybe if you could just follow-up and discuss Septin 9 launch and share your thoughts with us on how you think this test will be used and adopted, and any sort of update on the managed care strategy as it relates to that test?

Sure.

Septin 9, which we've named Colovantage -- that's our new molecular based blood test.

It's based on the Septin 9 biomarker and it can aid in the detection of colorectal cancer.

We will -- we are offering the test currently.

We will be launching the test some time shortly after Epigenomics releases its PRESEPT study, which we are participating in.

We expect those results to be available sometime later this year.

It's still early days from a launch perspective, obviously.

We will be working on our reimbursement strategy, and specifically related to that, establishing appropriate coverage from the health plans and the government payers.

I just want to add something.

One of the things we used a few years ago and actually invested money to diversify our business for more towards the gene based esoteric and anatomic pathology.

And I'm very, very proud of the fact that 36% of our business is now on the high margin business.

So you will see more and more introduction of products with the gene and esoteric test base, whether it's for colorectal cancer or whether it's for ovarian cancer.

And we are going to work with the health plans to establish the reimbursement.

But more importantly, to give a choice to the patient to have alternative tests, which are more specific and more sensitive.

Okay, and then just the last one for me actually, just had to do with margins.

I noticed sequentially the margins were down slightly.

Just wanted to get your thoughts on whether there was any new trend that you're seeing with expenses that would suggest that maybe margins are closer to 18% rather than 19% in 2010?

You should look historically at our margin.

It varied from quarter to quarter.

The second and third tend to be the quarters with the strongest margin percentage, and the first and the fourth tend to be the lowest.

So I think you're just seeing normal seasonality behavior in our business there.

Okay, great.

Thanks a lot.

Our next question comes from Ricky Goldwasser.

Your line is open.

Please state your company name.

Morgan Stanley, good morning.

Good morning.

I have a couple of follow-up questions.

First of all, on the bad debt expense, is this 3.9% level sustainable in 2010?

My second question is around hospital reference labs.

I think that the results for 2009 were somewhat slower than historically.

Is this mainly the impact off the economy or are you seeing some increased competition in the marketplace?

And then finally, if you can just discuss the potential type of acquisitions that you're looking at.

We saw some reports from local newspapers in India that you were looking at potential acquisitions there.

I know there was some speculation in the marketplace that you might look at companies on the product continuum.

So if you can just update us on what's your current thinking there?

Thank you.

I think that I got them all, Ricky.

Let me start with the bad debt, the bad debt percentage of 3.9% in the fourth quarter.

Don't think of that necessarily as our new run rate for bad debt.

Bad debt in any one quarter has probably 10 to 20 basis points of what I'll call normal variability in it.

And then additionally, in this fourth quarter we had some very strong cash collections, made a concerted effort to collect some older receivables, and as a result it brought the bad debt rate down a little bit in the quarter.

Going forward, I wouldn't expect the bad debt rate to be significantly different than the full year rate that we had this year.

I think your next question was related to hospital reference labs and whether or not there's a slowing there.

There's really nothing unusual there.

One of the things that you need to keep in mind is, and we have it broken out in footnote seven here, that the lab management contracts that we exited a year ago are now anniversaried.

But they impacted the full year results somewhat, particularly on the volume side.

But there's nothing in particular.

I don't see the economy impacting hospital reference work any different than the rest of our volumes at this point.

And then lastly, India, first of all, with respect to specific discussions about an acquisition, we're not going to speculate on that.

We don't comment on rumors and speculation, but we do have no plans for any international acquisitions at this point.

Okay, that's helpful.

And just in terms of like your share buyback program, like what you're factoring into the budget for 2010, is that exclusive of a potential acquisition?

Well, Ricky, as you know, the guidance for earnings that we put out each year is an all in number, and it would include the impact of any acquisitions that we might do or any share repurchases that we might do.

And you've heard us say this before, that our first priority for the point of cash is into growth, and if growth opportunities aren't available or they aren't available at the right price, we'll deploy excess cash into share repurchases at that point.

Okay, that's fair, thank you.

Our next question comes from Kemp Dolliver.

Your line is open and please state your company name.

Hi, thanks, it's Avondale Partners.

Looking at your comments around 2010 in margins, you talk about the operating margin potentially approaching 19%.

Not to get too literal with you, but if your operating margin were to get close to 19%, that performance in terms of the percentage increase would be pretty close to 2009's, which given your prior comments about the cost reduction programs, it's actually pretty impressive.

So could you just speak to any changes in priorities in the cost reduction side for 2010 versus where they've been the last three years?

I would tell you that overall, don't think of it as any dramatic changes.

The program that we have in place will continue, and we'll continue focusing on the areas where we think the biggest opportunity to improve our efficiency lie.

And that's going to continue to be standardizing our operations, deploying best practices across everything, using lean Six Sigma principles both within our laboratories and outside our laboratories, working on procurement and supply chain, obviously billing and collections we'll continue to work on as we see opportunities there, rationalizing our real estate cost, and certainly increasing electronic ordering.

Those are all areas that we'll focus on, but they're just some of the areas.

We will continue to touch really all aspects of our business with this program.

And as I think about it, hopefully we'll start to think about it here internally less as a program and really more as a way of doing business.

That's great, and what are your observations regarding the labor market for some of the, particularly the more specialized lab technician functions?

Well, Kemp, the reality is that we need more medical technologists, we need more histotechnologists, and there's not a lot of places where they've been trained.

So we are internally training, we're working with some of the universities.

And this is one of the comments I've made, that we need to invest in people.

And as we grow the company, there is certainly a shortage of these technologists, and we are training internally.

But there's no immediate panic -- it's just a question of what's going to happen in five and seven years.

That's great, thank you.

The next question comes from Gary Taylor.

Your line is open and please state your company name.

Hi, good morning, Citigroup.

A couple questions.

One, I just wanted to go back to pricing in the quarter and make sure I understood the comment that I think Surya made early in the call.

Just looking at revenue per requisition on average, typically, the dollar amount's down in the Q4, which I think is a seasonal phenomenon, presumably mix.

But it does look like that was down about $3 sequentially this year versus $2 last year and I think a comment was made that the absolute pricing was up sequentially.

Gary, I'm not sure how you're doing your math, but no -- revenue per requisition is up versus the prior year and it's up from the third quarter.

Okay.

And if there's some confusion, we can catch you offline to go through your numbers.

Okay, well, it sounds like there's definitely confusion, but I'll see if I can straighten myself out, thanks.

Secondly, on the cost side, there's not an explicit dollar amount on the cost savings for 2010, unlike what you've had in prior years -- is that correct?

That's correct.

Look, as we've told you, when we first launched this program we had some very specific targets which we wanted to lay out there for people.

But at this point, this program is really becoming more and more of a way of doing business and it will continue driving improvements in margin for us; that, coupled with top line growth.

But no, it doesn't make sense for us to put a target out there every year for you.

Think of it as built into our operating income.

Okay, next question, small matter.

Other operating expense was a $5 million number.

It's typically pretty de minimis.

Even $5 million isn't a lot for you.

But is that a unique thing?

If you're talking other operating, that includes an almost $4 million of foreign exchange in the quarter.

And if you look, a lot of this is detailed in the footnotes to the earnings release.

Sorry, I haven't had a chance to get through all that.

Last question then -- just overall in terms of volume growth, we've been looking at the overall requisition growth and looking at that ex the drag from the drugs of abuse testing, and the year started pretty weak and got sequentially stronger, Q2, Q3, and now looks to have backed off a little bit in Q4.

And I understand Q3 was probably inflated a little bit because you were comping a quarter with some hurricane impact in it, but when you just think about routine testing growth in the fourth quarter versus what you've seen the last couple quarters, any particular observations to make?

As I said, there was some general slowdown in the fourth quarter.

And one of the things that -- yes, I think it is important not to read too much into any particular quarter.

But as we look at where the fourth quarter came out versus the way we're thinking about our guidance, we're in about the same place as we were last year.

But you may recall that last year's revenue growth in the fourth quarter was a little bit below the expectations that we set for the year, and we're in the same position this year.

Okay, that's all I had, thank you.

Our next question comes from Kevin Ellich.

Your line is open and please state your company name.

RBC Capital Markets.

Thanks for taking my questions.

Just a few follow-up questions, and I know we've talked a lot about the 2010 guidance.

I was wondering, does it include acquisitions?

And also given the operating margin is expected to approach 19% and therefore there would be some margin expansion, how much of that is dependent on volume growth or volume coming back?

Well, first I would tell you with respect to the revenue guidance, there are no acquisitions in there.

That is organic revenue growth.

The earnings per share number, though, assumes that we'll deploy our cash either into acquisitions or into share repurchases, so think of that as an all in number.

Okay.

And then the latter part of your question?

Oh, the margin expansion -- with operating margin approaching 19%, how much of that is dependent on volume growth or volumes picking up?

Well, certainly, in order for us to continue expanding margins, we need both top line growth and we need to continue making progress on our cost reduction program.

So you should assume that it does anticipate continued revenue growth, and as we think about the revenue guidance, although we're not giving guidance for the components of price and volume, we are expecting both of them to grow in 2010.

Okay, that's helpful.

And then thinking about your relationships with some of the smaller diagnostic testing companies like Vermillion and the launch of OVA1, actually could you give us some color and detail behind what's going on with OVA1 launch, when it's expected?

And what are the other diagnostic testing categories you're interested or looking at?

Let me first start with the diagnostic category, and as I've always said that we are focusing on three diagnostic pre-disease areas, infectious disease, cardiovascular disease, and cancer diagnostics.

One of the major reasons for acquisition of AmeriPath is that we want to be the destination for cancer patients when it comes to cancer diagnostics.

So that's going on well as far as integration is concerned.

But now we are working with innovative companies, whether it's Vermillion or other companies where we are bringing in new gene based testing.

And some of this company worked for years and we are very excited that Vermillion has come up with OVA1 and we are going to introduce it this quarter.

As far as going forward, you heard the same thing about the genomics as far as Colovantage -- this is colorectal cancer.

You will see us more and more doing gene based and esoteric testing, whether it's for personalized medicine or whether it is just medicine to improve specificity and sensitivity on almost all aspects of cancer.

Okay, that's helpful, thanks.

And then going back to the international, could you give us an update on India?

How is it performing?

And then what other opportunities are you guys looking at in the international markets this year?

Well, I just came back from India 10 days ago and that country is growing.

While the western countries are growing 2% to 3%, this country is growing 7% to 8% and the Prime Minister announced that the country is under 10% in the future.

So as we said, one of our original goals was we are going to have 10% of our total revenue international business.

And yes, it's a very important area for us and we have started gaining customers, the laboratory is working, and it will take some time.

But we're very excited about our position in India and we're making an impact there.

Now as far as international growth, as Bob said, there's no immediate plan to acquire any company.

But we want to be very successful in India and we're always looking for opportunities.

And we don't want to speculate on those things, but we are working, in India we have done a good thing in Ireland as far as cytology is concerned, and then we have our operation in Mexico and the UK.

Got it, and then that cytology contract in Ireland -- does that come due this year?

It does, and we'll be rebidding on that obviously.

Okay, and then last question, sorry for so many questions here, but with your Care360 EHR and the meaningful use definition that was released at the end of 2009, have you guys gone through and does your system meet those requirements now?

At this point, it does not, but our next release coming out later this year will and it will come out well ahead of when the incentives for that kick in.

We're very comfortable that our solution will meet all of the criteria established for meaningful use.

Got it.

Thank you.

Our next question comes from Shelley Gnall.

Your line is open and please state your company name.

Hi, thanks, it's Shelley from Goldman Sachs.

Just a couple of quick questions here.

First, on pricing, I was wondering if you could back out the Medicare rate component and the revenue per acquisition for the fourth quarter?

As I told you, that's been about 0.5% throughout the year.

Okay, thanks, and then on the drugs of abuse testing, I just want to confirm -- it sounds like it's not expected to be a drag in 2010.

Is that a change in view or is that consistent with your expectations for the last couple quarters?

No, it's really not a change in view.

As we've said for some time now, we expect that the impact of that business will anniversary in the first part of 2010.

And while we don't expect it to be a big drag on our volumes or our revenue growth year-over-year, we're also not expecting it to be a big contributor either.

Okay, that was my next question, thanks.

And can you just remind us historically in your EPS guidance range, has that historically been provided the same way -- in other words the revenue is organic, EPS would include any share repurchases done or any acquisition impact for the year?

Yes, very consistent with what we've done historically.

Okay, great.

Thanks very much.

Our next question comes from Tom Gallucci.

Your line is open and please state your company name

Sure, Lazard Capital Markets.

Good morning, thank you.

I think most of my questions have been asked, but maybe just a couple of quick ones.

One, you noted the moderating volume trends or the sluggishness that's out there.

What are your views, your growth versus sort of the overall market growth and do you have any thoughts as to maybe why it's been a little slower lately?

Well, it's certainly hard to pinpoint it.

We think that in general we're probably growing consistent with what the market's doing, and the general softness that we saw in the quarter, we expect that it's probably consistent with the trends in physician office visits, in drug prescriptions which were written.

Okay, and then maybe just two macro issues quickly.

It's small, but if you could remind us the impact of the physician cuts that could come out there depending on what happens in Washington and how you handle that in your guidance?

Tom, for 2010 what we have included in our guidance is about $25 million in cuts from CMS, and that's the 1.9% reduction on the clinical fee schedule, and then the RVU adjustments that are in place on the physician fee schedule.

Right.

The sustainable growth rate that they've talked about, there's nothing specific in there for that at this point.

Any action on it has been put off until I believe it's March 1 of this year.

And at this point we're expecting that Congress will ultimately act to do something with that.

So we don't have anything specific built into our guidance for it.

Okay, and maybe the last one.

You mentioned pathology along with gene-based and esoteric as important areas.

And we've been seeing and hearing for a long time about a shift toward more in house operations.

Can you just give us an update on what your thoughts are on the pathology landscape generally?

Thanks.

First of all, as you know over the last five or six years, we are every year very disciplined way, we are growing.

Now we have 800 MD in the company and we have a number of subspecialties, whether it's [anatomic] pathology or histo-/hematopathology.

So once you build these, what I call the brain power, our doctors are seeing more patients a day than some of the hospitals.

So one of the questions I ask the companies is that who is looking at your slides, and this is our really great strength and we want leverage.

And another way of leveraging is to really combine in clinical pathology and anatomic pathology and molecular diagnostics.

And you're seeing these results, and obviously people talk about personalized medicine -- that's what we're doing.

And once we combine with the digital pathology, we think this is really going to give us a really unique advantage to move forward.

But we see some in-sourcing in the hospitals and people are trying to do what I call the individual analysis.

That's where you see some decrease in the anatomic pathology in the tissue.

But that's, I don't think it's a long term trend, because people are going to really come to us for more than just the tissue.

And you'll see that on our website that the anatomic pathology business for the year was essentially flat year-over-year.

And I think a lot of that slowdown had to do with the insourcing.

But to Surya's point, the anatomic pathology is just a piece of the broader market for cancer diagnostics, and given the molecular tests that we offer, which are often getting ordered now in conjunction with tissue and other AP work.

But we feel as though we're very, very well positioned for the long term, particularly with the 800 pathologists that we've got on board to offer consultation.

So when you think about the broader market for cancer diagnostics, we think that we're positioned extremely well there, in spite of this trend of insourcing, which at some point -- given that it's again a play for broader cancer diagnostics, I'm not sure that that's going to continue to have the same impact it's had historically.

Okay, thank you.

Our next question comes from Adam Feinstein.

Your line is open and please state your company name.

Sure, Barclays Capital.

Good morning, everyone.

I guess just maybe to start off, on the pricing side, things still look very healthy there, but we did see some slowdown in other growth areas.

I know mix will play into that.

But just curious to get some more clarity in terms of the revenue per req in the quarter and I have a couple follow-ups.

Adam, as I said earlier, revenue per req in the quarter actually continued to improve from the third quarter level, and it's improved sequentially every quarter this year.

The reason that the percentage increase from last year's fourth quarter is down compared to the year-over-year increases we saw earlier in the year was principally because of a very strong revenue per req in the fourth quarter last year.

We had some big recoupments and some big reimbursement initiatives go on that really helped that fourth quarter revenue per req last year.

And as we look ahead, we don't expect pure pricing to be a driver of improvements in revenue per requisition.

It hasn't been historically.

We aren't expecting that to be going forward, particularly with the fact that in 2010, we'll have a Medicare fee decrease versus an increase in 2009.

But it will continue to be the number of tests ordered per requisition and test mix that drive improvements in revenue per req as we go forward.

Okay, great, and then just on the acquisition side, you talked about that being a priority.

Just curious whether you believe that multiples are getting better.

This time last year, things were pretty bad out there, but sellers were still looking for big multiples.

You guys sat on the sidelines for most of 2009.

So just curious whether in your conversations, are you seeing more reasonable multiples for some of these transactions?

Certainly more reasonable than we saw several years ago, and I think there's probably a little more rationale which has been brought to it.

But yes, you still -- each transaction is a separate transaction.

You need to get a buyer and seller to come to an agreement.

One thing I just want to clarify is that we are in a very good position and I'm really very proud of the work we do and we're collecting cash.

But we are not going to be anxious buyers.

Okay, great, and then I guess just final question here -- you said before you guys made your cost cutting goal, and now it's just part of the business going forward, Bob, and you made similar comments in the past.

But as you think about margins and just longer term margin trends -- and I'm not looking for a point on number, but I'm just saying -- is there still more efficiency?

And if so, what areas or one area where you still think there is longer term opportunity as you think about your cost structure?

As we told you, our goal to get to 20% operating income as a percentage of revenues is unchanged.

If we get there and think we can go further, we'll give you some insight at that point.

But right now, our goal is to get there over time.

And as I think about our business and I think about the opportunities here, keep in mind that we keep talking about the lab a lot, but only 35% or so of our costs are within the four walls of the laboratory.

There's a lot of costs outside, whether it be logistics, whether it be patient service centers, in getting those specimens to the laboratory, and those are areas that we'll continue to look at in addition to the laboratory.

Billing, I continue to talk about billing and bad debt.

That's an opportunity for us, and it will continue to be going forward.

The more and more that we can do with our customers electronically, the more and more that it reduces manual effort, it reduces errors, and we're then driving Six Sigma quality, which is all about doing it right the first time and eliminating rework.

There's a tremendous amount of rework that's still done in this industry in our business, and to the degree that we can eliminate that, we'll improve quality and we'll continue driving down cost.

And that's our goal.

Okay, great.

All right, thank you very much.

Thank you.

Our next question comes from Ralph Giacobbe.

Your line is open and please state your company name.

Thanks, it's Credit Suisse.

Just a couple of quick follow-ups here.

In terms of the volumes, want to go back to that.

Obviously, you talked about general softness in the quarter, some of that attributed to just a slowdown in physician office visits as well as scripts.

I guess just given that, how comfortable are you that -- you mentioned that you'd expect volume growth.

What would give you that comfort level that you will see it, just given some of the recent trends we've seen?

Again, Ralph, we're not looking at just any one quarter as we think about this.

If you look at the full year and you look at the footnote seven that's in the press release you'll see that there was about 1.5% impact of various items that we do not expect to recur in 2010.

And when you adjust for that, the guidance that we put out there is very consistent with the 2009 performance.

And again as I said, last year in the fourth quarter, the revenue growth was slower than we had projected for the full year, yet we came in right on those numbers that we projected for the full year.

So I know people look at every quarter, but it's important not to read too much into any one quarter, because things do vary.

Okay, fair enough, and then in terms of the pricing mix, up 2.6% this quarter.

Given that we're going to see some tough comps as we head into next year and given the Medicare rate cut, is it essentially fair to take the run rate from Q4 minus the Medicare cut as a starting point to think about revenue per acquisition for next year?

Well, as I said earlier, we don't give guidance for the components of revenue growth.

But as you pointed out, in 2009 we had a tailwind of a Medicare fee increase, and in 2010 we have the headwind of a decrease.

So that's certainly something to factor in as you're trying to make your estimates as to what you think revenue per req might be.

But we're not going to get into the business of providing the components, because as we've told you in the past, sometimes we'll take action to make sure that the business is profitable, and that means oftentimes walking away from volume, but it improves overall profitability.

So we're driving for profitable revenue growth and not necessarily focused on one or the other metric right now.

Okay, and then just given the new share repo authorization, does that speak at all to what you're seeing or not seeing on the acquisition front?

Not at all.

If you think about what we've done historically, this is usually the time of year that we re-up our share repurchase authorization.

We've exhausted it in the fourth quarter and we now have flexibility to move forward with additional share repurchases, but it's not supposed to signal anything with respect to opportunities to grow the business.

Okay, great and just my last one quick one here.

Can you remind us what either percentage of your cost or percentage of revenue is patient service centers?

We have not provided that guidance.

But yes, as I've told you 65% of our costs are outside the four walls of the laboratory -- patient service centers being one of those costs but you've got 2,000 patient service centers roughly around the country, you've got roughly 8,000 phlebotomists, so that's obviously a big chunk of our costs.

Okay, all right, thank you.

Our next question comes from Bill Quirk.

Your line is open and please state your company name.

Bill Quirk, your line is open.

Please check your mute button.

Oh, sorry about that.

Piper Jaffray.

Good morning.

It's actually David Clair here for Bill.

How are you?

Very good.

Just another question on volume in the quarter here.

What was the growth rate for your esoteric testing volume?

And maybe as a follow-up here, can you give us any color on maybe some of the more established esoteric tests like HPV and Chlamydia and gonorrhea in the quarter?

David, we don't give any test specific information.

But what I can tell you is that our gene based and esoteric testing -- as we said earlier, it did grow faster than our overall rate.

And I'd point you to go out to our website.

We've got some supplemental financial schedules that gives you a nice breakdown by product category of our revenue performance in the year.

And you'll see there that the gene based and esoteric grew at about two times the rate the routine grew in the year.

Okay, great, and then a recent filing that you guys put out mentioned a potential acquisition of a diagnostic testing business.

Can you give us an update here?

Sure.

There's really nothing to update.

As I've explained this to several people already, any time you do a debt offering and you discuss use of proceeds, the disclosure requirements are very, very specific there.

And given that we're always talking about potential acquisition opportunities, we were obligated to make some disclosures that there could be something.

And when you look at that disclosure -- the way it's written, it basically says that there's the potential for us to do an acquisition anywhere from several million dollars to $250 million.

So in any case it would have been an immaterial acquisition.

Obviously nothing has closed yet and there's nothing to announce.

And quite frankly, given the size of it, it's not necessarily something we would press release if we had completed it.

Okay, great.

Thank you.

Our next question comes from Amanda Murphy.

Your line is open and please state your company name.

Hi, thanks, it's William Blair.

Just a few follow-ups, and not to harp on the volume issue some more, but based on the discussion it sounds like if you take out drugs of abuse and seasonality that perhaps the underlying utilization trends have gotten a little bit worse.

Is that a fair statement?

And if so, as you're out in the field, is there something specific that you're hearing that's driving that?

Amanda, in the prepared remarks I did indicate that the underlying volume growth slowed about 0.5 point from what we saw last quarter.

And again, if you look at footnote four and compare that to the previous quarters you'll be able to do all of the math there.

But no, there's no one particular thing that we're pointing to in terms of the slowdown.

We think it was a general softness, and as I said, I think it's very consistent with the trends or expected to be consistent with the trends for physician office visits and the number of drug prescriptions written.

Okay, and then in terms of the cost savings piece, you mentioned specifically some new initiatives for 2010.

We've talked a lot about it -- I don't know if you've already mentioned them specifically, but perhaps you could give a little more color on that.

No, Amanda, look.

I'm not going to detail out each of the initiatives.

As I told you, when we launched this previous program, it literally included hundreds of initiatives.

Many of those are going to continue to carry over into 2010.

They are going to be supplemented with additional initiatives, but the areas that we're focused on are really unchanged.

As I said, we're going to be looking to continue standardizing our processes, deploying best practices.

We're looking at using lean principles throughout the business.

There continue to be big opportunities on supply chain as I already said a couple times.

Billing and collections remains a big opportunity.

As we increase electronic ordering I think there's going to be efficiencies throughout our business.

And then we're obviously looking at all of our real estate costs, which include footprint and all of the other costs associated with real estate.

So think of those as the broad categories.

Okay, and then just lastly, as a follow-up to India.

Now that you've been live there for over a year, can you also talk about how the reimbursement environment played out and perhaps test mix in that specific country?

Well, first of all, most of the reimbursement there is self paid, so it's cash.

And as far as best mix and other things, we are trying to meet the local requirement, some of the routine testing -- but our focus there is actually esoteric testing.

And, you know, early days to really talk about which specific area is going to take off.

But we built this facility and it's one of the best facilities in Asia Pacific, and we're going to have some of the key tests there and some of the things that are not available, it will be done in the US.

Okay, thanks a lot.

Thank you.

That does conclude the question and answer session.

Thank you for participating in the 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 may be accessed online at www.QuestDiagnostics.com/investor or by phone at 866-428-3803 for domestic callers or 203-369-0904 for international callers.

No access code will be required.

Telephone replays will be available 24 hours a day beginning at ten-thirty AM Eastern Time today until midnight Eastern Time on February 22, 2010.

Thank you and goodbye.