奎斯特診斷 (DGX) 2010 Q1 法說會逐字稿

Welcome to the Quest Diagnostics first quarter conference call.

At the request of the Company, this call is being record.

The entire contents of the call included in the presentation and question and answer session that will follow are the copyright property of Quest Diagnostics with all rights reserved.

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

Now I would 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 to, adverse results from pending or future government investigations, lawsuits or private actions, the competitive environment, changes in government regulations, changing relationships with customers, payers, suppliers, and strategic partners, and other factors described in the Quest Diagnostics 2009 Form 10-K 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 update section of our website at www.questdiagnostics.com.

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

Now, here is Surya Mohapatra.

Thank you, Kathleen.

Our business remains strong, despite being negatively impacted by severe weather and softness in the marketplace.

During the first quarter, revenues were $1.8 billion, earnings per share were $0.89, and cash from operations totaled $239 million.

Our full year EPS guidance remains unchanged after adjusting for the first quarter charge and the impact of severe weather.

We saw continued growth in gene-based and esoteric testing and we are taking actions to accelerate revenue growth and manage our costs.

I'll review our progress after Bob discusses our financial performance.

Bob?

Thanks, Surya.

During the quarter, we saw a slowing in our growth due to severe weather, softness in the marketplace, and reduced reimbursement for Medicare.

Despite these challenges, our business remains strong, has continued to grow underlying earnings, and generated strong cash flow.

Earnings per share from continuing operations were $0.89, equal to the prior year.

The earnings comparison is impacted by a $0.06 charge recorded in the quarter associated with work force reductions and $0.05 associated with the estimated impact of severe weather across much of the country.

Revenues for the quarter were $1.8 billion, in line with the prior year.

Revenue growth was reduced by an estimated 1% due to the impact of severe weather.

Our clinical testing revenues, which account for over 90% of our total revenues, were within 0.5% of the prior year and grew about 1% adjusted for the impact of weather.

Reported volume was 2.6% below the prior year level and reflects an estimated 1% reduction due to weather.

Drug testing volumes have stabilized and are no longer impacting revenue and volume comparisons.

Overall, volumes are being pressured by a general slowdown in physician office visits.

We are aggressively addressing this challenge.

We have increased our focus on effective sales execution, and are expanding the capabilities of our sales force.

In addition, we are adjusting our cost structure to match volume levels.

Revenue per acquisition increased 2.3%, with the increase continuing to be primarily driven by a positive mix, partially offset by the 1.9% Medicare fee decrease which went into effect January 1 and served to reduce revenue per acquisition by about 0.5%.

Revenue in our non-clinical testing businesses, which includes risk assessment, clinical trials testing, point of care testing, and healthcare IT, and contains most of our international revenues, grew 3% in the quarter, principally due to favorable foreign exchange.

Operating income as a percentage of revenues was 16.5% compared to 17.8% last year.

The charge recorded in the quarter and the impact of weather combined to reduce the year-over-year change in operating income as a percentage of revenues by 1.6%.

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

Bad debt expense as a percentage of revenues was 4.2% compared to 4.5% a year ago.

DSOs at 41 days improved two days from both year end and a year ago.

Our cash flow continued to be strong.

Cash flow from operations was $239 million and compares to $273 million in last year's first quarter.

The decrease is principally due to the timing of annual incentive payments.

Capital expenditures were $40 million in the quarter.

During the quarter, we repurchased 4.5 million of our shares at an average price of $56.21 for a total of $251 million under the accelerated share repurchase we announced in January.

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

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

We now expect revenue growth of between 1% and 2%.

We expect operating income, which now reflects the first quarter charge and weather impact, to approximate 18.5% as a percentage of revenues.

We continue to expect cash from operations to approximate $1.3 billion and capital expenditures to approximate $200 million.

And lastly, diluted earnings per share are expected to be between $4 and $4.20 on a reported basis and between $4.10 and $4.30, adjusted for the impact of charges and weather in the first quarter.

We are taking actions to accelerate our growth and we expect these efforts to lead to improvement as the year progresses and we continue to be very excited about the prospects for our business.

Now I'll turn it back to Surya.

Thanks, Bob.

During the quarter, we saw positive growth from innovative tests such as Vitamin D and ImmunoCAP allergy testing.

Our esoteric laboratories saw stronger growth than our routine testing.

Additionally, over the course of recent months, we have extended a number of contracts with the health plans, increasing visibility to our performance.

In this environment, it is important to increase our sales effectiveness and to have a higher level of customer engagement.

We are putting plans in place to achieve that by upgrading our sales challenge and adding reps in some markets.

We continue to pursue our strategy of driving differentiation through innovative tests and services that create competitive advantage and will drive future growth.

In March, we and Vermillion launched OVA1, the first blood test cleared by the FDA for pre-cervical evaluation of an ovarian mass for cancer.

The response has been very positive.

We are pleased that Medicare is covering this test.

AccuType CP is our new blood and saliva test, which helps assess the patient's response to the anti-clotting drug Plavix.

We have seen an increase in interest from physicians and patients in this important test.

We continue to expand uses of our connectivity solutions.

By the end of the first quarter, Care360 ePrescribing users ordered at the rate of more than 16 million drugs a year, up over 30% from year end.

We formally launched our Care360 EHR solution which lists physicians and connectivity features like electronic ordering and prescribing at their own pace without occurring large capital costs or changing their office workflow.

We are seeing a positive response.

In addition, we are collaborating with [Geoscapes] to make lab results and prescription history more accessible to physicians.

During the quarter, healthcare reform legislation was passed.

The new law will provide coverage for more Americans, especially children, and request coverage of prevention and wellness benefits without any cost sharing.

Beginning in 2011, we will see a reduction in Medicare reimbursement.

On balance, we believe health reform will be positive for our Company and our industry over the long-term.

In closing, our underlying business is strong.

We are implementing plans to accelerate growth and further manage our costs.

We are well positioned for the future.

Thank you.

We will now take your questions.

Operator?

(Operator Instructions) The first question comes from Ricky Goldwasser.

Your line is open.

Good morning.

Good morning, Ricky.

Couple of questions.

First of all, on your volume trends, obviously you were saying that you see continued weakness in physician office visits.

When do you expect we are going to start seeing stabilization of these volumes in 2010 and is it going to be second half or do you expect it to be more of a 2011 event?

And then second of all, on the cost cutting opportunities, can you quantify the run rate savings from the headcount reductions and how much more cost cutting opportunities do you have?

Okay, Ricky, first, let me comment on the volumes.

As we said, we did see volume softness in the quarter.

It was down 2.6%.

A point of that was estimated to be weather and, yes, we have seen some general softness in the marketplace.

We believe it's driven by physician office visits.

It's also consistent with what you see in drug prescribing at this point as well.

In terms of when that general softness will turn around, we're not expecting it to turn around any time in the near future.

We expect the market will continue to be soft for a little while.

Although as we think about our business, we are expecting, based upon the guidance that we put out there for revenue growth, for our basis to pick up over the remainder of the year.

Essentially if you looked at the guidance that we have out there now for revenue growth and you compare that to the 1% underlying revenue growth that we had in the first quarter, it would imply that it's going to accelerate certainly over the back half of the year.

And, there's several things for us to point to there.

First, we're very excited about the opportunity for new tests to contribute to growth.

Surya mentioned Vitamin D.

We continue to see that growing strong.

He mentioned ImmunoCAP allergy testing.

Both of those will contribute to our growth.

And additionally there's a number of new tests that we've either recently launched or plan to launch, which we see accelerating growth.

Whether it be the Colovantage test which is the Septin9 biomarker, the test we have for Fragile X which is [Excent's] OVA1 and of course the AccuType test, which is the one for Plavix response.

So those, in addition to the items that Surya mentioned in terms of us increasing our sales effectiveness, getting more sales reps in certain markets and increasing the level of customer engagement -- those are the things that we see accelerating our growth in the back half of this year, not necessarily a pickup in the underlying market.

Cost?

And on the cost side, we're not going to provide specific cost savings associated with specific actions that we take, but what you should be comfortable with is the fact that this is a business.

Because of -- the number of times and you've heard me say this before -- that we have to do re-work either in reprocessing bills, recollecting samples because there were insufficient quantities, things like that -- that there continue to be significant opportunities for us to improve the efficiency of our operations.

And that program that we put in place several years ago is continuing.

And there continue to be big opportunities for us.

We're driving execution against those plans that we've had in place for a while and feel very good about our ability to continue to manage the cost structure and certainly if we need to do more to adjust it to volume levels, we'll be doing that.

Okay, thank you.

Tom Gallucci, your line is open, please state your company name.

Lazard Capital Markets.

Thank you.

A follow up on the volume if I could and then one other.

I was just wondering if you are seeing anything unique in terms of geographic trends or payer mix trends on the weaker volumes?

Tom, other than the impact of weather, no.

The general softness that we saw was pretty much across the board and no significant swings between payers either.

Okay, and then on -- I know you've talked to varying degrees over the last couple of years about sales force related initiatives and maybe looking to take market share over time.

So could you give us an update there, and also maybe on the competitive landscape.

We saw a blurb recently about maybe you all winning Texas Blue Cross/Blue Shield on an exclusive basis.

So are you seeing more deals out there that could be more exclusive, or could you give us an update on that environment?

Sure, Tom, this is Surya.

First of all, we believe we are maintaining our market share of 15%.

This industry is highly fragmented and there are ups and downs in the competitive marketplace.

But that's the way the business has been.

But as you heard from us, that we see a general softness, maybe related to the people visiting the doctor's office.

But our esoteric business grew.

Our esoteric laboratories grew stronger than our routine test and that's the reason why we have been diversifying our business and now 36% of our business is esoteric gene-based and anatomic pathology, so we will be investing more and more towards and introducing more gene-based testing, more esoteric testing for cancer, cardiovascular disease, and infectious disease.

So that's actually our value proposition.

Now, as far as the managed care contracts, and again, I mentioned that over the last quarters -- few quarters -- we have really extended most of our contracts and that takeaway the validity of our -- to where there is exclusive and unexclusive.

We tried to really work with the payers as they want.

Some payers would like really to reduce their number and being exclusive.

But the advantage is that once you have an open field, you can compete on the value proposition, not on the price.

We go back to our Six Sigma technology and Six Sigma quality and esoteric testing.

So as far as the health plans are concerned, I'm very comfortable that we can see the top line visibility and performance.

There's one other thing that people talk about -- the competitors and what we are doing with our sales effectiveness.

There's always a couple of companies and couple of areas they will do a little bit different than what we do.

But whenever the market slows and this has happened in '03 and what we are doing is basically increasing our sales effectiveness and increasing our customer engagement -- where they are putting specific reps in the marketplace or upgrading our talents, we have no shortage of value proposition, so we need to really be in the field getting engaged with the customers and call on our customers more often than the competitors.

So that's what we are going to do.

Tom, I would just add one thing here.

Surya said with respect to the payers, we respond to what they are looking for.

The Blue Cross/Blue Shield Texas contract that mentioned is really an exclusive -- only one product in that marketplace -- and it's not a trend that we see moving towards exclusive.

In fact, we think open contracts are better for patients, for employers, for payers and for providers at the end of the day.

And that's what we would hope we would see more of.

When you say one product, you mean one of their health plan type of products?

Yes.

Okay.

Thank you.

Shelley Gnall, your line is open.

Please state your company name.

Goldman Sachs.

Thanks for taking my question.

I was just wondering if we could get a sense of just broadly speaking -- a way to characterize the types of tests that are seeing the greatest weakness absent obviously from the volume issue.

I'm sorry, from the weather related issue.

For the ambulatory surgery centers, for example, it's the screening colonoscopies, the areas that's been most deferred in the current recessionary environment.

Is there just a broad way to characterize a type of testing -- other than saying routine -- is there a way we can think about what types of businesses have been the weakest?

Or the flip side, what's been relatively the strongest?

First I would say, weather doesn't differentiate.

It impacts all of our business, whether it be routine or esoteric.

But as Surya said, in the quarter, we saw a stronger growth in the esoteric business than in the routine business.

And, I would say that the general market slowdown is probably impacting the routine business more than the esoteric business.

But, the weather is having nothing to do with mix.

I was wondering if there was anyway you could just broadly characterize -- absent the weather effect -- so just the general weakness we've seen and it's the trend we've been seeing for several quarters now, throughout this recessionary environment, is there a way to characterize the types of testing that are being most impacted?

Well, first of all, I think it's very difficult to characterize a particular type of test because, we've got 3000 tests, but, if you think of the disease process, there's a chronic disease and there's acute disease and there's cancer and cardiovascular disease and infectious disease.

I think what Bob and I were saying is the esoteric business is growing because there are some deaths which are very specific to a particular disease which is important.

Particularly cancer diagnostics and cardiovascular disease.

So that not -- people are not giving up.

But as far as the general softness, we have to be really careful because this industry, all the trends for this industry are positive.

People are getting older, there's more tests, there's more technology coming in.

So what we are seeing is probably a temporary softness in the marketplace.

But having said that, when the softness comes, what we are doing actually, apart from managing costs, we want to increase our competitiveness by sales effectiveness and customer engagement.

When you have 15% market share, there's plenty of room to grow, even though there might be softness in the marketplace.

I guess the questions I'm getting -- than you for that color -- but I'm wondering is if we start to see strengthening in the economy -- and maybe it's not this year, maybe it's not even in 2011 -- at this point, you're taking cost reduction steps to manage the slower volume.

If we start to see a rebound, how quickly can you scale back up and how much visibility will you have and how will you get visibility on maybe strengthening command for some of the tests that have been weakest?

Shelley, with respect to costs and our capacity, we're really not doing anything that's going to limit our capacity to take on additional volume.

We can scale up essentially at a moment's notice there.

This is a very scaled business.

If you look at the impact of weather, you see that, because there's a disproportionate impact on the bottom line when you see the revenues drop off because of weather, because there's a not a lot other than the direct variable costs that you can pull out in that short a period of time.

But again, in terms of visibility, we can respond very quickly to increases in volumes of just about any test.

So I don't see that as an issue for us in ramping up, and that will be a very good issue to deal with.

Fair enough.

Thanks so much.

Adam Feinstein, your line is open.

Please state your company name.

Yes, Barclays Capital.

Maybe just a follow-up.

Pricing was pretty good in the quarter and you talked about the favorable mix shift, but clearly there was a small headwind from the Medicare pricing, so just want to get some clarity there.

I know you said there wasn't any big change in contracting, but wanted to get clarity on pricing and a quick follow up after that.

Adam, we continued to see mix shift and the number of test order per acquisition as the things that will continue to drive revenue per req as we go forward.

As Surya said, we've got good visibility now into all our major contracts, so there's clarity there, and we understand what the Medicare impact is going to be this year.

We don't quite know exactly what it's going to be next year, but again, keep in mind that that's about 15% of our business.

We know what range we're talking about next year for Medicare.

There will be a CPI increase that will be offset by productivity adjustment, which can't bring it down below zero.

Then there's the 1.75% reduction, which is part of the healthcare reform package.

So, from a Medicare perspective, I think our greatest risk is a 1.75% reduction next year on about 15% or so of our business.

I think we'll continue to see positive growth in revenue per acquisition, again, driven by the esoteric tests, the mix and the number of tests ordered.

Okay, and then maybe just a quick follow-up question here.

Clearly the growth has been much better in esoteric than other core business, obviously been the case for a number of years, but the magnitude certainly, it's to a greater magnitude now.

So I guess two questions.

One, how do you think about acquisitions going forward, so to the extent that you guys do stuff, will be primarily focused on the esoteric side.

And then, two, how do you think about the competitive landscape, because -- is everyone going to throw more resources towards esoteric now -- once again since there hasn't been any growth in the core market.

So just how are you guys thinking about it.

We have -- this is not a new strategy for us --.

Sure.

Over the last four or five years, we said we were going to diversify more and more towards esoteric gene and anatomic pathology and that's what we have done.

And as I told you last quarter, you will see more and more investment in esoteric and gene-based testing and how do you really combine molecular diagnostics with anatomic pathology.

So when we look at competitive landscape, we are looking at a value proposition, how do we really combine these capabilities we have of molecular diagnostics with anatomic pathology and using our connectivity to provide customer a unique value proposition that they don't have.

Now, when you look at the acquisition space, we have a very strong pipeline of acquisitions, but, as I said many times, we are not going to [anxious] buyers.

We are looking at companies which is going to help us to get more market share, whether it's cancer or cardiovascular disease, we are looking at companies which is going to improve our science innovation and lead us to that [oddly stage] of introducing new tests, like OVA1 and other stuff.

So I am very positive about how we utilize our cash to grow by investing in these higher end esoteric testing and gene-based testing.

Adam, that would include both laboratory testing, as well as point of care testing.

Okay, great.

Okay.

Thank you very much.

[Lester Thirks] your line is open.

Please state your company name.

[Wellquest].

Can you hear me?

Yes.

Can you state your name again, please.

I'm sorry.

Lester from Wellquest.

My question is basically this.

How is the new passage of the healthcare bill going to affect Quest's revenues in relationship to Quest's strategic alignment with Google Health?

Okay.

And that's question one.

Question two is -- is Quest going to continue with different online initiatives, and is there any interest in reviving -- because now the healthcare bill is passed, is there any interest in reviving the original initiative that it had in 2000 with it's trademark name QuestDirect to open store fronts where people would proactively care for their health?

Well, first of all, the healthcare reform bill does include tests and prevention measures and without cost saving so initially this is really helping people to do -- take care of themselves.

But as far as our relationship with Google Health, Microsoft or [Kiosk] we are very positive about this relationship because at the end of the day, we need to really empower patients, they need to really work with the doctors and be able to take some accountability for their own disease.

So we are working in number of ways to help them to stay healthy and get healthy by working with some of these web 2.0 companies.

And at the same time we have our own initiatives where we are helping patients to get their results and our wellness initiatives, which a number of companies, a number of health plans use for the employer base.

So we are pretty excited about it.

Now, as far as the store front and other things, you can still go to Google Health and buy a blueprint for wellness and that's what the patient empowerment is all about.

Okay, thank you very much.

Thank you.

Okay.

Kevin Ellich, your line is open.

Please state your company name.

Thanks.

It's Kevin Ellich through Royal Bank of Canada.

I was wondering if you could talk about, provide a little more color on the drugs or abuse testing.

Sounds like it's stabilized and just wondering if you think -- what's really going on in that market.

Is it the easy comps or are we starting to see some improvement?

Kevin, as I indicated, that business has stabilized.

It's a little too early to say that we're seeing a big uptick there.

But the fact that it's stabilized I think is good news.

Okay, and it's good to see the esoteric mix at 36%.

Have you guys ever provided the type of growth rate -- I know it's growing faster than the core or routine test mix -- but have you ever provided the growth rate and are you willing to do that now?

Kevin, this is Kathleen.

We don't provide the growth rate on our test product breakdown quarterly.

We do provide it annually, and as we indicated today, that we did see in Q1 that our gene-based and esoteric testing did grow faster than our overall and routine business.

So we're pleased with that.

Are you seeing any pressure from hospital internalization, I think some segments like histology might be -- I guess it's in-office internalization.

Are you seeing any pressure on that front?

We continue to see some internalization.

As the doctors are under pressure for creating their own revenues and we see [TCP] -- we see the technical component -- some of the people are doing and that's one of the concern we have.

But, again, this is hopefully temporary.

As far as the hospital is concerned, the way this business operates, the esoteric tests when they become routine or easy, some of the hospitals internalize it, but I'm happy to tell you that we are doing well with the hospitals because we are providing them with some value propositions which is beyond just the test.

Okay.

Surya, I was wondering if you could talk about the international markets.

I recently saw that it looks like the Ireland cytology contract is no longer going to be exclusive.

Right.

Do you know is that business is going to be split evenly, or how is that going to work out for you guys?

First of all, we don't know how it is going to be split, but we really encourage getting another player there.

Because first of all, we are there to stay and we are there -- we have done a very good job in providing services -- that's the reason why they have extended our contract for two more years.

Now, that will open door for other businesses, but as far as how this is going to be split and what is the territory, those things -- we don't have any information.

But I will tell you that we have a good value proposition.

We are working with the doctors and working with the health authority, so I'm very encouraged that we could extend our contract for two more years.

And does that segue into the bigger contract that Ireland is going to be tendering?

As you have read and we have read, obviously there's a bigger contract and that's another reason why we are there.

And hopefully that will give us an opportunity to also share the bigger contract.

But this question about exclusivity in a country -- there is positive side and negative side -- because first of all, they are not competitors and second thing is how do you really train and educate people?

So I encourage having more than one player in some of these countries because it helps the -- it helps industry and also it helps the healthcare providers.

Going back to international again, if you look at our strategy has been, we said, look, the testing are moving to near patient, so that's why we invested in [focused diagnostic hemafew and those entrics] and we will more and more look at the platforms where we can do testing near the patient that's applicable in the US and abroad.

We have modest investment in India and we continue to do that because I think India market has the largest opportunity at the moment for us and it has taken a little bit of time, but I'm very positive.

So when I look at our Company in the next three or four or five years, in the short-term, obviously esoteric and gene-based testing and anatomic pathology growing along with our routine businesses.

But when you go to the midterm we are to add both things along with the point of care testing, cancer diagnostics in India, and some application of health care ID.

Okay, and lastly, I was wondering, are you willing to provide the pricing on the OVA1 test?

Do we have the pricing of the OVA1 price?

Yes.

Our published list price is $650.

Okay.

Sounds good.

Thanks, guys.

Thank you.

Darren Lehrich, please state your company name.

Hi, it's actually Sudeep Singh in for Darren with Deutsche Bank.

I just wanted to go back to the workforce reductions -- first question is, was that always part of the original $500 million cost reduction initiative, or is this part of a new initiative?

No, it's not part of a new initiative at all and it wasn't part of the previous initiative.

It was in response to the lower volume levels that we saw.

And could you comment at all in terms of where -- in what part of the Company those reductions were, or just what area, just to get a sense for the size or the magnitude.

It was broad based in terms of administrative functions and functions that are directly impacted by volume.

Okay.

And then on the revenue guidance going down from 3% to 4% to 1% to 2%, is there something -- because you mentioned that weather impacted volumes by 1%, yet you are bringing down your revenue guidance by more than 1%.

So how should I be thinking about that?

Yes, as we said, the weather impact was only 1% in the quarter.

We saw a general softness across the board that we're expecting to continue and that's the principal reason for bringing down the volume and revenue guidance -- actually the revenue guidance.

Okay, great.

Thanks a lot.

Ralph Giacobbe, your line is open, state your company name.

Credit Suisse.

Was there anything else that impacted volume in the quarter besides weather -- any lost contracts or anything that we need to be aware of?

I know typically you break that out.

I didn't see it.

I wanted to make sure that wasn't the case.

Along those lines, can you maybe talk about the progression of volume through the quarter, given the softness.

I know you typically don't do that.

Anything better in March, because we did see a bounce back in some of the physician office visit data.

Yes, I'll repeat again there were no significant contract or customer changes to point to in the quarter.

You're right.

We typically don't talk about how the business is performing within the quarter, but you certainly -- we looked at how we ended up, how we were doing as we entered the month of April as we established our guidance.

Okay.

And then just going back to actions to accelerate revenue growth, can you expand on that a little bit.

Is that really just sales force driven or what else --.

Well, first of all, I think when we look at the market and we look at the area and then we want to -- the sales force is a bigger thing, that we are to put some revs in some marketplaces to penetrate more.

We have really to upgrade some of the sales people to go to let's say molecular diagnostics and genetic testing and also to launch the products appropriately.

So sales and marketing, along with the service we have, so it's mainly outdoor focus -- getting into the areas and calling on people more.

Okay, and just my last one, the margin expectation changed -- outlook 18.5% versus 19%.

Is that really just the softer top line coming into play, or is there something else?

As I said, it's really the impact of the first quarter charge and the weather impact.

Otherwise, margins are holding.

It's really a function of us -- two things, continuing to manage our costs and, as you heard, we're seeing more of the softness on the routine side of the business.

So the mix is continuing to improve and that helps margins, of course.

Okay.

Thank you.

Bill Quirk, your line is open.

State your company name.

Piper Jaffray, thanks, good morning.

Bob, appreciate the color on the physician office lab trends.

Any comment here in terms of the recent -- call it, last three year trend -- towards physician specialties insourcing the technical component of pathology and to the extent you can add any color on that versus the (inaudible) would be great.

Thanks.

Surya already referenced that to some degree, but I would tell you that that's not the driver of the softness that we've seen.

This softness is across the board.

It's very consistent with what you're seeing in drug prescriptions and the like.

So no, I wouldn't attribute it to insourcing.

Okay, great.

And then one big picture question, housekeeping one.

First off, Surya, we're starting to see what looks like could be fairly significant lab consolidation over in Europe, actually call it over the next three to five years.

To what extent is there an opportunity for Quest here?

And then just on the housekeeping side, Bob, 38% tax rate, is that the right number to use going forward?

Well, as regard to lab consolidation, I do know that we look at almost all the opportunities that are ahead of us.

At the moment, we are focused in the United States and as far as the international is concerned, we are in India and Ireland.

If there is an opportunity that comes which makes sense, we'll consider that, but there's no immediate plan for having any large international laboratory acquisition for the time being.

And, Bill, on the tax rate, we don't give specific guidance on that, but, yes, I wouldn't expect it to be significantly different from what we saw in the first quarter.

Very good.

Thanks, guys.

Robert Willoughby your line is open.

State your company name.

Banc of America Merrill Lynch.

Bob can you give us a run rate for the other revenues -- you're non-lab testing businesses -- that's been all over the board and the variability to that as well as the other income and expense line item has been somewhat compounding.

Yes, in terms of the other pieces of our business that are outside of our clinical testing business, they continue to be about 9% or so of our revenues.

And as I said, yes, they do fluctuate a little more because they are more impacted by foreign exchange in a particular quarter.

And certainly as you think about the point of care business.

That's impacted by many of the same things -- physician office visits and the like that -- our laboratory testing business is impacted by.

There's some general softness there as well.

In terms of the other income expense line, there's a couple things in there.

There's a -- I believe it's detailed in the footnotes to the earnings release.

There's a $4 million gain on an investment this quarter, but also in that line, I think we spoke about this at year end.

There's the gains and losses on the investments in the supplemental deferred comp plan.

The important thing to remember about those is to the degree that there's a gain or loss in that line, they are offset by a gain or loss that goes up in the operating income line and goes through compensation expense.

So those don't have an impact on the operating income percentage.

Okay.

And that creates some of the volatility in the quarters.

For example, last year we had a loss on the assets and the supplemental deferred comp plan.

This year we had a gain.

But again, the offsets were up above the line, no impact to operating income.

Okay, and I think you mentioned, Bob the ePrescribing volumes up 30% or so.

Did you mention EMR placements?

I know it's early, but is there any metric you can give us going forward?

At this point, there's over a thousand users of the MR product.

Not placements, but that's users.

Okay.

And Surya, I know you were recently at the White House.

You were touting that you were actually hiring as a Company and quite happy about that.

We do see some cutting of the work force here -- fairly quickly after that White House visit.

Should I be worried a little bit more about your forecasting and view of the future here?

This seems to be an abrupt turn.

No, this is not really a -- this is nothing unusual.

We are used to this thing.

We have to do this all the time when there's value up and down.

The positive trend is that we have still a lot of jobs open.

We are adding people in science and technology and innovations and we will add people in sales, so we have to reorganize.

We have got 43,000 people and we still have 600 vacancies.

So I'm not really worried about whether we will have people or not.

I think this industry is competitive and whenever there's a little bit of softness, we need to really adjust our costs accordingly and that's basically what we're doing.

And any -- how many people did the reductions touch?

Bob, how many?

About 500.

Okay, great.

Thank you.

Thank you.

Anthony Vendetti, your line is open.

State your company name.

Maxim Group.

Can you talk about the plan for repurchasing, particularly here in the second quarter.

And then if you can just comment on whether or not you have been approached -- or by any suitors -- or what you're -- if you can't comment on that, what your acquisition plans are going forward.

Okay.

First, with respect to share repurchases, we don't give specific guidance on that.

We tell folks that you should expect we're going to deploy our cash first in the growth opportunities to the point they are not available, then into share repurchases.

And to your second comment, we don't comment on rumors or speculation.

We're focused on growing our business.

Okay, but on acquisitions that you would make, is it pretty much status quo, what it's been going forward or any change to your acquisition plans?

No, none at all.

You heard Surya say earlier that we'd be looking at domestic acquisitions, regional esoteric, potentially hospital laboratories, point of care is an opportunity, but we're also looking at investments that give us access to new testing methods and technology, so on the science and innovation side as well.

Okay, great.

Thanks.

Kemp Dolliver your line is open.

State your company name.

Thank you.

It's Avondale Partners.

First question relates to molecular diagnostic testing and health plans.

Looks like the plans are starting to pay more attention to billing from diagnostics given the growth rate of the -- this area -- and then also just their shortcomings in terms of billing.

How are you working with your plans in contracting to provide adequate clarity on the nature of the test packages that you're providing?

Well, again, first I would say I'm not sure that we've seen any significant trend at all in terms of molecular diagnostics being reimbursed differently than any other testing that we do.

And in fact, some of those molecular diagnostics are critically important.

We talked about Plavix earlier, where you can have diagnostics that help identify whether or not a person's going to respond to a particular therapy.

In cases like that, we're seeing significant interest on the part of health plans.

So, we have not seen any issues in terms of getting reimbursed for molecular diagnostics.

Okay, great.

The second question relates to all the commentary regarding sales force effectiveness and the like.

And you gave a little bit of color with regard to the types of changes you're making, but could you just -- is there a way you could give a little more specifics with regard to what you're trying to do, because when I hear things such as upgrading people, et cetera, after a while it just becomes somewhat cliche.

And understanding a little bit more about what exactly is a large organization you think will change would be helpful.

Thank you.

Well, first off we have been building up a good sales organization and we are -- two years ago, two and a half years ago, we went into very focused organize and focusing on our customer base, whether it's a physician, whether it's a hospital -- so instead of the organization just based regionally, all the sales were under regional organization and we went into focus organized and with sales and marketing towards various customers.

Now what we're doing is taking that organization, which is already strong to build the next one because our business is trending more towards esoteric and anatomic pathology and that's actually nothing new, but what we're doing now to accelerate that plan and other additional thing we say upgrading talent is actually making sure that we have the trained people and then we are also going to add some of the reps in the marketplace which we are not planning, but we are going to do that because there's softness in the market and we have to work harder to maintain our market share and we can always do better.

So this is actually the next phase of going to get the sales organized and which we've been building over the last two years.

Just quickly to close the loop on that, if pharma has been shedding jobs, is some of the hiring people from, say, pharma that have expertise in particular areas such as oncology plugging them in.

Yes, you are absolutely right, there are good people available and we have a lot of good people here, too.

And we want to make sure that we have the right talent and pharma has good people, as far as the [new state] is concerned.

We're also hiring some young people who are coming from other industries.

The key is we need to have a very engaging sales organization, along with superior service and what you are seeing now is a little bit of acceleration because of the slowness in the marketplace.

Great, thank you.

Gary Taylor, your line is open.

State your company name.

Hi, good morning.

Citigroup.

Just a few questions.

One on the severance charge, which I think grosses up to about $18 million.

How much of that is cost of goods versus G&A, just for modeling?

Yes, Gary, the way to think about that is the majority of it is in SG&A.

Unlike the weather impact where the majority of that was in cost of sales.

And when you look at them combined, there's maybe slightly greater impact in SG&A, but they are pretty close.

And there is some discussion in the footnote in the earnings release.

Okay.

I might have missed that.

That puts the SG&A number for the quarter in the low 270s.

Can you help us think about that dollar progression as you move through the year on G&A.

As we've told you repeatedly in the past, we don't think about managing it either at the cost of sales line or at the SG&A line.

We're managing it at the operating income line and that's the result of some of the decisions that we make drive costs in one line item but save significant costs elsewhere.

That's the way we manage it and that's also why we don't give guidance on either cost of sales or SG&A.

Okay.

Could you -- it looked like depreciation was down about $5 million sequentially.

Could you talk about that and that's a run rate, I assume.

Generally it is.

There's no adjustments in the depreciation line.

I think, if you look at our capital spending over the last couple of years -- a few years back, we had some pretty heavy investments, which we have anniversaried at this point -- so I think you could assume that we're at a pretty good run rate in there.

Although I would tell you in order to hit the CapEx guidance that we have for the full year, you'll see some increased capital spending later in the year -- some increased depreciation attached to that.

And then finally, I think Tom asked this, and I just missed the answer.

But just going back to the drug and abuse testing, which was a big drag through most of last year, becoming less of a drag and no mention in the release today, are we to assume year-over-year no impact in the overall volume.

I did mention in my prepared remarks that there is no impact on the year-over-year revenue volume at this point.

Okay, great.

Thanks.

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

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

30 AM Eastern Time today until midnight Eastern Time on May 21st, 2010.

Good-bye.