奎斯特診斷 (DGX) 2011 Q4 法說會逐字稿

Welcome to the Quest Diagnostics fourth quarter full year 2011 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.

During this call, we may make forward-looking statements.

Actual results may differ materially from those projected.

Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in Quest Diagnostics' 2010 annual report on Form 10-K, 2011 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 Investor Relations quarterly update section of our website at www.QuestDiagnostics.com.

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

Now, here is Surya Mohapatra.

Thank you, Kathleen.

We delivered solid results in the fourth quarter.

During the quarter, revenues grew 3% to $1.9 billion.

Adjusted earnings per share increased 19% to $1.23.

And cash flow was strong at $338 million.

For the full year 2011, revenues grew about 2% to $7.5 billion.

Adjusted earnings per share grew 7% to $4.53.

And adjusted cash flow was strong at $1.1 billion.

We continued to execute our revenue growth and cost reduction plans.

The fourth quarter capped a year in which we made significant progress.

Despite a further decline in physician office visits, we exceeded the earnings expectations we set at the beginning of the year.

We completed the acquisitions of Athena and Celera that established a solid foundation in four critical areas of cancer, cardiovascular disease, infectious disease and neurological disorders.

We began a $500 million multi-year cost reduction program.

And with key acquisitions in place, we updated our capital deployment philosophy to return a majority of our free cash flow to shareholders over the medium term.

During 2011, we returned $1 billion to our shareholders through a combination of share repurchases and dividends.

And we announced a 70% increase in our dividend beginning in 2012.

As we have said before, our growth strategy is based on three elements.

Driving innovative new tests and advanced healthcare IT services, enhancing sales effectiveness, and strengthening our relationship with health plans and other payers.

Let me say a few words about each of these elements.

In the quarter, esoteric and gene-based testing grew 17% driven mainly by the contribution of neurological testing from Athena and cardiovascular testing from Berkeley HeartLab.

Demand for gene-based and esoteric testing continued to grow faster than routine testing.

For the full year, gene-based and esoteric testing revenues grew 11%.

Testing volume for SureSwab was up more than 40%, Vitamin D was up 12%, and ImmunoCAP was up 4%.

With the acquisition of Celera, along with Focus Diagnostics, we have assembled unique capabilities from discovery to laboratory developed tests to FDA-cleared IVD test kits.

A good example of how we utilize these capabilities to drive personalized medicine is our STRATIFY JC virus test which was just cleared by the FDA last week.

We developed this test in collaboration with Biogen Idec.

STRATIFY JCV helps physicians stratify risk for an infrequent brain infection in patients receiving Tysabri, an important multiple sclerosis therapy.

With regard to our industry-leading connectivity solutions, we continue to gain users and drive customer loyalty.

Approximately 200,000 physicians and clinicians now use our Care360 connectivity platform for lab orders and results.

In addition, Care360 users increased the use of e-prescribing by about 50% to an annualized rate of 32 million medications.

In 2011, Care360 was named the top e-prescribing platform by Black Book Rankings.

Our Care360 electronic health record is now utilized by 4,400 physicians, and has enabled them to receive payments for meaningful use.

Last week we announced a plan to help physicians nationwide adopt EHR through our Care360 EHR grant program.

Turning to sales effectiveness.

As you know, our sales force expansion is complete and we continue to enhance the support and training we provide.

We have seen results when our sales force is focused on our competitive advantages such as esoteric and gene-based testing, connectivity solution, or various disease categories.

Also, we continue to work with health plans and employers to move business to us from high-cost providers.

Regarding our three-year, $500 million cost reduction program, we are making good progress.

We have begun to implement some of our plans and expect to realize meaningful benefits in 2012.

You will hear more details from Bob, who is leading this initiative.

This initiative is all about building a sustainable platform for the future, while that will ensure we can continue to effectively compete in an ever-changing and an increasingly challenging healthcare environment.

To improve shareholder value, the first and most important step is improving operating performance.

That's why every member of our management team is focused on driving growth and efficiency.

As we said last quarter, starting in 2012, ROIC will be an important component of management's long-term incentive compensation.

All in all, we made progress in 2011 but we have more to do.

As you know, the Board of Directors is in the process of selecting my successor and we will keep you updated when we have more to report.

Now Bob will provide analysis of our performance and our outlook for 2012 and then we will take your questions.

Bob?

As noted by Surya, revenues for the quarter were $1.9 billion, 3% above the prior year.

And adjusted earnings per share were $1.23, compared to $1.03 in the prior year, a 19% increase.

The earnings improvement is principally driven by top line growth and actions we have taken to reduce our cost structure.

Adjusted EPS for the 2011 fourth quarter excludes $0.02 per share associated with restructuring and integration costs, and $0.02 associated with the CEO transition.

Adjusted EPS for last year's fourth quarter excludes $0.06 of charges associated with restructuring and employment litigation.

These items are further detailed in footnote 2 to the earnings release.

Fourth quarter results include a benefit of $0.08 per share in 2011, and $0.05 per share in 2010, associated with discrete tax items.

Consolidated revenue growth was driven by the acquisitions of Athena and Celera, which contributed about 3% to growth in the quarter.

Our clinical testing revenues, which account for over 90% of total revenues, were 2.6% above the prior year, and equal to the prior year before the contributions from Athena and Celera.

Volume in the quarter grew 0.4% from the prior year, and improved from the 1.2% decrease we saw in the third quarter.

We estimate the impact of weather helped the fourth quarter year-over-year comparisons by about 0.4%.

The market in terms of estimated physician office visits may be showing signs of stabilizing.

In the quarter, the data reflects a 2% improvement compared to the prior year.

While our most recent improvement in volume in the data on physician office visits is encouraging, we believe it is still too early to conclude the market has completely turned the corner.

We are not expecting further declines in physician office visits in 2012, nor are we expecting much improvement from the current levels.

Drugs of abuse testing volumes have continued to rebound and grew about 5% in the quarter, in line with growth of the last quarter.

Revenue per requisition was 2.2% above the prior year, with the improvement due to the increased esoteric mix contributed by Athena and Celera.

Base revenue per requisition has remained relatively stable throughout the year.

Revenues in our non-clinical testing businesses, which include risk assessment, clinical trials testing, products, and healthcare IT, grew about 7% in the quarter, driven by the products business acquired as part of the Celera acquisition.

For the full year, these businesses grew about 10%, with about half of the growth organic.

Adjusted operating income as a percentage of revenues was 17.9%, compared to 17.2% in the prior year.

Actions taken earlier in the year to reduce our cost structure are the principal driver of the improvement.

Restructuring, integration, and CEO transition costs totaling $11 million reduced reported operating income percentage by about 60 basis points in the most recent quarter.

In last year's fourth quarter, charges associated with restructuring and litigation totaling $19 million reduced reported operating income percentage by a full 1%.

In July we announced a multi-year initiative, the goal of which is to reduce our cost structure by $500 million by the end of 2014.

As we shared with you last quarter, the opportunities have been quantified and organized into a number of areas with dedicated teams of subject matter experts and cross-functional support.

Each team has a very specific charter and financial target.

Some of the areas around which teams are organized include specimen acquisition, which includes all the costs associated with obtaining and transporting samples; client support, which includes billing and customer service; the labs themselves and all the costs associated with operating them; IT and customer connectivity costs; procurement and supply chain; and SG&A, both in the field and at corporate.

Some areas are more developed than others.

However, we have made significant progress in every area and remain confident in reaching our goal.

We have now established specific targets which we expect to deliver about 20% of the $500 million goal by the end of 2012, with the remainder in 2013 and 2014.

The benefits we expect to realize in 2012 are the principal driver of the margin expansion we expect this year.

The areas where we are furthest along are in client support and procurement and supply chain, together, which we expect to provide about one-third of our savings.

Here, we plan to leverage technology to eliminate manual work, further standardize systems and processes, implement more self-service options for customers, and leverage Lean Six Sigma to further streamline activities.

In client support and billing, we plan to reduce manual work and customer call volume by enabling customers to do more online, including supplying insurance information, making payments, checking on the status of a bill, and obtaining test results.

In the area of procurement and supply chain, we will further consolidate suppliers, rationalize SKUs, standardize and optimize specs, and work more closely with our suppliers in sharing information and managing costs from design to manufacture to distribution.

As one example of the opportunity here, today, across our business, we use hundreds of different gloves, specimen bags and labels, and more than a dozen different urine collection cups.

We plan to significantly reduce these numbers and unlock the savings associated with both buying and the administration associated with handling all these different choices.

Another roughly one-third of the savings is expected to come from SG&A including IT.

We are flattening the organization structure and simplifying management processes, which will not only reduce costs, but drive increased accountability.

In the area of IT, we will place greater emphasis on connectivity solutions which don't require computer hardware.

Over time, this will dramatically reduce the cost of serving the tens of thousands of pieces of equipment we have in the field.

In addition, connectivity installations will be done quicker and at lower costs.

Other areas, like the labs themselves and specimen acquisition, we expect to contribute the remainder of the savings.

In these areas we are addressing capacity utilization, including our lab footprint, service parameters, organization structure and supply consumption.

Common themes across most areas include standardizing systems, processes and databases; increased use of automation and technology; and centralizing and selective outsourcing.

For the next few years, this will require some increased level of capital spending to standardize systems and upgrade IT infrastructure.

We are fully committed to realizing the planned benefits from this program which will not only make our Company more efficient but also serve as a platform for accelerated growth.

Today we continue to produce industry-leading performance in our billing and collection metrics.

Bad debt expense as a percentage of revenues was 3.5% in the quarter, and 3.7% for the full year, reflecting continued improvement from the prior year.

DSOs were 45 days, compared to 44 days last quarter.

Reported cash from operations was strong at $338 million.

Before the effect of special items, cash from operations was about $300 million.

For the full year, reported cash from operations was approximately $900 million, and $1.1 billion before the effect of special items.

Capital expenditures were $44 million in the quarter, compared to $69 million a year ago.

During the quarter, we repurchased 874,000 common shares at an average price of $57.21, for a total of $50 million.

We completed $935 million in share repurchases for the full year.

We are firmly committed to driving increases in shareholder returns.

The best way to do this is by improving operating performance and, as you've heard, we are taking actions to accelerate organic revenue growth and establish a more efficient cost structure.

We also intend to use our strong cash flows to enhance shareholder value.

As we stated last quarter, with a solid foundation of strategic assets and capabilities now in place, it is unlikely we will complete any large, strategic acquisitions in the near term.

We will, however, continue to invest in our business in a very disciplined way, to ensure we continue to differentiate Quest Diagnostics in an evolving marketplace, but in a manner which should require significantly less capital than recent years.

Our investments in growth are likely to focus on smaller, fold-in acquisitions like the S.E.D.

acquisition completed earlier this month in New Mexico; investments in science and innovation in the form of licensing, collaboration and internal development, and investments in technology which will improve quality and efficiency in our labs and other parts of our business.

We plan to use ROIC to guide these investment decisions and are committed to improving ROIC over time.

Beginning in 2012, improving ROIC is a major component of our long-term compensation program.

We are committed to increasing shareholder returns and improving ROIC through a framework which encompasses improving operating performance and a capital deployment philosophy which includes dividends, share repurchases, and investments in our business.

As we shared with you last quarter, this philosophy is grounded in maintaining a strong BBB credit rating which minimizes our cost of capital and provides us appropriate access to credit in support of our business.

As we have also indicated, in 2012 this will require us to use the majority of our free cash flow, about $500 million to $700 million, to delever to a leverage ratio in the range of 2 to 2.25 times.

On achieving our targeted leverage ratio, we plan to commit the majority of our free cash flow be returned to investors through a combination of dividends and share repurchases.

Last quarter we announced a significant increase, 70%, in our dividend, to an annualized amount of $0.68 per share.

We expect the dividend will grow over time commensurate with earnings and cash flows.

In addition, share repurchases will remain an important tool for returning cash to shareholders.

Earlier today we announced that our Board has authorized an additional $1 billion of share repurchases, bringing our total authorization to $1.1 billion.

There is no set time frame for utilizing our current authority, and the level of share repurchases will be a function of a number of factors.

While we expect share repurchases to be relatively modest in 2012, due to our commitment to delever, we expect them to be much more significant the following year.

Turning to 2012 guidance.

We expect results from continuing operations before special items as follows.

Revenues to grow between 2% and 2.5%, inclusive of the S.E.D.

acquisition, but before other potential acquisitions; operating income to approach 18% of revenues; cash from operations to approximate $1.2 billion; capital expenditures to be between $225 million and $250 million, the increase from the prior year principally due to IT investments required to standardize systems and upgrade infrastructure; and lastly, diluted earnings per share to be between $4.40 and $4.55.

Now, I'll turn it back to Surya.

Thank you, Bob.

In summary, we see signs of progress in a number of areas to drive organic growth and reduce our costs.

We are focused on increasing shareholder value and improving returns on capital.

With the actions we have taken over the past years, we are well positioned for the future.

We're now ready to take your questions.

Operator?

(Operator Instructions) Adam Feinstein.

Barclays Capital.

Maybe just a quick starting point.

I appreciate all of the background there on the outlook.

But, Bob, maybe just as you think about the revenue growth for 2012, just what's embedded in there for volumes?

And to the extent, if you can't break it out that way, just help us think about some of the benefits you'll get going forward relative to some of the headwinds you had this year.

So, just trying to think about the --.

Because looking at the quarter, the organic growth was relatively flat but that was compared to the down 1% earlier in the year.

So should we look for a continued ramp-up throughout 2012?

Adam, a couple things on that.

First, when you look at the guidance which is 2% to 2.5%, recognize that there is some carryover from the Athena and Celera acquisitions, and some small benefit from the S.E.D.

acquisition.

Combined, that's worth a little over 1%.

So that implies within the revenue guidance that there's about 1% organic growth there.

And that compares to about flat this year from an organic perspective.

So we are seeing some modest improvement there.

As I said, we're not expecting the market to really pick up significantly as we look at 2012, nor are we expecting it to decline much.

We're expecting pretty much flattish for the most part and some relatively steady improvement in the revenue growth as we go through the year.

As you know, we don't split out the components of revenue growth between price and volume.

Okay.

All right.

And then just once again, the fourth quarter showed progress relative to the earlier part of the prior year.

But just -- how do you think about the revenue per req in that with the flat growth trend for the fourth quarter, just wanted to get your sense in terms of what's going on with pricing.

Are things stable?

Is that the right way to think about that?

Yes, the way I think you should view pricing going forward is reimbursement itself is going to continue to be under pressure.

But what will fuel increases in revenue per req over time will be test mix and the number of tests ordered per requisition, which has really been the principal driver for the last number of years.

So that's one of the factors that we think about as we're considering what the revenue growth will be and what the guidance will look like.

Okay.

And then just my final question and I appreciate all of the details with the slides.

There was just a slide in there that had the revenue by payer.

Just to follow up a little bit to my last question.

And if I look at the managed care revenue, the decline in managed care revenues accelerated this year relative to last year.

And then relative to overall revenue growth it was a little bit weaker.

So just wanted to see what would be driving that.

Is it just a function of just managed care volumes being lower than overall volumes?

Or excuse me, I guess this is revenue per -- well, anyway, I just wanted to get your feedback in terms of the managed care revenue.

Nothing specific that I can point to there, Adam.

As I said, reimbursement does continue to be under pressure.

We're offsetting much of that with test mix, but --

The membership.

Membership declines could drive the mix there a little bit as well.

We also -- one thing that we pointed out earlier is we've had some mix shift between our plans, as well, this year.

Okay, great.

All right.

Thank you very much.

Kevin Ellich.

It's Kevin Ellich at Piper Jaffray.

Just had a quick question about the molecular diagnostic reimbursement changes that Palmetto's trying to implement at the beginning of March.

Is there any update as to whether that's moving forward?

And then I'm just wondering are you guys prepared to use and move over to McKesson Z-Codes?

And also what type of impact do you think this will have on you and the industry?

Kevin, in terms of where the Palmetto implementation stands, according to them, all signs seem to point to they are going forward with implementing their program effective March 1.

As we've said previously, we're leveraging and working all resources available to us to fight it.

We're working with the trade association.

There's a lot of questions about the program and the administration around it, and just clarity about what they're going to require and how the process is going to work.

We've expressed those concerns through the trade association, so we are going to fight it.

But it does appear that they are going to proceed.

So we'll continue to evaluate what it means to us in terms of implementing it from an administrative perspective.

But rest assured, we're working with others in our industry to fight it and try to either delay it or get better clarity around it.

Relative to the impact to us, as we've said, the molecular testing revenues that could be impacted by the new AMA codes that will go into effect next year, it represents less than 5% of our total Company revenues.

So from a financial perspective, not significant in terms of what it represents relative to total revenues.

We've also indicated that from a utilization perspective, this is all intended to get more clarity around what people are paying for and what's being performed.

We feel very comfortable that the testing that we perform and bill for is appropriate.

So from a utilization perspective we feel very good about that.

Until CMS establishes reimbursement for these new codes, we can't determine what, if any, impact there will be from a reimbursement perspective on these new tests, but from a utilization perspective we feel comfortable.

Sure.

I appreciate that color, Kathleen.

And then actually, just one quick follow-up there.

The AMA is also moving forward with their 101 new codes which, like you said, haven't been assigned pricing yet from CMS.

But I guess -- what's your view on if those AMA codes are put into the physician fee schedule versus clinical lab fee schedule?

And then also, if Palmetto moves forward and then you have the AMA coming out with their codes in 2013, isn't that going to kind of create a mess in terms of reimbursement for the systems?

Yes, and that's one of our exact concerns, is that there will create a lot of confusion.

And we and others in our industry have expressed that exact concern.

Okay.

Got it.

And then -- okay, thanks for the color there.

And then just wanted to switch back.

Bob, you provided a lot of detail.

And one thing I missed was when you said you plan to use your free cash flow to delever to 2 to 2.25 times this year.

How much do you plan on spending?

Between $500 million and $700 million of debt paydown.

Got it.

Okay.

That's helpful.

And then just out of curiosity, just wondering what the status is on the CEO search, if you found some good external candidates or if there's any strong internals that you guys could talk about?

Kevin, this is Surya.

CEO search is a top priority for our Board and Board is actively conducting the search.

I don't have any information to report now but as soon as we know something, we'll let you know.

Okay.

Thank you.

Tom Gallucci.

Tom, Lazard Capital Markets.

Bob, I was just curious, a couple quick questions.

But one follow-up to something you had mentioned earlier.

Seeing sort of a mix shift between plans and also persistent reimbursement pressure.

So over and above the government aspect of things, can you talk about that mix shift between plans, remind us what you mean there?

And maybe give us a little more on what you alluded to in terms of reimbursement pressure on the private side.

Sure.

Tom, yes, as you would expect, the pricing that we have with different plans varies.

And some plans are growing membership faster than others.

So when I talk about the mix shift between the plans, that's really what I'm talking about there.

That's impacting the overall average reimbursement from third-party health plans.

And with respect to reimbursement pressure, look, it's no news.

Reimbursement is going to be under pressure, will continue to be under pressure, whether it be from government payers or private payers.

And as we've said before, that's one of the reasons that we've initiated the $500 million cost reduction program.

Right.

So the mix shift is just sort of more the luck of the draw, it's not a change toward high deductible plans or anything like that that you're alluding to?

No, not at this point, not that we can see or have visibility to at this moment.

Although, as we think about the shift to high deductibility plans, that is a bit of a wild card as it relates to utilization.

Not so much reimbursement, but utilization.

Right, right.

Can you remind us to what extent you've got contracts or bigger contracts that we should be thinking about up for renewal over the next 18 months?

Well, yes, we always have a fair number of contracts set to expire in any given year.

But there are no big national contracts set to expire this year.

Overall, when I look at what's set to expire in 2012, it's probably a little less than we would have in an average year.

Okay.

Good.

And then you mentioned the doc visits, your data showed that maybe it was up a couple percent in the quarter.

Looks like organically your volume was closer to flattish, so do you think that the lab industry volume was up more like the doc volume?

How do you see the correlation between doc data and what the lab industry underlying market might be doing?

It's an interesting question, Tom, because there are lots of sources of data out there.

There's the IMS data that showed that they were up about 2% in the quarter.

There's analysis that JPMorgan puts out which shows that they were down in the quarter.

So, it's really hard to say.

I feel as though it improved, though, because both sets of metrics indicated improvement from the third quarter.

But as you know, it's really hard to get a gauge on what the market is doing, particularly in any single quarter.

But, yes, we are encouraged that it looks like there's some signs that things may be starting to improve or at least stabilize.

Okay.

Last one, if I could.

Pathology has been a pressure point, not only on volume but I guess that impacts your pricing calculation, as well.

Where do we stand on the trends there?

Thanks.

That's a business that when you look at the data that we put out there, you'll see it was down again this year.

Total AP revenues were down almost 6% versus the prior year.

I think the year before they were down about 10%.

So we've seen some moderation there but that's a piece of our business that we expect will continue to be under pressure from in-sourcing.

As you've heard us say before, we're working with legislators and other policy-setters to make them aware of the fact that in-sourcing drives, in some cases, unnecessary utilization.

So we're hoping to get a long-term solution there.

But in the short term, we're continuing to do what we can to sell our value proposition.

We've added some salespeople in that regard and we think that that is helping mitigate some of it.

But, as we said, we're looking for a longer term fix there.

Okay.

Thanks a lot.

Ralph Giacobbe.

Credit Suisse.

Bob, real quick, does your guidance include share repo?

It does, Ralph, but as I said, at a much more modest level than we saw this year.

When you think about how much cash we generate in a given year, we gave you guidance for cash from ops of about $1.2 billion, CapEx of $225 million to $250 million.

So, that gets you down to a free cash flow number of about $950 million or so.

We said we're going to delever between $500 million and $700 million.

So if you use the midpoint, about $600 million, which also approximates our short-term debt that we have outstanding, then you consider the dividend that we've got, that we've committed to, which is a little over $100 million.

What's available for share repurchases and acquisitions is a little over $200 million.

And while we're not expecting any significant acquisition activity this year, we did do a small one already with the S.E.D.

acquisition.

So that does limit the amount of share repurchases we can do in 2012.

But as I said, we expect the share repurchases to ramp up pretty significantly next year after we've completed the delevering.

Okay, and then just along those lines, does your guidance assume the lower interest expense that's going to come with the lower debt levels?

Sure.

That's assumed in guidance?

Absolutely.

We factor all that in, both the share repurchases and the debt levels.

Keep in mind that the interest rate on the outstanding debt is very modest at this point.

It's pretty low.

We're in a pretty low interest rate environment and the term loan that we're paying off is a LIBOR plus.

So, we're looking at a pretty significantly low rate there.

And so help us understand the margin commentary then.

You ended the quarter with close to 18% operating margin.

I think you had over 18% in the third quarter.

Your guidance says you expect to approach 18%.

Yet you've got 20% of your cost savings that's going to start in earnest in 2012.

So, just help me reconcile the margin run rate that we've had, the back half of this year, relative to what seems to be your implied lower margin profile for next year or for this year, 2012.

I would be a little careful, Ralph, in looking at any one quarter and trying to extrapolate it.

What I'd suggest you look at is the full year operating income percentage which was 17.6% on an adjusted basis.

Think about that compared to the approaching 18% that we're providing for 2012.

As I said in the script, the margin expansion that we are expecting is principally from the cost reduction effort.

As we've said in the past, this is a business with all of the fixed costs that we've got and the inflationary pressure on the element that is salaries, wages and benefits.

You need to grow organically 2%-plus to be able to hold margins.

And as I said earlier, the organic growth that we're contemplating here is more in the 1% range.

So, it's the cost reduction program that's helping improve those margins year-over-year.

Okay.

Any consideration to going to cash earnings?

Look, you can calculate it if you would like.

It's readily available.

We do report adjusted earnings so that people can understand what we view as the unusual items in the quarter.

Otherwise, it's GAAP adjusted for those things.

Cash earnings is not something that we've historically done.

It's readily available for folks to calculate and it can certainly be calculated.

And then just my last one.

Surya, I think you had talked about working with plans, to get more business away from the higher cost and over to Quest.

Can you talk about any changes to benefit design that you may be aware of and/or what you're doing with employers that's incremental to 2012 relative to where you were last year or two years ago?

Ralph, as you know, it takes quite a bit of time, but I am encouraged by the traction or even the engagement some of these health plans have.

Along with them we're talking to the employers and the whole objective is -- and they know also to meet their goals they have to persuade the doctors to send the testing to our network and to avoid the high-cost providers.

So that's one thing happening.

The other thing, which is becoming very exciting and will really put us in a very advantageous position, is this evolution of ACOs.

There you need data; there you need connectivity; there you need analytics.

So we are having a lot of discussion with them.

It may not have anything concrete in 2012 but I see that all the assets and capabilities we have accumulated over the years, now there are 200,000 doctors using our Care360.

We have a huge data bank.

So, those are the things that are going to help us to work with the health plans in this evolving healthcare forum.

But along with that also, they are also narrowing down their network and that's also helping when the other laboratories are removed from the network.

So we'll continue working with them and it's a part of our growth strategy.

Okay.

Thank you.

AJ Rice.

Susquehanna Financial.

A couple of questions, if I could ask.

This is a high level question.

But if you look at your anticipated revenue growth of a couple percent on a full-year basis, you're improving margin modestly, you've got the share repurchase and you're paying down $600 million in debt, and getting the benefit of the interest expense savings on that.

When I put all those things together I'm surprised that you would still forecast EPS to be effectively down on an adjusted base, or flat to down.

Is there something we're missing when we take those components because that would seem to point to at least modest growth?

Yes, a couple things, AJ.

First, as I said earlier, we can catch you offline but we want to make sure your interest expense assumption for the debt paydown is appropriate.

Again, the interest expense there is very modest.

The other thing that I would tell you is when you think about the tax rate, it's not going to be the same tax rate as this year.

This year we had a number of discrete items in there which helped the tax rate.

And if you want to think about the right tax rate to use, I suggest you look in the footnotes and you look at the rates we've used to tax effect some of the items in there, in footnote 2 in the press release.

Okay, all right.

We'll do that.

And we can follow up offline.

Maybe on a big picture, as well, question about Washington.

It seems like there's a lot of focus coming up to year end on the doc fix.

We have the House proposal, the Senate proposal.

And at least using those two as metrics, it seemed like the lab sector made it through.

What are you hearing in terms of this next phase of trying to get the doc fix done?

Can we -- do we wrestle -- do we seem like we're in a little better spot than maybe we looked like six months ago?

AJ, I think everything's still up in the air at this point, whether it be co-pays, deductibles, or reimbursement changes.

Obviously, we don't think any of those are appropriate for our industry.

We feel as though we've made some pretty significant contributions in terms of give backs.

And in addition, we want to make sure that whatever is done isn't counter-productive in trying to drive down the total cost of care.

Because as we've said repeatedly, and one of our arguments is that while this is a very small piece of the total spend, it has a very significant influence on treatment decisions and the total cost of care.

And you don't want to be penny wise and pound foolish here.

So we're continuing to make our case.

We think we have a good one.

But I would tell you that it's still up in the air as to what the outcome's going to be with respect to the permanent doc fix.

Okay.

And then last question.

I appreciate that you guys don't have significant large contracts up for renewal over the next 12 months.

But I had understood, at least, that maybe an opportunity for you guys was that the Horizon contract, which you're not in now, was up for grabs and that we might even hear something by year-end.

I personally haven't heard anything.

Have you guys heard any update on that?

Any thoughts?

Well, you know, if I hear I will let you know.

And we're always working with our health plans and trying to meet their needs.

But we haven't heard anything from them either.

Okay.

All right.

Thanks a lot.

Ricky Goldwasser.

One follow-up question on guidance.

So just to clarify, is the additional compensation for, Surya, for your retirement included in the 2012 numbers or not?

No, it's not.

That's being treated as a special item, just like it was in this quarter.

And as we said back at the end of Q3, we expect that to be about $14 million in total.

There was roughly $6 million that went through this quarter.

The remainder will go through in the first half, certainly before May next year.

Okay.

So just to make sure that we get all the line items right, and I know it's a follow-up on a question that was asked before, but it just seems that your guidance is very conservative and I want to make sure that we're not missing anything.

So, is really most of what I would say the headwinds to your guidance are below the EBIT line, is that a correct way to look at it?

Well, Ricky, to try and put it in perspective for you, one, we've talked about the tax rate a little bit so you ought to make sure you're using the correct tax rate.

The other topic that we covered in a couple different forms this morning is the share repurchases.

While we are going to do some share repurchases, they will be more modest than they have been this past year.

And we're not expecting the weighted average shares outstanding to change much from this year, because the share repurchases that we will do will pretty much offset the shares issued in connection with employee benefit plans this year.

Okay.

That's helpful.

And then recently we heard some discussion on formularies for lab testing.

Can you elaborate a little bit on this?

Have you seen formularies being implemented?

And do you think this is going to affect where the future will be and what your role will be in setting and managing those formularies?

Ricky, we have not seen that really anywhere at this point.

Certainly, as we talk to accountable care organizations and the like, we're trying to understand how we can work with them to not only manage their laboratory costs but more importantly manage the total cost of care.

And that really means getting the right testing to the right person at the right time, and then using the data that's generated from that to make informed decisions, and oftentimes marrying that with other data.

We haven't really, in those discussions, had much conversations about lab formularies.

Although you may have heard it someplace; we have not.

Okay.

Thank you.

Lisa Gill.

This is actually Gavin Weiss in for Lisa Gill from JPMorgan.

You discussed moderating trends in physician office visits and the various data sources that are out there.

We saw an improvement in our December volumes based on our survey.

I was wondering if maybe you could talk about how much you think this is the moderating trend versus are you seeing benefits from patients heading to the doctor before deductible resets in January.

I know there's been a lot of anecdotal commentary on higher deductible plans in 2012.

What do you think about those trends?

It's really hard to gauge, quite frankly.

We don't know for sure why patients either go or choose not to go to the doctor, particularly in any one month.

And December's a very difficult month to predict anything off of.

As you point to, there's typically this trend either in the fourth quarter or particularly in December where people are going in, trying to get their visits in prior to potentially higher co-pays, higher deductibles or more cost shifting into next year.

And there's been some speculation that that might be more pronounced this year as a result of expectations for further cost shifting in 2012.

But it's really hard to gauge.

It's speculation.

I don't think anybody has any good data on that.

Okay.

I guess you're not going to give us an update on maybe how January trends are going then?

No, we typically don't provide any information on how volumes are trending within a quarter.

Okay.

Thank you.

Bill Bonello.

Bill Bonello with RBC.

I would like to follow up on the topic that AJ and Ricky were hitting you on.

And maybe I can try asking the question in a slightly different way because, frankly, I think it's the most important question as we try and assess where you're heading.

And I appreciate that hopefully you've set an EPS guidance that is meetable and maybe even beatable.

But a couple of things.

I guess, just point blank, would you expect operating income to grow year-over-year in 2012?

Is that your expectation?

If you have revenue growing and you have the operating income percentage growing, by definition operating income grows.

I would have thought so, too.

So then my next question would be, I understand what you're saying about less share repurchase, but you're saying shares essentially flat.

I understand what you're saying about some people may be getting a little carried away in their interest expense projections.

But I can't imagine that interest expense will be more year-over-year if you're paying down debt.

So it would seem to me like the only real explanation for your expectation that EPS would be down year-over-year to flat, would have to be the difference in the tax rate.

Is there any other item that actually puts pressure on EPS?

Yes, I think you've identified most of them, and the tax rate is an important piece of it, yes.

Okay, and then this will be my last question.

Can you make it a little easier for us instead of -- hey, go into the footnote and pick out one of the tax rates that we used to adjust our earnings and just say --- hey, here's what we think the effective tax rate will be in 2012 versus what it was in 2011?

Well, Bill, without giving you the specific tax rate that we have in our guidance, what I would point out to you is in footnote 2 there's a rate which we use.

It's sort of an overall blended effective rate of 38.7%, which we use to tax effect a number of items there.

In that range is what you should be thinking.

Okay.

And what was the effective rate this year?

Well, the effective rate this year is impacted by a lot of things, particularly the government settlement and the like.

And overall it was 35.7%.

But you can't use that as a proxy for what it would be going forward.

No, no.

I get that.

But we're getting on the tax item, we're getting a couple hundred basis points of pressure on net earnings from just how you're looking at effective taxes if we're comparing year-over-year growth.

Yes.

Okay.

So your guidance understates, actually, I think, the health of the business, that's all I was trying to figure out.

Thank you.

Dane Leone.

Macquarie Capital.

Thank you for taking the questions.

Congrats on the quarter.

Could you just give us an idea on the pacing of the debt paydown?

Is this going to be mostly in the first quarter or second quarter?

Dane, I would tell you that it will most likely be over the course of the year.

It won't be first quarter, second quarter.

It's really going to be a function of how cash flows are trending.

While we do have some debt, a big chunk of debt that's due in May, we will likely draw on some short-term revolvers and the like to fund some of that paydown and then use cash from operations to fund the rest.

Then, over the course of the year get the debt level to where we're suggesting.

The maturity in May is somewhere around $500 million, right?

Correct.

Okay.

And then just on the gross margins, they're very strong in the fourth quarter.

How should we think of, just within the operating line, do you expect that trend to persist as you continue to benefit from Celera and higher margin Athena business?

Maybe offset just by the sales costs on the SG&A line?

I would, again, caution anybody to look at any one quarter and extrapolate there, particularly on a particular line.

What I would tell you, though, about cost of sales in SG&A is cost of sales is a line that actually benefits from both the Celera and Athena acquisitions, whereas the SG&A line is increased as a result of them.

Net-net, it's a positive to the combined SG&A and cost of sales, and neutral generally in operating income after amortization.

Great.

Thanks.

And just one follow-up on that.

In terms of the contracts with the managed care plans and payers for Athena -- basically Athena's testing.

Where are you with integrating that into the overall umbrella of Quest?

We're still in the process.

We're not expecting there to be much integration with respect to Athena, quite frankly, because of the truly esoteric nature of those tests.

BHL, on the other hand, is an opportunity for us to get more on contract because of how frequently that sort of testing is being ordered.

And we are doing that.

We're expanding contract access for BHL.

We're opening up our patient service centers and our logistics.

And we believe that that's actually going to help with the turnaround of BHL.

It will take some time.

But those are important steps that we're taking there.

Great.

Thank you very much.

Darren Lehrich.

It's Deutsche Bank.

Couple of questions here.

First, I wanted to just ask, Bob, you talked about some increased CapEx related to IT.

Could you just briefly update us on what your plans are there and are you ultimately moving to a common operating platform?

How should we be thinking about your IT platforms at this point?

Darren, as we talked about in the discussion of the $500 million cost reduction program, one of the elements of that is standardizing systems, processes and databases.

And certainly an element of the increase in CapEx is going towards that.

I would also tell you, though, that when I look at the CapEx that we had this past year, 2011, there were some things that we put on hold in anticipation of maybe doing something differently as we went through this cost reduction program.

And, as a result, some of the increase that we see next year is also just the catch-up on some -- deferral of a few items.

Okay.

And then I did have a question about the acquisition model that you have with the S.E.D.

deal.

Could you just update us on how you're thinking about some of the hospital deals that you're looking at?

This looks like you have a management contract in place for the hospital lab and you're picking up the outreach business.

Is that something that you think you can replicate elsewhere?

And just maybe an update on how you're thinking about working with hospitals.

Well, yes, I think it is something that could potentially be replicated elsewhere.

I would tell you that we have hospital lab management agreements that have been in place for -- they've been there for many years, and were not put in place in connection with acquisitions.

So those are opportunities that we have irrespective of whether or not there's an opportunity to acquire outreach business.

But we do think that those are the type of acquisitions that we'll see more of as time goes by.

They're relatively small.

They're fold-in type acquisitions and we have a good history of executing against those.

I think hospitals are asking themselves whether or not lab testing is strategic.

They all have different views, I guess.

But hopefully there will be more opportunities like this.

This is a very important subject because as the hospitals buy more doctors, obviously our hospital business benefits from the reference tests.

But also our capability in IT and our capability in managing laboratories and also our relationship with the health plans gives us an opportunity.

So again, if you think about, 60% of this market is in the hospital and working with the health plans and working with the hospitals.

We expect to use this as a strategy to go forward.

And as Bob said, many hospital CEOs they have different views.

But a lot of people are really interested to see how they can leverage our expertise and at the same time get some capital by selling their outreach business.

That's helpful.

Last question, and just forgive the blunt nature of it.

But I guess I'm surprised that we didn't see a goodwill write-down in the pathology business.

It's down mid-teens over the last couple of years.

And I'm sure you've tested the cash flows as you do normally at the end of a period.

Can you just give us a sense for what the outlook is for that business?

And are you expecting a turnaround?

And is that why we didn't get a goodwill write-down?

Well, first, Darren, you shouldn't think about a likely goodwill write-down there.

That's part of our clinical testing business.

That's a single segment.

It's fully integrated.

When we look at that business, the value of it is far in excess of the total carrying value.

So you shouldn't be looking for that.

Secondly, we said it's a business that continues to be under pressure.

The whole market is under pressure, not just our AP business.

And we are doing some things that we think over time will help that.

But you have to take a long-term view with respect to this business.

It's a very important element of cancer diagnostics overall.

Cancer diagnostics is going to be fast-growing and atomic pathology will be a growing element of it over time, as well.

And we feel as though we're very well positioned there.

No one has the breadth and depth that we have in that area.

And while there are some challenges now, and we expect that there will be some pressure at least for the foreseeable future, we think we're very well positioned for the long term.

Just to remind you, when we bought AmeriPath -- actually there are three elements of AmeriPath.

The specialty laboratory is a part of an esoteric lab; it is very well integrated and is very effective.

[Donpa] Diagnostics is doing really well.

And [you just -- they are now doing] pathology, both AmeriPath and Quest is under pressure.

But it is the key element of cancer diagnostics and it's going to show really improved results when we see in-sourcing stabilizes.

Okay.

Thanks for that.

Gary Lieberman.

Gary Lieberman from Wells Fargo.

Since last quarter you guys have announced a number of new initiatives -- the cost cutting, the share repurchase, the debt paydown and the dividends.

Obviously at the same time you've got this CEO search going on.

So can you maybe talk a little bit about what kind of flexibility the new CEO is going to have to potentially change or augment some of the strategies that you laid out?

Or is it going to be prerequisite for the new CEO to be onboard with the strategies that have been laid out so far?

Gary, first of all, all the things that we're doing we had it in plan to do in the beginning of the year.

This has been a multi-year program as far as repositioning Quest Diagnostics to drive esoteric and gene-based testing.

And putting $500 million cost reductions so that we can withstand the cost pressure.

And also when we have finished, or at least completed Athena and Celera, along with our AmeriPath focus, our goal was that we'll spend a couple of years in integrating.

So we could return majority of the cash to the shareholders.

So, having said all those things, all the strategic and operational activities we're doing with the management is also in line with the Board.

We believe that we have a very important strategy.

Going forward, the new CEO will leverage the unparalleled access and distribution we have in science and innovation and healthcare IT to drive, along with the routine testing, the esoteric and gene-based testing in cancer, infectious disease and cardiovascular disease and neurological.

From a strategy point of view, we've been building it.

As far as, every CEO has their own way of looking at certain things and he or she is going to work with the Board.

But there's not a single thing we're doing here which is going to limit the person who is going to drive this Company after I go.

And Gary, I'll just add.

The entire management team and the Board feel very good about the strategy that we've got, and that's what you're hearing here.

It doesn't mean that somebody new might not have a different perspective, but really what you're hearing is our confidence in what we've told you we're going to do.

Okay.

That's very helpful.

Thank you.

Amanda Murphy.

It's William Blair.

I just had a quick question on some commentary you've made previously about your patient service infrastructure and the sales force, and you had been working on upgrading the sales force.

So curious, it doesn't sound like those two areas are a specific focus in terms of the cost cutting.

So just looking for an update on where you stand with those two initiatives.

As I told you, that our organic growth strategy obviously driving the faster growing esoteric and gene-based testing, but also improving sales effectiveness.

And it has taken us a couple of years to have the right people in the right place.

Our sales force expansion is complete.

Obviously we are helping them in training and support and I'm happy.

We're seeing early signs of traction in areas where we say we're going to get focused.

So, we are not reducing the number of salespeople.

But as far as the patient service centers is concerned, as Bob said, that we are looking at how many patient service centers we have, in what areas.

And we're trying to optimize so that in some areas we may have too many and in some areas we may have too few.

But we are going to look at the whole patient service center demographics as far as convenience and cost point of view.

So how do you guys think about just maintaining service levels then just in that kind of --?

The first thing we have to do is to make sure that we don't do anything that reduce service level.

And the service level is linked with customer-facing activities, whether it's patient service center, or phlebotomies, whether it is IT services.

Those things are more or less we are trying to optimize them, but the reduction of cost is coming from procurement, billing, G&A and other activities which has less impact on customer-facing services.

And Amanda, if anything, the services that are valued most by our customers are areas where we could potentially invest more.

Whereas the services that are valued least are the ones that pose opportunities for us.

Got it.

And then just a question, you talked about the SureSwab growth which was pretty meaningful.

I'm just curious, obviously the physician community likes it.

Are payers talking about it?

What's the general buzz out there?

I haven't heard anything specific.

SureSwab is a new test for gynecological infection.

We had a weakness in that area.

And women's health is a big focus for us and we're very happy that the test volume is up 40%.

Amanda, payers -- we're getting reimbursed for SureSwab, so we have no issues or concerns there.

Okay.

Thanks very much.

Robert Willoughby.

Bank of America-Merrill Lynch.

Bob, can you hazard a guess on restructuring costs for 2012?

I can't really at this point, Bob.

We're not in a position to do that.

I think a lot of that's going to be a function of the pacing of the execution of the cost reduction program.

Is the run rate for the fourth quarter a good one to carry forward?

That would be something, I would think, on a quarterly basis, right?

There may be.

As I said, I would be very careful taking any one quarter and extrapolating it.

A lot of these charges are really driven by decisions, and some of those decisions we'll be able to make, will cut across the enterprise.

Some of those decisions will be impacting unit by unit.

So at this point I don't have good visibility to tell you how those costs will shake out.

But certainly we'll give you as much information as we can on those costs when we do incur them.

And to the degree that we have good visibility a quarter or so out, we can try and provide some information there.

Okay.

And I think maybe, like others, I thought the guidance for '12 would have been a little bit higher.

And I'm just wondering, is there any correlation between how you gave the guidance and the ongoing CEO search?

I would assume a new guy would want to set his own bar here and have you given him some leeway?

No, Bob.

I would tell you that we've really not changed our approach to establishing that.

And I won't allow him to do that either.

(laughter)

And maybe a last one.

I know I'm not going to get an answer on this one.

But since you've announced the CEO search, and you've been very adamant that the Board is onboard with the strategies that you've laid out.

But does a response from or inquiry from somebody from the outside come in and ask a few questions about other value-creating alternatives?

Or is it just radio silent out there?

We are focused on driving (inaudible), that's where I'm concerned.

Although we are looking for a new CEO, every day we're working as if I'll be here forever.

So that's number one.

Because I truly believe that we have built really a great Company and we have very unique capabilities.

And, yes, we have some headwinds but that's not the reason why one should really abandon strategy.

To me, strategy is sticking to it.

The Board is looking for my successor and obviously the person will have some flexibility.

But the strategy's built in conjunction with the Board and I'm very proud of the Company we've built.

Bob, I would add to that, I think the best opportunity for us to create value is by effectively executing against that strategy.

Wonderful.

Thank you.

Ashim Anand.

Natixis.

Congrats, guys, on a good quarter.

Also wanted to congrats you on the STRATIFY JCV test.

Obviously, Tysabri is a big drug, $1.2 billion a year, and half of it is coming from countries outside the US.

I guess as many as 65 countries.

Now, if the test were to go with Tysabri, how do you see this happening outside US?

You would be collaborating with Biogen and Elan in terms of sales?

Or how would this work?

Yes, we would collaborate with Biogen and Elan in distributing the test throughout the world.

And as you know, it's an FDA-authorized test and also the test kit.

So we would work with them in distributing it worldwide.

But there's a little bit more to this, as you may have pointed out.

We are the only company probably in the world who has all this capability, what I call end-to-end capabilities.

We have -- laboratories can develop tests, but they don't have the capability of creating IVD kits.

We can have biodiscovery, from discovery to laboratory developed tests, to IVD kits.

And then we can work with IVD distributors to distribute it somewhere else.

I think this strategy of putting together Celera and Focus Diagnostics, along with our Nichols is really a great opportunity for us going forward, because targeted therapy is going to come.

You are absolutely right.

Tysabri is a $1 billion market for Biogen Idec, and I'm very pleased that we were able to collaborate with them.

And there's a couple other things going in that area.

Part of my next question you already answered.

But maybe then it's safe to assume that these guys came to you, these pharma companies, biotech companies, came to you for this specific case because you had both the product and the service component.

Is that a fair thing to assume here?

We are being noticed very differently than before, because we have this unique capability of developing tests and also making IVD kits and getting it through FDA.

So the answer to your question is, yes.

Now, in terms of some of the revenue streams in terms of payers, physicians and others grew 13% which was a little surprising.

And hospital and reference lab also 7%.

And then, to my surprise, Medicare and Medicaid also 3%.

Excluding the benefits of Celera and Athena, if you can just give a general commentary on these three revenue streams, what was going on and what do you see going forward?

Yes, again, Ashim, some of this is impacted by the acquired revenues of both Celera and Athena.

And it's really difficult for us to break out the impact on each of these components for you right here.

We don't have that data available to us at the moment.

But there's nothing in the payer mix that I would say is a significant trend other than the fact that we did see some declines in the patient volumes there.

I think a lot of that was driven by the economy.

Otherwise it's been pretty consistent in terms of the way the payer mix has trended.

Okay.

And finally, your [HER] service that you provide to physicians obviously is distinguished.

I was wondering if you would like to comment on, you're giving 85% discount which I thought was a little high.

Maybe you can comment on the strategy.

Maybe this is a market share gain kind of strategy?

Physicians are hurting, obviously, maybe you want to make most of it or -- just what would be the strategy behind such a deep discount?

First of all, this is a grant program and it is only for two years, and this is actually to enhance the adoption of HER.

As you know, the doctors are the last one to really adopt it.

So now we have a product which has been certified for meaningful use.

We have 4,400 people are using it.

And the various components of that product, whether it is e-prescribing or whether it is clinical rules, all those things have been very well regarded.

Our goal is to increase our installed base and have market penetration.

So, I think this grant program is going to help us.

By the way, when it helps us, it also helps us in the diagnostics business because we see whenever anybody has our connectivity, we get more requisitions from them.

And it also helps the doctor to streamline their operation and get some revenues from the government.

Thanks a lot, guys.

Gary Taylor.

With Citigroup.

Thanks for staying on the call so long.

I just had a few quick follow-ups.

Bob, on that term loan, am I right that's still L plus about 55 basis points?

So the effective rate is 1% or less?

Yes.

Okay.

And I guess, at least from my part, given that we've been normalizing the tax rate all year, I see your EPS guidance as applying somewhere between up 3% and 5% on a normalized tax basis, excluding repurchase.

Does that make sense to you?

Again, I'm not sure what you mean on a normalized basis.

The effective rate for this year is about 3 points lower than is embedded in the guidance.

But the effective rate for this year has a lot of things that are driving it that won't continue.

My point is, to me, the 2012 earnings guidance looks to be up year-over-year if you normalize the tax rate in '11 and you exclude the legal costs and some of the restructuring charges.

I think you're right, Gary.

As we said, the operating performance is certainly expected to improve.

We're looking for revenue growth and we're looking for expansion of operating income.

So, the pure operating earnings we are expecting to be up versus last year.

In the fourth quarter where you really beat me was on gross margin, cost of goods.

And I know during the call you've alluded to better gross margin in some of the acquired revenue streams.

Is there anything else unusual about the quarter?

And it could be good or bad, I'm not saying unusual as in bad, but just that you're doing a better job on cost of goods and that's something that carries into '12?

Or should I not read too much into the increase in gross margin year-over-year outside of the acquisitions?

Again, I would caution you not to read too much into any one quarter.

I think coming into the quarter we're very conscious on managing costs.

I think we've done a good job not only in terms of advancing the $500 million program, but really ratcheting down on the day-to-day costs and managing those pretty effectively.

I think you're seeing some of that come through.

How much of that day-to-day management of cost we can continue at the same rate, there's probably some question around that.

But I do feel good about the way we've managed costs overall this past year and think that it's going to certainly help us as we go into 2012.

So, we've got some good momentum there and that's only going to be fueled by what we're doing with the longer-term program.

And I just wanted to ask a question on the acquired revenues.

So to us it looks like in '12, you mentioned this, but Athena looks like there's three months of revenue that will not have yet anniversaried in '12 and about four-and-a-half months for Celera.

To us, that looks like a benefit of about $76 million of revenue year-over-year.

And although you haven't disclosed it, we thought we found a $90 million revenue number for S.E.D.

Labs.

So combined, both of those look like about a 1% benefit in terms of year-over-year revenue growth.

Am I materially off on those?

You are with S.E.D., Gary.

S.E.D.'s probably -- the acquired revenue's in the range of $25 million to $30 million.

Okay, that's helpful.

Last question.

I just want to come back to thinking about routine versus esoteric volumes.

And you had said total volume's up 40 bps.

But excluding the positive weather impact, essentially flat.

We were estimating acquired volumes added maybe 1 point to 1.5 points.

And so I'm just trying to think about, if routine volumes are still growing high single digit or close to double digit, does that imply that routine testing volumes on an organic basis are still down 3% or 4% or 5% year-over-year?

Gary, just to clarify.

When you said that you were estimating acquisitions, added 1 point to volumes.

The volume impact of the Celera and the Athena acquisitions is negligible.

Well less than 0.5%.

And almost all of the benefit from the revenue growth shows up in revenue per requisition there.

So back to your point, though, I would tell you that when you look at the routine volumes, they have been down year-over-year but not to the degree that you've estimated there.

It sounds like my math may be -- more like down 1 or 2 based on what you said about the acquired volume.

That's more in line, yes.

Thank you, guys.

Steven Valiquette.

It's Steve Valiquette at UBS.

Just two questions for me.

First, is there any update on where everything stands on the potential repeal of the -- opponent of the Stark Law that allows physician software for lab testing?

And then the second question is along those lines but as far as your anatomic pathology volume trends for all of 2011, any chance you could provide that growth number?

Or do we have to wait for the 10-K to come out to get that?

On the first part of your question, Steve, there is no update.

We continue to work with our legislators in Washington to effect change.

We do have access to certain congressmen and women to educate them on the impact that self-referral has in a physician's office, not only on the cost of the test but also the utilization of testing.

So that work continues but there's nothing notable to report on that front.

Kathleen, the other question was about the AP trends.

Is the data out there yet?

If not, when?

Steve, the information is out on the annual revenues that we post.

It's out on the IR website.

If you look at supplemental analysis, it's available there to you.

Got it.

Okay.

All right.

Thanks.

Bryan Brokmeier.

This is Bryan from Maxim Group.

Thanks for taking the questions.

Should your issued shares for employee benefit plans in 2012 be similar to 2011?

Generally in line.

I'm not expecting that it will be dramatically different.

Based on where your shares are currently trading and, Bob, the $200 million in cash available you mentioned for share repurchases and tuck-in acquisitions, your share count should increase in 2012, correct?

We're not expecting it to increase much.

We're expecting it to be pretty close to the weighted average share count that we've got now.

Okay.

And Bob, you mentioned on some of the questions earlier on the restructuring charges, you said to the extent that you have visibility one quarter in advance you'll provide that on the restructuring charges.

Do you have any visibility on the first quarter charges?

Any range?

Not meaningful visibility at this point, other than the CEO succession costs which we said are going to be about $8 million or so.

Okay.

And on that note, are you still planning to replace -- sorry, so you expect to replace Surya within the next three months?

Because six months from when you announced the process, brings us to April.

So is that still the plan?

That's the plan.

Okay.

And so we should maybe be expecting to see a new CEO announcement any time now?

Or how long do you estimate is sufficient time for a smooth transition to the new CEO?

As I said, the Board is actively conducting the search.

This is the top priority.

And the most important thing is to find the right person who will take this Company to greater heights next five to seven years.

So I don't have any information but by April 30 we will have a new CEO.

Thank you very much.

Thank you for participating in the Quest Diagnostics fourth quarter full-year 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.

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Good-bye.