Quest Diagnostics Incorporated
Q1 2008 Earnings Call Transcript

Published: 22 Apr 2008

[Surya N. Mohapatra:]

Thank you, Laure. During the quarter, we delivered strong growth in revenues and earnings. Consolidated revenues grew 17% to $1.8 billion, earnings per share increased 31%, and cash flow was $158 million for the quarter. During the quarter we also made good progress in all elements of our plan. We drove profitable organic revenue growth. We further aligned AmeriPath with Quest Diagnostics. We generated double-digit revenue growth in our near-patient or point-of-care testing business. We continued to reduce our cost structure and improve our efficiency. We opened our lab in India, which is a key market for our international business. And we were the only company in our industry to be named one of America's Most Admired Companies by Fortune Magazine. After we hear from Bob, I will address each of these elements. Bob?

[Robert A. Hagemann:]

Thanks, Surya. As you heard, we continue to make solid progress against our plan, and are on track to meet the goals we established for the year. As I take you through the numbers, I'll elaborate on the areas of progress Surya highlighted. Before I do, I'll quickly address NID. We are continuing with our discussions with the government to attempt to settle this matter. We have made no adjustments to our reserve and have no updates to the status we provided you in February. Now, let's turn to the results. Revenues were $1.8 billion, 16.9% above the prior year, with AmeriPath contributing about 13% growth. Revenues for our clinical testing business, which account for over 90% of our total revenues, were 17.1% above the prior year, with AmeriPath contributing about 14%. Volume was 5.6% above the prior year and essentially even with the prior year, before the AmeriPath acquisition. This reflects continued growth in our underlying business, adjusted for the United contract change. Remember, that change went into effect January first of last year, and most of the volume loss ramped up over the course of last year's first quarter. Therefore, there continues to be about a 1.5% carry-over impact in comparing this year's first quarter volume to that of last year. During the first quarter, there was a positive impact to the year-over-year revenue per requisition comparison of about 0.5% due to higher reimbursement on the retained United work, which brings the year-over-year revenue impact of the contract change to about 1%. Since most of the volume impact was felt by the end of last year's first quarter, and since there continues to be no significant change in the amount of the United volume we have retained… over 20%, we expect a more limited impact on future quarterly volume and revenue comparisons. Revenue per requisition increased 10.8%, with 7.8% of the increase due to AmeriPath. The balance of the increase in revenue per requisition, about 3%, continues to be primarily driven by a positive mix, partially offset by price reductions on various health plan contracts. This 3% increase compares to an increase of 5.4% in the fourth quarter of last year. The difference is due to the anniversary of the positive price impact of the United contract change and pricing reductions negotiated last year, which went into effect January 1 of this year. As we've previously explained, all of our largest health plan contracts have now been renegotiated for multi-year periods, and we believe there is much more stability in pricing than a year ago. Adjusted for last year's contract losses, we continue to see growth in our base volume of between 1% and 2%, similar to the Q4 level. This is despite seeing a significant decline, almost 10%, in pre-employment drug testing, which accounts for about 7% of our total volume. Given that this tends to be very low-priced business, the impact to revenue and profitability is generally much less. Our drug testing business and our risk assessment business, which serves life insurers, are our two businesses most subject to a slowing economy. We expect both of these businesses to see their growth impacted this year and are taking actions to manage their costs accordingly. However, please note that these businesses, combined, account for less than 10% of our total revenues. Given our actions to manage their costs, we do not expect their performance to alter our consolidated revenue or earnings expectations for the year. And lastly, on the topic of revenue growth. We saw strong, double digit growth, in each of our, point-of-care, clinical trials and healthcare IT businesses in the quarter. You'll hear more from Surya on the point-of-care business. Included in footnote four to the earnings release is a table, which summarizes the impact to various revenue measures for a number of the items discussed. Operating income as a percentage of revenues was 15.7% for the quarter, up 2.5% percent from last year's first quarter, principally due to the actions we have taken to reduce our cost structure. This percentage is below the level we exited last year, primarily due to annual salary and wage adjustments, which go into effect in the first quarter, a seasonal increase in bad debt, as well as pricing reductions, which went into effect January first. However, we expect that our operating income percentage will continue reflecting improvement over the prior year in each of the next three quarters, due to continued revenue growth and further savings from our cost reduction program initiated last year. That program, which we expect to reduce our cost structure by $500 million as we exit 2009, delivered over $100 million in savings as we exited last year; and we expect to have realized about half of the remainder as we exit this year. The largest component of the savings will come from streamlining processes and increasing productivity in our labs by deploying Lean Six Sigma. The first deployment of Lean is now complete and has been fully analyzed. The analysis has confirmed significant productivity gains, double digits in most of the impacted departments, exceeding our initial estimates. We are now utilizing the learnings from this first deployment to ensure we maximize the returns and facilitate the deployment of Lean to our other labs around the country. The other major elements of our program, which contribute substantial savings include

[Surya N. Mohapatra:]

Thanks, Bob. During the quarter we drove profitable organic revenue growth, leveraging our sales, service and science. As Bob said, revenues for our clinical testing business were up 17% year-over-year. We are working closely with health plans, and offering them a series of unique services to meet their requirements. For example, with Aetna, we have been communicating to patients the benefits of our unique appointment scheduling service. Patients appreciate the convenience, and their employers like the fact that their employees can remain productive if they use Quest Diagnostics. With CIGNA, we have recently launched a program to educate physicians about the benefits of h. pylori testing for early detection of digestive disorders. Previous programs have focused on expanding colorectal cancer screening using our proprietary InSure test. With Wellpoint, we continue to promote e-prescribing in a pilot using our Care360 physician portal, which combines prescribing and laboratory data. E-prescribing can reduce medical errors and costs, avoid dangerous drug interactions and drive appropriate drug utilization. These service offerings are unique to Quest Diagnostics and available to help regional and national health plans improve patients' health and manage costs for their customers. We continue to grow our esoteric testing services. Gene-based and esoteric testing revenues increased over 20% in the quarter. We are seeing strong growth in HIV, Cystic Fibrosis and tests using tandem aspects such as Vitamin D and testosterone tests. We are also excited that we are providing physicians the gold standard proprietary test for kidney stone evaluations, UroRisk and StoneRisk. Also, during the quarter we licensed a promising new biomarker from Epigenomics for a future colorectal cancer test from a blood samples. Our unique proprietary tests and service offerings are helping us grow our hospital business. We won a number of new hospital and commercial lab accounts during the quarter. Hospitals and other commercial labs value our superior our service, quality and comprehensive testing menu. We are in the process of aligning AmeriPath and Quest Diagnostics. In the quarter, we completed the integration of Specialty Labs, AmeriPath's esoteric testing business. We have engaged the pathologists in the process, and together we are executing our growth plans for anatomic pathology. We have extended a key health plan contract. And we are leveraging our physician sales force to sell the AmeriPath value propositions to primary care physicians, who represent a major growth opportunity for us. We are moving with deliberate speed and the integration is on track. Our near-patient testing revenues grew double digits. Near-person testing is providing exciting opportunities to improve care and reduce cost by enabling physicians to make more timely treatment decisions for the patient at the point of care. We expect new product launches from our HemoCue, Focus Diagnostics and Enterix operations to drive further growth. For example, HemoCue's recently FDA-cleared handheld white blood cell monitor has the potential to change medical practice, by enabling physicians to diagnose infection, inflammation and other serious conditions at the point of care. We are currently waiting for a CLIA waiver, which will greatly expand access for this test. Similarly, Focus Diagnostics is awaiting a CLIA waiver for its HerpeSelect Express Test. This test can quickly and accurately diagnose a herpes infection, allowing the physician to make any immediate treatment decision while the patient is still in the office. We recently launched a physician office version of the InSure Fecal Immunochemical Test for colorectal cancer screening. This product provides physicians with the ability to generate the test results in their office, which has the potential to increase patient compliance. In conjunction with the test, we also launched an exciting education and awareness campaign to promote the benefits of early detection of colorectal cancer. We set an ambitious goal of reaching five million people over age 50 within the next five years. And I would like to invite each of you to join me in our challenge to increase early detection by visiting www.DoYouHaveTheGuts.com. We're expanding our international business by entering the Indian market. Today India is an underserved healthcare market. It is fast growing with a diversified customer base. India has surpassed China as the most popular site for clinical trials in Asia. Our lab in the New Delhi region is operational. We have begun to sign contracts with customers, and build a business focused on esoteric testing, clinical trials, risk assessment and near-patient testing. We are at the very early stage, and continue to believe that this is a significant opportunity. Before closing, I will briefly comment on recent developments associated with the CMS competitive bidding process. As I'm sure, most of you know, the competitive bidding pilot in San Diego was successfully challenged by the local hospitals. In granting the preliminary injunction, the judge expressed concern about the quality of patient care if the pilot were to move forward. We continue to believe that competitive bidding is not appropriate for laboratory services. In summary, we are focused on execution and our approach is bifocal. We are committed to deliver results in the short-term, while building sustainable shareholder value for the long-term. Last year, we took many bold and decisive actions to reduce uncertainty in this industry, and we also built the platform for our growth this year and beyond. During the quarter, we made good progress in all elements of our operating and strategic plans. In particular, we generated strong top and bottom-line growth with our revenues increasing 17% year-over-year. Our cost reduction initiative is in full swing and we are on track to achieve our goal of reducing our cost structure by $500 million by the time we exit 2009. And we are on track to deliver our commitments for 2008. We'll now take your questions. Operator? Question And Answer

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Art Henderson of Jefferies & Company. Sir, you may ask your question.

[Arthur Henderson:]

Hi. Good morning, very nice quarter. Couple of follow-up questions. Bob, you had sort of discussed a little bit, if the economy took a real downturn here, what the exposure would be? If I'm understanding you correctly, less than 10% of your business you really consider to be more discretionary in nature, drug testing and if you could just sort of elaborate on that a little bit more?

[Robert A. Hagemann:]

Sure. As I mentioned, we've two businesses that are really most subject to an economic downturn, that being the drug testing business which is really pre-employment drug testing and our risk assessment business, which does testing for the life insurance industry. And both of those businesses are already feeling the effects and we're starting to address their cost structures. As I said, combined they account for about little less than 10% of our total revenues. And we don't believe that there is anything in their outlook that would cause us to change the guidance for those two. When you think about the rest of our business, the physician business, the hospital business, et cetera, where the effects of the economy generally would show up there, would be in our volumes. Volumes generally move in line with physician office visits. We don't believe we saw any impact to volumes in Q1. The underlying volume that we saw in Q1 is consistent with what we saw in Q4 and throughout the second half last year, we saw the underlying volume growing. However, if a patient doesn't come into a physicians office, we're not really sure why, quite frankly. But to the degree that we see any impact on the physician side of the business, we don't believe that it will be significant nor cause us to be outside the guidance that we put. And frankly, we would have to think about doing some further adjustments to the cost structure if we saw that. But at this point, we're not anticipating any significant changes there.

[Arthur Henderson:]

So, we wouldn't need to worry about any stickup in bad debt expense as far as self-pay goes?

[Robert A. Hagemann:]

No. Bad debt is mostly driven by the quality of the billing information we get and not inability of people to pay us. We don't expect the economy to be a significant impact on our bad debt, unlike hospitals, because the vast majority of the testing that we do is actually for insured patients.

[Arthur Henderson:]

Okay, great. That's helpful. One last question and I'll jump back in the queue. You indicated that you spent about… looks like about $0.03, well, actually it looks like about $0.04 of the $0.20 during the quarter or actually $0.03 I guess it was $0.03 of the $0.20. How should we think about that for the remaining few quarters? I know you'll give quarterly guidance, but is that spread equally or front-loaded, how should we think about that, Bob?

[Robert A. Hagemann:]

I want to stay away from trying to give you guidance on that since we don't give quarterly guidance. But obviously, since we only spent $0.03 in the first quarter, you'd expect that the rate of spend in the rest of the year is going to be higher than what we had in the first quarter. And frankly, how much hits in the second, third and fourth is really going to be a function of a number of things, including how fast we can actually complete the development and then deploy some systems changes.

[Arthur Henderson:]

Okay. Thanks very much.

[Operator:]

Our next question comes from Adam Feinstein of Lehman Brothers. Sir, your line is open.

[Adam Feinstein:]

Great, thank you. Good morning everyone. Just a couple of housekeeping questions. Bob did you say that the bad debt expense excluding AmeriPath would have been down about 30 basis points, did I hear you correctly? Okay. And then as we think about bad debt, I mean, what sort of goal do you guys have there so as we think about any sort of goal that you could outline whether it's a shorter term or a longer term goal in terms of where you would like bad debt to be?

[Robert A. Hagemann:]

Obviously, we would want it to be lower, right? And the big opportunity for us right now is reducing AmeriPath's bad debt, which we expect we will be able to start making progress on this year and we'd expect to see that starting to ramp down as the year goes by. But also, when you look at our $500 million cost reduction program, a significant portion of that is reduced bad debt as well. That's a function of deploying more electronic connectivity, which gives us better billing information, doing some things in our billing shop, using some Six Sigma processes, et cetera. So, I want to stay away from giving a specific target for bad debt, something that we believe we can continually start to dry down. It's a big opportunity for us even when we're at 4%.

[Adam Feinstein:]

Okay. And then, just a follow-up question here, just on the managed care contracting side. Clearly, last year was a difficult year, lot more stability this year. But, in your opening comments, you had mentioned that there was some price reduction that took effect on January 1st. Just curious to get an update in terms of the managed care landscape, would you guys say you're more upbeat, more cautious there, and then just curious, any updates in terms of some of the newer contracts that you signed at the end of 2007?

[Surya N. Mohapatra:]

Adam, as I said, last year was a challenging year. But we took a lot of decisive action and we feel very good about our relationship with health plans and as you heard that we have a number of unique services we offer and we are working with all the large and smaller health plans to help them to reduce their cost by providing some unique services. So last year is gone and we feel better.

[Robert A. Hagemann:]

And certainly price is much more stable than it was a year ago.

[Adam Feinstein:]

Okay. And then just, and this maybe a difficult one to answer. But just on the CRF business any update in terms of what UNH tends to do with that piece of business?

[Laure Park:]

At this point in time clearly what we've seen is the letter that's been sent to the physicians, which would indicate obviously that they need to take care of some matters related to those physicians, those members, too Humana, and so we're watching this closely.

[Surya N. Mohapatra:]

But you know, we still have retained some United business, and as you know our AmeriPath subsidiary extended their contract with United.

[Adam Feinstein:]

Okay, great. Thank you very much.

[Operator:]

Our next question comes from Ricky Goldwasser of UBS, your line is open.

[Ricky Goldwasser:]

Good morning. A couple of questions. First of all on the volume growth of the 152% on a normalize basis, is this in line with your expectations, perhaps the internal expectation that you have and do you expect that metric to reaccelerate as we progress in the year?

[Surya N. Mohapatra:]

Certainly volume is tracking where it is. It's in the range of where we thought it would be at this point, and it's certainly one of the things that we're focused on and our plan is to try and ramp that up as the year progresses.

[Ricky Goldwasser:]

And you said in terms on focusing, are you deploying more sales people into the force, can you just give us a little bit of color, how you going to get volume growth back?

[Robert A. Hagemann:]

Again it's not necessarily adding sales people, but if you look at last year what was going on, we had the sales force very focused on explaining contract changes. And when they get in front of our physician we rather see them selling than explain changes in contracts and that's essentially what we are doing here, getting the sales force back to selling. We started to see that last year in the second half of a year and that's when the volumes start to improve. We've continually seen growth in the underlined volume, and our plan is to continue to see that over the course of the year.

[Surya N. Mohapatra:]

Ricky also we have introduced a lot of proprietary products and some of those products are doing very well, whether it is InSure or whether it is a Lumeta [ph] or other which is now is going to be the Uro… And UroRisk and StoneRisk. So we continue our diversification towards higher margin, higher growth, esoteric gene based testing and AP, so that's also helping us.

[Ricky Goldwasser:]

And in terms of the impacts, sorry just to follow-up on that. In terms of the impact to pricing can you quantify to us what was the contribution to pricing from kind of that shift towards more proprietary products?

[Surya N. Mohapatra:]

Well, we don't break into that. Yeah, as you know its not just one product, but Bob do you want to make any comment.

[Robert A. Hagemann:]

Rick as I said in my remarks, most of the increase really came from mix, some of that mix had to deal with the fact that the United Contract changes starting to anniversary and the big benefit that we're getting on pricing there is actually going away a little bit. But on the other hand we continued to sell a lot of esoteric and gene-based test which carry higher reimbursement rates and that's been improving, the revenue per requisition and we expect revenue per requisition to continue to be positive through out the year, driven principally by the fact that we're selling new tests and a better test mix. The other thing I would ask you to keep in mind is, we got away from giving specific guidance for volume and revenue per requisition, because essentially what we're looking to do is accelerate revenue growth. And sometimes that means you focus on one of the two elements and at the expense of the other potentially. But our focus is all about profitable revenue growth. And yeah, I'd caution everybody not to focus too much on quarter-to-quarter... slight quarter-to-quarter swings in either the volume or the revenue per requisition.

[Ricky Goldwasser:]

And then, two last questions, first on physician fee schedule. Does your current guidance assume that reimbursement changes post June? And then if you can just remind us, what percent of patients use your drawing centers versus samples taken at doc office, and also what's the process there? So if a patient who actually use the Quest drawing center, do you basically take their credit card information or just if you can walk us through that?

[Laure Park:]

First up on the physician fee schedule, we're not assuming any changes in the physician fee schedule. As we go into the back half of the year, we're assuming that basically the fixed stays in place. On the PSC side, we've got about a third of our volume is coming into the patient service centers, and clearly, you're right that when they're coming in through the patient service center, we're really able to ensure the accuracy of the billing information, and where appropriate and calculable, we can collect payments as well. But the big key is we can make sure we have good billing information and good clean information at that point of service.

[Ricky Goldwasser:]

Okay, thank you.

[Operator:]

Our next question comes from Ralph Giacobbe of Credit Suisse. Your line is open.

[Ralph Giacobbe:]

Thanks. Just a quick question on organic growth just so I know that I've understood you correctly. It sounds like United, basically about a percentage point overall, taking into account, sort of, you know, pricing and volume, so in looking at organic growth, roughly 5% for the quarter, is that fair?

[Robert A. Hagemann:]

It's actually a little less than that.

[Ralph Giacobbe:]

Okay. And I guess, is there anything noteworthy from whether it'd be incremental Aetna or loss to CIGNA or weather impact, anything else we should sort of consider when thinking about the organic growth figure?

[Robert A. Hagemann:]

Yeah well, first of all, there's no loss of CIGNA basis that we had, continues to be consistent with the levels that we had prior to renewing that contract and most of the underlying organic growth that we're seeing is as a result of Aetna contract.

[Laure Park:]

Ralph, I don't know if you have seen it. But Footnote 4 on to the press release does way out on the significant drivers... in the revenue net line.

[Ralph Giacobbe:]

Okay. Great. Thanks. And then, just to clarify I think there was notably an extended extension of the key managed care contract, was that the AmeriPath, UNH, is that what was refer to?

[Robert A. Hagemann:]

Yes.

[Ralph Giacobbe:]

Okay. And then, is there any other update, sort of, contracting in the North East around GHI and HIP plans. There has been sort of buzz in the market about sort of that contract potentially coming up. Could you just give us the details on sort of the timing of that, if there has been any recent change et cetera?

[Surya N. Mohapatra:]

Yes. Ralph. We don't specifically comment on contracts particularly when there was ongoing discussions. But what I can tell you is we are contracted provider to both those plans and we would expect to continue to be a contractor provider to both those plans.

[Ralph Giacobbe:]

Okay. And then, my last one just sort of thoughts and acquisitions. You guys have paid down decent amount of debt. I know you sort of said you're out of the acquisition market in terms of the large scale. There is some fairly sizable outreach slabs out there, I guess on the block. Can you maybe talk about your appetite for acquisitions at this point?

[Surya N. Mohapatra:]

Well, first, let me step back and put it into context of the capital structure. We manage the capital structures there. We've got the flexibility to be opportunistic with respect to acquisitions and other growth opportunities. But, also, I want to make sure that we've got sufficient operating flexibility to address situations, which could impact our cash flow, like the NID settlement. But in each case, we are considering what will provide the greatest long-term shareholder value and to me that means having a prudent amount of leverage in operating within certain parameters. That translates into generally not allowing our debt-to- EBITDA much over 2.25 times for an extended period. We're currently outside those parameters. A special, if you think about $241 million reserve was setup for an Id as short-term debt. At this point, the majority of our excess cash flow this year is going to be use to pay down debt as we said we pay down a little over $500 million in the last 12 months. And that will be the focus this year, it doesn't mean that we won't do any acquisitions, but the principle focus of deploying cash flow deployment will be to repay debt this year.

[Ralph Giacobbe:]

Okay. Great. Thanks.

[Operator:]

Our next question comes from Matthew Borsch with Goldman Sachs. Your line is open sir.

[Matthew Borsch:]

Yes. Thanks. Good morning. Apologies if you've already address this, but could you just talk a little bit to whether you can spike out any impact to volume from either the extra day in the quarter from leap year or that the flue season?

[Surya N. Mohapatra:]

Actually, it's an interesting question. As we analyze the volume and number of business days, that we have this year in the first quarter, the number of business days is actually flat with what it was in the prior year despite the fact that we have the extra day of leap year. So there is really no impact to volume as result of that. With respect to the flue season, I'll tell you, we've had flue seasons that have been non-existent. We've had really difficult flue seasons. And historically, we have not seen any significant impact through our volume as result of the flue season. Part of that because there is not a specific test for the flue to the degree that it drives increases in physician office visits, you might see a little more testing. But generally there is nothing in the volumes that we can see this quarter associated with the flu season.

[Matthew Borsch:]

Great. And if I could ask a question on sort of a more historical basis. Have you tried looking back or how the volumes may relate to the economy in any way, if there is some historical perspective that there is a lagged relationship between slowdown and acceleration in economic growth, and maybe three to five years? Have you looked at that relative to your own business?

[Surya N. Mohapatra:]

We have. And as I said earlier, if we're going to see any impacts of the economy in our physician business, it will show up in the volumes. But in the past when we've seen the impact of the economy show up, it really has not been significant in terms of volumes.

[Matthew Borsch:]

Okay.

[Surya N. Mohapatra:]

It was maybe 1% to 2% in the past. And as I said, we have not seen anything that we can discern in either our first quarter or the second half of last year that we can attribute to the economy.

[Matthew Borsch:]

Okay. And one more question, if I could. In California there apparently Blue Cross in that market has cut laboratory imbursement, again, apparently to 70% of Medicare. I am not sure who they are applying that to. Is that something that you are aware of? Is that having a positive or negative impact on you guys?

[Surya N. Mohapatra:]

Yeah. We're obviously aware of that. And we have a contract with them in that marketplace, which guides what our reimbursement will be there.

[Matthew Borsch:]

Are you seeing more volume directed to you though as a result, I mean, if there are some independent stat.

[Robert A. Hagemann:]

There's nothing significant on that front.

[Matthew Borsch:]

Okay. Thank you.

[Operator:]

Our next question comes from Tom Gallucci of Merrill Lynch. Your line is open Sir.

[Tom Gallucci:]

Good morning. Just a couple of follow-ups. Bob, before I think you said in response to one of the questions about bad debt, there is a big opportunity there and it's a good chunk of the $500 million expected in cost savings. Have you quantified; I don't recall if you had said, but what portion of the $500 million is related to bad debt?

[Robert A. Hagemann:]

We have not given specific guidance on the components, but what we have said is, when you look at the $500 million and you look at where most of our costs are, for the most part, the savings is proportionate to where the costs reside in our business. Obviously the biggest piece of it coming from the laboratory, where we've got much of our cost. And then you look at purchasing, you look at bad debt et cetera.

[Tom Gallucci:]

And, I think Laure, you said the physician fee schedule, you are not expecting any change there, so continued fixed days in place. Is it material either way or could you quantify what the change would be if it didn't get fixed or if the fix wasn't continued?

[Laure Park:]

Keep in mind obviously, the only think it would impact is anything that's of anatomic pathology testing for Medicare. So it's a modest but a large piece after the AmeriPath acquisition, but we've not specifically quantified it, and obviously everything is baked in here.

[Tom Gallucci:]

Right, okay, but it's sort of modest, that's what you'd say?

[Laure Park:]

Medicare in totality for us, for all pieces of business is 15%.

[Tom Gallucci:]

Right.

[Laure Park:]

And it's going to be a subset of that.

[Tom Gallucci:]

Right. As you said, how big would that be then, versus the total 15?

[Laure Park:]

The 15% would include anatomic pathology and clinical laboratory testing. So, in total, Medicare is 15% and of our total book of anatomic pathology is about 16% to 17% revenues.

[Tom Gallucci:]

Okay. And then United, you sort of said I guess that you have been pretty steady there in the percent of business that you have retained. You have been saying for some time that you would expect that to go down, is that still the case and what is sort of your outlook there then for I guess this year, on United related business?

[Robert A. Hagemann:]

We are not giving you specific guidance around that because that's not going to be valuable, I don't think to anybody. We have not seen a significant in the amount of business we've retained. Although, over time, we expect that some of that business will continue to shift away, because of United's efforts there. But that is all built into the guidance that we have provided to you for this year.

[Tom Gallucci:]

Okay. And then my last one Bob, I just wanted to make sure I understood the one statement that you did make before. I guess base volume growth in the 1% to 2% range. I think when you were responding, maybe to Ricky's question, that I think it was something like most organic growth is the result of the Aetna contract? So how do you see industry growth versus your contract that you have added contributing to your base volume growth at this point?

[Robert A. Hagemann:]

Well, as I said, most of the base volume growth is coming from the Aetna agreement and as we step back and we look at total industry growth, which I think is more to your question here. We still think that, over time, its going to be around 5% organic revenue growth. And again as I said earlier, it's not necessarily appropriate to focus on just volume of just or just revenue per acquisition in any one quarter.

[Tom Gallucci:]

Alright. Okay thank you very much.

[Operator:]

Our next question comes from Kemp Dolliver of Cowen. Your line is open.

[Kemp Dolliver:]

Hi. Thanks and good morning. Two question on AmeriPath. First, could you just talk about what actions you have completed so far as it relates to say, sales force training for cross selling and anything related? And then also just, if the retention of the pathologists is still at the level you had mentioned in the last call?

[Surya N. Mohapatra:]

Yes, Kemp. First of all, I'm really very pleased with the progress we have made in aligning AmeriPath with Quest Diagnostics. We were concerned about pathology retention, I can tell you that we have retained all our pathologists and they are engaged in growing the combined organization. We have also renewed the contract with United that was a worry, whether United will renew the contract with AmeriPath or not, but that's behind us. We have no customer attrition to speak of, and we have completed the specialty integration. Now we are in the process of integrating the sales force to do the cross selling. So, we are moving with deliberate speed, as we told you that we slowed down the IT rollout. Hello?

[Kemp Dolliver:]

Sorry, continue.

[Surya N. Mohapatra:]

Okay. All in all, actually we have made good progress and we are moving in deliberate speed and AmeriPath is on track.

[Kemp Dolliver:]

Great. Thank you.

[Surya N. Mohapatra:]

Thank you.

[Operator:]

Thank you our next question comes from Robert Willoughby of Banc of America Securities. Please go ahead.

[Robert Willoughby:]

Hi, Bob. I guess you didn't want to comment on the components of the $500 million in cost savings that you've indicated, but can you help us prioritize or at least kind of rank where the savings from switching suppliers from Cardinal to Thermo is on that list?

[Robert A. Hagemann:]

You know what, that's one of many, many things that we are doing on the procurement side. And again, I don't think it would be appropriate to comment on any one contract, whether it's a customer contract or a supplier contract.

[Laure Park:]

And to get an allocation of what kind of buckets the cost are in, actually in the most recent Investor Presentation, its on the website there is pie-chart, what's the cost on a ratio basis between the major buckets been… Basically work within the lab, purchasing, billing in the other areas. So there is a pie-chart that supports the 500 on a ratio basis.

[Robert Willoughby:]

Great. And just depreciation and amortization a bit light relative to where our expectation was, is this the new run-rate or do you anticipate any incremental charges with the new systems this year?

[Surya N. Mohapatra:]

Well. Again that's not necessarily component of our P&L that we would give guidance on, but I would not expect it to be dramatically different than you're seeing the first quarter.

[Robert Willoughby:]

Great. Thank you.

[Operator:]

Our next question is from Amanda Murphy of William Blair. Your line is open.

[Amanda Murphy:]

Hi. Good morning. I just had a follow-up question on AmeriPath. Could you provide an update on your efforts to drive cost and revenue synergies out of the acquisition? And also, I think last quarter you had indicated that operating margins would be over up year-over-year, are you still seeing those same trends in AmeriPath?

[Robert A. Hagemann:]

Well. With respect to the cost in revenue synergies, most of the cost synergies were coming from the integration of specialty laboratories. And as Surya mentioned earlier, that integration is essentially complete at this point, And we feel good about that. And here the revenue synergies are really going to come as we sell the AmeriPath value proposition into the primary care physicians' offices and sort of comes to… That we are making good progress around getting a line to run that.

[Amanda Murphy:]

Okay. And then in terms of the operating margins, are you still seeing that same trends in terms of year-over-year increases?

[Robert A. Hagemann:]

In terms of operating margin, as we realize the synergies there, as we start to ratchet down near bad debt. We would expect that the operating margin for the AmeriPath business will continue to improve over the course of the year, not dramatically different in first quarter than it was, as we exited last year.

[Amanda Murphy:]

I got it. Thank you.

[Operator:]

Our next question comes from Bill Bonello of Wachovia Securities. Your line is open.

[Bill Bonello:]

Good morning. Just a couple of follow-up questions. So, first of all back on the cost savings, you mentioned where you ended '07, and you mentioned where you expect to end '08, I'm just wondering if you can give us any sense of the sequential increase in cost savings achieved in Q1 relative to Q4 of last year. And then just as we look forward, some sense of the timing, in other words, just trying to figure out how much of these cost savings are back-end loaded in 2008, or is it a pretty steady progression throughout the year?

[Surya N. Mohapatra:]

Bill, again I'm trying to stay away from giving quarterly guidance here, as much as you would love me to do that. But as we exit this year, we expect to have about half of the remainder in the books at that point in a run rate basis. And obviously, for us to get there, we can't have it all coming in the fourth quarter, so you should expect that there is some ramping up throughout the year, but yeah, we're making good progress in each of the quarters this year in order to get to that number.

[Bill Bonello:]

Did you made some progress in Q1 relative to Q4?

[Surya N. Mohapatra:]

Absolutely.

[Bill Bonello:]

Okay.

[Surya N. Mohapatra:]

No, the cost saving is real, it's happening.

[Bill Bonello:]

Okay. And then, I guess, the next question would be and just as we think about the startup cost, and I know you've addressed this before, but I just want to make sure we have it correct the $0.20 of startup costs, can you give us some sense, quantification of what portion of that recurs in '09, and what's essentially non-recurring?

[Surya N. Mohapatra:]

Okay. Well, here is the way I think about it. First, there were two big buckets, right? One is the startup cost associated with India, which we estimate to be around $0.07 or so. And let's follow through on that one first. India, we expect it going to be in a startup mode for this year and next. And we expect to have some ongoing startup losses next year as well. We're targeting for India to be breakeven by the time we get into 2010. So, yeah, there is going to be some recurring costs there next year. With respect to the systems deployment, the development and the deployment, much of that, if not all of that development cost will be incurred in behind this year, and the other piece which is really the deployment cost is starting to occur this year. There will be some next year because that's a key element to our standardization and enabling us to realize the $500 million in savings, but next year's amount associated with systems will be far less than this year. And what that's going to be, it's a little premature to tell you. I think all of that's going to be a function of the progress that we make this year.

[Bill Bonello:]

Okay. That is helpful, though. And then, just as we think, as you look at what your initiatives are to drive that $500 million, are there any additional sort of non-recurring costs that might not be occurring now that you already expect to come online in '09 or 2010?

[Surya N. Mohapatra:]

The only non-recurring cost that we are not incurring now could potentially be associated with workforce reductions. But frankly, we're managing most of that through voluntary turnover. And yeah, that's the way we've managed the vast majority of it to date and the way we will manage it as we go forward.

[Bill Bonello:]

Okay. And then, just the last question. Just trying to sort of bridge the quarterly results to the guidance, I mean if you do $0.72 in the quarter to get to the low end of the guidance then you'll have to do $0.76 per quarter for the next three quarters plus you're going to have an incremental $0.02 to $0.03 of startup cost in each of those quarter. So, you need sort of extra $0.06, $0.07 of improvement. I mean is most of that coming from increased cost saving over the future quarters or what else drive such significantly higher EPS in the future quarters than in Q1?

[Surya N. Mohapatra:]

Well, certainly, a big element of it is to ramp-up and the costs save. But also, keep in mind, we're expecting that our growth is going to continue to accelerate.

[Bill Bonello:]

Okay. So, if you do even relative to Q1, you expect your tax cost saving, you would still expect some incremental ramp?

[Surya N. Mohapatra:]

Yes.

[Bill Bonello:]

Okay. That's very helpful.

[Laure Park:]

Okay.

[Surya N. Mohapatra:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Andreas Dirnagl. Your line is open. I am showing from JPMorgan.

[Andreas Dirnagl:]

Yeah. Hi, guys. Since still… Bill for my big question. I will just ask my last one, which is more of a thorough one, Bob, sort of when you are commenting, I think it was on Matt's question about doing the analysis as to whether the economy has any impact and/or has had any impact in the past. Clearly, you talked about the downside in those two portions of the business. Have you also done an analysis as to whether sort of, you guys are also part of what we see, particularly in hospitals where you have an acceleration of some elective procedures? Does that result in higher volumes in pre-recessionary environment? I mean, in other words, is some of this volume because of that and at danger of slowing down?

[Robert A. Hagemann:]

That would be a very, very difficult question to answer. I don't believe so, but I don't know that we have anything that we can look at, which would help us attempt to even quantify that.

[Andreas Dirnagl:]

Like in the past, you haven't seen any sort of significant spikes in volume prior to an economic downturn?

[Robert A. Hagemann:]

No, we have not.

[Surya N. Mohapatra:]

Most of our business, Andreas, comes from physician offices and I think Diagnostics is still a healthcare service, so think if there is some changes it will be very slow. But as Bob said that, we are prepared to manage our costs if there is going to be any softness.

[Robert A. Hagemann:]

And keep in mind to, if this is actually happening with elective procedures, which are taking place in hospitals and elsewhere. Those are bigger ticket items. We're talking much smaller dollar amounts here. So, I'm not necessarily sure that people would think about either delaying or accelerating this as a result of their thoughts around the economy.

[Andreas Dirnagl:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Bill Quirk of Piper Jaffray. Your line is open.

[Bill Quirk:]

Thanks, good morning. I appreciate the earlier comments on the Blue Cross Blue Shield contract of California. Just wanted to follow-up there, are we seeing any other activity in the balance of the WellPoint, Blue Cross Blue Shield? And I guess follow-on, have you seen any changes in any of those contracts over the balance of the year? Thank you.

[Robert A. Hagemann:]

We have nothing to report on any of the other WellPoint contracts and we're not anticipating any significant changes, any of them over the course of the remainder of the year.

[Operator:]

And our last question comes from Ricky Goldwasser of UBS. Your line is open.

[Ricky Goldwasser:]

Yeah. Just one follow-up question. As far as AmeriPath, not sure if you quantified or not, but, what was the EPS impact in the quarter?

[Robert A. Hagemann:]

In the quarter, it was still slightly dilutive, not significantly different than we saw in the fourth quarter of last year. But as the year progresses, we expect to see improvement there.

[Ricky Goldwasser:]

So you expect it to breakeven by one in the year?

[Robert A. Hagemann:]

We have not given specific guidance on that and frankly we're starting to integrate that business now and it becomes very difficult to segregate that out as you proceed on that line.

[Ricky Goldwasser:]

Okay, thank you.

[Operator:]

And that does conclude the question and answer segment. Thank you for participating in the Quest Diagnostics first quarter conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com. A replay of the call will be available from 10