Quest Diagnostics Incorporated
Q1 2009 Earnings Call Transcript

Published: 21 Apr 2009

[Operator:]

Welcome to the Quest Diagnostics first quarter 2009 conference call. At the request of the company, this conference is being recorded. The entire contents of the call including the presentation and question-and-answer session that will follow are copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of Quest Diagnostics is strictly prohibited. Now I would like to introduce, Laure Park, Vice President of Communications and Investor Relations for Quest Diagnostics.

[Laure Park:]

Good morning. I'm here with Dr. Surya Mohapatra, our Chairman and Chief Executive Officer and Bob Hagemann, our Chief Financial Officer. Some of our commentary and answers to questions may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date that they are made and which reflect management’s current estimates, projections, expectations, or beliefs and which involves risks and uncertainties that could cause actual results and outcomes to be materially different. Risks and uncertainties that may affect the future results of the company include but are not limited to adverse results from pending or future government investigations, lawsuits, or private actions, the competitive environment, changes in government regulations, changing relationship with customers, payers, suppliers and strategic partners and other factors described in the Quest Diagnostics 2008 Form 10-K and current reports on Form 8-K. Also, a new accounting rule went into effect January 1st, SFAS 160. This requires minority interest to be renewed, net income attributable to non-controlling interest, and companies must present consolidated net income that includes amount attributable to such non-controlling interest for all periods presented. This change did not impact our previously reported numbers, but did change how our P&L was presented. A copy of our earnings press release is available and the text of our prepared remarks will be available later this morning in the quarterly updates section of our website at www.questdiagnostics.com. A power point presentation and spreadsheet with our results and supplemental analysis are also available on the website. Now, here is Dr. Surya Mohapatra.

[Dr. Surya N. Mohapatra:]

We are off to a great start in 2009. During the first quarter, earnings per share increased 24% to $0.89 per share, revenue increased to $1.8 billion, operating income increased to 17.8%, and cash flow increased to $273 million. We are executing our strategy and driving results. We got profitable organic revenue growth, and the growth continues to be driven by our focus on growing esoteric testing including cancer diagnostics. We continue to reduce our cost structure and drive sustainable efficiencies. We are committed to enhancing the patient experience with a range of innovations. As a result of our strong performance, we increased our next guidance and now expect EPS to be between $3.65 and $3.75. After we hear from Bob, I will address our progress.

[Robert A. Hagemann:]

As you heard, our business performance has continued to improve off an already strong base. Revenues, earnings, and cash flow have all grown and we remain confident in our prospects for continued growth. Earnings per share from continuing operations were $0.89, 24% above the prior year with the increase principally driven by strong operating performance, and to a lesser degree lower interest expense. Revenues were $1.8 billion, 1.3% above the prior year. Revenues for our clinical testing business which accounts for over 90% of our total revenues were 2.2% above the prior year and about 3% above before the impact of our pre-employment drug testing business. Volume was 1.9% below the prior year, driven by a 25% decline in pre-employment drug testing volume which reduced consolidated volume by 1.7%. In addition, the exit last year from several lab management agreements which did not meet our profitability thresholds reduced volume by about 1%. Also, this year’s first quarter had fewer business days than the prior year and impacted volume by about 1%. After giving consideration to these factors, underlying volume grew about 1.5% in line with a slightly better than the rate we exited last year. Revenue per acquisition increased 4.1% with the increase continuing to be primarily driven by a positive mix and a benefit of about 0.5% from the Medicare fee increase which went into effect January 1. Revenue in our non-clinical testing businesses which include our risk assessment business, clinical trials business, Point of Care testing business, and MedPlus, and contained most of our international revenues was below the prior year by about 8% with the entire decline due to foreign exchange. In total, foreign exchange reduced consolidated revenue growth by almost 1%. Despite the lower revenue for these businesses, their aggregate profits exceeded the prior year level. A table contained in the footnotes for the earnings release summarizes the impact of various revenue metrics associated with the number of the items I just discussed. Operating income as a percentage of revenue was 17.8%, up from 15.7% last year. The improvement is due to a more profitable revenue mix and progress we’re making with our cost reduction program as well as discrete cost containment actions we took during the quarter. We continue to see strong performance in our billing and collection metrics. Bad debt expense as a percentage of revenues was 4.5%, 30 basis points improved from the prior year. DSOs at 43 days, improved 5 days from a year ago and 1 day from year end. Our cash flow continued to be outstanding. Cash from operations increased to $273 million for the quarter compared to $158 million last year. During the quarter, we repurchased 5.6 million shares at an average price of $44.48 for a total of $250 million and we made capital expenditures of $40 million. Now, let us turn to our full year outlook for continuing operations. We continue to expect revenue growth to be approximately 3%. We expect operating income as a percentage of revenues to improve to about 18%. We expect cash from operations to approximate $1 billion before the NID settlement payment or approximately $700 million after such payment. Capital expenditures are expected to approximate $200 million. And lastly, we have increased our estimate of diluted earnings per share to between $3.65 and $3.75 which includes a second quarter benefit of $0.05 per share associated with an insurance recovery. We’ve been proactive in comparing for changes in the business climate in capitalizing on opportunities. This has not only allowed us to perform well in a difficult economic environment but has positioned us to further strength in our competitive position and to further improve our outlook for the year. Now, I’ll turn it back to Surya.

[Dr. Surya N. Mohapatra:]

We are making good progress in executing our strategy which is based on patients, growth, and people. I’d like to review our growth drivers in the first quarter, look at the current climate, and to update you on some of the ways we are planting the seeds for future growth. Our business is moving to a higher value esoteric, gene-based, and anatomic pathology testing which now accounts for approximately 35% of all revenues. During the quarter, gene-based and esoteric testing revenues continued to grow more rapidly than overall clinical revenues. We had seen double-digit growth in a number of tests. For example, HPV testing increased as we continued to educate physicians about testing guidelines and the benefits of HPV testing in conjunction with lab tests. Vitamin D testing grew more than 50% based on increased awareness in the market and interest among doctors in identifying patients with vitamin D deficiency. Our ImmunoCAP allergy testing grew approximately 20% as doctors increasingly used it to identify allergy and asthma in patients. We have also enhanced service to customers in several ways while driving efficiencies. Now, we are enabling physicians to get faster answers to their most frequently asked questions by adopting self-service technology through the web and interactive voice response technology. This new system is more efficient for our physicians and us. We have improved the ability of patients to pay for their testing in our patient service centers or online, which has further improved cash collections and patient satisfaction. Our specimen tracking initiative is a great example of how we are improving service quality and also enhancing customer service and employee satisfaction. By assigning unique bar codes and using hand-held scanners, we can follow a patient specimen at every step of its journey to the laboratory, eliminating cumbersome manual tracking. The number of uninsured people is increasing due to the recession. We recognize that many patients are facing financial hardships. We offer several programs to assist patients. Our financial assistance program provides free or reduced fee laboratory services. In addition, we are proud to be participating as the official diagnostic testing laboratory for Walgreens Take-Care Recovery plan. We are benefiting today from investments and decisions we made years ago. We believe that awareness drives appropriate utilization of diagnostics to enhance healthcare outcomes and reduce cost. However, we do not create such awareness overnight; it sometimes takes years to give support in the medical community. Take for example our Cardio CRP test; ten years ago, we were the first laboratory to offer high-sensitivity CRP testing working with Dr. Paul Ridker of Brigham and Women’s Hospital. Test volume did not increase immediately, but gradually use of this test has grown. The landmark Jupiter study last November supported broad use of CRP testing to identify people with low LDL cholesterol who may be at high risk for heart attack. In the first quarter, Cardio CRP volume grew about 50% over the prior year. We were one of the pioneers in the use of tender mass spectrometry to meet growing demands for a number of advanced tests including vitamin D, testosterone, and other hormones. Recently, when the National Institute of Standards and Technology developed a vitamin D standard reference material to reduce inter-laboratory variability, it used tender mass spec. The Endocrine Society considers tender mass spec to be the new gold standard in the measurement of subnanolytes. Our proprietary Leumeta family of plasma-based leukemia and lymphoma tests continues to grow. Since we introduced the first Leumeta test in 2006, we have expanded the family to include 22 tests. Helping doctors manage patients with blood cancers is one of our goals. To solve this important growth segment, we have built a team of more than 60 board-certified hematopathologists, more than any other laboratory. We are pleased that the American College of Gastroenterology recently updated its guidelines for colorectal cancer detection. Now, it recommends an annual fecal immunochemical test such as our proprietary InSure FIT in conjunction with colonoscopy or as an alternative. We focus on our med needs to identify potential new tests in different disease states and across the spectrum of care, from identifying a patient’s predisposition to disease, to diagnosing a problem, to driving therapy decisions, and monitoring treatment. For instance, there is a significant need for ovarian cancer tests. We are excited about the potential that our HE4 blood test and when used in conjunction with the CA125 biomarker may enable doctors to better identify women at high risk for ovarian cancer. While the combination test still requires FDA action, we are encouraged by a recent study by researchers at Brown University that provides additional support for the use of two biomarkers together. We are working on two new tests for prostate cancer. We licensed a DNA Methylation biomarker for a blood test and are working to develop a urine test utilizing 4 gene markers. Another test with good potential is the new QuantiFERON test for tuberculosis. This new test replaces the 118-year-old skin test and has significant advantages. It reduces false positives, has higher compliance, and does not require patients to return to the physician for the results. We are educating physicians and public health operatives about the benefits and are starting to see results. The interest and demand for companion diagnostics and other personalized medicine is also increasing. To meet the growing need in this area, we have added biomarker capabilities and medical and scientific personnel. While it is still holidays, some of these tests are improving health outcomes. Some examples are K-RAS gene mutation analysis to determine eligibility for therapies such as Erbitrux. Our two new tests to assess candidates for Herceptin therapy and CYP450 mutation analysis to identify patients who may have difficulty metabolizing drugs such as Coumadin and anti-inflammatory agents. We are growing our market presence in healthcare IT. Starting in 2009, physicians using ePrescribing for medications are eligible for a supplemental payment from Medicare. This has resulted in strong increases in uses of our Care360 physicians’ portal for ePrescribing. By the end of the first quarter, ePre users were up 45% from year end. The number of medications ordered through Care360 had grown to the current annual rate of 6.5 million. Care360 laboratory orders and results and ePrescribing create stickiness with physician customers. We are enhancing the patient experience and also making it easier for physicians to practice medicine. Additionally, health information exchanges foster better patient care and improved business performance for healthcare institutions, physicians, and patients. Our MedPlus subsidiary is a leading developer and integrator of data exchange solutions and its technologies driving greater data sharing for HIEs in New York, California, Canada, and New Mexico. The National Debate on healthcare is probably just beginning and we believe that the outcome will be a net positive for our industry. Diagnostic testing is a vital component of the healthcare equation and it will play an even expanded role. It is a growing consensus that keeping people healthy drives better long-term outcomes and reduces costs. That means, identifying diseases like cancer, diabetes, and heart disease only when there are options to avoid painful complications and costly treatment. In closing, we are the leader in our industry and are making investments and taking decisive actions to differentiate ourselves from the competition. We were again recognized by the Fortune Magazine as one of the world’s most admired companies. We drove strong results in the first quarter and are raising our commitment for the full year. We now expect EPS of between $3.65 and $3.75, and we are excited about the opportunities before us. Thank you, we will now take your questions.

[Operator:]

At this time, we will begin the question-and-answer session. (Operator Instructions). Our first question comes from Ms. Ricky Goldwasser - UBS.

[Ricky Goldwasser:]

Congratulations for a solid quarter. A couple of questions, first of all, can you just disclose the current run rate on the cost containment initiative, and then secondly, on a normalized basis very strong volume performance up 1.5%, it could be somewhat surprising given the concern around the potential impact from the economy on a core testing, can you just give us a little bit more color on what you’re seeing in terms of physician offices as an overall trends and do you think that they are sustainable throughout the year?

[Robert A. Hagemann:]

Let me first comment on the cost reduction program; as we indicated, at the end of last year, when we exit this year, we will have realized $500 million in annualized cost save; that program is progressing very well, and as you heard me say before, what we’re doing there is simplifying processes by re-designing them, streamlining them, and as a result, those are sustainable cost reductions, and that was obviously a significant contributor to what we saw in the first quarter; that along with the revenue mix was a big piece of the increasing margins. In addition though in this first quarter I would say that we were probably a little extra-diligent in managing cost and scrutinizing everything; some of the discrete spending that we had planned for the quarter whether it be meetings, travel, consulting, other programs was either eliminated or deferred, and at least for the first quarter, I think we are in good shape in doing that without having any adverse impact on the business. So, I feel very good about the progress we’re making with the cost reduction program; it’s either on or ahead of plan, and as I said, it’s going to be sustainable cost reduction. With respect to your question about physician office visits, obviously that’s probably what would impact our business more than anything because for the most part as physician office visits grow, that’s how our volume moves. With that said, it’s really hard to assess what the direct impact of the economy is on physician office visits, there’s not real good data out there on that, but our underlying performance in our physician and hospital reference testing business has held up very well and the volumes have been pretty consistent now over the last 3 or 4 quarters. So, I can’t say that we’re seeing any significant impact there, obviously where we have seen impact is in the employer business, the drugs of abuse testing, and to some degree in the risk assessment business as well, but we see no reason to think that there’s going to be a significant change in the experience that we’ve had over the last few quarters.

[Ricky Goldwasser:]

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

[Robert A. Hagemann:]

Well, you’re not going to see that until the end of the fourth quarter. It was the fourth quarter where it really started to decline, and it really wasn’t until the end of the fourth quarter that we saw the real significant impact. So, it’s going to be some time late in the fourth quarter. There are a couple of other things though that will anniversary before that; the impact of the lab management contracts I expect to anniversary before that anniversary as we get into the second half of the year, and obviously the number of business days will reverse itself out as we get later into the year as well.

[Ricky Goldwasser:]

Thanks, that’s helpful.

[Operator:]

Our next question comes from Mr. Anthony Vendetti - Maxim Group.

[Anthony Vendetti:]

You had mentioned that generic, esoteric, and anatomic pathology was 35% of revenues for the first quarter and you mentioned some of the tests that were up double-digit or even more, can you mention what the growth was overall for that category, and then if you could just talk about MedPlus, I know that that’s a growing piece of your business, do you have any quantifiable data and what percentage of physicians are using that and how is that specifically increased?

[Laure Park:]

On the gene-based and esoteric testing was growing definitely significantly higher than our overall average for the company, and as we’ve seen in the past, keep in mind that’s becoming a very large piece of our business, so you’re no longer going to see in the entire book a double-digit growth, but it continues to grow significantly in excess of the company average. On the MedPlus side, right now, we have over a 140,000 physicians on the Care360 connectivity suite and we’re seeing an increasing percentage of them on the physician portal. The physician portal is an important aspect that will given them the ability to do ePrescribing and other premium services. On the ePrescribing side, we saw an increase of 45% over the end of the year with over 6.5 million prescription run rate now in that business. I would expect to see continued strong growth in the number of physicians using ePrescribing as they look to taking advantage of the Medicare premium that they can get this year for using ePrescribing platforms.

[Dr. Surya N. Mohapatra:]

I think the beauty of MedPlus Care360 physician portal is the combination of laboratory orders and results and ePrescription. A lot of people have EMR, they can do scheduling, they can do billing, and they can do ePrescription, but I think what we are seeing that doctors are using our physician portal to have improved practice because they can know the impact of various medications on therapy.

[Anthony Vendetti:]

Okay, just lastly on the CapEx, you said $200 for the year, could you talk about what projects that’s going to focus on and can you mention whether or not you made any small lab acquisitions this quarter?

[Dr. Surya N. Mohapatra:]

There were no small lab acquisitions in the quarter; if they were, you would have seen those show up directly in the cash flow statement. So, I think what we do there is pretty apparent. On the CapEx side, there’s nothing you need in there. The way that you should think about our CapEx is, typically about a third of it goes into our IT, about a third of it goes into facilities and related and about a third of it goes into laboratory equipment. I would say at this point the laboratory equipment is probably a little higher than it’s been as a percentage of the total only because the other two areas we’ve been managing I think pretty tightly at this point; but no significant projects in there other than what we had last year which is really the standardization of all of our IT systems that had been billing across the company which will continue for the next several years.

[Operator:]

Our next question comes from Mr. Arthur Henderson - Jefferies & Co.

[Arthur Henderson:]

Good morning, a very nice quarter; a couple of questions, Surya, could you give us your thoughts on healthcare reform and what it may mean for the labs and your outlook for the physician C6 start?

[Dr. Surya N. Mohapatra:]

First of all, every administration has a desire to deal with the healthcare reform, but for some reason or the other, the healthcare reform becomes #2 and #3, but it does not feel like that with the President Obama’s administration and what really encourages me is that he’s understanding of the role of prevention that’s going to play in healthcare, his desire to really cover the children and the uninsured, and also the integral part of healthcare IT. So, we’ve been talking about for years that the diagnostic testing is important and nothing happens without the test, so in my reading and my impression from listening to people, I think the diagnostic testing is going to play a very important role and we are going to benefit as an industry, but as far as the physician fee schedule, that’s something we don’t know what the final amount is going to be, but we had the increase for the first time, the medical increase, but it looks like there may not be any drastic cuts, but I feel very encouraged about diagnostic industry and about our company, how we have positioned our company to meet the patients’ and the physicians’ needs whether it’s cancer or it’s infectious disease or whether it is cardiovascular disease.

[Robert A. Hagemann:]

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

[Laure Park:]

Yes, on the physician fee schedule, that’ll be something that we don’t know what the final fix will be, but from everything we’re seeing, they’re not going to let those draconian cuts going to affect.

[Dr. Surya N. Mohapatra:]

Right, and the most significant impact is really the laboratory fee schedule as opposed to the physician fee schedule.

[Arthur Henderson:]

That’s helpful, and then two quick questions, in terms of commercial payer contracts that are coming up, I guess CIGNA is the next one in 2010, just want to get your outlook on that, and then Bob, on the uses of free cash flow, you bought back a lot of stock, is that the kind of way we need to think about what you’re going to be doing with your cash flow?

[Robert A. Hagemann:]

With respect to managed care contracts, most of the big ones are extended through 2010 or beyond. CIGNA actually runs out beyond that, closer to 2012, I believe, it is. So, I think we’re in good shape; I would say, pricey relative to that piece of the business, it’s much more stable than it’s been in quite a while and so we’re feeling pretty good about that. With respect to capital deployment, as you’ve heard us say in the past, the first goal with respect to excess cash is deploy it into growing the business which would be acquisitions, new test development, and the like. When those opportunities don’t exist or aren’t available at the right price, that’s the point which we would deploy it into share repurchases, which is essentially what we’ve done in the past. I would say though that we want to do all that in the context of preserving our investment grade credit rating. So, there will continue to be some further reduction in debt levels as we go throughout the year and at the end of the day probably the very first priority is to make sure we maintain that investment grade credit rating.

[Operator:]

Your next question comes from the line of Robert Willoughby - Bank of America-Merrill Lynch.

[Robert Willoughby:]

Can you give us any additional details on the lab management contracts that have gone; how many were there and why the change in philosophy here? These were good for you at one point, why the change, and are there are any left that you might seek to step away from?

[Robert A. Hagemann:]

Bob, we talked about these a little bit on the last call, these are lab management agreements that come up for renewal periodically and in assessing them they were not meeting the profitability thresholds that we’ve set and as a result did not renew them. If you look at the table and footnote 4, you can see that while it had a pretty significant impact on volume it had a relatively insignificant impact on revenues. So that tells you that they were pretty low priced. They were profitable at one point, but sometimes either the service levels need to change or other things cause those to not be as profitable as we would like, and as a result if we can’t adjust the pricing accordingly, we won’t renew them. Now, do I expect that there are additional contracts like that that are coming up this year; no, I think we’re in pretty good shape relative to the ones that we’ve got at this point. Most of the impact you see showing up in the volume, very little to the revenue, and certainly very little to the profit.

[Robert Willoughby:]

What’s the strategy on the new Walgreens relationship you announced? Are you guys just nice guys or do you expect the relationship to evolve into something maybe more meaningful economically for you?

[Dr. Surya N. Mohapatra:]

Well, first of all, we are nice guys, but we work with a number of retail clinics and this is our way of increasing our channels, and we know that little clinics are going to play an important role in the healthcare delivery system and there is an opportunity to work with Walgreens and I think it’s a great program for Walgreens to provide healthcare support for people who lost their jobs, and we’re going to provide them with free testing for some of those patients.

[Robert Willoughby:]

Is there any cash business between the two of you at the moment?

[Laure Park:]

Yes, Robert, there is, and we actually do provide laboratory services for paying customers into the clinics per minute for Take-Care as well as for Minute clinic.

[Dr. Surya N. Mohapatra:]

It’s all the little clinics.

[Robert Willoughby:]

There’s no esoteric opportunity there, is there?

[Laure Park:]

At this point in time, their services menu is pretty focuses on sick care. There may be some movement as walk in, but right now it’s a very thin menu.

[Dr. Surya N. Mohapatra:]

There are a limited number of tests.

[Operator:]

Your next question comes from the line of Charles Rhyee - Oppenheimer & Co.

[Charles Rhyee:]

Just a couple of followup questions here. Surya, you commented on healthcare reform and where your labs are situated it looks very favorable in terms of helping on the diagnosis for care, but as we think about the physician fee fix and the Obama administration’s focus on preventative care, do you think you can come into a situation where maybe the family physicians, the front liner of the physician community benefits more in the physician fee fix maybe at the expense of higher end specialties and do you think that might have a potential impact on the esoteric mix at all, in terms of the fees, like I said, slightly balancing?

[Dr. Surya N. Mohapatra:]

Nobody knows exactly how it’s going to turn out, but I’ll be very surprised that is going to reduce any significant changes with the specialty because the reality is that as we grow old and the population is growing, there are issues whether it is chronic disease or whether it is acute disease, and so when I think about the healthcare reform, I think the most important thing at the moment is realizing that instead of having episodic care, now we have to take a continuum of care and that is where the diagnostic laboratory, the diagnostic testing is going to be more important. We know the healthcare cost has gone up and for the last 20 years we have miracle drugs and miracle devices and now the question is how diagnostics is going to study the predisposition to a disease, to monitor therapy, and I think that’s going to be across the spectrum of whether it is primary care or whether it is specialists.

[Laure Park:]

Actually if you think about everything that we’re looking at, obviously we need to see exactly where they go as compared to effectiveness, but laboratory testing can help the specialized physician to make decisions more efficiently and effectively as it relates to the overall use of healthcare. Obviously if we think about the cancer areas right now, in-therapy selection and monitoring are great examples.

[Dr. Surya N. Mohapatra:]

I think you feel worried about whether the specialists are only ordering esoteric testing and that might change, you shouldn’t be worried about that because now esoteric testing are also ordered by internists and primary care and what is esoteric today in five years it becomes routine. So, this is the reason why I said that we invested money a long time ago and now we’re now getting the benefit of CRP. We invested money in technologies like mass spec and we’re getting the benefit of vitamin D. We’ll continue doing this, bringing new technology and increasing the quality, and we will have a significant amount of business based on high-quality high-value esoteric testing.

[Charles Rhyee:]

Two followup questions here; the insurance recovery, can we get a little more detail, what’s that related, and I know you said $0.05, that on $8.5 million, does that sound alright then?

[Robert A. Hagemann:]

Charles, I am not sure I can give you a lot of additional color here. We’re expecting to receive an insurance recovery in the second quarter which will give us about a $0.05 EPS benefit, and that’s closer to about $15 million pre-tax. You’re probably doing an after tax number.

[Charles Rhyee:]

Yes, I was looking at after tax. So, $15 million or so.

[Robert A. Hagemann:]

Right, and it relates to a claim associated with a storm which occurred a number of years ago. It’s non-recurrent in nature and that’s why we’re breaking it out for you separately.

[Laure Park:]

Footnote 6 has the information; that’s where we placed it on the P&L; in the second quarter, it will be sitting above in operating income.

[Charles Rhyee:]

The interest expense looks like a tick down, but I look at debt and cash at the end of the period it looks like the debt ticked up a little bit. Is there anything that occurred in the quarter in terms of timing of payments that is related to this or…

[Robert A. Hagemann:]

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

[Charles Rhyee:]

I’m sorry, the net cash was, because it looks like you have been buying back stock.

[Robert A. Hagemann:]

Correct. I think you can see that all the way down on the pace of the cash flow statement. It was essentially the share repurchases that reduced the cash balance, but otherwise it was a terrific quarter in terms of operating cash flow.

[Operator:]

Your next question comes from the line of Gary Taylor - Citigroup.

[Gary Taylor:]

I missed a little bit of the Q&A, so just refer me to the transcript if I am repeating something. Have you had any evidence in the 1Q that there was anymore aggressive buy-down by employers with the managed care plans through the last renewal cycle; any noticeable uptick on the copay side?

[Robert A. Hagemann:]

Not that we can see Gary. Certainly, if you look at our billing matrix, they’ve continued to improve, ageings have continued to improve, DSOs are down, bad debt is down. So, I would tell you that I’ve not seen a significant impact here. Usually the first quarter carries a little higher bad debt than the rest of the year does. So, it could be because of copays and deductibles, but I can’t say that we’ve seen any significant uptick in the amount that we’re having to bill patients.

[Gary Taylor:]

Can you remind us as a percent of revenue copays and deductibles are what?

[Robert A. Hagemann:]

As you think about it it’s probably about 5% to 6% or so and that’s really embedded in what we call third party. So, if you were to look at our 10-K and you look at the revenue by payer there, embedded in third party are the copays and deductibles, and what you see sitting up in patient is really the uninsured that we’re billing directly.

[Gary Taylor:]

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

[Laure Park:]

The Q will be filed later this week as planned today.

[Operator:]

Your next question comes from the line of Ralph Giacobbe - Credit Suisse.

[Ralph Giacobbe:]

A couple of quick guidance things; is there something in the back half of the year that we should be thinking about that gives you confidence in that 3% topline guidance, and just to be clear the 3% revenue is for total company and not just the clinical business?

[Robert A. Hagemann:]

Correct, it’s total company, and Ralph, I guess the best place for you to look would be again in this footnote 4 to the earnings release because there are a number of factors that are impacting the first quarter which are not going to impact the full year to the same extent. Certainly, we talked earlier about the lab management agreements which are going to anniversary, the number of business days, the drugs of abuse testing business won’t anniversary until late in the fourth quarter, and foreign exchange may or may not reverse out, but that’s really not reflective of underlying performance.

[Ralph Giacobbe:]

I required this because you’re using 1.3% I guess as the first quarter number; is that right? So it’s implied that the back half is a little bit stronger. Okay, that’s fair. In terms of the raise in guidance; obviously $0.05 was the insurance recovery. Is the balance mainly lower share count just given timing of repurchase so far or is there something else?

[Robert A. Hagemann:]

It’s really improved operating performance. As you think about it we brought the midpoint up by $0.10 and you can think about that as $0.05 from the insurance recovery and $0.05 from operating performance. So, the range that tightened the $0.10, we brought the bottom end up $0.15 and the top end up $0.10.

[Ralph Giacobbe:]

Okay, so it wasn’t share repurchase that had been factored in when you originally gave it?

[Robert A. Hagemann:]

Share repurchase for the most part is very consistent with the capital plan that we’ve got this year, maybe a little more front-end loaded because of the GSK repurchase, but very much in line with our capital plan for the year.

[Ralph Giacobbe:]

On the AmeriPath business; I know you’re not breaking that out separately anymore, but can you give us any color on retention efforts with pathologists?

[Laure Park:]

On the enzyme pathology front, our retention efforts on the pathologists are very strong. We have a pathologist team, if you think about a consolidated organization of about 800 pathologists. So, you don’t keep everyone, but our retention efforts are very strong and we’re pleased with that.

[Ralph Giacobbe:]

Okay, correct me if I’m wrong, but did you lose a case in terms of the non-competes around AmeriPath?

[Laure Park:]

It was related to one state and keep in mind it’s one state and still in dispute.

[Ralph Giacobbe:]

The last question, when we think about international expansion, should we consider acquisition or should we just think about it as mainly a build out of current locations and start ups if will, and then if you could just remind us the goal again, was it 10% of revenue, is it in the next five years and you’re currently at 3%, is that right?

[Laure Park:]

International revenue is about 3% growth rate now, but 10% is the multi-year goal and I think it’s safe to tell you that that’s been organic plus a supplement or the strategic acquisitions as they become available.

[Dr. Surya N. Mohapatra:]

We continue to believe that going to international especially for developing countries provides a mid and long-term growth opportunity and our large investments outside the US is at the moment in India and that market is $1.5 billion to $2 billion and it’s growing double digits. We’re making progress in many fronts; we’ve built the laboratories, one of the best laboratories in Asia Pacific and we’ve got CAP and NABL certification and now we’re putting together the plans to acquire customers. So, international is an important strategy and when you look at our other interests of business whether it is clinical trials whether it is HemoCue which is point of care and laboratory and our work in Ireland and UK, those are the things that are really going to grow and our goal is to have 10% revenue in several years.

[Robert A. Hagemann:]

In these markets many of them are much more fragmented than you see here in the US and as we get more familiar with the markets and understand how to operate there make us more comfortable considering acquisitions down the road.

[Laure Park:]

But to put it in perspective, it’s a small piece of the business today; it’s not a short-term drive. It’s really a seed planted for long-term growth.

[Operator:]

Your next question comes from the line of Shelley Gnall - Goldman Sachs.

[Shelley Gnall:]

Just a couple of clarifying questions on the last questions around the topline guidance. I am still having a little bit of trouble getting to just keep a ramp now to the 3% guidance for the year. So, if I understood correctly, I believe there’s a comment of the number of business days, that impact essentially gets washed out by the end of the year in the anniversarying effect that we see from the lab management contracts should be worth about 1% impact in the second half of the year. So, I guess my questions are; first, have I got that right, and secondly, is there anything that’s coming online that would make that revenue per acquisition within that range not sustainable through the end of the year, and then finally, are there any key assumptions in that guidance on improvement on volumes or recovery in the economy that we should know about.

[Laure Park:]

That’s a lot of questions.

[Robert A. Hagemann:]

Let me see if I can clarify at least one item that you mentioned about the laboratory management contracts and it was about a 1% impact of volume, it was a lesser impact to revenue growth, and again, that’s all laid out in that footnote 4 in the table there, but in terms of expectations for the economy and the like, we’re not anticipating any significant improvement in the economy which is going to impact our volumes over the course of the remainder of the year, and again, if you look at the underlying growth that we’ve got in our physician and hospital reference testing business, it’s in excess of 3% in the quarter, and we feel pretty good about that being able to continue, and then with the number of these things that we talked about anniversarying, we feel pretty good about our 3% revenue growth estimate.

[Operator:]

Your next question comes from the line of Adam Feinstein - Barclays Capital.

[Adam Feinstein:]

A very strong quarter here. Just wanted to ask a few questions here. I guess, last quarter you said that the drugs abuse testing business was still profitable even with the decline in volumes; just curious whether that is still the case.

[Robert A. Hagemann:]

Very much so.

[Adam Feinstein:]

So, it is still profitable. Okay, and then Bob, your last quarter also you’d said that you thought that some of the cost cutting would be more back-end loaded in 2009; I heard your earlier comment about you guys were just extra cautious this quarter, this in terms of managing costs with everything going on, but still you had made the comment back in the Q4 conference call that it would be back-end loaded. So, just trying to think about that now; can you just give us a quick update in terms of what is different or whether we should look for the rest of the cost cutting to be more back-end loaded.

[Robert A. Hagemann:]

Adam, with respect to the comments that we made in Q4, it was not so much that we saw that back-end loaded as we saw it ramping up throughout the year and increasing as the year progresses because as we continue to deploy the initiatives across the businesses, the benefit continues to grow, but as you did hear me say, we were extra diligent in this first quarter making sure that we manage costs pretty tightly and in some cases deferring a few thing. My expectation is that some of those expenditures that we deferred in the first quarter are going to be required to be made and as such we’re not expecting the same benefit that we saw in Q1 in terms of a 2% margin improvement to continue for the rest of the year. Obviously, if we can see clear to permanently removing some of those costs from our cost structure, we will, but that’s not what we’re projected at the moment. The cost reduction program that we’ve been talking about all along is very much on track and a big driver of our performance improvement.

[Adam Feinstein:]

On the bad debt side you guys have done a great job there and you answered some questions earlier about that, but is it your expectation that we can see that trend continue to get better throughout the year or do you think the trend for Q1 should be seen as in a steady state for the rest of the year.

[Robert A. Hagemann:]

I certainly would love to see it get better in terms of bad debt and DSOs, but I wouldn’t expect any significant improvement in either of those, and as you know, DSOs bounce around a few days from quarter to quarter and bad debt in the first quarter typically is a little higher than we see for the rest of the year because of copays and deductibles, but I am not expecting a significant swing in bad debt or DSOs either way at this point.

[Adam Feinstein:]

Final question; there was this California Medicaid lawsuit that came out about a month ago, just wanted to get any comments there in terms of how you guys are thinking about that and just any additional color.

[Laure Park:]

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

[Adam Feinstein:]

When would you expect any update in terms of getting that…

[Laure Park:]

I am not going to speculate there.

[Operator:]

Your next question comes from the line of Darren Lehrich - Deutsche Bank Securities.

[Darren Lehrich:]

I wanted to go back to the discussion around costs and I know you’re taking lot of work out of the labs so that that should be sitting in a bowl. I wanted to just key in a little bit more to what you’re seeing with regard to supply chain and the opportunity there. Can you just comment a little bit more about the variable cost side, maybe the reagent trends in terms of price increases or savings?

[Robert A. Hagemann:]

We obviously are looking at the entire supply chain and we’re talking to all of our vendors, and it’s not just a matter of trying to beat people up on cost, but work with them to see how we can help reduce their cost of delivery to us and as such we can both benefit from it, but I think we’ve done a nice job in managing the cost of supplies and reagents and the like and certainly that’s been one of the components of the $500 million savings program at that time.

[Darren Lehrich:]

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

[Dr. Surya N. Mohapatra:]

First of all, there are no single tests which I can really point to you. It is the way we develop our test and the way we provide our services to the clinician who is to provide the solution for cancer patients, and cancer test is getting more and more molecular along with anatomic pathology and clinical pathology. The whole idea of joining AmeriPath with Quest Diagnostics is that we cover whether it is blood cancer or whether it is skin cancer. So, just to give you some indication like HPV, of course, is growing. The whole molecular diagnostics and anatomic pathology tissue study together is increasing revenue for acquisitions, and there are a number of companion diagnostics, that’s also growing. So, you need just one particular test and we’re very pleased that we have this group of pathologists and a group of tests, whether it is genetic testing or whether it is tissue testing which is really helping us to improve our revenue for acquisitions, but the most important area also which is growing is hematopathology. So, our Leumeta family of tests, that’s proprietary, and we have also cytology growing, and flow cytometry also growing.

[Darren Lehrich:]

Two more quick ones for Bob; just in terms of the investment you’ve made in India, you’ve commented before what that run rate has been on the earnings per share; can you comment on that, maybe just give us a high-level comment on the management team in India; how long has that team been in place and together at this point?

[Dr. Surya N. Mohapatra:]

Let me first talk a little bit about what we’re doing in India and Bob can talk about the investment. We decided to build a state-of-the-art laboratory in India to provide high-quality esoteric testing to not only India, but also become the Asia Pacific laboratory for clinical trials and also testing for specialty physicians. Now, we have changed a couple of management because as we develop and as we grow we are seeing whether people meet our requirements or not, and I am very happy with the current change in the management and we now have a group of people who are not only looking at high-quality operations, but also focusing on customers.

[Robert A. Hagemann:]

Gary, the investment that we expect to make in India this year is not significantly different than what we made last year. If you recall, it was rather modest, about a penny a quarter, and obviously anytime you enter a new market, you expect to make an investment upfront in order to realize gains in the future, and I think we’ve been very diligent in managing that investment until we get to the point where that business breaks even.

[Darren Lehrich:]

My last question with regard to your borrowings, obviously you can elect various LIBOR fixings; where are you on the LIBOR curve at this point and I guess going into the second quarter, I am assuming you’re on the shorter end with most of your bonds. Can you just confirm that?

[Robert A. Hagemann:]

We are on the shorter end at the moment.

[Operator:]

Your next question comes from the line of William Quirk - Piper Jaffray.

[William Quirk:]

Just a couple of wrap-ups here; first off, Surya, basing your comments on vitamin D, it sounds to me like you’re still using the internally validated assay; I assume that you’re obviously pleased with the corrections that you guys have taken.

[Dr. Surya N. Mohapatra:]

Yes, and one of the things that I always tell people that you’d expect from our company as a Six Sigma company that we will continuously evaluate technology, we’ll continuously evaluate quality, and I am very pleased with we invested money in the long-term on mass spec and we’re very pleased with the demand that we see in vitamin D and we’re actually gearing up to meet that demand in the marketplace.

[William Quirk:]

You’ve only backed up the benefit of the lab fee schedule, does the correct revenue pre rec increase nicely here in the quarter. I guess I am just trying to think about the sustainability of this vis-à-vis what appears to be anyway an incremental push if you will on the esoteric side; any color here would be great.

[Robert A. Hagemann:]

Again, I hate referring people back to this footnote in 4, but there is a table there that reconciles some of the big drivers of that 4.1% and as you can see 1.7% of it is really due to mix, the drugs of abuse testing, and the lab management agreements producing less volume which carried lower reimbursement than the average, but when you adjust for that, we’re around 2.5% or so which is pretty consistent with what we’ve been seeing, and it’s not just esoteric testing, it’s additional test per rec being ordered during encounters, and that could be routine testing as well as esoteric testing, but we do feel pretty good about that being sustainable.

[Operator:]

We currently have no questions. Thank you for participating in Quest Diagnostics first quarter conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics’ website at www.questdiagnostics.com. A replay of the call will be available from 10