Quest Diagnostics' CEO Discusses Q1 2012 Results - Earnings Call Transcript

Quest Diagnostics (DGX)

Q1 2012 Earnings Call

April 18, 2012 8:30 am ET


Kathleen Valentine - Director of Investor Relations

Surya N. Mohapatra - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Robert A. Hagemann - Chief Financial Officer and Senior Vice President


Adam T. Feinstein - Barclays Capital, Research Division

Dane Leone - Macquarie Research

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Bill Bonello - RBC Capital Markets, LLC, Research Division

Darren Lehrich - Deutsche Bank AG, Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Sylvia Chao

Unknown Analyst

Gary P. Taylor - Citigroup Inc, Research Division

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Erin Wilson



Welcome to the Quest Diagnostics First Quarter 2012 Conference Call.

At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and the question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of the call in any form without the express written consent of Quest Diagnostics is strictly prohibited.

Now I'd like to introduce Kathleen Valentine, Director of Investor Relations for Quest Diagnostics. Go ahead, please.

Kathleen Valentine

Thank you, and good morning. I am here with Surya Mohapatra, our Chairman and Chief Executive Officer; and Bob Hagemann, our Chief Financial Officer.

During this call, we may make forward-looking statements. Actual results may differ materially from those projected. Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in Quest Diagnostics' 2011 Annual Report on Form 10-K and current reports on Form 8-K.

A copy of our earnings press release is available, and the text of our prepared remarks will be available later today in the Investor Relations Quarterly Update section of our website at A PowerPoint presentation and spreadsheet with our results and supplemental analysis are also available on the website.

Now, here is Surya Mohapatra.

Surya N. Mohapatra

Thank you, Kathleen. Before we get started, I'd like to say a few words about our leadership transition. Last week, we announced that Steve Rusckowski will become the President and Chief Executive Officer of Quest Diagnostics effective May 1. Also, Dr. Dan Stanzione, currently our leading independent Director, will become non-executive Chairman at that time. We are pleased to have someone of Steve's caliber join and lead Quest Diagnostics. Steve is a strong leader with a proven track record of success. His experience and expertise will benefit the company as it looks to capitalize on the opportunities that lie ahead.

I know that all of you are anxious to hear about Steve and his plans for the company. However, please hold your questions until after he arrives. Now to the results.

We had a very solid first quarter. Our 6.3% increase in revenue was driven by both organic growth and acquisitions. We generated a 7% increase in earnings per share. We increased guidance for adjusted EPS to between $4.45 and $4.60. We saw strong growth in esoteric and gene-based testing as a result of our focus on cancer, cardiovascular disease, infectious disease and neurological disorders. In addition, we saw improved growth in routine testing.

We also are making good progress in our previously announced $500 million cost reduction initiative aimed at improving operational efficiency. Let me briefly comment on long-term and short-term market trends.

The long-term fundamentals for our business remain strong. The population is growing and aging, prevalence of chronic conditions is on the rise, early detection and wellness are increasing in importance, the pace of medical innovation is accelerating and we are seeing much greater engagement by payers, employers and patients in improving health outcomes and reducing costs.

However, in the short-term, the current market environment continues to be challenging. Published data indicates physician office visits have been weak in spite of mild weather. Reimbursement pressure from government and other payers continues. Against this backdrop, we continue to execute our growth plans and while we have made good progress, we have more to do. As we have said before, our growth strategy is based on 3 factors: One, driving innovative new tests and service to improving sales performance and towards strengthening our relationships with health plans and other payers.

Demand for esoteric and gene-based testing continued to grow faster than routine testing. In the quarter, esoteric and gene-based testing grew 20%. Volume for SureSwab gynecological testing was up more than 50% and ImmunoCAP allergy testing was up more than 10%. Vitamin D testing also continued to grow.

Anatomic Pathology Testing continues to be affected by physician in sourcing. However, the impact on revenues has continued to moderate. There have been recent developments which we believe may lessen the impact and potentially reverse this trend over time.

Last week, Health Affairs published a study on physicians who refer biopsies to pathology labs in which they have a financial interest. The study found these physicians billed Medicare for 72% more evaluations, but find fewer cancers. This study highlights the adverse impact of unnecessary procedures on patients and the need for Congress to end the loophole in the Stark legislation that currently allows it.

In addition, we are encouraged to see health plans taking actions, including changing reimbursement policies related to in-office testing. In science and innovation, we continue to focus on bringing innovative tests to market that will improve patient care and help health lower healthcare costs. Last week, the FDA cleared out new test for C. Diff, a common and dangerous hospital-acquired infection. This test uses proprietary technique to deliver faster results for hospitals and clinical labs.

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