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Quest Diagnostics (NYSE:DGX)

Q1 2011 Earnings Call

April 20, 2011 8:30 am ET

Executives

Kathleen Valentine - Director of Investor Relations

Robert Hagemann - Chief Financial Officer and Senior Vice President

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

Analysts

Ralph Giacobbe - Crédit Suisse AG

William Quirk - Piper Jaffray Companies

Shelley Gnall-Sazenski

Ricky Goldwasser - Morgan Stanley

Steven Valiquette - UBS Investment Bank

Gary Lieberman - Wells Fargo Securities, LLC

Kemp Dolliver - Avondale Partners, LLC

Robert Willoughby

Thomas Gallucci - Lazard Capital Markets LLC

Darren Lehrich - Deutsche Bank AG

Alexander Draper - Raymond James & Associates, Inc.

Brendan Strong - Barclays Capital

Gary Taylor - Citigroup Inc

Anthony Vendetti - Maxim Group LLC

Amanda Murphy - William Blair & Company L.L.C.

Bill Bonello - RBC Capital Markets, LLC

Operator

Welcome to the Quest Diagnostics First Quarter Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed 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 make forward-looking statements with respect to both Quest Diagnostics and Celera Corporation. Actual results may differ materially from those projected. Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in Quest Diagnostics' 2010 annual report on Form 10-K and current reports on Form 8-K.

In connection with Quest Diagnostics' tender offer for the common stock of Celera Corporation, Quest Diagnostics and its subsidiary have filed with the SEC a tender offer statement on a schedule TO, including the offer to purchase and related documents. Celera has filed with the SEC a tender offer solicitation recommendation statement on a schedule 14b-9.

You are strongly advised to read these documents carefully because they will contain important information. Those materials and all other documents filed by Quest Diagnostics and Celera with the SEC will be available at no charge on the SEC's website at www.sec.gov.

A copy of our earnings press release is available and a text of our prepared remarks will be available in the Investor Relations Quarterly Update section of our website at www.questdiagnostics.com. A PowerPoint presentation and spreadsheet with our results and supplemental analysis are also available on the website. Now, here is Surya Mohapatra.

Surya Mohapatra

Thank you, Kathleen. This was an important quarter for Quest Diagnostics. We completed our acquisition of Athena Diagnostics and established a leading position in the neurology diagnostics market. We also announced our proposed acquisition of Celera to further strengthen our leadership position in cardiovascular testing, as well as molecular diagnostics products and discovery. These transactions position us well for the future.

In this quarter, we returned $835 million to shareholders through share buybacks, immediately enhancing shareholder value. Our testing volume continued to improve, and we increased revenues.

Our earnings were down, and we took actions to reduce our cost structure accordingly. During the first quarter, revenues grew 1% to $1.8 billion on 2% volume growth. Adjusted earnings per share were $1, and cash flow was $161 million. I will update you on our progress after Bob discusses the financial results. Bob?

Robert Hagemann

Thanks, Surya. Revenues for the quarter were $1.8 billion, about 1% above the prior year, and adjusted earnings per share was $1, compared to $0.99 in the prior year. Adjusted 2011 earnings per share exclude $0.14 per share associated with the following items: $0.05 charge for workforce reductions; $0.02 for costs associated with the Athena and Celera transactions; $0.07 impact of severe winter storms.

Our Clinical Testing revenues, which account for over 90% of our total revenues, were slightly above the prior-year level by 0.3%. Volume in the quarter was 2% above the prior year and reflects the continued and steady improvement we have seen over the last several quarters.

There are two important dynamics to understand relative to our volumes. First, due to the number of business days in the quarter, we estimate the year-over-year comparisons benefited by approximately 1%. Secondly, while we experienced severe weather last year in the first quarter, which reduced volumes by an estimated 1.1%, this year's storms had an even greater impact, affecting volumes by an estimated 1.4%. As such, weather unfavorably impacted the year-over-year comparisons by 0.3%. After considering these two items, the underlying volume grew an estimated 1.3% versus the prior year and reflects continued improvement. Drugs of Abuse Testing volumes have continued to rebound and grew about 11% in the quarter and contributed modestly to the improved volume trend.

Revenue from acquisition was 1.7% below the prior year and a little over 1% below last year's fourth quarter. While year-over-year revenue for acquisition continues to benefit from an increased mix of gene-based and esoteric testing and increases in the number of tests ordered per requisition, this benefit continues to be offset by some business and payer mix changes, the latest Medicare fee decrease of 1.75%, which went into effect January 1, and the pricing changes in connection with several large contract extensions executed in the first half of last year.

The business and payer mix changes, which continue to pressure revenue per requisition include a further rebound in lower-priced Drugs of Abuse Testing and weakness in our higher-priced Anatomic Pathology Testing.

Revenue in our Nonclinical Testing businesses, which include Risk Assessment, Clinical Trials Testing, Point-of-Care Testing and Healthcare IT, grew 7% for the quarter versus the prior year. Adjusted operating income as a percentage of revenues was 16.3%, compared to 18.1% in the prior year.

The special items, as detailed in footnote 2 to the earnings release, reduced the operating income percentage by 1.6% in each year. Adjusted operating income in the first quarter, which was below the prior-year level, is consistent with what we expected in our full year estimate, which contemplates improvement in the latter part of the year.

In the quarter, we took further actions to reduce our cost structure resulting in a charge for workforce reductions. The benefit of these actions will show up in future quarters. As previously shared with you, we've also made recent investments in sales and service, which are temporarily pressuring margins, but which we expect over the longer term will result in accelerated revenue growth and a return to margin expansion.

We continue to see solid performance in our billing and collection metrics. Bad debt expense as a percentage of revenues was 4.2% in the quarter, comparable to a year ago. DSOs were 44 days, unchanged from year end. The temporary hold on MediCal billings has added about 1.5 days to our DSOs.

Cash from operations, which is generally lowest in the first quarter of the year, was $161 million and compares to $239 million in the first quarter of last year. The difference is principally due to a larger increase in accounts receivable compared to the prior year and the timing of interest payments.

Capital expenditures were $39 million in the quarter, compared to $40 million a year ago. Over the last few months, we have deployed or announced plans to deploy a significant amount of capital to drive growth in revenues and EPS. In February, we repurchased 15.4 million shares from GSK for $835 million, and as a result, increased EPS guidance by $0.15 per share.

In the quarter, we announced agreements to acquire Athena and Celera, committing net capital of about $1 billion. The Athena transaction closed in April, and we expect the Celera transaction to close later this quarter. Each acquisition is expected to contribute about 1% to revenue growth this year and, excluding charges associated with the transactions, are not expected to materially impact our EPS.

These acquisitions bring us unique capabilities in key areas of discovery, development and licensing, proprietary test offerings and specialty sales capabilities, which we expect will be important drivers of our future revenue and earnings growth. The permanent financing to fund our recent capital deployments was raised to a very successful $1.25 billion bond offering last month at attractive rates, while maintaining our investment-grade credit ratings.

Before I discuss guidance, I would like to note that we have no further update on the status of our litigation with respect to the California MediCal program, other than to indicate we have extended through May 2 our interim agreement with the state, which provides for the temporary suspension of MediCal billing.

Turning to guidance. While we do not provide quarterly guidance, as we have previously indicated, in considering how 2011 will unfold you should generally think about our earnings comparisons to 2010 being more favorable in the back half of the year, as the year-over-year comparisons become less challenging.

We expect results from continuing operations before future special items as follows: revenue to grow approximately 2%, reflecting a 1% increase from the impact of the Athena acquisition; earnings per diluted share to remain between $4.25 and $4.45 on an adjusted basis and between $4.11 and $4.31 on a reported basis; operating income as a percentage of revenues to be between 17.5% and 18% on an adjusted basis and between 17% and 17.5% on a reported basis; cash from operations of approximately $1.1 billion; capital expenditures to approximate $220 million.

Our outlook on an adjusted basis excludes the first quarter impact of severe weather, workforce reductions and costs associated with the Athena and Celera transactions. Footnotes 2 and 6 to the earnings release reconcile the adjusted financial measures to the corresponding GAAP measures.

Now, I'll turn it back to Surya.

Surya Mohapatra

Thanks, Bob. I want to update you briefly on the progress we are making on some of the initiatives we have shared with you previously. As you have heard, we have seen steady improvement in the volume trend. Over the past year, reported Clinical Testing volume growth has gone from negative 2.6% in the first quarter of 2010 to 2% positive growth this quarter.

We are making progress although there is much more work to be done. We continue to focus on promoting our genetic, esoteric and anatomic pathology tests. Demand for our esoteric and gene-based testing continued to grow at a faster rate than routine testing. The growth was driven largely by Vitamin D testing and testing for blood cancers, particularly our Leumeta family of blood tests, both of which had double-digit volume growth in the quarter.

We have announced our service to hospital customers. We have reduced turnaround time for esoteric testing and deliver commercial excellence. This has helped drive growth in our Hospital business. Anatomic Pathology Testing continues to be impacted by physician insourcing. During the quarter, we saw a moderation of the downward trend.

Athena Diagnostics became part of Quest Diagnostics after the end of the quarter, establishing us as the clear leader in the rapidly emerging neurology testing market. We assume some physicians will realize significant benefits from the transaction, including greater convenience and access to a broad range of innovative tests for neurological disorders.

We announced our proposed acquisition of Celera to significantly strengthen our leadership position in the discovery and development of molecular diagnostic products and services. We will gain immediate access to Berkeley HeartLab, Celera molecular products and a strong pipeline of biomarkers for the future. We are pleased that the Hart-Scott-Rodino waiting period has expired, and that we resolved a number of the shareholder lawsuits related to the transaction. We look forward to completing our $8 per share all-cash tender offer and adding Celera to the Quest Diagnostics family.

With reference to sales, we are seeing steady improvement in our volume trends. Our sales organization continues to enhance its effectiveness and, as we indicated previously, we have completed the expansion of our sales force. As regards to costs, in the first quarter, we took actions to reduce expenses, which we are closely managing to improve operational efficiency, while maintaining a superior customer experience. With regard to capital deployment, we have taken strong actions to demonstrate our commitment to use our cash to drive growth and increase shareholder value.

We are building our position in the marketplace. We were recently honored with the prestigious Edison Award for innovation for our Simplexa molecular diagnostic testing platform on the 3M Integrated Cycler. We also are proud to be one of FORTUNE's World's Most Admired Company for the fourth consecutive year.

In closing, trends and testing volume continue to improve, and we increased revenues. We took steps to reduce costs and drive efficiencies. We are on track to meet our expectations for the year. And the Athena and Celera transactions enhance our position for the future, and we're excited about the opportunities. Thank you. We'll now take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Tom Gallucci from Lazard Capital Markets.

Thomas Gallucci - Lazard Capital Markets LLC

Thanks for all the color. Just two quick questions. First one was on revenue. I think, sort of organically, you're looking for about 1% for the year, Bob. It was about 1% in the quarter even including the weather impact. So can you just talk about how you sort of think about the balance of the year relatively speaking?

Robert Hagemann

Yes, Tom. I would point out, as I said in the prepared remarks, that we did get the benefit of about 1% simply because of the timing or the number of business days that we had in the quarter. So you need to factor that in as you're thinking about the year-over-year growth for the remainder of the year.

Thomas Gallucci - Lazard Capital Markets LLC

Okay, so you're really looking at it as more flat in the first quarter?

Robert Hagemann

Up slightly.

Thomas Gallucci - Lazard Capital Markets LLC

Right. But then weather hurt you by a bunch. So I guess, if you'd sort of adjust for the weather, it still makes the rest of the year look somewhat with a conservative bias. I don't know.

Robert Hagemann

Again, Tom, what we indicated was the impact of weather this year was 1.4% to revenues. Last year, we had severe weather as well. It was 1.1% impact. So really, we only had, on a year-over-year comparison, a drag of about 0.3% due to the weather.

Thomas Gallucci - Lazard Capital Markets LLC

Right, okay. And then just on margins, I think your prior EBIT margin guidance was for around 18%. It looks like on an adjusted basis, your 17.5% to 18%, I'm assuming that excludes some of the items but includes the benefit of Athena, which I thought was higher margin. So can you just help us understand sort of the adjustment in the EBIT margin guidance for the year?

Robert Hagemann

And as we've indicated, Athena certainly does carry higher margins. It's a relatively small business compared to our total business. We're adding, this year, about less than $100 million in revenues at very high margins. So it's a positive impact certainly, but it's not going to be significant in the year simply because of the size of the business relative to the total company.

Thomas Gallucci - Lazard Capital Markets LLC

And the adjusted number, that excludes weather and charges and everything?

Robert Hagemann

Correct, it does. And that's all detailed in the footnotes to the earnings release.

Thomas Gallucci - Lazard Capital Markets LLC

Right. So my only question was why did it seem to come down a little bit? Even though Athena's small, it would have helped. What else is going on there?

Robert Hagemann

It's a refinement of our thinking. I would tell you, though, between 17.5% and 18%, it's still approximately 18%, is the way we're thinking about it. We've just got a little better visibility coming out of the quarter now.

Thomas Gallucci - Lazard Capital Markets LLC

All right. Don't want to slice hairs, just want to make sure I understood. Thank you.

Operator

Thank you. Our next question or comment comes from Ricky Goldwasser from Morgan Stanley.

Ricky Goldwasser - Morgan Stanley

So first of all, Bob, if you can just clarify your comments on the quarterly progression of guidance? I know you talked about EPS ramping up in the second half of the year. I think consensus estimates for the second quarter are about $1.19, right now, versus the $1.07 that you reported in the second quarter 2010. So are you basically saying that we should temper our second quarter EPS estimates, and just model a bigger pickup in the second half? Is that how we should understand your comments?

Robert Hagemann

Ricky, I'm not trying to give you any specific guidance for any one particular quarter since we don't do that. But as we've stated now for a while, you should expect the comparisons in the latter part of the year to be more favorable than in the first part of the year. Some of that's reflected, certainly, in the operating income. It's lower in the first quarter. We expected that. There's a number of things which are impacting the year-over-year comparisons besides just the changes in contract pricing, which were negotiated last year. But there are some things on the cost side, which we expect will have bigger benefits in the back half of the year. Some of the actions that we took in Q4 and again in Q1, will start to show up in the latter part of the year.

Ricky Goldwasser - Morgan Stanley

Okay. And then when we really think about Q2, about the operating income expenses, I mean, is commodity pricing -- is the increasing commodity pricing having some impact in the business that we might have underestimated previously?

Robert Hagemann

No, Ricky. I think while there's certainly some pressure on commodity pricing, that's not significant. Most of our supply contracts have fixed pricing for extended periods of time. And we're not seeing a lot of pressure there. We are seeing some pressure, certainly, on fuel costs, but that's a small piece of our total costs, less than 1%. And that's not having a significant impact. It's really, as I indicated earlier, the fact that some of the actions that we've taken, we expect to show up in the latter part of the year.

Ricky Goldwasser - Morgan Stanley

Okay. And then lastly, I think you talked in the press release about the incremental hit to your -- to the EBITDA lines from the weather. What was the incremental hit on the revenue line?

Robert Hagemann

It was about 1.4%. That's laid out, again, in the earnings release. Last year, the impact of weather was about 1.1%. So again, the year-over-year impact is an unfavorable, roughly, 0.3%.

Kathleen Valentine

And Ricky, the impact is laid out in footnote 3 in the press release. You can see some details there.

Ricky Goldwasser - Morgan Stanley

So the question then, the increment -- when we look at those numbers, at the incremental, at the revenue hit and the operating hit, it implies a pretty significant incremental margin on that business.

Robert Hagemann

Absolutely, and we've said that historically. When we lose volume as a result of weather, in those situations we're really not adjusting our cost structure. Folks are still coming in to perform whatever work is there. And in many cases, we actually even pay overtime to get folks out, so that they can pick up specimens, get them into the laboratory et cetera. And what you see in terms of the incremental operating income relative to that incremental revenue is very consistent with the way we've historically calculated it.

Ricky Goldwasser - Morgan Stanley

Right. So we calculate around 70-plus percent, which is similar to 2010. The question is: once volume comps improve, is that what we should see in the upswing? Or is there a reason why the margin is going to be so high, that incremental margin that you lose is so high versus the incremental margin that you pick up?

Robert Hagemann

Again, when you lose volume as a result of weather, there's very little ability to impact your cost structure for other than the purely variable costs. And as I said, in some cases, you're actually adding some costs to procure that work and get it into the lab because of the challenges associated with logistics and the like. So the incrementals on volume loss to weather are much higher than you'd expect on any sort of incremental work that we get elsewhere.

Ricky Goldwasser - Morgan Stanley

Can you quantify that delta?

Robert Hagemann

Other than to say it's significant, no. But you should expect that on incremental volume, we do see strong drop-downs because, again, depending upon where it's coming from, in some cases we have, obviously, the cost of testing, that's incremental, but then you have the additional logistics costs, the additional processing costs, et cetera. But historically, if you go back and you look at our business and you look at the incremental margins associated with top line growth -- go back, I don't know, in the last 4 or 5 years when we were realizing low- to mid-single-digit revenue growth, we were expanding margins in the range of 0.5 to 75 basis points.

Ricky Goldwasser - Morgan Stanley

Okay. Okay. Thank you.

Operator

Our next question or comment comes from Bill Quirk from Piper Jaffray.

William Quirk - Piper Jaffray Companies

First question is, Bob, I was hoping you could give us a little more color on the sources of the volume strength in the quarter. I guess a two-part question here. One is can you quantify any impact that we would've seen from the new laws related to the healthcare reform? And then secondly, can you give us a little color in terms of how the quarter progressed? Should we, by chance, see any type of sequential strengthening throughout the quarter?

Robert Hagemann

Bill, yes, I think it's very difficult to quantify any potential impact as a result of healthcare reform and the fact that folks aren't obligated to pay copays and deductibles for certain preventive care. With that said, I think over time that should be a net positive to us. But at this point, it's very hard to attribute anything to that. I'm not sure necessarily that, that's driving physician office visits which, at the end of the day, probably is the biggest driver of our volumes. The data that's out there says physician office visits were down versus the prior year. Not as much as we were seeing last year, but they were down about 3% based upon the IMS data, at least through the first two months of the year. And as we look at the volume, I would tell you that there's no specific area I can point to other than I did indicate that the Drugs of Abuse Testing business has started to grow again. But that's having a modest impact on our overall volume growth. And really, what you see when you take out the impact of weather and you take out the impact of the number of the revenue days, it is kind of a steady improvement from what we've seen, and it's a steady improvement that's been going on now for about five quarters or so.

William Quirk - Piper Jaffray Companies

And so, Bob, just to follow up there. So there's no specific comments that March is stronger than February, February is stronger than January? Or should we read into that, that's exactly what's happening because we are seeing this gradual improvement?

Robert Hagemann

Yes, I'm reluctant to provide any information on a specific month because one month does not make a trend, and we typically stay away from providing any information on an individual month.

William Quirk - Piper Jaffray Companies

Understood. And then secondly and lastly, can you elaborate a little bit on the bad debt comments? Certainly, we do expect to see it up a little bit on a sequential basis first quarter over fourth, but if memory serves, it looks like it just made the largest jump since about 2007.

Robert Hagemann

Well, the bad debt is pretty consistent with what we saw last year at this time. And the first quarter typically has higher bad debt than in any other quarter, simply because of the fact that there's more billings directly to patients for deductibles and copays.

William Quirk - Piper Jaffray Companies

Thank you.

Operator

Our next question comes from Ralph Giacobbe from Credit Suisse.

Ralph Giacobbe - Crédit Suisse AG

I just wanted to go back to kind of the margin squeeze and specifically on the SG&A side, obviously, we saw a tick up there. Any more color into what exactly's driving that? I know you already mentioned some of the logistic issues around weather. But anything more into that in terms of that SG&A number?

Robert Hagemann

Ralph, as we've indicated, we've been investing in sales and service, which, ultimately, we believe are going to accelerate revenue and earnings growth. We've expanded the sales force. We're improving service levels. Some of the service levels show up in cost of sales. Some of it shows up in SG&A. But those are things that we expect are going to have positive impacts to us as we move forward.

Ralph Giacobbe - Crédit Suisse AG

Correct me if I'm wrong, the run rate from the end of last year though, is there incremental? Because I thought you had said you guys had sort of made the investments and now is that starting to play itself through or are there more than what we had seen the back half of last year?

Robert Hagemann

Most of it is the case where it's just playing itself through. Although, I will tell you that we did make some incremental investments in the quarter in new test development and the like, much of that's showing up in cost of sales now.

Ralph Giacobbe - Crédit Suisse AG

Okay. And then just to kind of go back to some of your pricing comments before. So it sounds like it's pretty straightforward in terms of the contract updates, obviously from last year. We knew Medicare -- the Medicare cut was coming through. And then you just talked about the business and payer mix changes in terms of the drugs of abuse. So there's -- I mean, there's nothing else driving that slightly-weaker pricing. And so I guess my point is, should this be sort of a temporary issue that we start to see the growth in sort of pricing in the second half of the year? And maybe just help us understand exactly when do we anniversary those contract updates?

Robert Hagemann

Yes. We certainly expect that the year-over-year revenue per rec comparisons will improve in the latter part of the year. The anniversary of the pricing changes made in connection with contract changes last year really start to anniversary in the second half.

Ralph Giacobbe - Crédit Suisse AG

Okay. And then just my last one. You had mentioned the AP business. I may have missed it. Did you talk about -- you said that there was a moderation in the downward trend, but can you give any more color on what the actual declines were?

Surya Mohapatra

Yes. I did mention that. The Anatomic Pathology business is a key business for cancer diagnostics. We saw last year it was impacted through the physician insourcing, which is still continuing. However, the rate of insourcing has moderated over the last few months.

Ralph Giacobbe - Crédit Suisse AG

Okay. But no hard numbers around that?

Surya Mohapatra

No.

Ralph Giacobbe - Crédit Suisse AG

Okay. Thank you.

Operator

Our next question or comment is from Amanda Murphy from William Blair.

Amanda Murphy - William Blair & Company L.L.C.

Just a follow-up question on the sales force, and you talked about this a little bit, but I'm just curious. You've talked about the upgrading of the sales force sort of offset by some reductions. Can you provide a little more color on how that's impacted your business or your market share to date or how you kind of expect it to going forward? Or is it too early at this point?

Surya Mohapatra

Amanda, first of all, it is early. But let me give you some rationale behind what we have been doing. We saw, last year, the number of patients that's going to the doctor's office have reduced. And you know 80% of our business comes from physicians' office visits. And I mentioned last year first quarter, that we've continued to upgrade our sales force, and also we are building specialty sales force. Now, getting sales force means providing new tools, providing new training, trying to bring people to a particular knowledge level. But also, we have now have specialty sales force to be very close to our customers. We have a sales force for Physician business, we have a sales force for Hospital, sales force for cancer. And as I mentioned, through Athena and Celera we'll have specialty sales force for neurological disorders and cardiovascular disease. The reason for doing all these things is because we have invested money in esoteric, gene-based and anatomic pathology to build our competitive differences in cancer diagnostics, cardiovascular disease, infectious disease and neurological disorders. And these four platforms with specialty sales force is going to be the growth engine for us in the future. So I think the major part of our sales force reorganizing is complete, and now we are executing the strategy. However, as I mentioned, that we see steady improvements in our volume, but it is early to say how much exactly we are getting from the sales force. But as we continue, our belief is that the sales force are going to create the differences and then be reason for our growth.

Amanda Murphy - William Blair & Company L.L.C.

Okay. Thanks. And then now that you've got Athena under your umbrella, if you will, have you gotten any more clarity on some of the longer-term revenue synergy opportunities?

Surya Mohapatra

Well, nothing more than what we said before. And obviously, Athena, 70% of their revenue is patent protected. They have a lot of tests, not only for neurological disorders, but some of the tests like SMA and MODY, that's going to be useful for the broader customer base. And we are going through our [indiscernible] plan how to really bring some of those tests to the primary care physicians.

Robert Hagemann

And we expect to do that shortly.

Amanda Murphy - William Blair & Company L.L.C.

Okay. Thanks. And I guess just last one. You talked about pricing trends year-over-year. Any way to get any perspective on sequential trends in the pricing metric?

Robert Hagemann

Amanda, I did give you some indication as to how revenue per rec performed this quarter versus the last quarter. But generally, we don't give guidance for revenue per rec, and certainly not how it's going to perform quarter-over-quarter.

Amanda Murphy - William Blair & Company L.L.C.

Okay. Thanks, a lot.

Operator

Our next question or comment comes from Shelly Gnall from Goldman Sachs.

Shelley Gnall-Sazenski

Thank you. Couple questions. I guess first on the pre-employment drug screening. Can you remind us what the margin on that business, how does that compare to sort of the routine and Esoteric Testing business?

Robert Hagemann

Yes, we've actually never provided specific margins on that, but what we've indicated is it's much lower-priced business. And as a result, carries significantly lower margins than the Esoteric business.

Shelley Gnall-Sazenski

Okay, thanks. And can you update us on what percent of the revenues that is for the company, as of this quarter?

Robert Hagemann

It's generally in the range of about 3% of revenues or so. A much bigger percentage of the volume given the fact that it's much, much lower-priced business.

Shelley Gnall-Sazenski

Would you be willing to share the percent of volume?

Robert Hagemann

It's in the range of 6% to 7%. It's about double the revenue impact because the pricing is about half.

Shelley Gnall-Sazenski

Okay, great. And would you be willing to share how strong the pre-employment drug screening grew? And what contribution that was to volume growth in the quarter?

Robert Hagemann

I did indicate in the prepared remarks that it grew almost 11%...

Shelley Gnall-Sazenski

Okay. I've missed that. Thank you.

Robert Hagemann

... in the quarter. And on a year-over-year basis, it's contributing about 0.5% to volume growth, which is pretty consistent with the contribution that it's made over the last three quarters or so. So when you're looking at the sequential volume growth, it's not having a significant impact.

Shelley Gnall-Sazenski

Okay. Great. Then I wanted to make sure I'm understanding the incremental margin commentary. So I understood that incremental volumes lost carry a big margin. And am I correct in understanding that incremental margin -- incremental volumes gained also carry a big margin but just not as big because there are costs associated with bringing in that new volume?

Robert Hagemann

That's generally the way it works, yes.

Shelley Gnall-Sazenski

Is it fair to say -- I know you don't want to quantify this, but sort of doubles the company's standard EBIT margins?

Robert Hagemann

Say that again?

Shelley Gnall-Sazenski

If you think about the incremental margin on the next patient that comes in the door, the next test that comes in the door, serves twice the operating margin of the company? Is that a fair way to think about incremental margin on new business?

Robert Hagemann

Well, it's a long, complicated answer. But if you're looking at the next rec that came in the door, you'd see a very, very high incremental margin on that. But generally, that's not the way it works. It's a function of where the business is coming from, what territories, what concentration of business we already have there, what the mix of business is, whether it's coming from a new account or an existing account, whether or not it's coming from additional tests ordered on a requisition or it's a new requisition. So all those things impact it. But certainly, we would expect that incremental volumes would have strong incremental margins associated.

Shelley Gnall-Sazenski

Understood. And then just a quick one. I understand you've got a 4-gene urinalysis prostate cancer test under development. Can you give us any update on this test, where it is and whether it's expected to be an important test?

Kathleen Valentine

You threw me off with the name. 4G?

Shelley Gnall-Sazenski

The 4-gene.

Kathleen Valentine

Oh, the 4-gene. Okay, yes. It's still in development, Shelley. And while it's in development, we don't have anything to comment on yet. But we're pleased with the progress that it's making. And then when we get to a stage where we have something to disclose, we certainly will do so.

Shelley Gnall-Sazenski

Okay, great. Thanks, very much.

Operator

Our next question or comment is from Bill Bonello from RBC.

Bill Bonello - RBC Capital Markets, LLC

Just a couple of questions. One is just a simple logistics question. Is there a quarter in which we would expect to see an offsetting impact in terms of the number of days where the business day comparison is unfavorable, year-over-year?

Robert Hagemann

Bill, I don't have this off the top of my head, but generally, the quarters are pretty comparable. They vary anywhere typically between being flat and maybe 0.5% or so in any one quarter. But I think for the most part, the rest of the quarters are pretty comparable.

Bill Bonello - RBC Capital Markets, LLC

Okay. And then at the risk of beating a dead horse but maybe coming at it a different way on this margin question, I just want to understand the guidance maybe a little bit better. Doing sort of simple, back-of-the-envelope math, the guidance seems to imply that operating income is going to be up anywhere from 2% to 5% over the rest of the year, the next three quarters. But on an apples-to-apples basis, operating income was down 10% in Q1 despite the favorable business day comparison. You don't seem to be suggesting that you really expect much in terms of a big uptick in volume. So just trying to understand sort of how we go from a 10% apples-to-apples decline to sort of a 2% to 5% growth in the rest of the year.

Robert Hagemann

Yes. Bill, there's a few things at play there. Obviously, as we get into the back half of the year, the price changes in connection with the contract extensions, which were done last year, start to anniversary. So that has an impact. Additionally, some of the cost actions that we've taken in both Q4 and in Q1 start to give us benefit at that point. And in addition, in this first quarter, we had a number of cost increases versus the prior year, principally related to salaries, wages and benefits, which will not have the same year-over-year impact in the latter quarters.

Bill Bonello - RBC Capital Markets, LLC

So on that, if I can just parse that out little bit, I guess I'm what I'm trying to have an understanding is sort of how much of the drag is really just a factor of the pricing and once that comps, most of this decline is made up for, and how much of it is the incremental investment and we've got to hope that you can get some revenue boost to offset that? Not an exact number, but just to give us some comfort.

Robert Hagemann

And Bill, I'm probably not going to completely satisfy you with this answer. But it's really a combination of three things. It's the price changes anniversary-ing as we get into the back half of the year. It's also the investments that we've made in sales and service starting to anniversary as we get into the back half of the year. And it's the impact of the actions we've taken to reduce costs, which will start to show up in the latter part of the year.

Bill Bonello - RBC Capital Markets, LLC

Yes, that's a good thing. I sort of missed that part. Okay. And then just a separate question. I know in the past we've asked this about the molecular diagnostics coding initiative. And it seems like, in general, you haven't been particularly concerned about it. I think we asked specifically for Athena and Celera. But just, is there any kind of quantification or further color you can give us on why we don't need to be worried about that? I mean, is it -- in other words, is it that you look at it, and you say, "Gosh, we're just not worried that molecular diagnostic rates are going to come down when they get CPT codes," or is it more, "Look, we only get sort of 3%, 4% of our revenue from stacked codes and so it doesn't matter that much what happens to the rates?"

Robert Hagemann

Well, it certainly does matter what happens to the rates. We get more than 3% or 4% of our revenues from what I characterize as stacked codes. I mean, when you look at what CMS is trying to accomplish, it's really the increase the visibility around what's being billed for. And for those that are billing for more mutations than are necessary or are clinically appropriate to achieve an accurate diagnosis, those are the ones that are most likely to see reimbursement reductions when rates are set. We feel pretty comfortable that what we're billing for is medically appropriate and necessary to achieve an accurate diagnosis. And as such, we're not expecting there to be a significant impact.

Bill Bonello - RBC Capital Markets, LLC

Okay. And even if it goes in the physician's fee schedule and you have a copay, is that just sort of a minimal enough -- Medicare exposure on that is minimal enough that we don't have to get worried about that?

Robert Hagemann

Say again?

Bill Bonello - RBC Capital Markets, LLC

Well, if it goes in the physician fee schedule, you suddenly have a copay that you haven't had on these molecular tests. Am I just to think about that it as, look, Medicare in general is not that good a deal and so Medicare/molecular testing is just not enough to matter even with the copay?

Robert Hagemann

Well, Medicare is about 15% to 17% of our total revenues. I'm not expecting that we're going to see a significant impact to our Medicare revenues as a result of anything that comes out of this.

Bill Bonello - RBC Capital Markets, LLC

And then there's one last question. In the proxy, you talked about Surya's employment contract expires at the end of the year. I don't know, Surya, if you can expound at all, sort of on how you guys are thinking about -- well, first of all, if you want to comment on whether that's been renewed. But more broadly, just sort of on how you're thinking about the future in terms of continuing to build out the management team and succession planning and that kind of stuff. How should we be thinking about the future?

Surya Mohapatra

Bill, good question. First of all, we are very fortunate that we have a very strong leadership development and succession planning in the company. I share with the board almost every quarter in a private session about people development. As you know, over the years, we have not only added a lot of gene-based, esoteric testing and anatomic pathology, but also we have acquired a number of key people from various companies. So while I work at mostly at the pleasure of the board, I'm very excited about what we are building, and I have no plans to do anything else, but it's up to the board. But I'm very satisfied with the people we have and the succession planning we have in our board discussions.

Bill Bonello - RBC Capital Markets, LLC

And as you get bigger and bigger, would you give some thought to sort of creating a Chief Operating Officer role?

Surya Mohapatra

Sure.

Bill Bonello - RBC Capital Markets, LLC

Okay. Thank you.

Operator

Our next question or comment comes from Gary Lieberman from Wells Fargo.

Gary Lieberman - Wells Fargo Securities, LLC

In just talking about the volume trends, is there any reason that the Drugs of Abuse Testing is impacted by the weather? Or is it also similarly impacted by the weather to the other tests?

Robert Hagemann

Well, Gary, it does have some impact, but generally what we've seen is it's less impacted by the weather than the other business.

Gary Lieberman - Wells Fargo Securities, LLC

And just, out of interest, what would be the reason for that?

Robert Hagemann

Generally, I think what happens is if somebody needs to be tested for pre-employment drug screening, that work gets done, whereas with some of the other work that we get from physician offices, it's lost for good.

Gary Lieberman - Wells Fargo Securities, LLC

Okay. That makes a lot of sense. And then maybe a follow-up question on Athena. With the deal having closed and the progress that you've made in terms of -- on the sales force front, how do you feel about accretion from the deal and maybe any updates in terms of timing and how do you feel about it as you head into 2012?

Robert Hagemann

There's really no update on that. As we indicated, we don't expect it to have a material impact to EPS this year, excluding charges associated with the deal.

Gary Lieberman - Wells Fargo Securities, LLC

Then maybe if I could ask it a little bit differently. What do you see sort as the biggest challenges or the biggest opportunities on the sales force front in terms of eventually driving accretion from the deal?

Surya Mohapatra

I think as I mentioned, Gary, that we are getting closer to the customers. And I know there's a concern in the beginning whether we are investing money in sales is going to pay off or not. But I am very pleased with the way we are driving different customer and business, whether it is Anatomic Pathology or whether the Hospital business or the gene-based business. And now with Athena and Celera, we will increase our customer call points which we never used to call, like the neurologist or endocrinologist and even the cardiac specialist. So again, in the investment, we continue to execute our strategy, and as we move from just a lab company to a diagnostics company, now four different specialty offerings, again I think that will be our growth as we go forward.

Gary Lieberman - Wells Fargo Securities, LLC

Okay. Thanks a lot.

Surya Mohapatra

Thank you.

Operator

Our next question comes from Steven Valiquette from UBS.

Steven Valiquette - UBS Investment Bank

Few questions here. First on Celera. You mentioned initially the potential dilution should be immaterial for 2011 EPS once it closes. Just curious how you see things now. Should we still not expect any adjustments to EPS guidance for 2011 for Celera once it closes? Is that still a safe statement?

Robert Hagemann

As we indicated, when we signed the Celera transaction, we expect it to be dilutive this year by an immaterial amount. And until the transaction closes, we don't really have any further update.

Steven Valiquette - UBS Investment Bank

Okay. One other quick one on Celera, to the extent you can talk about it. One of the things that didn't really come up on the call last month, just curious how much the potential future royalties from the Merck Phase 3 drug for osteoporosis may have played a role in your enthusiasm for Celera. Was that material in your thought process or is that just kind of a wild card, where you'll take it if you can get but you're not counting out? Just trying to get a sense for how you preliminarily, at least, think about that?

Robert Hagemann

Yes. Without trying to provide any color, certainly we considered all of the assets of Celera when we valued the company. As did Celera and their advisers. Let me take a question off the table relative to this, and that is there's been a lot of question as to whether or not we're going to amend our $8 per share offer for Celera. The answer to that is no. Surya has clearly stated in the past that this is our best and final offer. We think that it's one that fully values all of the assets. As Celera has disclosed, they engaged in a very lengthy process before accepting our offer, looked at a lot of alternatives to maximize value for shareholders, and viewed our $8 per share offer as the best alternative and in their shareholders' best interest. I know that you may have seen that there are some Celera shareholders who had been vocal in their views about the $8 per share offer not fully valuing the company. But I would point out that Celera's advisers considered the potential value of all of Celera's assets in their valuation work. The offer that they got from us was the best one they received after a lengthy process. And there haven't been any superior offers that have emerged in the three weeks since the announcement. And frankly, if the transaction is not consummated, the Celera shareholders run the risk that ultimately they can realize significantly less for their investment than we're offering. If this merger doesn't go through, Celera operating as an independent public company is going to be facing a number of continued challenges. First, it's operating at a loss, and so long-term outlook for the performance of the business has significantly deteriorated. They've got the challenges of serving as an out-of-network provider. And they've indicated their operations were subscale. And while these are big challenges for Celera as a stand-alone company, as part of Quest Diagnostics they're all readily addressed. So we're excited about the transaction, and we're hoping that the Celera shareholders will conclude, just as Celera's directors unanimously did, that the transaction's in their best interest and offers them the best opportunity to maximize value.

Steven Valiquette - UBS Investment Bank

Okay. That's helpful. One other just quick one here. I think I'm almost apologetic at this point for bringing this up again. But just when determining the lost revenue from weather, do you count actual days of closed facilities or is it just guesswork? Just trying to get a sense for the quantification process of the lost revenue, in particular, from weather.

Robert Hagemann

Yes, and it's a good question. Essentially what we do is we look at the volumes that come through the door every day compared to what we typically see on that day of the year. We also look at what we believe is normal weather. Because frankly, in our budgeting and the way that we develop guidance, we always assume that there's going to be some storms in the winter. And what we saw last year and this year was significantly in excess of what we'd expect in a typical year. In fact, this year was about 3x what we'd expect in a typical year in terms of lost volume due to the storms. But when we quantify it, we try to play it right down the middle and give you our best estimate as to what we think the impact of weather is, net of any potential rebound that might come in the few days following the storms.

Steven Valiquette - UBS Investment Bank

Okay, got it. Okay. Thanks.

Operator

Our next question or comment comes from Robert Willoughby from Bank of America Merrill Lynch.

Robert Willoughby

Bob, anecdotally, what drove the other revenue line item growth in the neighborhood of 7%? And can you give us some of the metrics that are ePrescribing customers and medical record customers at this point, how sequentially that may have built?

Robert Hagemann

I'll give you a little color around the other businesses and then Kathleen can comment on the ePrescribing for you. But in those other businesses, as we've indicated, we've got our Risk Assessment business, our Point-of-Care Testing business, we have a Clinical Trials Testing business. The Clinical Trials business and the Point-of-Care Testing business has showed nice growth in the quarter, but essentially, all of those businesses grew in the quarter and contributed.

Kathleen Valentine

And on the ePre, Bob, we saw -- we now saw physicians order prescriptions and medications through our ePre capability at the rate of about $24 million, annualized. And on the EHR, which as you know, we rolled out last year and it became ECHIT certified in December of 2010, we now have over 2,000 physicians enrolled.

Robert Willoughby

Okay. And maybe a question for Surya. Surya, you've been cutting costs since the changeover in the United contract relationship here. I mean at what point do we have to start worrying here that you're cutting into some muscle here with the further workforce reductions? I mean, how much more can we really go from a cost-structure standpoint there?

Surya Mohapatra

Right. And this is why we have to be very careful actually that we reduce our costs but don't affect our front-line employees and also don't affect the customer experience. Having said that, we learn every year through Six Sigma and Lean Six Sigma how to really improve. And we use our size and skills to go after supplies. So I still believe there is room for our margin expansion. And we have not given up our 20% operating income margin as a long-term goal.

Robert Willoughby

Okay. And just, Bob, quickly on the cash going forward, should we assume you chip away at the short-term debt?

Robert Hagemann

Yes. We have some of that actually coming due later this year and some coming due next year. As you can see on the balance sheet, there's a little over $600 million or so that's due within the next 12 months. One of the notes is coming due later this year, and we'll be paying that down.

Robert Willoughby

So retiring, not refinancing?

Robert Hagemann

Correct. As we indicated when we levered up or when we actually announced the share buyback and the two acquisitions, that for the remainder of this year, a significant portion of the cash flow is going to go towards delevering, although we have not ruled out any other potential acquisitions.

Robert Willoughby

That's great, okay. Thank you.

Operator

Our next question or comment comes from Brendan Strong from Barclays Capital.

Brendan Strong - Barclays Capital

Maybe just a couple of questions here for Surya, just to start off. First off, I was thinking about what you guys have done over the past six months, here. You ramped up acquisitions, so you're making a big investment. You're making an investment in growth there. You're making an investment in growth in terms of spending a lot more on the sales force. I'm just curious, I mean, is there a change in the business that you've seen that you think indicates that now is the right time to be doing this?

Surya Mohapatra

Well, we have been anticipating changes in healthcare reform, and how our company is going to grow both top line and bottom line in the coming years. So over the last four or five years, we've stated our strategies that we're going to invest money in esoteric, gene-based testing and anatomic pathology, and that's what we have done over the last three or four years. And then last year or 18 months ago, we stated also that we're going to build up specialty sales force because we think our future is in science and innovation. Our future is beginning in proprietary products to solve the unmet needs of the four disease area, which is the growth areas: cancer, infectious disease and cardiovascular disease and neurological disorders. So what you are really seeing is, to some extent, how we are transforming our company just from a lab company to a diagnostics company, now we're getting into the science and innovation. And we believe for our shareholders and for our patients, this is the best strategy, and we are just executing our strategy, what we said three or four years ago.

Brendan Strong - Barclays Capital

Okay. And then on Celera, it seems like an interesting opportunity for you guys to really boost your growth around cardiovascular testing, and not just from -- obviously from adding Celera in, but from the cross-selling opportunity, from the specialty sales force opportunity. So I guess I'm curious. As you think out, after you -- assuming you guys are able to close on the deal, I mean, how many quarters out do you think you really start to see the benefit? How are you thinking about that?

Surya Mohapatra

Well, again just before I answer that -- although I don't want to use this word, but in every industry there is a time and there is a place where it goes to an inflection point. And we've been working very diligently over the last two or three years to put the pieces. And now with Athena and Celera I feel that we have completed a long-term strategy for getting into the disease stage, and getting into the next phase of what we call the esoteric and gene-based testing, which is basically having a pipeline of discovery, which is really going to fuel our further growth. So we are -- as Bob said, that in our $8 per share offer is the best and final. And I hope and I believe that the Celera shareholders, we believe that is the compelling reason to accept our tender. And as soon as we close, we are in the process of integrating. And hopefully, by the end of this year, we will be able to help some of the issues Celera had through BHL, because some of the operational things is very -- not new to us, and we have done that, so I'm looking forward to that next year is going to be a very different year because Athena is there and Celera is there and also our science and innovation. I'm very, very excited about the assets and capabilities we have acquired. And we want to get back to our growth on top line and bottom line.

Brendan Strong - Barclays Capital

Okay. It sounds like what you're saying is you do think that there's going to be some incremental growth around Celera, not just from the revenue you acquire, but incremental growth in the business once you get into 2012?

Surya Mohapatra

We are expecting some of the biomarkers that's in the pipeline is going to help us, not only in Esoteric business but also in Clinical Trials.

Brendan Strong - Barclays Capital

Okay. And then maybe just the last question on the costs, just so I understand it. I mean, in terms of where the costs are coming out of. Are they coming out in the lab, in areas where you just don't need certain costs? And I guess of the SG&A, it's not like we're going to see -- it seems like you've made a big investment in sales, it's not like we're going to see that come down, I don't think. But if you could provide some details.

Robert Hagemann

Well, Brendan, as Surya pointed out, we used Six Sigma to drive a lot of the cost actions that we're taking because as we take them, at the same time, we want to make sure that we're not adversely impacting service levels. And while we're adding on the sales side, on the admin side, I would tell you that I think there's still further opportunity to reduce costs there. We've done things like shared services. There's more opportunities to do that. Six Sigma is terrific not only in the laboratory in terms of streamlining processes, but in a lot of the administrative functions as well. And we've looked to outsource some of those things, we've looked to centralize them, put them in shared services, and we're continuing some of those activities.

Brendan Strong - Barclays Capital

Okay, great. Thanks a lot.

Operator

Our next question comes from Anthony Vendetti from Maxim Group.

Anthony Vendetti - Maxim Group LLC

Most of my questions have been answered. But just on the acquisition front, last year was a year where you didn't make many acquisitions, and you said that valuations were high and that was part of the reason. And now you've made two. What has changed on the acquisitions landscape? And is this indicative of -- are these two acquisitions indicative of others that you're looking to do in this size range or anything out there that's in the pipeline that's larger than these two?

Surya Mohapatra

Well, first of all, as we said, that any acquisition for us has to fit in strategically and has to make economic sense. And now you folks can realize why we waited to do the things that was really in line with our strategy to get into new platforms. Athena was a new platform for neurological disorders. Celera is a new platform for cardiovascular disease, but more importantly in discovery and development. And we will continue to invest money in these type of acquisitions as we go forward. Now, as regards to other fold-in acquisitions, that is a routine task for us and if it is available at appropriate value, we'll always look into fold-in acquisitions for lab. But our focus remains to build up Quest Diagnostics as the most innovative company by investing in science and innovation.

Anthony Vendetti - Maxim Group LLC

And lastly, on the workforce reductions and restructuring in Six Sigma, is that largely complete, all complete?

Surya Mohapatra

No. Again, the whole part behind Six Sigma and Lean Six Sigma is continuous improvement. And as we become bigger and bigger, we look for the areas where we can really become more efficient, whether it's through automation or whether it is through the workforce training. And as I indicated, that we have not given up on our long-term goal in the margin expansion. So I feel very comfortable that we have the tools and we have the management to look at and we continuously look at how to really improve our margin.

Anthony Vendetti - Maxim Group LLC

Okay, great. Thanks.

Operator

Our next question comes from Kemp Dolliver from Avondale Partners.

Kemp Dolliver - Avondale Partners, LLC

Just brief questions. Several times you all have referred to investments to improve service. But I'd just like a little more detail regarding where the investments are going. Is it essentially expanding call center headcount? Or what specifically have you been doing there?

Robert Hagemann

Kemp, when I talk about investments to improve service levels, it's principally adding phlebotomists and PSCs and customer service folks. The phlebotomists and PSCs are to address turnaround times, improve customer service in those areas, and obviously the customer service people are aimed towards doing the same thing. But we've added a significant number of phlebotomists over the course of the last 12 months or so.

Kemp Dolliver - Avondale Partners, LLC

And where would you say you are in that process? It sounds like you're pretty close to the end.

Robert Hagemann

Yes, I would say we are, at this point. I mean it's something that we're always evaluating, but the vast majority of that expansion should be behind us at this point.

Kemp Dolliver - Avondale Partners, LLC

That's great. Thank you.

Operator

Our next question or comment comes from Gary Taylor from Citigroup.

Gary Taylor - Citigroup Inc

Just a few quick questions. One, really just for my edification. When you guys look at seasonality, Bob, and you were talking about the plus 1% business day, are you only looking at Monday through Friday? Do you also pick up Saturday? Because I'm not seeing that when I look at year-over-year. I'm glad you culled it out. But --

Robert Hagemann

Yes, we do pick up weekends, and it's interesting. It's a subtle thing. But what drove it this year is the fact that the New Year's holiday was actually celebrated by most people on the 31st as to the 1st, like it was in the prior year. So that impacted the way we think about the number of business days in the quarter.

Gary Taylor - Citigroup Inc

Pulled a Monday out of January then, basically. And just in terms of across the week, for example, for different types of providers, there's seasonality across the week. We have a higher waiting on a Monday, Tuesday, versus a Friday. Do you do any of that or are you just looking at a straight week?

Robert Hagemann

We absolutely do.

Gary Taylor - Citigroup Inc

Is that included in your 1%? So it's a little more...

Robert Hagemann

Yes, all that's factored in.

Gary Taylor - Citigroup Inc

Got it. Thanks. And then on the sales force expansion that you talked about, have you ever told us how many bodies you're actually adding in sales? Or is the net body count not relevant, it's the net investment that's relevant? Because you might -- these might be some more experienced folks?

Surya Mohapatra

I think I did mention that we have added more than 100 people in the sales organization.

Gary Taylor - Citigroup Inc

Year-over-year?

Surya Mohapatra

Yes.

Gary Taylor - Citigroup Inc

And is that -- I know people -- I'm not sure. I know this has been asked several times. But will there still be -- if we fast forward two, three quarters, is that year-over-year body count going to be even higher than 100 or have we kind of hit the run rate?

Surya Mohapatra

Well, again, we're adding sales force when we have Athena and Celera. But what you ought to really look at is, we want to increase our operating income. We want to really reallocate some resources, so some resources might go from various parts where there's operations or G&A to sales and marketing. But we have to do what is really required for us to increase our market position in the marketplace.

Robert Hagemann

And Gary, as Surya indicated, at the end of last year, and I think emphasized again in his script this time, that the sales force expansion is substantially complete at this point.

Gary Taylor - Citigroup Inc

And have you ever told us how many total sales people you have?

Surya Mohapatra

We have not given that number.

Gary Taylor - Citigroup Inc

Okay. And then secondly, on the G&A -- I know this was asked and I'm sorry, I didn't entirely understand the question. But G&A up about $10 million. Sometimes that comes down sequentially, but usually you kind of have a modest sequential build through the year. So should we generally look at that as run rate with some modest sequential fluctuation or is there a reason to look at that differently?

Robert Hagemann

Well, certainly, some of the one-time costs that we mentioned are showing up in there this quarter. A little over $4 million of the restructuring cost is showing up in there. A little over $2 million of deal cost is showing up in there this quarter. So those are certainly things to consider.

Gary Taylor - Citigroup Inc

But backing those out, which I think we did, it's still up. And I guess it sounds like there's not another big adjustment. Maybe there's some seasonal or quarterly fluctuation, but -- or am I just not going to be able to pull anything out of you non that?

Robert Hagemann

Yes, I'm not going to provide specific guidance around the SG&A percentage by quarter. But again, I would emphasize that a number of the investments that we've been making in sales and service are going to start to anniversary as we get into the latter part of the year. And then some of the increases that we saw in salaries, wages and benefits in this quarter versus the prior year, will be less substantial as the year progresses as well.

Gary Taylor - Citigroup Inc

You just haven't tripped up yet on giving anything quarterly. You've been asked a hundred ways, and you've been consistent. So well done. Hopefully, the call's almost over. Last question is on the cost of goods sold as a percent of revenue, obviously that's been running a trend up a little more than 100 bps for a while now, and the majority of that related to the change in pricing from two quarters ago. So my assumption is that year-over-year trend, excluding the impact of the acquisitions, sort of starts to normalize in the back half. Is there something else in cost of goods pressuring that margin item outside of just the pricing change?

Robert Hagemann

Yes, well, certainly the investments that I talked about in service, specifically the phlebotomists and the patient service centers, show up in that cost of sales number. The way you should think about cost of sales is it captures all of the costs associated with obtaining the specimen, transporting it to the laboratory, performing the testing and resulting out the work.

Gary Taylor - Citigroup Inc

And the sales investment's in G&A?

Robert Hagemann

Yes.

Gary Taylor - Citigroup Inc

Okay. Thank you very much.

Operator

Our next question or comment comes from Sandy Draper from Raymond James.

Alexander Draper - Raymond James & Associates, Inc.

Most of my questions have been asked and answered. But maybe just one way to come back, Bob or Surya, on the cost cutting, when you look at taking out cost -- obviously six Sigma is a constant thing for efficiency. When you do something sizable, you're going to sort of call out or potentially take some charges for, do you view those cuts as more reactionary relative to some economic or competitive pressures or even if they're that size, you still look at those as a proactive cut as you're seeing things that are going to be potentially happening down the road? Thanks.

Surya Mohapatra

Okay. Well, first for all, most of the cost cutting or cost reduction, we consider that as continuous improvement. Some savings goes towards investing in the company, some savings goes towards the bottom line. So there are some reactionary stuff we had to do when we lost or there is a change in volume. But most of our expense reduction is proactive, and it is a part of the way we run our operations.

Alexander Draper - Raymond James & Associates, Inc.

Great. Thanks.

Surya Mohapatra

Thank you.

Operator

Our next question or comment comes from Darren Lehrich from Deutsche Bank.

Darren Lehrich - Deutsche Bank AG

You've deployed a significant amount of capital on some interesting platforms that really don't add much accretion in the first kind of 12 to 18 months. What gives you comfort in these platforms given it's a little bit harder to see the reward? How should we generally think about your M&A strategy, going forward?

Surya Mohapatra

Well, first of all, the M&A strategy, in the stated strategy. We told three or four years ago that we're going to diversify more and more towards esoteric and gene-based and anatomic pathology, and that's what we have been doing. And as you know, 36% of our total revenue now is in this high-margin and high-growth areas. Now, of course, there are some market dynamics with the changes, like in anatomic pathology, we are going through a tough time in physician insourcing. Of course, we are working with a trade association for legislative changes in that. So the way we look at it is, to some extent, Quest Diagnostics is going towards creating a new Quest Diagnostics where we are really looking at the four disease areas. And these platforms are the reason why we could say we can serve the cancer patients effectively, cardiac patients effectively , neurological patients effectively, and infectious disease. Now that gives us the competitive advantage compared to other companies in the United States and our competitors. So although it is not reflected in this year and we don't give long-term guidance, but we are very, very excited about the long-term future of the company and our role as the industry leader, what we can do for our patients and what we can do for our shareholders

Darren Lehrich - Deutsche Bank AG

Okay. Last question. Do you expect the Horizon contract to be exclusive for 2012? I thought it was coming to term. How are you guys thinking about that?

Robert Hagemann

We don't specifically comment on individual contracts.

Surya Mohapatra

Individual contracts, yes.

Darren Lehrich - Deutsche Bank AG

All right. Thank you.

Surya Mohapatra

Thank you.

Operator

And our last question is coming from Kevin Ellich from Piper Jaffray (sic) [RBC Capital Markets]

Kevin Ellich

I just wanted to go back over the Drugs of Abuse questions, Bob. My understanding is that it has an incremental positive impact on margins when volumes come back. Is that correct? I know it's a low-priced test, but given the high-fixed-cost nature of the business, wouldn't that have an incremental positive impact on the margin?

Robert Hagemann

Any business that is growing is going to be additive to the margins, historically. Right? The point is that, that business carries much lower margins than the rest of the business. So if you're seeing growth there, for example, and we're still seeing the AP business decline, that's not enough to offset it.

Kevin Ellich

Okay. I understand. That's all I had. Thanks.

Operator

Thank you for participating in the Quest Diagnostics First Quarter Conference Call. A transcript of the prepared remarks on this call will be posted on Quest Diagnostics' website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at (866)350-3614 for domestic callers or (203)369-0039 for international callers. No access code will be required. Telephone replays will be available 24 hours a day until midnight, Eastern Time, on May 20, 2011. Good-bye.

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