Exhibit 99.1
TRANSCRIPT OF
QUEST DIAGNOSTICS CONFERENCE CALL ON ACQUISITION OF LABONE
CONFERENCE CALL: AUGUST 8, 2005 AT 8:30AM EST
CORPORATE PARTICIPANTS
Laure Park
Quest Diagnostics - VP, IR
Surya Mohapatra
Quest Diagnostics - Chairman & CEO
Tom Grant
LabOne - Chairman & CEO
Bob Hagemann
Quest Diagnostics - CFO
CONFERENCE CALL PARTICIPANTS
Tom Gallucci
Merrill Lynch - Analyst
Ricky Goldwasser
UBS - Analyst
Gary Lieberman
Morgan Stanley - Analyst
Adam Feinstein
Lehman Brothers - Analyst
Steve Hamill
Piper Jaffray - Analyst
Eugenia Shin
Thomas Weisel Partners - Analyst
John Wood
Bank of America - Analyst
Kemp Dolliver
SG Cowen Company - Analyst
Sam Sabak
Quattro Global Capital - Analyst
Edward Genis
Tidderman (ph) - Analyst
Frank Bianco
McMann Securities - Analyst
PRESENTATION
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Operator
Welcome to the Quest Diagnostics investor conference call. (OPERATOR
INSTRUCTIONS). Now I would like to introduce Laure Park, Vice President of
Investor Relations for Quest Diagnostics.
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Laure Park - Quest Diagnostics - VP, IR
Thank you for joining us. I am here with Surya Mohapatra, Chairman and Chief
Executive Officer of Quest Diagnostics. We are also joined by Bob Hagemann, our
Chief Financial Officer, and Tom Grant, LabOne's Chairman and CEO. Surya and Tom
will make a few brief remarks on our news so that we can get right to your
questions.
As you know, LabOne issued its financial results this morning. This call will
focus on Quest Diagnostics' agreement to acquire LabOne. As such we will not be
commenting on LabOne's financial results. LabOne has canceled its earnings call
for today and plans to file its second-quarter 10-Q before the market opens
tomorrow morning. The terms of this agreement are summarized in this morning's
press release in the merger agreement we filed earlier today as part of a Form
8-K.
Some of our commentary and answers to questions may contain forward-looking
statements that are based on current expectations and involve risks and
uncertainties that could cause actual results and outcomes to be materially
different. Certain of these risks and uncertainties are described in the Quest
Diagnostics and LabOne 2004 Forms 10-K, subsequent filings and the press release
related to this transaction issued earlier today. Now here is Surya Mohapatra.
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
Thank you. I'm excited to announce that we have signed a definitive agreement
to acquire LabOne in a cash transaction valued at $934 million. We expect the
transaction will close during the fourth quarter of 2005. LabOne is a leading
provider of clinical diagnostic testing and drugs of abuse testing and is the
leader in the health screening and risk assessment (inaudible) for the life
insurance industry.
LabOne operates major modern laboratories in Lenexa, Kansas and Cincinnati,
Ohio. It also has a state-of-the-art call center in Summit, Missouri and
provides pharmacological examination services throughout the United States and
Canada to solve the life insurance industry. Our companies have contributed
services and facilities. LabOne operates on a national scale but with a limited
infrastructure. Quest Diagnostics' extensive network infrastructure and our many
other core capabilities will accelerate LabOne's growth and improve its
profitability.
I anticipate that the acquisition will generate annual synergies of
approximately $30 million. This acquisition will solidify our leadership
position in diagnostic testing by expanding access for physicians and patients
and giving us added presence in several geographic areas, and it will expand our
position as the nation's leader in drug of drugs of abuse testing.
In addition, this will establish us as the leader in a new testing-related
business, providing health (inaudible) services to the life insurance industry.
I'm pleased that Tom Grant will join Quest Diagnostics reporting directly to me
and lead the combined business, (inaudible) the life insurance industry and
employers. We look forward to bringing together two companies that are dedicated
to quality, service and (inaudible).
Combining our two companies will significantly enhance customer service for the
health care providers and patients. LabOne's customers will benefit from
improved access to Quest Diagnostic' network of laboratories, approximately 2000
patient service centers and strong logistic capabilities. LabOne's present
customers will have an expanded testing menu, as well as access to consultation
with the industry's leading network of medical and scientific specialists. They
will also have access to Quest Diagnostics' (inaudible) portal. It enables them
to order tests and view results online, as well as create electronic (inaudible)
systems.
Employees and customers will benefit from access to infrastructure and expanded
testing options, including hair testing and expanded wellness products and
services such as our Blueprint for Wellness.
Now it is my pleasure to introduce Tom Grant.
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Tom Grant - LabOne - Chairman & CEO
Thank you. Good morning, everybody. I believe this is an exciting opportunity
for LabOne and an attractive offer for LabOne shareholders. Our physician
customers will benefit from expanded access to lab services. In addition, they
will have access to the advanced science and medicine offered through Nichols
Institute, Quest Diagnostics esoteric testing laboratory and research and
development center, as well as consultation with more than 400 MDs and PhDs.
Personally I am thrilled to be joining a company focused on patients, growth and
people with strong vision and values. I am excited about leading the combined
risk assessment and employer businesses. I'm proud of the strong track record we
have established at LabOne as a result of the hard work of our dedicated
employees who will now become part of the industry leader.
Quest Diagnostics and LabOne will complement each other. Our strengths in the
clinical testing market enable Quest Diagnostics to expand its reach, and I'm
excited about the opportunity to use Quest Diagnostics' distribution network and
many other capabilities to further differentiate ourselves as the leading
provider to the life insurance industry. This will accelerate growth and improve
profitability of the LabOne business.
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
Thanks, Tom. As you know, we have demonstrated our ability to effectively
integrate companies. We will use our proven integrated approach that has served
us so well through previous acquisitions. We anticipate that the (inaudible)
will drive revenue growth and generate significant synergies.
The biggest contributor to the synergies will be eliminating duplicate
infrastructure and administrative and public company costs. And integration
(inaudible) will be established with members from both companies. We are
building a strong foundation to deliver sustainable profitable growth, and this
acquisition is an important element of our plan.
Operator, we will now take questions.
QUESTION AND ANSWER
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Operator
(OPERATOR INSTRUCTIONS). Tom Gallucci, Merrill Lynch.
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Tom Gallucci - Merrill Lynch - Analyst
I just had two questions if I could. First, I was wondering you'll get a new
line of business here in the risk assessment area. Can you just maybe give us
some thoughts on how you are viewing that business longer-term as Quest gets
into it initially here?
And then the other question was, it is a cash deal. I was just wondering how
that came about. Obviously Tom will be taking on a new position at the new
company, so he will continue to have his incentives aligned with the Company.
But can you talk about the cash versus a stock deal?
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
Thank you, Tom. We are very excited about this acquisition. As you know, we
have been signing our double-digit growth for two elements, the acquisition
growth that (inaudible) growth and organic growth. In organic growth for the
last 18 months, we have been focused on how to make the Company -- take the
Company from solid (inaudible) into sales and science, and we have done a number
of strategic alliances over the last 18 months to establish our organic growth.
When it comes to acquisition growth, this particular acquisition is very
important because we are getting into testing (inaudible) business, which is an
addition to our space. For example, we believe as people are getting older, the
life insurance is getting more and more dependent on not only just their
laboratory testing but also paramedical services. And LabOne is easily doing
this test. It's $1 billion market, and they have only $250 million.
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Tom Grant - LabOne - Chairman & CEO
260 actually.
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
260. And we have plenty of room to grow. The key here is that Quest
Diagnostics is going to bring a lot of core competencies which will really help
and accelerate the growth of the insurance business.
Tom, do you want to add anything?
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Tom Grant - LabOne - Chairman & CEO
Yes, absolutely. We are very excited about our new relationship with Quest
Diagnostics and being part of the team, and we think to the life insurance
industry bringing access to a Company that has over 400 MDs, many many PhDs,
will be terrific because certainly the life insurance industry is using the
laboratory testing really -- as really a means to evaluate the risk and having
access to new tests that are developed is of keen interest to the life insurance
industry.
In addition with all of the patient service centers that Quest Diagnostics has
around the country, we think that there is some opportunity there as well with
some of the paramedical examinations, and we also think with -- although this is
not part of the risk assessment business, two of really the engines that we have
built with our risk assessment business, the paramedical business now where we
have over 5000 mobile phlebotomists around the country, the Quest Diagnostics
has a product called Blueprint for Wellness, and we are extremely excited about
the opportunities for Blueprint for Wellness, utilizing our mobile paramedical
network and also utilizing our call center that we mentioned earlier and at
least some where we can use individuals that are now doing medical histories,
and they can function really as health counselors for behavior modification.
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
Bob, would you confirm (inaudible)?
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Bob Hagemann - Quest Diagnostics - CFO
Tom, this is Bob Hagemann. You have heard me consistently say that we generate
a lot of cash, and our first priority for that cash is to deploy it into growth
opportunities. And this is -- we believe an ideal opportunity for that.
When you think about cash versus stock, we believe that utilizing cash versus
stock is also going to generate better returns for our shareholders given the
cash flow characteristics of our business.
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Operator
Ricky Goldwasser, UBS.
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Ricky Goldwasser - UBS - Analyst
Good morning. It seems like LabOne has been for sale for a few years now. And
obviously the added Health Alliance to the books business, which is a greater
explosion to clinical testing, but can you tell us what is different in your
operating environment today compared to a year ago, two years ago that makes you
decide that you actually want to go ahead with that transaction?
And then the second question is actually relating to Health Alliance. They made
a decision to go ahead with LabOne at a time rather than one of the national
players, and just wondering if there any provisions that would allow the Health
Alliance network to separate themselves in the out years?
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
Tom?
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Tom Grant - LabOne - Chairman & CEO
Yes, absolutely. First, let me comment on I think you mentioned that the
Company was for sale, and LabOne was not for sale. We had an unsolicited cash
offer for the Company, and we certainly had no discussions at any time with
anybody about selling our Company.
Regarding the Health Alliance situation, we had built a brand-new facility in
the Cincinnati area which is dedicated to serving the needs of the physicians in
the Cincinnati community and certainly the Health Alliance system. We are very
confident of the relationship that we have with the folks at Health Alliance,
and I know -- as a matter of fact, I think Quest had some discussions with the
Health Alliance people as well in the dialogue as they looked to outsource their
laboratory.
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Ricky Goldwasser - UBS - Analyst
So it is part of the due diligence process Quest talked with the Health
Alliance people and there are no provisions that two or three years from now
might cause the separation of the business?
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Bob Hagemann - Quest Diagnostics - CFO
As you would expect, we thoroughly reviewed all of the significant contracts
that LabOne has, this one included, and we feel very comfortable about that
relationship.
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
As you know, we have been driving our strategy based on patient growth and
people, and when we look at LabOne, our goal was just not to buy a laboratory,
but also to meet our three key drivers of our growth. To solidify our position
in radio geographic areas where we have been working. The second thing is that
it gives us a new market which we want to bring our core competencies and help
LabOne because they are the leader, but when you put Quest Diagnostics,
information technology Quest Diagnostics (inaudible) and Quest Diagnostics
science and medicine, it really opens up a lot of opportunity for us for the
employer business and also for the insurance business, and this will also become
the platform for our wellness products. So I'm very excited that by combining
these two companies not only we are driving the top line, but also it makes the
LabOne business much more profitable, and it helps us to really meet our
strategic goal also.
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Operator
Gary Lieberman, Morgan Stanley.
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Gary Lieberman - Morgan Stanley - Analyst
Maybe just to follow-up a little bit on the last question that was asked in
terms of specifically or just generally, what has changed now to make this the
right deal versus pursuing this, say, a year ago?
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Tom Grant - LabOne - Chairman & CEO
Again, we had no dialogue with anybody a year ago, and this is Tom Grant
talking now. We never had dialogue with anybody regarding the sale of our
Company before Quest approached us.
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Gary Lieberman - Morgan Stanley - Analyst
I just directed more toward Surya. From your perspective, what makes this deal
a good deal for you now versus trying to get it done previously?
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
Well, first of all, as I told you that when I came to see you, I wanted to
make sure that we can really grow internally, and organic growth was extremely
important for us, so we worked extremely hard to set our improving sales,
improving service and really setting up a lot of strategic alliances as you have
seen over the last three or four months. We signed up with three different
companies in proteomics.
So having the organic growth going and making sure that we have a strong
foundation and at the same time we have been looking for a number of
opportunities, and frankly, a number of opportunities which we saw were passed
because it did not meet our strategic goals, and the strategic goal was very
simple. It has to be a well-run company. It has attractive sort of growth, it is
strategic for our future, and at the same time, it makes economic sense. And I
am the person who really approached Tom, and it has been really a combination of
desire and will to make this thing happen rather than anything else.
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Tom Grant - LabOne - Chairman & CEO
And Gary, you have many add-ons to that and address what you and Ricky were
asking. There is nothing specific that has changed. Anytime you're looking at
acquisitions, particularly one of this size, it is a combination of a whole
bunch of things that need to come together. It needs to fit in with our
priorities. There needs to be a willing buyer, willing seller. You need to get
the right valuations, and sometimes all those things don't come together as
quickly as you would like. In this case, they did, and we had a unique
opportunity here.
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Gary Lieberman - Morgan Stanley - Analyst
And then if I could just ask a quick follow-up, you all on the Quest side have
spoken historically about being very disciplined on the pricing front and the
prices that you would be willing to pay for acquisitions. It would look like the
price that you're paying at least on an EBITDA multiple is significantly in
excess of where Quest is trading. So could you talk a little bit more about the
synergies that you think you're going to be able to generate that make you
comfortable with the price that you are paying?
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Bob Hagemann - Quest Diagnostics - CFO
Gary, we indicated that we expect to generate approximately $30 million in
synergies once the two companies are fully integrated, and we are very
comfortable with that number. They are going to come from the typical areas --
corporate overhead, public company costs, excess testing capacity and duplicated
infrastructure. And given the amount of the number of integrations that we have
done over the years, we can usually get very comfortable with a pretty tight
range of synergies.
When you layer those synergies on to the cash flows and EBITDA that LabOne
generates, we are paying just over an eight times multiple, which I think when
you look at that relative to other transactions that have been done relative to
our multiple, it is very reasonable.
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Gary Lieberman - Morgan Stanley - Analyst
Should we expect this to be accretive in the first year, or how should we
think about it from an EPS perspective?
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Bob Hagemann - Quest Diagnostics - CFO
Well, in '05, if it does close in '05, which is what we expect, we really
don't expect anything material at all given how late in the year it is going to
close. So the impact to EPS, excluding any charges that we might have associated
with the transaction, will really be immaterial, and we're not anticipating
changing our guidance as a result of that.
And then in '06, we expect it to be modestly accretive. As you know, we don't
have any guidance out there for '06 at this point.
And then certainly beyond '06, as we integrate the operations and realize the
full synergies, we would expect the accretion to accelerate beyond that point.
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Operator
Adam Feinstein, Lehman Brothers.
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Adam Feinstein - Lehman Brothers - Analyst
Just a few questions. First, I think I know the answer. I just want to
clarify. Since you guys have revenues coming from many different sources at
Quest, I guess do you have any revenues now coming from the risk assessment
business? Even if very small, do you any revenues?
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Bob Hagemann - Quest Diagnostics - CFO
No, we do not.
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Adam Feinstein - Lehman Brothers - Analyst
Okay. So no current revenue. Okay. Just my second question just to follow-up
to the last couple of questions. Just on the synergies, can we get some more
details? Considering this is a new line of business than just talk about just
the ability to really consolidate the operations, are you're going to close down
centers? Where exactly should we see these changes coming from since this is a
new line of business?
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Bob Hagemann - Quest Diagnostics - CFO
As we said, Adam, the synergies are going to come from several areas. A
significant piece will come from corporate overhead and total company costs.
Certainly excess testing capacity. But when you think about the other line of
business, we really have complementary operations. And that is not where we were
expecting a significant amount of synergies to come from. Actually we're hoping
to use our resources and the resources of LabOne in that area to actually grow
and accelerate the growth in the risk assessment business.
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Adam Feinstein - Lehman Brothers - Analyst
Okay. And then just a question for LabOne here just in terms of maybe -- Tom
may be the best one to answer this. But just you were talking before saying you
have international I guess operations versus limited infrastructure currently.
So what kept you from I guess really expanding the business more than in the
past? Clearly you guys have shown very strong growth over the last several
years, but was there anything that kept you from really building out the Company
more previously?
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Tom Grant - LabOne - Chairman & CEO
Yes, I think in terms of when you look at the health care opportunity, which
clearly was the greatest opportunity for our Company, you are talking about a
$40 billion market. The reality is that the bulk of our business with our
clinical businesses in the Midwest and Kansas, Ohio, and Missouri and to roll
out on a national basis obviously is an expensive endeavor, and certainly that
was an endeavor that we were willing to take on but with the opportunity I think
to really partner to work with Quest Diagnostics with their national platform I
think, and with the premium for our stock, I think this is an attractive
alternative for our shareholders.
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Adam Feinstein - Lehman Brothers - Analyst
Okay. And then just maybe, Bob, just one more question if I may. Just
previously you were talking about stock buyback. How should we think about stock
buyback going forward? I know the deal is not going to close until later in the
year. But how are you going to balance that, and I guess should we think about
you guys taking on the incremental debt, or do you plan on using all of your
free cash for the deal?
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Tom Grant - LabOne - Chairman & CEO
I think, as we said in the press release, we plan to finance the acquisition
through a combination of cash, our available credit facilities, and we will most
likely raise some debt. In doing that, though, our credit statistics are still
going to be very conservative, and I think it provides us with continued
flexibility to pursue other acquisitions, as well as continue to do share
repurchases.
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Adam Feinstein - Lehman Brothers - Analyst
But will we see I guess from now until the end of the calendar year, would you
guys not be in the market buying stock most likely?
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Bob Hagemann - Quest Diagnostics - CFO
Since we have not given specific guidance on the amount of share repurchases
that we do either for the year or for the quarter, yes, I really cannot comment
on that. Other than I am telling you that this acquisition will not impact our
ability to do share repurchases or other acquisitions.
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Operator
Steve Hamill, Piper Jaffray.
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Steve Hamill - Piper Jaffray - Analyst
First, I was wondering on the synergy front if this deal poses more of an
opportunity to take advantage of excess testing capacity than perhaps previous
deals that Quest has done given the large size and capacity available both in
Lenexa and Cincinnati?
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Bob Hagemann - Quest Diagnostics - CFO
I would say that it is not typically any different than others. You know when
you look at the acquisitions that we have done over the last years whether it be
Unilab or AML, I think you have had similar situations. So I would not cite this
as significantly different one way or another.
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Steve Hamill - Piper Jaffray - Analyst
Okay. And then I was wondering if maybe Tom could comment a little bit about
the risk assessment business. Obviously you just reported your second-quarter
results also this morning, and that life insurance market in general looks to be
pretty soft. Is this something that is probably going to turn in the next
several quarters, or is just a long-term decline in the total life insurance
market in your view?
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Tom Grant - LabOne - Chairman & CEO
The MIB index, the Medical Information Bureau Index, has the number of life
insurance applications up about 5%, and the market this year has been somewhat
soft. But again as you pointed out, Steve, that market tends to be somewhat
cyclical, and certainly we would anticipate in the future that there would be --
that there would be a strengthening of that marketplace.
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Steve Hamill - Piper Jaffray - Analyst
And is that something where given this combination you feel like there is any
improved opportunity to take share, or is it pretty tough given the size of your
market share position already?
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Tom Grant - LabOne - Chairman & CEO
Absolutely. Want me to answer that? I think there is a tremendous opportunity
to take share. Certainly as I mentioned earlier before with the access we have
to the scientific talent at Quest Diagnostics, the laboratory testing is of keen
interest and is really critical in terms of the evaluation of risk. So having
access to new -- whether it is cardiovascular markers or cancer markers is very
significant to the life insurance industry.
We think it's also significant in that now instead of just one or two facilities
for disaster recovery facilities, there are 35 facilities that Quest Diagnostics
has, which will be of I think of keen interest to the life insurance industry as
well. So numerous advantages.
Also on the paramedical side, we have already talked about the wellness
opportunities. Certainly to utilize some of the fixed locations in paramedical
collections is of interest as well. But we think that we can get increased
market share.
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
I'm not very worried about whether the market grows every year or not. When I
look at the available market, we are only $261 million in that business, and the
market is up roughly $1 billion.
The key is, how do you really bring these two companies together and to use the
expertise whether it is a call center, whether it is (inaudible) technology,
whether it is a present service center or whether bringing new tests and doing
the appropriate algorithm to find out risk. And one day as Tom says, people will
have individually tailored life insurance. Right, Tom?
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Tom Grant - LabOne - Chairman & CEO
Absolutely.
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
So we are pretty excited about the skills and the expertise they bring. Also, I
think some of these services LabOne has, which is paramedical services, can help
also our core business. Because obviously as we get older, some people would not
like to come to PSC (ph), so we're looking at how you really utilize the mobile
paramedics also to help our core business.
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Operator
Eugenia Shin, Thomas Weisel Partners.
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Eugenia Shin - Thomas Weisel Partners - Analyst
Given your focus on the PSCs and the customer, could you just provide a little
bit more granularity on your plans on using the para-services organization that
drives this?
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
Well, I'm going to start with the PSC and the customers, and I will have Tom
talk about how the paramedical services can be an extension to our field network
we have. You know we have approximately 2013 service centers, and we're almost
35 to 38 million people go to the PSC.
And, as you know, we have approximately 140 million (inaudible) encounters a
year. I think that our businesses which we could get if we can have access to
paramedical services, and that was some of the things that Tom and I talked
about. How do you really utilize those services not only for life insurance but
also for core and wellness?
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Tom Grant - LabOne - Chairman & CEO
Absolutely. I think Surya talked a little bit about our mobile paramedical
network. We think the opportunities for our mobile paramedical network really
are twofold, and then I will comment on the patient service centers.
First, regarding the wellness, I think I mentioned this earlier. But we are
incredibly excited about the opportunities for utilizing our paramedical network
to do really help there is wellness testing for large corporations.
Right now in American business you're looking at over the last four years a 50%
increase in health care cost. Obviously with the advent of consumer driven
health care plans and with consumers having to take or employees having to take
more responsibility for their own health, companies are turning to wellness
programs and turning to health risk appraisals. And the key part of those health
risk appraisals is the biometric data from laboratory testing. And to do testing
on a large-scale basis for large corporations, having a mobile paramedical
network to utilize our people is a tremendous opportunity for our paramedical
company called ExamOne.
Secondly, as Surya said, they do millions and millions of patient encounters
around the country, and certainly there could be a small market in terms of
doing some mobile collections with our network in the clinical setting as well.
And then thirdly, we do right now -- with our paramedical office, we do some
fixed site location collections, and certainly that opportunity is there with
the 2000 patient service centers that we have talked about.
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Eugenia Shin - Thomas Weisel Partners - Analyst
Great. And then the traditional lab attrition rate is about 15 to 20%. Do you
think given your mix that you will be seeing a lower rate?
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
I did not -- what did you say?
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Bob Hagemann - Quest Diagnostics - CFO
Where did you get your numbers on lab attrition rate? Are you talking customer
turnover?
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Eugenia Shin - Thomas Weisel Partners - Analyst
Yes.
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Bob Hagemann - Quest Diagnostics - CFO
I'm not sure that that is a good number. And, frankly, we have never disclosed
what our attrition rate is, but it is certainly well south of 15%.
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Operator
Robert Willoughby, Bank of America.
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John Wood - Bank of America - Analyst
John Wood in for Bob. There is about a 10 day differential in the DSOs between
the businesses. Is that a structural or mix issue? Can you talk about some of
the initiatives that Quest can employ to drive that down?
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Bob Hagemann - Quest Diagnostics - CFO
Certainly I think there are some opportunities there to drive down DSOs on the
LabOne side. Some of it is structural, though, in terms of their mix of
business. But certainly we will be looking to take all of our
best practices in the billing operation and see if we can utilize those in
LabOne's operations. Their bad debt, keep in mind, is very low already, and that
is driven by a mix of business. So on one hand, you might have slightly higher
DSOs. On the other hand, you have much lower bad debt.
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John Wood - Bank of America - Analyst
Can you characterize LabOne's esoteric capabilities? Is that an area that we
need to be focused on for the revenue synergies moving forward, especially given
their presence in the hospital market?
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
Tom, do you want to comment on this?
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Tom Grant - LabOne - Chairman & CEO
Yes, actually the esoteric testing for us is a very small amount of work that
we are doing for hospitals. We have brought more and more tests in-house. I
think this is an opportunity Surya can comment on as far as the esoteric during.
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Surya Mohapatra - Quest Diagnostics - Chairman & CEO
Yes. You know, one of the synergies and one of the opportunities we think the
LabOne customers are going to get, they will have access to Nichols Institute.
And whatever they outsource (inaudible) it will come to Nichols Institute. So
that is an opportunity there both from a synergy point of view and also both
from the doctors and patients having access to this large menu.
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John Wood - Bank of America - Analyst
Great and then one more. Bob, do you have a preliminary estimate for
intangibles on the deal?
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Bob Hagemann - Quest Diagnostics - CFO
We have some ranges at this point. I'm not prepared to disclose anything, but
it has been factored into the estimates that we have provided to date. What I
would tell you is yes, we have run some pretty significant sensitivities around
that, and despite where we come out within that range, it is not going to impact
our views of the accretion associated with the transaction all that much.
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Operator
Kemp Dolliver, SG Cowen Company.
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Kemp Dolliver - SG Cowen Company - Analyst
Two sets of questions. First, and, Bob, you may have cutoff this discussion
for the moment, just any further details you can give with regards to your
assumptions for 2006 in terms of the accretion, whether
it is the percentage of the synergies you think you would realize in '06? And
again, back to the earlier question about intangibles and also net borrowing
costs. Thank you.
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Bob Hagemann - Quest Diagnostics - CFO
It sounds like there were three of them there.
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Kemp Dolliver - SG Cowen Company - Analyst
Sorry about that.
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Bob Hagemann - Quest Diagnostics - CFO
That is okay. As I said earlier, we have not provided guidance for 2006 at
this point. In 2006, though, we do expect to start realizing some of the
synergies associated with this transaction. We will also have some costs
associated with integrating the two operations as well. But even the net of
those, we are expecting will be modestly accretive in '06. As I said earlier,
once the integration is fully complete, we would expect that the accretion would
accelerate beyond '06.
And as far as the intangibles go, yes, I indicated that we are not prepared to
identify how much was specifically allocating to the intangibles. We still have
some work to do there, but certainly we have run a number of sensitivities, and
I think we have got the whole spectrum of outcomes there. And that within that
spectrum of outcomes, we are very comfortable that the numbers that we're
putting forth here still hold.
And then on the cost of financing, I think was your last question, it is going
to be a mix, quite frankly. Because we will be using some cash. We will be using
some existing credit facilities which are LIBOR-based and carry relatively low
grades. And then we would be expecting to go out and raise some money in the
bond market as well.
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Kemp Dolliver - SG Cowen Company - Analyst
That is fine. Just one detailed question on the synergies is, what kinds of
actions do you think you will be able to take in 2006 to realize the synergies
and which actions come later?
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Bob Hagemann - Quest Diagnostics - CFO
Well, I think certainly the public company and corporate overhead costs are
the first things that you can get at, and we will be getting at those very
quickly. I think when you are looking at excess capacity and duplicate
infrastructure, some of those things take systems to get converted and get
standardized before you can really realize the full benefits of those. So those
are the type things that come later down the line.
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Operator
Sam Sabak, Quattro Global Capital.
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Sam Sabak - Quattro Global Capital - Analyst
Congratulations on your transaction. Just a quick question with regard to the
8-K filing just made. It appears that there is a divestiture cap of about 2.5%
of LabOne revenues. And I was just wondering if there is any particular reason
you selected that amount? Is there any area of divestitures you think that would
be required, or is that just a number that makes the transaction work
financially?
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Bob Hagemann - Quest Diagnostics - CFO
It is a negotiated amount between the two parties. There we feel very
comfortable that from a regulatory standpoint this will receive full clearance,
and we are expecting to make our filings within the next several weeks.
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Sam Sabak - Quattro Global Capital - Analyst
Okay. And what impact, if any, will this change of control have on LabOne's
State Farm contract?
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Tom Grant - LabOne - Chairman & CEO
We are actually very confident that this will enhance our relationship with
State Farm. Because having a relationship and being part of the Quest
Diagnostics team will only strengthen the partnership with the State Farm
Insurance Company for reasons that I have articulated earlier.
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Sam Sabak - Quattro Global Capital - Analyst
Thank you and congratulations.
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Operator
Edward Genis (ph), Tidderman (ph).
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Edward Genis - Tidderman (ph) - Analyst
Congratulations on the deal. Just a follow-up on the antitrust. What are the
LabOne revenues in Kansas City and Ohio?
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Bob Hagemann - Quest Diagnostics - CFO
I don't believe we have disclosed revenues in any particular geography, and it
has been our practice not do disclose revenues by business unit, and I would
expect that we would continue that.
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Edward Genis - Tidderman (ph) - Analyst
Are there any local markets here where the two businesses overlap?
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Bob Hagemann - Quest Diagnostics - CFO
Certainly there is overlap in many of the markets, but as we said, we fully
expect to receive regulatory clearance.
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Operator
Frank Bianco (ph), McMann Securities.
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Frank Bianco - McMann Securities - Analyst
Two questions. The first is, do you see any antitrust issues? And the second
relates to the converts. It looks like the payment date is the 15th of December.
If you convert prior to then, are you still entitled to your coupon?
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Bob Hagemann - Quest Diagnostics - CFO
Let me try and respond to the FTC. Earlier we said we fully expect regulatory
clearance. We do not anticipate any issues with this transaction. Although we
operate in similar markets, there is no significant overlap in any of them, and
we will be filing our HSR filings within the next several weeks.
And then with respect to the convert, I think it is a document that is publicly
filed. When you look at it, you will see that there is a premium associated with
it, and we have factored that into the cost of the transaction for us, and we
are expecting that to convert. We will essentially consume about 3 million
shares and translate into about $132 million in costs.
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Operator
(OPERATOR INSTRUCTIONS). We have no further questions. Thank you for
participating in Quest Diagnostics and LabOne's special conference call.
Investors in the U.S. may listen to a replay of this call by dialing
888-568-0443. The replay will open today at 11:00 AM Eastern time and will
continue through 11:00 PM on August 22, 2005. Investors outside the U.S. may
dial 402-530-7976. No passcode is required for either number.
In addition, registered analysts and investors may access an online replay of
the call at www.streetevents.com. The call will also be available to the media
and individual investors at Quest Diagnostics website. The online replay will be
available 24 hours a day beginning at noon. Good-bye.