Quest Diagnostics

       Annual Report


  This has been a truly historic year for Quest
  Diagnostics Incorporated.

  In the space of tw...
immunoassay, cytogenetics and mole-
Last year at this time, we were                                                      t...
turned our attention to integrating                                                    We accomplished all of this, and at...
                                                       Kenneth W. Freeman,
We will be the
         highest quality,
              lowest cost
             provider of
      diagnostic testing,
Our Business                               ately. Some tests that rely on growing     There is a cost difference of approx...
serum with HDL is loaded into a
basis. We have also selected a stan-
                                           chemical a...
We will be
       the preferred
        partner with
         large buyers
       of health care

ciently. Ten years ago, two competing     of intent with University of Pittsburgh
It isn’t enough for us to be the high-
ed to provide, we are selectively rene-    grams and underlying systems that         progress. Research shows that rigor-
We will be the
        leading innovator
             for diagnostic
      testing, information
              and services...
volume comes from outside the Quest
As a diagnostic information company,                                                 A...
specialty testing methods through
Last year Nichols Institute established
                                          the de...
Steve Kovach
 Kim Fatovich
Client Services

Gina Talmadge     Gladys Cuezas
   Phlebotomy    ...
Board of Directors                 Executive Officers                  Major Facilities

Kenneth D. Brody                 ...

Corporate Profile                                                                 ...
Compliance                                Trademarks                                Quest Diagnostics is an equal
Quest Di...


Quality                                   Accountability
The patient comes first in everything     As...
One Malcolm Avenue
Teterboro, New Jersey 07608

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quest diagnostics 96annualreport

  1. 1. Quest Diagnostics Incorporated 1996 Annual Report Answers.
  2. 2. CHAIRMAN’S LETTER This has been a truly historic year for Quest Diagnostics Incorporated. In the space of twelve months, we have launched a new company with a new name, a focused strategy, a clear mission and a compelling vision of our essential role in providing answers for health care: answers for patients, answers for partners, answers for better health care decisions. We are excited about Quest Diagnostics and the opportunities which it presents. The model for driving the successful turnaround of our company starts with our employees. Satisfied employees will yield satisfied customers, which in turn, will yield satisfied shareholders. We are creating a culture that focuses on our customers as our number one priority. We believe this is the fundamental way to create shareholder value.
  3. 3. immunoassay, cytogenetics and mole- Last year at this time, we were together to reach agreement with the cular diagnostic testing. Corning Clinical Laboratories and Department of Justice to settle out- Corning Nichols Institute, units of standing charges relating to the busi- With annual revenues of just over Corning Incorporated’s health ser- ness practices of Damon Corporation $1.6 billion, we are a leader in the vices businesses. In the spring of that predated Corning’s acquisition of independent laboratory testing indus- 1996, Corning’s Board of Directors Damon in 1993. The charges were try. As we go about solidifying our decided to spin off our business and settled for $119 million, for which we leadership, we remain committed to our sister operation, Corning were fully reimbursed by Corning. the proposition that the patient Pharmaceutical Services, which has We made great progress in resolving comes first in everything we do. We been renamed Covance Inc., as two outstanding government legal issues carefully chose the name “Quest separate, completely independent prior to the spin-off, and Corning is Diagnostics” to signify our dedication publicly-owned companies. We select- committed to reimburse us for any to the continuing pursuit of unex- ed our new name: Quest Diagnostics settlement costs arising from the few celled quality in our core testing and Incorporated and each Corning outstanding identified governmental our relentless search for new knowl- shareholder received one share of issues that remain. edge and medical insights. Our new Quest Diagnostics for every eight name is closely linked with a new set shares of Corning stock. In the course of the spin-off, our com- of values to which our people aspire: pany also took a $445 million write- Quality, Integrity, Innovation, Today, Quest Diagnostics encompass- down for goodwill, an accounting Accountability, Collaboration, and es almost 18,000 employee-owners adjustment to value our laboratory Leadership. who, in the words of our corporate assets at estimated fair market value vision, are “Dedicated people improv- rather than their amortized acquisi- The Spin-Off ing the health of patients through tion price. This special charge has no In a business environment increasing- unsurpassed diagnostic insights.” Last impact on the company’s cash posi- ly marked by tougher competition year we processed approximately 60 tion or our overall financial strength. and intense price pressure from gov- million requests from more than 1996 In Review ernment agencies and managed care 75,000 customers for testing and The past year was one of dramatic systems, the spin-off from Corning analysis of human fluids and tissues. changes and significant progress. offers the twin benefits of focus and Quest Diagnostics covers the entire flexibility. As an independent compa- gamut of laboratory testing, all the After nearly a decade of unabated ny operating in a turbulent industry, way from the bedside to highly eso- growth, the company experienced a management is now in a stronger teric specialized testing. At our 17 period of near free-fall in 1994 and position to act swiftly and aggressively regional laboratories and 14 branch 1995. In 1996, we moved to stabilize to meet the challenges and seize facilities across the U.S., the bulk of the business. The decline has slowed, upon new opportunities. our activity is “routine” testing, and we have stabilized; now at the including blood counts, Pap smears, midpoint of our turnaround, our goal Throughout the spin-off process, pregnancy testing, cholesterol levels, is to increase profitability in the face Corning lived up to its promise to AIDS-related tests, and substance of intense market pressure. launch our new company on solid abuse testing. In addition, our financial footing. Corning, in Nichols Institute is a leading provider We froze acquisition activity. essence, forgave more than $700 mil- of more complex “esoteric” testing, Following a period in which the com- lion of debt attributable to the labora- serving nearly a third of the nation’s pany had nearly doubled its size, we tory testing business. We worked hospitals, performing comprehensive 2
  4. 4. turned our attention to integrating We accomplished all of this, and at We developed a clear, three-pronged our diverse operations. the same time, took our company strategy: public. We implemented a “Focus” process • To be the best supplier of the high- Looking Ahead that identified critical success factors est quality and lowest cost diagnostic and began putting into place systems We began 1997 with the installation testing, information and services; and processes marked by rigorous of our new Board of Directors, an attention to quality management. experienced and diverse group of out- • To be the preferred partner with standing leaders from the worlds of large buyers of health care services; and We renewed our commitment to business, technology, and goverment. full compliance with all regulatory • To be the leading innovator for requirements, and the Department of Our primary goal in the new year is to diagnostic testing, information and Health and Human Services cited our pursue the “highest quality and lowest services. corporate compliance program as “a cost” component of our strategy model for the industry.” through standardization of business Each component of the strategy is processes and information technology, described in detail later in this report. We launched a major assault on our including company-wide implementa- historic problem of bad debt expense, tion of best practices that already exist We undertook a strategic review of which stems from a combination of inside Quest Diagnostics. To scale the our business, market by market. We non-standardized billing practices and opportunity, the approximate average believe that health care remains pri- increasingly complex payor require- cost of processing each requisition marily a regional business. In ten of ments. For the year, our bad debt ranged last year from $17 at our most our seventeen regions we are the mar- expense averaged 6.9% of sales, down efficient lab to a high of $30. Our ket leader. We determined that in from 9.4% in 1995. While we have goal is to reduce our current average those regions where we are not a made significant progress, much work cost per requisition of approximately strong competitor, we will act aggres- remains in order to meet our goal of $25 by about $3 by the year 2000. sively to fix our operations, dispose reducing bad debt expense to 4% of The potential payoff is substantial. of them, or seek creative ways to sales by 2000. Each $1 we shave from the average secure competitive leadership. cost produces approximately $60 mil- We began to develop a systematic lion in operating profit. We installed a strong management process for weeding out unprofitable team, combining experienced accounts, disciplining ourselves to We are standardizing our approach to Corning executives with seasoned begin terminating high volume con- managing our customer accounts, veterans from other health care tracts that fail to provide a sufficient striving to better align our pricing companies. return for the services we provide. with the value of the services we pro- vide. Historically, our industry, and We restructured the organization of We intensified our emphasis on inno- our company believed that incremen- our company for the first time in vation, developing more than 120 tal volume, at virtually any price, more than ten years to align our new test assays in our research and would generate good returns. Reality operations with our new strategy and development facilities at Nichols has taught us an important lesson in assigned clear accountability for meet- Institute. this regard. ing the objectives essential to the suc- cess of the strategy. 3
  5. 5. (front) Kenneth W. Freeman, Chairman and Chief Executive Officer; (back left to right) Dr. Gregory C. Critchfield, Senior Vice President and At the same time, we are moving Chief Medical and aggressively to team up with strong Science Officer; partners in selected regions across Don M. Hardison Jr., the country. An early example is the Senior Vice President developing relationship with the Sales and Marketing; world-renowned University of Pittsburgh Medical Center to explore Douglas M. VanOort, close collaboration in four areas: lab Senior Vice President Operations. testing, anatomic pathology, molecu- lar diagnostic testing, and medical information systems. Similar relation- ships are in varying stages of develop- ment in other markets. Finally, we see promising develop- ments in the area of scientific innova- tion. We have just received U.S. Food and Drug Administration approval for the Nichols Advantage™ system, a state-of-the-art automated medical look to the future with pride in our provide each client; to focus our busi- testing analyzer that will be shipped accomplishments, confidence in the ness on markets where we are -- or to customers starting later this year. capabilities of our people, and excite- can become -- the market leader; and And, we see significant opportunities ment about the opportunities that lie to reestablish our role as the indus- at Quest Informatics, a business that within our grasp. try’s leading innovator. draws upon our rich store of medical data to create medical knowledge We hope you will join us in the turn- We have stabilized our business. In essential for more effective disease around of Quest Diagnostics! 1997 we expect to maintain marginal management. profitability. Going forward, as the benefits of our current efforts across Our Challenges Quest Diagnostics begin translating Our challenges are clear: to stan- into results, we anticipate accelerated dardize the operations, processes and earnings growth. systems of our multitude of laboratory facilities and support services; to con- None of this will be easy. Many of our vert unprofitable customer accounts Kenneth W. Freeman efforts have just begun, and we fully into profitable ones by better match- Chairman and understand the considerable obstacles ing our prices and the services we Chief Executive Officer that lie before us. Nevertheless, we 4
  6. 6. We will be the highest quality, lowest cost provider of diagnostic testing, information and services. Answers for Patients
  7. 7. Our Business ately. Some tests that rely on growing There is a cost difference of approxi- cultures, tissue analysis or esoteric The first element in our three prong- mately $13 per requisition between tests that require amplifying genes ed strategy is to be the best supplier our most efficient and least efficient can take longer to complete. of diagnostic testing, information and labs. Our attention is focused on mak- services. ing operations consistent across the In 1996, we processed approximately company by implementing best prac- 60 million requisitions for testing. In the delivery of health care, virtu- tices in all our facilities. After we provide the test results, we ally nothing happens without diag- produce invoices and begin a com- nostic test results. Clinical laboratory Labs with leading regional market plex process to get paid for our ser- testing provides answers for caregivers share are typically our most profitable vices. Payors include patients, doctors, that lead to better decisions for and generate cash. Yet several labs indemnity insurance companies, man- patient care. with weak market positions are aged care companies, hospitals, clin- unprofitable and consume cash. We Providing these answers is a complex ics, employers and government payors are working hard to quickly return logistical undertaking. It starts with such as Medicaid and Medicare. these labs to profitability. We are also one of our more than 75,000 doctor- considering several strategic actions Our History clients completing a patient requisi- including selling labs, swapping labs Dr. Paul Brown founded MetPath Inc. tion for testing, and preparing the with competitors, or forming joint in 1967 in New York City, with a new specimen or sending the patient to ventures with other lab providers to concept for highly automated, high one of our 850 patient service centers establish stronger market position. quality and low cost testing. MetPath around the country to have blood Billing quickly grew to become the leading drawn by one of our phlebotomists. In our business, billing and getting independent testing lab in the New The specimens are then retrieved by paid for testing has become more dif- York area. Corning Incorporated pur- our network of professional couriers ficult than performing the testing chased MetPath in 1982 and, in ensu- and delivered to one of our 17 itself. Billing was established as a sepa- ing years, grew the business primarily regional laboratories, 14 smaller rate corporate function late in 1995 through acquisitions. Revenues branch labs, approximately 200 rapid- in response to the emergence of seri- tripled between 1991 and 1995 as turnaround STAT labs around the ous billing issues. We measure the Corning led the wave of consolidation country, or our center for specialty health of billing ultimately by the that radically reshaped our industry. testing, Nichols Institute. amount of bad debt expense we Acquisitions brought us growth, pur- incur. Bad debt refers to tests we per- Our labs generally process the speci- chasing power and national market- form but don’t get paid for because mens overnight. Unique bar-coded ing clout. However, they also left us of missing or incorrect billing infor- identification numbers are assigned with a collection of highly autono- mation or, simply, non-payment. to each requisition, and specimens mous laboratories which varied widely During 1995, bad debt expense rose are sent to the appropriate depart- in the quality of their processes, the to 9.4% of total revenues. ments to have tests performed for cost of the testing they performed most routine blood and urine tests. We are now taking aggressive actions and their management approaches. Doctors receive results for most tests to gain better control of our billing the next morning electronically or Highest Quality and Lowest Cost process. We have focused our efforts reports are delivered by our couriers. Today, our highest quality laborato- on standardizing our process to pro- If testing reveals a life-threatening ries also are our lowest cost labs. duce a claim or bill on a more timely result, the doctor is notified immedi- 6
  8. 8. serum with HDL is loaded into a basis. We have also selected a stan- chemical analyzer. The whole process dard software program called SYS as takes about 45 minutes. our billing system of choice for the company. Early last year, a doctor on our med- ical staff approached a supplier, Bad debt expense declined to 6.9% of Genzyme Diagnostics, which was revenues in 1996 as a result of treat- working on a new reagent that could ing billing as a process with equal greatly simplify the HDL testing importance to testing and reporting process. Instead of having to cen- results. Despite the improvement, we trifuge the specimen, the Genzyme feel significant pressures due to rapid- reagent would be added to the origi- ly changing reimbursement require- nal serum specimen and placed ments. The most difficult recently directly on a high-throughput chem- imposed requirements make us istry analyzer. The new process, responsible for the physician to docu- referred to as homogeneous HDL, ment the medical necessity of certain takes eight minutes. Our Chemistry tests being ordered. If the physician Test Method Advisory Group evaluat- orders a test but doesn’t include this ed the new process and quickly recog- information, then we perform the test nized that it would produce quality but don’t get paid. and process improvements as well as Standardization—An Example cost reductions through labor savings. Let’s look at how we standardized on The Chemistry Group adopted the a new technology for handling an process and led a phased roll-out to important blood test that measures all of our regional laboratories. “good cholesterol” or high density lipoprotein (HDL) cholesterol. This Our company was the first commer- test currently requires several labor- cial laboratory in the country to offer intensive steps. First, a laboratory routine HDL cholesterol testing back technologist takes the specimen and in 1977, so it’s fitting that 20 years pipettes some serum into a separate later, Quest Diagnostics is the first test tube. Then the technologist adds commercial laboratory to offer an a chemical, or reagent, and spins the improved homogeneous, or direct, Quest Diagnostics is the first tube on a centrifuge to separate the HDL test. lab in the country to offer a mixture into serum with and without direct HDL cholesterol test, HDL. Finally, the tube containing the thanks to an innovative partnership with reagent sup- plier Genzyme Diagnostics. Here, Bernadette Chin, who coordinated our Chemistry Test Method Advisory Group, is pictured with Genzyme’s Peter Cooke. 7
  9. 9. We will be the preferred partner with large buyers of health care services. Answers for Partners
  10. 10. ciently. Ten years ago, two competing of intent with University of Pittsburgh It isn’t enough for us to be the high- not-for-profit hospitals in Erie, Medical Center to jointly pursue est quality, lowest cost provider of Pennsylvania--Hamot Health opportunities in routine lab testing, diagnostic testing, information and Foundation and Saint Vincent Health medical informatics, anatomic services. To survive in the rapidly Center—tried combining their labs, pathology and molecular diagnostics changing world of health care, we without success. They approached research. must work collaboratively to become us with the idea of partnering to the preferred partner with large jointly improve the quality, service In coming months we hope to health care customers. The data we and access of testing, and reduce the announce close affiliations with generate in the course of performing cost. We took over management of integrated hospital-based delivery tens of millions of routine tests is the the jointly-owned hospital lab, which systems, large physician groups, raw material for knowledge that can handled inpatient testing, and also set managed care companies, and provide answers to managed care up a separate commercial laboratory, group purchasing organizations. We companies interested in learning Associated Clinical Laboratories have completed regional marketing more about the health of their grow- (ACL), to do outpatient testing. strategies across the U.S. In each mar- ing patient populations. In addition, ket we have identified the providers our experience in running high vol- Over the years, some of the struct- we expect will be the likely winners in ume, high quality labs lets us offer ure of the partnership in Erie has a consolidating health care world. We answers to the rapidly emerging hos- changed. But one thing that hasn’t have put together business plans that pital and physician networks that are changed is the value of the partner- map out how we can join forces with looking for ways to boost both the ship. The hospitals have seen an these leaders to optimize the delivery quality and efficiency of the care improvement in quality while their of health care within the community. they provide. costs have declined. The average lab We are aggressively working to imple- Hospital Networks… cost per patient admission at 571 ment these plans. A Major Opportunity urban acute care hospitals across the Providing Value Hospitals account for more than half U.S. is $435; in Erie, it’s now down to of the $30 billion laboratory testing Improving the profitability of each of $343. market in the U.S. Yet numerous our 75,000 accounts is a key focus and analyses show that hospital lab costs a major challenge. With the strong The most compelling evidence of our are, on average, significantly higher growth of managed care over the past success in Erie is that the partnership than our costs. We can help hospitals few years, our industry engaged in is growing. During 1996, an addition- in several ways, including: managing fierce price competition, which al 17 hospitals in northwestern their inpatient labs for a fee and proved damaging. At the moment, we Pennsylvania and southwestern reducing costs; providing leading believe we lose money on the majority New York joined the Hamot-Saint edge specialty testing through of our managed care and many physi- Vincent inpatient lab cooperative and Nichols Institute; and also by partner- cian accounts. We are currently evalu- will form several additional regional ing to provide high quality, low cost ating the profitability of each of our hub labs. We expect to manage these routine testing for outpatients. Each accounts, and intend to ensure that labs for a fee, as we do at the Hamot- relationship is unique and requires we provide outstanding value to Saint Vincent inpatient lab. nurturing. the client in return for a price that yields an appropriate profit for In Lincoln, Nebraska, and Sioux A Successful Partnership— Quest Diagnostics. City, Iowa, Quest Diagnostics has a Erie, Pennsylvania management contract to manage in- We are helping hospitals in western To be properly compensated for the patient and outreach labs for 25 hos- Pennsylvania run their labs more effi- high level of service we are expect- pitals. In December we signed a letter 10
  11. 11. ed to provide, we are selectively rene- grams and underlying systems that progress. Research shows that rigor- gotiating our relationships. In New will enable us to pay our sales organi- ous monitoring of diabetes patients England, for example, we were asked zation based on profitability, and have can prevent complications later on by a large managed care organization pilot programs in certain locations and save money for the managed care to provide services under a national this year. provider. Quest Informatics receives a contract that was priced below our transaction fee each time a result is cost. Because physicians in the region Turning Data Into Information sent over its electronic bridge. are familiar with our high level of ser- The massive amounts of data generat- vice and quality, we were able to suc- ed by our testing processes represent cessfully renegotiate the contract away a valuable database resource for from a capitated rate, or one in which health care companies. Our two year we were paid a fixed monthly fee per old venture called Quest Informatics member of the plan, to a fee-for-ser- turns our testing data into informa- vice arrangement at a rate that tion and supplies it to large health ensured the contract would be both care buyers that use this knowledge profitable to us and valuable to our to help them better manage their customer. patients’ disease states. On the West Coast, we approached a One managed care company on the major third party payor about raising East Coast uses this information to its reimbursement levels for the Pap help it monitor and manage diabetic smear, a labor-intensive cervical cancer members who are employees of a sin- screen for women that is performed gle member company. Specifically, by highly trained cytotechnologists. the managed care company requires test results every time one of their Our people went back to the third diabetic patients has a test performed party payor and presented our num- at one of our labs. Searching through We recently expanded our bers, which showed we were being millions of records for a few hundred decade-long laboratory paid for Pap smears at a rate well test results is an information technol- partnership with the two below our cost. Based on our analysis, ogy challenge of the highest order. leading hospitals in Erie, Pa., the payor acknowledged the fairness Quest Informatics designed a screen- to cover an additional 17 of our position and more than ing process and an electronic bridge hospitals in the region. Here, doubled the reimbursement rate on connecting our mainframe comput- Sister Catherine Manning, Pap smears. ers to the managed care client. President of Saint Vincent Whenever a diabetic employee is test- Health Center (second from Part of the problem we have had with ed and the result is within a specified left) and John Malone, pricing is that our employees’ interests range, the results are transmitted President of Hamot haven’t always been aligned with the electronically to a disease manager Health Foundation company’s long-term interests. who specializes in diabetes. Now, the (second from right), meet with Compensation for our sales represen- managed care company can target its Tony Geramita of tatives was based solely on new sales resources for educating patients on Quest Diagnostics and volume, not profitability. That’s now diabetes to the individuals who need Karen Case of Associated changing. We are designing the pro- it most and then closely monitor their Clinical Laboratories. 11
  12. 12. We will be the leading innovator for diagnostic testing, information and services. Answers for Better HealthCare Decisions
  13. 13. volume comes from outside the Quest As a diagnostic information company, As more discovery and innovation has Diagnostics laboratory network. we provide answers to physicians, begun to emerge from private health care organizations, hospitals, research firms, we also have estab- Nichols Institute was founded in 1971 labs, and patients to help drive better lished partnerships with many of the by Dr. Albert Nichols and a handful decisions. We are constantly searching leading biotechnology firms in the of fellow endocrinologists and for new knowledge to improve those world. This gives us access to new internists with the mission of identify- answers. We will provide answers for technologies as they are being devel- ing new endocrine tests, which detect better health care decisions by devel- oped, which helps us make them levels of specified hormones. Over oping new tests, services and informa- available to our customers earlier. For the years, Nichols Institute has been a tion products, and by continually example, we helped pioneer viral significant contributor to knowledge improving our offerings. load HIV testing to detect small in the diagnostic testing world and amounts of the HIV virus. The tests A Competitive Edge: has played a major role in transfer- are performed using two types of Nichols Institute ring academic research to the com- genetic testing: polymerase chain Often, routine testing won’t provide mercial marketplace. Among its inno- reaction (PCR) as well as the newer adequate answers. The scientists and vations: development of the definitive branched DNA technologies. medical directors at Nichols Institute reference method accepted the world Through our work with Roche in San Juan Capistrano, California over for measuring free thyroid hor- Molecular Systems for PCR and have the ability to get at these diffi- mone, and the development of new Chiron Corp. for branched DNA, we cult questions through highly special- tests to detect the response to treat- have worked on streamlining and ized esoteric tests and high quality ment for HIV. improving the tests before they were databases that give meaning to the approved by the U.S. Food and Drug Access to Leading Researchers results. In many cases, the specialty Administration. They are now com- Dr. Nichols aimed to commercialize tests performed at Nichols Institute mercially available. leading academic research. To do this rely on ultra-sensitive gene sequenc- The Promise of Genetic Testing he created an Academic Associates ing, cell scanning, and biochemical Program to enlist as advisors individu- Nichols Institute is working actively to technologies which allow for the als in academic institutions through- commercialize several promising gene detection of minute traces of a virus out the world who are recognized as sequencing tests. We are one of the or mutation via amplification of the leaders in the application of new first labs to offer a test for the Ret cell or gene. technologies to clinical medicine. gene, which is implicated in a syn- Today, we carry the tradition forward drome of inherited malignancy. We Nichols Institute performs these tests with 57 Academic Associates who help are working actively with our for a range of labs that are run by us target areas of development in our Academic Associates to study the hospitals, doctors and even our major innovation process, develop new tests value of a test for p53, another gene competitors—in addition to speci- and consult with our clients. whose mutation has been connected mens sent by our own regional facili- to cancer. ties. Over half of Nichols Institute’s 14
  14. 14. specialty testing methods through Last year Nichols Institute established the development, manufacture and a Molecular Microbiology Department, marketing of diagnostic test kits and affording new reference laboratory diagnostic testing systems. We cur- capabilities in all areas of infectious rently distribute test kits to over 35 disease -- including classical microbi- countries around the world through ology and virology, molecular micro- an international network of wholly- biology, serology, and immunology. owned subsidiaries and distributors. Today, Nichols Institute also leads the We introduced the world’s first and way in immunoassay methods for only non-invasive chemiluminescence measurement of circulating hormone intra-operative parathyroid hormone levels and sensitive tests to help doc- assay with FDA clearance, allowing tors in breast cancer prognosis. surgeons to accurately localize hard- Recent developments also include the to-find tissue during surgery for validation of blood serum tumor quantitative hormone assessment. marker assays to detect breast, blad- Later this year we will begin shipping der, prostate, lung, pancreas, liver a new state-of-the-art product, the and colorectal cancers, sequencing of Nichols Advantage™ analyzer, which the p53 gene, comprehensive prena- economically provides a highly tal molecular biology testing utilizing automated and very high quality Fluorescence in Situ Hybridization specialized testing capability. (FISH) technology, and the detection Our 57 Academic of abnormal pregnancies using chro- Associates in leading From the new products we develop mosome studies. research institutions at Nichols Institute Diagnostics to around the world help us the important job our Academic Nichols Institute Diagnostics translate the latest medical Associates perform in helping Through Nichols Institute discoveries into clinical us transfer academic research to the Diagnostics, we are bringing new lev- applications for our labora- commercial marketplace, we are els of detection technology to physi- tories. Jorge Leon, Ph.D., working hard to provide answers for cians, hospitals, clinics and commer- Director of Biotechnology better health care decisions. cial laboratories. Nichols Institute Research & Development Diagnostics brings on-site access to at Quest Diagnostics Nichols Institute, is working closely with renowned breast cancer specialist Dr. Marc Lippman, Director of the Vincent T. Lombardi Cancer Research Center at the Georgetown University Medical Center, to develop new tests to help doctors select more effective therapies for breast cancer patients. 15
  15. 15. Steve Kovach Kim Fatovich Logistics Client Services Gina Talmadge Gladys Cuezas Phlebotomy Auto Chemistry Lab
  16. 16. Board of Directors Executive Officers Major Facilities Kenneth D. Brody Kenneth W. Freeman Regional Laboratories Founding Partner Chairman and Auburn Hills, Michigan Winslow Partners Chief Executive Officer Baltimore, Maryland Washington, DC Cambridge, Massachusetts Gregory C. Critchfield, M.D. Denver, Colorado Van C. Campbell Senior Vice President and Horsham, Pennsylvania Vice Chairman Chief Medical and Science Officer Irving, Texas Corning Incorporated Lincoln, Nebraska Don M. Hardison, Jr. Corning, NY Phoenix, Arizona Senior Vice President Pittsburgh, Pennsylvania Mary A. Cirillo Sales and Marketing Portland, Oregon Senior Vice President St. Louis, Missouri Douglas M. VanOort Global Relationship Banking Operations and Technology Senior Vice President San Diego, California Citibank, N.A. Operations Smyrna, Georgia New York, NY Tampa, Florida Robert A. Carothers Teterboro, New Jersey David A. Duke, Ph.D. Vice President and Wallingford, Connecticut Retired Vice Chairman Chief Financial Officer Wood Dale, Illinois Corning Incorporated James D. Chambers Corning, NY Nichols Institute Vice President San Juan Capistrano, California Kenneth W. Freeman Administration Chairman and Associated Clinical Laboratories Kurt R. Fischer Chief Executive Officer Erie, Pennsylvania Quest Diagnostics Incorporated Vice President (54% owned by Quest Diagnostics) Teterboro, NJ Human Resources Dan C. Stanzione, Ph.D. Raymond C. Marier President, Network Systems Vice President and and Bell Laboratories General Counsel Lucent Technologies Incorporated Warren, NJ C. Kim McCarthy Vice President Gail R. Wilensky, Ph.D. Compliance and Government Affairs Senior Fellow Alister W. Reynolds Project HOPE Bethesda, MD Vice President Strategic Planning 18
  17. 17. ANSWERS FOR INVESTORS Corporate Profile ‘Safe Harbor’ Statement under the Private Additional copies are available upon Securities Litigation Reform Act of 1995 Quest Diagnostics Incorporated is written request to: one of the leading clinical testing lab- Investor Relations The statements in this Annual Report oratories in the world. With 17 Quest Diagnostics Incorporated which are not historical facts or infor- regional labs and 14 smaller branch One Malcolm Avenue mation are forward-looking state- labs across the country, Quest Teterboro, New Jersey 07608. ments. These forward-looking state- Diagnostics processes and provides ments involve risks and uncertainties Common Stock data annually on approximately 60 that could cause the outcome to be Shares of Quest Diagnostics million requisitions for testing. The materially different. Certain of these Incorporated common stock (ticker wide variety of tests performed on risks and uncertainties are listed on symbol: “DGX”) are listed on the New human tissue and fluids help doctors pages 21 and 22 of the 1996 Annual York Stock Exchange and also trade and hospitals diagnose, treat and Report on Form 10-K contained in on the Stuttgart (Germany) Stock monitor diseases and disease states. In this Annual Report. These risks and Exchange. Options on Quest addition, Quest Diagnostics conducts uncertainties include heightened Diagnostics shares are traded on the research through its Nichols Institute competition, impact of changes in Chicago Board Options Exchange. unit, which specializes in esoteric test- payor mix, adverse actions by govern- ing using genetic screening and other mental and other third-party payors, Transfer Agent and Registrar advanced technologies, and produces the impact upon Quest Diagnostics’ [No dividends have been declared test kits. collection rates or general or adminis- on common stock] trative expenses resulting from com- Corporate Headquarters Harris Trust and Savings Bank pliance with Medicare administrative Shareholder Services Division One Malcolm Avenue policies, adverse results from pending P.O. Box 755 Teterboro, New Jersey 07608 governmental investigations, reduc- Chicago, Illinois 60690-0755 201-393-5000 tion in tests ordered by existing cus- Telephone: 800-255-0461 tomers, material increases in premi- Additional Information ums for insurance coverage, denial of For the hearing impaired, Harris Investment analysts who need addi- licensure, computer or other system Bank has a Telecommunication tional information may contact: failures, development of technologies Device for the Deaf (TDD) telephone. Investor Relations, Quest Diagnostics that substantially alter the practice of The listing is Harris Bank Incorporated, One Malcolm Avenue, medicine and changes in interest rates. Hearing Impaired Telephone Teterboro, New Jersey 07608. TDD 312-461-5633 or Shareholders may call the toll-free TDD 312-461-5637. Quest Diagnostics News and Information Line at 888-DGX-0002. Change of Address Form 10-K Report change of address to Harris Trust and Savings Bank A copy of the Quest Diagnostics 1996 at the above address. Annual Report on Form 10-K, filed with the Securities and Exchange Independent Accountants Commission, is contained in this Price Waterhouse LLP Annual Report, starting after page 21. 1177 Avenue of the Americas New York, New York 10036 19
  18. 18. Compliance Trademarks Quest Diagnostics is an equal Quest Diagnostics is committed to the QUEST DIAGNOSTICS, the Quest opportunity employer. highest ethical standards and comply- Diagnostics logo, QUEST, and QUEST ing with all applicable laws and regu- DX are trade/servicemarks; and Produced by: lations that govern its business opera- QUEST INFORMATICS and Corporate Communications tions, including those that apply to NICHOLS INSTITUTE are service- Quest Diagnostics Incorporated reimbursement for testing under the marks of Quest Diagnostics federal Medicare and Medicaid pro- Incorporated. NICHOLS ADVAN- Design: Q. Cassetti grams. Quest Diagnostics requires TAGE is a trademark of Quest Photography: Ed Wheeler that all employees abide by these Diagnostics Incorporated. CLINICAL laws, rules and regulations and pro- DISCOVERY is a servicemark and Printed in U.S.A. vides annual compliance training SMARTECH is a trademark of CLMP, for all employees. Quest Diagnostics is Inc. METPATH, QUIKSTREP and committed to protecting the health CHEM-SCREEN are registered service- and safety of its employees as well as marks of CLMP, Inc. QUICK-INTRA- the environmental resources of the OPERATIVE and QUICK-PAK are communities in which it operates. trademarks of Nichols Institute Diagnostics Inc. The Raymond Gambino Quality Award Neither this report nor any statement The purpose of the Raymond contained herein is furnished in con- Gambino Quality Award is to encour- nection with any offering of securities age and recognize quality excellence or for the purpose of promoting or and best practices within Quest influencing the sale of securities. Diagnostics. The award is named for Quest Diagnostics’ distinguished Chief Medical Officer Emeritus whose long career includes service as Director of Laboratories and Chief Pathologist at New York’s St. Luke’s- Roosevelt Hospital as well as a tenured professorship of pathology at Columbia University College of Physicians and Surgeons. 1996 Winners: Grand Rapids, Michigan Auburn Hills, Michigan Wallingford, Connecticut 1996 Challengers: © Copyright 1997 Quest Diagnostics Incorporated. Denver, Colorado All rights reserved. Wood Dale, Illinois 20
  19. 19. QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES FINANCIAL HIGHLIGHTS YE A R S E N D E D D E C E M B E R 3 1 (in millions, except per share data) Pro Forma 1996 (a) 1996 1995 1994 ____________ ________ _________ _________ $ 1,616.3 $ 1,616.3 $ 1,629.4 $ 1,633.7 Net revenues 15.6 (15.9) (19.2) 82.3 Net income (loss) before restructuring and other non-recurring charges (594.5) (626.0) (52.1) 28.3 Net income (loss) (b) 28.8 Weighted average common shares outstanding $ 0.54 Earnings per common share before restructuring charges and other non-recurring charges (c) $ 166.4 $ 166.4 $ 176.5 $ 295.4 Adjusted EBITDA (d) (a) Assumes that the spin-off from Corning Incorporated had been completed and the change in accounting policy for intangible assets had been adopted as of January 1, 1996. (b) Includes non-recurring charges totaling $669 million, $51 million, and $80 million in 1996, 1995, and 1994, respectively. (c) Historical earnings per share data is not meaningful as the Company’s historical capital structure is not comparable to the capital structure subsequent to its spin-off from Corning Incorporated. (d) Adjusted EBITDA represents income (loss) before income taxes, net interest expense, depreciation, amortiza- tion and restructuring and other non-recurring charges. 21
  20. 20. OUR VALUES Quality Accountability The patient comes first in everything As a company and as individuals, we do. Our passion is to provide we accept full responsibility for our every patient and every customer performance and acknowledge with services and products of our accountability for the ultimate uncompromising quality — error free, outcome of all that we do. We strive on time, every time. We do that by for continuous improvement, believing dedicating ourselves to the relentless that competence, reliability, and pursuit of excellence in the services rigorous adherence to process we provide. discipline are the keys to excellence. Integrity Collaboration Credibility is the key to our success; We believe in teamwork and the therefore, all of our processes, limitless possibilities of collaborative decisions and actions ultimately are energy. We achieve excellence by driven by integrity. We are honest and putting collective goals ahead of forthright in all our dealings with our personal interests. We support and customers and with each other. We encourage open communication and are responsible corporate citizens in meaningful cooperation among the communities we serve. We strictly colleagues from varying backgrounds comply with the laws and regulations and disciplines. We respect individual governing our business, not only as a differences, and we value diversity. legal obligation and a competitive Leadership necessity, but because it is the right We strive to be the best at what thing to do. we do — both as a company, and as Innovation individuals. We embrace the qualities We constantly seek innovative ways to of personal leadership — courage, enhance patient care and provide competence, confidence and a passion value to our customers. We support for surpassing expectations. We will the creativity, courage and persistence provide growth opportunities for our that transform information into employees, quality services and knowledge, and knowledge into products to our customers and insights. We seek continuous superior returns to our shareholders. advancement through the adaptation of existing knowledge as well as through experimentation, with the full understanding that we learn from our failures as well as our successes.
  21. 21. One Malcolm Avenue Teterboro, New Jersey 07608 Annual Report without 10K: MI0029(6) Annual Report: MI0030(6)