Quest Diagnostics 2010 Annual Report Download - page 46

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Our Company
Quest Diagnostics is the world’s leading provider of diagnostic testing, information and services, providing
insights that enable patients, physicians and others to make better healthcare decisions. Quest Diagnostics, with a
leading position in most of its domestic geographic markets and service offerings, is well positioned to benefit
from the long-term growth expected in the industry. Over 90% of our revenues are derived from clinical testing
with the balance derived from insurer services, clinical trials testing, diagnostic products and healthcare
information technology. Clinical testing is generally categorized as clinical laboratory testing and anatomic
pathology services. Clinical laboratory testing is generally performed on whole blood, serum, plasma and other
body fluids, such as urine, and specimens such as microbiology samples. Anatomic pathology services are
principally for the detection of cancer and are performed on tissues, such as biopsies, and other samples, such as
human cells. We are the leading cancer diagnostics testing provider focused on anatomic pathology and molecular
diagnostics, and provide interpretive consultation through the largest medical and scientific staff in the industry,
with approximately 900 M.D.s and Ph.D.s, primarily located in the United States. In addition, we are the leading
provider of gene-based and esoteric testing, and testing for drugs-of-abuse in the United States, and the leading
provider of risk assessment services for the life insurance industry in North America. We are also a leading
provider of testing for clinical trials. Our diagnostics products business manufactures and markets diagnostic test
kits and specialized point-of-care testing. We also empower healthcare organizations and clinicians with robust
information technology solutions that can improve patient care and medical practice.
The Clinical Testing Industry
Clinical testing is an essential element in the delivery of healthcare services. Physicians use laboratory tests
to assist in the detection, diagnosis, evaluation, monitoring and treatment of diseases and other medical
conditions.
Most laboratory tests are performed by one of three types of laboratories: commercial clinical laboratories;
hospital-affiliated laboratories; or physician-office laboratories. In 2010, we estimate that hospital-affiliated
laboratories accounted for approximately 60% of the market, commercial clinical laboratories approximately one-
third and physician-office laboratories the balance.
Orders for laboratory testing are generated from physician offices, hospitals and employers and can be
affected by a number of factors. For example, changes in the United States economy can affect the number of
unemployed and uninsured, and design changes in healthcare plans can affect the number of physician office and
hospital visits, and can impact the utilization of laboratory testing.
While the economic slow down in the United States has temporarily reduced industry growth rates, we
believe the clinical testing industry will continue to grow over the long term because clinical testing is an
essential healthcare service and because of the following key trends:
•the growing and aging population;
•continuing research and development in the areas of genomics (the study of DNA, genes and
chromosomes) and proteomics (the analysis of individual proteins and collections of proteins), which is
expected to yield new, more sophisticated and specialized diagnostic tests;
•increasing recognition by consumers and payers of the value of laboratory testing as a means to improve
health and reduce the overall cost of healthcare through early detection and prevention;
•increasing affordability of, and access to, tests due to advances in technology and cost efficiencies; and
•the growing demand for healthcare services in emerging markets and global demographic changes.
The diagnostic testing industry is subject to seasonal fluctuations in operating results and cash flows.
Typically, testing volume declines during the summer months, year-end holiday periods and other major holidays,
reducing net revenues and operating cash flows below annual averages. Testing volume is also subject to declines
due to severe weather or other events, which can deter patients from having testing performed and which can
vary in duration and severity from year to year.
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