Quest Diagnostics Inc. Business Information, Profile, and History

Company Perspectives:

The patient comes first in everything we do. Our passion is to provide every patient and every customer with services and products of uncompromising quality--error free, on time, every time. We do that by dedicating ourselves to the relentless pursuit of excellence in the services we provide.

History of Quest Diagnostics Inc.

Quest Diagnostics Inc. is one of the largest clinical laboratory testing companies in the United States. It offers a broad range of routine and esoteric services used by the medical profession in the diagnosis, monitoring, and treatment of disease and other medical conditions. The company's customers include independent physicians and physician groups, health maintenance organizations and other managed-care groups, hospitals, and government agencies. It was spun off from Corning Inc. in 1996.

Corning Medical Products and MetPath to 1982

The origins of Quest Diagnostics were in the laboratory glassware of Corning Glass Works. Its Pyrex glassware--which spawned a lucrative cookware line--put the company in the laboratory business as far back as World War I. When instrumentation began to replace test tube, flask, and beaker chemistry in the 1960s, Corning added to the primitive meters it was already making a high-powered pH-measuring instrument designed to find how well a critically ill patient's lungs were exchanging oxygen and carbon dioxide. The new blood-gas apparatus could not, in 1977, be produced fast enough to keep up with demand.

By 1975 Corning also had begun marketing white blood cell analyzers to automate one of the last blood tests still being performed manually in clinical laboratories. In 1976 the company had a medical products division making electrodes, pHmeters, electrometers, biomedical instruments and systems, photometers, electrophoresis equipment, and densitometers in Medford, Massachusetts, and in Palo Alto, California. In 1977 Corning's health and sciences activities were consolidated into a single operating division with sales amounting to $221 million and net income at 12 percent of the parent company's total. In 1981 these figures were $374 million and 32 percent, respectively.

Corning's clinical laboratory testing did not begin, however, until it acquired MetPath Inc. in 1982. Paul A. Brown, a pathologist who later said he was "amazed at the sky-high test prices charged by hospitals and clinics," founded what was originally Metropolitan Pathological Laboratory in 1967 with $500 and initially ran it out of his Manhattan apartment. Two years later he invested in a $55,000 device that automatically performed 12 common blood tests, charging $5.50, compared with more than $40 charged by hospitals and medical laboratories. In 1972 Brown spent more than $1 million on two AutoChemist units, which raised the number of blood tests MetPath could perform automatically to 25 and saved significantly on costly chemical reagents needed for analysis. The company began turning a profit in 1971 and, beginning in 1974, made money each year. Corning Glass Works bought ten percent of its stock in 1973.

By 1975 MetPath had one of the best equipped and largest medical laboratories in the world and was the largest U.S. company devoted entirely to clinical laboratory services. It was offering, in 11 cities, more than 600 laboratory tests to physicians, hospitals, and institutions and performing more than two million lab tests a month from specimens of more than 150,000 patients. The tests were being processed at a highly automated central laboratory in Hackensack, New Jersey, with 80 percent of the results delivered to the client within 24 hours after collection of the specimen. Overall, MetPath's average billing per patient transaction was only $9.

MetPath was, by 1979, challenging Damon Corp. for first place in the clinical laboratory testing field, which had grown into a $12-billion-a-year business. The company had net income of $3.8 million in fiscal 1978 (the year ended September 30, 1978) on revenues of $53.4 million. A new, $25 million laboratory, easily the industry's largest and capable of analyzing up to 30,000 samples a day, was completed in Teterboro, New Jersey, in 1978. Fifty local offices made daily collections at doctors' offices and clinics, shipping them via same-day air freight to the laboratory. The results were transmitted to telecommunications terminals at each of the company's local offices. For a package of 29 common tests, MetPath was charging only $20.

MetPath was tops in the clinical laboratory testing field by 1982. The Teterboro laboratory's four IBM mainframe computers were sending results to terminals in 70 branches and 550 doctor's and hospital offices. MetPath had acquired small testing laboratories throughout the country to become collection points for samples and had built a second clinical laboratory near Chicago's O'Hare Airport. The expansion raised the company's debt so precipitously, however, that in 1982 it was sold to Corning Glass Works for stock worth about $145 million.

MetPath and Other Units: 1982-95

Although MetPath remained autonomous and its revenue kept growing--fueled by Medicare funding, a new emphasis on preventive medicine, and a wave of medical malpractice suits, which encouraged doctors to order more tests--the company found itself overwhelmed by freight costs. It also had lost business to smaller labs as testing equipment became smaller and more affordable. MetPath's operating profit margin fell from ten percent in 1981 to four percent in 1985, when it wrote off the Chicago-area lab and closed some local offices. Instead, it transformed its testing facilities into a network of regional laboratories close to the physicians being served and capable of quicker response to customer needs. By 1988 MetPath was again solidly in the black, although SmithKline Beckman Laboratories was doing twice as much annual business in the clinical testing field as MetPath's $350 million.

Corning regrouped its products and services in 1989 into four industry segments. The science and optical products units were moved from the former Health and Science segment to Specialty Materials, with the remaining businesses forming the Laboratory Services segment. Laboratory Services had net sales of $580.8 million in 1989 and income before tax of $99.2 million. At the end of 1990 the Laboratory Services segment was placed into a subsidiary named Corning Lab Services Inc.

MetPath, now able to handle more than 1,400 different clinical tests, remained the major unit. It strengthened its regional network in 1991 by the addition of smaller labs, including Clinical Pathology Facility, Inc. in Pittsburgh and Continental Bio-Clinical Laboratories in Grand Rapids, Michigan. Corning Lab Services acquired Southgate Medical Laboratory System, a Cleveland-based operator of clinical testing laboratories in Ohio, Indiana, and Pennsylvania, in 1992, and clinical laboratories in Denver, Dallas, and Phoenix from Unilab Corp. in 1993. (Corning had taken a major stake in Unilab--a major western U.S. clinical testing network--in 1992.) Another Corning Lab Services operation was St. Louis-based Metropolitan Reference Laboratories Inc. Founded in 1987, it was testing medical samples from ten midwestern and southern states by 1993.

Also in 1993, Corning acquired, for its Laboratory Services subsidiary, Damon Corp., the nation's fifth largest owner of clinical testing laboratories, with 14 in the United States and one in Mexico and about 220 satellite labs in remote U.S. locations. This made Corning Lab Services the nation's second largest laboratory testing company.

Founded in Needham, Massachusetts, in 1961 by Dr. David Kosowsky, Damon bought many small labs and had $22.8 million in revenue and $1.3 million in net income in 1968, just before going public. It was first in its field in 1978, doing $76 million a year in clinical laboratory analysis, but was then overtaken by MetPath and by 1982 was struggling financially. After being taken private in a 1989 leveraged buyout, it lost money for three successive years because of large interest payments tied to the buyout debt. In 1992, however, the company earned $18 million on sales of $317 million. Corning, which paid $575 million for Damon, sold the company's California laboratories in 1994.

Corning Lab Services was renamed Corning Life Sciences, Inc. in 1994, and MetPath was renamed Corning Clinical Laboratories. That year the parent company acquired Maryland Medical Laboratory Inc., one of the Baltimore area's largest diagnostic and testing operations, with annual sales of nearly $100 million, for about $140 million worth of stock. Maryland Medical was conducting regional testing for AIDS, immunogenetics, virology, veterinary diagnostics, molecular biology, and computer sciences. Also in 1994, Corning acquired Nichols Institute, another clinical laboratory testing operation, for about $325 million. Both acquisitions became part of Corning Clinical Laboratories, which in 1994 accounted for $1.7 billion of the parent company's $4.8 billion in sales and was the nation's largest clinical laboratory company.

The business climate for Corning Clinical Laboratories was far from ideal, however, as public demand intensified for cost containment in healthcare. MetPath and Metwest--a California-based spinoff from MetPath--agreed in 1993 to pay the federal government $39.8 million to settle charges that they had submitted Medicare claims for unnecessary blood tests. In 1995 Corning Clinical Laboratories agreed to pay the federal government $8.6 million for tests that doctors never ordered, and in 1998 Quest Diagnostics--Corning Clinical Laboratories' successor--agreed to pay $6.8 million to settle a similar case. In 1996 Damon--which had been renamed Damon Clinical Laboratories Inc.--agreed to pay $119 million in criminal and civil fines after pleading guilty to charges that it had defrauded Medicare by seeking reimbursements for unnecessary blood tests.

Fines, the tougher regulatory climate, the growth of managed-care networks limiting the ability of Corning Clinical Laboratories to increase prices, and the difficulty by the diverse companies acquired in processing bills put the unit in the red in 1995. Despite net revenues of $1.63 billion in 1995, Corning Clinical Laboratories lost $52.1 million, after the parent company took a charge of $62 million to increase accounts receivable because of the billings problems. Moreover, Corning Clinical Laboratories' long-term debt reached almost $1.2 billion.

Quest Diagnostics: 1996-97

In 1996 Corning decided to spin off its laboratory testing and pharmaceutical services businesses to shareholders, creating two independent public companies. The laboratory testing business became Quest Diagnostics Inc. Corning, on the last day of 1996, distributed all outstanding shares of common stock of the new company to Corning stockholders, with one share distributed for each eight shares of Corning. Revenues for 1996 came to $1.62 billion, with a loss of $626 million after taking into account special charges of $668.5 million, including a $445 million write-down of intangible assets. Long-term debt declined, however, to $515 million because Corning assumed more than $700 million of Quest's debt when it spun off the company. In 1997 Quest had a net loss of $22.3 million on revenues of $1.53 billion. The loss reflected special charges totaling $55.5 million in connection with eliminating and consolidating company facilities to reduce excess capacity.

In 1997 Quest Diagnostics had a network of 15 regional laboratories located in major metropolitan areas across the United States and an esoteric testing laboratory and research and development facilities (Nichols Institute) in San Juan Capistrano, California. In addition, Quest had several smaller branch laboratories, including one in Mexico, approximately 150 local laboratories, and about 800 patient service centers. The company was processing about 54 million requisitions for testing each year.

Routine testing services and operations, performed at the regional laboratories, included procedures in the areas of blood chemistry, hematology, urine chemistry, virology, tissue pathology, and cytology. This accounted for about 89 percent of Quest Diagnostics' net laboratory revenues in 1997. Esoteric testing by Nichols Institute was being performed in cases where the information provided by routine tests was not specific enough or was inconclusive as to the existence or absence of disease. This generated about nine percent of the company's net laboratory revenues in 1997.

The balance of Quest's net revenues in 1997 was derived from the manufacture and sale of clinical laboratory test kits by Nichols Institute and from clinical trials and informatics businesses. Quest Informatics was collecting and analyzing laboratory, pharmaceutical, and other data to help large healthcare customers identify and monitor patients at risk for certain diseases.

Principal Subsidiaries: CLMP Inc.; Damon Investment Holdings, Inc.; DPD Holdings, Inc.; Laboratory Holdings Inc.; Nichols Institute Diagnostics; Nichols Institute Diagnostics Ltd. (U.K.); Nichols Institute Diagnostics Trading S.A. (Switzerland); Nichols Institute Diagnostika GMBH (Germany); Nichols Institute International Holding B.V. (Netherlands); Nomad-Massachusetts, Inc.; Quest Diagnostics Inc.; Quest Diagnostics of Pennsylvania Inc.; Quest Holdings Inc. (Maryland); Quest Holdings Inc. (Michigan); Quest MRL Inc.