M c I n t i r e I n v e s t m e n t I n s t i t u t e 1

McIntire Investment Institute At the University of Virginia

Quest Diagnostics Incorporated

(NYSE: DGX)

Prepared by Ting-Yu Hu| 17 March 2011

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Founded in 1969

Headquartered in Madison, NJ

Clinical laboratory services

2,000 Patient Service Centers. 33+ regional laboratories

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Company Overview

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1-Year Stock Chart

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Share Price: 54.09 Market capitalization: 9.26B

P/E: 13.36 EPS: 4.05

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52-week range: 40.80 - 60.28

Average volume: 1,866,140 Total Cash: 449.30M Total Debt: 2.99B

Stock Summary

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DGX is a Long

1. Industry Leader/Brand Recognition

2. Significant Growth Opportunities

3. Strong Financial Position/Cash Flow to Fuel Growth

M c I n t i r e I n v e s t m e n t I n s t i t u t e

•  Industry segment leader •  Competition is limited:

– LabCorp is main competitor – Local clinical labs – Local hospital outreach

•  National brand recognition

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Quest is an Industry Leader

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Clinical Labs Comprise a Major Portion of the Market

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Quest Diagnostics is a Clear Industry Segment Leader

Company FY2010 FY2009 % Change

QUEST DIAGNOSTICS INC 7.37B 7.46B -1.21

LABORATORY CRP OF AMERICA 5.00B 4.69B 6.61

BIO-REFERENCE LABS INC 458.02M 362.65M 26.29 MEDTOX SCIENTIFIC INC 97.11M 84.108M 15.46 ENZO BIOCHEM INC 97.082M 89.572M 8.38 PSYCHEMEDICS CORP 13.02M 16.955M -23.21 MYRIAD GENETICS INC 362.648M 326.527M 11.06 ORCHID CELLMARK INC 59.062M 57.595M 2.55

M c I n t i r e I n v e s t m e n t I n s t i t u t e

So Why is Revenue Falling?

•  Industry-wide decrease in testing due to recession/external factors – Decrease in workplace drug-

testing – Visits to physician offices

decreased

•  Increased competition

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

•  Electronic health records (EHR)

•  Specialized diagnostic tests

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Significant Growth Opportunities

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Quest’s IT Services Account for a Minority of Revenue

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EHR Usage is Government Incentivized

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•  “Meaningful use” clause in HITech Act 2009 •  $44,000 incentive per physician •  2012 deadline

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Quest Stands out from its Competitors

•  Existing national physician base •  Modular, integrated services •  Accessibility (Smartphone, iPad, computer) •  Differentiation

– Free trial offer – Marketing

•  User friendly UI

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“EHRs don’t really compete on technology but on sales force, service, a little on UI, but

more on solutions and integrations. Most EHRs are local businesses and therefore compete in the same way as pizza shops

and restaurants – service.”

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Keith Klein, MD, FACP, FASN Cedars-Sinai Medical Center David Geffen School of Medicine, UCLA 16

“…Their interface is exquisitely and brilliantly designed…no learning curve at all. The programmers really understood what the doctors wanted; they really understood the work flow, the limitations of being in an exam room talking to a patient.…”

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Growth Focused in Specialized Testing Needs

•  Esoteric tests •  Anatomical pathology tests •  Gene-based tests

–  Insurers support usage

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Industry driven by inorganic growth

•  Internal tests take time to develop

•  FDA approval necessary for new test procedures

•  Quest is making the right acquisitions to stay in the lead

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Strong Financial Position/Cash on Hand to Fuel Growth

•  Cash on hand to finance acquisitions

•  Strong cash flow – Easily collectible

accounts receivable

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Leftover Cash Flow Return Value to Shareholders

•  Consistent dividends –  $0.40/year

•  Significant stock repurchases by management

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Comparables Analysis Shows DGX is Undervalued

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Company P/E QUEST DIAGNOSTICS INC 13.36

LABORATORY CRP OF AMER 16.71

BIO-REFERENCE LABS INC 21.2

PSYCHEMEDICS CORP 17.65

MYRIAD GENETICS INC 13.45

Average P/E without DGX: 17.25 Implied Price for DGX: 69.87

M c I n t i r e I n v e s t m e n t I n s t i t u t e

•  Quest is just a clinical testing/reference laboratory

•  Truth: Quest has a growing healthcare information technology business

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Misperceptions

“…every Quest customer already has their EHR.  All they have to do is flip

the virtual switch and their current customers can start using their

EHR.”

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•  Local hospital outreach programs will push Quest out

•  Truth: Quest’s economies of scale allow it to compete effectively

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Misperceptions

“Even if you have a smaller local lab, many of them will even use Quest…because Quest's

costs are so much lower for certain tests because they do them in a high volume...a small local lab might not have the volume and so the

cost is too high to do just a small number.”

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Catalyst

•  Widespread physician adoption of EHR

•  Diagnostic testing volume increases

•  Quest wins contracts with new managed care clients

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Catalysts

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Risks

Macro trend risk •  Physician patient volume remains flat

Business Risk •  Hospital outreach programs gain

market share •  LabCorp acquires Quest’s managed

care contracts •  Quest fails to promote Care360

Political Risk •  Medicare incentives eliminated

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Recommendation: Initiate a 3% Position at Current Prices

Growth Opportunity

Cash for Acquisitions

Compelling Long

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McIntire Investment Institute At the University of Virginia

Quest Diagnostics Incorporated

(NYSE: DGX)

Prepared by Ting-Yu Hu| 17 March 2011

M c I n t i r e I n v e s t m e n t I n s t i t u t e

VAR

•  John Lynn- editor of the nationally renowned blog EMRandHIPPA.com (over 800 articles viewed over 2.4 million times). Former EHR Manager for the University of Nevada's Health and Counseling Center.

•  Shahid N. Shah- healthcare IT software analyst CTO for CareFusion, CTO of two Electronic Medical Records (EMR) companies, a Chief Systems Architect at American Red Cross

•  John Zimmerman, MD 28