Each year, hundreds of thousands of people undergo painful bone marrow biopsies so their physicians can diagnose or monitor the treatment of leukemia and lymphoma. Doctors sometimes refrain from frequent testing to monitor their patients for fear of causing undue pain. In 2005, scientists at our Quest Diagnostics Nichols Institute developed Leumeta™ cancer tests to provide patients and their doctors with vital information about their disease using a simple-to-obtain blood sample rather than a much more invasive bone marrow biopsy.

At Quest Diagnostics, our first responsibility is to patients. The convenient new Leumeta cancer tests are just one way that we demonstrate our commitment.

» Focused on Patients, Growth and People

Our strategy is based on three simple but profound words—Patients, Growth and People. As such, our focus is on enhancing the overall experience we offer our patients; driving profitable growth; and facilitating the success of the 41,500 people who truly represent Quest Diagnostics.

I am pleased to report that during 2005 we made significant progress in each dimension of our strategy, as detailed in the pages that follow. We embarked on a journey to distinguish ourselves through exceptional patient and customer service. We drove profitable growth and generated significant cash flow, which increased shareholder value. We expanded our innovation pipeline and acquired LabOne, which strengthened our existing business and extended our reach into a new market. And, by providing our employees incentives and tools to improve their health, we are demonstrating that early detection of disease really can improve outcomes and reduce costs. As a result of these accomplishments, we made significant strides in positioning Quest Diagnostics for long-term success.

» Generating Strong Financial Results

We drove strong financial results for 2005 by performing more testing on behalf of more doctors and more patients. For the year, we increased revenues over 7 percent; posted a 13 percent increase in earnings per share; and generated $852 million in cash flow from operations, which we invested for growth and returned to shareholders through dividends and share repurchases. These results were achieved despite the disappointing performance of our test-kit manufacturing subsidiary, NID. Early in 2006, we increased the quarterly dividend 11 percent and expanded our share repurchase program by $600 million.

» Delivering Exceptional Customer Service

As a service business, we must continuously give patients and their doctors new and compelling reasons to select Quest Diagnostics as their diagnostic testing provider. Our efforts range from elevating the level of service in our patient service centers to developing tests and technologies that advance healthcare to investing to improve our employees’ skills and their ability to service our customers.

In 2005 we provided our teams of phlebotomists and managers with intensive customer service training. As a result of our efforts, patient satisfaction at our patient service centers showed strong improvement. In the future, we plan to expand this training to other customer contact personnel, such as couriers and customer service representatives.

We created Quest Diagnostics Health Trends as a way to mine our enormous database of test results to provide insights on vital health issues as a public service. We published the first such report on Heart Health based on 80 million patient encounters between 2001 and 2004 and identified a significant 10 percent decline in average LDL or “bad” cholesterol.

» Driving Profitable Growth

Quest Diagnostics has always generated growth through a combination of winning new business and making acquisitions. In 2005, we drove organic growth by educating physicians about important tests to improve patient care, particularly for cardiovascular and infectious diseases, allergy and cancer diagnosis. We introduced several new tests in addition to the Leumeta cancer tests and enhanced our ability to provide valued consultations to important medical specialties, including hematologists, oncologists, urologists, endocrinologists and gastroenterologists. We also identified proteomics as a major growth technology for the future, investing in several emerging pioneers.

We made advances in information technology by expanding the features of our Care360™ patient-centric physician portal, which reduces medical errors and improves efficiency by enabling doctors to electronically order tests, receive results, prescribe drugs and share medical records online. Our goal is to make Care360 an integral part of the national healthcare information infrastructure.

We supported these new service and science initiatives by providing our sales force with enhanced training so they can become trusted advisers to our physician clients. In addition, we created specialized sales teams to effectively market our more complex tests and information technology products to specific medical specialties.

We complemented these efforts by acquiring LabOne, thereby strengthening our core business and establishing us as the leader in a new adjacent market—health risk assessments for the life insurance industry. LabOne, which generates annual revenues of approximately $500 million, will account for an estimated 8 percent of our revenue growth in the coming year, and further improves our profitability with the $30 million in synergies we expect to realize once we complete this integration in 2007.

» Empowering Our People

At Quest Diagnostics, we believe in the value of early detection. In 2005, we introduced HealthyQuest, a self-driven health improvement plan to help our employees take control of their health. We encouraged them to enroll in Blueprint for Wellness™, our proprietary health risk assessment tool, based on lab tests and other biometrics. During the year, 70 percent of our employees and their spouses elected to participate in Blueprint for Wellness. The response was overwhelmingly positive, and a number of employees told us that their Blueprint for Wellness reports uncovered potentially life-threatening medical conditions which would otherwise have gone untreated.

The HealthyQuest initiative is just one way that we facilitate the success of our employees. We have a strong team of dedicated individuals and we continue to attract talented people from a broad range of companies and industries who are eager to join us.

We firmly believe that our responsibility to patients and employees extends to the communities where we live and work. We fulfill this obligation by offering free testing to the indigent at a variety of clinics around the country, and collaborating with relief organizations to assist others in need. I’m proud that this spirit of community involvement is embraced by our employees, many of whom donated time and money to help colleagues and their families who were displaced by the Gulf Coast hurricanes.

» Excited About the Future

Diagnostic testing accounts for less than 3 percent of U.S. healthcare spending, but influences approximately 70 percent of all medical decisions. At a time when healthcare costs are receiving scrutiny like never before, we have the experience and reach to help reduce costs and improve outcomes by working with physicians, hospitals, managed care organizations and the government.

Quest Diagnostics is the clear leader in the more than $40 billion diagnostic testing industry in the U.S., yet we account for only 13 percent of this market, with a very limited international presence. We have significant opportunities to grow—by expanding our market position here in the U.S. and abroad, and continuing to be an innovation leader.

There has never been a better time to be in the diagnostic testing business. The long-term need for testing is being driven by an aging population, as well as the advent of new technologies, which enable the development of new tests and healthcare information technology solutions. Consumers are taking a more active role in managing their health, and diagnostic testing is a fundamental tool for this purpose. Finally, several related fields are converging, blurring the lines that used to separate genetic predisposition testing, diagnostic testing, diagnostic imaging, and information technology. Meanwhile, short-term trends are also creating opportunities. For example:

  • Cancer testing represents a growth opportunity. Currently, clinical pathology, or testing of blood and other bodily fluids, accounts for most of our business. While we are the leader in cancer testing, we remain under-represented. We are educating doctors and hospitals about our capabilities in cancer diagnosis, monitoring and prognosis. Moreover, we have recently expanded our presence in anatomic pathology by adding subspecialist pathologists, creating proprietary tests, and developing state-of-the-art lab reports.
  •  
  • Healthcare information technology is an increasingly vital issue for policymakers, doctors, hospitals, payers and especially patients. Our Care360 physician portal is already in use by approximately 80,000 physicians—and we are adding capabilities to enable users to do more to reduce medical errors and drive efficiencies for healthcare providers.
  •  
  • The managed care field is swiftly consolidating, prompting managed care providers to seek ways to reduce healthcare costs and improve patient outcomes. We offer the greatest access to convenient laboratory services and are drawing on our proven capabilities in laboratory network management to collaborate with these organizations.
  •  
  • Medical quality is critical for the success of any healthcare provider. We adhere to our own stringent quality assurance processes—including Six Sigma principles. We are focused on continuously improving quality throughout our business.

Quest Diagnostics is well positioned for the future, and I am excited about the opportunities available to us. We have a strong company and the right strategy, which we are focused on executing, based on Patients, Growth and People.

It is my distinct honor to lead our company. Thank you for your continued confidence and support.

Take care,

Surya N. Mohapatra, Ph.D.
Chairman, President and Chief Executive Officer