Industry

By Kim Dixon

CHICAGO (Reuters) - Lab testing company Quest Diagnostics Inc. said on Tuesday it will no longer be the national provider for insurer UnitedHealth Group Inc., losing a major contract to rival Laboratory Corp. of America Holdings

The news sent Quest shares down more than 13 percent, their biggest one-day percentage slide ever, due to concerns about the potential fallout on its earnings outlook.

But shares of Laboratory Corp. jumped more than 4 percent, their biggest one-day percentage gain in nearly a year.

UnitedHealth accounts for about 7 percent of Quest's annual revenue and is its biggest customer. Quest said it will continue to provide some lab services in certain markets to some UnitedHealth members, but could not estimate the full financial impact of the contract loss.

"We feel there has been a degradation of UnitedHealth's relationship... which limits earnings visibility in the intermediate term," Merrill Lynch analyst Tom Gallucci said in a research note. He cut his rating on Quest shares to "neutral" from "buy."

UnitedHealth is one of the biggest U.S. health insurers, with 28 million members mostly through employer health plans.

Earlier on Tuesday, Laboratory Corp. said it entered into a 10-year deal with UnitedHealth to start in 2007, making it United's "exclusive national provider." It said the contract would generate $3 billion in revenue over the life of the deal.

On a conference call with analysts and investors, Quest chief executive Surya Mohapatra said it would have been "irresponsible" for him to accept the demands of UnitedHealth, but would not give specifics about the proposed contract.

He said in the call the company would not be able to estimate the effect of the loss when it gives third-quarter results on Oct. 19. Quest will give a forecast on the impact later in the year when it gives a full-year 2007 estimate.

He said the company would not immediately cut costs to account for the loss of business, because it will aim to win business, mainly by targeting doctors. Physicians can still refer patients to Quest labs, though patients will likely pay higher rates.

"I will not cut costs first. If the volume changes... we will reduce our costs accordingly," Mohapatra said.

Burlington, North Carolina-based Laboratory Corp. said the agreement will trim earnings by 6 cents to 8 cents per share in 2006. It also committed to pay up to $200 million to UnitedHealth in transition costs, which will be recognized as a reduction of revenue over the life of the contract.

Laboratory Corp. executives said in a conference call it would not be necessary to build additional labs to handle the increased volume, but the company will consider strategic acquisitions.

Shares of Laboratory Corp. rose $2.93, or 4.5 percent, to $68.10, while Quest shares slid $8.25, or 13.6 percent, to $52.65, both on the New York Stock Exchange.

Copyright © 2006 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.