Dan Haemmerle - Executive Director of Investor Relations Stephen Rusckowski - President and CEO Mark Guinan - CFO.

Glen Santangelo - Credit Suisse Ricky Goldwasser - Morgan Stanley Michael Cherny - ISI Group Inc Darren Lehrich - Deutsche Bank Bill Bonello - Craig Hallum Amanda Murphy - William Blair & Company David Clair - Piper Jaffary Bryan Brokmeier - Maxim Group.

Welcome to the Quest Diagnostics First Quarter 2014 Conference Call. At the request of the Company, this call is being recorded. The entire contents of this call, including the presentation and question-and-answer-session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved.

Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Quest Diagnostics is strictly prohibited. Now I would like to introduce Dan Haemmerle, Executive Director of Investor Relations for Quest Diagnostics. Go ahead please..

Thank you and good morning. I am here with Steve Rusckowski, our President and Chief Executive Officer; and Mark Guinan, our Chief Financial Officer. During this call, we may make forward‐looking statements. Actual results may differ materially from those projected.

Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in Quest Diagnostics' 2013 Annual Report on Form 10‐K and Current Reports on Form 8‐K.

A copy of our earnings press release is available, and the text of our prepared remarks will be available later today, in the Investor Relations 'quarterly updates' section of our website at www.questdiagnostics.com. A PowerPoint presentation and spreadsheet with our results and supplemental analysis are also available on our website.

Now, here is Steve Rusckowski..

Thanks Dan, and thanks everyone for joining us today. This morning what I would like to do is walk you through the industry dynamics, talk about the impact harsh winter on the quarter and review progress against our five-point strategy, and then Mark will provide more detail on the results and walk you through the guidance.

So let's start with the industry dynamics and the legislative dynamics in particular. As you know our industry has been facing unprecedented reimbursement challenges from the government from a long history of reimbursement cuts.

The new provisions of what's called the Doc Fix Legislation that related to the clinical fee schedule remove a dark cloud that was hanging over our industry. This legislation gives us an outcome that is much preferable to earlier government proposals. What is does is it delays adjustments to the clinical out fees schedule until 2017.

It provides for a rule making process to define new rates, based upon a market weighted medium of commercial rates for abroad or in laboratories and importantly it restricts the authority of CMS to make discretionary cuts. I look forward at working on this with our trade association, particularly in my new role as Chairman.

Now there's been questions about the pricing mechanisms in the legislation, and let me provide some clarity to that. First, this needs to be top defined through the role making process, but it's designed to be representative of the entire commercial laboratory market.

The legislation includes hospitals, out reach laboratories and independent laboratories. The laboratory industry agrees that everyone benefits from including a broad spectrum of providers in the network. Now beyond the recent legislation we continue to believe the affordable care act will be net positive for the industry.

In the near term we expected it to be neutral to slightly positive for Quest in 2014. The enrolment process was in line with our expectations, that is bumpy roll-out followed by a late surge near the deadline, and we believe that going into the second half will see some impact, but again neutral to slightly positive.

As we all know this was an unusually harsh winter in many parts of the country. And this had a significant impact on many businesses. During the quarter we estimate that the harsh winter reduced our revenues by 2% and EPS by $0.11.

At this winter and more like last year revenues would have been essentially flat to the prior year and EPS would have been favourable to 2013. We saw signs of continued stabilization in the underlying trends. Sequential year-over-year trends improved for revenue, volume and revenue per acquisition.

As we said in January, we want to deliver guidance that is both realistic and achievable. While the slow start to this year clearly is a challenge. We are confident that progress we have made on growth initiatives, particularly as a result of acquisition activities will enable us to meet our commitments.

Given this environment and actions we are taking, we now expect to show revenue growth beginning in the second quarter. In a few minutes Mark will share color on our 2014 guidance. We have been dealing with dynamic market forces and we are in the process of updating our longer term view.

We do expect to share this with you later in the year at our Investor Day Presentation. But in the meantime we continue to be bullish on the longer term growth drivers of this industry. First, the market will benefit from continued population growth and favourable demographics as baby boomers move into Medicare and live longer.

Also advanced esoteric testing will grow as precision medicine drives demand for advanced diagnostic insights. And despite the slow uptake for the affordable care act, more ensured buyers will gradually begin to enter the market each year.

And then finally, medical guideline changes do influence physician behaviour and we expect to see increases in some tests such as hepatitis C, non-invasive prenatal testing, lymph syndrome and lipid testing.

Over the long term we see significant opportunity in being a high quality, low cost provider of diagnostic information services which are essential to healthcare delivery. We remain committed to executing our five-point strategy and what I'd like to do now is to give you an update on progress. Our top priority for 2014 is to restore growth.

We are making solid progress on our growth priorities. On the business development front, we've completed seven acquisitions at the beginning of 2013, including three this year. Prior to our January call we announced the agreement to acquire Solstas. I'm happy to say the integration is now well under way.

I've been impressed with the professionalism in the quality of the Solstas team that I had met. Solstas will help us improve top-line performance and strengthen our presence in important region of the country. We also recently completed the acquisition of Summit Health a few days ago.

Summit solidifies our leadership decision in the fast growing wellness business. In this business we partner with employers in health plans to provide an overall health assessment, including biometric screening as well as a comprehensive laboratory analysis.

Summit is complimentary to Quest owned wellness offering whose customers tend to be large employers. Both businesses have been growing organically in the double digits. Summit offers wellness services largely through third parties, including through large health plans and employers.

And both Summit and our wellness business also works closely to help retailers and urgent care centres meet their necessity explored new business models. Our specimen collection is largely based on vein puncture and Summit relies largely on fair sticks.

This positions us well in the major Wellness segments including screening, immunization, coaching and disease management. At Investor Day on 11/20/12, we indicated that we are targeting 1% to 2% of revenue growth through strategically aligned acquisitions. As we have shared Solstas Lab about 5% to revenues on a annualized basis.

In addition other acquisitions including Summit and Stewart, we add an additional 1% to 2% to revenues growth in 2014. Beyond the quarter growth we have been highlighting the opportunity to target with hospital systems in integrated delivery networks.

Our investor day on 11/20/12 we spoke about the challenges that integrated delivery networks would begin to have as a result of intensified reimbursement pressure and following utilization.

There are many ways that Quest Diagnostics can help from performing reference testing to various forms of laboratory management partnerships, all the way to including purchasing of hospitals outreach business, such as our recent agreement with Stewart Health System.

What we're seeing over the past year is increased interest from the C-suite of integrated delivery networks, interested in learning more about our broad experience across the spectrum of service offerings.

During our last call we announced that we have reached agreement with three humidity based hospitals, and we indicated that we would have more to share. I am pleased that during the quarter a lab professional services team reached agreement with a significant regional integrated delivery network.

This is a multi-million dollar opportunity evolving several sights. We have taken out hundreds of this client's former employees to operate this lab network and we begin to generate revenues earlier this month. These are all exciting opportunities for us.

This last win is further evidence that hospital leaders are open to new ideas to help them manage the emerging challenges of reimbursement pressure and lower utilization. We have the experience and expertise to help tailor solutions for the needs to hospitals of all shapes and sizes.

Finally, we are seeing results from our focus on specific disease stay-in conditions. We talked about the strong growth in our Wellness business, combining with Summit Health, will strengthen this business.

We have also seen solid growth in our toxicology and prescription drug monitoring offerings, as well as improvements in Hepatitis C, BRC Advantage, and non-invasive prenatal testing.

In Oncology, women's health, we have launched a test to assess the risk of lymph syndrome, a genetic disorder associated with the higher incidence of colon, rectal, and other cancers. While we are making progress, we need to keep our focus on this top priority of restoring growth. We also continue to make progress driving operational excellence.

Our Invigorate cost reduction in this is expected to approach $700 million in run-rate savings by the end of this year compared to 2011. And we also are committed to our longer term goal of $1 billion in savings beyond 2014.

As we have said the operational excellence program which we call Drive, is improving our quality and efficiency, it will enable us to improve our overall customer experience.

You know driving operational excellence is really all about creating a superior customer experience in towards that end we recently launched what we call Our My Quest, which is by Care360 patient portal that allow patients to take ownership of their own results and manage their conditions more effectively.

A new federal rule that took effect earlier this month, gives patients in all 50 States the right to view their tests directly without first being authorized by a physician. We also made great progress on our simplifying the organizations strategy last year.

So in 2014, our intention has been shifted towards building a high performance culture, focusing on our behaviours and delivering results. We also made some important organizational changes. First, I'm pleased that Lidia Fonseca, an industry veteran has joined Quest as our new Chief Information Officer.

I worked with Lidia years ago at Philips in Marlborough. Lidia is now fully engaged in this part of our plant to strengthen our IT capabilities, which includes improving the customer experience and driving efficiencies that will help us reach our $1 billion goal.

Also as previously announced John Hayden, formally our Senior Vice President of Operations has moved into a key role to oversee our equity joint ventures. He has succeeded in the operation role by Jim Davis, who has deep operational experience and had led our Employer Insurance and Products businesses.

Finally we continue to review our portfolio for opportunities to refocus on Diagnostic Information Services and enable us to continue to deliver disciplined capital deployment. We remain committed to our plan to return the majority of our free cash flow to our shareholders through a combination of dividends and share repurchases.

The harsh winter made a particularly tough quarter. But we are seeing signs of continued stabilization in the business and closed this quarter strong in March. We are making progress and recognize that there is much more to be done. Now I would like to turn it over to Mark for a detailed analysis of numbers, Mark..

Thanks Steve. Starting with revenues, consolidated revenues of $1.75 billion were 2.3% below the prior year. Our Diagnostic Information Services revenues which account for over 90% of total revenues were 2.1% below the prior year. Volume was 0.07% favourable to the prior year. Recent acquisitions added approximately 3.5% to volumes.

The seasonably harsh winter depressed volumes by approximately 2% compared to the prior year. You've heard us talk about the impact of weather on our business in the past. Given the severity of this past winter let me take a minute to give you some color on how we calculate the impact of weather on our business.

Our analysis is based on specific declines in volume versus trend for a specific geographies related to various specific weather events. Adjusting for acquisitions in weather, we are estimating our organic volumes decline less than 1% compared to Q1, 2013.

This year-over-year comparison is essentially in line with our exit run rate from Q4, 2013, and is an improvement in the comparison from the earlier periods of 2013. Revenue per acquisition in Q1 was down 2.8% compared to the prior year. The recent acquisitions and price erosion each accounted for about 100 basis points of the change.

While changes in business mix accounted for the remainder. However we except this metric to improve as we move through the year, as certain items will anniversary, including sequestration and certain commercial rates that were renegotiated during 2013, consistent with what we shared with you in the fall of 2012.

We continue to plan our average reimbursement pressure of 1% to 2% through 2015.

Q1 revenues in our Diagnostic Solutions businesses, which include risk assessment, clinical cross testing, healthcare IT, and our remaining products businesses were down 4.3% compared to the prior year, with approximately half of that impact related to the devastator of Inter X last year.

Adjusted operating income at 13.5% of revenues was about 1.7% below the prior year, with the decrease due principally to lower margins associated with reimbursement pressure and limited flexibility in our ability to remove costs in response to short term weather events.

Despite these challenges we continued to make progress on our Invigorate Program, which helped offset wage bill inflation and lower margins on our more recent acquisitions.

As we indicated on our last call, we expect to achieve approximately $200 million in real life savings during 2014, and approach approximately $700 million in run rate savings as we exit 2014, with a longer term gaol of $1 billion over time.

Adjusted EPS of $0.84 was $0.05 below the prior year, with an $0.11 headwind resulting from the impact of the unfavourable weather in the quarter. Special items totalling $28 million principally restructuring in integration costs, reduced reported operating income as the percentage of revenues by 1.6%, and reported EPS by $0.13.

Last year's first quarter included $45 million of costs associated with restructuring and integration charges, which reduced reported operating income as a percentage of revenues by 2.5%, and reported EPS by $0.17. Bad debt expense as a percentage of revenues increased 30 basis points from the prior year to 4.3%.

Two issues to keep in mind on our bad debt, first as you think about the year, our bad debt expense is typically the highest in the first quarter due to increased patient responsibility associated with the un-met deductible amounts.

Second, from a benefit design perspective, as we shared in our last call, we expected that employers would shift more costs to individuals and we see a continued increase in the prevalence of high deductible plans.

Despite this trend we believe we are managing the change in operating environment and continue to see improvement in our collection rates across our various pair categories, as a result of our efforts to drive operational excellence. DSOs were 49 days, a two day increase from last quarter, principally as a result of the Solstas transaction.

That is our results include all of the Solstas accounts receivable balance, but only revenues since the early March close date. Cash from operations was $84 million in the quarter, compared to $47 million in the prior year.

Cash flow for Q1 is seasonally the weakest of the year and as we explained last year our Q1, 2013, cash flow was reduced to a tax payment that has previously been deferred. Capital expenditures were $68 million in the quarter compared to $49 million a year ago.

During the quarter we repurchased $32 million of our common shares at an average price of $52.80. We plan to meet our capital deployment commitments by returning the majority of our free cash flow to shareholders through a combination of dividends and share repurchases.

We also acquired Solstas and recently went to the Capital markets and ran a very successful $600 million bond offering last month at attractive rates, while maintaining our investment grade credit ratings.

We remain committed to maintaining our investment grade credit rating and also remain committed to paying down the majority of the debt associated with the Solstas transaction over the next 18 months. Turning to guidance, our guidance remains unchanged to what we shared last month.

We expect results from continuing operations before special items as follows; revenues to increase 2% to 4% compared to a year ago. Earnings per diluted share to be approximately between $3.95 and $4.15. Cash provided by operations to approximately $900 million and capital expenditures to approximately $300 million.

While the first quarter was negatively impacted by the weather, we continue to believe that guidance is realistic and achievable, and will benefit from our recently completed acquisitions and our efforts to restore growth. Finally I'd like to remind you of some data points to help put our guidance into perspective.

Regarding reimbursement keep in mind some items were anniversary this year, including sequestration and certain commercial contracts. On acquisitions, you should dial 6% to 7% revenue growth into your models for the remainder of the year, 5% from Solstas and an additional 1% to 2% from other acquisitions in the year.

And we expect acquisitions to benefit EPS gradually through the year as integration plans unfold, both Solstas and Summit will be dilutive to second quarter earnings but accretive for the full year.

As a result of these items, we now expect second quarter EPS to approximate the prior year level and to show growth in adjusted EPS in the back half of the year. Now I'll turn it back to Steve..

Thanks Mark, and to summarize the harsh winter hurt us in the quarter, but we are seeing positive signs in underlying trends. Fortunately Congress lifted a cloud from our industry with a recent legislation that effects the clinical out fee schedule, and our top priority for 2014 is restoring growth.

We are pleased with progress we are making on our growth priorities and particularly the recent acquisitions. As we said in January, we believe our 2014 guidance is both realistic and achievable. Now we would be happy to take your questions, operator..

(Operator Instructions) Our first question comes from Glen Santangelo with Credit Suisse..

Thanks and good morning. I just want to follow-up on the pricing question. Mark, if I heard you correctly, I think you sort of talked about the revenue pre-requisition being down 2.8%. You kind of laid out the different components being acquisition, price erosion, and business mix.

I wonder if you can elaborate a little bit more on the price erosion and business mix, you know components of that erosion because I think if I heard you correctly your assuming that pricing will be down 1% to 2% this year and next year.

So given that you’re down almost 3% in 1Q, should we assume that you’re going to start an anniversary in some of these acquisitions and ultimately in some of these contract renewals and so we should see pricing start to improve sequentially throughout the year.

Is that the right way to think about it?.

Yeah I appreciate the question Glen. So first off the 1% to 2% guidance is really a three year from 2013 to 2015. So what we're, what I was trying to emphasise is that we're not deviating from what we had communicated. You know starting with our investor day in 2012 and I think pretty consistently, each time we have a chance to address it.

So the, when you look at the 2.8% that I referenced, the revenue per rack, this quarter about 100 basis points was true price, and that's what we are referring to when we talk about the 1% to 2 percentage. True price independent from business mix and business mix obviously comes in two forms.

One is, should we do acquisitions, for instance we've talked about the toxicology acquisition, we did mid last year. That can have a different structure and had lower revenue per rack, obviously also lower cost per rack as well, and therefore it has a negative mix impact on us.

The other one is the mix within our core organic business as we go forward and things can shift you know quarter-to-quarter depending on tax mix and so on and so forth. So the trend throughout the year, what I'm really talking about is the comparisons year-over-year will improve.

Not necessarily you know forecasting and improvement in overall rent per rack, although we have talked about the fact that we have seen a positive trend in a number of tests per acquisition and that's certainly something that we would expect to continue..

Okay, I appreciate that. Steve maybe if you can just follow-up on the molecular diagnostics piece of the business. You know your primary competitor obviously has called out you know some big challenges getting paid in that area in 2013. Maybe we start and see a little bit of reprieve on that in 2014.

Could you maybe comment in terms of what your collection experiences have been related to the molecular diagnostics and ultimately do you think this could be an opportunity as some of the payers start to maybe ease up a little bit on some of the restrictions here and can just be a tailwinds. For U.S.

we think about the balance in 2014 relative to 2013..

Yeah. Thanks. Glad it. Let me just underscore something that Mark just went through. We feel that we have good visibility on pricing and there has been a lot of interest at pricing in the past and as we said our guidance for the next three years is 1% to 2%.

We shared at 2013 it was going be about 3%, we ended at about 3% and we actually showed in the first quarter that were making movement down. We actually believe that we’re executing well against our pricing discipline approach in the market place and the 1% real price effect in the first quarter, I think, underscores that strategy.

So, Dan answered your on molecular diagnostics. Actually, we continue to work with payers and what I’d share is even though we had been in constructive dialogue, I would not say that it’s material change than what we’re getting paid for by payers. So, this is a continued process we continue to work at.

We’re hopeful we’re having a good dialogue and good discussion, but I can’t say in the first quarter there was material change of what we were paid for versus prior quarters..

Okay, thanks for the comments..

Thanks brother..

Next question comes from Ricky Goldwasser with Morgan Stanley..

Ah yeah, good morning..

Good morning..

Just a couple of questions here. Obviously, we’re hearing a lot of commentary around hep C. I just want to get your perspective.

Are you seeing any upside to your hep c testing business as a result of sociability [ph] you expected to be a meaningful contributor for the remainder of the year?.

Yes. Thanks for the question, Ricky. We did actually mention in Steve’s prepared remarks at just one of the areas that we had seen growth in. So, yes absolutely we’d seen growth and we expected to contribute to our overall business success for after remainder of the year..

Okay.

And can you quantify for us?.

Yes..

Now I’ll take that. It’s tough to quantify. I think as you’re commenting has a lot of visibility right now with the new drug therapies in the market place and now there is effective treatment for hepatitis C.

There is lot more visibility to it and so therefore we should see some tailwinds in the testing we performed, but we can’t quantify for you at this time..

Okay. And then on your ACA comments, obviously, it’s early on and we get most of the uptick in lives towards the - actually we’re getting in first quarter.

But any early insights on ACA-related volumes? How are patients on exchanges utilizing that services versus kind of like your non-NCA population?.

Well. The best way that will I answer at this point were so digestive what we’ll see. We are at commences that for this year on the neutral-to-slightly positive for us in our numbers. We [indiscernible] of this industry or trying to understand the true impact of the exchange.

We still believe there was increase at Medicaid volumes and we’re also trying to digest it and have it on the employer’s side. The [indiscernible] breaking is as you know we do have a larger percentage of our business with highly top [ph] peoples. We are relieving a fair percentage of the new lives.

We will have higher deductibles and as interest they are aiming for our business both in [indiscernible] but actually these people will have to pay our pocket. It’s exactly [ph] what it does to pressure our bad debts. So, we’re digesting it all. We don’t have better fill for it yet, but again we believe it will be neutral to slightly positive in 2014.

Mark, will you care to join?.

Yeah. There is someone come out at us. One of the very positive aspects amongst many of the Affordable Care Act is that there is a number of diagnostic and preventative treatments that are not actually subject to many patients responsibility. It’s not clear that that’s broadly understood.

So, until that’s broadly understood certainly the passion would be so much needed to taking advantage of past not having to work after deductible and these higher deductible plans. So, I think it’s very early. I think it’s the answer. And we’ll be interested, we’ll be monitoring it.

I’m sure you’ll be asking us about regularly but it’s just too early to make a call at this point..

Let me just assemble [ph] on last comment on you for Affordable Care Act again. We believe Affordable Care Act continues to be net positive. This is free and net positive for us. We have said in the past, we’ll continue to say that more people are determined to continue with what we do and that’s the trust..

And that’s – those are included in your 1% to 2% assumptions for pricing trends going forward? Yeah..

We have to do this..

Thank you..

Thank you..

Next question comes from Michael Cherny with ISI Group..

Hi. Good morning, guys..

Good morning..

Good morning..

So obviously, a few weeks ago everyone knows the push-outs you mentioned of the clinical lab fee schedule reimbursement changes. In terms of your negotiations there I guess you obviously think that the clinical lab has been a bit of the crosshair as seen with us for a while now. This is clearly a sign of positive for you guys.

What you think was a key tipping point in convincing CMS to delay some of these costs particularly? And also what you did mention much also was the downside limits on those cuts of 15% released [rail guards] up to 17%..

Yeah, Michael. I have described it this way is if we did a good job actually as an industry as you know active with the Miracle Clinical Episode Association so are number of people in this industry.

We expect a fair amount of time walking the halls of Congress getting Congress involved and what this industry has paid in the past and what is at risk if it in fact we didn’t have any what we’ll describe as guard rails on the process going forward. Fortunately, we got them to listen.

We were fortunately there also thinking about how they would do this year’s doc fix.

We took advantage of that opportunity, and fortunately with the build-up was passed it allowed us some time now to get it to a good dialogue about the rule-making process and also that will allow us to have a comprehensive market view by code that will eventually set the prices that will take effect in 2017. So, we’re encouraged by that.

We have worked on furloughs [ph] to make sure the rules are done correctly and eventually when we do the market analysis and again when I set up my remarks it’s a full market view including all segments of the market place and we feel good about that.

We think it serves all segments well to be participants in that survey, and when we go through the data in 2015 and 2016 we’ll eventually have new prices in 2017. We did have caps at the per code level. You know they are at 10%, but until you get the market data you’re not sure really what the effect would be per code, but that’s 2017.

So, we feel good about the process, we feel good that we’ve some time to digest it and create some stability with us but this is unknown in the market price and as I said from my earlier remarks it actually lifts the cloud that was over this industry that worked in the past. So, we feel good about what’s happened..

Great. Thanks. And just quickly relative to maintaining the 1% to 2% compounded reimbursement cuts to 2015.

Are there any other really unknown there are swing factors one way or the other that could impact on ’15 and the year currently debating to you positive or negative?.

Yeah.

Mark would you like to add that one?.

Yeah. I think the add to that is no. I don’t think there is any other wildcards, at this point certainly not in the radar. So, I think as you mentioned in the past we’ve got a good handle on the cycle of commercial renegotiations.

I think we got a pretty track good of be able to kind of guard rail those as Steve mentioned and we called the 3% going into 2013 that includes negotiation but had yet to be completed.

At that point, we at that pretty much nail right on the head and we talked about obviously our setting those lower rates in 2014 and 2015 and certainly as we shared this quarter it seems like we’re delivering on that. So, at this point, we feel very confident in those guard rails of 1% to 2% that we mentioned over that period of time..

Perfect. Thanks..

Next question comes from Darren Lehrich with Deutsche Bank..

Hey good morning, Darren..

Good morning. Thanks. Good morning, everybody. So I just keen to one of your comments, Steve, just around what you said you’re in the process of updating your longer term view.

Can you just remind us what is your current long-term view of the market? I recalled at the initial Investor Day that you had hosted you thought it was around 4% market growth and maybe just give us a sense for how you’re thinking any differently about the longer term view..

Sure, well enough you to reiterate what we said in 2012 and I guess we have to update it. So, it’s all decimals, but we’ll tell you what we said. We said that we believe that market place was a good market and that’s this market will be growing at about 4%.

Now in that market assumption, we assumed the Affordable Care Act would be taking full force in 2014 and as you know that hasn’t happened, so that was a big assumption in that. Clearly, this has been pushed out. It could be more of a gradual build and we’ll eventually come back to you with our current assessment of the market.

This fall we’ll evaluate what our current forecast is as far as the Affordable Care Act. On the Investor Day I said my comments were really arranged [ph]. The population is growing, we’re all living longer and we [indiscernible] will be into the med care system. Also, advanced diagnostics are critical to persist with medicine.

These all have very positive effects on other Diagnostic Information Services that are needed in the market place. So, we’ll update this when we have our Investor Day in the fall. Some of the assumptions that we had at 2012 really have changed, but we still are optimistic and bullish of the process with this industry..

Okay. That’s all for DGX [ph]. It’s clear that you’re suggesting here that the ACA benefits may just come in more gradually and that seems like a key assumption that’s changed and this would be cherished.

Are there any other things that maybe changing for the better in your view because we’ve heard a lot from you just about the activity in the hospital domain? And I’m just wondering if you think you gain more traction there such that you have a different view the other way in that part of the market?.

Yeah. We’ll see as it’s in our comments. We’re encouraged by the traction we are getting with our dialogues in hospitals. We’ve announced the relationships over the first quarter too a bit about those, and in their [indiscernible] range of difficult relationships that we formed but still got the boasted integrated delivery system.

We feel good that they have decided to continue to work with us and for other in our relationship.

We also announced the small hospital punitive [ph] hospital in North-western Connecticut this week in [indiscernible] again is a community in North-western Connecticut, but [indiscernible] hospital all these happened [indiscernible] the same thing and their cost structure there is [indiscernible] about that.

We also announced with [indiscernible] is that there is [indiscernible] integrated delivery system that has multiple [indiscernible] and all the multimillion dollars as the volume for us and we’re encouraged about that. We started to see some of this.

Then we shared this with you because the [indiscernible] is to build our discussion continued to build around and we think about that, but we’re not so optimistic that at this point we’re going to change our guidance because there are so building and you need to bring [indiscernible] will progress. We feel bit of our guidance for this year..

Okay. That helps for me. Just one follow-up really with regard to your Q2 commentary, I guess be implied on flat year-over-year guidance for Q2 is roughly 6% to 7% below consensus on ETS line.

Are you saying that most of that is the diluted nature from the DOs? Can you just suppose think about prior year you’re giving us this Q2 flavor at this point?.

Yeah, I do appreciate the question. First up, generally, we don’t really address consensus but what I can tell us you is that if we look at the year obviously we’re guiding to something that’s just little bit better than flat year-over-year. So, really the question is how the cord is to get lay down.

In the first quarter your nickel [ph] behind and you mentioned that you do have a little bit of delusion in the second quarter from soft business of it, which really implies that we’re going to pay cut nickel or so in order to grow [indiscernible] in the back half of the year as these acquisitions really become creative through the integration synergies that were driving and take a little time to accomplish.

So, yeah I’m not quite timed to your 6% to 7% below consensus, some of the priority was about 6% and while we’re not speaking precisely, giving you precise number in Q2 which does try to simulate generally flat, a little bit of growth on the underlying business offset with a bit of delusion on the two recent acquisitions. .

Okay. That’s all folks. Thanks very much..

Um hmm..

Next question comes from Bill Bonello with Craig Hallum..

Hi guys. I also just wanted to say hi to Lydia. I worked with Lydia too and I think that’s a great hire..

Great..

I wanted to ask a couple of questions too about the hospital deals because it seems to me like those are really starting to take off. That’s the first thing and you probably talked about this before.

But can you just remind us sort of what your targeting in terms of return on capital with these deals? How we should think about what the metrics that they really need to achieve for you to want to get involved with – I assumed margin is probably less of a concern than return but maybe just elaborate and then we’ll have a follow-up..

Yeah. I’m characterizing that every hospital has its own lab strategy. They were approaching peacefully just working in and were having a discussion about the lab strategy and just like so much it helped to see one strategy seem one strategy same for the lab.

And what we try to give you is portfolio of all the different opportunities, which we find exciting. People are engaged dialogue with us. It all starts. We have a strong hospital business as you know.

We do reference testing for hospitals and people don’t really like relationship and some of these deals will take the form of laboratory management and the deal we talked about that’s a multi-side deal has a portion of that laboratory management. We also have forms of joint ventures in the past.

We have a number of successful joint ventures with integrated delivery systems. And finally, in some cases hospitals want to get out of the outreach business and already between [indiscernible] and the [indiscernible] stores selling the remainder of the household outreach that today of course some hospitals coming their way.

It is an encouraging time that many systems are now thinking or rethinking what they should do in the labs base in the setting that’s best for them to focus on what they do well and rely on earlier [indiscernible] we do well for them. So, we think that’s encouraging.

This supports what [indiscernible] We believe those two large role drivers of value are growth and return on invested capital, and we think that this business or lab professional services business will allow us to restore growth and at the same time be accredited to our return on invested capital targets as before.

And I will turn to Mark to add some color to that as well..

Yes, Steve mentioned. Bill, I’m sure you’re smart, at least deals come in different shapes and forms. So, we buy a business from average business like they were still like [indiscernible] there’s some of the greater invested capital but you also will get higher margins because you owned the business.

Whereas in some of the other deals we’re really just partnering. Obviously, we don’t have as much investments and the margins, therefore, are acceptably lower to still get an attractive return on invested capital. So, we’re really focused on growing our return on invested capital.

Certainly, we try to do as well as we can in the margin in every given deal, which suggests that the structure of the partnership deals are going to be lower margin with lower invested capital than the acquisitions.

I also want to make sure we’re clear because you mentioned that some of the acquisitions are lower margin that’s really the initial margin, so until we drive those synergies.

But as we mentioned and I think I specifically addressed on the January call once we get Solstas, for instance, up and running we expect those margins be comparable to our base overall business..

That’s helpful.

And do you have an actual return hurdle than an acquisition have to gather a deal have they hit that you can share?.

Yeah. No that we can share. Well, we have, as I said, we’re really targeting to grow our return on invested capital. So on the acquisitions we do mention that we wanted to be a creative on our RIC basis by the third year but have not shared specific overall RIC targets or hurdle rates.

I mean as you know, Bill, there is some subjectivity on this because everything has different levels of risk. So, we certainly would not accept anything below or cost of capital and we turn on getting to grow our RIC, which suggests they all have to be above our current level of our RIC but we haven’t shared special hurdle rates..

Okay. Great. And then just one final question, I guess, for both of you. There seems to be an ever-growing mass of clear wave especially labs and for the most part you haven’t done a lot in that area, you’ve done a couple, I guess, in the past.

But can you just kind of tell us your view on that? Can those be attractive opportunities? Those seem to be growing really fast, but I know that there can be other concerns maybe about integrating them with the business like yours, but I just be curious if you think that’s an opportunity for growth or not..

That’s so. First of all, one of our points of our five-point strategy is to build or deliver disciplined capital deployment and as part of that we have a goal to go over 1% to 2% through acquisition. And what we said is we want to use our money wisely.

We’re going to look for strategically aligned accredited acquisitions, and as you get from our comments this morning we feel good about the progress we’re making, we are on the high end of that range. We provided it in our five-point strategy. We’re tracking well against it.

So, Bill in terms of speciality labs we will consider speciality labs that are strategically aligned and they need to be creative. Every deal is a deal by itself and we need to look at it based upon how we can make money for our shareholders, but we’ll consider it but in the end that’s be aligned.

We also would consider make [indiscernible] considerations whether we could do it ourselves and whether it’s wise for us to invest on buyings so that we can do it ourselves, but at the end we need to deliver on our goals of making money for our shareholders and we’ll continue to put up through that filter..

Okay. Thanks..

Thanks Bill..

Next question comes from Amanda Murphy with William Blair..

Good morning, Amanda.

Hi guys. So, I just had a follow-up on some of the questions around volumes. I know there is a lot going on in the numbers that I’m curious. What you guys are seeing in terms of underlying dynamics relative to HAS [ph] plans just in excluding reforming [indiscernible] not.

Are you seeing that impact Q1 volumes or benefit Q4 volumes at this point?.

Yeah, I think looking at that level of granularity it’s a little bit tough and especially looking at the first quarter, Amanda, with the amount of weather we saw it’s tough to read too much in some of these trends at the moment. .

Got it. And I’m just curious about the pathology side of the business.

Are you seeing, I guess two questions there, one, any attempt to sort of insourcing dynamics that’s given all the reimbursement issues in this phase? And then secondly is that an area that you think maybe - or I guess are you seeing more assets in that area, come to market, is that something that you would consider being more active in terms of M&A?.

Yeah. Let me give you some color on pathology. Clearly with the ADA [ph] three or five cuts last year, there’s more pressure on everyone to make money in pathology services and also on the tech side. You would have expected given the pressure that there will be increased interest in outsourcing if you will.

What we shared before then really haven’t changed. We haven’t seen enough material change on people’s perspective on this, but we do have discussions with hospital systems, we go department if you will by department talking about what their strategy is in pathologies consideration, but no notable change at this point. .

Got it. Thank you very much..

Thank you..

Next question comes from David Clair with Piper Jaffary..

Hi good morning, everybody..

Good morning..

First question from me. I was just hoping we could get an update on BRCAvantage and your NITT businesses.

How are they performing compared to your original expectations and any color on reimbursement?.

Yeah, sure. Let me take that. BRCAvantage as you know we entered the market place in the fall. We did this very, very quickly after the Supreme Court decision in June, we feel good about that. We’re gaining traction in the market place. As you introduced product you first have to introduce it to your customers.

There is a variety of segments in this market place from the surgery to radiology to women’s health specialist, and we’re doing that as we speak. We’re actually tracking to our internal plan, which obviously would have a ramp build into it and we feel good that we’re making the progress we would expect.

But also non-evasive prenatal testing is a growth market for us, we’re focused on that as well. We feel that with the progress we’re making there we think it’s a fast growth market place. It is a great example where medical guidelines are actually stimulating demand for us and we’re taking advantage of those new guidelines of the market place.

So, in summary they’re both tracking, they’re both opportunities for growth for us and we’re looking about their prospects.

And Dan, any colour you can give us on reimbursement for using one of those? Mark, would you want to add anything to that?.

Yeah. We have successfully negotiated reimbursement rates with the typical health plans that we contract with. We feel good about the prices again similar to what Steve said on expectation as not just volume but the reimbursement rates that we thought we could achieve. We’re feeling good about those.

So, the reimbursement environment is reasonable certainly like any other task that starts to get lot more attention - the payers start to put some things in place like pre-authorizations, etc.

that can slow down the process, make things a little cumbersome and you’re going to work through some of those issues initially to smooth up the process but no major hurdles on reimbursement in those two categories right now..

Okay. Thank you. And then as you look at the portfolio right now, are there any businesses that you’re kind of looking at potentially the best thing or what’s your thoughts there? I know you’ve pointed out in the past that the [indiscernible] products business is something that could potentially be divested..

Yeah. So again go back to our five-point strategy what we have worked on in the course of 2013 as we’re focusing on Diagnostic Information Services. Back in 2014 we actually sold four assets too small too larger. We continue to evaluate some other portions of our portfolio.

When we had our Investor Day on 2012 we did talk about looking at our strategic options for [indiscernible] products, we’re currently still evaluating that. And we’ve got a few others that will evaluate but we’ll keep you informed as necessary.

We continue to stay focus on our core business, which is Diagnostic Information Services and there is a few things we might consider changing in our portfolio but we made excellent progress making sure that we’re focused on bringing more Diagnostic Information Services companies into our portfolio with our acquisitions..

Okay. And then just one quick one on guidance. I’m assuming the update that you gave at mid March did not include Stewart or the IDN that you’re talking about right now.

So, should we assume that these deals just get you more comfortable with guidance or should we assume that there is potential upside here?.

Yeah. Within the guidance we earmarked with the 1% to 2% for strategically aligned acquisitions. So, while we may not know exactly which acquisitions there might be, we typically have a pipeline.

So, the Solstas’ acquisition kind of stands outside that given its size, you should really look at some [indiscernible] and the other two as kind of being within the envelope of that 1% to 2%. So, they weren’t explicitly in the guidance. I think you should assume they were in place of [indiscernible] guidance..

Okay. Thank you..

Thank you..

Our last question comes from Bryan Brokmeier with Maxim Group..

Hi Brian..

Hi good morning..

Good morning..

How large is your clinical trial business? And despite the recent slowdown are you seeing any impact to that business from the recently high level of biotech financings?.

Mark, go and check that..

Yeah. We have not shared the specific size. It’s one of the smaller businesses within our Diagnostic Solutions. But certainly the slowdown in R&D span has had some impact on the overall market within the clinical trials laboratory area and has made growth a little more challenging.

But we also feel good about our service offering and some of the relationships that we have, which really enable us to maintain work with some of our - as preferred provider for a couple of the drug development company.

So, it’s been tough headwinds but not anything of major significance in terms of the slowdown and we feel good about that business both today and about its future prospects..

Alright. Thanks.

And was the doc fix legislation a fact during your acquisition of the remainder of the Stewart Outreach business and more broadly how does it impact the M&A environment?.

We’ll say that the doc fix legislation had no bearing on your view on our acquisitions that we’ve done in the past and also this year.

And as far as the environment going forward it provides the lift, if you will, the cloud that was over the industry where we’re happy about that and it provides us some time now to work on the rule making we feel good about that.

So, what it did do the doc fix is it will at least provide us with more clarity around pricing and in 2015 and 2016 some reasonable confidence around the clinical lab fee schedule pricing that we should be considering while we’re looking at acquisitions.

So, it’s a part of the conversation, but I can’t say it had an overwhelming consideration for what we do with Stewart..

Does the legislation also make scale much more important in the industry?.

Well, I think there is a lot of dynamics in general around scale in this industry. It’s true for the broader health care industry. Frankly, what you see us driving is a continuation of what we believe is necessary health care and more and more consolidation.

What we did with Solstas, what we did with the other acquisitions are consolidating this industry.

We think that’s strategically helpful to us and also we can make money our shareholders and we’re going to get continue to track down that road because we believe it’s the right strategy for Quest Diagnostics and I think it’s consistent with what you see in other parts of health care overall..

Okay. Thanks a lot..

Okay. Thanks..

Thank you for participating in Quest Diagnostics first quarter 2014 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com.

A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at (800) 937-2485 for domestic callers or (203) 369-3858 for international callers. Telephone replays will be available from 10:30 a.m. Eastern time on April 24 until midnight Eastern time on May 23, 2014. Goodbye..