Dan Haemmerle - Executive Director-Investor Relations Stephen H. Rusckowski - President, Chief Executive Officer & Director Mark J. Guinan - Chief Financial Officer & Senior Vice President.

Glen J. Santangelo - Credit Suisse Securities (USA) LLC (Broker) A.J. Rice - UBS Securities LLC Jack Meehan - Barclays Capital, Inc. Amanda L. Murphy - William Blair & Co.

LLC Lisa Christine Gill - JPMorgan Securities LLC William Bishop Bonello - Craig-Hallum Capital Group LLC Gary Lieberman - Wells Fargo Securities LLC Michael Aaron Cherny - Evercore ISI Whit Mayo - Robert W. Baird & Co., Inc. (Broker) Jason Michael Plagman - Jefferies LLC Ricky Goldwasser - Morgan Stanley & Co. LLC.

Welcome to the Quest Diagnostics second quarter 2015 conference call. At the request of the company, this call is being recorded. The entire contents of the 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 expressed 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'm 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 and also discuss non-GAAP measures. 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' 2014 annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.

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 the website.

Now, here's Steve Rusckowski..

Thanks, Dan, and thanks, everyone, for joining us today. This morning, we'll provide you with highlights of the quarter, share industry trends, and also review progress we are making, executing our five-point strategy. Then Mark will provide more detail on the results and take you through guidance.

Well, we grew revenues, margins, and earnings in the second quarter, and made progress executing our strategy. Revenues grew 1% to $1.9 billion. Adjusted operating income grew 9%, adjusted net income grew more than 8%, and adjusted EPS increased 5% to $1.25. This was the second consecutive quarter in which operating income grew faster than revenues.

This underscores what we've been doing with executing our five-point strategy. We are not just interested in growth at any cost, we are focused on driving profitable growth. And I'll speak about this more in a minute. Before we get into our strategy, I would like to spend some time on industry dynamics.

After two years of some of the heaviest government reimbursement pressure this industry has faced, we're seeing a moderation of that government reimbursement pressure in 2015, and we don't see any significant headwinds for 2016.

Any changes to the clinical lab fee schedule proposed as part of the Protecting Access to Medicare Act, also known as PAMA, would go into effect in 2017. As you know, CMS continues to work on the rule-making process and the data collection that will help determine future reimbursement schedules.

We appreciate the work done by CMS, as well as the complexity of this task, and we will continue to collaborate with CMS throughout this progress – process. So on utilization, we continue to see stability in test volumes on a same provider basis during the quarter.

Turning to the Affordable Care Act, we continue to believe it will be net positive for our company and our industry. The Supreme Court removed uncertainty regarding the future of the act in King v. Burwell.

As we look at the impact on our business to date, as you know, there are a lot of moving parts and we don't have perfect information, but what we can say is that we are seeing growth in our Medicaid and managed Medicaid volumes in different markets around the country, as well as a decrease in our uninsured patient volumes.

These trends appear to be consistent with our expectations related to the new lives coming into the system. We expect this will improve over time as additional uninsured patients begin to access health care. With greater certainty related to the Affordable Care Act, payer consolidation has dominated the headlines in recent weeks.

Today, Quest serves all major national payers with an unsurpassed national network of laboratories, information services and logistics. Health care in general and diagnostic testing in particular are characterized by significant disparities in price for similar services.

It's not unusual for test performed by a hospital lab to cost two times to five times as much as Quest. We offer tremendous value, providing the highest quality at a competitive price. We are very well positioned to help health plans in our networks achieve the most efficient network design and provide members with outstanding service.

Now, let me shift to the progress we are making on our five-point strategy, which is to restore growth, drive operational excellence, simplify the organization, refocus on our core diagnostic information service businesses, and deliver disciplined capital deployment. Well, starting with growth.

This is the third consecutive quarter of organic revenue growth on a consolidated basis. It was also the first quarter we recorded revenue per requisition growth in three years. Now, let me talk about a few of the drivers. Our regional sales team are now better aligned with the clinical franchises and the professional lab services team.

We grew revenues in the quarter for several recent clinical franchise solution launches, including BRCA, CardioIQ, Noninvasive Prenatal Screening, and HIV fourth generation testing. We also continue to see growth in prescription drug monitoring. Last quarter, we shared that gene-based and esoteric testing revenues grew at the fastest rate in the year.

We were pleased to see that the growth rate continued during the second quarter. This focus on esoteric and gene-based testing has continued to be the increase in revenue per requisition. We continue to grow revenues from new relationships with hospitals and integrated delivery networks by helping them improve healthcare outcomes and reduce cost.

Most recently, we announced an agreement to acquire MemorialCare Health Systems' laboratory outreach services business. This transaction fits well within our M&A guidelines, and is a smaller tuck-in type acquisition compared to some of the more recent deals we have completed. We expect the transaction to close in August.

Our M&A and business development pipeline is strong, and we are optimistic about the opportunities our team are pursuing. We said before we're enhancing our diagnostic information services to help customers with population health, data analytics and decision support tools.

These tools are driving growth and helping us deliver a superior customer experience. So, for example, for physicians, our Interactive Insights offer provider trending data, interactive features such as customizable reports and additional content, as videos and articles related to specific conditions and diseases.

We have piloted these solutions with approximately 70 physician providers and are encouraged by the feedback. Now, for hospitals, more than 100 customers are now using our IntelliTest Analytics solution.

This easy to use tool provides hospitals, integrated delivery networks, physician practices, with timely access to utilization insights to assist with laboratory test optimization decisions and driving cost controls. And for health plans, we've expanded pilots with health plans for our Quest Analytics platform.

This self-service informatics tool enables health plan customers to query our massive database to help manage populations of patients, encourage the appropriate use of screening and monitoring tests to drive better health and follow guidelines. We've received very positive feedback.

So we continue to build on our data analytics tools and we will update you on our progress. And then, finally, consumerism is an emerging trend in healthcare, and we offer a number of compelling services in this exciting space. We began to offer our Blueprint for Wellness health-risk assessment directly to consumers in 2010.

Now, we're getting ready to offer Blueprint for Athletes, to help athletes and their coaches and trainers, as well as weekend warriors, gain valuable insights into the training recovery regiments, peak performance conditions and optimal dietary consumption. We also recently announced an agreement with HealthTap, a digital healthcare provider.

HealthTap's virtual network of physicians can offer easy ordering of tests for patients from Quest Diagnostics. Doctors can see test results on HealthTap's platform, and patients can access their own results using our patient portal, the MyQuest application. More than 1.8 million patients have now downloaded our MyQuest application.

A growing portion of those consumers are paying us a premium to gaining access to the historical lab results and maintain access to the longitudinal test results. And last result – last week, we began to offer direct access testing to consumers in Arizona, where a new law just took effect, enabling people to order tests without a physician's script.

We're operating this through our joint venture partner, Sonora Quest Laboratories, which builds on the strengths of our partner, Banner Health, the leading healthcare provider in Arizona. Initial interest in this service is very strong.

As the responsibility for managing and paying for healthcare shifts rapidly to consumers, we are well positioned to be the consumer-friendly diagnostic testing provider. The second element of our strategy is driving operational excellence.

Our Drive program is focusing on delivering a superior customer experience, as well as allowing us to become more efficient. We perform more than 3,000 different diagnostic tests in our large network of laboratories, many of which came to us through acquisitions with different laboratory information systems and billing systems.

We're always looking for ways to improve the service we deliver, whether it's providing more than 90% of our results to doctors by 8:00 in the next morning or making more than 5 million phone calls a year to notify physicians of critical results they can act on. Our investor day last fall, we said we would be standardizing systems and processes.

Since then, the portion of our legacy systems that are standardized has increased from 70% to 75%. Our latest system conversion occurred without any disruptions to clients, which is very encouraging. We also drive and track a number of medical quality and service metrics related to a superior customer experience.

Many of our service elements, such as availability of our Care360 Physician Portal, and our specimen tracking performance are already at Six Sigma levels. In addition, we have saw improvement in several key areas, including wait times at patient service centers, installation of EMR interfaces to onboard new clients.

We continue to move closer to achieving our Invigorate goal of $1.3 billion in cumulative run rate savings by the end of 2017. As I mentioned at the beginning of this call, this quarter's strong operating income performance demonstrates the value we're creating from our improved efficiency.

The third element of our strategy is to simplify and strengthen our organization. We have been focusing on execution and building a performance-oriented culture. Our Quest Management System is the way we run the company by using a set of standard tools and processes.

Additionally, we have been training our leaders and recently launched the leading Quest Academy to provide a rigorous form for putting our Quest Management Systems tools to the test. Academy graduates are now hard at work on teams focused on addressing opportunities and challenges facing our business.

The fourth element of our strategy is to refocus on our core diagnostic information services business. We've made substantial progress in the last 90 days.

As you know, we launched our newest joint venture, Q2 Solutions with Quintiles, in a capital efficient way that provides us with a path to generating better growth and profitability from that business than if we had operated it as a standalone entity. We have a great partner and are excited about the opportunities for that venture.

Quintiles will share more on the joint venture, including expectations related to financial performance, in their upcoming earnings call. We're excited to be working with Quintiles exclusively for a period of time to combine our respective data set to help biopharma customers improve their drug discovery and development process.

Lastly, we continue to review our portfolio, looking at options for non-core assets that can build value for shareholders. The fifth element of our strategy is delivering disciplined capital deployment. During April, we completed the refinancing of more than $1.2 billion of our debt that will lower interest expense for years to come.

We also deployed our cash to reinvest in the business and continue to make progress on our commitment to shareholders by returning approximately $250 million year-to-date through a combination of share buybacks and dividends.

Now, Mark will provide an overview on our second quarter financial performance, walk you through the details of our 2015 outlook, which is based on our strong operational performance.

Mark?.

Thanks, Steve. Starting with revenues, consolidated revenues of $1.93 billion increased by 1.2% versus the prior year and grew organically by 80 basis points. Revenues for diagnostic information services or DIS for short improved by 0.4%, compared to the prior year.

Volume, measured by the number of acquisitions, declined by 0.4%, versus the prior year. However, revenue per acquisition was 0.9% better than the prior year and, as Steve mentioned, it was first increase in three years.

While reimbursement pressure continued to be moderate at just under 1%, we were more than able to offset that pressure through favorable test and business mix shifts. The favorable test mix shift reflects the strong growth in our gene based and esoteric testing.

Moving to diagnostic solutions business, which includes risk assessment, clinical trials testing, healthcare IT and the remaining products businesses, revenues grew by 11% compared to the prior year.

Our diagnostic solutions revenues will be lower on a reported basis in the second half of 2015 as a result of the contribution of our clinical trials business to the joint venture with Quintiles.

To provide you with a representative view of the operational performance of the business, we will communicate our reported 2015 revenue against 2014 revenue on an equivalent basis. Revenue for 2014 on an equivalent basis excludes clinical trials revenues reported in the third and the fourth quarters of 2014.

The 2014 revenue excluded is $41 million and $46 million in the third and the fourth quarter, respectively. Adjusted operating income for the quarter was $321 million, or 16.7% of revenues, compared to $296 million or 15.5% of revenues a year ago.

The improvement of 120 basis points can be primarily attributed to the benefits of our tests and business mix, Invigorate program and continued integration synergies from our 2014 acquisitions. Lower amortization in the quarter versus a year ago negatively impacted the comparison of cash EPS to the prior year by $0.03.

For the quarter, adjusted EPS, excluding amortization, grew 5%, to $1.25. The company recorded after tax charges totaling $52 million in the quarter, $41 million of which is associated with our recent debt refinancing.

The charges also included restructuring and integration costs associated with our Invigorate program and recent acquisitions, and combined to reduce reported EPS by $0.36. Last year's second quarter included $24 million of after tax costs associated with restructuring and integration charges, which reduced reported EPS by $0.16.

As a reminder, we also expect to book a gain related to the valuation of the joint venture with Quintiles. We will adjust this one-time gain out of our earnings. Bad debt expense, as a percentage of revenues, was 4.1%. 20 basis points better than last quarter, but up 20 basis points compared to a year ago.

Our DSOs were 44 days, one day lower than last quarter and three days lower than a year ago. Consistent with the first quarter, we are adjusting our operating cash for the first half of the year to exclude cash charges for the debt refinancing. Adjusted cash provided by operations was $324 million in the second quarter of 2015.

Reported cash provided by operations in the second quarter of 2015 was $275 million and was negatively impacted by cash charges of $49 million associated with the early retirement of debt, in connection with the company's debt refinancing. In the second quarter of 2014, reported cash provided by operations was $280 million.

Typically, cash flow is stronger in the second half. However, this year, we have an extra payroll cycle and a tax payment associated with the previously disposed business that, together, account for about $100 million. Despite these headwinds in the back half, we now expect adjusted cash provided by operations to exceed $850 million for the year.

Capital expenditures were $61 million in the quarter, compared to $49 million a year ago. Moving to guidance, we expect full year 2015 results before special items as follows. Revenues are now expected to be between $7.49 million and $7.57 billion, an increase of 2% to 3% versus 2014 on an equivalent basis.

Adjusted diluted EPS is unchanged, to be between $4.70 and $4.85. Adjusted cash provided by operations is expected to exceed $850 million, and capital expenditures are also unchanged to approximately $300 million. Now let me turn it back to Steve..

Thanks, Mark. Well to summarize, we delivered solid bottom line growth in the second quarter. It was our third consecutive quarter of organic revenue growth. We continue to make good progress executing our strategy. We thank you for your time today, and we'll be happy to take any questions.

Operator?.

Thank you. We will now open it up to questions. Our first question comes from Glen Santangelo from Credit Suisse. Sir, your line is open..

Yeah, thanks and good morning. Steve, just wanted to talk to you about volumes in the quarter. They were probably a little bit slower than what we would have estimated. I'm just kind of curious to get your perspective.

If you think there's -- are you seeing any type of slowdown in the market or maybe is it more difficult comps from the ACA comparisons from last year or does it perhaps maybe reflect some business that maybe you've walked away from that you deemed to be less profitable? Any sort of color on underlying market trends would be helpful..

Sure. Let me start and then I'm going to pass it to Mark. Well, first of all, what I said in the opening remarks is we do this analysis where we look at our stable accounts, and we call it a same provider, same store analysis, and year-on-year what we said they were consistent with the prior years.

So on an existing basis, we feel utilization is stable versus the prior year. So that's point number one. Point number two, as I said in our introductory remarks, we continue to steer our resources, our energy around the higher profit portion of the marketplace, whether that's with better solutions and we've gotten some growth.

As a matter of fact, you see our growth in our higher end portion of our portfolio growing faster than our top-line growth. So that focus is paying off. And then it's also paying off in better revenue per requisition and, obviously, our growth and operating income.

Some portion of that is related to growing the revenue in the right way to get profitable growth. And then I'll turn it to Mark because, as you know, in the past we've talked about some business that we have reconsidered over the last few quarters. We still had that in Q2.

We'll start to lap that in the second half, but I'll let Mark provide some insight into that.

Mark?.

Yeah, thanks, Steve. Glen, you're correct that I think some of that certainly is driven by some of the business that we've talked about for a while and that we thought was lower value add, and I think the fact that we were able to grow revenue and earnings validates that walking away from some of that volume, it was probably a good decision.

And that does anniversary certainly through the second quarter, so we've talked about also the back half having easier comps than the front half. The other perspective I just want to provide is we talked about the weakness of using requisitions for volume. Certainly, we're responsible for that.

That's what we provide, but there certainly are some watch-outs there, so the real important thing is obviously the tests. And I can tell you that test volumes actually grew despite the fact that requisition volumes declined in the quarter. So we feel good about the volumes.

That's what we're trying to drive through our clinical franchise strategy is to actually drive a better outcome for patients, which in many cases means actually filling in more richer req than what it's been maybe in the past and some of the business we walked away were lower value, fewer test requisitions.

So again, we just wanted to give you additional perspective. Actually, test volume did grow in the quarter..

Okay. Thank you very much..

Thanks, Glen..

Thank you. Our next question comes from A. J. Rice of UBS. Sir, your line is open..

Hi, everybody. Just thought I might ask, Steve, you mentioned in your prepared remarks about what's happening in Arizona with the direct access to tests, the legislation and I'm curious. I'm not sure I've heard you guys opine on that.

What's your view about that? Is that something that you would promote in other states? And then more broadly, because Theranos has been in the news and I know they were also part of seeing that legislation pass, any update in your thinking about them or whether you're seeing anything from them competitively?.

Yes, thanks for the question. First of all, we continue to look at the best way to engage with the healthcare marketplace by state. Arizona was notable because of the new law, and we're actively participating in that.

I think some portion of all markets will access the healthcare system this way, not all, and it will be a growing trend with, as I said, the trend around the consumer and that's become an increasingly important part of our business. We also have been offering, A. J., access to our Blueprint for Wellness online. That's accessible beyond Arizona.

And, as I said, we're expanding that with the Blueprint for Athletes offering. So as far as we're concerned, we're going to continue to evaluate where we get more aggressive in certain starts, where it makes sense, where we can still do it. As you know, all states are not created equal here. Arizona was very strong in this regard.

We are trying to see how Arizona goes. As I said, we're actually encouraged by the initial results from what we see in Arizona and we do believe this is a trend we're on top of, and we're very well positioned. You asked a question about Theranos, they continue to be a regional lab that is getting additional labs, as you know.

Probably, it's important for me to mention that part of the attention they've received is around Capital Blue in Pennsylvania. And I just wanted to reiterate for the people on this call that actually Capital Blue is a very strong partner of ours.

And actually, interesting enough, despite that news, we actually extended our longstanding relationship with Capital Blue with a new contract in January of this year. And we are their only national laboratory and its preferred provider.

And, actually, I have recently spoken with the CEO there, and he did note that the arrangement that they have with Theranos does not change, in any aspect, the agreement that they have with Quest.

As a matter of fact, what we went on to talk about is the difficult challenges we faced in healthcare, and what we could do together to help with the challenges of healthcare cost and help with this membership. And what we offered to him, with our great quality and our great cost, is an important part of a solution he sees for his marketplace.

So we are very well positioned with Capital Blue, and we're, again, one of their laboratories, but we're their only national laboratory and their preferred provider. So I wanted to share that with you.

We obviously didn't share that publicly, but to give you some color of, in fact, what we have for a presence in many of our marketplaces despite news you might hear from others..

That's great. I appreciate that. Thanks..

Thanks, A.J..

Thank you. Our next question comes from Jack Meehan of Barclays. Sir, your line is open..

Hi, thanks, and good morning..

Hi, Jack..

Hi, Jack..

Hello. Just wanted to ask, you mentioned the growth in Medicaid and managed Medicaid in the quarter, and starting to see, potentially, some signs from health reforms starting to come through.

I was wondering if you could just maybe parse that out and help us better understand because I think the belief was that new patients were coming through the emergency department.

Do you think you're actually beginning to start to see some managed care come through the physician office? And then maybe states that have expanded versus states not expanded, if you've seen some sort of trend there. Thanks..

Yeah, well, first of all, and again, I'll start and Mark will add to it. On the managed Medicaid side, we are seeing increased volumes. It is in the states that have expanded Medicaid, to your question. As you mentioned, you can read and what we have heard is those states have seen an increase in those lives entering the system through hospitals.

So there's some growth in volumes there. And also, you probably have seen in the last half, we published a study where we looked at diagnosis of diabetes in those states that expanded Medicaid versus those states that did not, and we actually saw an increase in the diagnosis of diabetes with those states that have expanded Medicaid.

So the data is out there that expansion for the low-income portion of our population continues to gain momentum. For all intents and purposes, it's the lives increase that we have seen, and for all intents and purposes, it's hard to track this, as you know. It is the reduction we see in some portion of our uninsured patient volumes.

So we think the momentum is building. The momentum is building for more insured lives, and as we said, back three years ago, we believe when people have insurance, they need what we do. We're at the core of healthcare, and we're 70% of healthcare decision making, at 2% of costs.

So it's a very important part of getting a good baseline understanding of what's happening with someone's life. And, therefore, as they enter the system, we're going to see those volumes.

So, Mark, would you like to add some color to Medicaid?.

Yeah, Jack, I'd say, as we've mentioned before, it's directional. We're seeing some growth in that area, but certainly not to the extent of what our fair share might be of over 10 million new lives in the system. Our belief is that it's going to take some of the newly insured a while to learn how to navigate the system.

Their experience with healthcare has either been nothing or going to the hospital in an emergency setting for a lot of them. And they continue, I'd say, to utilize the hospital to a greater degree than they will over time. So, we're certainly expecting to get our fair share, but I think to this point, we're not there yet.

And as I said, they need to figure out how to find a primary care physician, how to navigate the very complicated healthcare system, and then we'll see certainly more growth down the road.

And we do see a growth that's fairly aligned with the states that have expanded Medicaid, certainly versus the states that have not, and we absolutely are seeing a reduction in the volume of our uninsureds..

Got it. Great. Thanks..

Thank you. Our next question comes from Amanda Murphy of William Blair. Ma'am, your line is open..

Good morning, Amanda..

Hey, good morning. I just had a question on the JV with Quintiles. So I'm just curious. I know it's been – you only recently closed, but wondering if you could share just a general reaction from your side of the world, from clients, as well as if Quintiles might have shared any initial reactions on their side.

And then I know you have a temporary agreement to share data, but any updates on how a relationship might work between you and Quintiles more broadly than the central lab? Thinking about economics of sharing data, and then potentially any revenue synergies that might come out of that data sharing..

Yeah, sure. First of all, our initial reaction from customers is quite good. We continue to build volume in the business that we moved over to the JV. When I say volume, I mean revenue and profit, and you saw that in some of our numbers, and then that's now part of the JV. So that's a strong combination with their strong business.

We're doing this, as I said in my remarks, to build a stronger business when we put both resources together. And this is both in terms of addressing the market, so growing faster, and also taking some cost out. So we're going to be more profitable, and that's why we did it.

So, reactions from those customers that we've gone out and spoke about how we're going to act together with Q2 Solutions has been quite good, and we're encouraged by that. The second part of your question, Amanda, has to do with the work we are going to do together now to tease out, if you will, the value we can create for drug discovery.

The first part of this is we have this incredible capability in clinical chemistry and our data is very strong.

And so, on the testing side, we believe by working proactively with Pharma, we could have an earlier bird's eye access to what we could do with diagnostics and typically have that access to help us be well positioned as the companion diagnostic partner with some of the new drugs that will enter the market in years to come.

So that's one area that we're going to put some work into now that the initial JV has closed. And the second is just the data that we've talked about. We have data, they have data, Pharma has data.

And how do we collaborate together to use that data, in a smart way, to improve drug discovery? And one idea that people have talked about, and we already have done some of this with our data already, is with better patient selection.

And anything they can do to be more targeted and more precise and help with making drug discovery more efficient is a very good thing for our Pharma partners. So that's what we're going to spend some time in.

As I said in my remarks, we're going to take some time now to work with the management team of Quintiles to see if we can find exactly what we will do. We're proud to say we have formed all of this in a very capital efficient way, and we're going to deliver good value for our shareholders..

Okay. Thank you..

Thanks, Amanda..

Thank you. Our next question comes from Lisa Gill of JPMorgan. Ma'am, your line is open..

Hey, Lisa..

Hi, Steve, how are you?.

Hey, good morning. Doing well..

Good morning. Thanks. I just had a couple quick questions here. I guess my first question would just be around PAMA.

Do you have any thoughts or insights into the timing? I think that many of us are tired of sitting and waiting for it to come, but just wondering if you are hearing anything out of Washington, as far as the timing of that?.

Yeah, well, we continue to share the information we have with you all. As we shared, we said the goal was to have the draft guidance out in June. Well, we're past that date. But we continue to hear that we're going to be seeing something, not in the distant future, but hopefully in the near future. They're not specific on timing.

And as I said in my remarks, it's because it is a very complex task that we're all taking on. We're all engaged. We're working proactively with them. Our trade association, ACLA, which I'm the chairman of, is actively engaged with them.

So, we're entering this with the spirit of making sure we get the data we need to have to rebase the clinical schedule in 2017.

And, again, we want to make sure it's a full view of the market, which includes all laboratories we compete with, and obviously that includes small independents, large nationals and hospital outreach labs because that's a big part of this market, as you all know.

So we know what we have shared and we continue to be anxiously waiting, as you, for the guidelines. We'll have time to comment on that. We have a lot of data to collect in 2016 to get the refresh done in 2017. So that's the schedule we have..

Is there anything that's changed your view that the full view of the market would be included based on any discussions that you've had in your role?.

No, no, not at all. As a matter of fact, we've shared precisely what we shared with you, as far as the market – the competition in the market, which includes about a third of the market being hospital outreach.

As you know, when you buy a hospital outreach business we have to go through antitrust reviews so, by definition, if you have to go through antitrust review, they are our competitor, and therefore they should be part of a full view of the market. So we haven't got any kind of push-back on that at all.

So we continue to believe that we will be included because they should be included..

Okay. Great thank you..

Thank you..

Thank you. Our next question comes from Bill Bonello of Craig-Hallum. Sir, your line is open..

Great..

Good morning, Bill..

Hey, good morning. Thanks a lot for taking my call. Sort of a big picture question here on the hospital strategy. I'm just wondering if there's any metrics at all that you can share with us to give us some indication of how those deals are going.

I don't know if there's a growth metric at what you've acquired or partnered with or a profit improvement or just something that gives us a sense of how that strategy is going and then just your thoughts on continued activity there going forward..

Yeah, yeah. Well first of all, we continue to be very encouraged. I would say that the interest on the lab strategy for hospitals and integrated delivery systems continues to grow. As I said in my comments, we are very encouraged by our funnel and our discussions.

When you enter into discussions with large organizations, it takes a longer time to come to conclusion, but we're making progress on some bigger prospects that hopefully we will be sharing with you in the second half.

With all that said, we've talked about us closing on a number ever opportunities already, and what I'll share with you in the back half, you'll see some more.

We have not broken it out because typically what we do, Bill, is we take these opportunities and we fold those into our regions and that's how we can get synergies and we can have advantages for hospital systems working with us.

In some cases, we offload some of the hospital test menu and we move them into our closely located laboratories, which allows them to benefit from our effectiveness and our cost structure within that hospital environment.

So it's more difficult to tease it out, but we are encouraged by the trend and we think this is something that we've invested in as part of our growth strategy. We feel good that we've put our bets in a good place and there will be more to come on this in the quarters to come..

Thank you very much..

Bill, as we shared, the six deals we closed in the prior year, were about worth $40 million in revenue. I will also mention that some of the first teals we did were smaller. It was kind of our proof point. So you shouldn't assume that that's the average deal we might close going forward. So as we've gotten more learning, we got more confident.

We've engaged actually with some deals with the potential to be much larger than the average we've closed thus far..

Oh, very helpful. Thank you..

Thanks, Bill..

Thank you. Our next question comes from Gary Lieberman of Wells Fargo. Sir, your line is open..

Good morning. Thanks for taking the question. Just looking at the detailed EPS guidance in the press release. The overall number, the $470 million to $485 million is the same. The components moved around somewhat.

Would it be possible just to go through those and sort of get some color on what each line item is moving around for?.

Yes, typically in the press release tables, we update some of the line items around restructuring and some of the adjustments just for the year-to-date impact as much as anything else..

Okay. So for the restructuring we should expect, I guess, that to continue to increase and then the -.

That will increase as we move throughout the year with those adjustments, yeah..

And the diluted EPS, I guess, will be offset by that? So sort of assuming all else being equal, the total number to remain unchanged but the components to move around?.

That's fair..

Okay.

Any reason you guys do it that way and not sort of put the restructuring where you would expect the spending should be?.

Not particularly. I mean, this is how we've done it historically and it's just based on our latest updates and latest actual results at that point..

Yeah, Gary, as I mentioned earlier, we anticipate a significant gain on the creation of the joint venture, so that will be an adjustment in the other direction. What we also have mentioned is our attempt is to provide better information.

That's why we do these adjustments and if you look at a three-year period, from 2012 through 2014, actually adjusted earnings and GAAP earnings are very, very close. So we have adjustments up, we have adjustments down.

We're trying to provide clarity and to Dan's point, the reason we do the tables we have, is not that we're wed to anything specifically, but we're trying to be consistent to make it easier and clearer on our stakeholders..

Okay, that's helpful. And then maybe one follow-up, just on pricing, what are you seeing from competitors? Going back to Theranos, Theranos has put out sort of their very specific test menu with prices.

Is that having any impact in your conversation with payers?.

Well, we're tracking to where we expect it to be for this year and also over the last three years. We have shared our guidance about three years ago, as far as what we expect to be seeing for price impact. We're in that envelope. So we feel good about our visibility on that. We've delivered on what we said it would be to you all.

So you should have confidence we have a good handle on this. As far as pricing is concerned for 2016, what we shared is we see less pressure on the government side, based upon what we know about the clinical ad fee schedule and the physician fee schedule. So that's encouraging.

And then we already got the question on PAMA what's happening in 2017 and beyond. We'll keep you abreast of what happens there.

As far as visibility and pricing in the marketplace, as you know, the way patients and consumers engage with the marketplace, the question is, when do they actually have the out-of-pocket cost? And yes, we have published our own prices in Arizona and we think those prices are very competitive.

When you look at our average price per requisition, if you were just to go through our 10-K and you just make an assumption around test per requisition, you see a very strong value proposition from Quest Diagnostics in the marketplace and as you know, most people in this country have insurance. That's a growing percentage over time.

So therefore, for diagnostic testing, and as you also know, there's a portion of the Affordable Care Act that was related to screening and diagnostic testing. Some portion of what we do does not have out-of-pocket cost to consumers.

So, how this all pans out as far as what the consumer will actually pay and how our prices affect kind of general visible and transparency of pricing in the marketplace, we'll see. The last part of this, I just want to reiterate, if you look at prices in this industry, there's wide disparities on prices.

Hospital outreach organizations are sometimes in the neighborhood of two to five times more expensive than our prices.

We think transparency around all of that for consumers and for health plans to provide to their membership is very important, and we're right in back of all that because we think that serves us very well, because our quality and our price of that quality is really unsurpassed in our marketplace.

And so the more volume we get around that, the better for us, we believe..

Yeah, and I just want to add this important distinction. So the direct-to-consumer prices are really a self-pay price. So for anybody who's got commercial insurance, and depending on your plan, even if you make the decision yourself on a test, there could be coverage and there might be coverage, you'll get the negotiated commercial rate.

And in fact, our prices with people who have commercial insurance are not all that different than the competitor mentioned. So we feel pricing is actually an advantage for us. We'd like to see more transparency.

Our largest national provider has a tool where people who are a part of their plan can go to their site and can actually shop and we think that's a real positive thing. So we're in support of pricing transparency. But there is a difference between what self-pay price might be and what people have under their commercial coverage.

Got it. Thanks very much..

Thank you. Our next question comes from Michael Cherny of Evercore ISI. Sir, your line is open..

Good morning, guys..

Hey, Michael..

Good morning, Michael..

So, just one quick housekeeping question. I apologize if I missed this.

Did you give the acquisition contribution specifically related to volume in the quarter?.

We did not because the acquisitions pretty much – (49:19) anniversaried in Q1 and Summit was at the very beginning of April. So it's just inconsequential, so we didn't tease that out..

Perfect. That's helpful. I just want to type the model there. And then, you talked a lot about the pipeline related to the hospital businesses, and obviously, also, your M&A strategy.

As you think about the moving pieces related to regulatory changes between SCOTUS finally being decided, the upcoming pending decision on PAMA, whichever way that's going to shake out, how does that impact the M&A environment? How does it impact the discussions you're having as part of that pipeline? Is there a rush to get deals done in the face of uncertainty related to the moving piece? Is there a wait and see until we get particularly something like PAMA out of the way? So I would think that either way, whichever way PAMA shakes out, it would probably open up some opportunities in terms of closing down or closing out deals in the pipeline versus what you may have right now.

So I'm just trying to get a sense of how that's changed the discussion, if anything, if that's had any impact as well on the types of multiples that sellers want from you..

Yeah. Well, we just say, in general, it's not changing our pace of our acquisition portion of our strategy. We have always had and will continue to have going forward, as a portion of our Restore growth strategy, of having about 1% to 2% top-line growth from acquisitions. So our growth strategy is both organic and through acquisitions.

So, it's an important part of our strategy. And because of that, we've been actively engaged on it. We announced the Memorial deal already. We said that we have more in our pipeline, so you should expect that there will be something else to come.

As far as the deals itself, we continue to be very disciplined with how an acquisition would fit into our strategy, it has to be strategically aligned, and we have to meet our financial thresholds. And when we look at that, we continue to be prospective on what we think might happen with payment going forward.

And you did mention PAMA and what could happen with the clinical lab fee schedule, but it is an unknown for the whole industry. So, I would say in general, that's not an active consideration right now, and just what's happening in the general environment is not changing our pace or perspective on any of this right now..

Great. Thanks, Steve..

Thanks..

Thank you. Our next question comes from Whit Mayo of Robert Baird. Sir, your line is open..

Hey, thanks. Good morning..

Good morning..

Hey, good morning..

Mark, can you just give us a sense of maybe where you are on Invigorate in terms of realized savings at this point halfway through the year, and what you expect for all of 2015? And then maybe just qualitatively, give us a sense of where you see some of the savings coming from..

Yes, so we haven't broken out the incremental $600 million that we talked about, taking us from over $700 million at the end of 2014 to $1.3 billion over the next several years. So we haven't broken that down by year, having suggested that it's proportional.

However, obviously, you can see, as we committed, that some of that Invigorate is now starting to help us to actually grow profitability and not just to offset some of the headwinds. So we haven't teased out the exact numbers at this point, Whit, but you shouldn't expect that it should be skewed heavily in one direction or another.

The $600 million is going to be fairly steady over the next couple of years..

Okay.

And then maybe just qualitatively, just maybe where do you see a lot of the savings coming from at this point?.

Yeah, so it's the things we talked about. Obviously, you start with some of the things, basic, such as procurement excellence, certainly some of the lab efficiencies that we're driving through our Quest Management System.

We did talk about some things that probably are going to be skewed toward the back end in terms of the full savings that Jim Davis referred to specifically, the three planks about e-enablement, certainly getting paid more for the work that we do and the value that we provide, those things.

Some of the things are going to take a little longer, though certainly were in the early stages.

We've talked about starting to implement credit cards in our patient service centers, starting to put them in some – inner office (53:46) to actually get payment more upfront, instead of having to chase it after the fact, more similar to what the rest of the healthcare industry has been doing for quite a while.

So, it's not as if some of these things are going to not start until the back end, but some of them are just going to take longer to get to their full level of savings.

All of those things, along with some of the things that we've been doing for the last several years, are going to continue to help us drive Invigorate up to that next level of $1.3 billion..

No, that's helpful. And maybe just one last one for Steve. I mean, obviously, CMS has missed the statutory deadline to publish the clinical lab fee schedule.

And just any idea why we haven't seen this, and just any updated expectations and thoughts on PAMA and the data collection process?.

All I can share is when we've engaged with them, and I said this in my remarks, this is very complex. There's – we're one of thousands of laboratories. We have thousands of tests. They need to – and we have hundreds of payer contracts, and we're one. So if you go through the math, I mean, the degree of complexity by code is significant.

So they're trying to understand how they collect the data in a reasonable way, and then curate that data to be able to make some sense out of it. And so as they got into it, it is a tall order for them to try to accomplish.

So that's what I would share as the reason why I believe that they have not, missed the deadline and continue to be silent on when they think they're going to get this done.

With all that said, it is what we have to try to figure out, and we do want to continue to work with them in good faith as an industry to get this put together, so we can get the data and have them share with us what they think the clinical lab fee schedule will be in 2017. So that's what I can share, Whit, that's what we know..

Okay, great. I guess, we'll just wait and see. Thanks..

Yeah..

Thank you. Our next question comes from Brian Tanquilut of Jefferies. Sir, your line is open..

Hey, guys, this is Jason Plagman on for Brian. A question on – so your organic volume growth has been around flat for the last year or so.

Are you seeing anything in the market that would lead you to believe that'll change significantly in either the second half of 2015 or 2016?.

Yeah, well, what we have shared is that some portion of that organic volume for us is related to decisions we have made. And some of those are strategic as far as where we're focusing our energy in the higher end portion of our portfolio, and some of it is around customers.

And we also have shared in the back half, some of that becomes an easier comp for us.

And, Mark, why don't you just share perspective on what we've talked about in the last three quarters or four quarters and then what will happen in the back half with our organic performance on volumes and revenue?.

Yeah, well, as I noted before, you've seen that despite some volume declines, we've actually been able to grow revenue the last several quarters. So first off, I want to mention that. But yes, as Steve mentioned, we did have some of that volume, less profitable volume that we walked away from, and that's gotten behind us.

And then we did also cite some competitive losses, Department of Defense was one of them that was a while back. A lot of the implementation really happened over the last 12 months. And then there was a large Blue's plan in Philadelphia, Independence Blue Cross, where we were at par with our chief competitor, and they negotiated a rate to exclude us.

So we did have that loss. Now, that again largely gets behind us as we go into the back half of the year. So those two large losses combined with the volumes that we walked away from have made volume certainly a headwind over the last 12 months, but those comps get a lot easier in the back half..

Yeah. Just to underscore what Mark has said, we continue to share with you that our Restore growth plan is both organic and through acquisition. We feel very good that in the first half, we grew greater than 3% growth in revenues. It's a good number. Some portion out of that is organic and some portion through acquisitions.

As you know, in the second quarter, we were lighter in acquisitions, and we provided you guidance in the back half of the year. And that 3% growth has allowed us to grow earnings at the level that we have, and it's real earnings. If you look at our operating income, it's up nicely versus last year. We're proud of that.

And, also, we've gotten expansion, margin expansion. So, we think we've got the right formula here that we're working, and we'll continue that formula because at the end of the day, as you all know, the way we're going to get our value up for this company is to continue to grow our earnings, and we think we're on the right path to do that..

Thanks, guys..

Thanks..

Thank you. Our last question comes from Ricky Goldwasser of Morgan Stanley. Ma'am, your line is open..

Hey, Ricky..

Good morning, Ricky..

Yeah, hi. Good morning, and thank you for squeezing me in. So, a couple of questions, follow-up questions here. First of all, Mark, you highlight the fact that test volumes were actually up despite requisition coming down.

So, can you just give us a little bit more detail on, on average, how many tests per requisition you're seeing now, and how does this compares to kind of maybe last quarter or last year? And then also, how does this go over to pricing? I mean, obviously, that should be positive for average revenue per requisition, but just that we get a sense because pricing was positive for the first time in a very long time.

I know you talked about esoteric is a positive trend, but if you can just help us kind of like think about number of tests per requisition versus test mix..

So, Ricky, your first question, we have provided some visibility on our requisition volume over the years and also what tests we have seen annually.

And, Dan, why don't you share those numbers we've shared in the past?.

Yeah, so what we said is in terms of requisitions, we said last year was requisition count was about $156 million. We said that in general, we see, on average, about three to four tests per requisition.

When you think about that and on your question about the revenue per requisition growth, just keep in mind, that's a combination of both the pricing and reimbursement pressure that we're seeing, as well as the benefits of some of the test and business mix shifts.

So when you think about pure pricing, the reimbursement pressure is a little bit less than 1% for the quarter. And so, how we got to that favorable revenue per acquisition overall is really being driven by favorable test and business mix shifts.

Steve and Mark both mentioned gene-based and esoteric testing had – grew very nicely in the second quarter, grew in the first quarter as well. And so, some of the benefits of those additional tests on requisitions, as well as a richer test in some of the things that we are selling, has benefited that revenue per requisition calculation..

Okay. Thank you. That's helpful..

And that outcome is not a coincidence. It is a consequence of our strategy, to steer a larger portion of our portfolio to where we can make more money and where we can deliver value..

Okay. And then, Steve, a follow-up question on – just to get your market perspective. In the past, the number of tests that are offered on a menu has been, I think, a limiting factor or a critical factor for a lab to penetrate the provider segment, whether it's ambulatory or hospital.

Is that still the case? And what do you think is that critical number? Do you need to have 250 tests on your menu, do you need 1,000 tests, do you need more than that?.

So, we – as one of our elements of our value that we deliver to all our clients, including integrate delivery systems in hospitals, is we have one of the broadest test menu of anyone. So, as you know, we've got the most routine and the most advanced, and we're bringing new science to the marketplace every day.

We're proud of that, and we think it will continue to be a differentiator. The hospital market, the referencer (01:02:40) market, is a more concentrated marketplace. It's – there's no specific number because in addition to the test menu, it includes consideration about quality and service and reputation in the marketplace.

And, yes, pricing is a consideration for that as well. So, you have to put all of those elements together to eventually really understand what happens at the end of the day of us getting reference work and more hospital business versus others. So, there's no particular number that we can see..

Okay.

And then just what is self-pay as a percent of your revenues?.

About low single digits. I think it's about 2%..

Okay. Great. Thank you very much..

Thanks, Ricky..

Okay. I think we're up on time. So I just wanted to say once again that we believe we had another good quarter. We are making solid progress executing our strategy. We appreciate your time here today and we hope you have a great day. So take care and see you in our travels..

Thank you for participating in the Quest Diagnostics second quarter 2015 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 800-677-4302 for domestic callers or 402-998-0977 for international callers. Telephone replays will be available from 10:30 a.m. Eastern Time today until midnight Eastern Time on August 21, 2015. Good-bye..