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

Ricky Goldwasser - Morgan Stanley & Co. LLC William R. Quirk - Piper Jaffray & Co (Broker) Jack Meehan - Barclays Capital, Inc. Amanda L. Murphy - William Blair & Co. LLC William Bishop Bonello - Craig-Hallum Capital Group LLC Dave K.

Francis - RBC Capital Markets LLC Robert McEwen Willoughby - Bank of America - Merrill Lynch Michael Aaron Cherny - Evercore ISI.

Welcome to the Quest Diagnostics Third 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'd 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, 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 Update 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 I'll provide you with the highlights of the quarter, share a few comments on the industry dynamics, and review progress on our five-point strategy. And then Mark will provide more detail on the results and take you through guidance.

We grew revenues, margins and earnings in the third quarter. Revenues grew 1% on an equivalent basis to $1.9 billion. Adjusted operating income grew approximately 7% and operating margin expanded by 130 basis points compared to the prior year, once again reflecting improved operational efficiency.

And adjusted diluted EPS increased approximately 7% to $1.28. Before I get into our strategy update, I'd like to talk to you about industry dynamics, starting with the recent CMS proposal related to PAMA. We are currently reviewing the draft and are sharing our perspective with the trade association.

As you're well aware, this is an important issue for every lab because it will result in a refresh of CMS' clinical lab fee schedule, which will apply to independent physician and hospital laboratories for their fee for service Medicare payments. We have said all along that PAMA needs to be built on an accurate representative view of the market.

We were disappointed that the draft provided as many limitations as it did to the definition of applicable lab.

In a recent study, the Office of Inspector General reported that the two largest independent labs represented only approximately 17% of the total Medicare spending from the clinical lab fee schedule, while hospitals and physician offices represented nearly half of the total Medicare spend. PAMA stands for Protecting Access to Medicare Act.

It would be a terrible irony if the data collection process demanded by PAMA had the unintended consequence of reducing access to critical laboratory services that could cause some labs to close their doors to Medicare beneficiaries.

Additionally, the coding containment proposals recently released by CMS jeopardized the advancement of personalized medicine. These proposals failed to take into consideration the value provided from clinically validated information that further advances more targeted and sophisticated approaches to patient care.

That said, we remain optimistic that the proposed rulemaking will result in an outcome that the industry can live with even if it takes a bit more time to finalize. Now, let me shift to the progress we're making on our five-point strategy.

To remind you, it's to restore growth, drive operational excellence, simplify the organization, refocus on the core diagnostic information service business, and deliver disciplined capital deployment. Well, let's start with growth. This was the fourth consecutive quarter of organic revenue growth on a consolidated equivalent basis.

Let me share with you some key elements of our strategy. First, revenues from our gene-based and esoteric testing revenues continued to grow. We also saw significant growth through infectious disease testing, prescription drug monitoring and our industry-leading wellness business.

Our science and innovation team continues to work with our clinical franchises to bring new solutions to the market. In October, we announced the launch of two companion diagnostic solutions for non-small cell lung cancer based on the recent FDA-approved Merck therapy, called KEYTRUDA, as well as Bristol-Myers Squibb's therapy, called OPDIVO.

Both diagnostic tests are from Dako, an Agilent company. Second, over the past few years, we've outlined our strategy to partner more effectively with hospital systems.

We have shared our view that hospitals will look to partner with us in running their in-patient laboratories as well as their outreach service models, and we expect to announce additional agreements by the end of the year.

Finally, over the past few quarters, we've shared additional proof points on our three information solutions that help customers with population health, data analytics and decision support tools.

Specifically, our Interactive Insights for physicians, our IntelliTest Analytics Solutions for hospitals and health systems and finally, our Quest analytics platform. In late September, we announced our partnership with Inovalon to deliver our data diagnostic solution.

Our data diagnostic solution will provide a real-time point of service suite of analysis to physicians at the patient level.

This solution will help physicians improve care through a better understanding of the patient's medical history and review that history gives relevant quality metrics through the use of big data and real-time connectivity solutions. These solutions will help deliver valuable insights precisely when and where clinicians need them most.

We believe this value-added information will help drive the transformation from volume to value-based healthcare. The second element of our strategy is driving operational excellence. We continue to make progress with our focus on building e-enabling services, standardizing our processes data and systems, and improving cash collections.

We continue to move closer to achieving our Invigorate goal of $1.3 billion in cumulative run rate savings by the end of 2017. We continue to simplify and strengthen our organization, which is the third element of our strategy.

We are proud of the professionalism and commitment of our employees, which has enabled us to be included in the Dow Jones Sustainability Index for the past 12 years.

Quest Diagnostics was one of only eight healthcare equipment and services companies listed on the Dow Jones Sustainability North American Index and one of only 11 companies listed on the Dow Jones Sustainability World Index in the same category. The fourth element of our strategy is to refocus on our core business.

In July, we finalized the joint venture transaction with Quintiles. The new entity, now known as Q2 Solutions, is off to a great start with strong culture built on collaborative strengths of both JV partners. We continue to review our portfolio, look at options for non-core assets and are focused on building value for our shareholders.

And then finally, we remain focused on the fifth element of our strategy; delivering disciplined capital deployment. Year-to-date, we have returned approximately $330 million to our shareholders through a combination of dividend and share buybacks. Additionally, we continue to invest in our business and announced two acquisitions.

Looking forward, we continue to have a strong M&A pipeline. Now, Mark will provide an overview of our third quarter financial performance and 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 $1.88 billion increased by 0.9% versus the prior year on an equivalent revenue basis; that is excluding the third quarter 2014 clinical trials revenue. On a GAAP, or reported basis revenues, were lower by 1.3%. Revenues for diagnostic information services were flat to the prior year.

Volume, measured by the number of requisitions, declined by 0.2% versus the prior year. Revenue per requisition was 0.2% better than the prior year, marking the second consecutive quarter that revenue per requisition grew compared to the prior year.

While reimbursement pressure continued to be a moderate headwind, we were able to more than offset that pressure through test and business mix.

This reflects our strategy to grow our esoteric testing business and drive profitable growth Moving to our diagnostic solutions business, which now includes risk assessment, healthcare IT and our remaining products businesses, revenues grew by approximately 18% on an equivalent basis compared to the prior year.

That is again excluding the third quarter 2014 clinical trials testing revenue. On a reported basis, diagnostic solutions revenues were lower by approximately 17% from a year ago. Adjusted operating income for the quarter was $325 million or 17.3% of revenues compared to $304 million or 16% of revenues a year ago.

The improvement of 130 basis points can be primarily attributed to efficiencies from our Invigorate program. In the quarter, adjusted net income grew by approximately 7% compared to a year ago. For the quarter, adjusted EPS, excluding amortization was $1.28, 6.7% better than a year ago.

In the quarter, reported operating income benefited from the $334 million pre-tax gain on our contribution to the clinical trials testing joint venture. This benefit was partially offset by net charges related primarily to restructuring and integration costs totaling $28 million. Overall, net adjustments benefited reported diluted EPS by $1.17.

Last year's third quarter reported operating income was reduced by $48 million or $0.22 per diluted share principally due to restructuring and integration costs. Bad debt expense as a percentage of revenues was 3.9%, 20 basis points better than last quarter and 10 basis points better than a year ago.

Our DSOs were 44 days, two days lower than the prior year and flat to last quarter. As Steve mentioned, we continue to improve our cash collections at a time when there is a growing portion for the healthcare bill paid by patients. Reported cash provided by operations was $212 million in the third quarter of 2015.

Adjusted cash provided by operations was $188 million in the quarter, excluding cash tax benefits realized during the quarter, related to the recent debt retirement. In the third quarter of 2014, reported cash provided by operations was $271 million.

Cash provided by operations was lower than a year ago largely due to a payment against certain tax reserves in the third quarter of 2015. Capital expenditures were $52 million in the quarter compared to $102 million a year ago. Before moving to guidance, let me share a few comments to help you frame our guidance for the remainder of the year.

First, we delivered strong results for the quarter that are in line with our expectations for the full year. Second, through the first three quarters of this year, we have shown steady growth in operating income and will continue to see improvement in Q4. However, this improvement will be largely offset by a higher effective tax rate in Q4.

As a result, we anticipate a slower earnings growth rate in the fourth quarter than we have seen throughout the first nine months of the year. Moving to guidance, we now expect full year 2015 results before special items as follows.

Revenues are now expected to be approximately $7.49 billion; adjusted diluted EPS, excluding amortization to be between $4.75 and $4.80, basically unchanged from previous guidance with the tightening on both ends of the range.

Adjusted cash provided by operations to exceed $850 million and capital expenditures are now expected to approximate $275 million. Now, let me turn it back to Steve..

Thanks, Mark. While we delivered another solid quarter as many of you recall at last year's Investors Day, we shared our expectation that we would deliver revenue growth of 2% to 5% and earnings growth of 8% to 10% over the next three years. Through the first nine months of this year, we are meeting that outlook.

Revenues are up by more than 2% on an equivalent basis and earnings are up by 10% from a year ago. We're pleased with our performance and are on track to meet our expectations for the full year. I'd like to say that 45,000 dedicated employees that work at Quest remain focused on delivering a superior customer experience every day.

This commitment is helping us to execute our strategy and deliver on our commitments. Now, we'd be happy to take your questions.

Operator?.

Thank you. The first question comes from Isaac Ro with Goldman Sachs. You may ask your question..

Good morning, Isaac..

Sir, please check your mute button..

Isaac? You want to move onto the next question, Christine? And if Isaac comes back in, we'll take him..

Thank you. The next question comes from Ricky Goldwasser with Morgan Stanley. You may ask your question..

Yes, hi. Good morning..

Good morning, Ricky..

Good morning, Ricky..

So just had kind of like a follow-up question on the volume and one on PAMA. So we talked a lot over kind of like the first half of the year about the easing comp into second half around the contracts, right, with your anniversary from last year.

We haven't really kind of like seen a significant uptick in the third quarter; so can you just kind of like walk us through kind of like what you're seeing in evolving environment and how should we be thinking about volumes for the remaining of the year?.

Yes. So thanks, Ricky. Well, first of all, let me go back and refresh ourselves on where we've come from and the progress we've made. Then, we'll talk about specifically what we're seeing in Q3 and Mark and I will tag team this.

First of all, if you recall, back in 2017, we said at our first Investor Day that this had been a company that had declining volumes and we needed to first slow down the rate of decline, flatten that out and start to show improvement and continue to show progressive improvement, and that it would take time.

So if you think about the past few years, if you go back to 2013, our organic revenue declined by about 4%. If you go back to 2013, our organic revenues shrank by about 2%. As you know, what we just said is in the last four consecutive quarters, we've seen our organic revenue growing by 1%, so we are making progress.

And then if you look at it, what we're doing to grow our business and also grow our margins is to focus on the larger req portion of our business and the richer req portion of our business, which is the more sophisticated, esoteric and genetic piece of our business, which is growing faster.

And what you've seen for the last two quarters is nice progress in our revenue per requisition, which is helping us both in revenue as well as profit growth for the quarter. And then also, our growth strategy, as you know, is not just related to organic growth but also grow through acquisitions.

We do plan in our strategy 1% to 2% growth through acquisitions with the exception of MemorialCare and what we just announced last night, which is a smaller acquisition in our ExamOne business. We haven't had a material acquisition as soon in the year as we expected.

However, what you did hear in my commentary, we do have a strong M&A pipeline and we do expect to be seeing some of that come out in the months ahead. So let me turn now to Mark of what we saw in the third quarter in terms of our volumes and the general environment we're seeing..

Yes, so thanks, Steve. Ricky, as Steve mentioned, we are making progress. We certainly would have liked to have seen even stronger volume in the third quarter. We did see a couple of things, a couple of trends I'll mention. And as we've also talked about in the past, we don't have any sort of independent market data.

So our sense is that the market softened a bit in the third quarter based on the utilization basis. And what I would point to is there was some softness broadly across all of our regions, which would suggest it's more market versus class performance, more pronounced in July and August and it rebounded a little bit in September.

It was certainly stronger in September. And we've also shared that we have what we call the same account analysis, which is our way of trying to assess utilization. And versus the trend we saw in the first half of the year, we definitely saw a bit of softness in that analysis. We also have been working closely with a couple of potential M&A targets.

We saw softness in their volumes as well, which has also slowed down some of those deals to make sure that we understood how much of that was market and how much of that was unique to those potential targets. So, just a couple of data points that definitely make us feel that there was some market softness in Q3.

So, yes, we would have liked to have made stronger volume progress. We do think it was largely market-based; certainly expecting to be somewhat temporary. But as Steve pointed out, despite that, we still are continuing to progress and restoring our growth..

Okay. Thank you. And then just a one follow-up on PAMA; I mean, Steve, obviously you kind of like you highlighted it in your prepared comments.

When we think about kind of like the current proposed kind of like rate cuts and when you think about your mix, how should we think about the potential impact if it were to be implemented in 2017 now that you have the data points?.

Okay. Well, first of all, the final guidelines are not out and as I said in my commentary, we're not accepting those guidance – those guidelines and we now are in the comment period. We'll actually meet with CMS in November.

I want to say us; it's myself as Chairman of the trade association, American Clinical Laboratory Association with some of my colleagues. We'll meet with CMS to talk through the glaring flaws in their collection of the data.

As I said in my commentary, this is supposed to be a representative view of the marketplace to exclude a large portion of the marketplace, which based upon what we understand there are applicable law – lab definition will exclude a large piece of the physicians' offices as well as some portion of the hospital marketplace.

And as I said, that's a large piece of who's providing Medicare laboratory services, so that's a big problem. Second is, if you look to the timing, they're going to receive feedback from a number of people, not just the trade association, but independent concerned parties in the fourth quarter.

They need to then finalize the guideline and then start collecting the data. Another inconsistency of what they sent out is a view that we could start providing the data in the first quarter of 2016. While we can't provide the data until we have a final rule, so that's a contradiction in what they've sent out. So we're going to talk to them about that.

So as we all know, this has been pushed out. It's already been late and, again, this is supposed to be in a place where we're going to collect all the data in 2016 and refresh the clinical lab schedule by 2017.

What I'm sharing with you is, it's already late and my sense is that we're going to have more delays in 2016 with finalizing the rules and then collecting the data and understanding how that does affect the clinical lab fee schedule.

As far as the potential reductions of our clinical lab fee schedule, until we collect the data and I've said this all along, we don't know what the results are going to be. Frankly, when we looked at the data we've gathered, we shared the Avalere study from the trade association.

There were notable differences when you do a fair representative review of the marketplace and so we need to gather data to see what the results are. Now in their guidance that they've sent out, they did speak to a couple of estimates of what they think the range to be. And we've shared before that it's about 12% of our revenues for Quest Diagnostics.

We're not going to speculate of what any reductions there could be because we're not certain about this, but it's 12% of our revenues or whatever reduction there may be would have an effect on that 12%. So, hopefully that's clear..

The next question comes from Bill Quirk with Piper Jaffray. You may ask your question..

Great. Thanks, and good morning, everyone. Hey. Good morning..

Good morning..

Good morning..

So I guess, a follow-up on the utilization comment, I was hoping you could just add a little color to the comment around some of the market softness that you're seeing.

Was that I guess overall utilization or should we think about that being specific to any particular sub-segment, like drug testing for example?.

Sure. Mark, you want to....

No, that was overall. That was not segment specific. Generally, when we're commenting it's the largest portion of our business that we're commenting on any – not any of the unique sub-segments.

So actually, we saw some pockets of strength so it seems as if some hiring may have picked up in the economy so actually that business is doing better than the broader business but it's kind of the base overall routine in esoteric testing volumes compared to the trend we have seen earlier seem to slow a bit in July and August especially..

And though we did see, as we said, we did see some pick-up at the end of the quarter and we did see good growth once again in our genetic and esoteric business. We said that last quarter as well. We're encouraged by that and our results on revenue per req is reflecting that.

And we think that's an important aspect of our strategy for growth and an important aspect of our strategy for growing earnings, and you're seeing it reflected in our numbers, so we feel good.

Prescription drug monitoring needs to be a nice growth opportunity for us and we continue to drive our wellness business which is something that we feel strongly about going forward as a good growth driver for us. So it's really related to the overall base of business. We do the same store analysis we talked about before.

We take our existing accounts that we know they're our accounts. We do analytic on that to prepare volumes this year versus last year and there was some softness in Q3 versus what we saw in the last few quarters. So it was notable, particularly at the start of the quarter and strengthened as the quarter continued..

Very good. And then just I guess one more on PAMA. You certainly kind of outlined a number of the limitations with respect to the proposed data collection document.

Any way to ballpark kind of where you – or are what the odds of that getting expanded to including more hospitals? Steve, I mean, you spoke pretty confidently about some of the problems with the document and then mentioned obviously that you're going to be sitting down with these guys, or CMS rather in November, but where do you put the odds of potentially seeing that expanded to reflect a more broader representation of the industry?.

No, I can't place odds on what happens in Washington. I don't think anyone can. We're working on this. We want to make sure we get this right. There is a bill passed by Congress. It's called Protecting Access to Medicare Act. It was intended to refresh our clinical lab fee schedule, which hasn't been updated since the 1980s.

It was very strongly felt by Congress that the right way to do it is to take a market-based approach; look at the market, understand what our people are paying on the commercial side and then reflect that in the clinical lab fee schedule.

To exclude 50% of who's providing Medicare laboratory testing is a glaring flaw in the definition of the relative market. So we're going to be all over this. We have been all over this and we'll continue to work it. And again, it has been delayed.

It's hard for us to understand how they're going to be able to collect the data in the early part of 2016 to be able to adjust this fee schedule in 2017, but that remains to be their goal. And we'll see how this evolves but I'm sharing with you exactly where we stand right now.

And we have a huge initiative as a trade association but also in reflecting the access comments I made.

When you look at the large part of this marketplace being provided for by small independent laboratories and you think about those rates not being included in the market, we know that, that could create an issue for many of them and therefore, Medicare beneficiaries were not going to get the lab test and that's going to be a huge issue for Congress.

So we're going to work our way through this but we're going to do this in due course of the process that we have within CMS..

The next question comes from Jack Meehan with Barclays. You may ask your question..

Hi. Thanks, and good morning.

I just wanted to ask another question on PAMA, and certainly understand we don't have perfect data today without the survey, but just as you look at the framework that CMS used to lay out what an applicable lab is, it appears, at least based on the definition today, that Quest and lab were going to be a good portion of the survey.

I think it's around 1/3.

What do you think as you look at some of your rates on the routine side of the business versus what Medicare is today? Do you think the 6.5% cut that they laid out is a reasonable assumption to use?.

Again, I'll repeat what I said earlier. Until they gather the data, it's hard for us to speculate what the results will be. We don't have, along with they, good visibility on the rates. That's why they want to gather the data. We don't know what other analysis commercial contract rates are by code. There's an enormous amount of data here.

We have over 3,000 tests. We have multiple contracts. And if you read what they propose, it has to be done by TIN number, which adds more complexity. So if you look at what we have to do, it's a lot of reporting and we're just one of hundreds of labs that are required to report. So we've got to go through the data.

As far as what was in that report or in the guidance around an estimate, we're not sure where those estimates come from other than an interesting data point with some cherry-picked results that they've seen.

We'll see what the data supports and we'll make sure there is sort of a thorough process to get to our fair rates in the marketplace for the value we deliver..

And, Jack, as I'm sure you're aware, when we looked at the Avalere study, even without hospitals, we didn't expect significant reductions in the clinical lab fee schedule. When we shared that, hospitals were included. In fact, in many cases, Medicare was paying less.

So you then have the CBO scoring which is another data point which would suggest more reductions than Avalere but certainly not anything overly draconian and then you have what's come out from CMS based on their proposal being even higher. So these estimates are all over the board.

As Steve said, until we get some actual data it's kind of hard to answer that question..

Yes, that's fair. And then just one around the commentary around the M&A pipeline; do you think that some of the discussion around PAMA has either delayed some of the transactions taking place or does that change the way you evaluate targets in the market? Thanks..

Well, first of all, many hospital outreach labs that we look at and we have purchased have a larger percentage of their business with Medicare. And so we do take into consideration what the Medicare rates will be in our evaluation of the business.

Second is if that in fact is true, then we believe this could be a further catalyst of more outreach businesses interested in looking at their options. And what we've said we have a nice M&A pipeline. Many of those assets that we're considering are hospital outreach assets.

And we're encouraged by it and we still believe with the projections of what we have for rates that on the cost synergies when you realize by bringing their volumes into our infrastructure, we can build a nice business case related to the cost synergies associated with those acquisitions. So it's been a deliberate part of our strategy.

It's key to what we believe will happen in this marketplace that is more hospitals relying on us for their laboratory services.

And the second part of our working with hospitals or hospital outreach opportunities where we help them with their impatient laboratory, we are working on a number of very large opportunities there and we hope to share some of that with you in the next few months and going into 2016.

So stay posted, but we're encouraged by the progress and I think all the change that we see happening in healthcare in general is going to be a further catalyst for more interest than what we've been talking about for several years..

The next question comes from Amanda Murphy with William Blair. You may ask your question..

Hi. Good morning..

Hey, Amanda, how are you?.

Mark – good. Mark, I just had a follow-up, I don't think we specifically addressed why you guys expect to be at the lower end of revenue guidance for the year. I apologize if I missed that.

Are we to assume it's because of some of the volume commentary you made or is there something else there that we should be thinking about?.

That's a large driver certainly, Amanda, but the other one is if you recall after the first quarter when we had a little more impact from weather than we had anticipated, at that point I shared that for us to get towards the upper end of the range, we would've had to execute some meaningful M&A.

So while we went into the year thinking we could do the 2% to 3% without any M&A after the first quarter headwinds we had based on weather, especially in the Northeast, and in Boston specifically record snowfalls where we have a very important share and a large portion of our business that it was going to take some M&A.

So as you've seen that we have announced two deals this year, one of them just last night, Superior, and then MemorialCare. Those are not large enough at this point and we're not done early enough to contribute significantly in 2015.

So therefore, a combination of a little bit of unexpected volume softness in Q3 and then not getting a deal done in a – large enough deal in a timely fashion is really the two drivers..

Got it. Okay. And then I had a question on Q2.

I know it's a bit early there but I'm curious if you can talk about how the two companies are sort of going to market? Is there any evidence yet of any competitive advantages from the combination at this point recognizing it's still pretty early there?.

Yes, it is still early but we're encouraged. We closed in July. We've consolidated our business into one Q2 Solutions. We are now working through the integration that we've put in place.

We still believe there's a nice business case of a creation opportunity for the joint venture now that will realize 40% of in subsequent years so we're still encouraged by that.

And then second, to your point, the days are still early but this market has consolidated and we're now in a smaller subset of companies who are now addressing the marketplace and we believe that now with Quintiles and us working together, we have a stronger presence with pharma and we're optimistic about the prospects.

So as that develops and we have some opportunities to talk about as far as wins within the joint venture, we will and I'm sure Quintiles will as well but it's still early with that but we're encouraged..

Okay. Thanks very much..

Thank you..

The next question comes from Bill Bonello with Craig-Hallum. You may ask your question..

Hey, Bill..

Great. Good morning, guys. A couple of questions; so for the last several quarters and especially this quarter, you're starting to show some really impressive growth from an operating income standpoint, which is something that we haven't seen for years frankly.

And I'm trying to understand as you look forward, whether you think that kind of leverage either through cost savings or other factors is sustainable into 2016 and beyond? Do you think if you don't see an uptick in sort of volume or pricing that it would be, you would have to revert back to sort of lower operating income growth or is there enough on the cost saving side that you can drive growth even if the macro environment sort of doesn't improve? And then I do have a follow-up after that..

Yes, thanks for the question, Bill.

I'm sure you recall that at the Investor Day in November, I talked about and Steve talked about the fact that we thought – we foresaw 2% to 5% revenue growth through 2017; 1% to 2% of that coming from M&A, so on organic level of growth of 1% to 3%, and earnings growth, not earnings per share but earnings growth, of 8% to 10%.

And that was going to be fueled by three drivers. One was going to be some of the continued synergies and leverage we would get out of the transactions we executed in 2014 carrying into 2015.

The second driver was our Invigorate program which moving our goal from $700 million in run rate savings to $1.3 billion and we didn't lay out how that would drop through by year.

But given the size of that growth in savings and efficiencies, we talked about the fact that contrary to the past several years, it would be large enough to not just offset the headwinds that Invigorate had paid for in the earlier years of the annual wage inflation and some sort of price erosion but actually would contribute to the bottom line and that that would be significant.

And then yes, the third lever was as we return to organic growth and there's a fairly high drop-through and that would help us to leverage our earnings growth faster than revenue as well. So those are the three levers and while we're a little bit disappointed in the softness of Q3, we have grown.

As Steve pointed out, revenue was minus 400 basis points in 2013, minus 200 basis points last year and plus 100 basis points this year. So we are growing and we are getting some leverage and we expect to continue that progress.

So a long-winded answer but while we haven't given any guidance for 2016 yet, the outlook I laid out would suggest yes we are confident that we will continue to grow our earnings faster than our top line..

And, Bill, just to follow up with that, I said in my introductory comments we continue to believe that we can deliver on that goal we set out which is the additional savings opportunity. We exited 2014 with $700 million run rate savings. We said there's another $600 million. The goal is now $1.3 billion. We are nicely on our way.

We see that reflected in the results.

But I'd like to also underscore another thing that you've seen in the last couple of quarters and that is the emphasis we have on our strategy is to continue to focus our energy and our investments on a higher growth portion of our portfolio; the richer portion of our portfolio which is more of the advanced esoteric, genetic based services.

We have said that that's growing nicely. You see that's reflected in our revenue per req so that headwinds that we've seen before in last two quarters we haven't seen. So we feel good about the progress we're making on that as well to make sure we get a better yield in our portfolio than what we've seen in the past.

So you put all that together coupled with the M&A to just to underscore what Mark said, we believe that that 2% to 5% growth of this business over a three-year period is solid, and we believe the 8% to 10% growth in earnings, real earnings, operating income, is achievable. So we're confident we can continue to do that as we go forward..

Great. And then if I can, just one slightly unrelated follow-up. But you talked about potentially we could see some exciting stuff with big deals to manage hospital, even in-house labs, et cetera.

Can you talk about as you think about what you're doing on the hospital side, whether it's managing hospital lab business directly or purchasing outpatient outreach business, but particularly the former, what impact that might have in terms of sort of metrics that we're looking at? And in particular, I'm thinking about capital intensity, return on invested capital, et cetera.

Is that a higher return proposition for you and how does it fit from sort of just a margin standpoint?.

Bill, I'll begin with this and then I'll turn it to Mark on the returns and how that affects our goals we've laid out. First of all, it's both. And it's both managing hospitals' in-patient laboratories in some form. And in some cases, it might not be entirely, but some portion of it. And then finally is helping them with their outreach business.

In some cases, we would acquire their outreach business, which we have done for the last three years. And as so much in healthcare goes, you see one strategy, you see one strategy. So we've engaged with the C-Suite around their lab strategy. When this goes well, we are their lab partner going forward.

We've demonstrated this already with a number of our joint ventures we have and a number of the outreach businesses we've acquired. We're clearly their lab partner going forward and I think this is a direction that we'll see more of in the future as this healthcare system in this country continues to evolve.

Now with these potential deals around what we call laboratory professional services and also outreach, they do affect our earnings and growth rate differently. And I think you're referring – or asking the question about return on invested capital. So, Mark, give us some perspective on both sides of the growth with hospitals..

Yes, certainly, and thanks for the question, Bill. Let's start with the professional laboratory services. What we've talked about in the past is this is really organic. There's not a significant capital outlay.

There might be a little bit of capital upfront as we transition some of the volumes into our labs and out of their labs, but it's anything of significance. It is lower margin versus buying someone's outreach business where we're capturing all the margin on a go-forward basis.

The way these deals work is given our economies of scale and our efficiencies, we can save them significantly enough money to get them to sign a multiyear contract with us to perform that service for them and we basically split that savings with them as part of the negotiation, but we don't have a large capital outlay.

So from a ROIC perspective, these deals, while lower margin in our current business, are very attractive on a ROIC basis. And again, as I said, it's a source of organic growth that largely was unaddressable previously. So it's getting into a market and an area, in-patient, outpatient, that is a new source of growth for us on the top line.

On the outreach, we certainly expect to continue to pursue such deals. We've talked about how the economics work very well. They're basically paid out through cost synergies. We've demonstrated the ability to do that successfully. We know how to do that and we think it's excellent for our shareholders and it is part of the 2% to 5%.

So when we talk 1% to 2% of M&A, it's really those outreach businesses, small tuck-and-fold and outreach or small labs, for that matter, but a portion of that's going to be outreach. And we can fund that within our operating cash flow and still maintain our commitment to delivering majority of our free cash flow to our shareholders.

So I wouldn't anticipate any significant shift in capital intensity to drive that strategy. Certainly, the professional laboratory service business is not going to require ton of capital. And finally, on the outreach and any other M&A, we've talked about the three metrics we use.

One of them is that these need to be accretive to our ROIC plan of record by year three. So we're very focused to make sure even in the acquisitions that they're growing our ROIC..

Excellent. Thanks so much..

Thank you..

Thanks..

The next question comes from Dave Francis with RBC Capital Markets. You may ask your question..

Hey. Good morning, guys..

Hey, Dave.

How are you?.

I'm well. Thanks.

Wondering bigger picture, do you guys have a perspective or I was wondering if we could get your perspective on just kind of what do you see overall volume-wise given your results and your perspective here? Just kind of what the puts and takes are from a broader perspective relative to kind of what's likely to kind of resolve some of the softness that you saw in the last quarter? Is there something going on with the mix of high deductible health plans, with the newly insured? Again, your bigger picture take on what's going on volume-wise?.

Yes, sure, Dave. I'll take this to start and I'm sure Mark will add to it. First of all, if you look at the market, there is a bunch of puts and takes as you describe it. First of all, we believe the Affordable Care Act and the number of uninsured decreasing will add more lives to the system.

What we've said consistently when people have insurance we believe they need what we do, therefore that would be good for us. Albeit, what we have seen so far for lives in the system for the Affordable Care Act are much less than what we anticipated back three years ago, as we all know.

But we've said in the past few quarters that we are starting to see some of those Medicaid lives enter the system, so that is providing some volumes. And most people would agree that there will be increasingly less uninsured in this country in the years ahead, and that's what we have modeled in our expectations going forward. So, that's number one.

Number two is, there continues to be a push for higher deductible insurance programs offered to employer-based healthcare offerings in this country. We believe it's about 40% of employer-sponsored healthcare is high deductible and that clearly has put pressure on utilization.

I've said before that, those of us that are blessed with being reasonably healthy are paying for the majority of our healthcare out of our own pocket.

And so people have thought twice about using the system and most people would agree over the past seven years or so that some portion of the utilization softness has been caused by this effect, and we believe actually that, that will continue. There will be more and more pressure on employers. They'll be pushing more responsibility to employees.

The employees will consider when and where they use the healthcare system and that will have an effect on utilization.

Now, with all that said, we think that's actually a good thing for our business, because we offer such a strong value proposition and we believe price transparency and the visibility of the wide variation on pricing in this industry is actually a good fact for us given our value and our prices in this industry are so attractive.

So, that's the second effect. The third effect is we do have an aging population, us baby boomers. We already see that in our results. We talked about infectious disease growing. We're seeing some nice growth in hepatitis C, as an example, where all baby boomers are encouraged to get tested given the new drugs on the marketplace to cure that.

The age of the baby boomer slug of our marketplace will continue to grow. The population grows. So you put all that math together and we continue to believe that in the mid-term to long-term, this industry that we're in should be growing in value 2% to 3%.

We believe there will be more value per test going forward given the advancements and the introduction of new genetic-based services that we have demonstrated in our results as well.

We believe that there are some submarkets that are growing faster than that, but some of that 2% to 3% is from the dynamics of what's happening overall in healthcare, as well, based upon more people with insurance, higher deductibles for those of us to get our healthcare from our employers, the aging population, and the growth in the population.

So, hopefully that provides some perspective you're looking for, for what we see in the macro market overall..

Yes, no, that's helpful color and I appreciate that. A quick follow-up.

On the Inovalon announcement that you guys had recently; can you talk just very briefly about what your go-to-market strategy is there? Is that a product that your sales guys are capable of selling themselves given the footprint that they have, but the difference in what they're typically selling or do you have to rely on the Inovalon guys? How are you going to go to market with that? Thanks..

Yes, great question. First of all, we're very encouraged about the prospect, the opportunity with Inovalon. The reason why we think this is so encouraging and why Inovalon thinks it's so encouraging is our presence in healthcare.

So if you think about our presence, particularly in the work floor of healthcare, we have over 200,000 placements of our quarter entry results reporting system, called Care360. We interface with all the EMRs you can think of on the planet, the large EMR companies like Epic and Cerner and McKesson and also the small homegrown activities.

We sell to 50% of physicians in this country; we sell to 50% of hospitals, so we're right in the center of the ecosystem of healthcare, so therefore we have a large presence. And the nice thing about that is, what we will do with Inovalon is attach their capability into the workflow of physicians.

So, it's not something they have to disrupt their workflow to get access to.

And so we're working on the actual integration of their applications into our applications, so the physician or the administrator when they're working through the workup on the patient and the completion of gathering all the information on the patient, we'll be able to access all that information.

As far as go-to-market, like so much in healthcare, it's obviously complicated. We have people that call on physicians, both primary care physicians and all specialists. That portion of our sales force will be informed and we are talking to the customers about this prospect. We also have an information sales force.

These are highly specialized people that can get into more of the content associated with this. And Inovalon as well is providing some capabilities on the ground level, as well as broadly to support the sale, as well, from a real specialist perspective.

So it's a hybrid sales approach, but we are encouraged about the prospects for us and Inovalon going forward and we have launched this in the fall to get off to a good running start going into 2016..

Great. Thank you..

Thank you..

The next question comes from Robert Willoughby with Bank of America Merrill Lynch. Please limit yourselves to one question at this time..

Hey, Bob..

Hey, Steve, on that Inovalon deal, I guess my question would be, how did you arrive at a 50%/50% revenue share for it? It seems to me with the connectivity that you have that you cited, the data you have, aren't you bringing a lot more to the table? Can you maybe flesh that out?.

Yes, well, I appreciate you saying that, Bob. We believe we bring a lot of value to the table. On the same side, they bring all the content to the table and there's a lot of content. They've built a nice capability with their quality metrics application, the collection of all claims data real-time.

So there's some very sophisticated approaches to gathering the information and serving that up to physicians. So we think the 50%/50% split fairly recognizes the value we deliver and the value they deliver, and it's a good partnership.

So we think that's a fair split, but we are happy about the value I think we bring to the table because we think it's a good opportunity for us..

Yes, Bob, just real quickly. I mean the analog might be some small independent lab came up with a new esoteric test, okay, so they created the whole test.

They didn't have the ability to sell it to the health plans as well as we could, and then to do the pull-through with, as Steve said, our coverage, that it's going to be ordered basically like a CPT, kind of like a test. And so I think you'd say, okay, yes, 50%/50% is pretty fair.

They did the innovation, obviously they've got the IP, et cetera, and we're really the commercial arm to help sell that and educate people on the value and the opportunity..

And just maybe a question on the cost associated with setting this up and then the deliverable itself.

It's a one page of report or a two page, and maybe just, can you give like an anecdotal example of what the report might look like? And then, just lastly, how do you get the doc to pay for it? Is the payer going to pay for it? I mean how do we get over that hurdle?.

Yes, well, first of all, the reports vary based upon what you're asking for, so some of the patient history are nice, well-presented summary of patient history.

The quality metrics are somewhat of a simple, this is what you need to do to close the gaps in Care related to quality metrics to qualify for stronger HEDIS Scores and your Star Ratings, so that's another report.

As far as the pay for here, in many cases it will be the risk-taking organization, the insurance company would be the person that has the motivation to do this.

But in other portions of this, particularly related to the HEDIS Scores, it could be the provider organization that's clearly incentive to do a better job of closing the gaps in Care and see the value, and therefore will pay us for this..

And in terms of the investment required, Bob, it was a little more complicated than adding a couple of test codes to our compendium. That's kind of the way you should think about it. It's not a significant investment required to get this capability in our Care360. Okay..

The last question comes from Michael Cherny with Evercore. Please limit yourself to one question. You may ask your question..

Great. Thanks, guys, and thanks for squeezing me in. I'll make it one simple question. It's a clarification question.

Just, Mark, on the reported volume for the quarter, is there any way you can break out the M&A contribution? If I'm reading correctly, I believe the only deal that should have contributed is MemorialCare; so any sense on what's organic versus what came from M&A?.

It's pretty much all organic, Michael. And then the quarter M&A was less than 10 basis points..

Okay. That's perfect. All right..

And as we said earlier, we expected some M&A sooner. We have got a nice funnel for M&A and you'll see that in subsequent months. But the third quarter was pretty clean, but it was the fourth consecutive quarter of organic revenue growth..

Okay. Perfect. Thanks, guys..

Okay. So thanks, everyone, for joining. As we have shared, we had another solid quarter. We are making good progress executing our strategy. We do appreciate all your support and interest in our company and have a great day..

Thank you for participating in the Quest Diagnostics third 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- 839-2347 for domestic callers, or 402-998-0556 for international callers. Telephone replays will be available from 10:30 a.m. Eastern Time today until Midnight Eastern Time on November 21, 2015. Goodbye..