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 Mitchell Petersen - Barclays Capital, Inc. Lisa Christine Gill - JPMorgan Securities LLC Jason Michael Plagman - Jefferies LLC A.J. Rice - UBS Securities LLC Nicholas M. Jansen - Raymond James & Associates, Inc. William R. Quirk - Piper Jaffray & Co (Broker) Joel Harrison Kaufman - Goldman Sachs & Co.

Elizabeth Mary Blake - Bank of America Merrill Lynch Donald H. Hooker - KeyBanc Capital Markets, Inc. William Bishop Bonello - Craig-Hallum Capital Group LLC Amanda L. Murphy - William Blair & Co. LLC Michael Cherny - International Strategy & Investment Group LLC.

Welcome to the Quest Diagnostics Fourth Quarter and Full Year 2015 Conference Call. At this time, at the request of the company, this call is being recorded. The entire content 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 express 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, 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 today. This morning I'll provide you with highlights of the quarter, share a few comments on industry dynamics and review progress on our five-point strategy. Then Mark will provide more detail on the results and take you through guidance.

Well, we continued to make progress on our path forward, delivering a strong year and positioning ourselves very well for 2016. Before turning to the quarter, let me recap our performance for the year. Revenues grew by 2% on an equivalent basis.

Adjusted operating income as a percentage of revenues expanded by about 110 basis points, and adjusted EPS, excluding amortization, grew by 6%. In the fourth quarter, revenues were $1.85 billion, growing by 60 basis points on an equivalent basis.

Adjusted EPS, excluding amortization, was $1.19, and this represents our seventh consecutive quarter of year-on-year EPS growth. Before I get into our strategy update, I'd like to talk about our industry dynamics, starting with the recent CMS proposal related to the PAMA legislation, which as you know, stands for Protecting Access to Medicare Act.

As you have heard me say before, PAMA needs to be built on a representative view of the market. The current proposal limits the definition of an applicable lab to exclude a large portion of the market. We also believe that a 2017 effective date will be a significant challenge for all parties.

With strong support from the American Hospital Association, the American Medical Association, and members of Congress, we remain optimistic that together industry and government can still achieve a reasonable outcome. Second, I would like to discuss the proposed FDA guidance on regulation of laboratory developed tests.

We understand the FDA's concerns, but we continue to believe what the FDA has proposed would result in labs being subject to both CLIA and FDA regulations that may be overlapping, duplicative, and sometimes contradictory in their requirements. This has the potential to raise healthcare costs for patients and potentially, hinder medical innovation.

The House Draft Legislation is a good first step in the legislative process. We share ACLA's goals of promoting and supporting diagnostic innovations that provide physicians with the insights necessary to advance patient care and save lives.

We want to work with Congress to get the right balance in legislation; right for the industry, right for physicians, and right for patients who depend upon our diagnostic insights to make informed healthcare decisions every day.

Now, let me shift to the progress we're making on our five-point strategy, which is to restore growth, drive operational excellence, simplify the organization, refocus on our diagnostic information services business, and deliver disciplined capital deployment. So, starting with growth, just three years ago this business was shrinking by more than 4%.

We slowed the organic decline to 2% in 2014 and have now grown organically on an equivalent basis for the fifth consecutive quarter. We grew 2015 full year revenues by 2% on an equivalent basis and we are well positioned for 2016. Our gene-based and esoteric testing business grew by approximately 5% to $1.8 billion for the year.

We continued to see strong growth in our infectious disease testing and prescription drug monitoring. Additionally, in late 2015 we launched two companion diagnostic solutions for non-small cell lung cancer. This week we announced another complementary diagnostic test for melanoma.

Quest's expertise, scale, and collaborations with the top organizations such as Dako and Bristol-Myers Squibb position us to provide companion and complementary diagnostic test services for immunotherapies on a scale other providers can't match.

We are encouraged by the progress of our clinical franchise teams and expect to continue to build more momentum going forward. Second, over the past few years, we have outlined our strategy to partner more effectively with hospital systems. We've shared our view that hospitals will look to partner with us to develop and execute their lab strategy.

In November, we announced the acquisition of Hartford HealthCare's outreach business. We have been working on detailed integration plans and now expect the relationship to close later in the first quarter of 2016. In December, we announced a professional lab services relationship with Barnabas Health, New Jersey's number one health system.

Under this relationship, we will manage inpatient laboratory test services for seven of their locations throughout New Jersey. We are currently working through the transition plans. We expect clinical testing volumes to be fully transitioned by mid-year 2016.

These are two strong proof points of our evolving market where hospitals are looking for high value world-class partners. We continue to be encouraged by the robust pipeline of opportunities we have developed. In addition, we are building our portfolio of health information technology solutions.

Our capabilities help payers, providers, and patients to improve patient care, lowering cost to manage populations. We're rolling out our new suite of solutions called Quantum internally to our sales force this week.

A good example of Quantum solution is our recent partnership with Inovalon to deliver real-time insights at the point of care, which we call Data Diagnostics. We launched this solution in December, are seeing strong interest, and have already begun to sign business. We are very encouraged by the opportunity.

You'll hear more about our Data Diagnostics and our Quantum solution later this quarter at HIMSS. The second element in our strategy is driving operational excellence. At our Investor Day in November 2014, we outlined our goal to increase our cumulative run rate savings to $1.3 billion by the end of 2017.

To achieve that, we need to deliver an additional $600 million in run rate savings by the end of 2017. And we've made progress on our major objectives of our program, which include building e-enabling services, standardizing our processes, data and systems and improving cash collections. We delivered over $200 million in realized savings in 2015.

This enabled us to deliver 10% growth in pre-tax earnings for the year as we continue to move closer to our Invigorate goal of $1.3 billion. Now, we're doing all this as we improve our customer experience at the same time that we lower our costs by removing waste from the system.

We continue to simplify and strengthen our organization, which is the third element of our strategy. During the year, we launched our new brand promise. We call it Action from Insight. Our brand promises more than a refreshed logo. It's really about recommitting to a superior customer experience.

We recently launched Everyday Excellence, a new initiative that focuses on our customers. We've already rolled it out to more than one-third of our workforce, but it's not just about our frontline employees. Everyday Excellence is for all of us, all of our employees, and it starts with me.

We've also invested and trained over 150 senior leaders at our Leading Quest Academy. And we've deployed our Quest management system to create a standard framework for running our business. Our 44,000 employees are key to our success.

Actually, in a recent companywide survey we experienced a record rate of engagement from our employees, and the results put us on par or above performance of high performing companies in several key areas. There is a clear link between employee engagement and performance at the most successful companies.

Our employees are providing us with valuable feedback, and we are listening. On a recent visit to our facilities in California, as with so many visits with our operations, I came away both impressed and grateful for our employees' passion and commitment to our customers.

The fourth element of our strategy is to refocus on our Diagnostic Information Services business. During the year, we contributed our clinical trials testing business into the newly formed joint venture with Quintiles called Q2 Solutions. The JV's performance is on track with our expectations, and we're excited to be part of this growing business.

And then finally, we remain committed to the fifth element of our strategy, delivering disciplined capital deployment. In 2015, we returned over $400 million to our shareholders through a combination of dividends and share buybacks.

We returned 80% of our free cash flow to shareholders in 2015, well in excess of our commitment to return the majority of our free cash flow to our shareholders. During the quarter, we increased the company's share repurchase authorization by $500 million.

And then earlier today, we announced a 5% increase in our quarterly dividend; this is our fifth dividend increase since 2011. Along with all this, we continue to invest in our business. We announced the Hartford HealthCare Outreach acquisition in the quarter and closed two acquisitions earlier in 2015.

These acquisitions are aligned to our objective of growing revenues through strategically aligned M&A. Now, Mark will provide an overview on our fourth-quarter financial performance and walk you through the details of our 2016 outlook, which considers several of the recently announced relationships I noted earlier.

Mark?.

Thanks, Steve. Starting with revenues, consolidated fourth quarter revenues of $1.85 billion increased 0.6% versus the prior year on an equivalent revenue basis; that is, excluding the fourth-quarter 2014 clinical trials revenue. On a reported basis, revenues were lower by 1.8%.

Revenues for Diagnostic Information Services grew by 40 basis points versus a year ago. Volume, measured by the number of requisitions, grew by 30 basis points versus the prior year. Volume grew on an organic basis by 20 basis points. Revenue per requisition was 10 basis points better than the prior year.

Reimbursement pressure was moderate in the quarter and for the year, which is consistent with what we shared at our Investor Day in 2014. Both test and business mix continue to have net positive impact, reflecting our strategy to grow our esoteric testing and drive profitable growth.

Adjusted operating income for the quarter was $288 million or 15.5% of revenues, compared to $283 million or 15% of revenues a year ago. The improvement of 50 basis points can be primarily attributed to efficiencies from our Invigorate program and business mix.

For the quarter, adjusted earnings per share excluding amortization was $1.19, or 80 basis points better than a year ago.

Fourth quarter 2015 reported income from continuing operations includes a net benefit of $31 million or $0.21 per share related to deferred income tax benefits recognized during the quarter, partially offset by charges primarily related to restructuring and integration costs.

In the fourth quarter of 2014, reported income from continuing operations included a net benefit of $27 million or $0.18 per share from the favorable resolution of tax contingencies, offset by charges related primarily to restructuring and integration costs.

Bad debt expense as a percentage of revenues was 3.5%, 30 basis points better than last year and 40 basis points better than last quarter. This is primarily due to a one-time bad debt benefit in the fourth quarter. It remains a challenging collection environment and we remain focused on improving our operational activities.

Our DSOs were 47 days, one day lower than the prior year and three days higher than last quarter. Reported cash provided by operations was $271 million in the fourth quarter of 2015, compared to $303 million in the fourth quarter of 2014. Cash provided by operations was lower than a year ago largely due to an additional payroll cycle this year.

Excluding the net cash charges related to the recent debt refinancing, adjusted cash provided by operations was $899 million for the full year 2015. Capital expenditures were $94 million in the quarter compared to $89 million a year ago. Total capital expenditures in 2015 were $263 million.

Before moving to guidance, I'll share a few comments to help you think about our outlook. First, a few of you recently asked about the 8% to 10% earnings CAGR shared at our Investor Day in 2014. Reflecting on 2015, we delivered 6% adjusted earnings, excluding amortization.

Keep in mind that the compare in 2015 was negatively impacted by amortization and a discrete tax benefit in 2014. These two items reduced our reported earnings growth by about 2%, mostly because we beat our 2014 estimate by $0.05.

Taking these items into consideration, we feel we are on track compared to our objectives outlined at Investor Day in 2014. Second, because of the newly formed Q2 Solutions JV, we no longer consolidate the clinical trials revenue.

Our clinical trials business reported revenues of $85 million in the first half of 2015 that you should consider as you update your model. Finally, as you think about our revenue projections, we have been on a favorable trajectory, but one that has been building over time.

We expect that we will continue to show improvement as we progress through the year. Specifically, you should consider the Barnabas Health opportunity that will phase in over the first half of the year and the recently announced Outreach acquisition which we expect to be completed late in the first quarter.

Moving to guidance, we now expect full year 2016 results before special items as follows. Revenues are expected to be between $7.52 billion and $7.59 billion, an increase of 1.5% to 2.5% on an equivalent basis. For comparative purposes, equivalent revenues will exclude the 2015 revenues associated with our clinical trials business.

Adjusted diluted EPS, excluding amortization, to be between $5.02 and $5.17; cash provided by operations to approach $1 billion; and capital expenditures to be between $50 million to $300 million. Now, let me turn it back to Steve..

Well, thanks, Mark. Well, we believe we have the right strategy to restore growth and build value for our shareholders. We delivered another solid quarter and a good year. We're building momentum with our focus on advanced testing. Hospital partnerships are building and our expansion of our health information solutions activities is promising.

We have now delivered adjusted EPS growth for the seventh consecutive quarter. We are well positioned to deliver on our commitments for 2016. Now with that, we'd be happy to take any of your questions..

Operator?.

Thank you. We will now open it up to questions. Our first question is from Ricky Goldwasser of Morgan Stanley. Your line is open..

(20:50) ...regarding the underlying assumptions on guidance, obviously you have upped your buyback allocation to over $1 billion.

Can you just share with us what's kind of like your assumptions for capital deployment? Are you assuming any buybacks now and if so, kind of, like the magnitude?.

Yes. So Ricky, I thank you for the question; good morning. In the EPS guidance, it assumes a flat share count. So at this point, depending as we always talk about, the best value-creation opportunity between M&A and share buybacks, we may end up deploying more towards buybacks. We may end up reducing the share count.

But at this point, EPS guidance assumes a flat share count..

And the topline assumes some capital deployment?.

Right. The topline at this point is built based on some organic growth, including the Barnabas Health deal, and then the only M&A that we have explicitly in there at this point is the Hartford Outreach acquisition. But obviously, we give a range, and so within that range there's various scenarios between organic and inorganic growth..

Okay.

And can I have just one follow-up? Just when you think about kind of like the early hospital partnerships that you've signed – not this year but the year before and we think about it as case studies – what type of growth are you seeing from these kind of like early partnerships that we can think about as kind of like a framework for the new deals that you've signed recently?.

Well, we're building the business, Ricky, so with building any business this is part of our growth strategy, is to focus on these hospital partnerships, and we find the receptivity of hospital systems quite promising. And we've talked about in the past, we now have a number of deals that are already in our revenues in 2015.

And we announced Barnabas in the fourth quarter, so that will start to show up in 2016. And again, these are growth rates of our organic revenues that Mark talked about. And then finally, as we have a nice robust funnel, more prospects in 2016.

So we believe that this business will continue to build and contribute to our growth prospects for the company going forward. So that's the way we look at it..

Okay, thank you..

Okay. Thanks, Ricky..

Our next question is from Jack Meehan from Barclays. Your line is open..

Hey, Jack..

Good morning, Jack..

Hey, thanks. This is actually Mitchell Petersen calling in for Jack this morning. Last quarter, I know you guys talked about utilization levels and how they are little bit weaker in 3Q, but trending positively. I was wondering if you could call out the trends you've been seeing on utilization per customer throughout the quarter..

Yeah, sure. We've talked about it in the past. We do this test where we take a look at our known accounts that are our accounts; we have about 1,000. We look at year-on-year comparison. We did that in Q3 and we said that volumes picked up at the end of the quarter.

And we've done that again in Q4, and what we'll say at this time is when we look at that it's feeling like Q4 was stable with the prior year. No notable change in that and that's the best insight we have around utilization in the market that we serve..

Great. Thanks. And then just one more quick one. So obviously, PAMA coming out and then the margin impacts from the esoteric mix shifts.

Are there any other noticeable pricing trends that you're seeing in the market?.

Mark, you want to...?.

No trends per se. I mean, obviously, there's mix we talk about, and that includes test mix; it also includes payer mix. So we have mentioned previously that we have seen some growth in our Medicaid volumes, probably most likely in response to the Affordable Care Act, but also a reduction in our uninsured mix as well.

So, some of that was more pronounced several quarters ago. I wouldn't say recently any other thing of note. And as I shared at the Investor Day, we expected 2016 to be more like – and then 2017 as well – to be more like 2014. You've seen the results for the past year. You can see that there was some pricing pressure.

It was fairly tame, certainly compared to several years ago. And even with PAMA, we're still confident that through 2017, there's not going to be anything noteworthy, and as we said, it should be consistent with the last couple years..

Great. Thank you..

Thank you. Our next question is from Lisa Gill from JPMorgan. Your line is open..

Thank you..

Hey, Lisa..

Good morning..

Good morning. I was wondering if you could maybe just give us an update. You talked a little bit about the Quintiles' JV Q2.

But Mark, can you tell us what you have built into the guidance for 2016 for that? And then maybe, Steve, if you can spend a minute, have you been successful in signing some new deals under the new relationship?.

Sure..

Yeah, sure. So Lisa, to answer your question directly, I'm sure you recognize, nothing on the revenue line since we can't consolidate. On the earnings line, certainly as we discussed, we expected to deliver some significant synergies this year in 2016, and I have that built into our guidance. We don't break that out specifically.

It's not large enough or substantive enough to provide specific detail. But that is considered, and we are pleased and looking forward to having more earnings in 2016 than we did in 2015 from clinical trials, and then also having more than we think we would've had had we kept that business as standalone Quest..

Great. And Lisa, to your point about the business prospects, actually I was down there earlier this week with Quintiles' management team. As you know, we started this joint venture Q2 Solutions in the second half. We're very pleased with the integration that's gone on so far. We've built a nice management team. We now have a good integration plan.

We feel good about the cadence. And in parallel with the integration, we feel good about the prospects that we're seeing in our funnel and the business that we've retained.

We're not going to comment specifically any new business, but we're encouraged about the beginning of the joint venture and the working relationships between both companies – and between both of us, ourselves and Quintiles – we'll give you more color as it evolves, but so far so good..

Is there any way to quantify any of that? The size of the funnel or – I know that you said it's bigger than what you thought previously on your own.

But just as we think about that as being a future opportunity for your business, is it something that could be a key driver over time? Or you just think this is something that's a smaller, incremental driver to your business?.

I just want to refresh everyone's memory. It was 2% of our overall revenues. What we shared at that point was that its operating margin was fairly representative of the overall enterprise, so nothing materially higher or lower.

So therefore, you can kind of frame about what the contribution was, and we expect significantly larger growth on that than we could have done ourselves, but still off a 2% base. So, we're pleased with it and certainly every couple pennies is nice to have, but it's not going to be a game-changer overall.

But as Steve said, relative to the expectations going into the partnership, we're very pleased with the first six months and looking forward to 2016..

And since we don't consolidate revenues, we're going to see it back in our earnings growth. And a lot of that earnings growth will come from the cost synergies that's implied in – or a portion of it's implied in our guidance..

Okay, that's helpful. Thank you..

Okay. Thanks..

Thank you. Our next question is from Brian Tanquilut from Jefferies. Your line is open..

Good morning Brian..

Hey, guys. This is Jason Plagman on for Brian. Morning. A question on the Barnabas partnership and the hospital management segment in general.

How should we think about the margin profile for that segment, both over the next year or two and then how you're thinking about it longer term?.

Well, the way we look at this is we believe the market is continuing to look for partnerships. I said this in my opening comments. Hospitals are looking for partners like us to help them with their lab strategy.

A piece of this is helping them run their hospital business, but also think about how we could partner with them in their more sophisticated testing – what we refer to as reference work.

And so, then when we engage with clients or customers like Barnabas, we expect that we're going to start working with them and we're going to start to – continue to build their book of business with us. As far as margins, what we'll say is this. We're driving growth in this company and we're driving better ROIC.

And included in our guidance around growth and included in our guidance around earnings growth, we do expect that our build of our professional lab services business will be accretive to our plan going forward..

And I'll just add that – I have shared in the past – these professional laboratory services agreement come with a couple of different components, as Steve just laid out. Certainly the reference piece, those margins would be similar to our other reference business relationships.

And then, in some of these cases there is partnership involving Outreach as well.

On the PLS piece itself, which is focused on taking some of the inpatient and outpatient in the hospital testing and partnering with them on that lab work – which previously was unaddressable revenue, so it's a new source of growth for us – those margins are lower than our overall book of business because we have to share the value creation with our partner.

Obviously, when we go in, it's a supply arrangement, and therefore we have to save enough for us each to make a return. However, as Steve also pointed out, since there's really no significant capital outlay at that point, the ROIC is very attractive.

And I also want to emphasize it's somewhat previously unaddressable revenues, so a new source of growth..

Yeah. Just to close on this, in 2015 we feathered in a number of PLS deals – so they're in our results – that help us with growth. But also, as you can see with our results, we expanded our margins by 110 basis points.

So I feel good about our prospects of this piece of business along with other businesses growing the company and also making sure that we continue to deliver good return on invested capital..

Great. Thanks for the insight..

Thanks..

Thank you. Our next question is from A.J. Rice from UBS. Your line is open..

Hey, A.J..

Hi, thanks. Just initially, I'm trying – this is sort of a bigger-picture question. So the revenue guidance looks for 1.5% to 2.5% growth, and I'm just trying to think through the puts and takes and how they relate to the underlying assumptions.

Obviously, you've got the headwind of the half year, so the revenues that were contributed in the Quintiles JV. Alternatively, you're anniversarying at this point some lost or exited contracts that sort of impaired growth last year, as well as you've got the St. Barnabas deal ramping up.

So I'm trying to get to what do you really think the underlying trends are in terms of pricing, volume, and sort of an apples-to-apples revenue comparison? Any comments on that would be helpful..

Sure. First off, A.J. – and thank you for the question – the 1.5% to 2.5% is on what we call an equivalent basis. So that does not include the headwinds from clinical trials. So this is excluding that. So the businesses that we continue to have or will be adding, such as the Hartford acquisition or new partnerships like Barnabas, are included in that.

But that excludes the impact of the $85 million in the first half. So as we look at it, we talked about the price; and we expect price in 2016 to have some modest headwinds. And then mix, obviously, we didn't get to that specifically, but we wouldn't expect a materially different trend than what you saw through 2015.

So we continue to grow our esoteric business; so we mentioned 5% growth in Q4. We continue to focus on our most profitable business opportunities. We have cleaned up our portfolio, which certainly you're seeing some of that benefit in terms of our customers.

And as we engage with new customers, we're very focused on making sure that we get the value that we deliver through our pricing. So that's really the overall commentary. I would say the 1.5% to 2.5% is a combination of organic growth and we've had five straight quarters of revenue.

We mentioned we had some volume, organic growth in this quarter, and an improving trend throughout 2016..

Okay, that's great. And then, maybe just following up on Steve's comment around the LDT question and the FDA. It seems like there's two dynamics going on.

The Congress is sort of working with the industry to try to come up with some parameters around what might happen there, and then you occasionally have these salvos out of the FDA suggesting that they may move ahead with guidance around it.

Can you give us any flavor? I mean, is there any dialogue with the FDA? Do you get any sense of whether they're going to stand down and let Congress move forward, or are they – do you have any sense of what they're doing?.

Yes. So, thanks, A.J. First of all, as you know, our position as an industry is the FDA does not have statutory authority to regulate laboratories. We're in the business of medicine and applying a device (35:00) regulation to our industry doesn't make sense. And it's duplicative with what we already have with CLIA. So that remains our position.

Now with all that said, as an industry we also believe that the legislative action or process is the best solution to this and we're encouraged with what's been proposed from Congress as a good start. So we're engaging with Congress on their proposed legislation. We're doing this with other stakeholders.

And as far as the FDA involvement in this, I trust Congress and their team, and also with the work in our trade association. We have engaged with the FDA as well to see if we can come up with a reasonable solution of what they are trying to accomplish, while at the same time address the issues we're concerned about. So we are working.

We think the legislative action is the best action for us, and that would be much better than the current guidance that we've seen so far from the FDA..

Okay. Thanks a lot..

Thanks..

Thank you. Our next question is from Nick Jansen from Raymond James. Your line is open..

Hi, nice job on the quarter with the organic volumes, but a couple questions. First on the SG&A trend, it did look like your SG&A dollars grew faster on maybe an equivalent basis. Maybe it's probably because last year's number wasn't restated.

But just want to get a better sense of what you're viewing as core SG&A growth, and how we should be thinking about 2016 in context of the accelerating benefit from Invigorate 2.0..

Yes, thanks, Nick. I'm sure as you can appreciate SG&A will bounce around quarter to quarter, depending on the timing of certain investments and other things that impact that overall expense. There is certainly not a trend to be read from that. You can see for the year we drove not only improvement in gross margin but leverage of our SG&A.

You would expect we need to continue that in order to drive the leverage that we're implying for our guidance in 2016, and certainly the leverage we were implying through the outlook that I provided at the Investor Day in 2014.

So, some of Invigorate is on the cost of sales line; some of it is on the SG&A line and you should not expect us to deleverage our SG&A going forward..

Okay. and then secondly, I think you mentioned a bad debt benefit in the quarter. Just wanted to know if you could potentially quantify that and think about what drove the improvement from that benefit. Thanks..

as we get a larger proportion of our revenues from patients, the bad debt rate on that is significantly, on an order of magnitude, higher than it is from the payers, whether it's commercial payers or the government. So that's something we have to offset.

And through some of the good Invigorate work we've been doing, we've held that at bay and held it pretty stable. So that's what I would say is, without that one-time benefit, you should have expected to see some stability in our bad debt..

Operator?.

Thank you. Our next question is from Bill Quirk from Piper Jaffray. Your line is open..

Great. Thanks and good morning, everybody..

Hey Bill. Good morning..

I guess going back to FDA as well as PAMA, Steve, what are you guys thinking in terms of the final documents coming out? I guess we've been hearing probably 1Q for PAMA and 2Q for FDA. I'm just curious if those are consistent with your expectations..

Yes. So first of all, let me start with PAMA. So, we've been engaged with CMS on this all last year, once we received their draft document. Two things, as I said in my introductory comments, we believe they did not get it right as far as the applicable labs; it needs to include hospitals.

We've been quite clear on that and we've got a lot of support now from American Medical Association, American Hospital Association, and Congress to help us with that. So we've made that loud and clear. And then second is the timing.

We think the ability for us to get the final guidance out this year, for us to submit the data, and then also for them to go through that data to refresh the clinical lab fee schedule by 2017 is a very, very tight timetable, as you can imagine. So those are the two big issues that we've highlighted.

We're hopeful that we'll see something in the first half of 2016. They never commit to what the date is, but we're hopeful that we'll see something after they've digested everything we've provided to them in the last part of last year. So that's where that stands.

As far as the FDA, as I just mentioned, we continue to work with Congress on a legislative action. We believe that's the best approach for this issue. We believe it is a good start. And again, as a trade association, we believe they do not have the statutory authority – the FDA does not have the statutory authority to regulate laboratories.

So, we're going to work this in due course. We're hopeful that we can come up with something with Congress, and we'll see where that leads us. But this is going to be done step-by-step and kind of make progress and see where this evolves over the next several months..

Got it.

And then if you had to handicap – I guess sticking on PAMA – if you had to handicap the option (40:54) of them expanding beyond the labs they've already spoken to, where are you thinking at this point, Steve?.

Oh, the applicable lab? You can't handicap it. All I know is the message has been loud and clear. We got the support of the American Hospital Association, which clearly gets paid the same way we get paid.

If they do not include hospitals – as we all know, those commercial rates are higher than our rates – so they need to be in the base to get a market view of the codes. Second, is the Senate has weighed in. The House has weighed in. Industry has weighed in.

We clearly have done a good job of making sure – we want to make sure we get this right because it's important to all of us.

Again, you go back to the definition of PAMA – it's Protect Access to Medicare Act – it's very important that Medicare beneficiaries continue to get the critical testing, and all those Medicare beneficiaries are not just in those large cities where we primarily serve.

There's a lot of regional players and there's a lot of hospital outreach players in this marketplace that have to get fair rates from CMS..

Got it. Thanks, guys. Appreciate the color..

Thank you. Our next question is from Isaac Ro from Goldman Sachs. Your line is open..

Hi, guys. Thanks. It's actually Joel in for Isaac..

Hi, Joel..

You guys touched a little bit on the companion diagnostics market in the prepared remarks.

Could you maybe help us think about how you intend to win share in that market? It appears that market's increasingly becoming a more commoditized end market?.

Yes, sure. It's a promising market. If you go back and look at our platforms for growth, companion diagnostics, and sometimes it's connected with precision medicine. It is an important part of our growth strategy. Several things – one is that we continue to work with the market-leading research organizations.

About two years ago, we announced a relationship with Memorial Sloan-Kettering; we're actually taking their research and we are now marketing a product we call OncoVantage, with 34 actionable genes. And we're actually going to expand that panel this year as well with their help.

So this is right in the middle of precision medicine, and clearly, we're providing the companion diagnostics associated with that. Second is, we're engaging with pharma. We announced the work this past quarter that we were doing. I talked about in my introductory remarks our recent announcement around melanoma.

We continue to be highly engaged with all the pharma companies that have many companion diagnostics associated with their development funnels. So we're very well positioned in that regard.

We do work now closely with Quintiles of getting an even better view in the marketplace and better access point for a lot of the smaller pharma companies with the relationship that they have, since they are the world's largest CRO.

So, we think we're very well positioned as an innovation player; and now we're positioned even better with our relationship with Quintiles in terms of access to the market..

Thanks. And then maybe just a high-level question on what you're seeing for M&A dynamics in the market right now.

Are there pockets in the market where valuations are more attractive on a relative basis? Just trying to get a sense of whether we should expect to see more deals towards esoteric-geared independents or more traditional full-service labs?.

Yes, we continue to work the market. Our strategy is to focus on Diagnostic Information Services. We're entirely focused on that. All our M&A has been associated around that. We've done some hospital outreach deals, the most notable one is Hartford's Outreach activity in the fourth quarter.

We continue to have a nice funnel, and that's consistent with our strategy of 1% to 2% growth through acquisitions. Through our outlook, we believe there's plenty of prospects to support that. And in that regard, we also have been clear that we're going to only acquire when we can have a good business case to make money for our shareholders.

And many of the deals we've done so far have justified themselves based upon cost synergies which, in our experience, is the best acquisitions you can do. So, we're still encouraged. We still have a strong belief that we can deliver this portion of our strategy, and we've delivered on that through the past several years..

Thanks..

Thank you. Our next question is from Elizabeth Blake from Bank of America Merrill Lynch. Your line is open..

Hi, good morning and thanks for taking my question..

Hey, Elizabeth,.

Hi. You touched on your Data Diagnostics partnership with Inovalon that you launched in the quarter.

Could you provide some color around your plans for reimbursement there? I mean, have you been in discussions with health plans? I guess, how would you characterize the interest you're getting from a payer perspective?.

We said in our comments that we're quite encouraged. We're offering a lot of value. Typically, the payment is through payers or the risk-taking organization, so it could be an ACO; those people that are managing the population and have the financial incentive to provide this information to the physicians that are treating and managing patients' lives.

So, in that regard, we've been off and running since the fourth quarter. Momentum is building. We've worked through the integration. The nice part about this is we're providing this capability in the normal workflow of a physician.

We have tremendous, tremendous capabilities at the desktop of a physician with our order entry results reporting system which we call Care360. And so when they're in the order entry system, if in fact they want the visibility to this information that we're getting from Inovalon, they can easily access that information.

And the payment model is back to, again, typically the risk-taking entity whoever that might be, the payer or in the case of an entity that's taking risk like an ACO. So, we're working both physicians' awareness of this capability along with payer awareness of this. And we're very encouraged about the prospects..

Okay, great. Thank you very much..

Thank you. Our next question is from Donald Hooker from KeyBanc. Your line is open..

Great, good morning. So my question will be simple because it's a follow-up on the last question. So, I'm also interested in this Data Diagnostics relationship you have with Inovalon and appreciate the color.

And looking ahead, how long do you think – if you were to guess – in terms of how long do you think this relationship would take to ramp to sort of a mature level, I guess, over to a point where, I guess, theoretically it could potentially start impacting and showing up in numbers? I guess, in other words, how long are the sales cycles?.

Yes. Well, first of all, we started in the fourth quarter. We announced this deal in October. We've already signed some business; I mentioned that in our remarks that we signed some business. We're starting to – we'll start to see some flow in the first quarter and it will continue to build just like building any business.

So it's implied in our guidance. We do expect some growth from this business in 2016 and that business will grow into the future..

And then, what is your dedicated sales force to this product?.

Well, as you can imagine, you're selling to payers. So we have a hospital – excuse me – we have a health system team that calls on and manages our health insurance relationships. So, there's a portion of the sale that happens there.

Second, is we have a health systems sales organization that calls on integrated delivery systems, and as I mentioned, some of those integrated delivery systems are taking risk and have ACOs, so we call there.

Third, is we're equipping our physician sales force that goes in and talks to primary care physicians and all physicians, including our specialist physician sales forces. And so, we're training our sales force there and we have over 1,200 people in our sales organization.

And this is complementary to what Inovalon already does in calling on the health insurance organizations as well..

Got you, Thank you..

Thanks..

Thank you. Our next question is from Bill Bonello from Craig-Hallum. Your line is open..

Hey good morning, Bill..

Good morning. I just have a couple of questions about the guidance. So, Mark, you talked about that you felt after puts and takes and adjustments, you were pretty much in line with your long-term guidance range for what you delivered in 2015.

If I look at the 2016 EPS guidance, at the middle of the range it's sort of 7%, which I think is still below your long-term EPS guidance range. So I'm just trying to reconcile why that would be and when you might expect to be in that 8% to 10% range? And then I have a follow-up..

Yes, thanks, Bill. So, I appreciate the question. Obviously, we're going to provide guidance that we think is prudent and deliverable. We have provided a range. That range certainly includes some numbers that would put us into that 8% to 10%.

I want to refresh people's memory that the 8% to 10% was a compound annual growth rate over three years, so it was not a commitment to do that every single year. And also in my prepared remarks, I reminded people that at that point we were obviously looking at a 2014 number that was a nickel lower than we actually delivered in 2014.

And I certainly did not anticipate a reduction in our amortization, which was really driven by the fact that we did not have as much significant M&A activity in 2015. So, we feel in terms of what we committed to that we're on track. We're not behind.

Certainly, depending on where we end 2016 within that guidance, we'll either be a little bit slightly below the CAGR or right in the CAGR. So really, what we want to do is provide guidance that we feel is prudent and deliverable, and as we progress through the year, obviously, we'll see where we might end up within that range.

But we certainly don't think the guidance implies, given the framing I shared on 2015, that we're materially off of that 8% to 10%..

Okay.

And then just as a follow-up to that, wouldn't it be logical to think that the growth comp – assuming PAMA doesn't get postponed – that the growth comp would actually be a little bit more difficult in 2017 than it is in 2016? Or are there things about either this year or next year that would offset that Medicare cut?.

Yes, so Bill, I talked about three levers that would enable us to grow earnings significantly faster than revenue. One of them was the synergies that would be continued to be delivered to their kind of steady-state from acquisitions we had done early in 2014. So you would imagine that probably a lot of that has been delivered.

The second piece has been our Invigorate, and it being large enough to offset price and wage inflation, and deliver some margin expansion. And then the third element is the leverage we get from organic growth. And so, we committed to improving our relative performance.

As Steve talked about, minus 4% in 2013, then minus 2% in 2014, and then some revenue growth the last five quarters. And certainly, since there's not as much M&A in our guidance this year as there was in the 2% we got last year, which benefited from some carryover on Solstas, we're implying continued strengthening of our organic performance.

And as you know, organic volume growth has a high drop-through, and as we get closer and closer to market rates, which we had committed we would do through the three-year timeframe, that's going to also enable us to lever our P&L.

So you should expect accelerating organic growth, which will be a driver, and then continued to progress to get to the $1.3 billion of Invigorate, which will also accelerate our earnings leverage..

That's really helpful. And then, just one last thing.

Is there any way you can tell us what clinical trials contributed to operating income in Q4 of last year on an annualized basis? Just so we have an apples-to-apples comp on the operating income as well as the revenue?.

We never broke it down by quarter, Bill. So the best I'm willing to do, which I've said in the past, is that it was about 2% of our revenue and its margin was comparable. So, you can kind of frame what that would've contributed in Q4..

Okay. Thank you so much..

Thank you. Our next question is from Amanda Murphy from William Blair. Your line is open..

Hi, good morning, guys. I just had a follow-up actually to one of the points you just made in terms of volume growth. So, what is, would you say, is the market growth at this point? I'm just curious what you're seeing in terms of just base utilization. Obviously, there's been some discussion around the ACA and what impact that has had.

So, just curious if you can provide more detail on utilization rates this year and then going into next year as well?.

Yes, well, I'll start and then I'm sure Mark will add something to it. First of all, we continue to build our own market model. In 2014 when we had our Investor Day, we ran our model with a number of assumptions.

And we say that the independent laboratory market's going to grow about 2% to 3% in value; and 2% to 3% in value has, as you know, a lot of moving parts. We also made some assumptions about the ACA impact.

We've always assumed that as we have more insured lives in the United States that that would be net positive for this industry, net positive for us. But we all know that has been muted. There's some question about what will happen in 2016 around some of those lives. And then also, we assume in that, our advancement of technology.

We're continuing to roll out new innovation to the marketplace, which helps with the growth rate assumptions and that was implied in the 2%, 3%. The aging population, for instance, Hepatitis C is a good opportunity for us, which we're taking advantage of, with the Baby Boomers who need to get tested, so all that is in the 2% to 3%.

And also what we're seeing, Amanda, is what we refer to as density. We're seeing a continued improvement in the amount of tests we're getting through requisitions. And some of this also might be enhanced with the delays that we've seen since the Great Recession over the last, let's say eight to nine years.

That people eventually when they show up to the physicians have more need for more testing per that episode. So, you put that all together and that's why we feel that 2% to 3% – and that's not in any specific year, but in the longer-term view – is a good gauge of the market.

And we believe that utilization or volumes on a req basis would be slightly less than that, but on a test basis would be slightly greater than the reqs because you're getting an increase in the number of tests per requisition. So, that's what we have right now. As I said, in 2016, we saw utilization being somewhat stable.

Like you, we look at all the different indications in the marketplace to get engaged with what's happening on – going on within the marketplace. But so far, it's feeling as we come out of this year, somewhat stable expectations for utilization in 2016..

Got it; very helpful. And then, just one more on esoteric growth. You mentioned a few tests that you've rolled out. I'm curious if you can provide a little more detail in terms of what's driving that growth.

Like for example, are you seeing increased hospital send-outs from all the consolidation a couple years ago? Just helping us understand the parts of that growth is helpful..

Sure. So, what we mentioned in our prepared remarks is we have a big business. It's $1.8 billion. I referred to it in my closing remarks as being advanced diagnostics, which include gene and esoteric testing, and it grew by 5%, 5%. So we feel good about that. And I would say it's a number of programs that we have launched in the past few years.

It is taking advantage of our investment that we made in our clinical franchise organization. We have invested in a stronger team. We're launching products in a better way.

And Dan, why don't you give us the top handful of opportunities that we saw in that number?.

Yes, sure. Amanda, we've seen growth in a number of different categories but certainly saw during the course of the year growth in our BRCA testing; in our non-invasive prenatal testing solution; within infectious disease with HCV and HIV. So, seeing growth in a number of different areas..

So we feel good about that $1.8 billion business growing 5% and we think the prospects continue to be good going forward..

Got it. Thanks very much..

Thanks..

Thank you. Our last question is from Michael Cherny from Evercore ISI. Your line is open..

Good morning, guys..

Hey, Michael..

So I actually want to dig a little bit more into Amanda's question. You gave us a nice breakdown in a follow-up related to the way you look at the market here, low single digits growth in terms of the market. Obviously, it's been a while for a number of factors since you guys have been able to deliver that growth on an underlying basis.

As we think about both this year as well as the next few – and I know there are moving pieces, so this is a bit of a loaded question.

But is thinking about sub-1% organic volume growth or 1%-ish, or somewhere in that range, the new normal that we should think about relative to your business? And if it is or whatever that number is, what does that mean in terms of the incremental drop-down that you would expect relative to historical levels on the volume side?.

Yes, so obviously we're not going to project our volume beyond this year, Michael. I'm sure you can appreciate that. What we did commit to was getting back to market levels of revenue growth and also then gaining share at some point.

But in the three-year timeframe through 2017, we felt it was incumbent upon us to get back to market-level growth and that's what we're certainly striving to do. I think, as everyone recognizes, we talk about utilization in a market that's really a bunch of submarkets.

So one of the drivers, certainly, besides the fact that we have outstanding offerings, of the 5% growth in esoteric, is that some of those markets are growing. Certainly BRCA is a growing market; non-invasive prenatal testing is a growing market; hepatitis C is a growing market.

And then you've got things that we mentioned and it's not quite behind us, such as paps, which is a declining market. Certainly the impact of some of the safety scares on testosterone has impacted that market in terms of utilization over the last couple years. So, there's really a bunch of markets moving somewhat different directions.

And depending on each lab and certainly Quest's share in those markets, it's going to impact us all differently. So it would be really difficult, even if we were willing, to give you a volume number. That's why what we really feel better about is giving revenue numbers.

And certainly, if you just look at volume, you miss some of the positive mix aspects that you've seen come through in our results over the last year-plus in terms of mix, higher mix of these esoteric offerings; higher mix of better customer pricing, being more disciplined in those ways.

So that's what our focus is on as opposed to figuring out volume. We think the demographics we've talked about are positive, certainly aging population, growing population.

We certainly, despite some of the recent negative news such as 40% fewer enrollees in the exchanges; some of the slower growth that we've talked about over the last 18 months in terms of enrollment; you've seen a major payer who has talked about some of the struggles with the exchanges.

And despite all that, we still think the Affordable Care Act is adding patients with insurance, and that's a good thing for us. So, we do feel positive about volumes and trends and certainly expect to get our fair share of that. But it would be very difficult to give you some sort of a steady-state volume organic growth projection going forward..

And Michael, just to follow-up on that a little bit. Keep in mind, we talk about revenue a lot because what shows up as volume versus growth in our esoteric business sometimes falls into the mix category.

So revenue per requisition, this year we felt some pressure but we were able to offset that for the last several quarters, more than offset that with favorable test mix that's coming through the gene-based and esoteric.

So, I think Steve also mentioned that we're seeing more tests on requisitions as well, so the requisition volume counts don't necessarily get the credit, but you see the credit overall in the revenue line for some of that benefit and some of that strategy..

No, I appreciate that, guys.

If I could squeeze in one more quick one, any updated thoughts related to some of the technological developments, or maybe lack thereof, related to some of the point-of-care testing and particularly some of the microfluidics-linked point-of-care testing? Obviously, there's been a lot of news around a certain upstart that seems to have hit a bit of a wall.

So anything related to how that market is evolving; if you see any other technologies that at some point make sense to be suppliers, particularly into the patient service centers?.

Yeah, so thanks, Mike, for your question. First of all, point-of-care diagnostics has been around for decades. I've been around for decades, invested in it, and know the market well. Where it has been successful is where there has been a good value proposition that has delivered something to the marketplace.

So, chronic disease management, diabetes, it's done well. If you look at critical care in hospitals, if you were to go into a critical care unit with blood gas testing, that's been an example of good point-of-care testing value proposition.

And then finally, emergency medicine, if you look at cardiac enzymes and the value of having those cardiac enzymes sooner, when the patient is being transferred to the emergency room, has a good value proposition. But in other areas where it's not quite clear, where it's not compelling, those promises have not really been delivered.

With all that said, we're the world's largest diagnostic information services company. We're always looking at ways we can improve our cost structure. We buy from all the in-vitro diagnostic companies.

If in fact there is a better platform to do some portion of our routine testing on a much more efficient, effective platform than the current ones that we use from all the suppliers, we're all ears.

And so, we never not look at innovation that could be helpful in us delivering on our promise of great quality at some of the best prices in the industry. And our value proposition continues to be very, very strong.

So point of care is a part of that, but you need to make sure that you really understand what it's going to do and where the value proposition is strong enough to get some traction. And again, we could be a utilizer of some of that if in fact the facts are compelling..

Thanks, guys..

Thanks..

Thank you. At this time we have no further questions..

Great. Well, thanks, everyone, for all the questions and thanks for joining us on the call today. Just to conclude we had another solid quarter and finished the year strong. We appreciate your support, and have a great day. Take care..

Thank you for participating in the Quest Diagnostics fourth-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 888-568-0748 for domestic callers, or 203-369-3927 for international callers. Telephone replays will be available from 10:30 a.m. Eastern Time today until midnight Eastern Time on February 27, 2016. Goodbye..