Dan Haemmerle - Executive Director, IR Shawn Bevec - Executive Director, IR Steve Rusckowski - President & CEO Mark Guinan - CFO.
Amanda Murphy - William Blair Gary Lieberman - Wells Fargo A.J. Rice - UBS Lisa Gill - JPMorgan Isaac Ro - Goldman Sachs Ashley Craig - Morgan Stanley Elizabeth Anderson - Evercore ISI Bill Quirk - Piper Jaffray Brian Tanquilut - Jefferies Bill Bonello - Craig-Hallum Nicholas Jansen - Raymond James.
Welcome to the Quest Diagnostics First Quarter 2016 Conference Call. 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. Before we begin, I would like to share that I will be transitioning into a new role in the company over the next two months.
Now, I would like to introduce our new Executive Director of Investor Relations, Shawn Bevec.
Shawn?.
Thanks, Dan. 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' 2015 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.
The text of our prepared remarks and a PowerPoint presentation will be available later today in the Investor Relations Quarterly Updates section of our website at www.questdiagnostics.com. Now, here's Steve Rusckowski..
Thanks, Shawn, and welcome aboard and thanks everyone for joining us today. This morning I'll provide you with highlights of the quarter will share a few comments on industry dynamics, will review the progress on our five-point strategy. And then, Mark, will provide more detail on the results and take you through guidance.
But before I get started I would like to recognize the sad passing of Dr. John Baldwin, a Quest Diagnostics board member since 2004. John provided important independent and thoughtful perspective as a Director and was a responsible steward of shareholder interest. John's life pursuits transcended his work as a practicing physician.
Our board will miss him. Our thoughts and prayers are with the Baldwin family. While during the first quarter revenues grew by 3.6% on an equivalent basis. Adjusted EPS excluding amortization grew by almost 7% and this is our eighth consecutive quarter on year-on-year EPS growth.
Before I get into our strategy update I would like to briefly update you on PAMA. Late last month 27 members of Congress urged the administration to lay changes to the Medicare clinical IP schedule under PAMA.
Due to delays in the rule making process they argue that the January 2017 effective date for the updated fee schedule is not feasible and should be delayed.
Our view that PAMA needs to be built on a representative view of the hospital is shared by the American Hospital Association, the American Medical Association, and a number of members of Congress. So we remain optimistic that together industry and government can still achieve a reasonable outcome.
But given all that remains to be done we think that the implementation by January 2017 deadline is highly unlikely.
Now I would like to shift to the progress we are making on our five-point strategy, which as you know, is to restore growth, drive operational excellence, simplify the organization, refocus on our diagnostic information services business, and deliver disciplined capital deployment. So, let's start with growth.
We continue to seek improvement in our diagnostic information services revenues. Diagnostic information service revenues grew by 3.8% versus the prior year. We have now grown organically on an equivalent basis for the sixth consecutive quarter and our organic growth rate continues to improve.
Our performance reflects our continued focus on advanced team-based and esoteric testing for our clinical franchise team and expanding our hospital relationships. We delivered solid volume growth across a number of areas but with particular strength in testing for prescription drug monitoring.
We continue to drive innovation in the way of testing, what I would like to do is to share a few examples. Well, first as you saw last week, we have been very active on Hepatitis C testing. As many as 3.9 million Americans are chronically infected with HCV.
We recently expanded our HCV offering with the launch of a new test that meets a new FDA recommendation to help physicians determine the type, dose, or duration of newly approved HCV drugs from Merck and Bristol-Myers Squibb. These new Quest services underscore the central role of diagnostics in delivering precision medicine.
The second good example is our new companion and complementary diagnostics solutions for non-small cell lung cancer and melanoma. And then finally, Zika testing. We are prepared to address the growing Zika public health concern in the United States which has been getting more attention and then funding recently.
We currently have two Zika test waiting FDA clearance. In addition to advanced testing, our hospital strategy also contributed growth in the quarter. Our acquisition of Hartford HealthCare's outreach business closed at the end of February. Inspiration is off to a good start and we are excited to expand our service offerings in Connecticut.
Now in addition to acquiring growth, our professional lab services strategy provides us with a strong growth of organic component of our hospital strategy. Our leanest organic contractual professional lab services relationship with Barnabas Health, New Jersey's number one healthcare system is off to a great start.
During the quarter, we began to manage laboratory operations at several of their hospital locations and I'm pleased that all planned locations are now operational. We can now focus on improving operational efficiencies with a great new partner in New Jersey.
This hospital professional lab services pipeline remains strong and we continue to be encouraged by the growth opportunities. We continue to make progress on the second element of our strategy, driving operational excellence.
Our Invigorate program continues on track and what I would like to do additionally is to share some examples of how we're using technology to improve the customer experience and at the same time drive operational efficiency.
So what we have done is installed kiosks in a select number of patient service centers that are benefiting patients with shorter wait times, but also freeing our professional phlebotomist to do what they are trying to do, provide great service to patients.
In the area of logistics, our new Pathfinder Software platform is helping customers and driving efficiencies. This platform integrates our dispatching, dynamic route optimization, and specimen tracking systems into one end-to-end logistics solutions.
And lastly, more clients are using our QuestConnect self-service portal to get results faster and more efficiently. As adoption has grown we have seen a decrease in calls from clients for the test results.
So as you can see these initiatives that we're able to do make us more efficient while at the same time delivering the customer experiences better that allow us to grow faster. We continue to simplify and strengthen our organization which is the third element of our strategy.
We are very proud that we will be recognized as one of the Fortune's most admired companies. The fourth element of our strategy is to refocus on a diagnostic information service business.
Since our first Investor Day in 2012, we have taken a number of actions including the sale of our HemoCue point-of-care products business, OralDNA, Ibrutinib royalty rights, and the contribution of our clinical trials business to Q SQUARED SOLUTIONS joint venture.
And most recently we exited the Celera Products business and announced the sale of our focused products business to DiaSorin. With these moves, we have substantially completed our effort to refocus on our diagnostic information services business which has grown at a 3% CAGR rate since 2013.
We inspect the focused sales of both in the second quarter and when it does it will generate approximately $300 million of pretax cash which brings us to the fifth element of our strategy delivering disciplined capital deployment.
As you all know, we are committed to deploying our cash in a balanced way between investing in business, our business, and M&A and returning cash to our shareholders through buybacks and dividends. We will deploy the after-tax proceeds from the focused sale in a manner consistent with our strategy.
Now, Mark, will provide an overview on the first quarter results and provide you an update on our 2016 outlook.
Mark?.
revenues to be between $7.52 billion and $7.59 billion, adjusted diluted EPS excluding amortization expense to be between $5.02 and $5.17. Adjusted cash provided by operations to approximate $1 billion and capital expenditures to be between $250 million and $300 million. Now let me turn it back to Steve..
Thanks Mark. Well, we are off to a good start in 2016 with a solid performance in the first quarter. Adjusted earnings grew by approximately 7% and our Diagnostic Information Services revenues grew by nearly 4% and we are largely completed with our strategy to refocus our business. So now we will be happy to take any of your questions.
Operator?.
Thank you. [Operator Instructions]. Our first question is coming from Amanda Murphy of William Blair. Your line is now open..
Good morning, Amanda..
How are you?.
We're doing well..
I had a question actually on just given your focus on advanced testing that you talked about and the mix shift that you had this quarter. I guess if you look at Medicare, they've put out some pricing on some of the NextGen panels that maybe isn't so great.
And I think the rationale, obviously, is that the older codes are based on Sanger and with NextGen sequencing you gain some efficiencies. So, I just had a question round lot as you move more into that type of testing and it becomes a bigger part of your business.
What is your perspective on Medicare pricing and your ability to service that market in a lower pricing environment? And then two, how our private payers looking at those types of tests? And are they recognizing the value-add from looking at more genes in the same assay and the difficulty around interpretation that comes along with that?.
Yes, well we appreciate the question. First of all as we all know this is an evolving market. We entered the BRCA market, it's a growing market and we're gaining share and a portion of our growth is coming from our growth that we're seeing from our entry into BRCA, so we feel good about that.
At the same time, we also realized this is far from a commoditized market. We offer great solution to the marketplace, we offer great value and yet there is different price points to the marketplace and there is new contributions being added everyday for the panels which I believe will continue to advance the science going forward.
So that's not going to stop.
With the specifics of Medicare and the codes again one should bring us through kind of the view on the panels and the Medicare and eventually with PAMA, how could this fold out?.
Yes, specific to the BRCA coding changes that I think came out earlier this week, our BRCA offering leveraged in different codes, codings getting more and more complex with respect to genetic testing.
So it's something that we use some different code based on the methodology that we're following and we're also working very closely with the number of payers on how they would like to see things coded.
So there is constant dialogue and it’s not just coding, it’s also about looking at other things that go along with the services how we leverage the information, how we share the information back with providers as well as payers, how we work through prior of processes when necessary because many of the payers have different approaches to approvals and what types of information they require to get paid on these claims.
So, as Steve mentioned, it's an evolving marketplace that will continue to move and as PAMA moves forward many of these codes could we would expect to get refreshed as well as part of the whole PAMA data collection process..
Great. Okay and then I just had one unrelated question. You've also talked about working with Quintiles beyond the central lab to leverage the diagnostic data between the two companies.
Have they moved forward with that or can you provide an update there?.
Yes, we have. We continue to work with Quintiles in a very productive way.
As I mentioned in the comments that with our refocusing strategy, we are very pleased with our integration of our Central Labs clinical trials business into Q SQUARED SOLUTIONS, that's off and running well, we are very pleased with the first plans that we have in place for integration being completed. So that's all very, very good.
And as we said with our relationship there is two other areas that we want to collaborate with Quintiles. One is around deeper engagement with drug discovery and around companion diagnostics and complementary diagnostics.
And what we're doing is trying to understand where they engage with pharma and where we can engage, where we have real specific opportunities to work together. And I would say that's opportunity by opportunity. And then second is how we can more smartly use our data and their data and other data to accelerate drug discovery.
And again I would describe it this way as we have -- we have the dialogue we put in place and outlined how we will approach it, there is some work underway and we are testing the logic with some potential customers. So work in progress more to come, what we still believe there is still opportunity there.
But we are working out carefully because it is like BRCA an evolving marketplace..
Our next question is coming from Gary Lieberman of Wells Fargo. Your line is now open..
Good morning. Thanks for taking the question.
I'm not sure if you said, I'm not sure if you guys mentioned it but where are we on the Invigorate run rate savings and kind of where do you expect to be from here?.
Yes, Mark wants to take that..
Yes, we did not mention it Gary we haven't updated it. Typically we do that at the end of the year. So we talked about $600 million in opportunity around 2015 to 2017 and we did report that we delivered over $200 million in 2015.
So we never laid out how that $600 million will break out year-by-year but just by mathematics you we can see that we are certainly not behind and we feel confident that we are on track to deliver this $600 million that we shared at the Investor Day..
Yes, we still feel bullish about the prospects there. What we wanted to share in my opening remarks are the broader technology based innovation that we bring in this thinking about how to become more efficient and how to have a better patient experience. We are finding more and more examples where frankly we can do both and we are pleased about that.
So off and running in a good way in the first quarter, we still have fabulous prospects for 2016, and we still have our sites with good line of sight at that $600 million that Mark spoke to..
And Gary I'm sure you seen that in 2015 we grew our operating margin by over 100 basis points, in the recent quarter we improved it by 50. So, that's as we said certainly revenue growth is helping some of that with the drop through. But Invigorate is a critical component of us continuing to improve our margins..
Great. And then you guys mentioned having a Zika test in clearance.
Can you give us the timing for that coming to market and then is there any way to quantify your initial expectations for what the volume in that test might be?.
No, as I mentioned in my introductory, Mark, we have two solutions with the FDA now where we cannot comment on what the timeframe will be for that. But we are optimistic about that and optimistic about the opportunity. And as we all know there has been a lot of dialogue about the changing nature of the potential risk for the American public.
We think we will be very well positioned if we have our test approved to be able to deliver good solutions in the marketplace to deal with that risk. So we are encouraged..
And any thoughts from a clinical perspective on how pervasive that test is going to be?.
Hard to say. I mean you read the newspapers as do we. We are close to the Center for Disease Control. We are staying close to what the clinical protocol would be and how we can implement that and it's evolving like so much in healthcare every day. So we're hopeful that we can make a contribution like we do so in many areas of the business well..
Our next question is coming from A.J. Rice of UBS. Your line is now open..
Thanks everybody. Hello. First let me say good luck to Dan and welcome aboard Shawn there. I would like just first drilldown obviously you've shown a nice sequential improvement in both volume and pricing 2.6% and 1.1%. I know you said that volume was held by 20 basis points with acquisition.
Can you give us any more color about what the underlying sort of apples-to-apples volume was if there is anything else that needs to be backed out or should we think of that as really sort of the underlying trend and similar on the pricing is there any breakdown between mix and absolute pricing in your mind?.
Mark?.
Sure. So A.J. the numbers that we shared are accurate, so 20 basis points organic, so there is really nothing else that needs to be backed out.
As we did mention the compares are favorable in terms of the extra day and better weather, although weather wasn’t perfect we did have a significant snowstorm and it really paralyzed DC and Baltimore whole lot, but definitely better than in the prior year, partially offset by an earlier Easter and the holidays and vacations that tend to take place which definitely impacts our business.
So that's the only other consideration but there is nothing else in that performance that you should be taking into account. In terms of the revenue per req which is not price, we did have continued price headwinds but they were more than offset to the extent that we actually got 1.1% less in revenue per req really driven by test mix.
So test mix not only offsets price but actually it gave us 110 basis points less on revenue per rack and that's certainly an outcome of some of the innovation that we've been driving in the new test that we're introducing and our focus on higher value offerings and really being price disciplined as we continue to negotiate and operate in the market..
Okay. And then may be just one --.
Let me just add what we feel really good about --.
Sure..
Progress made on growth. And hopefully you picked up in the script; we thought it would be helpful to highlight our growth in what we define as Diagnostic Information Services which grew by about 3.8%. And the reason we did that is we know there is a little noise, if you will, with our changes with the refocused strategy with diagnostic solutions.
So it's a very clean repair and also if you go back and look at the historical growth rate now, three-year CAGR going back to 2013 it grew by about 3%. So as we shared this before we are on march of improvement in growth sequentially and year-on-year and we think this is just another quarter of progress against that goal so..
Okay, and may be just a follow-up on one area that you don't get asked as much about anymore, but anatomic pathology. I know that that was a drag for a while and it's dropped below 10%.
Is that at this point bottomed out or is it even possibly growing again? Can you give us a flavor on that?.
Yes, sure. We have a very big business. We made a lot of changes to over the last two years integrate it into our regional operations, we feel good about that. And actually this quarter we actually saw small single-digit increase in tissue this year. So it's becoming less of a drag that, as you say before it was less.
So we feel good about the progress we made and improvement of the underlying business..
Our next question is coming from Lisa Gill of JPMorgan. Your line is now open..
Good morning, Lisa..
Good morning, thanks for the question. Just really to follow-up on a couple of things.
One, as we think about the impact of the leap day in this quarter as well as the overall utilization, I think in the past, Steve, you've talked about high-deductible health plans having an impact in the first quarter where services are pushed back towards the back half of the year, as well as the impact on the bed debt.
But can you may be just talk about what you're seeing in the overall utilization environment? And is it possible to quantify what the impact was from the leap day?.
Yes so as you know its complex and we do the press to try to understand the underlying business. So let's provide some perspective I will start and I'll turn it to Mark as well.
As we've shared before what we do is we take number of our accounts, so we know our accounts, we go back and do a deficit reading, if you will, on year-on-year comparison of volumes within those existing accounts. Now what we'll share with you is that there is no notable underlying improvement or decrease in those accounts.
So we will describe it as stable, the volumes in those accounts. And that secondly is Mark will share what we think extra day would do and also the quality of the days giving some of the holiday effects on the first quarter and then also notable bad winter particularly in Boston last year and that.
So, Mark, why don't you go through that once again?.
So as Steve mentioned I don't want to suggest this is precise. However when that said if you take a 13 week quarter time five days you get 60 plus days billing days in the quarter, we have extra day. So basically the math would suggest we got about 150 basis points let all other things equal for the extra day.
And then, the weather as we said isn't precise but probably something north of 100 basis points according to our estimate and as we also mentioned the earlier holiday, the Easter holiday had a negative headwind for us this quarter.
So we still feel overall that the underlying business grew at 1% in terms of organic revenue for the quarter that is a continued improvement. We feel really good about it and then we have the extra bonus as you noticed of the leap day and also the better weather would certainly help that..
And just to follow-up on -- to close off on this topic and we're happy to that this was our expectation for Q1. We said this in our remarks. We hit our expectation with revenue. We hit our expectation for EPS. We made some investments in the first quarter to continue to invest and accelerate that growth throughout the year.
When we get into some of the effect that had on SG&A I'm sure you saw that but we're tracking to our plan for the year and we're consistent with our guidance for 2016..
And then, if I think about just one other impact, at least versus our model, was the tax rate and the effective tax rate coming in higher than we anticipated.
Is there something there that is more one-time for this quarter, or should we think about this being more of a run rate from a tax-rate perspective?.
I would say something in between Lisa. So it wasn't driven by a one-time event but it will not be the run rate for the year.
So really each quarter is dependent on some mix items within our business between our international and our domestic, and so again we didn’t break down by quarter, we in fact gave you some guidance for the year and you should assume that the guidance for the year is still appropriate..
Our next question is coming from Isaac Ro of Goldman Sachs. Your line is now open..
I want to talk a little bit about the operating leverage in the business. You've obviously done a lot of restructuring over the last few years, and now you're getting a little bit more top-line growth.
And if I look at my model, there wasn't as much operating leverage as I might have hoped for and I'm wondering if you could talk a little more specifically around where you need to be on revenue growth to see better margins.
Does it have to be closer to the midpoint of that 2% to 5% target that you have? Or is there -- I know there's some other factors, just seasonally this quarter, but I'm just wondering if you could talk more generally about operating leverage and what it will take to see a little more..
So thanks for the question, Isaac. Growth provides operating leverage it doesn't need to be several hundred basis points. As Steve mentioned earlier we made a conscious choice to make some investments.
So as we put our plan together for the year obviously there is always an opportunity to deliver even more earnings but we want to be long-term focused as well. We have a couple of critical things going on in the company that we think will drive future growth and are important such as launch of Quantum in our data diagnostics initiative.
We talked about one of the major pieces in that being our partnership with Inovalon and getting us in a position to drive the growth that we aspire to, we think is possible. We really needed to make some investments.
We have also been investing in our we call everyday excellence initiative which is critical around what people do every day in terms of customer excellence and focus on quality and those required some investments earlier in the year just to site a few examples.
So it wasn't a question of how much operating leverage, as Steve said, this is the plan we put together, and did involve some incremental investments in the first quarter that we made a conscious decision to do so in that quarter..
Yes, so if you look at the list of gross margins, we feel good about that year-on-year. We despite what we just shared, we will continue to seek improvement in our operating income margin which we feel good about. And as you know we've been on a long track record of improvement in operating income for a number of consecutive quarters.
So we feel the growth rate coupled with improvement in EPS is right in line with what we want to get started with the year and we're off to a very good start..
Got it, that's helpful. And then may be just a little bit more of a speculative question around the state of the managed care sector, given the potential consolidation we're going to see there.
Can you talk a little bit about your plan to try and capitalize on that consolidation if and when it happens? And to what extent should we be thinking about the opportunity to gain share? And as part of the conversation, I imagine there is always a conversation about price when you try to get the share.
But just curious about how you're planning for it conceptually and from a process standpoint, how we should think about timing if and when those deals go through..
Yes, thanks, Isaac. Well first of all we think conceptually this trend in terms of consolidation in healthcare overall is consistent with where we think we're going to continue to build values across diagnostics. We continue to offer and it's getting stronger and stronger day and a great value proposition in the marketplace.
We offer great solutions, we offer great service at very, very affordable and good prices in the market and we continue to work on our presence and our access with all the healthcare insurance companies.
And one of the things we invested in first quarter along with what Mark mentioned is improving our team and also our reach into the healthcare insurance portion of our sales force. And so we made some ads there, we've continued to invest in that and we put some of that in the first quarter as well.
So I would say that we are now more engaged than never before with this evolving marketplace. Obviously we are very engaged with the national players. We feel very good about those relationships. We have relationships with all the national players.
But as I said before in my comments, we can't lose sight, because a large part of this country and this market is also affected by all the other players, the regional players and the other blues and we're as equally engaged on that portion of the market as well.
So we think going back to where I started conceptually given where the market is headed, that it plays very nicely into what we're all about which is being the strongest in what we do and very focused on diagnostic information services that offer incredible value to delivering great quality healthcare in affordable prices.
So nicely positioned for the short run but also the long-term..
And the other comment I would make is that to your pricing question, I think it's really related to what are some of the critical things that people are going to ask about in terms of consolidation. And the two areas I would point to are access and value. And I think we do really well on both of those.
So as a national lab we can help to ensure that as this consolidation takes place we are partnering with those payers, we can ensure that access remains or improves. And the second piece is as you are aware they already get excellent value from us.
So we are part of the solution and certainly that doesn't require in our minds additional price concessions, we already can bring them tons of value by just further consolidation into class..
Our next question is coming from Ricky Goldwasser of Morgan Stanley. Your line is now open..
Good morning, Ricky..
Good morning. This is actually Ashley on for Ricky this morning. Congrats Dan on the new role..
Thank you..
So you said in the past that and just kind of piggybacking on Isaac's question to start off real quick. But you said in the past that you need 2% volume growth to start seeing leverage down to the bottom-line.
So 2.6% for the quarter and you did expand margins are you expecting us to see an acceleration in margin expansion through the rest of the year or is what we are seeing in Q1 more of a steady state?.
So hi actually it is Mark. I don’t believe I have ever made this statement that we need to 2% volume growth in order to leverage margins.
What I've talked about was we're going to grow earnings not earnings per share, but earnings faster than our revenue growth and where we've been focused more on revenue than volume because as we've also talked about not volume is credit equal and there is definitely a fair amount of volume in this market that is not value creating.
So we're focused on the volume that has a reasonable revenue, reasonable price, and as we do that and we laid out a picture of 2% to 5% growth which 1% to 2% we said will come for M&A. And I also pointed out that I was not counting on significant earnings from on executed M&A when we talked at the Investor Day in late 2014.
So really the earnings were coming from the book of business largely that we had at the Investor Day that we would grow that 8% to 10%. And I said there was three pieces to that. One was we would get some continued synergy value early in 2015 for some of the acquisitions we had done in '14 including Solstice.
The second piece was our integrated program being large enough to offset price headwinds that we anticipated, as well as wage inflation. And then the third piece was as we did improve our overall revenue momentum and turn to growth that we would get a drop-through and reasonably high drop-through on that.
So it doesn’t require 2% as I said a minute ago any sort of revenue growth is going to have and especially in the short-term a reasonably high drop-through. Now in terms of the balance of the year, we have given the guidance.
So I'm not going to specifically do the math but you can see what we're expecting in terms of our overall revenue and our earnings. So I think you can see that we are projecting a consistent improvement in our margins and I haven't talked about accelerating or decelerating or anything like that..
Okay. That's helpful. Thank you. And then just a really quick follow-up on revenues, because they came in a little bit above what we were expecting.
Was there any pull through from 2Q or do you expect -- was that just more of a steady-state as well?.
It's all straight up business within the quarter. I wouldn't say there is no pull through from this quarter..
Yes our model we are not a products business, so our model is basically detailed in the services performed. So there is really very little swing at any given quarter from one quarter to another, it's very clean..
[Operator Instructions]. Our next question is coming from Ross Muken of Evercore ISI. Your line is now open..
Hi, Ross..
Hi, Elizabeth Anderson in for Ross Muken. You guys have obviously talked about some of the opportunities in hospitals and managed care over the past call and on this call.
What do you think the other vertical integration opportunities might be, like for example drugstores or something like that?.
Yes so first of all I'm glad to comment on the hospital strategy, it's a big part of our growth strategy and we saw a portion of our growth coming from that in this quarter.
I mentioned two aspects of our hospital strategy one is related to what we call professional ad services and a great example of that is what we're doing now with Barnabas and that's off and running in a good way and some portion of our growth came from part of this ramping up and then continuing to ramp up.
Second is we do engage with hospital systems and typically in these conversations some consider selling their business to us, their outreach business and Hartford Hospitals is another great example of that happening and we started the inspiration of Hartford, so that's off and running.
So our hospital strategy is well underway, we feel good about the growth prospects. And then, your specific question is I will share that over the last several years with healthcare becoming more and more consumer oriented, we're becoming more consumer oriented. And we have brought a lot to the marketplace in a variety of places. Let me comment a few.
First of all we now serve up our results with an application called MyQuest. This came out about two years ago and we are approaching 3 million registered registrations for that service which is remarkable. Now people are quite interested in results and we're serving that up and for a small fee, we will be able to look back at their history.
Second is, as you know, we have a great and growing wellness business that we invested in over the years and then also augmented with their acquisition of Summit where we are deeply engaged with the players in healthcare insurance companies. Third, is we have unparalleled access around to your specific question.
We have over 2,200 patients service centers; we have over 3,500 phlebotomists in physician offices.
So we have close to 6,000 access points for testing and we’re trying to understand how we’re going to augment that with pilots that we’re running and we’ve done some work with Walmart, where we have pilots off and running in some of their stores because they are looking at healthcare and how they provide better access to healthcare in their stores.
And what I would also share is we are exploring other possibilities with retail in general because I would say retail in general is very interested and they trusted on how they can assist with providing more access to healthcare.
It is a fair percentage of ordered requisitions for laboratory testing that go on fulfilled and we believe if there is better and better access, it's an opportunity for us to fulfill those requisitions and provide better healthcare.
So more to come on this but we will becoming increasingly more and more consumer focused and oriented and when we have more we'll share with you but work is in progress..
Our next question is coming from Bill Quirk of Piper Jaffray. Your line is now open..
First off, Steve, on PAMA, thank you very much for sharing the likely delay. I do think that is pretty consistent with many on the line here, our thinking as well.
I guess, to think on a go-forward basis, where are you guys thinking about in terms of date for the final regulations or certainly some talk here that will be out before the election?.
We really have shared what we know and that is we all know it's been delayed. We have shared our perspective, we think it's highly unlikely given where we’re sitting here in April of 2016, and somehow magically we’re going to get the guidelines and going to get all the date and they are going to refresh the clinical IP schedule by January 2017.
That is highly unlikely. With all that said they've missed any dates, and so we don’t want to project when they're back eventually we will come out with a final guidance. But we are hopeful that we will see something this year and if we see something this year that they will play out the exact timetable.
What we've been very strong on is when they come out they need to give us enough time and we've been very strong on this with our Trade Association, American Clinical Lab Association, to make sure they give us enough time to understand what they're asking for allows to put in place the systems and then allow us to get the data, send it to them, and then they need them sometime to go through that.
And what we shared is once they communicate the final guidance that is at least 18 months for us to go through that whole cycle before they can refresh the clinical IP schedule.
But the question you asked me really don't have any more insight than what we have said and that is we’re hopeful that we’ll see something this year and then from that give us enough time to work through and then that will determine the date that they refresh the schedule with..
Got it. And then just staying on another controversial topic, the FDA LDT regulation, or the final rule rather. Also hearing that this may be out as soon as before the election. Obviously, there's a couple of legislative potential alternatives working their way through Congress as well, and so I would love to hear your latest thoughts there. Thanks..
Yes, well first of all as you know our perspective on this is FDA does not have the statutory authority to regulate laboratories. We would be consistent on that.
With all that said, we have been working with the FDA, we have been working with Energy and Congress in house and also with Health Committee in the Senate on a potential legislative solution to this.
We do believe that a legislative solution is the best option for this country when it comes to the FDA potentially having some more oversight and also rationalizing how they integrate that work with CMS and CLIA.
And we are actually encouraged you might not have seen it but actually this week the House Appropriations Committee just included the new language in their agricultural FDA spending bill that just came out of committee, what they are stating in this bill is that in their view the FDA should support what Congress is doing to trying to put together a legislative solution for this FDA discussion that's going on and not issued their guidance.
So that's just come out of committee, we obviously need to go through the House and go through the Senate but we are encouraged by that. We think that's a good piece of work, we are obviously supportive of that, and we’re continuing to work on making sure that this goes through the process in Washington.
So more to come but this is the step in the right direction we hope..
Our next question is coming from Brian Tanquilut of Jefferies. Your line is now open..
Hey, Brian..
Hey good morning, Steve. So question for you on revenue per requisition is in the past you guys have commented that we could expect a slight decline in that statistics 3 point gain.
Given that it's still on the downturn is there any change to that view that we should see that inflect after 2017?.
Good, Mark will give this..
Sure. Brian we wouldn’t expect that trend to change within the core fee-for-service business as we mentioned as we increased our professional laboratory services book of business just based on the mathematics, that's going to reduce our revenue per requisition.
We've also talked about the fact that from quarter-to-quarter it could change for instance our wellness business has some seasonality as you might have imagine, it's very heavy towards the back end of the year as employers are getting ready for benefits enrollment plan, a lot of them sponsor that kind of testing later in the year.
And that wellness business does have lower revenue per req. So we've also shared it doesn’t necessarily mean a lower margin. So other than some of the quarter-to-quarter variability and then the mathematics as we build a book of business in PLS that might grow faster than our core book.
Really you should expect that the revenue per req trend is something that as far as we’re expecting we will continue as we continue to come out with new innovative solutions which tend to have a higher price and a higher revenue per requisition..
Some portion of the 110 basis points improvement this quarter for revenue per req is related to what Mark just said around our stronger mix of more advanced diagnostics in the portfolio which is deliver part of our strategy.
Now as we shared before we are all about revenue growth and we are all about earnings growth and revenue per req is an interesting calculation but this is a lot as we all know that goes into that calculation with multiple variables. So as we go through our business plan and execute it, there will be some changes in the calculation.
And one of those as Mark pointed out already in our comments in our professional lab services business, we think it's a great business, it offers great growth opportunities, great return on invested capital.
But on our revenue price basis, it would put some pressure on that calculation but it does not in any way affect our optimism about the opportunity of that business..
Got it, my follow-up for you, Steve, clearly you're very excited at Hartford and Barnabas.
So what did the pipeline look like for hospital deals at this point?.
Yes, as we said, it’s very robust and it’s encouraging. The more we get into these dialogues the more we understand we’re on the right track, hospitals are quite interested in us helping them with their lab strategy that lab strategy includes what we can do for them, if we don’t do it already around advanced diagnostics for the inpatient environment.
What we think could do with us to become more efficient in their hospitals and that's what we are doing with Barnabas. And then finally as many are thinking that's to them to rely on Quest for all their diagnostics needs, and in some cases like Hartford, they sold us, us their outreach business.
So typically, when we get in there on any of the three fronts, we have a dialogue with all three and we think it’s a way of the future and we think it’s a great growth opportunity and we think we made the right investment over the past couple of years and starting to pay off and you see it in our growth..
Our next question is coming from Bill Bonello of Craig-Hallum. Your line is now open..
Great, thanks guys. Kind of a big picture question. Steve, since you've come on board, you've done a tremendous amount to clean the Company up in terms of what it looks like, as strategically obviously divesting a lot of what might be non-core assets. You guys have paid down a significant amount of debt.
I think the leverage is pretty reasonable at this point in time. You generate free cash flow. How are you kind of thinking about your use of capital? I would be curious on two things.
One, what are your thoughts around any kind of large-scale laboratory acquisitions? And two, about something, I know you've expanded your share repurchase, but about something more aggressive on that front?.
Thanks, Bill and I will start and then I'll turn it to Mark. So hopefully what you’ve seen from us and we delivered on it quarter-on-quarter is we do what we say. So we launched a five-point strategy back in 2012 and part of that is to refocus on our diagnostic information services business. We think the business is a good business.
We think there is plenty of growth prospects in it and we have our strategies to grow that business and we’re happy actually that if we go back and to do a look back and I said in my remarks if you look at 2013 and the CAGR since then at our diagnostic information services business is up by 3%.
Included Bill in that 3% is our delivered strategy to look for acquisitions that are strategically aligned with that strategy and they are accretive that we can make money at. And we said that we believe there is 1% to 2% top-line growth from those types of acquisitions and we continue to deliver on that.
And Hartford Hospitals continues to be good example of that this year. And then finally, when it comes to our disciplined capital deployment we’ve been again very consistent with doing what we said we would do returning the majority of our free cash flow to our shareholders.
We have been consistent with that in regards to raising our dividend, our share buyback program.
And then finally as we and investing in the business which is a big part of what we do every year with the capital budget and then our acquisition strategy is with our growth strategy and yet at the same time looking for those assets that we think we can make some money on.
So we are doing what we said we will do and we are tracking well against it and we are very pleased that with the sale of Focus hopefully we will close that in the second quarter as I said in my remarks, our refocusing strategy is largely complete and behind us. So that portion of our portfolio change is in good shape.
So let me turn it to Mark to add more color to this..
Thanks Steve and then Bill thanks for the question. We've been very intense with our strategy. As Steve said hopefully as people look out what you laid out in 2012 that we’ve been doing what we told people we would do.
And so therefore while we always have fiduciary responsibility to look at any opportunities for cash deployment that seems like the best way for our shareholders to recognize value and a return. And at this point, we’ve been pretty consistent saying M&A of 1% to 2%, returning majority of free cash flow to shareholders.
And so therefore when you do the math, you can see that we could fund a 1% to 2% top-line growth within our operating cash flow. As we've also said year-on-year depending on what opportunities were there, we could always potentially spend a little more and drive a little more growth in one given year where we could potentially buyback more shares.
So we’re not going to be led to any sort of formula because as you might imagine as we go for every deal, we want to make sure that any deployment of our cash and our capital is the best opportunity in that window to create shareholder value.
So I also want to point out that by increasing the dividend five times in a period of several years, we've gotten to a significant portion that is coming from the dividend and so versus the uncertainty of how much we might buy in given year so on and so forth, we have made a significant commitment to our ongoing shareholders to return a chunk of cash to that dividend.
So that gets us most of the way to the 50% and then anything beyond in terms of share repurchases are really going to be driven by in a short period of time a lack of M&A opportunities, we have seen more value creating than buying back shares.
So nothing that you should expect in terms of significant changes in our leverage in the near-term, certainly nothing you should expect and I think your question was around more significant share buybacks, I certainly wouldn’t go to the balance sheet to do that.
So whatever we do will be driven by operating cash flow or by some strategic asset divestitures such as we did with birdnib in the past. And while we haven't said specifically what we’re doing with Focus we can assure you we will deploy that cash in a manner that's consistent with what I just said..
Our last question is coming from Nicholas Jansen of Raymond James. Your line is now open..
Good morning, Nicholas..
Hey guys, good morning. Just two questions. One on in the quarter you spent $135 million on acquisitions. And I was just wondering, get a sense of, is that entirely on the Connecticut transaction? And if so, what are these types of outreach multiples that you're paying? And then the second question would be on the bad debt.
Obviously, it's seasonally always higher in 1Q, but sequentially it was up about 110 basis points. And if I go back in my model the last few years, it's usually 50 to 60 basis points sequentially.
So just trying to get a sense of was there anything moving parts here that was a little bit higher low than what you were expecting either this quarter or last quarter? Thanks..
Certainly I appreciate the questions. So first off on the acquisitions yes that was Hartford Health acquisition. In terms of multiples as I’m sure you can appreciate there is really no multiple that makes sense in terms of the seller's revenue and EBITDA because the business in our hands is completely different.
So the revenue tends to be lower as we mentioned as we move the reimbursement to our negotiated rates, but obviously in all cases when we do an acquisition, the EBITDA and the earnings are much better than what the seller had.
So really the best way to think about it is that because we apply the financial metrics which we give around a ROIC hurdle, around an NPV hurdle, and really driving earnings accretion in the near-term, the math would make it impossible for us to overpay.
And so what I said to people on a pro forma basis if you saw our models, you would see that the multiple what we are paying on an EBITDA multiple is would not be above our overall market multiple, so it would be in the ballpark or lower.
So you can feel good about we're not going on buying companies or assets or businesses at a significantly higher -- high premium. And then on the bad debt question, we did have a one-time favorable adjustment in Q4 to look back at what we shared in the quarter.
So the bad debt was not a run rate Q4 bad debt, it was favorable given a one-time collection that we had that helped Q4 disproportionately.
So the sequential historical sequential would be impacted by that and that's why you're seeing a larger increase from Q1 -- Q4 to Q1 but also the other thing is that we do have this continued increase in high deductible plans and now our Invigorate program is very focused on offsetting a lot of that mix shift through earlier collections, upfront collections, or PSCs and other initiatives we have going on.
The reality is that the bad debt rate on patient responsibility is in order of magnitude higher than rest of our business. So we will continue to work on that and we expect to certainly mitigate that impact but it does have some impact..
Okay. Well thanks again for joining our call today. As you can hear, we are making good progress executing our strategy and we want to thank you for your time and have a great day..
Thank you for participating in the Quest Diagnostics first quarter 2016 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 (866) 509-6774 for domestic callers or (203) 369-1933 for international callers. Telephone replays will be available from 10:30 a.m. Eastern Time today until midnight Eastern Time on May 19, 2016. Goodbye..