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

Brian Gil Tanquilut - Jefferies LLC Ricky Goldwasser - Morgan Stanley & Co. LLC Ross Muken - Evercore Group LLC Jack Meehan - Barclays Capital, Inc. Steven J. Valiquette - Bank of America Merrill Lynch Amanda L. Murphy - William Blair & Co. LLC William R. Quirk - Piper Jaffray & Co. A. J. Rice - UBS Securities LLC Isaac Ro - Goldman Sachs & Co.

William Bishop Bonello - Craig-Hallum Capital Group LLC.

Welcome to the Quest Diagnostics Second Quarter 2016 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved.

Any redistribution, retransmission or rebroadcast of this call in any form without express written consent of Quest Diagnostics is strictly prohibited. Now I'd like to introduce Shawn Bevec, 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. For this call, references to adjusted EPS refer to adjusted diluted EPS excluding amortization.

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.

The text of our prepared remarks and a PowerPoint presentation will be available later today in the Investor Relations page of our website. Now here's Steve Rusckowski..

Thanks, Shawn, and thanks, everyone, for joining us today. This morning we'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.

Through the second quarter, revenues declined 1% on a reported basis related to our efforts to refocus the business, but grew 2.4% on an equivalent basis. Reported EPS grew more than 69%, while adjusted EPS grew more than 7%.

Before I get into our strategy update, I'd like to provide perspective on a few key aspects of the final rule implementing provisions of the Protecting Access to Medicare Act, referred to as PAMA, issued late last month by the Centers for Medicare and Medicaid Services, referred to as CMS.

First, on the issue of timing, we are pleased with CMS's decision to delay the implementation of the new payment system until January 1, 2018, a position advocated by members of Congress, hospitals and hospital – excuse me, and laboratory trade associations. Second, CMS changed its approach to secure a better view of market pricing.

By gathering the pricing data from labs in a different way, CMS will increase the number of labs that provide pricing data. And finally, we continue to evaluate the impact of this final rule, but we won't have a clear view until we see the final pricing data. In the meantime, CMS is estimating a mid-single digit rate reduction in 2018.

As you know, the clinical lab fee schedule represents approximately 12% of our revenues. As we've shared in the past, our Invigorate savings have more than compensated for price headwinds in the market. So if there is a fee reduction in 2018, we would be able to manage it.

Now let me shift to the progress we're making on our five-point strategy, which, as you recall, is to restore growth, drive operational excellence, simplify the organization, refocus on our Diagnostic Information Service business and deliver disciplined capital deployment.

So starting with growth, we delivered solid volume growth across a number of areas including prescription drug monitoring, hepatitis C testing, and Cardio IQ, which provides a more complete picture of patients' cardiovascular health with basic cholesterol testing.

We also grew in the second quarter with the help from our new hospital service agreements. Our acquisition of the Outreach Laboratory Service business of Clinical Laboratory Partners, referred to as CLP, and professional lab services agreements from Barnabas Health are helping us deliver the continued execution of our accelerated growth plan.

Additionally in this quarter, we announced an agreement to manage the inpatient laboratory operations for six Denver-area hospitals in HealthONE System of HCA Healthcare. We expect to see revenues from this engagement before the end of the year.

You know, hospitals continue to talk to us about how we can help them execute their lab strategy, from advanced hospital reference testing to lab management to joint ventures and outreach lab purchases. Our pipeline remains strong and we continue to be encouraged by the growth opportunities.

In advanced testing, we strengthened our service offering, which includes gene-based and esoteric tests. During the quarter, we announced that there will be three new Quest Vantage Answer tests. These are designed to provide clinical actionable insight into an individual's risk of developing hereditary forms of cancer.

These new offerings will better position us in this exciting and growing marketplace. We piloted a program this quarter for non-invasive prenatal screening to serve women of average risk in select regions. Encouraged by the results, we're now offering the testing nationally.

We continued to drive operational excellence, the second element of our strategy. We believe quality and efficiency go hand in hand and we have strong evidence of demonstrated improvement in our customer experience as we make our business more efficient. As we deliver cost savings, we're also able to improve quality and service.

This is a well-understood principle of total quality management approaches across all industries. Evidence of this can be seen in a recent independent blinded survey of more than 500 physicians. In the survey, Quest scored highest on customer experience, lab effectiveness and patient satisfaction among national, regional and hospital competitors.

Our recent agreement with Safeway will make it easier for people to get tested by locating our Patient Service Centers in high-traffic Safeway supermarkets.

By expanding patient access through our relationships with retailers, we will optimize our real estate footprint and have an opportunity to reduce the number of unfulfilled test orders, which some suggest could be as high as 30%. We're also shrinking our real estate footprint by consolidating our corporate sites.

In June, we announce the relocation of our corporate headquarters and support functions from Madison and Lyndhurst, New Jersey to a single location when our current 10-year lease expires in September of 2017. By consolidating our footprint, we'll be able to get greater collaboration and performance while realizing savings in operating expenses.

Our Invigorate cost savings program continues on track to realize $1.3 billion in run rate savings as we exit 2017. We continue to simplify and strengthen our organizational capabilities, the third element of our strategy.

Also this quarter, we were proud to be recognized as one of 100 companies named to Forbes 2016 America's Most Trustworthy Companies list, the only company from the diagnostic services industry to be included.

The fourth element of our strategy, to refocus on our Diagnostic Information Services business, was completed in May, following the completion of the sale of the Focus Diagnostic Products business. Proceeds from the sale of Focus Products were used to drive the fifth element of our strategy, delivering disciplined capital deployment.

We launched the $250 million accelerated share repurchase program, ASR, with the Focus proceeds. And since 2012, we have repurchased approximately $2 billion of company stock. Additionally, in May, we issued $500 million in debt to take advantage of favorable interest rates and refinance a portion of our debt.

We actually look forward to sharing more detail on our market views and strategic outlook at our third Investor Day in New York City on November 11. So mark your calendars, and we'll be providing more data about this as time goes on.

Now Mark will provide an overview on our second quarter financial performance and provide you with an update on our 2016 outlook.

Mark?.

revenues to be between $7.47 billion and $7.54 billion, flat to an increase of approximately 1% versus the prior year on a reported basis, and an increase of 2% to 3% on an equivalent basis; reported diluted EPS to be between $4.18 and $4.33; adjusted EPS to be between $5.02 and $5.17.

Cash provided by operations to be approximately $880 million on a reported basis and roughly $1 billion on an adjusted basis. Finally, capital expenditures to be between $250 million and $300 million. Now, let me turn it back to Steve..

Thanks, Mark. Well, to summarize, we built on our good start in 2016 with another solid performance of second quarter. Revenues grew by more than 2% on an equivalent basis. Adjusted EPS grew more than 7%. We continued to generate strong cash from operations and we've remained on track to meet our commitments for the remainder of the year.

Now we'd be happy to take any questions.

Operator?.

Thank you. We will now open it up to questions. our first question comes from Brian Tanquilut of Jefferies..

Hi, Brian..

Morning, Brian..

On the hospital JVs. I know that's something that you alluded to a little bit earlier in your prepared remarks.

What are you seeing in the landscape on the hospitals now, and how do you envision this joint venture with HCA in terms of the opportunity set or the receptivity of HCA and other for-profit hospitals to expand into a similar kind of strategy?.

well, a couple points, Brian. Thanks for the question. First of all, as I mentioned in my remarks, the interest of hospital CEOs, CFOs and their teams to work with us on their lab strategy is growing, evidenced with what we did with Hartford Hospital and their CLP laboratory.

In fact, I was just up there last week meeting with the CEO and meeting with my team. And once we engage and we have this definite relationship, I would say the relationship continues to grow and we are their strategic partner for diagnostic information services. The same continues to grow at Barnabas. We feel good about the progress made there.

Again, it continues to expand. And then you asked a question about HCA. HCA is not a joint venture. It is a contract. It's an agreement that we're helping them run their inpatient laboratories and we're hopeful that that will go well and could potentially provide us with more opportunities going forward, but one step at a time.

Our job right now is to do a good job at the Denver area in this division and we can take it from there. So this continues to be a growth prospect for us. We've been focused on it for a number of years as you know, and we're starting to see the results..

And then, Steve, you alluded to the Safeway arrangement.

So, how should we think about the rationalization of the platform or the PSCs? Is that something that is based in a way to invigorate guidance, or is that going to be an incremental opportunity to reduce cost as you shift all your PSC's into the Safeways?.

Yeah. Well, first of all, there's three aspects of the work we've done with retailers and Safeway is a good example. First of all, it's to improve the patient experience.

If you've seen any of these Safeway clinics or healthcare centers, they're very nice and so it provides a really nice, fresh patient experience for our patients, so we're pleased with that. So again, goes hand in hand with our strategy around improving quality patient experience, at the same time becoming more efficient.

And on the efficiency side, we are looking at where these stores are, where we have Patient Service Centers, and where possible, we'll optimize that and take some cost out. But in some cases, we're also augmenting our unparalleled access to the marketplace with some of their locations. So it actually allows us to get greater access.

And we think of this market, to the last point I made in my introductory remarks, it's quite important for us to continue to get more and more access for patients where they are.

And retail has a great opportunity for us to continue to get more and more access because the data we have is about 30% of laboratory requisitions in the marketplace go unfulfilled.

And so our notion is if they have more access, make it more convenient, make it easy for people to go in, get their laboratory requisition fulfilled, it's going to be better for healthcare and it's going to be better for this industry. So that's our strategy..

Yeah, I just want to add in, Brian, that as Steve pointed out, this is not just a cost play and certainly we believe that it's an opportunity to grow our business faster by making our sites more accessible, making things more convenient, making it a more positive experience.

But in terms of your other question around Invigorate, you can imagine that our retail strategy's going to work through over time. So at this point we've only given guidance on Invigorate through the end of 2017. Obviously at some point we'll give an update beyond then. So we've got multi-year leases in many cases for our Patient Service Centers.

We are not going to dilute our volume and add a lot of incremental sites, so really this is largely going to be replacing Patient Service Centers. So it's not going to be ever 100% of our footprint for a couple reasons. One is for that, because we want to make sure we're located where we need to be and there may not always be a retail opportunity.

The second thing is we've got some Patient Service Centers where we might have four, five phlebotomists at a time. And given the limited space in a retail site, we're never going to be able to move those kind of centers fully into retail. So we see it as a great opportunity, but it's not going to be a full replacement.

And in terms of its impact on our cost savings and our Invigorate, which also is revenue enhancement, it's going to play out over the next couple years..

Got it. Thanks, guys..

Thank you..

Thank you. Our next question comes from Ricky Goldwasser of Morgan Stanley. Your line is open..

Hi, Ricky..

Hi, Ricky..

Yeah, hi. Good morning, guys. I have two questions. First one just in terms of clarification around the moving parts around pricing. I think you mentioned that the hospital contracts are a price headwind of 120 basis points.

So can you just kind of like walk us through what the headwinds and tailwinds are on the price metric?.

Mark, I think that's yours..

Yeah, sure. So, again, I want to separate price from mix. I think it's really important. So price itself, as we mentioned, which is apples-to-apples price for the same offering on a given test was down a little less than 1% in the quarter. So everything else was mix.

So what we did share is the mix impact for Professional Laboratory Services was a headwind of 120 basis points. So you could back into everything else was the positive mix that offset price and offset the mix of PLS to give us a net 20 basis point improvement in revenue per req.

Now with that said, the reason we're very careful, Ricky, about separating price from mix is that while price definitely directionally is an indication of profitability, mix is not always representative of profitability, so we caution people, and as we've said over time, don't take math, which is mix driven, as a signal for increased or decreased profitability..

Okay.

And just to clarify on that impact from hospital, is that something that you expect to improve over the course of the year, over the course of the contract? Or is this just going to be a matter of we have to think about it from a comp perspective?.

So it's a very different business, Ricky, as I pointed out in my prepared remarks, and because of the nature of that business, it happens to have fewer tests and different priced tests than our core business.

And those tests are at an attractive margin, so it's not indicative that, again, just because it has lower revenue per req, that that means it's not a profitable test.

And in fact, the impact should grow because our expectations are that PLS will grow faster than our core book of business, and therefore that mix impact will increase over time, not just this year, but as our strategy would be going forward, we see more and more of these opportunities..

Okay. And then my next question is more longer-term nature, really focusing on 2018, which is the first year of PAMA.

When we think about the different moving parts and try to better understand the earnings power, obviously there's more clarity on PAMA now, but can you just kind of like help us through to think what are the other variables we need to think about? Do you have any big contract up for renewal in 2018? And also as you think about expanding Invigorate beyond 2017, how much more cost do you estimate you'll need to take out in order to offset the PAMA impact?.

Yeah, so first of all on PAMA, as we said in our remarks, we're pleased we have a push-out of the date. Second is we're pleased that they've expanded with the approach of more laboratories in the sample set, and we'll see when we get to 2018 if there is a price reduction and how much it is. And they estimate that as mid-single digits.

And then also what we said is if you go back and look at our history, the reason why we have Invigorate and the reason why we continue to drive quality and efficiency is to be able to absorb some of the headwinds. And obviously, true price concessions, and I treat this as true price concessions, as Mark just said, is one of the offsets.

So what we said and what we believe is when we get there, we'll have to absorb this, and we will absorb this. So with that said, we've only provided guidance and an outlook for Invigorate through 2017. What I said in my remarks is they continue to be on track for that.

It's $1.3 billion, it's an additional $600 million from what we achieved a couple years ago, so we feel good about the progress made on that. And then what we also have said is that in any business, in any industry, you need to continue to drive efficiency and quality going forward past 2017, and we're not prepared at this point to talk about that.

But given what I said earlier, obviously, we're going to have to have some efficiency gains in 2018 to be able to offset any kind of price erosion and we feel confident that we'll have those given what we have in our perspective on the future.

So that's what I can share this point, but we're encouraged by what we've learned in the visibility around PAMA. We're encouraged by Invigorate and the progress we're making there. And we're not done with that. We'll continue to make progress, and we'll deal with that in due course..

Thank you..

Thank you..

Thank you. Our next question comes from Ross Muken of Evercore. Your line is now open..

Hi. Good morning, gentleman..

Good morning, Ross..

I guess you talked a lot about some of the improvements across the business. Obviously quite evident first part of this year versus last year and the few prior.

Now, I guess, where do you feel like the momentum has been maybe better than you would have expected? Maybe it's on some of the PLS agreements or what bps is looking like? And then is there any part that you would point to as it's trended that maybe you feel like needs to be more of a tailwind for you than it's been? It feels like the business is sort of starting to turn a corner here.

So I'm just trying to differentiate where you feel like maybe not you've declared victory, but you're sort of where you want to be versus not..

Yeah, I appreciate the question. And what we've said for the last four years is that our restore growth strategy is multifaceted. This business, this industry has a number of products, a number of different programs, a number of different services. And we have to work multiple fronts.

To answer your direct question about where we are encouraged, we are encouraged about the continued prospects around advanced diagnostics; the genetic offerings that we introduced this quarter are very strong. We feel they're very competitive now with some of the incumbents in the marketplace, particularly around our BRCA offering.

We expanded our panel. We have now a very nice comprehensive hereditary-based panel. And as you know, we continue to build on our relationship with Memorial Sloan Kettering in that space. And we offer some nice offerings around colorectal cancer, as well as a comprehensive hereditary cancer panel.

So that is good and growing, and a lot of promise in front of it. Second is we talked about the work around hepatitis C continues to be a great opportunity for us. Last quarter, we talked about the companion diagnostics associated with it. That is promising. And then third is prescription drug monitoring continues to be a big opportunity for us.

It's growing. We're pleased with our progress. And as you know in this country, there's a lot of renewed interest around pain meds and opiates and misuse of those and we're right in the middle of that whole debate. And we're part of the solution to that problem.

And with that, we're coupling that with our Hospital Services business, which we've been working on for the past four years. You're starting to see the fruits of our efforts there. We're very pleased with our announcement of Barnabas.

We're very pleased with the acquisition of our Hartford Hospital outreach relationship, which again is a purchase, but at the same time it builds a relationship with Hartford Hospital. We're very pleased with our first work with HCA. And as I said, there's many more prospects in our funnel that we continue to be happy about.

Now with that said, the last question is where you think there's more promise. I think this last piece, the strategy around hospitals, is something that I believe will continue to be a great growth driver for us.

As I work the country and speak with our teams and speak with hospital CEOs and their management teams, they clearly can't do it all themselves, and they're looking for partnerships. And they realize that all we do every day is diagnostic information services.

And where we have these relationships are those organizations that realize they're best served serving their population and doing best in their business by relying on us for their diagnostic information services business. So I think there's a lot more growth opportunities going forward than what we've seen so far, and I'm optimistic about that.

Thank you for the question..

Yeah, that was great. And maybe just quick follow-up on the cancer genetic side. There's so much going on and we continue to hear more optimistic things in terms of the companion PD-L1. How is your thought process evolving around how you're going to play there? Obviously you have some existing relationships.

And how you size that market versus maybe some of the legacy similar type drugs?.

Yeah, well, first of all, it's evolving, it's growing, it's exciting. As you know, reimbursement's always the challenge in this space. While we have focused on those areas where there is good reimbursement, and clearly, BRCA is one of the best examples of the industry seeing benefit from it and now it's getting reimbursed for it.

And as we introduced with our new product this past quarter but we now have an expanded channel in that regard for other hereditary markers in that offering.

We believe that it looks promising for us and it provides more prospects for growth and we continue to work the reimbursement side of this to demonstrate with good clinical evidence that in fact that that actually delivering value that's actionable because only when you can defend that you have good clinical value and it is actionable, then you will get paid by healthcare insurance companies.

So we're continuously working that. So it's evolving but it is exciting and it's a key opportunity for growth for us going forward..

Great. Thank you..

Thank you..

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

Hi. Thanks. Good morning, guys..

Good morning..

I wanted to start just on the underlying utilization trends you're seeing. I know, Mark, you mentioned about half the growth was from CLP and MemorialCare.

What do you think – did Barnabas and maybe the movement of Easter add in the quarter? And then just in general what are you seeing in terms of the physician office trend?.

Yeah. So I have not, and I wouldn't break out a specific engagement like Barnabas and its impact, but certainly it contributed positively for us. As you look at all the moving parts, Jack, I think the organic growth is a pretty solid number, taking into account the movement of Easter and other calendar shifts and so on and so forth.

So you can look at the approximately 100 basis points of organic growth and count on that as being solid and something that's a trend that we're going to build on and continue throughout the balance of the year driven by growth in our core business and also some growth in this new opportunity being our professional laboratory services, most notably Barnabas.

But I'm not going to be splitting out specific relationships or engagements each quarter..

Yeah, understood. And then one more on PAMA.

I'm just curious now that the final rule is out in the market and is beginning to get digested by the industry, are you seeing any different tone with either hospitals or smaller independent labs in terms of the M&A around whether it's in-sourcing versus outsourcing and just the relationships that you develop there? Thanks..

Well, I can't say that the build, if you will, of interest around building a relationship with Quest is specifically related to what's going on with PAMA. But there might be some correlation between PAMA in that it's another contributing factor.

When we have conversations with hospital systems, they talk about the changing nature of their business, they're moving away from fee for service to taking risk. When you move the risk, they need to have a low-cost provider.

There's no question we're a lower cost provider than typically their hospital lab is, and they have a lot of other priorities and why would they put the next dollar of investment into laboratory when they have a good national leader nearby? And so that's typically the conversation we have, and they realize that there's going to be price pressure on the commercial rate in every place.

And, yes, their laboratory commercial rates will be under pressure, but also they understand Medicare is not going to also provide a lot of help as well. So there could be pressure there. So it's contributing but it's not necessarily, I would say, an overall driver so far.

But with all that said, I think people have realized that there will be, with all this analysis for interest in it going forward, it's hard to say beyond what the estimate was of mid-single digits in 2018, how that will affect specific labs. So that estimate is based upon the market basket that CMS says.

The fees for all their expenditures from the clinical lab fee schedule, and so when you specifically apply whatever cuts there might be to a specific business, they could be considerable for small operators that are doing mostly routine testing in a small geography.

And they're not billing out all the codes like we do for clinical lab fee schedule for Medicare. So it's unfolding, so more to learn, but I think we've got a lot more clarity today than we did six months ago..

Understood, thanks, guys..

Thank you. Our next question comes from Steven Valiquette, Bank of America Merrill Lynch. Your line is open..

Okay. Thanks. Good morning, Steve and Mark. Congrats on these results..

Morning..

Just on the PAMA related reimbursement change delay, it's obviously good news as you mentioned. But it does still seem from some calls that we're getting that maybe there's still a little bit of investor confusion as to whether or not there could be any CMS cuts to the CLFS in 2017 to essentially replace the PAMA delay.

I think there was some color in the final rule that suggests this is probably even more unlikely now, but maybe it wouldn't hurt on this call just to give your latest thoughts on that just to clear the air if you are able to. Thanks..

So I think CMS is very focused on getting PAMA right. It is an act of Congress and therefore, any change to PAMA would require another act of Congress. So their entire focus is on this. Clearly, they've got to get it right. They've been told by Congress that they need to do it with a market based approach, and this is their entire focus.

So from our view, this is what we should expect will happen in 2017, is really gathering all the data, going through all the data trying to understand it. And as you know, we still have the CPI adjustment and the productivity adjustments as well. And some of that came through in 2016 and will continue to come through as time goes on.

So our view is this is going to be predominance of focus for CMS and how we get paid..

Okay. Got it. One other quick one, just if I can sneak one in too. The earlier color on the Safeway retail deal is helpful. Just the one quick follow-up on that is, I'm curious whether that Safeway deal precludes you from entering into other similar large deals with other retailers in those six states that you've entered into so far.

And could you theoretically still do a national retail deal like this with any third party if you chose to do so? Thanks..

Yeah, we continue to have freedom to operate. It's a great relationship. We could build on it. But we believe there's more opportunities for us to build our patient access. We have unparalleled access, we believe. We have over 2200 Patient Service Centers, they have over 3500 people in physicians' offices, and then we have partnerships with JVs.

So – and it continues to build, and we think this retail opportunity, as I described, has really got those three prongs. One is great patient experience, second is that helps us with efficiency, and potentially, augments that unparalleled access, with nice access to where people go every day which are typically retail stores.

So we're encouraged, but we have more prospects as well going forward to expand in even further because we're not limited in our ability to operate with the relationship we have with Safeway..

Yes. As Steve said, the contract with Safeway does not preclude us from other arrangements. But as you might imagine, we're not going to put in redundant space. So if we have a Safeway location in a given neighborhood, it's unlikely, even if we have a partnership with another retailer, that we would put another PSC in the same location.

So it's really all about mapping this out, the demographics where our business is, where we draw the businesses from the physician's office, et cetera.

So in the partnership in Safeway it's really important, and they're kind of, since they're on the lead here, they're going to be one of the first people to decide, in partnership with us, where we're going to put some of these locations.

And so I wanted to stress that while it doesn't preclude us and we certainly are in discussion with other retailers, we highly value the Safeway agreement, and as I said, as the first mover, they're going to going to be the one we're starting with..

Okay, got it. Okay. Thanks..

Thank you. Our next question comes from Amanda Murphy from William Blair. Line is open..

Hi. Good morning. Just a follow-up on PAMA.

So I'm not sure if you have an answer to this, but I'm just curious, in terms of using the NPI from a hospital perspective, just given that you have quite a few relationships with hospitals at this point, I'm just wondering how, or if you have any view into how they're looking at that piece of it, particularly if they don't have an NPI as a hospital lab.

Is that something you think that hospital labs will have incentives to get at this point? Or is yours the opposite view?.

Yeah, well first of all, as I said in my remarks, the movement away from using the TIN, the tax ID number, to a net provider indicator or (44:04) number, is positive. We think there'll be more labs required to contribute their data to CMS with that.

But like so many parts of healthcare, we don't fully appreciate the extent of how many more and what percentage that will be. And actually, as trade associations, as American Clinical Lab Association, we're going to sponsor a project to actually do a sampling of hospitals to see if in fact there are – what this does to the sample.

Because our objective, along with Congress, along with CMS is to get this right, and we said it should be market based, and we all agree that the market includes the national labs, the regional labs and hospital outreach. And so we appreciate this new approach, but we want to make sure that this new approach does capture possible outreach.

So we're going to run a study to see what it shows us and then take it from there..

Okay. Fair enough. And then just on the Quintiles JV, just wanted to get an update there given their relationship with IMS. I think you had talked in the past about potentially working with Quintiles more broadly than the central lab. So wondering how those conversations are going at this point..

Well, we continue to focus on our integration of our laboratory operations, and that was the primary focus of the joint venture is to bring both of our businesses together and take out the cost, the redundant cost of both those operations. We're making very good progress on that front.

We feel good about it, and as Mark said in his introductory remarks, it's showing up in our results below the operating income line. But we will build value through that relationship.

As far as other work with Quintiles, what we shared before is, yes, we will consider working with Quintiles and IMS and others around how we use our data to help with drug discovery.

We have nothing really firm in place with any of them, but I'll share with you that we have multiple working relationships, and one of those relationships is with Quintiles. So we continue to look at what the data means and how we could use it and doing some tests with a variety of potential partners in this space.

So we're still encouraged about the prospects, but having some type of preferred or exclusive or closer relationship is not what we have today..

Got it. Thanks very much..

Thank you..

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

Great. Thank you, and good morning, everyone..

Good morning, Bill..

So first question I guess is going back to the earlier HCA HealthONE lab management question, and that is in the event that you were able to expand this, do you have any sense, Steve, what time, I guess, the evaluation period would be? I'm just trying to get an idea here.

Is this a two-year see if this works and we can expand it, or is this a longer-term sort of project?.

That would be highly speculative for me to comment on that. We have to be successful at this first project, demonstrate we can save them money. I mean, in the end, this all about making their inpatient laboratory more efficient. We believe we can.

When we put those points on the board, we realized that that's going to be very visible to HCA management and we'll take it from there. But beyond what I said, it would be highly speculative for me to comment on how fast it's going to move..

Just be clear, the relationship itself is not a pilot. It is a firm multi-year relationship that we're committed to. What we were implying is that, as you might imagine, there's a possibility of further expansion.

And whether it's within HCA or other hospital systems, seeing the momentum we're getting, hearing from some of the CEOs with whom we have relationships how successful these things are going and how valuable it is to them. So we will save them money. So it's really, in our minds, just a matter of comfort and time before we'll expand these somewhere.

Whether we expand it more broadly within HCA or other places, we think the better your track record is, the better opportunity you have to get more people onboard. And it is with the Denver division of HCA, just to be clear, not with HCA itself..

I appreciate the color. Thank you. And then secondly, just I guess latest thoughts around the FDA's LDT initiative.

It seems like every day that goes by without it getting to OMB or congressional notification suggests that we may see a legislative solution?.

Well, we're working it. As you know, we believe as an industry that the FDA does not have the statutory authority to regulate laboratories and LDTs. We've been working proactively on a legislative solution with a number of groups.

We've made some progress on that front, but as you know, it's the summer months and not a lot will happen in the summer months in Washington. So we will see, when the fall is here, where this goes, but we think a legislative solution is the best option for us.

And that's the one that we're pursuing, and we hope we can be able to get to a place that we can accept as the Trade Association and as the company going forward. But it's still there, but it's moving at a very slow pace..

Understood. Thanks for the color..

Thank you..

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

Hey. Good morning, A. J..

Oh, thanks. Hi, everybody.

How are you?.

Good..

With the pickup in the pace around deals with hospitals, whether its contract, outright purchasing of business and other structures, can you just maybe comment a little bit on how those structures have evolved and the economics of the deals that you're seeing today versus a few years ago? Are they different, about same? Are you pushing a different type of structure? Is the hospital asking for any kind of different structure? Just give us some flavor on that..

Yeah, well, first of all, you see one deal, you see one deal. We've said this before because healthcare is complex. Every deal has got its own nuances as you could appreciate. And you have to separate. When we buy an outreach business, that's an outright purchase of their existing commercial business.

And in the case, a good example of that is what we did with Hartford Hospital and CLP, which we closed and we're in the process of integrating. And I would characterize those deals as being similar to the other ones we've done. We take over the business. We reprice it at our rates.

We build a business case around taking out cost and we think the returns for our shareholders are quite good. But what I'll also say, and I said this in my introductory remarks, when we typically do that, it typically gets us into a broader conversation about their lab strategy. And so typically they say, wow (51:18), okay, now we're tight with you.

Let's talk about our advanced testing for our hospitals, or what's called reference testing, and let's talk about how you potentially could help us with our hospital inpatient laboratory and making that more efficient. So it typically becomes a beachhead opportunity for us to build a stronger relationship. The second type of relationship, A.

J., is we have an engagement, a professional services engagement like the one we have with Barnabas. And that's a services relationship. It's multi-year. We're providing service for a fee. We believe that we agree on certain conditions of delivery and payment, and we run it as that.

And again, when we get in those relationships, because this is all around their inpatient laboratory, we then typically get in a conversation around their outreach business. Is that something they want to continue to stay in? Could we help them with it? And second is their advanced testing or their reference testing business.

So we have that conversation, as well. And I would say the third example is where there is a broader, deeper relationship where we think it might be prudent for us to form a joint venture in some form.

And the most recent example of us doing that is with University of Massachusetts Medical Center, where we bought their outreach business but we also help them in many different ways in central Massachusetts. And so they actually have a small minority stake in that joint venture. So we're deeply embedded together in making that work in central Mass.

So all different sizes and shapes of how we work with hospital systems, which reflects the marketplace. I think part of our strategy here as well is what we're showing to the marketplace is we're a company and an organization that can manage in this very, very dynamic space. And you can work with Quest in whatever way makes sense.

Obviously we want a deal that's going to work for both sides, but we are flexible and prudent in how we put together those relationships. But again, you see one deal, you see one deal. So hopefully that's helpful in providing a little bit more color....

Yeah, that's great. Let me – just a quick follow-up on a different area. So you had the asset sale this quarter and you stepped up the share repurchase as you've done before with other asset sales.

When you think about capital deployment for the second half and moving forward, should we assume the share repurchase activity sort of settles back to what we saw in the first quarter? Or any other comments on direction of cash flow in the back half of the year?.

Yeah, so I assume when you say cash flow, you mean cash utilization, A.

J.?.

Right..

What you should assume is we'll follow our fifth point of our five-point strategy, so once we get through the ASR, which was really triggered as you pointed out by the monetization of the Focus Products business, we'll continue to either deploy towards M&A or towards share repurchases.

Obviously between the dividend and share repurchases we've done through the first half of the year, we've met our commitment of guaranteeing a majority of our free cash flow to our shareholders. So we've met that threshold.

So the back half, depending on the timing and probability of executing any sort of deals, the cash flow will either be utilized for that, and if we don't have value-creating deals and we close in that timeframe, then we will – as opposed to sitting on the cash – we would do some additional repurchases..

Okay. Great. Thanks a lot..

Thank you..

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

Thanks, guys. Good morning..

Hi, Isaac..

Hi, Steve. First question was kind of a longer-term item regarding PAMA. Just curious if the current state of PAMA legislation has had any impact on the nature of your conversations with private payers when it comes to negotiating your longer-term contracts with them..

No. It's an interesting topic, but frankly they're looking at our relationship, the term of that relationship, where any discussion around pricing should be. So very little relationship, if any, between what's happening with PAMA and the refresh of the lab fee schedule in our discussions with payers..

Yeah, we've gotten that question, Isaac, a number of times. I want to say again that there's very, very few contracts, if any, that are mechanically tied to Medicare rates.

Yes, it's a reference point that people use in some discussions, but there's really – since there's not a mechanistic trigger, as Steve said, it's really not been a topic of conversation. They obviously want the best value. We're having discussions around the value that we bring them and the fact that we already have excellent pricing.

That's more the focus of the conversation versus anything going on in the public sector reimbursement..

Yeah, that's helpful. And then just a follow-up question on 2016 guidance, specifically for cash flow. I think your guidance does call for an acceleration in CapEx in the back half of this year just based on what we know you spent in the first half.

So I'm wondering what that acceleration is related to, and then to what extent some of those dollars might be one time in nature that roll off in 2017? Thank you..

Yeah, so when you say acceleration, we have had a historical pattern of spending more in the back half than the first half, so this year is not atypical. We are slightly lower this year versus last year by a little over $10 million for the first six months of the year.

We're guiding to a number that's similar to slightly less than we spent last year, so I think it all fits, Isaac. It really has to do with the timing of some of the work that we're doing where we consume our capital, and certainly a part of that is some equipment refresh.

Some of that is tied to our Invigorate program such as the lab standardization work, and it's really driven by when we're executing some of those conversions. So really nothing unusual or atypical, I would say, in our capital spend this year, but I think the good news is that we're expecting to spend less this year than we did last year.

And as we move forward, as we've mentioned, we're looking to get some of this high level of capital for Invigorate behind us and really return to a little lower level than we have versus the last couple years as a proportion of our total operating cash flow and as a proportion of risk..

Got it. That makes sense. Thanks very much, guys..

Thank you..

Thank you. Our last question comes from building Bill Bonello of Craig-Hallum. Your line is open..

Thanks..

Hey, Bill..

Just kind of a big picture question on the commercial contracting outlook going forward. I think we're coming up on 10 years of some of these preferred national relationships for the large labs and some of the largest payers. Obviously the payer landscape's changing pretty dramatically. At least one of those contracts, I believe, terms in 2018.

I'm just curious how you think that situation plays out going forward.

Do you think we continue to have a situation where you have certain payers aligned with certain national providers? Or do you think we move into a more open access kind of contracting situation over the next several years?.

Yeah. Well, first of all, Bill, thanks for the question. We're not going to comment on the specific contracts with some of our largest partners. But as we said before, we have hundreds of contracts so we're potentially working, and what happens every year with some of the refreshes on those contracts.

And in that regard, we have our normal cadence of how we'll work through that this year, next year and into 2018. Generally, given our leadership position in this marketplace, we're fortunate to be included in most of the healthcare insurance contracts throughout this country.

And I think we're increasingly making it obvious it's good for patients, it's good for them attracting membership that they have Quest on contract.

Now despite us maybe not having a preferred national relationship in some cases, we still continue to have strong working relationships with some of those healthcare insurance companies that we don't enjoy those relationships. And also, we continue to see other ways of working together with some of those systems.

So I won't speculate on or give specifics on contract dates and timing of all that, but we're managing this in due course.

And fortunately for us, we have a very strong position given our strength and position in this marketplace that collectively and collaborately we're part of the network of what's required in healthcare delivery throughout the country in a big way. And we have a good, strong seat at the table..

Do you want to elaborate at all, you said exploring alternative ways of working together, on what any of that might look like?.

Sure. I mean, give an example. We have a big business measure around wellness. So our wellness business is a good business, we sell it directly to large employers but we also sell it to healthcare insurance companies. In selling it to healthcare insurance companies, they resell it.

An example of that is we sell it to Aetna, we sell it to Cigna, but we also sell it to United Optum, as an example. We also are perpetually asked for data. We test about 50% of adult Americans every year, excuse me in the course of three years. Having that data is quite important to healthcare insurance companies.

So we're quite collaborative with the industry of serving up our data to help them manage some of their managed Medicaid or managed Medicare business in a collaborative way. So, two examples. And the third example is with Inovalon, which is our data analytics product which is part of our new product introduction that we made this year around Quantum.

We serve this up to all healthcare insurance companies, regardless of what we have for a laboratory contract. And so we're proactively working with all the companies that are taking risk, and so put this again in a different place with all healthcare insurance companies in a much different and broader way.

So we often think about our laboratory contract, but our relationship with these systems are much broader than that..

Perfect. Thank you very much..

Thank you..

Operator?.

So thanks again for joining us on this call today. As you can tell, we're making very good progress executing our five-point strategy, and we appreciate your time, and look forward to seeing you in our travels. Have a good day..

Thank you for participating in Quest Diagnostics Second 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 888-566-0473 for domestic callers or 402-998-0640 for international callers. Telephone replays will be available from 10:30 a.m. Eastern Time today until midnight Eastern Time on August 20, 2016. Goodbye..